By Madhusudan Raj on Mises India

Chapter 2, Vol I of the Economic Survey of India 2018-19 begins with this title: Policy for Homo Sapiens, Not Homo Economicus: Leveraging the Behavioural Economics of “Nudge”. It starts with the following Sanskrit stanza: We cannot rely totally on rational thinking to gain information, as it is not without its bias. The following is the short abstract of this chapter:

Decisions made by real people often deviate from the impractical robots theorized in classical economics. Drawing on the psychology of human behaviour, behavioural economics provides insights to ‘nudge’ people towards desirable behaviour. This chapter illustrates how the Swachh Bharat Mission (SBM) and the Beti Bachao Beti Padhao (BBBP) have successfully employed behavioural insights. Using such learning, the chapter lays out an ambitious agenda for social change: (i) from BBBP to BADLAV (Beti Aapki Dhan Lakshmi Aur Vijay Lakshmi); (ii) from Swachh Bharat to Sundar Bharat; (iii) from “Give it up” for the LPG subsidy to “Think about the Subsidy”; and (iv) from tax evasion to tax compliance. First, a key principle of behavioural economics is that while people’s behaviour is influenced significantly by social norms, understanding the drivers of these social norms can enable change. In India, where social and religious norms play such a dominant role in influencing behaviour, behavioural economics can therefore provide a valuable instrument for change. So, beneficial social norms can be furthered by drawing attention to positive influencers, especially friends/neighbours that represent role models with which people can identify. Second, as people are given to tremendous inertia when making a choice, they prefer sticking to the default option. By the nearly costless act of changing the default to overcome this inertia, desired behaviour can be encouraged without affecting people’s choices. Third, as people find it difficult to sustain good habits, repeated reinforcements and reminders of successful past actions can help sustain changed.

So Modi government, as other governments around the world, has found a new excuse in the form of Behavioral Economics to suppress people of India. Behavioral economics is a relatively new school of psychology, calling it a school of economics will be a travesty, which supposedly corrects the mistakes of mainstream neoclassical economics, and by doing so helps the state (aka government) to form better (sic) public policies like what the Modi government’s economic survey is saying above. The mainstream neoclassical economics assumes that human beings are some kind of utility maximizing machines i.e., homo economicus (economic man). Neoclassical economists defined rationality in this strict sense of utility maximization assumption of theirs. This assumption and following theorizing was obviously wrong. Austrian economists like Ludwig von Mises and Murray Rothbard pointed out these mistakes long before the behavioral economists arrived on the scene, but no one listened to them because their conclusions were politically incorrect i.e., they won’t help the state in its goal of controlling and regulating people more and more. Mises and Rothbard recognized that all human beings are rational in that they are using various subjectively valued means to achieve their subjective ends. They took their choices as a demonstration of their preferences and left them alone. They did not impose their own notions of rationality on people, like these modern behavioral economists, and when they failed to meet those rationality standards they started calling them irrational who are in need of nudging from the state!

Various psychologists and mainstream economists like Herbert Simon, Vernon L. Smith, Harvey Leibenstein, Daniel Kahnamen, Amos Tversky etc., via their subjectively conceived laboratory experiments showed that human beings are not homo economicus but their decisions are influenced by not just economic considerations but also by social and psychological considerations. But unlike Mises and Rothbard, these psychologists and economists started calling human beings irrational because they were not behaving according to the (wrong) assumptions of mainstream neoclassical economics! Harvard economists, one of them won Nobel prize in 2017 for his work in behavioral economics, Richard Thaler and Cass Sunstein went further ahead and said that because human beings are irrational or misbehaving, and they are emotional beings who don’t know what is good and bad for them, they need the help of the benevolent paternal Nanny government to nudge  them in the right direction; the direction that was determined by wise (sic) politicians and these behavioral economists!  In this way behavioral economics provided one more excuse for the government to suppress people and their freely made choices which the state officials don’t like or disapprove of.

Behavioral economists like Richard Thaler, Cass Sunstein, Dan Ariely or Modi and his advisors don’t tell us that if all human beings are irrational and emotional fools then how politicians and their advisors like they themselves, who are also homo sapiens, automatically become rational and in a position to nudge other people in the right direction? If we citizens are irrational and don’t know what is good and bad for us then Narendra Modi and his advisors are also irrational and don’t know what is good and bad for people. How can they know what 140 crore Indians want and what is good and bad for them? Last five years of Modi government, which implemented irrational policies like demonetization and GST, proves this fact beyond any doubt.

Modi and his advisors are using behavioral economics as just another excuse to centrally plan our lives. This is nothing but totalitarianism, and this totalitarianism is not going to end well.