Transcript Behavioural welfare economics

How the market gives us what we want –
even if we are irrational
British Academy Keynes Lecture 2010: Robert Sugden
1
As this is the Keynes Lecture in Economics, named in honour of one of the
greatest economists of the 20th century, I ought to start with some link
between my topic and the work of John Maynard Keynes.
This might seem difficult, because my lecture is a defence of the market,
rather in the tradition of Friedrich von Hayek.
Hayek is usually seen as the patron saint of pro-market economics, and
Keynes the patron saint of market regulation and planning. But …
2
Keynes to Hayek in 1944, after reading The Road to Serfdom:
‘We all have the greatest reason to be grateful to you for saying so well what
needs so much to be said... Morally and philosophically I find myself in
agreement with virtually the whole of it; and not only in agreement, but in a
deeply moved agreement.’
3
Keynes over lunch at the Bank of England, 10 days before death in 1946:
‘I find myself more and more relying for a solution of our problems on the
invisible hand which I tried to eject from economic thinking twenty years ago’.
4
The invisible hand
… by directing that industry in such a
manner as may be of the greatest value,
[the merchant] intends only his own gain,
and he is in this, as in many other cases, led
by an invisible hand to promote an end
which was no part of his intention. Nor is it
always the worse for society that is was no
part of it. … Adam Smith, Wealth of
Nations, 1776, p. 456.
Or more generally: the market is a spontaneous order with unintended
consequences that are broadly beneficial, and that may be more beneficial
than those that can be produced by deliberate planning.
5
I don’t want to pretend that Keynes has been misrepresented, or that in the
last few days of his life he had a conversion experience.
But these quotations tell us something about how deeply the idea of the
invisible hand is embedded in the professional thinking of economists. This
has been a core idea of economics for over two hundred years, and one that
non-economists continue to find counter-intuitive.
Economists now find Smith’s insight so obvious that they are often more
excited about investigating exceptions (as Keynes did in his macroeconomics),
but that doesn’t make the insight less true or important.
In this lecture, I want to defend the idea of the invisible hand against a new
challenge, from behavioural welfare economics.
6
Behavioural economics tries to explain economic behaviour by using
research methods and theoretical ideas adapted from psychology.
I’ve followed this approach since the early 1980s. So, I see myself as a
behavioural economist.
Until recently, behavioural economics was an almost wholly descriptive
enterprise – discovering patterns in individual and small-group behaviour
which are inconsistent with traditional rational-choice theories, but which
psychology can explain.
However, its findings pose severe problems for conventional forms of
normative or welfare economics (i.e. the analysis of recommendations about
how the economy should be organised, what economic policies governments
should follow, etc.) Recently, behavioural economists have started to think
about these problems. Hence, proposals for ‘behavioural welfare economics’.
7
The problem of reconciling normative and behavioural economics
From the early 20th century, the dominant form of economics has been
neoclassical. A fundamental assumption of neoclassical theory is that
individuals have coherent preferences over all relevant economic outcomes,
and act according to those preferences (= ‘maximise utility’).
‘Coherent’ preferences are:
-- stable (i.e. not subject to random or arbitrary variation);
-- context-independent (i.e. not affected by arbitrary changes of ‘framing’ of
decision problems);
-- internally consistent (i.e. satisfying ‘rationality’ principles such as
transitivity).
Neoclassical welfare economics uses the satisfaction of preferences as its
normative criterion.
8
But the findings of behavioural economics cast doubt on whether coherent
preferences really exist. In many cases, individuals’ economic behaviour
reveals incoherent preferences; the incoherencies (‘anomalies’) are
systematic and can be explained psychologically. A few examples:
-- preferences between two options depend on which is perceived as the
status quo (the ‘endowment effect’, ‘loss aversion’);
-- preferences revealed in choices are not the same as preferences revealed in
valuations of the same objects (‘preference reversal’);
-- preference between A and B varies according to whether C is in the
opportunity set (‘decoy effect’: if C is clearly inferior to B, but not to A, adding
C to the set makes B more attractive).
