Free Market Madness
A few days ago there was lots of happiness and excitement in the street and you must have wondered what was the source of this excitement.
Well, it was the publication of Peter Ubel‘s new book on behavioral economics — Free Market Madness
To celebrate, here is a web interview with Peter and you are all welcome to join in on the conversation.
Dan: You are a physician writing a book about politics and behavioral economics. Not to get all Blagojevichy on you, but what the f%^# qualifies you to write about this topic?
Peter: I am a big fan of yours too!
Dan: But seriously.
Peter: I conduct research on the irrational forces that influence people’s medical decisions. In addition, I take care of patients in clinic every week whose health problems arise, in large part, from their own decisions and behaviors — people with diabetes who cannot lose weight despite their best efforts, smokers who can’t kick the habit despite covering their body with nicotine patches.
Dan: What does that have to do with politics?
Peter: It means that when we leave people to fend for themselves in the free market, we can predict that they will hurt themselves by making bad decisions. Starting from this perspective I try to expose the unconscious forces that influence our behaviors. And then I try to show people what that means for the kind of debates we have about whether unfettered free markets deserve some, um, fettering.
Dan: All this looks a bit too general to me. Can you give me an example of one disease, one mistake that patients make, and one policy recommendation?
Peter: Diabetes. We have an epidemic of adult onset diabetes in developed countries now, because people are gaining so much weight. And the obesity that causes diabetes is a direct result of the market: capitalism has spurred on innovation in food production, so that people now can eat tasty, calorie dense food without having to spend much time preparing or cleaning up the food (open the bag of chips, insert in mouth, yum . . .).
What’s the mistake here? Well, people’s appetites are influenced by unconscious forces. Change the size of my dinner plate and I’ll eat 24% more calories; tell me the food is made of “healthy fat,” and I’ll tell you it doesn’t taste good (even though, as experiments have shown the same cracker will “taste great” if I convince you it is made out of unhealthy fat.) How much food we eat, then, and how that food tastes is far less rational than most of us believe.
Dan: So, does this mean that the fault is with capitalism and innovation in food production? And if this is the case what policies would you try to implement to overcome this problem?
Peter: We need to experiment on a whole slew of policies to combat obesity: New York is requiring restaurants to post calories on their menus, a good start, but one that is likely susceptible to biases. For example, if I was trying to sell Big Macs now, I’d add a new line of “Bigger Macs”–add a couple slices of bacon, 3 more kinds of cheese. I’d proudly label this new burger’s calories: 50% more than the original Big Mac. And I’d expect two things to happen: first, some people would be drawn to this meal — risk takers, contrarians, Homer Simpson wannabees and so on; second, most people would not want this new burger, but they’d look at the Big Mac and think, “Wow, that burger is pretty darn healthy!”
I’d like to see someone try to label unhealthy food with emotive pictures, signaling that people should consider trying out another entrée. Maybe a profile of people in varying stages of obesity?
Ok, maybe some other symbol.
Dan: Your book is actually not much about medicine and medical related mistakes and it is largely about individuals and markets. It seems that you believe that markets are efficient in the way that they operate, but that the outcome they arrive at is not optimal. Can you explain this?
Peter: Hmm, efficient wouldn’t be on my short list of words to describe markets. Efficient sounds so uncontroversially good.
I am a fan of capitalism. Very happy I grew up in the USA rather than the USSR. But that doesn’t make capitalism, or free markets, perfect. Look at all the people who bought mortgages they shouldn’t have bought, or SUVs that they mistakenly thought were safer than other cars. (SUVs are more dangerous than minivans and even sedans, because they have a nasty habit of rolling over–very inconsiderate of them!)
Our brain can tell us that a long commute isn’t a big deal, or an adjustable rate mortgage isn’t a big risk, and the market efficiently provides us with suburban homes and fancy mortgage packages. That doesn’t mean we picked the right home at the right price.
Confession: I live in the suburbs (barely), drive a sedan (because I don’t feel manly enough for an SUV), based the last decade of my savings and spending behavior on the assumption that my stock holdings (retirement accounts in mutual funds) would grow at 10% a year, and that my house’s value would grow faster than inflation.
At age 46, I have lots of time to rejigger my retirement plans. But my fingers are crossed that my kids don’t get into college!!
Dan: So now that we know we should not take any advice from you, what are you hoping is the main thing that readers will learn from your book?
