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George Akerlof, Meet Oliver Williamson

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Robert Shiller's column in last Friday's New York Times illustrates the foolishness of the new "behavioral" approach to economic policy. Referring to his new book with George Akerlof, Phishing for Phools, Shiller recites a laundry list of standard (and trivial) business practices like putting candy bars at supermarket checkout lines, touting them as evidence that "manipulation and deception" pervades the market system. Obviously, the solution is government intervention, glibly described by Shiller as "common-sense regulation." 

Shiller's worldview features a caricature understanding of free markets along with a naive and uncomprehending model of government regulation. I suppose we can blame the Times's editorial team, not Shiller, for the headline "Faith in an Unregulated Free Market? Don’t Fall for It." But it nicely illustrates the Shiller crowd's view that support for free markets is based on faith, rather than two centuries of reason and evidence. You might think that Shiller's coauthor George Akerlof could walk down the hall and speak to his UC Berkeley colleague and fellow Nobel Laureate Oliver Williamson for a better understanding of how markets work. Williamson, of course, is famous for explaining how market actors protect themselves against opportunistic behavior from other market actors through contracts, joint ownership of assets, reputation, exchange of "hostages," and similar practices. It is markets, not government, that enable cooperation and joint production in the face of information and incentive problems. (I also wonder if Shiller and Akerlof have bothered to read Coase, Buchanan, or Ostrom; I won't even ask about Mises, Hayek, or Rothbard.) 

As is characteristic of the behavioral policy literature, Shiller is silent on the implications of behavioral economics for the analysis of government intervention. But thoughtful readers will find the basic premise of "Phishing for Phools" -- that firms systematically manipulate and deceive naive consumers, who should then turn to government regulators to protect them -- unintentionally hilarious. What is modern democracy, other than an attempt by candidates to manipulate and deceive voters, in hopes of winning the right to manipulate and deceive them as citizens? I'll take the market, candy bars and all, any day.


Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University's Hankamer School of Business.

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