Thursday, July 12, 2007

After dinner speech to Social Policy Conference dinner

Australian Social Policy Conference dinner
Sydney, Thursday, July 12, 2007

Peter Saunders - the Peter Saunders I call the original and best Peter Saunders - tried to inveigle me into giving this talk by promising me a free feed, but something in the back of my mind warned me that meals are never free. So then he tried the line that I could use the occasion to plug my latest book - and he had me. Actually, I’m going to plug my last two books.

What do you get when you cross an economist with someone from the mafia? An offer you can’t understand. Both books seek to defy that prediction. If you happen to be interested in finding an easy-read introduction to conventional economics - the economics of inflation and unemployment and interest rates that you find in newspapers - I recommend the book I published last year, the one with the blue cover, Gittins’ Guide to Economics.

But the book I want to talk about is my latest, one that’s not like any conventional economics book in that its focus is on you, not the economy. It’s about how you live your life within the economy and make sure the economy is working for you, not you for it. This is the book with the red cover, modestly titled Gittinomics.

One of the ways I’ve tried to keep the economics practical and interesting is to mix in with it a fair bit of psychology and neuroscience. Conventional economics assumes we’re all coldly calculating and rational in the decisions we make, but over the past 20 years or more psychologists and neuroscientists have demonstrated how far this is from the truth. It turns out that the primitive, more emotional part of our brain often overrides - or beats to the punch - the more recent, more logical part of our brain. This leads to a strange dualism in our minds: we’re often motivated to do things by considerations the more intellectual part of our brain knows to be nonsensical.

The classic example, of course, is advertising. The central proposition of most ads is that mothers who buy a certain brand of margarine - or a certain brand of sliced bread - will have good-looking, healthy, happy families. Intellectually we know such propositions to be absurd. We imagine there must be some simple souls somewhere who fall for such rubbish, but we certainly don’t. Sorry. Advertisers wouldn’t spend millions each year on such ads if they didn’t work on people in general and enough individuals in particular. Clever appeals to our emotions can induce an emotion-driven response from us even though the more reflective part of our brain knows them to be laughably silly.

Once you accept that we’re capable of responding in a quite unthinking way to the opportunities and temptations thrown at us in this consumer economy, various things become clear. For instance, who’d be silly enough to believe you don’t have to pay for stuff you buy with a credit card? Only a few silly teenagers? No, many of us. Consider an experiment undertaken by some marketing professors at MIT. They organised an auction using written bids for some very attractive basketball tickets. They did the experiment twice. The first time they said you’d have to pay for the tickets with cash; the second time they said you could pay by credit card. The people in the credit card auction offered to pay twice as much as the people who had to pay by cash. The trick is that, when you pay by credit card, you can postpone the need to worry about whether you can really afford the thing you’re buying.

Another instance of the difficulty we have keeping control of our money concerns choice. Politicians, economists and business people assume choice is an unmitigated blessing and the more choice we get the better. In truth, the psychologists have demonstrated that when we’re faced with too much choice we find it confusing and debilitating. Consider an experiment in which researchers set up a display of exotic jams in a gourmet food store, offering a saving if you bought a jar. In on case they offered people tastes of 24 different jams; in another case they offered just six varieties. Comparing the two cases, the larger array attracted more people to the table, even though people tasted about the same number of jams in both cases. But get this: when only a small number of jams were offered, 30 per cent of people bought some; when the larger number of jams was offered, only 3 per cent of people bought. In other words, people found the larger array confusing and so avoided making a decision to buy.

This inability to cope with tricky choices makes it fairly easy for retailers to manipulate us. Consider the way theatres sell popcorn.

Or, consider the way we pick wine from a wine list in a restaurant.

Though almost all of us have spent almost all of our lives living in a market economy, many of us don’t know much about how markets work. We have it in our heads that businesses just add a set mark-up to their costs and that’s what they charge us. But often it doesn’t work that way. For instance, the higher prices charged for organic fruit and vegetables or free-range eggs or ‘fair-trade’ coffee commonly far exceed the extra cost involved in producing the item. Why? Because people with tender consciences about the treatment of chickens or third-world coffee growers - or people worried about the chemicals used to produce non-organic food - are willing to pay higher prices to assuage their consciences. When you’re selling free-range eggs you’re selling something extra beside the eggs: conscience balm. And if that’s what you want, the retailers are happy to charge you more and take your money.