If preferences are incoherent, how can preference-satisfaction be used as a
normative standard?
9
In behavioural economics, a consensus seems to be developing around a
particular response to this problem: libertarian paternalism/ asymmetric
paternalism/ soft paternalism/ behavioural welfare economics.
This has become influential both within academia and outside:
-- Thaler and Sunstein’s popular book Nudge;
-- Thaler recently visited 10 Downing Street to advise the ‘behavioural insight
team’ or ‘Nudge unit’ on how to apply his approach to public policy.
This approach is often presented as a challenge to the idea of the invisible
hand.
I’ve responded to this challenge in a series of theoretical and philosophical
papers.* This lecture summarises the arguments I have been developing.
* Including: American Economic Review 2004; Social Choice and Welfare 2007; Constitutional
Political Economy 2008; Economics and Philosophy 2008 (with Bruni); Economics and Philosophy
2010.
10
In part, my argument will be a critique of behavioural welfare economics.
Not of the specific policy proposals advanced by behavioural welfare
economists, which are often quite sensible (e.g. regulations on displays of
tariffs to facilitate price comparisons), but of the theoretical approach that
they are using.
This is fair: behavioural welfare economics is presented as a whole new way
of thinking about normative economics (‘the real Third Way’ – Thaler and
Sunstein).
But my argument will also be a critique of the way that the invisible hand idea
has been understood by neoclassical economics.
11
Neoclassical economists have represented Smith’s insight in theoretical
models in which economic agents are rational and in which the satisfaction of
rational preferences is the standard by which institutions are evaluated. In
these models: markets are efficient in satisfying preferences.
The findings of behavioural economics do challenge this understanding of the
invisible hand idea.
My response is to develop a different understanding of what markets do for
us, which retains the insights of the liberal tradition of Smith, but is
compatible with behavioural findings.
12
What is behavioural welfare economics?
Two (remarkably similar) manifestos appeared in 2003:
Cass Sunstein and Richard Thaler. Libertarian paternalism is not an oxymoron.
University of Chicago Law Review, 70 (2003): 1159-1202. [The academic paper that
was expanded and popularised as Nudge.]
Colin Camerer, Samuel Issacharoff, George Loewenstein, Ted O’Donaghue and
Matthew Rabin (2003). Regulation for conservatives: behavioral economics and the
case for ‘asymmetric paternalism’. University of Pennsylvania Law Review 151 (2003):
1211-1254.
Each paper has a legal scholar as a co-author. Otherwise, a roll-call of the
great and the good of American behavioural economics.
Titles (‘libertarian paternalism’, ‘regulation for conservatives’) signal that the
authors will propose interventions in the economy that have traditionally been
opposed by pro-market thinkers – but the authors’ arguments will be immune
to their opponents’ usual criticisms.
13
These papers implicitly criticise traditional welfare economics, but do not
explain how, if their authors’ proposals are accepted, welfare economics
should be reconstructed.
Sunstein and Thaler’s most concrete advice: public decisions should be based
on ‘a form of cost-benefit analysis’ whose goal is ‘to measure the full
ramifications of any design choice’. (No discussion of how to measure costs
and benefits when individuals don’t have coherent preferences.)
Similarly unspecific suggestions about cost-benefit analysis by Camerer et al.
More concrete proposals for reconstructing welfare economics are now being
made. For example:
Douglas Bernheim and Antonio Rangel. Beyond revealed preference: choice-theoretic
foundations for behavioral welfare economics. Quarterly Journal of Economics 124
(2009): 51–104.
Esssentially: Bernheim and Rangel take the approach advocated in the 2003
manifestos and try to adapt theoretical welfare economics to fit it.
14
In this lecture, I’ll focus on the principles of behavioural welfare economics, as
advocated by Sunstein and Thaler.
Richard Thaler
Cass Sunstein
And I’ll focus on one of Sunstein and Thaler’s central claims (in opposition to
traditional welfare economics):
The findings of behavioural economics force us to recognise that paternalism is
‘inevitable’; the idea that there are ‘viable alternatives to paternalism’ is a
‘misconception’; the anti-paternalist position is ‘incoherent’, a ‘nonstarter’.
