I’m glad that the 2017 Nobel Prize in literature went to the Japanese-born British author Kazuo Ishiguro – whose novels include the ‘The Remains of the Day’ and ‘Never Let Me Go’.
The Nobel committee last year controversially awarded this hallowed prize to singer-songwriter Bob Dylan, who refused to comment for weeks, then snubbed the formal prize ceremony. This time, the Swedish Academy has played safe, opting instead for a widely admired novelist, albeit one whose works have been remade as blockbuster movies.
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I’m equally pleased that the 2017 Nobel Prize in economics has gone to Professor Richard Thaler – the foremost practitioner of the relatively new field of ‘behavioral economics’. Unusually for an economist, Thaler likes to engage with the real and messy world of policy-making, openly chiding abstract theoretical modeling while admitting that entirely market-based analysis is flawed.
As such, Thaler and the ‘behavioral school’ combine a practical understanding of financial incentives with concrete findings from psychology, sociology and other related subjects. In sum, Thaler and his growing band of acolytes seek to make economics more human and, therefore, more realistic.
While Thaler is a worthy winner, the Nobel Prize in economics isn’t really a Nobel Prize. There are five of those – in physics, chemistry, medicine and peace, as well as literature. These have all been awarded since 1895, the year before the death of Alfred Nobel, the Swedish industrialist who famously made his fortune by inventing and selling dynamite.
It was only in 1969 that the Swedish Central Bank began dishing out a ‘Nobel’ medal each year for economics. It remains separate from the main prizes established in his will – and so it should. That’s because Nobel was a scientist – and economics, categorically, is no science.
Recent recipients of the economics Nobel have been rewarded for work that claims to have established ‘certainties’, made ‘findings’ and discovered ‘scientific relationships’ – all of which, when it comes to economics, is bunkum. Economics is, or at least should be, a study of human behaviour – above all, the allocation of scarce resources between competing ends. It requires the analysis of economic, commercial and financial life in all its human and institutional richness, or it is nothing. A solid grounding in theory and numeracy is essential but so, too, are broad dashes of politics, history, sociology and common sense.
We live in extremely tough times. Markets are volatile, trade wars are brewing and, as our societies age, we’re juggling with nasty demographic time bombs. The Western world is now so indebted that some large economies are creating money ex nihilo to buy up vast swaths of their own government bonds. And economic power is rapidly shifting east – a process that scares far more of our citizens than it inspires.
Yet academic economists, with a few honourable exceptions, have little to say about such uncomfortable realities. Those who do so are dubbed ‘controversial’ or ‘maverick’ – apparently doing little to improve their ‘Nobel’ chances. It is vital, though, that if economists are to retain any legitimacy with the broader public, that they engage with, and tackle, the pressing issues of our day – in a practical, hands-on manner.
Too often, the Nobel judges, those in control of the world’s premier economic prize, have chosen to anoint academic time-servers – theoretical economists who have barely engaged with the real world, writing only for a narrow audience and risking nothing. In Thaler, though, they have finally recognized an economist not only with the required academic credentials, but who has left his Ivory Tower to work for numerous governments and is also a best-selling author.
‘Can I call you the undismal scientist?’ I asked Thaler, in an extended interview in 2016.
‘Well, it’s better than what I’ve previously been called,’ the laid-back University of Chicago professor replied with a smile. ‘For ten years or so, my name was ‘that jerk’,’ Thaler told me, while chuckling. ‘But that was a promotion. Before that, I was ‘Who’s he?’
Much of the conversation I held with Thaler last year recounted the academic battles that shaped him. ‘You get your ideas straight when you argue with those whose views are most different from yours,’ he told me. Far from otherworldly, Thaler’s academic research has been adopted by governments across the globe.
Struggling with his doctorate in the early 1970s, he faced an economics discipline focused on mathematical models assuming people always behave rationally. He fought back, insisting that economics should open-up to other social sciences, acknowledging emotion, bias and whim.
