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Thursday, October 12, 2017

Thaler Earned His Nobel, but…

He really should be sharing it with someone else.

Richard Thaler was awarded the 2017 Nobel Prize in Economics. Was this prize deserved? Perhaps it was. Thaler won this prize for his work in Behavioral Economics. According to Thaler, there are two types people: Humans and Econs.

Econs are fully rational people who maximize utility. Basic economic theory uses the notion of a rational utility maximizer (AKA homo-economicus) to construct theoretical models of fully efficient competitive markets.

Economists have always known that perfect markets are hypothetical. However, Thaler has pointed to some legitimate issues with human behavior. As Thaler himself once put it, “Theories based on the assumption that everyone is an Econ should not be discarded. They remain useful as starting points for some realistic models”.

Speaking of Humans, many people may be predictably irrational. Humans, unlike Econs, commit errors repeatedly, perhaps even systematically. People should learn from systematic errors, but Thaler thinks that Humans are irrational to the point where economists can make theoretical models of irrational behavior.

His insights deserved some recognition, but not exclusive recognition. Thaler and his coauthor Cass Sunstein have argued that government policies can nudge humans towards making better decisions. The idea that we should trust government officials to nudge people in the right directions is, to say the least, debatable. Given the controversial nature of Thaler’s conclusions it might have been appropriate for him to share the 2017 Nobel Prize with another economist, one with a different opinion of how markets work.

It is, after all, very obvious that human well-being rose with the development of global markets. The idea that the Economics Nobel could be shared by two opponents is not new: free market economist Friedrich Hayek and socialist Gunnar Myrdal shared the Economics Nobel in 1974.

Who should have shared the Nobel with Thaler? There is one economist who also assumed that some people are more astute than others. Israel Kirzner developed the notion of entrepreneurial alertness. According to Kirzner, most people go about their daily routines without noticing available-unexploited opportunities. A few people have a special talent, a mental ability, to notice previously unseen opportunities for gainful trade. Alert entrepreneurs earn profits by acting upon opportunities for gainful trade ahead of others. The actions of alert entrepreneurs move markets towards greater efficiency, to the benefit of the general population.

Thaler has pointed out reasons why markets are far from perfect. His insights deserved some recognition, but not exclusive recognition. Kirzner has pointed out reasons why life in the market system keeps getting better. Given the unprecedented progress experienced in capitalism over the past few centuries, Kirzner is more deserving of recognition. The Nobel Committee could be nudged into correcting this error in 2018, but only if someone on this committee is alert to Kirzner’s contributions.

  • D. W. MacKenzie is an assistant professor of economics at Dickinson College.