15
Why (according to Sunstein and Thaler) is paternalism inevitable?
Traditionally, economics has assumed that individuals have coherent
preferences which are prior to the decision situations in which they are
revealed. If that assumption were true, it would make sense to ask whether
those preferences should be respected. The anti-paternalist would say ‘Yes’,
the paternalist would say ‘Perhaps not’.
But in fact, individuals often form their preferences only when confronting
specific decision problems. Those preferences are sensitive to apparently
arbitrary details of framing (e.g. endowment effect, preference reversal,
decoy effect…).
So, the anti-paternalist’s principle (respect preferences) can’t be applied: the
objection to paternalism fails.
That in itself doesn’t make paternalism inevitable, only unobjectionable.
But …
16
Sunstein and Thaler conceive of themselves as advising a ‘planner’ (later:
‘choice architect’) who is responsible for designing the presentation of
options to individuals.
If individuals’ preferences are sensitive to framing, the planner’s choice of
frame can affect the preferences that individuals reveal; there is no way of
simply standing back and respecting preferences.
So the planner cannot avoid a decision about the direction in which to steer
the individual, and the only reasonable criterion for making this decision is
the planner’s judgement about the individual’s best interests.
This is the sense in which there are no viable alternatives to paternalism.
But if the planner’s only intervention is to set the framing, individuals remain
free to ignore that framing. Thus, this form of paternalism can still be called
‘libertarian’.
17
Sunstein and Thaler’s favourite example of libertarian paternalism:
the cafeteria.
Consider the cafeteria ‘at some organisation’ …
(Let’s say: the cafeteria at the University of East Anglia...)
18
Customers proceed along a line, choosing food items from a display, until
they reach the checkout.
The cafeteria director notices that given items are more likely to be chosen if
they are placed earlier in the line. On the basis of current medical
knowledge, she judges that most customers would be better off if they ate
fewer sweet desserts and more fruit. Which should she display first, the
fruits or the desserts?
19
Sunstein and Thaler draw up a shortlist of four rules the director might follow
in deciding how to display food items.
Two really are non-starters: ‘choose at random’ and ‘make the customers as
obese as possible’. This leaves two plausible contenders:
20
(1) ‘She could give customers what she thinks they would choose on their
own’ [notice ‘give’ …]; or
(2) ‘She could make choices that she thinks would make the customers best
off, all things considered’.
An anti-paternalist would favour (1), but this rule is meaningful only if ‘what
the customer would choose’ can be defined independently of the director’s
choice. But it can’t:
‘consumers … lack well-formed preferences, in the sense of preferences that
are firmly held and preexist the director’s own choices about how to order the
relevant items. If the arrangement of the alternatives has a significant effect
on the selections the customers make, then their true ‘preferences’ do not
formally exist.’
So the cafeteria director has to use (2).
21
And in the UEA cafeteria ...
22
Another view ...
23
The shortlist of rules for the director didn’t include ‘Choose the display that
maximises profit’.
The (later) Nudge version of the story (now set in a school) does, but:
‘[This rule] has some appeal, especially if Carolyn [the director] thinks that the
best cafeteria is the one that makes the most money. But should Carolyn
really try to maximise profits if the result is to make children less healthy,
especially since she works for the school district?’
The reference to children is a diversionary tactic (S&T are proposing
paternalism for adults).
The thought seems to be that a cafeteria manager should be concerned with
the welfare of her customers, and not just ‘making money ’. If coherent
preferences existed, they might be treated as indicators of customers’ welfare
(and so making money would produce welfare) – but they don’t exist.
Implication: if individuals’ preferences are incoherent, the usual argument for
the market (i.e. that it satisfies preferences) is invalidated; then, paternalism is
the only defensible response.
24
Are Sunstein and Thaler being too neoclassical?
S&T instruct the planner (or cafeteria director) to nudge individuals towards
the choices that are in their best interests. But how is ‘best interest’ judged?
S&T spend much more time discussing how people can be nudged than on
how the planner decides in which direction to nudge them.
