However, by turning Keynes's insights into a full-blown mathematical model, economists have left out what Keynes really thought about the economy. Rather than seeing the economy as naturally stable, Keynes instead thought that instability was inevitable. Whilst economists have modelled his insight with the notion of demand ‘shocks’ to an otherwise stable system, Keynes had something altogether different in mind: an ‘unknowable’ future that makes rational, self-interested and calculating behaviour of the kind economists assume very difficult, if not impossible.
Keynes made the point that when we decide how much to invest (or to spend), we have to try to predict the future: the likely path of our future earnings and the likely returns from our investments. But, because the future is unknowable, it is impossible to make accurate assessments. We are, at all times, walking into the unknown, making decisions based on little knowledge. The result is that we regularly simply assume things will carry on as ‘normal’ and follow the crowd. We jump on bandwagons, fearful of missing out on something, overconfident one moment and overcome by panic the next. The spirit of the group will regularly take hold – what Keynes called ‘animal spirits’ – leading to waves of optimism and pessimism that destabilize the economy. Human behaviour is both erratic and open to social influence. Psychology and sociology both matter.19
3 Personal finance, poverty and social mobility
Only by recognizing that humans are human can we start to understand many of the everyday challenges we face, challenges which have a major impact on our lives, on our personal finances, on our health and on our emotional well-being. Behavioural economics suggests that by uncovering the part of our human flaws that are systematic (that are ‘predictably irrational’), policy makers can work out ways of ‘nudging’ us into making better decisions.20
Architects have always known that our surroundings can have a big effect on the choices we make. When designing office buildings, they will, for example, use an open-plan layout in places where human interaction aids the exchange of ideas and, where it does not, make sure that bathrooms are easily accessible so people do not waste time bumping into colleagues. Behavioural economics similarly argues that we can design ‘choice environments’ that make it easier for people to make the ‘right’ decision. Those responsible for positioning food items at the supermarket check-out desk and in school canteens can, for example, ‘nudge’ us to make ‘better’ choices. Furthermore, when it comes to saving schemes and pensions, rather than asking us whether we want to opt in, we should instead be asked whether we would like to ‘opt out’, the idea being that doing what is ‘right’ is much easier if it does not require action. Evidence suggests that opt-in schemes produce an enrolment rate of around 60 per cent but opt-out schemes lead to a much higher enrolment of 90‒95 per cent.21
When employed by the state, in what Cass Sunstein and Richard Thaler have called ‘libertarian paternalism’,22 this will not be costly to the taxpayer and will not involve limiting choice or prohibiting certain goods. In other words, it will not impinge on personal freedom and does not mean bigger government – just better government.
According to Sendhil Mullainathan and Eldar Shafir, self-control of the kind needed to maximize our long-term well-being becomes a particular problem when our minds are occupied with other things such as work deadlines or financial stress.23 That can create vicious circles of deprivation. Many of the concerns we regularly face as human beings can easily come to dominate our lives. This can have an advantage – it can help the brain to work out a solution – but it also comes with a major negative: it deprives us of the mental energy needed for everything else. Our brains ‘tunnel’, ignoring things that are outside the problem at hand. The result is that we give in to temptation, snap at our children and become forgetful. This is a particular problem as so many of the decisions which have a positive effect on our long-term well-being require continual vigilance and self-control. Eating healthily, keeping fit, taking medication, keeping our skills up to date, nurturing our relationships and saving for the future are all cases in point, making them difficult to achieve when we are financially stressed. By contrast, many of the decisions that have a negative effect on our lives are one-offs; signing up to a costly loan is all too quick and easy and seems to provide an instant fix when our minds are dominated by a particular problem. Poverty ‘taxes the brain’, making digging ourselves out of it all the more difficult ‒ and, one might therefore say, all the more important for governments to take it seriously.
Tackling poverty requires economists not only to pay attention to psychology but also to sociology. That includes what other people think of us. As I found out from my own experiences of living below the breadline, human dignity and respect are just as important as money ‒ perhaps even more so when you are poor. Where claiming benefits is public, as was the case with free school meals in my own youth, people may go without in order to preserve what they see as their self-respect. The result can be long-term damage to health and well-being. And, where they are unable to access the financial resources they need, individuals find other ways of earning respect from their peers. Unable to participate in ‘normal’ society, they create their own, along with a sense of purpose and belonging. Respect is, of course, central to gang culture. George Akerlof and Rachel Kranton have researched the power of identity, noting that seemingly perverse behaviour ‒ including behaviour that can cause us pain ‒ can be explained by our desire to belong and to signal that we are part of a group.24 The resultant social structures can, however, affect the ability of particular individuals to make the jump to ‘normal’ society, either because they become socialized to value whatever the gang values or because building life outside comes with severe punishment.
