Since assuming office, US President Barack Obama has attempted to assess why markets become overheated and then come crashing down. He read Cass Sunstein’s much acclaimed book Nudge to get a sense of how government regulation can wean people away from poor decision making. Using behavioural economics, Sunstein suggested “libertarian paternalism” as a weapon to help people nudge a herding tendency that often determines investor behaviour.
The critical question, however, is not whether people should be steered towards the right choice but to ascertain what indeed is right. Jonathan Aldred, a University of Cambridge economist, dismisses the idea of economic success as the indicator of right decision; he concurs that ethical economics is what determines smart decisions. In his revealing and entertaining book The Skeptical Economist, Aldred says that economics is not an agreed body of knowledge or an objective science. Instead, it is built on ethical foundations—how we ought to live, and what we should value.
Given the widest of choices at hand, Aldred laments, the market has denied consumers the expression of moral convictions. The Skeptical Economist responds to the malaise about quality of life, and a growing curiosity about economics and its relevance to life. The book conveys a sense of hope without being utopian.
The Skeptical Economist -- Revealing the Ethics Inside Economics: Hardcover, 256 pages, £24.95 (around Rs1,900).
Traditional economic analysis recommends paying doctors according to the number of tests they perform, in order to “incentivize” them to increase productivity. Common sense points out that doctors will then stop doing anything for which they don’t receive a financial incentive. Aldred rubbishes the idea that incentives are the cornerstone of modern life, a message asserted by Steven D. Levitt and Stephen J. Dubner in Freakonomics. He also questions the assumption that higher output per capita means progress, or happiness. Since we rapidly adapt to increased material affluence, rising wealth puts us on a happiness treadmill.
Though written in a style that is in parts convoluted, The Skeptical Economist is an astonishingly good book. The author concludes that economists need to stop bending the world to fit their theories, and pay more attention to ethical considerations. This is as much a book for Obama as for those who believe that traditional economic considerations have failed them and dragged the world into one of its worst downturns.
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