Sunday, December 11, 2011

A heterodox economist looks (disapprovingly) at market design

Ana Santos writes, not-entirely-unsympathetically, about choice architecture and market design, based on her reading of Thaler and Sunstein's book "Nudge...," and my survey article "The Economist as Engineer..." Her remarks include a novel (to me) objection to creating institutions in which individual goals don't conflict with social welfare: in the absence of such conflict, your "ethical muscles" would grow lax from not needing to be used. (Really; see the end of this post...)

Ana C. Santos, "Behavioural and experimental economics: are they really transforming economics?," CAMBRIDGE JOURNAL OF ECONOMICS 35, 4, 705-728, JUL 2011

"The purpose of choice architecture is to prepare contexts of choice to help individuals make better choices, as judged by individuals themselves, or by society as a whole (Thaler and Sunstein, 2003, 2008). Design economics is in turn devoted to the conception of specific allocation mechanisms that aim at coordinating individual actions for the accomplishment of the goals set by the designer (Roth, 2002). Rather than assuming that markets emerge spontaneously and automatically generate efficient allocations of resources, design economics puts at the forefront the complex social engineering processes involved in the building of markets and market-like allocation mechanisms that determine individual outcomes and the aggregate results that are obtained by having people interacting under those mechanisms."
"Not only do these proposals retain the fundamental principles of neoclassical economics—rationality and efficiency—they also continue to promote their expansion to various domains of social life. Through the architecture of contexts of choice and the design of market mechanisms, economists are putting their expertise at the service of individual rationality and economic efficiency, within and beyond the traditional domain of economics.

"Choice architecture and design economics promote a particular version of economics imperialism that goes beyond the mere export of its concepts to territories traditionally occupied by disciplines other than economics. They actually aim at inculcating economic calculus in human deliberation and introducing market-like forms of social interaction where they have been absent. In other words, what is at stake here is the deliberate attempt to make society more like its description in neoclassical economic theories, i.e. the performativity of economics (Mackenzie, 2006; Callon, 2007; Mackenzie et al., 2007). Whether or not they have succeeded in this endeavour is an empirical question that cannot be addressed here. For now, it is suffice to note that while taking into account predictable behavioural irrationalities and the opportunistic behaviour of economic agents in their policy proposals, both choice architecture and design economics retain and promote the expansion of the neoclassical concepts of rationality and efficiency in their market-based solutions."

The article includes a novel argument against aligning individual incentives with social welfare:
"In markets people are less compelled to follow non-market norms and values. By aligning self-interest with the interests of others, market mechanisms moreover obviates the need for ethical reasoning; as a result, individuals no longer have the opportunity, as Steve Turnbull puts it, to ‘flex their ethical muscles’ (Frohlich and Oppenheimer, 2003, p. 290). Individuals’ ability to behave in accordance with non-market norms and values, then, will be seriously compromised. On the contrary, living with the tension between the best strategy from a rational, self-interested point of view and the ethically best strategy keeps the ethic imperative active."


Banantonio said...

Is making sure that kids in New York have a high school to go to unethical? Is ensuring that more people in need of a kidney transplant get one unethical? Haha...

dWj said...

The technology of market design could probably be used to make coordination problems worse, if that's really what one wanted.

Anonymous said...

The purpose of building good institutions and market rules is you don't want to give criminals or the truly opportunistic free rein. These are people who will never reflect on their moral obligations or "flex their ethical muscles." And if you let them go hog wild, they will do some incredible damage to society and innocent people.

The degree to which Santos is out of touch is jaw dropping. Society is not one big homogeneous group of "good people" who will do the right thing if you just give them the opportunity. It is heterogeneous group that includes a non-trivial fraction of sociopaths. Let Santos do her social experiment and the wolves will eat the sheep.

Tim said...

First, I do not understand why in the title you include the word heterodox economist. Unless it is to discredit the author through association.

Second, the author is taking position on human nature. That is people are inherently good, and therefore "must be given a chance to flex their ethical muscles". This position, is once again, not particular to heterodox economists.

It is just a philosophy that the author subscribes to. The author could have subscribed to Hobbes' view that people are inherently bad. It has nothing to do with being orthodox or heterodox.

Third, there is a middle ground in all this. Many bad actions are not from bad intentions, but simply due to ignorance of the consequences. These people will reform their behavior upon determining the consequences of their actions. On the other hand there are bad people, who intend to do wrong. I guess market design, and law for that matter, has to take into account the actions of latter group, where as more information will be sufficient for the former group.