In the first of this three-post series I offered a sound file of Dan talking about the limits of rationality when devising and regulating public services.
In the second, we explored how Treasury’s un-trustworthiness dealing with TARP and the financial meltdown has led to social anxiety and depression.
While writing that second post it occurred to me if our elected and appointed officials been truthful and upfront in their dealings with $700b bailout, we’d already have a healthcare reform bill.
It also occurred to me that we hold public servants to a higher standard than CEOs of healthcare. When healthcare execs earn blood money by standing between us and our doctors, we shrug it off by saying “Hey, that’s just capitalism,” or “Oh well, cost of doing business,” but when our elected officials stand between us and our doctors we get nuts because that’s rationing.
What Ariely has to say about our beloved invisible hand of the market
In the updated version of Predictably Irrational, Ariely observes about his own profession:
Rational economics has always been the basis for setting up policies and designing our institutions. What’s wrong with that? Neoclassical economics is built on very strong assumptions that, over time, have become ‘established facts.’ Most famous among these are that all economic agents (consumers, companies, etc., are fully rational, and that the so-called invisible hand works to create market efficiency). To rational economists, these assumptions seem so basic, logical, and self-evident that they do not need any empirical scrutiny.
Building on these basic assumptions, rational economists make recommendations regarding the ideal way to design health insurance, retirement funds, and operating principles for financial institutions. This is, of course, the source of the basic belief in the wisdom of deregulation: if people always make the right decisions, and if the “invisible hand” and market forces always lead to efficiency, shouldn’t we just let go of any regulations and allow the financial markets to operate at their full potential?
On the other hand, scientists in fields ranging from chemistry to physics to psychology are trained to be suspicious of ‘established facts.’ In these fields, assumptions and theories are tested empirically and repeatedly. In testing them, scientists have learned over and over that many ideas accepted as true can end up being wrong; this is the natural progression of science. Accordingly, nearly all scientists have a stronger belief in data than in their own theories. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful, logically appealing, or mathematically convenient.
Unfortunately, such healthy scientific skepticism and empiricism have not yet taken hold in rational economics, where initial assumptions about human nature have solidified into dogma. Blind faith in human rationality and the forces of the market would not be so bad if they were limited to a few university professors and the students taking their classes. The real problem, however, is that economists have been very successful in convincing the world, including politicians, business people, and everyday Joes not only that economics has something important to say about how the world around us functions (which it does), but that economics is a sufficient explanation of everything around us (which it is not). In essence, the economic dogma is that once we take rational economics into account, nothing else is needed (emphasis added).
In sum, we trust theories more than facts. No wonder we’re in such a quandry.