One way in which I saw the forces of psychology and society at work in my own local community was through a process that I will call careless talk.25 Put yourself in the situation of being a young person from a working-class community who is thinking of applying to a top university. Just when you are building the confidence to make an application, someone scuppers it by saying, ‘Why bother? You know you won't make it.’ Of course, one such statement is not really a problem. But when it becomes frequent, that is a different matter. Careless talk succeeds in knocking the confidence of aspiring young people and making them imagine that even if they were to be successful, they would be excluded or laughed at. I can tell you that the only reason I ever felt ‘left out’ after leaving my home town was a result of paranoia – a paranoia brought about by others which took a while to shake off.
From my own experiences at least, it seems clear that young people with the ability to succeed can encounter everyday resistance from those around them, rather than from those at the top (with whom, to be honest, they rarely come into daily contact). However, the idea that communities can damage their own members might sound rather paradoxical: after all, why would a community want to discourage its most talented from succeeding? One possibility is that communities aim to keep their members grounded – to prevent them from becoming ‘too big for their boots’. This chimes with the work of the anthropologist Richard Borshay Lee, who found that the hunters of the indigenous !Kung community he studied were subject to ridicule if they returned with a big kill.26 This ridicule served to prevent arrogance, helping to preserve social harmony. Another possibility is that careless talk forms part of a self-defence mechanism – one that can help people who do not move ‘upwards’. None of this is to say that communities are in any way malicious. However, what is perhaps true to say is that people can sometimes have a strong incentive to champion, propagate and magnify what they might not realize are ‘untruths’, with the unfortunate and entirely unintended effect of limiting social mobility.
In economics, it has become normal to blame poverty and the lack of social mobility on economic factors, such as the ‘hourglassing’ of the economy, the ability of richer families to give their children additional support and a lack of funding for schools or welfar
e. However, to truly understand such important issues, economists also need to rethink the assumptions they make about human behaviour.
Conclusion
By leaving human reality in the cold, economists have not only oversimplified the world but have limited their ability to understand it. However, resistance to behavioural economics doesn't merely reflect the ghost of Milton Friedman's snooker player. Another ghost has been hanging over economics since its early days in the eighteenth and nineteenth centuries, when reason began to trump emotion and science began to trump the arts. It is the ghost of macho man.27
When economics set out its formal assumptions about economic behaviour at the time of the marginal revolution, society was developing rather set views about men and women. In the words of Lord Henry in Oscar Wilde's The Picture of Dorian Gray, ‘[m]y dear boy, no woman is a genius. Women are a decorative sex. They never have anything to say, but they say it charmingly. Women represent the triumph of matter over mind, just as men represent the triumph of mind over morals.’ Emotions and irrationalities were (wrongly, of course) cast as female, and reason and calculation ‒ so revered by the Enlightenment ‒ as male.28 Diversions from ‘rational, self-interested and calculating’ behaviour were therefore thought to be ‘soft’ and ‘unrigorous’.29 The idea of independence was glorified and associated with men; that of dependence was despised. The autonomous self became the ideal, not the connected and supposedly ‘female’ self.30 Furthermore, since economics has been defined much more by its approach ‒ by the application of its standard assumptions ‒ than by its subject matter, it ‘makes economists particularly reluctant to admit dissent which challenges their approach, for this would threaten a methodological unravelling that would leave them naked in the world’.31
Although economists aimed for a ‘scientific approach’, they were far from objective. When the subject was fast developing in the nineteenth century, it was against the backdrop of an economy in which the Industrial Revolution was pushing women out of the workplace and into the home.32 With the gendered divide now erected between the market and the home, economists increasingly focused their attentions on the market. When it comes to the market, it is difficult to prize anything other than self-interested, calculating and rational behaviour, so such assumptions seemed entirely justifiable ‒ that is until we realize that the sphere of market production is only one half of the story. The activities taking place outside the market, which also depend on care, love and altruism, are just as important for understanding economic success (and failure).
However, rather than incorporating non-market activity into economics, or questioning society's heavily gendered assumption that the home is female and paid work is male, many economists actively contributed to the growing sexism within society.33 That includes leading economists associated with the marginal revolution: Alfred Marshall, who argued in favour of ‘family wages’ for men, and F. Y. Edgeworth, who argued that women and men should not be paid equally for equal work.34 Through the support they gave to sexist practices, economists have actively contributed to gender inequalities. And they employed economic theory to back up their arguments. In the words of Michele Pujol, Marshall ‘opposes employment for married women’ and gave his support to the practice of paying women less than men for exactly the same work so as to keep them in the home ‘to enhance the environment in which male workers and their children live, and to generate greater health, character and ability’.35 Women's work, he argued, created a negative externality that must therefore be discouraged. A woman's individual freedom came second to what he thought was best for society as a whole. Needless to say, it serves to show the risks of ignoring individual freedom when judging what is best for society.36
Economics, to borrow the words of Jane Humphries, was ‘not only made by gendered subjects but it made gendered subjects’.37 It's time for the subject to free itself of its masculine biases.38
Notes
1 Humphries (1995), p. xvi.
2 Roth et al. (1991).
3 Ledyard (1995).
4 Fehr and Gächter (2000).
5 Simon (1957).
6 Thaler (1992), ch. 1.
7 Tversky and Kahneman (1974).
8 Kahneman (2011).
9 McClure et al. (2004).
10 Damasio (1994); Gigerenzer (2008). Cohen (2005) notes the power of emotions in a primitive setting and how reason and control developed once the environment changed.