Peter: This may be too personal but if they can go home at Christmas armed with good arguments to take on their insanely libertarian older brother, who really does think the market can solve all the world’s problems (“we need more free market in medicine, schools . . .”), then I will be happy.
It’s funny that people need fodder to go against libertarians, as if the super-powerful libertarian base is what’s preventing government from getting their claws into markets.
There are certainly huge flaws in human rationality, but we need to temper our chants for government intervention recognizing that in nearly every case the government will perform worse than the free market.
I appreciate that Dr. Ubel seems to have a healthy respect for markets. Looking forward to reading the book.
So are you saying people need more financial education or they can not make rational decisions in a free market?
If workers saved much more (for that rainy day) and bought below their earning power, they would be in much better shape now. Living within your means should not be an art, but a habit.
The long term look at financial history would have helped rather than a very short term view that is expected to repeat continually.
Somehow people have been lured by the ever expanding value in the market place. Can’t go on forever. Those who were raised in the depression (1930s) know better than to believe that everything always expands forever and no one loses a job or a house.
“if they can go home at Christmas armed with good arguments to take on their insanely libertarian older brother…”
OMG this just happened to me! Older sister, though. She came back with a Mises essay, who says that people are rational by definition: “Who’s to say what is rational for one person? Maybe they want to be die of diabetes?” etc. I did bring up some examples of obvious irrationality, and then it was about how individual liberty is good regardless of the consequences. I could see another argument being made that even if someone behaves irrationally, it is because they have chosen to not behave rationally. They have effectively calculated that behaving rationally is too costly, so they behave irrationally, and we should respect their decision.
But as any competent psychiatrist will tell you, we all make irrational decisions all of the time, but we have to pretend that we are rational, or else a justice system cannot work. In the same vein, the default position is that every adult is competent to make his/her own health decisions: eating, smoking, helmets, etc. The human brain developed for instant responses and gratification, not for future deferment (which may be a mark of civilization). We tend to fasten the seatbelt 10 seconds before we hit the brick wall. And is believing that smoking will not kill you any less rational than praying that a loved one will not die?
As far as overweight, growing up in the 50′s and 60′s, there was at most one overweight boy in my school classes, and he was usually unathletic. I think that if today’s children ran around for 3 hours every day after school, they would burn off the extra calories. We all grew up on “junk” food, and didn’t gain weight: Good Humor, BonBons, Dots, ice cream sundaes, Crackerjacks, Nedicks’ hit dogs, etc.
If you read Locke and read Mill, you rapidly agree that each man is naturally the judge of what suits him best, i.e. what seems the best solution for him, and feels best for him. Which of us is wise enough to substitute our judgment? Remember lobotomy surgery for schizophrenia, insulin shock therapy, bleeding with leeches. These were all accepted and “validated” treatments in their time. Which of you would say that I myself am so irrational that someone else should make all my health decisions , including birth control, abortion, etc.
I should also add that smokers know they should not smoke, diabetics know they should diet, speeders know they should not speed, etc., but there is usually a psychological gain from their otherwise contrary behavior, and the inner self is usually more important to the ego than the body.
The banking collapse is a ‘free market’ problem? Give me a break. There’s nothing free about the system. If there were, the government wouldn’t bail out those who make or take out stupid loans.
This is typical elitist thinking that people can’t run their own lives- i.e be responsible for their own health. Please, run my life for me, I’m too feeble to think for myself.
Have we ever had a truly ‘free market’ in the US? Regulation has a place in public life, but to suggest we need more policies and regulations to rein in the ‘free market’ continues a fantasy that free agency has been the cause of our current crisis. The argument denies complexity, and ignores a body of academic and public evidence that suggests that the relationship between the free market and public policy is more complex than the author suggests.
A plea for more nuance from the author
On the Freakonomics blog recently, Ian Ayres reviewed my book, and singled out a story I tell there. Ian has written many books himself, so it isn’t surprising which story, of the many stories in my book, he discussed.
He picked out a section near the end of the book, where I describe my efforts to interest a leading editor in my book idea. After asking to know the bottom-line, take-home message of my book, the editor asked me whether I was “aiming for a nuanced argument?” I responded yes, and then explained how I hoped to write a nuanced book that could nevertheless be marketed with a crisp sound bite. I lost his interest at the word “yes.”
Anyone trying to write a political book the last few years knows about this other “n” word: Nuance.
What I most want people to keep in mind, as they continue this lively discussion in the Predictably Irrational blog, is this one word:
Nuance.