But their official position is to use an informed desire or true preference
criterion. Individuals are treated as not acting in their own best interests if
their decisions are ones ‘they would change if they had complete information,
unlimited cognitive abilities, and no lack of willpower’.
Implication: a person’s best interests correspond with the preferences he
would reveal if he had complete information, unlimited cognitive abilities, and
no lack of willpower.
Notice the implicit assumption that true preferences exist, and are coherent.
What justifies this true preferences assumption?
25
Sunstein and Thaler are effectively assuming that, inside every ‘behavioural’
human being, there is a neoclassical rational agent. The rational agent’s
optimal choices are frustrated by imperfections that are ‘external’ to it,
(imperfect information, imperfect cognition, imperfect self-control).
This idea doesn’t fit well with the methodology of behavioural economics –
the concept of true preferences seems to have come from a priori rational
choice theory, not empirical psychology.
Information, cognition and willpower are all inert without desires to act on.
Superhuman agents who had perfect information, perfect cognitive powers
and perfect willpower would still have to deal with their actual desires, which
are matters of psychology, not rationality. ‘Anomalies’ in human decisionmaking (i.e. deviations from rational-choice theory) may reflect the structure
of desires (e.g. loss aversion), not ‘error’.
So perhaps S&T are being too neoclassical. (I think my approach is more
behavioural as well as more liberal!)
26
Behavioural welfare economics: the fundamental logic
Think about the structure of Sunstein and Thaler’s argument:
1. Welfare economics is addressed to a planner, who decides what individuals
should be given (not to citizens who decide whether they want to have a
planner, or to choose for themselves how to spend their own money).
2. The planner seeks to maximise the welfare of each individual (other things
equal). There is a presumption that preference is an indicator of welfare. So,
if the individual has coherent preferences, the planner gives him what he
prefers.
3. The market may be a convenient mechanism for doing this (the invisible
hand argument); but the justification of the market is that it gives each of us
what the ideal planner would give us.
4. If individuals’ choices are influenced by ‘arbitrary’ factors, the data provided
by revealed preferences (and on which the market operates) are corrupted. So
the invisible hand argument for the market fails.
27
Two concerns about this form of argument
1. Mismatch between the liberal tradition to which Adam Smith belongs and
the idea of defending the market by taking the viewpoint of a planner, for
whom individuals’ choices are just a source of data.
2. If the argument in support of the market really applies only when
individuals have consistent preferences, its power is very limited. We all know
that our preferences are affected by ‘arbitrary’ factors (e.g. tendency to favour
status quo, sensitivity to the way goods are displayed, influence of other
people ...). ‘Given’ preferences is a modelling assumption, not a fact about
the world.
These concerns are not specific to behavioural welfare economics – they
apply to neoclassical welfare economics too.
28
An alternative approach
Behavioural and neoclassical welfare economics interpret the invisible hand
argument as claiming that markets are effective in satisfying given
preferences. (First we specify preferences, then we ask whether the market
satisfies them.)
I propose that we reformulate the invisible hand argument as claiming that
markets allow individuals to satisfy their preferences, whatever those
preferences turn out to be. (We evaluate the market from the perspective of
individuals who do not yet know what their preferences will be.)
Preference inconsistencies disable the first approach, but not the second.
29
Reconstructing the first fundamental theorem of welfare
economics
This theorem is generally seen as the core neoclassical statement of the
invisible hand argument. Roughly, it says that competitive markets are
efficient in satisfying preferences.
I’ll show how the theorem can be reconstructed so that it doesn’t refer to
given preferences. (Just the first step in a bigger project ...)
First, I’ll state the theorem more precisely, as applied to a very simple
exchange economy.
30
In this economy, there are many individuals.
There are many goods, all of which are private. There is a fixed stock of each
good, so the only economic problem is to divide these stocks between
individuals. Any division of goods between individuals is an allocation.
We start with an initial allocation (individuals’ endowments). Individuals are
then able to exchange goods by mutual consent.
Competitive equilibrium is a list of prices, one for each good, such that all
markets clear (i.e. for each good, total amount offered for sale = total
amount demanded). Trade at these prices brings about a new allocation.