Reflecting on a career that’s taken him from undergraduate studies in Ohio to Stanford and Cornell, Thaler says he found a ‘perhaps unlikely’ long-term home at the University of Chicago – a citadel of free-market economics, not a natural berth for a cross-disciplinary iconoclast. ‘I went with my eyes open, and it’s been great,’ Thaler told me. ‘What I’ve learnt at Chicago and elsewhere is that adding real people to economic theories isn’t only fun, it also improves the accuracy of your predictions’.
In 2008, Thaler co-authored “Nudge: Improving Decisions About Health, Wealth, and Happiness”, which highlights how individuals and organizations often make terrible choices – from education to personal finance and road safety. Thaler’s response is to come up with policies that work with human nature, nudging people towards acting in their best interests.
An international bestseller, ‘Nudge’ brought Thaler policy influence – particularly in the UK. After the Tories took office in 2010, he helped set-up and run the fabled Behavioral Insights Team in Downing Street – the ‘Nudge Unit’ – that continues to play a significant role in British policy-making.
Since 2012, many UK employees have been automatically enrolled into occupational pensions – a policy, lifted from ‘Nudge’, that recognizes inertia. Opt-out rates have been small, yielding 90% take-up. The UK tax authorities have also adopted Thaler’s findings, based on psychological experiments, by re-writing letters to late-payers telling them they’re ‘in a small minority who haven’t paid on time’. Payments rose, compared to the standard wording, by almost 10%.
The UK’s Nudge Unit has now been spun out from the Cabinet Office and partially privatized, while inspiring copycats institutions in Singapore, Australia and the US. Thaler’s broader aim is to encourage governments to nudge consumers towards better decisions using enhanced data. ‘We need what I call ‘choice engines’, where you go online, enter your national insurance number and get a list of everything you own and are entitled to in terms of pensions, mortgages and so on,’ he says.
Thaler criticizes Britain’s notoriously opaque consumer energy market – now at the top of the political agenda, with the Tories recently proposing a price cap. ‘There’s no reason it can’t be competitive, if firms were compelled to make all information available, in an intelligible, comparable form,’ he told me.
Thaler’s latest book – ‘Misbehaving – the making of behavioral economics’ – is part intellectual history, part novelized memoir. It’s packed with thoughtful and often funny writing, as the author tells of his struggle to bring academic economics back down to earth.
Having been heavily criticized for largely failing to prevent or even foresee the 2008 financial crisis, can the economics profession repair its reputation?. ‘Yes, it can – we’re still digging ourselves out of that financial crisis, but it was largely a behavioral phenomenon,’ he says.
‘We had real estate bubbles all over the place, and there was misbehaving at every level – how did that happen?’ Thaler asks. ‘While homeowners were refinancing their mortgages and buying cars and vacations, we had mortgage-backed securities (MBSs) containing such loans classified as triple-A by the ratings agencies – that was not rational behavior’.
I asked Thaler if we’ve faced up to the fraud that drove the banking collapse. ‘Only partly,’ he replies. ‘I want to see every bit of data about every mortgage in an MBS freely available’ he says. ‘And when it comes to the opacity of our banks, we need more disclosure’.
On the question of Europe, Thaler wanted the UK to stay in the EU – ‘divorces are always less amicable than you expect’, he says. But he is, at the same time, a vociferous critic of the single currency. ‘It was a lousy idea, and Britain was smart not to join,’ he says. ‘The idea you could trust some of the other governments involved to keep accurate fiscal accounts was always a bit preposterous – I mean, Berlusconi?’
The euro ‘came along at exactly the time it was no longer needed, because you could walk into any city with your ATM card or use a credit card,’ says Thaler. ‘We certainly don’t need the euro now, not least as people barely use cash,’ he argues. ‘One thing I would like to see is abandoning physical cash altogether – as it would aid fighting corruption, with everything on the books’.
As our conversation ended, I ask Thaler if the economic profession remains too remote, and distrusted. ‘We have a long way to go,’ he concedes. ‘I’m happy, though, many of the best and brightest young economists are very open to behavioral ideas’.
The novelist Kazuo Ishiguro, according to the Nobel literature prize committee, ‘uncovered the abyss beneath our illusory sense of connection with the world’. I’d say that Thaler, too, has highlighted, and then thumbed his nose at, the ‘illusory sense of connection with the world’ exhibited by much of the sheltered and rather snooty economics profession – and rightly so.