Columnists: Hans Nilsson, Fourfact

Published on: 4 Apr 2017

The phantom of the economy

In the Paris opera, the tales has it there was a phantom living in the basement. He could be heard and traces of him seen from time to time, but he was himself never visible. Don’t we have a similar creature haunting us even in modern days and in everyday life? Preventing us from making clever and sensible decisions about our future.

“...the problem with the model being used by economists .... that replaces homo sapiens with a fictional creature called homo economicus, .… means that economic models make a lot of bad predictions….”

These words come from a world famous economist. A man that also was president of the American Economic Association (AEA) a few years ago and who is regularly mentioned as a possible and probable candidate for the Nobel Prize in economy. His name is Richard Thaler and the quote is from his recent book “Misbehaving”. Among the bad predictions he is hinting at is the 2008 financial meltdown, which provoked Queen Elizabeth to ask “why did nobody notice the ‘awful’ financial crisis earlier?”

Indeed – Why?

Thaler is also a bit surprised and says about his fellow economists: “Ironically, the existence of formal models based on (this) misconception of human behaviour is what gives economics its reputation as the most powerful of social sciences. .... Economists carry the most sway when it comes to influencing public policy. In fact, they hold a virtual monopoly on giving policy advice. ....other social scientists were rarely invited to the table, and when they were invited, they were relegated to the equivalent to the kids’ table at the family gathering.”

So his apparent answer to the Queen’s question is that the mainstream economists have too much influence and a bad concept – a model that assumes that people are at all times acting economically rational. They tell the modern tale of a phantom.

Thaler wrote with his friend Cass Sunstein in their book “Nudge” that this phantom – the economic man, the Econ – thinks like Einstein, has a memory of a big mainframe computer and the will power of Mahatma Gandhi. This creature however only lives in textbooks! Thaler and Sunstein contrasts this Econ with (the rest of us) called Humans.

But Thaler is not the only one who has reacted and criticised the ruling model for how people, and in consequence with that view, the economy functions. Only recently the World Bank wrote in a planning document called “Mind, Society and Behavior”, with a view of their own past practice, that:

“Economics has … come full circle. After a respite of about 40 years, an economics based on a more realistic understanding of human beings is being reinvented. But this time, it builds on a large body of empirical evidence—microlevel evidence from across the behavioral and social sciences. The mind, unlike a computer, is psychological, not logical; malleable, not fixed. It is surely rational to treat identical problems identically, but often people do not; their choices change when the default option or the order of choices changes. People draw on mental models that depend on the situation and the culture to interpret experiences and make decisions. This Report shows that a more interdisciplinary perspective on human behavior can improve the predictive power of economics and provide new tools for development policy.”

So indeed the concept of the economic man is in sincere doubt. But as with all good ghost stories they continue to thrill us even if they are not true. Can that thrill be used in a productive manner?

Dead man walking!?

What are the implications for us who are working to promote sustainable energy in its different forms? What could we learn from and maybe even use of the old concept of the economic man? Can the dead man be made walking – as the phantom he is – or even as an idol?

Frankly speaking we are already using him almost every day when we talk about the bliss of energy efficiency. We are talking about, we are calculating and we are arguing about the potential (mostly in economic terms) we could reach by application of energy efficiency in a wider scale. Actually we are talking about how far we could go if everyone was realising their optimal use of energy as if they were Econs!

It might be by envy we are portraying a society in which all resources were used in a fully (economical) rational manner. And let it stay there: as a fiction, as a romance, as a voice from the basement. He could show how far we could get if we were acting as him – the economic man. That is useful for setting goals for our activities. Let him remain what he is – a phantom.  But let us not imagine that he is real. Realisation will remain our own work – and our challenge.


Other columns by Hans Nilsson