It’s assumed that each individual has a ‘given’ preference ranking over all
bundles of goods, and acts on this. An allocation is Pareto-optimal if no
feasible reallocation of goods between individuals would make some
individual better off and no one worse off (in terms of their preferences).
The theorem tells us: every competitive equilibrium is Pareto-optimal.
31
A sketch of a proof of the first fundamental theorem
Deliberately, the proof is not quite standard. It proves as much as possible
using only the most minimal assumptions about preferences, and introduces
rationality assumptions at the very end. This allows us to identify desirable
properties of the market that don’t depend on rationality assumptions.
Preliminary. Competitive equilibrium can be defined without using the
concept of preference (or ‘utility’).
Conventionally, ‘demand’ and ‘supply’ (and hence market-clearing) are
defined in terms of utility-maximising choices. But all we need to assume is
that individuals make decisions about how much to buy and sell at the prices
that are on offer.
These decisions need not reveal consistent preferences (e.g. desired holdings
of goods may depend on endowments, and/or on ‘arbitrary’ framing features).
All I assume about preferences is that one good (‘money’) is always desired.
32
A possible doubt:
Competitive equilibrium is defined as a list of market-clearing prices. In
neoclassical welfare economics, this is treated as an idealised representation
of the outcome of real markets. For this idea to be plausible, do we need to
assume that individuals have consistent preferences?
No. It’s sufficient that trades are mediated by profit-seeking professional
traders (who are ‘rational’ in their professional activities). No one needs to
have consistent preferences over bundles of goods.
[I show this in a paper in American Economic Review 2004.]
33
Step 1 of proof: In competitive equilibrium, all opportunities for voluntary
transactions have been made available to individuals (severally).
Let Z be the initial allocation.
Let X be the allocation reached in a competitive equilibrium, by trades from Z
made at the price list P.
What would it mean to say that some opportunity for voluntary transaction
had not been made available?
Suppose that were so. Then there would be:
(a) a feasible allocation Y (not the same as X), reachable from X by some
composite transaction; and
(b) no party to that composite transaction (i.e. no individual whose bundle in
Y is not the same as his bundle in X) has been offered his part of the
transaction and has rejected it.
But in fact, for any Y satisfying (a): at least one party to that transaction was
34
offered his part of it through the market, and chose not to take it.
How do we know this?
X (the outcome of the market) and Y (the outcome of the composite
transaction) contain exactly the same goods. (In this economy, the only
possible transactions are exchanges.)
So: value of Y at market prices = value of X at market prices.
For each party to the transaction we can ask whether his Y-bundle is worth
more or less (at market prices) than his X-bundle. Clearly, it can’t be the case
that every party ‘gains value’ in the transaction.
So there must be at least one individual i, who is a party to the transaction,
and whose Y-bundle is worth no more than his X-bundle.
But i had the opportunity to buy his Y-bundle (or one unambiguously better)
at the market prices, and chose not to do so.
Which proves: In competitive equilibrium, all opportunities for voluntary
transactions have been made available to individuals.
35
Step 2 of proof: If each individual acts in accordance with a stable preference
ordering, then competitive equilibrium is Pareto-optimal.
For simplicity, I assume that preferences are strictly convex (i.e. there is a
uniquely optimal choice from every budget constraint) – this isn’t essential.
From Step 1, we know that if X is the outcome of the market, then for every
other feasible allocation Y, there is at least one individual i who chose not to
take his Y-bundle in exchange for his X-bundle. So, i prefers his X-bundle. So,
every feasible reallocation of X makes at least one individual worse off.
QED.
36
The significance of this proof:
Behavioural welfare economists claim that the invisible hand argument is
undermined if individuals lack coherent preferences.
But coherent preferences are needed only for Step 2.
Step 2 converts ‘In competitive equilibrium, all opportunities for voluntary
transactions are made available’ into ‘Competitive equilibrium is Paretooptimal’.
This step switches from individuals’ perspectives to the planner’s perspective.
