For more than two centuries, many people have tried to shake that peculiar branch of the tree of knowledge called economics. Perhaps no one has done it better recently than Richard Thaler, a University of Chicago professor who has challenged the traditional idea that free markets reflect the self-interests of rational individuals.
On Oct. 9 he was awarded the 2017 Nobel Memorial Prize in Economic Sciences for recognizing, as the Nobel committee put it, that “human behavior is very complex.” Economic models cannot be easily simplified and must be “more human” by admitting that theories based on self-interest are not always correct.
Indeed, the field of economics has long been overdue for a humility check. Mr. Thaler showed his own lack of hubris in his response to the question of how he would spend the $1.1 million that comes with the Nobel Prize: “I will try to spend it as irrationally as possible.”
In other fields of knowledge, the fact that people do not always act in their own self-interest is pretty obvious. Yet most economists still rely on Adam Smith’s 18th-century notion of markets being guided by “the invisible hand” of forces driven by people seeking their own well-being. What is often overlooked is that Smith himself was more complex. He also took a noble view of human behavior. In 1759 he wrote: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”
Thaler’s work largely focuses on why humans often do things contrary to their own good, such as not saving money for retirement. His theories have created a whole new field called behavioral economics, which looks for ways that either governments or companies can, by using suggestions and positive reinforcement, “nudge” people to take action in their long-term interests. One popular result of “nudge economics”: Many companies enroll new employees in a 401(k) plan without asking, giving them only the choice to opt out.
Even this new field is subject to a similar critique. Can bureaucrats and corporate officials operate any more rationally in trying to “nudge” people whom they deem too irrational? Perhaps behavioral economics is still too young to answer that question.
In a paper from the Brookings Institution in Washington, scholars Richard Reeves and Dimitrios Halikias argue that trying to influence people’s actions is the wrong approach. They suggest that society and its economy are best developed through “self-efficacious” attributes of character, not paternalistic nudges to change behavior. A humane society, they write, “is one in which men and women possess the discipline, self-command and personal autonomy needed to live with a sense of purpose and direction.”
Other scholars even question the whole concept of modeling. “The very ways that economic models represent the world, the ways that they relate one individual to another, and the resulting changes in human nature that ensue are such that humans are depersonalized; transformed into individuals who are turned inward toward themselves and thus unable to grow into the image of God,” writes D. Glenn Butner Jr. of Sterling University in the Journal of Markets & Morality.
Unlike other Nobel Prizes, the one for economics has been given only since 1969. The field remains fluid in its theories. Perhaps a future prize can go to an economist who can take Thaler’s ideas even further and show how prosperity relies on traits of character in a society. Models of economics are best built on models of thought.