William Paul Bell Queensland University Researcher

Why is mainstream economics not a social science but ideological mathematics?

Comparing the role of government in self-control problems from behavioural and neoclassical economic perspectives

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In my previous post, titled ‘The G8 protests and the logically inconsistent foundations of neoclassical economics’ , I discussed how neoclassical economics is theoretically and philosophical flawed and how it has become entrenched in our political systems via university economics departments indoctrinating undergraduates with the neoclassical ideology. The current article discusses how the indoctrination produces a world view that causes confusion over the role of government and the concept of freedom of choice. Additionally, the current article provides an economic perspective on  ‘Weighing the blame for illness: biology versus personal responsibility‘ by Dena T. Smith.

One of the axioms in neoclassical economics is that individuals are utility maximising agents who know their own preferences and have constant tastes, unlimited cognitive ability and access to all the relevant information.  These utility maximising assumptions are obviously incorrect.  However neoclassical economics uses these assumptions to derive the ‘Fundamental Theorems of Welfare’.  Simply, individuals without government interference make the optimal decisions for themselves and via the invisible hand for the whole economy.  It is optimal in the sense that you cannot make somebody better off without making somebody else worse off.

Among other issues, behavioural economics addresses self-control problems, which range from the fairly minor, such as watching too much TV, to significant social problems, such as obesity, smoking, drinking, drug-taking, gambling, speeding, and using too much credit and the inability to save.  These self-control problems are sufficient to prove the ‘Fundamental Theorems of Welfare’ is invalid without the need to address all the other anomalies of the utility maximising assumptions.

Some of the controls that governments introduce to ameliorate for self control problems infringe on the freedom of choice but they are uncontroversial for example breath testing for drink drivers, safety belts and the sale and advertising of alcohol and tobacco.  Legislation to deal with these self control problems can be viewed from addressing the supply side or demand side.  Examples of legislation affecting the supply side are reducing the trading hours of alcohol retailers or restricting the number of alcohol suppliers.  Legislation that affects the demand side includes: education, promoting alcoholics anonymous and constraints on advertising.  Obviously the alcohol industry fights any restrictions on advertising.

The ultimate supply side constraint on alcohol was the prohibition in the USA, which had the effect of spawning organised crime and police corruption.  The “war on drug” is another supply side effort that has unsurprisingly spawned more organised crime and police corruption.  An additional result of the “war on drugs” is the high price of drugs,  which requires drug users to steal and recruit more users to sell drugs to fund their own habit.  The latter produces pyramid marketing. The alternative approach is to legislate on the demand side by decriminalising the drugs and treating drug addiction as a disease for example in Switzerland, Portugal and Holland.

An alternative to legislation is taking legal action against the offending company.  If you get fat from eating at McDonald’s or get lung cancer from smoking, sue them.  While this litigious approach is lucrative for the legal system, it is more akin to an ambulance at the bottom of the cliff with the complainants allowed to buy expensive lotto tickets.  Surely it is better to prevent the population becoming obese or contracting lung cancer.

While not claiming that all self-control problems can be treated identically, there are some commonalities.  The demand side legislation on restricting advertising, providing education and treatment appears more appropriate  for self-control problems than criminalising the problems, which ensues more problems.  The demand side approach acknowledges the findings of behavioural economics that people are fallible and slants the environment to help people make a better choice. The supply side approach tries to remove freedom of choice.  From a neoclassical perspective, people are utility maximising agents, so ought not to make bad choices.  If they fail to maximise utility, they are just bad or faulty people and should be punished.

My post Capital Asset Pricing Model (CAPM) and Efficient  Market Hypothesis (EMH) Contributing to the Global Financial  Crisis (GFC) discusses how the neoclassical ideology affects the worldview of people in the financial markets.

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