Cincinnati Republic: Revolutionary and Evolutionary Economics

Richard H. Thaler was awarded the Nobel Prize in Economics on Monday for his work on human behavior and [ir]rational choice. Ironically, he currently hails from the same university that yielded one of the fathers of modern classical economic theory: Milton Friedman. While Thaler’s work challenges the basic economic assumption that humans behave in their own self-interest, its implications can – and probably will – impact both Keynesian and Austrian economic theory in the immediate future. The award is well earned, but while the hotly debated anticipation of who would deservedly win the award has been put to rest, it’s implications are still green. Many have asserted that Thaler’s work may signal the end of classical economics as we know it, but this seems both incomplete and contrary to many of Thaler’s assertions. Plainly, it assumes his work runs contrary to only classical economic theory while the rest of the field is left unscathed; all fields of economic theory operate under the specific assumption that people are self-interested, including Keynesian economists and, as such, are impacted as well. Most economists acknowledge this “fatal” flaw in their work and often attempt to adjust for it. Or, at the very least, make the limitation know. Thaler’s work is all encompassing, broad in scope, and is certain to force all economists to double check their work, especially behavioral economists. In Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, Kahneman, Knetsch, and Thaler conducted an experiment on the perceived price of coffee mugs. Their conclusion: those who owned the mugs valued the price of the mugs at a significantly higher price than those without them. Some news sites have suggested that this phenomena does not mesh with classical economics as property shouldn’t influence a product’s worth. This rationale has rightfully led to the emergence of the specialized field of behavioral economics, but this specific case may be limited. When an individual owns a product, they may form an emotional, or unemotional, attachment to it. Classical economists could explain this away by arguing there is less demand for products that are already owned compared to those clamoring to grasp it. This organically and graphically lowers the price of the good. As always, more research and more case studies would be intriguing. Much of Thaler’s work has been applied to retirement savings, but his most significant impact may be in healthcare. Much of the healthcare partisan divide has landed squarely on the individual mandate. Republicans view it as an overreach in power that enables to the government to prioritize consumer preference, while Democrats contend it is necessary to prevent the healthcare markets from slipping into a death spiral. Read more at Cincinnati Republic.