In Free Market Madness, I try to do three things:
(1) Entertain readers with surprising examples of the often hidden forces that influence the way we humans think, decide and behave. I show the peculiar mix of rational and irrational that make up human nature, the often surprising combination of conscious and unconscious decisions that determine our life trajectories. Did you know, for example, that people named Paul are more likely to migrate to St. Paul, Minnesota than are people named Joe, unconsciously influenced by what social psychologists call implicit egotism?
(2) Give readers a brief and colorful history of the link between economists’ beliefs in human rationality and libertarians’ faith in free markets to promote people’s best interests. Readers of my book will see that I am a huge fan of capitalism and liberty. But I also recognize that completely unfettered markets can harm not only those people who make unwise decisions, but have spillover effects on everyone else; that consumers’ choices aren’t as “free” as we think, because we humans can be manipulated by those who understand our weaknesses. Tobacco companies, for instance, when forced to run public service ads, have created television campaigns that, while on the surface seem to discourage teens from smoking, actually make them more interested in smoking!
(3) Nuance, baby, nuance. We have to find a balance between liberty and well-being, when the two collide. Freedom is a good, on its own, but freedom to take out mortgages we cannot afford, after being persuaded to do so by people who can make money off our decisions, can lead to widespread economic disaster.
Government regulations always have costs. But there are costs, too, in standing by on the sidelines and leaving everything up to the market. My hope is to get people arguing less about the extremes– capitalism versus socialism; freedom versus government control– and more about the large, gray zone in the middle, a zone where I expect we will often find the best policies.
I think Peter Ubel is re-stating Isaiah Berlin’s analysis of the difference between “freedom from” and “freedom to”, or “positive” vs. “negative” freedom. Since the market is basically unalyzable and un-predictable just because we don’t (?always) have free will, the government should probably stay out of it.
If we outlawed corporations’ legal/financial shield so that boards and executives were directly responsible for the results of their actions, we would see a very different stock market.
I don’t see any way to prevent citizens from believing that since the market always goes up “in the long run” that it can never go disastrously down in the short run. Doesn’t every fund prospectus say that “past results are no guarantee of future performance”?
I agree that just because you have the “right” to make a decision, your decision may not be morally or otherwise “right”, but that’s what being human is all about, our ability to learn from our mistakes, just as we eventually repealed prohibition.
Since the government is only made up of people, with the additional burden of trying to get re-elected, why should we assume that a collection of people is any wiser in making rules than a single individual?
Many people believe that an action that is “safe’ for them to do solo, would be “dangerous” if everyone did it, which is the exact opposite of Kant’s “moral imperative”.
I am not even discussing the separate imperatives dictated to us by our religions, except that I think that if we all accepted God’s imperative to “be fruitful and multiply” then Malthus would be proved correct very rapidly.
“Who shall guard the guardians?”
Hi! I was looking around for some thing like that on the net for my blog. My Uncle runs this real estate business and I help him out in some ways. I told my uncle about John Beck program and now he’s having a look at it. Thanks for the post.
I just bought the book and look forward to reading it. It seems that the only person that gets it is Retired in Good Shape. Stay with in your means. Don’t over buy. No brainiac words involved, just straight talk. Maybe he is a PHD, or maybe not, but he states it like it is. Jbuford wants to talk about the govenment staying out of financial markets. Well I would say that is exactly what caused the real estate bubble to break. Dr. Ubel may be on to something. If the mortgage guys wouldn’t have the public lining up like Pavlov’s dogs drouling for the chance to overbuy on their houses, I would not have lose 50% of my 401K and bail out these folks that did not get the proper advice from the Fat Cats selling the excessive mortgages. I appreciate Retired’s comments and wish more people would say it that simple. Dr. Ubel, you go man… Retired, please write your own book.
If you actually want some genuine insight into what a truly free market can do for people, then I highly recommend you read Dr. Mary J. Ruwart’s “Healing Our World In an Age of Aggression” (http://www.amazon.com/Healing-Our-World-Age-Aggression/dp/0963233661).
The reason I make that suggestion is that you honestly believe we have true free market capitalism, not to mention, a free market in the U.S or any country for that matter. The U.S. economy is nothing more than a fascist state-socialist controlled mixed economy. Corporatism at best.
So I sincerely encourage you brush up on your facts before you start taking stabs at something you obviously know nothing about.
All the best to you.
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