11 Levine (2012).
12 Mokyr (2009).
13 Keynes (1936).
14 Amabile (1998).
15 Picchio (1992).
16 Braunstein, van Staveren and Tavani (2011).
17 Waring (1988); O’Hara (2013).
18 Folbre (2009), p. 316.
19 Baddeley (2018); Shiller (1984); Baddeley (2017), ch. 8.
20 Ariely (2008).
21 Thaler and Sunstein (2008).
22 Thaler and Sunstein (2008).
23 Mullainathan and Shafir (2013).
24 Akerlof and Kranton (2011). For more on how the social nature of human beings affects our behaviour, see Baddeley (2017): a short intro, ch. 3.
25 Bateman (2015a).
26 Borshay Lee (1969).
27 Nelson (1992); McCloskey (2008).
28 Bryson (2016), p. 151; Nelson (1992).
29 Nelson (1995), p. 132; McCloskey (2008); Marçal (2015).
30 England (1989): 15‒17. For a more general discussion, also see Harding (1986) and Bordo (1986).
31 Ibid.
32 Folbre (1991); Pujol (1984).
33 Pujol (1984). J. S. Mill is one of the few exceptions, though see Pujol (1998) for a more nuanced discussion.
34 Pujol (1984); Edgeworth (1923): esp. 493.
35 Pujol (1984): 217.
36 In a similar vein, Nussbaum (2013), ch. 2, argues that we need more not less individualism if we are to take note of feminist concerns.
37 Humphries (1995), p. xviii.
38 Ferber and Nelson (1993).
10
Economics Meets Feminism
Behavioural economics has provided a powerful critique of economists’ assumptions about individual behaviour: that we are rational, self-interested and calculating. It is, as we've seen, impossible to get to grips with big economic problems without relaxing these assumptions. However, as we saw in chapter 8, the assumptions were not made without justification. They grew out of two philosophical revolutions taking place in the nineteenth century: the idea that we could all ‘reason’ and a belief in individual rights. To model the economy as if people were not rational would have undermined the case for individual freedom. Given that the state and religion had shackled the masses for centuries, and that they were only just starting to break free and take control of their lives, that would have been a dangerous course. Although behavioural economics is, of course, right to point to the need for economists to adjust their assumptions, we should not lose sight of this deeper point ‒ or of the fight for individual freedom that gave rise to those assumptions. One might argue that critiques of economics have gone too far, but in this chapter we will see that there is also a sense in which they haven't gone far enough. Economists need to pay more attention to three things in particular if they are to fully comprehend the causes of poverty and prosperity: the body, family and society.
The Body
In the eighteenth century, Mary Wollstonecraft, who penned what is commonly seen as the first celebrated piece of feminist writing, A Vindication of the Rights of Woman, wrote with passion in a letter to the former Bishop of Autun:
Consider, I address you as a legislator, whether, when men contend for their freedom, and to be allowed to judge for themselves respecting their own happiness, it be not inconsistent and unjust to subjugate women, even though you firmly believe that you are acting in the manner best calculated to promote their happiness? Who made man the exclusive judge, if woman partake with him the
gift of reason?1
At this time, women were assumed to be fragile, emotional and irrational creatures. According to Wollstonecraft, this impression was not only wrong, it had resulted from their unequal treatment. This unequal treatment meant that ‘their minds are not in a healthy state’. In resisting the fight for votes for women, the anti-suffrage movement relied on propagating the idea that women were mentally incapable of rational and reasoned thought. They argued that women's ‘natural’ capabilities were in providing moral and emotional support for their families; that men and women had different but complementary abilities.2 Women's political freedom thereby rested on making the case that women were rational self-interested beings ‘just like men’.
But precisely because freedom was initially thought of in the context of men's lives, it was inevitable that something would be missing: women's bodies. In the words of Lucy Stone, a prominent US feminist of the mid-nineteenth century, ‘[i]t is very little to me to have the right to vote, to own property etc., if I may not keep my body, and its uses, in my absolute right.’3
Given its neglect in concepts of freedom, women's control over their fertility has always been controversial, even amongst economists like Malthus who highlighted the problem of excessive population growth.4 Birth control pioneers, like Marie Stopes and Margaret Sanger, were viewed with suspicion and even faced the wrath of the law. The battle for a woman's right to control her own body has certainly not been easy, and it is still very much ongoing. In some countries the state's hold on women's bodies is so strong that even a miscarriage brings a risk of arrest. Rich countries are unfortunately not immune. Freedom to access technologies such as abortion continues to be restricted and, even where they have such freedom, women regularly face abuse for accessing them. Paradoxically, some of those most vehemently in favour of individual freedom are the very same people who move to deny women's bodily autonomy.
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