The Community of Advantage: A Behavioural Economist’s Defence of the Market. Robert Sugden. Oxford University Press. 2018.

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A standard character in critiques of economics is ‘homo economicus’. This figure encapsulates what economists are meant to believe humans are like, with the ability to ‘think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the willpower of Mahatma Gandhi’, as Richard Thaler and Cass Sunstein satirically put it. This unrealistic view of humans – rational, informed and calculating to the extreme – is believed to be behind economists’ faith in free markets. After all, if such extraordinary beings as homo economicus agree to participate in a market transaction, they must know what they are doing – whether we are talking about bankers making risky investments, savers deciding how much to put aside for their pensions or shoppers loading up on discounted junk food.

Behavioural economists, such as Thaler and Sunstein, catalogue the various ways in which real humans are nothing like homo economicus: the decisions we make are impulsive, inconsistent, shaped by our context and open to manipulation. Bankers throw good money after bad chasing their losses, savers put off dealing with their retirement, shoppers are tricked by cleverly designed promotions. Much of behavioural economics involves developing schemes to correct these apparent mistakes by influencing or even blocking individuals’ wrongheaded choices.

As the subtitle of Robert Sugden’s new book – ‘A Behavioural Economist’s Defence of the Market’ – would indicate, he favours a different approach. He readily accepts that homo economicus is a poor guide to actual behaviour, but he denies that this justifies market intervention – or certainly not as regularly as other behavioural economists suggest.

The argument has three elements. First, Sugden challenges the presumptuousness of much economic analysis (including behavioural economics), geared towards producing ‘policy recommendations’ without questioning the legitimacy or practicality of enacting such policies. Economics typically operates, he suggests, as though addressed to an ‘impartially benevolent autocrat’. Sugden favours an alternative approach that he calls the ‘contractarian model’: recommendations should be addressed to all affected individuals, showing how they will all benefit from the proposal, in terms that they will all accept.

Second, the book challenges the common claim that behavioural economists are not imposing their values upon others, but are merely trying to make people better off as judged by themselves. For example, supermarkets displaying confectionary by the checkouts may draw people’s attention to the sweets and tempt them into buying them through non-rational processes. Some behavioural economists, concerned about the health effects of eating too many sweets, suggest that people would be better off if they were moved to a less prominent part of the store so that they don’t buy them. On what grounds do the behavioural economists say people are better off? There is a sense in which people want the confectionary when it is displayed before them. It is also true that most people do not want to increase their risk of obesity, diabetes and other ailments. Typically, behavioural economists claim that because the desire for the sweets is unduly influenced by non-rational factors, the health concerns are more ‘genuine’. More generally, the standard behavioural economics approach is to attempt to ‘purify’ our preferences of irrelevant and irrational factors, and to help us live according to our underlying ‘latent preferences’.

This assumes, as Sugden puts it, that we all have a ‘rational inner agent, trapped inside and constrained by an outer psychological shell’ (82). He argues that this is empirically false – people do not have consistent context-independent underlying preferences. We might care more about our health when we are shown alarming statistics or feel unwell, but this preference is no more ‘genuine’ than favouring chocolate over health at the supermarket.

Instead of trying to do the impossible and work out what people’s latent rational preferences are, Sugden suggests that we should seek to increase people’s opportunities: the range of options open to them. This follows from his contractarian model because Sugden contends that regardless of our individual values, we all have reason to value greater opportunity. This means that measures that increase opportunity can be justified to anybody in a way that, say, measures to increase health may not (because the person affected may not prioritise their health).

This leads to the third element of his argument: defending the market.  The value of the free market, in Sugden’s view, is that profit-seeking traders will always try to supply consumers with whatever they want and are willing to pay for. As such, free markets provide people with maximal opportunities: not only what they want today, but anything that they might want in the future.

The Community of Advantage is a rich and wide-ranging work, touching on welfare economics, political philosophy, value theory and meta-ethics. Apart from the formal analysis of the later chapters, it is clear, readable and accessible, even for novices. Almost inevitably, Sugden’s treatment of some of these subjects is more superficial than others, but his book hangs together well as a unified, coherent and plausible worldview, set in opposition to the dominant approaches of orthodox and behavioural economics. Whether you swallow it whole or reject the entire argument, there are insights, objections and challenges to learn from throughout.

The book’s most valuable contribution, I believe, is to behavioural economics. There is a tendency in the discipline to assume that interventions can be justified with airy appeals to people’s ‘true’ preferences. Sugden’s arguments go some way to keeping behavioural economists honest and pressing them to make clear how exactly they think they are making people better off. At the same time, I am not convinced that confronting tough questions on value inevitably leads us to Sugden’s conclusion that we should focus on increasing opportunity.

For decades, the standard criterion of value in economics has been preference satisfaction: the more of your preferences that are satisfied, the better off you are. Some people believe this is a fundamental philosophical truth: that you are better off because your preferences are satisfied. Sugden’s argument exposes the inherent difficulties of maintaining this view, by demonstrating that people’s preferences may be irreconcilably conflicted. Yet I suspect that if you push them, as Sugden is trying to do, most economists would say that satisfying preferences is not valuable in itself, but just a convenient proxy for promoting some other good. Historically, one reason that economists have focused on preferences is the belief that people are happier when they get what they want, and because preferences are believed to be more readily observable and measurable than happiness. But it is happiness that the economists think is really valuable.

If this is the case, then the potential regulator deciding whether to restrict confectionary displays should not be worrying about whether people ‘really’ want to eat chocolate or be healthier, but rather which of those options will make them happier. That is not an easy question to answer, but it is the question that matters. I am using happiness as the example here, but we can run the same argument with anything that might have value – flourishing, knowledge, health, autonomy. The point is that we cannot hide behind others’ preferences, but need to be explicit about what we think really has value.

The obvious objection is that it is paternalistic for economists, policymakers or even fellow citizens to force their values on other people. But why should they want to avoid paternalism? Presumably because it involves too great a restriction of autonomy or dignity. This just raises a different, familiar, sort of value judgement: is the benefit in terms of happiness/welfare/health worth the cost in terms of autonomy/dignity?

Sugden wants to avoid such fundamental questions of value altogether. His contractarian approach implies that what matters is what we can get people to agree on, and he believes everybody should agree on the value of opportunity. Leaving aside whether in fact everybody would agree to this, Sugden does not say enough about why we should care about this supposed consensus. As a matter of pragmatic politics, measures need to have sufficient popular support to be effective, but here we are talking about abstract questions of value, not trying to pass specific measures. As an individual moral agent, it is unclear why anybody should set aside their own personal view of what has value in favour of opportunity, just because that is the lowest-common-denominator principle acceptable to everybody else.

Sugden’s arguments may not persuade everybody, but they represent a plausible alternative to the orthodox approach and will push many within the mainstream to clarify their thinking. As such, it is an essential philosophical grounding for anybody with an interest in behavioural economics.

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Notes:

  • This blog post appeared originally on LSE Review of Books.
  • The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
  • Featured image: Rachel D CC BY 2.0
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Aveek Bhattacharya is a PhD student in social policy at LSE, where his research focuses on secondary school choice. He blogs at Social Problems Are Like Maths, and you can follow him on twitter @aveek18.