Richard Thaler’s Nobel Should Nudge Economists to Think More About Ethics

The Modi government could have drawn upon behavioural economics to curb the use of cash in India without enacting demonetisation and its accompanying disruptions.

Richard Thaler. Credit: Kamil Krzaczynski/Reuters

Richard Thaler. Credit: Kamil Krzaczynski/Reuters

Richard Thaler, winner of the 2017 Nobel Prize in economics, is one of the chief protagonists of the behavioural school of thought within economics. Over the last decade or so, this particular school of thought has allowed for a marriage between the fields of psychology and economics. Thaler, Daniel Kahneman (awarded the economics Nobel in 2002), Amos Tversky and Cass Sunstein are among a handful of people who have challenged a few foundational assumptions of mainstream economic thinking, which are often seen as narrow, self-interest maximising and utilitarian.

A key aspect of Thaler’s work brings out the importance of seeing economic agents as human beings, driven by complex ideas and thoughts, who are inconsistent decision makers. The motivations shaping individual decision-making often make economists address questions like: What ought to be done to maximise and satisfy our preferences? What is good for an individual to do using a utilitarian framework of reasoning?

Nevertheless, in this quest to understand the decision-making behaviour  of apparently rational and self-interest maximising beings, a question that arises for most mainstream economists is, to what extent can economists (without imposing their own beliefs) accommodate some form of an ethics-based framework in answering the deeper motivational questions guiding human decisions?

The current teaching, learning and practice of economics would go a long way in incorporating insights from Thaler’s work (along with the work of other behavioural economists) and invoking a larger discourse on the role of ethics in economics. By ethics in economics, I refer to the moral principles or claims that are often unconditionally accepted by society and are responsible for shaping an individual’s behaviour.

While creating policies that will affect millions, a modelled approach to decision-making involves mainstream economists attempting to provide elegant, empirical solutions to complex socio-economic problems. While both the principal (policy maker or government) and agent (the actors implementing the policy) involved here are very much human, a discussion on how ethics can play a vital role in designing and framing a policy warrants wider attention.

In India today, Thaler and Sunstein’s idea of the ‘nudge’ – small interventions made to push a consumer to make decisions the government (or whoever is doing the nudging) thinks are better for them – is very useful. In such a policy design, people are not denied choice but are still nudged in a particular direction.

The current government after the recent implementation scenarios from demonetization and GST (in its first quarter), may learn more from the application of such choice architecture techniques (defined by Thaler and Sunstein) and set up ‘nudge units’ involving behavioural economists who design choices for people with incentives to act in accordance with the government’s vision. With the right incentives to promote the digital use of currency (without experimenting with a policy like demonetisation) and curb cash use, there are ways for the government to nudge people towards a desired action sans the disruptions.

In addition to the behaviouralist school, works of development economists like Kenneth Arrow, Amartya Sen, John Broome, Thomas Scanlon and Edmund Phelps can also offer some useful insights in invoking a larger ethical discourse in economic thinking and reasoning. Here,  two situational contexts where a discussion on the role of ethics may serve a purpose.

Situation 1: Designing an ethics-based framework in preference-based decision making

Sen’s work in the 1980s and ’90s dealt extensively with the issue of ethics in economics and human rights, while developing his novel theoretical framework, the capability approach. From the insights of his capability theory, Sen looked at two broad questions: what determines people’s perceptions of well-being (both personal and societal), and what kind of well-being people value more.

The first concern is how most taught economics literature (especially microeconomics) is silent on some of the actual motivational factors responsible for guiding people’s preferences, except for putting everything under some sort of all-encompassing self-interest maximising explanation. The motivating factors in making a decision or choice can be driven by people’s own beliefs, values or habits and there is no standard way of knowing what guides these. From an ethical perspective, what seems more feasible is to design an arrangement that helps not one person but all people (as a group) to be able to achieve their well-being and happiness (without substantially reducing the others’ capability to do so).

For example, in environmental economics, where ethical considerations have occupied some importance, the concept of ‘existence value’ offers an ethical path for collective well being. ‘Existence value’ tries to assess the value of natural resources which people are attached to by paying more for conserving or preserving them (say stop a lake from being polluted or preserve an Arctic glacier from melting due to global warming) beyond the direct benefits derived from the resource itself (like drinking water from the lake). Thus, in this case, by paying for the existential significance of a lake, people can use the willingness to pay principle for an ethical consideration, where protecting the environment has some form of greater good attached to it, rather than some form of direct return derived from choosing an action.

Similarly, our motivation to contribute a part of our income for any charitable purpose that is working towards the protection of child rights in some country in Africa may be entirely guided by the ethical consideration that wants children all over the world to have basic human rights.

There also remains a strong need to address Sen’s second concern, about how to incorporate ethical considerations into the practice of economics, which is based on the idea that the goodness of society is an aggregate of people’s well being. In achieving this idea, invoking the role played by economists in a democracy requires greater attention. Democracy as a system not only has a representative component attached to it (because people vote for their leaders), but also helps in forming people’s preferences through the role of public education, discussion and critical scrutiny.

Economists can add much value in the latter component here, by forming people’s preferences using ethical considerations as a basis for policy assessment, democratically. The use of empirical ethics used in the field of health economics (discussed by John Broome in his essay Why Economics need an Ethical Theory) is a good way to investigate collective social choice questions by studying people’s preferences on issues where ethical questions find a more extensive space for discussion and then relaying these studies back to the people.

Situation 2: Assessing the value of human life

If we simply talk about the value of human life (also discussed by Broome in his essay), the question of what “sacrifices it is worthwhile for us to make in order to save some people’s lives” in economics is often answered by applying a willingness to pay (WTP) principle – where “the value of life should be determined by people’s willingness to pay to avoid exposing their lives to danger”. This is a simple logic best used in quantifying insurance cost or in doing any cost-benefit analysis while covering for a risk.

One implication of using the WTP principle in case of designing an insurance policy seems to be related to the per capita income problem for countries where life of people living below an income standard will be valued less (with a low willingness to pay) as against those who are benchmarked at a higher per capita income. Advocating an absolute dependence on using WTP, or capacity to pay, as a principle for resolving such an issue can make economists appear to work outside the domain of ethics. One needs to then look at promoting greater public engagement on enhancing the role of the Indian state in perhaps determining a threshold on ascertaining the value of human life (beyond some WTP principle) and insuring its citizens against this value.

In today’s global society, where ideas of well being are shaped largely by economic capabilities and opportunities, it is vital for mainstream economists involved in public policy making to challenge the existing, arcane assumptions used in economic thinking while using insights from works of Thaler, Sunstein, Sen and other to develop an inclusive ethical framework in various fields of economic thinking and application.

Deepanshu Mohan is assistant professor of economics at Jindal School of International Affairs, O.P. Global Jindal University.