The planner is trying to maximise each individual’s welfare; she treats ‘given’
preferences as indicators of welfare; so she needs to show that opportunities
for voluntary transactions translate into the satisfaction of given preferences.
But: For each of us as individuals, assessing what the market does for us, isn’t
‘All opportunities for voluntary transactions are made available’ sufficient? Do
we need the planner’s viewpoint?
37
How the market gives us what we want
My representation of the invisible hand:
The market gives each of us what we want and are willing to pay for, when
we want it and are willing to pay for it.
38
The market gives each of us what we want and are willing to pay for, when we
want it and are willing to pay for it.
‘Willing to pay’ = willing to give up what would induce others to take part in
the transaction.
‘When we want’: the market responds to our preferences, whatever they may
be, at the moment at which we transact (and so, whatever framing is in place
at that moment). It takes no notice of whether our preferences are
‘consistent’ or not.
If trading takes place over time, the market responds to our preferences at all
trading moments. If I change my mind from one moment to another (e.g.
today I want to sell my Nissan and buy a VW, next week I want to sell the VW
and buy the Nissan back), the market gives me what I want and am willing to
pay for at both moments (in effect, facilitating a trade between ‘me now’ and
‘me next week’).
39
Is this property of markets good for each of us (from our own viewpoints)?
Let me try to persuade you that, all things considered, this is good for us,
even if our preferences don’t meet the standards of neoclassical economics.
40
An analogy: Suppose you need to go shopping to buy food for your next
meal. You haven’t decided what you want to eat. You expect that you will
decide only when you are in the shop, seeing what is on offer (and perhaps
being influenced by the displays). At the moment, all you have to decide is
which shop to go to.
There are two grocery stores, roughly equally distant...
41
A small shop, with a limited range of products...
42
and a large supermarket, with a much wider range...
Which shop would you go to?
43
I would go to the big supermarket. (From trends in the grocery market, I infer
that many people would make the same choice.) Why?
Not because it is more effective in satisfying my existing preferences for meals
(these preferences are not yet defined) ...
... but because it will give me more opportunity to buy what I want, when the
time comes to choose. Whatever my preferences turn out to be, I will be
better able to satisfy them at the larger store. This is true, however different
my preferences then are from my preferences now.
To see this as ‘good for me’, I don’t need to ask what future choices would be
best for my welfare. I just have to be willing to delegate future decisions to my
future self.
44
The point of this analogy: opportunity can be valued by someone who can’t
predict how he will use it, and who recognises that his preferences may be
subject to ‘arbitrary’ variation.
To recognise this value, you have to take a particular attitude to your future
‘selves’: responsibility.
You (i.e. you-now, reflecting about your continuing interests) have to identify
with your future selves. You have to see ‘their’ actions as yours, whether or
not these are the actions that you-now would choose.
Taking this attitude, you-now want it to be the case that you-then are able to
get what you-then want. So, you see all opportunities, present or future, as
good for you.
45
Economists find this way of thinking about future selves surprisingly difficult
to grasp.
Because economists like using rational-choice models, their inclination is to
model the relationship between selves as a game between agents with
conflicting interests. In these models, the present self thinks of the future
self as if it were a different person, liable to frustrate the present self’s
intentions.
So, in cases like the supermarkets, they immediately think about self-control
problems...
What if I-now am worried that the supermarket displays will tempt me-then
to buy something that I-now think would not be good for me-then?
Can I-now use the choice of the smaller supermarket as a way of constraining
me-then?
And so on...
46
Of course, genuine self-control problems (i.e. cases where people want to
impose constraints on themselves) do sometimes occur.
But I suggest that these problems are far, far less common than cases in
which people can’t fully predict their future preferences, have no expectation
that their preferences will be consistent, but have no desire to impose their
present preferences on their future selves.
For most of us, most of the time, it is entirely sensible to delegate future
choices to future selves.
So, if markets tend to give us what we want, when we want it, that’s not such
a bad deal.
47
Back to Sunstein and Thaler’s cafeteria...
In a competitive market, what displays will cafeteria managers choose?
