October 6th 2018

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Articles from this issue:

COVER STORY Bank plan a sure bet to build up PNG and our Pacific neighbours

VICTORIA Infrastructure fiasco clogs Melbourne roads

CANBERRA OBSERVED Ex Lib leaders seldom follow the rule that silence is golden

THE ECONOMY A shower of cold facts may counter coal phobia

POWER AND ENERGY SECURITY Not the moment to hit the snooze button, Australia

LIFE ISSUES Abortion grief: a restoration of honour

NATIONAL AFFAIRS Drought: just one element in a bigger climate picture

FREEDOM OF SPEECH Former High Court chief defends free speech on campuses

EUTHANASIA Seeking peace in a poisoned chalice

NATIONAL AFFAIRS Migration numbers: a new discussion begins

OPINION Victorian election 2018: How will you vote

FICTION A gentle dying

MUSIC Amy Winehouse: A natural jazz talent

CINEMA Searching: Digital window on the soul

BOOK REVIEW Biological realities v social constructs

BOOK REVIEW A little application of common sense

CHINA Social Credit System gives complete control of every citizen

LIFE ISSUES Bowing to the goddess of abortion law reform: the pseudo-religion of radical feminism

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little application of common sense

News Weekly, October 6, 2018

PHISHING FOR PHOOLS: The Economics of Manipulation and Deception

by George A. Akerlof and Robert J. Shiller

Princeton UP, Princeton, New Jersey
Hardcover: 288 pages
Price: AUD$54.99

Reviewed by David James

Mainstream economic theory is riddled with circular arguments, the most prominent of which is the idea that markets, and the consumers in them, are rational.

Restated, the idea is something like this: “Whatever traders do in markets is necessarily in their self-interest; to act in your own self-interest is rational; therefore markets always behave rationally.”

Put that way, it is hard to argue with because it is a tautology. But the word “rational” has no descriptive value, because it has been decided a priori that it applies to all behaviour in markets.

The debate over the notion of rationality certainly has a history. Nobel prize-winning economist Eugene Fama argued that markets are always rational and efficient, and volatility in prices is down to “rational variation and the reward for bearing risk”. Other Nobel prize-winning theorists, such as behaviourist Robert Shiller, say that what is happening is “market mispricing that eventually gets corrected”.

Fama’s argument is simply saying that in the absence of any evidence or model that suggests otherwise, it is best to act as if the price of the shares reflects the underlying value of the company and that the investors are all active and willing buyers and sellers. That is, that they are behaving rationally.

A more critical approach to the use of the word “rational” is long overdue. In the last few decades, it has been used, or misused, to propagandise neo-liberal views of society. A pernicious instance in Australia was the use of the term “economic rationalism”, which was a sly way of saying that government should be reduced in size, and that anyone who disagreed must be “irrational”.

George Akerlof and Shiller attempt to mount such a critique in Phishing for Phools. They take aim at the idea that people are always self-interested, and therefore “always and invariably the best arbiters of the decisions that affect them”.

The authors say that this may make sense to economists “in the abstract” but it does not describe what often happens in markets: “We find that to a remarkable extent (people) are phished for phools: and, in consequence, they are making decisions that, applying just a bit of their own common sense, they would know are not to their benefit.”

The authors spend the rest of the book examining some of the irrationality of human behaviour in markets, especially the inability to do some basic arithmetic about personal finances. They also explore in some detail the way consumers are deceived: made phools. And there is extensive documentation of scams, such as the fact that in almost a third of home purchases to new buyers in the United States, total transaction costs equate to more than half the down payment.

It is quite a litany of manipulation or outright corruption. The authors look at the dissimulation of advertisers; rip-offs with cars, houses and credit cards; food and pharmaceutical scams; bankruptcy scams; and the use of political lobbying by corporations that undermine the interests of consumers. The banking royal commission in Australia is revealing similar chicanery here.

The authors conclude that modern economics inherently fails to grapple with deception and trickery. They suggest that this may be why almost all economists failed to predict the 2008 global financial crisis (GFC), and propose that looking for “phishing” might have been a way to see it coming.

Rethinking economic theory may be a good idea, but it is not necessary to see when things are going wrong; good sense will do the job. This writer did see the GFC coming – I started writing about the looming risk in a national business magazine a decade before it happened. Simple common sense suggested that the massive growth in derivatives markets was out of control and would eventually threaten the entire monetary system – which it did.

Simple common sense suggests that a lot of what happens in markets is dodgy and manipulative, and is not accurately described by the word “rational” (circular arguments notwithstanding).

Simple common sense also suggests that there is nothing new about markets, so they cannot be the sole reason for the raising of the standard of living in the West, as neo-liberal propaganda would have it. Neither is the free market “free” in any reasonable sense of the word, especially where it is dominated by the world’s biggest corporations.

Simple common sense further implies that examining the meaning of the words being used is a good place to start. That, at least, is what Akerlof and Schiller are attempting to do.

Purchase this book at the bookshop:


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