The Yellen-Akerlof Connection Isn’t Good News for the Treasury
As part of the rollout of his coming administration, Joe Biden announced his intention to nominate Janet Yellen as his Treasury secretary. As with all such announcements, people tried to anticipate what that would mean for future policy.
One of the most interesting versions of that crystal-ball gazing came from John Tamny. His article “The Biggest Janet Yellen Red Flag is George Akerlof,” connected Yellen to her husband George Akerlof, because they apparently seldom disagree, and then used Akerlof and Shiller’s Phishing for Phools to show how questionable such reasoning could be.
Since I did an extensive review of Phishing for Phools in the Summer 2016 Independent Review, Mises Institute readers might find it an appropriate extension of his insights.. So, with their permission, consider the following:
In Phishing for Phools: The Economics of Manipulation and Deception, Nobel Prize–winning economists George Akerlof and Robert Shiller argue that free markets are less benign than generally understood, because “our free-market system tends to spawn manipulation and deception” (p. vii). The phishing of the book’s title is not internet fraud to trick personal information out of people. The authors use it as a broad metaphor for “getting people to do things that are in the interest of the phisherman, but not in the interest of the target” (p. xi). Those targets are phools; psychological phools who let “emotions…override the dictates of common sense” or let “cognitive biases…lead him to misinterpret reality” (p. xi) and informational phools subject to manipulation and deception due to a lack of relevant knowledge. Phishing for Phools insists such phools become prey, because free markets inevitably create more phishermen whenever profitable phishing opportunities remain unexploited.
Phishing for Phools claims to be “a very serious book” (p. 11) and it makes sweeping claims of omnipresent phishing (though it backs away from some of its apocalyptic rhetoric later in the book), including “Insofar as we have any weakness in knowing what we really want, and insofar as such a weakness can be profitably generated and primed, markets will seize the opportunity to take us on in those weaknesses” (p. x) and “Civil society and social norms do place some brakes on such phishing, but in the resulting market equilibrium, if there is an opportunity to phish, even firms guided by those with real moral integrity will usually have to do so in order to compete and survive” (p. xii).
Unfortunately, the book’s analysis and the dire picture it paints are seriously flawed. Even applications intended to illustrate it actually contradict it.
Phishing for Phools starts from assertions that people “do not do what is really good for them; they do not choose what they really want” (p. 1) and that we follow “monkey-on-our-shoulder tastes” which are “not good for us” (p. 4). However, it never makes clear what those statements mean. Is “what is good for us” the same as “what we really want?” Does every choice the authors believe is not good justify added government regulations? Would “beneficiaries” really be grateful? And with regard to the volume’s opening illustration, is every Cinnabon customer phished into a self-deluded choice? Such lack of clarity provides one reason its sweeping conclusions are insufficiently supported.
Phishing for Phools also errs in personifying markets as causing phishing, as when it asserts “The free-market system exploits our weaknesses automatically” (p. 3). Markets don’t cause phishing. Self-interest and the willingness of some to take advantage of others spawn manipulation and deception, not free markets. In fact, the argument has causation reversed. The important issue is not that markets make people more ethical (though they do reward many types of such behavior), but that the more people find ways to reduce unethical behavior (the more people tell the truth, live up to agreements, etc.), the more efficient and beneficial markets become (as illustrated in economics textbook discussions of the superiority of legal markets over black markets). If the authors had studied, say, Avner Greif’s wo
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