Obviously: the displays that maximise profit. So, the more costly forms of
display will be used for the products for which display has the largest impact
on customers’ willingness to pay.
I conjecture: chocolate- and cream-rich desserts offer more scope for this
form of added value than apples and bananas.
48
Compare a supermarket-style display of cakes ...
49
... with a coffee-shop display.
The coffee-shop display is more costly, but also more tempting.
50
If competitive cafeterias choose prominent displays of their less healthy
options, does that count against the invisible hand?
It’s easy to say that other people should be steered away from buying what
we think isn’t good for them. So, academic economists, philosophers and
lawyers who would never dream of entering a McDonald’s are often happy to
recommend nudges directed at people who do.
But when you think about the restaurants that you go to, and the delicious but
unhealthy dishes that you like, do you really want the management to use
deliberately untempting displays (e.g. hygienic but cracked plates, tasteless
and harmless but unattractive colourings)? Or do you want the restaurant
owner to try to offer you dishes that you will want to order?
51
So, when the cafeteria director chooses a prominent display for the desserts,
that isn’t necessarily a matter for shame on her part or disapproval on ours.
What she is doing isn’t just ‘making money’ (as Sunstein and Thaler say). She
is seeking out voluntary transactions with customers. She is trying to offer
them what, when they see it, they will want to buy.
That cafeterias try to do this isn’t such a bad thing for me as a potential
customer.
52
[3 min or 1 min]
Mutual advantage
I have said that that the manager of the competitive cafeteria isn’t just
making money, she is seeking out voluntary transactions with potential
customers. What does this mean?
I want to suggest a way of thinking about market relationships that is slightly
different from Adam Smith’s.
Adam Smith on the motivation of shopkeepers:
53
It is not from the benevolence of the
butcher, the brewer, or the baker, that we
expect our dinner, but from their regard to
their own interest. We address ourselves,
not to their humanity but to their self-love,
and never talk to them of our own
necessities but of their advantages. Nobody
but a beggar chuses to depend chiefly upon
the benevolence of his fellow-citizens.
Adam Smith, Wealth of Nations, 1776, pp.
26-27.
Notice contrast between self-love and benevolence. Smith is saying that the
shopkeeper isn’t benevolent, he is self-interested (‘making money’). The
invisible hand converts private self-interest into public benefit.
54
But there is another possible motivation: mutual benefit, i.e. acting on the
intention to benefit oneself and one’s trading partners together.
This is neither self-interest nor benevolence. Compare: playing one’s part in
cooperative arrangements.
So: the cafeteria director who tries to supply what her customers want to
buy can be motivated by mutual benefit – just as participants in other
cooperative practices (e.g. voluntary supply of public goods, trust) can be.
55
A text from an Italian economist, a contemporary of Adam Smith’s:
Antonio Genovesi, Lectures on Commerce, or on Civil Economy, 1765-67. The
concluding paragraph of his series of lectures on economics:
Here is the idea of the present work. If we fix our eyes at such beautiful and
useful truths, we will study not for stupid vanity ... but to go along with the law
of the moderator of the world, which commands us to do our best to be useful
to one another.
Genovesi is telling his students that economics teaches us how to be useful
to one another, i.e. how to achieve mutual benefit through cooperation.
56
We can understand the market as an institutional framework that facilitates
mutually beneficial transactions. That is why it tends to give us what we
want and are willing to pay for, when we want it and are willing to pay for it.
Well-motivated market participants construe their transactions as
relationships of mutual benefit.
We should be cautious about disabling the mechanisms by which markets
tend to facilitate voluntary transactions. Even when our preferences are
inconsistent, the invisible hand may be at work.
57
Thank you for listening.
2
3
4
58
[offcut]
But Sunstein and Thaler are not completely opposed to restricting choices:
‘How much choice should people be given? Libertarian paternalists want to
promote freedom of choice, but they need not seek to provide bad options,
and among the set of reasonable ones, they need not argue that more is
necessarily better’ (2003, p. 1196).
[Notice suggestion that people are ‘given’ choice options by a benevolent
planner. Not: people propose transactions to one another.]
59