While we’re on the subject of what’s called ‘behavioural economics’ I want to talk about something that’s not in the book. I’ve been thinking a lot lately that there’s a contradiction at the heart of the capitalist system. The system includes many people who make their living by tempting you to buy things and do things which are fine if you do them only in moderation, but which can bring you down if you do too much of them. So the key to being a winner - a master - in the capitalist system is to possess the self-control to resist the temptations it continually throws at you. If you oblige the capitalists and always buy what they’re pushing, you’ll help to make them rich but, paradoxically, you’ll become a loser - a victim - of the system.

What are these temptations? They’re manifold. The one we’re most conscious of these days is the temptation to eat too much. But there are many more: to get too little exercise, to smoke, to drink too much, to watch too much television, to gamble too much, to shop too much, to save too little and put too much on your credit card, to work too much at the expense of your family and other relationships.

All of those things are being pushed on us by the system. They’re what the capitalists are trying to sell us. A lot of highly paid advertising people, marketers and merchandisers make their living finding ever-more effective ways to persuade us to indulge. In the case of exercise, no one’s selling the lack of exercise, but lots of people are selling ways to avoid exercise - whether it’s going everywhere by car, using the remote or watching sport on telly rather than playing it. Admittedly, people are also selling ways to get fit - from exercise bikes to gym subscriptions and all the right gear to wear - but then you’ve got to make sure you don’t get hooked on being underweight or using steroids to bulk up.

OK, so we need to demonstrate a bit of self-control in our lives. What’s so new and surprising about that? Two things.

First, research by psychologists, neuroscientists and behavioural economists has shown that humans have a great problem exercising self-control. We think it’s up to us to decide how much to eat or how much TV to watch but, in fact, many of us find it very hard to restrain ourselves in the way we know we should. Experiments with people who’ve had the two sides of their brains severed in some accident show that the reasoning part of our brain often doesn’t know why the faster, more instinctive part of our brain decided to do what it did, but is adept at thinking of plausible explanations for its behaviour. In other words, humans are prone to ex-post rationalisation.

It’s as though we have two selves, an unconscious self that’s emotional and short-sighted and a conscious self that’s reasoning and far sighted. We have trouble controlling ourselves in circumstances where the benefits are immediate and certain, whereas the costs are longer-term and uncertain. When you come home tired from work, for instance, the benefits of slumping in front of the telly are immediate, whereas the costs - feeling tired the next day; looking back on your life and realising you could have done a lot better if you’d got off your backside and played a bit of sport, sought a further qualification at tech, studied harder for exams, spent more time talking to your kids etc. Similarly, the reward from eating food is instant, whereas the costs of overeating are uncertain and far off in the future - being regarded as physically unattractive, becoming obese, becoming a diabetic, dying younger etc. As everyone knows who’s tried to diet, give up smoking, control their drinking, save or get on top of their credit card debt, it’s very hard achieve the self-control our conscious, future selves want us to achieve. Many of us may have no trouble controlling ourselves in most of the behaviours I’ve listed, but I doubt there’s anyone much who can claim to have themselves perfectly under control in every area.

The second reason for getting so excited about the problem of self control is the likelihood that the very success of the capitalist system in making us more affluent is serving to heighten our self-control problem. Economics is all about coping with the problem of scarcity. But human ingenuity - including the development of the capitalist system - has increasingly overcome scarcity. These days, most of us in the developed economies have a greater problem coping with abundance than scarcity. For instance, we’ve evolved to eat everything that comes our way, because nutrition was scarce on the African savanna, but now food is abundant and, hence, cheap. So we’ve lost the natural control that, until relatively recently, stopped our instinct to overeat from making us overweight. Similarly, the huge growth in our real incomes over the past century has made it easier for us to afford to overindulge in many of the other vices I listed. Credit is another thing that’s become readily available and relatively cheap.

So I’m beginning to think that overindulgence and difficulties in self control are the big problem of our age. There are solutions to this problem - at the government policy level and at the level of individuals controlling their own behaviour (the latter involving subtle ways of tricking our unconscious selves) - which I suspect will become an increasing focus as the 21st century progresses.