This book by George Akerlof and Robert Shiller, “Phishing for Phools” deals with the deep issues that arise in rejecting the “rationality” assumption in economic theory. If, as economic actors, we are rational and well-informed then free markets make a lot of sense. If we make irrational choices (choices that create an unforeseen disadvantage for us) and this disadvantage can be turned into profits by someone else then, applying the rationality assumption to this other person, means that they will take advantage of our stupidity. That is clearly unless they have ethics that go beyond self-aggrandisement. Then the view that free choice works in the sense of guaranteeing social optimality then becomes a theoretical point of zero practical interest.
An example of “phishing” taken in the book is slot (or “poker”) machines that are clearly designed to addict us to using them and to rob us of our money. That people are subject to this deception means that entrepreneurs, like James Packer (and firms like Woolworths and Coles) will seek to exploit the bad judgement involved in playing these machines. Indeed such firms and such firms/people are seen as being pillars of society who make billions through entrepreneurial vision. Indeed, they are not, strictly speaking, crooks since they act within the law. But their gains are based on exploiting actions by others that create huge disadvantage for those gambling.
To be clear: James Packer makes his billions by deceiving people.
Moreover, people like Packer dominate our economy in areas such as gambling, smoking and booze. Big bucks here.
There are many other examples discussed in Akerlof-Shiller. The fraud that comprises most modern advertising (and the reason I do not believe subjects such as “marketing” belong in universities), car and house purchases, credit card interest rates, the use of addictive drugs such as alcohol and tobacco and the monumental frauds conducted in finance markets that, after 2008, came close to devastating the world economy.
A key question is “what should be done?”. Regulation and quality controls are the conventional answer provided by Akerlof-Shiller and I do not disagree. I loved their answer to those who said that action to prevent a world depression after the events of 2008 would only deliver “moral hazard” (people would be insured against the consequences of their own actions in seeking to financially defraud others) :
“It’s based on faulty logic that would tell us to do away with fire departments, because there would be no fires since people would be more careful”.
While agreeing I think the key approach to dealing with “Phishing” is education. From a young age children need to understand that almost all advertising is bullshit = lies. Indeed I have a friend who instructs his infant son to say “this is bullshit” when ads appear on TV that are obvious lies. I approve. We need to understand that we are being constantly lied to both by the advertising media and the commercial press. The motives of the “Phishers” need to be paramount in the mind of every citizen. If enough people are aware the “Phishers” have fewer opportunity and markets, overall, will work better.
Educating businesspeople is also valuable. Having taught in a business school I have participated in instructing MBA’ers of how they can best extract the last dollar from consumers – no linear pricing, bundling, rewards schemes etc etc. Business schools now routinely have courses on business ethics. A useful idea is to try to persuade business people simply to try to provide quality products that do meet genuine consumer needs. It is such an obvious sounding claim that it is almost insults my reader’s intelligence to state it. It is not quite obvious however as if only some entrepreneurs and managers exercise good moral judgement the opportunities increase for those who do not.
Did I learn much from this book? Probably not much that was new, though the overall skeptic framework is useful. The interesting issues in economics involve the complex tradeoffs in recognising the value of markets and also their limitations. That would be a very conventional endpoint for most economists. Both ratbag libertarians and doctrinaire socialists miss the subtleties and difficulties in making such judgements. We want a free society but we want a society based on good ethics and sensible judgements not on the crude and ugly materialism of those trying to fleece us.