Licence to be Bad

What if the economic 'truths' that guide our policies and decisions are rooted more in ideology than reality?

1. Free-market economics has shaped our world, but not always for the better

In 1947, Friedrich Hayek and a small group of economists gathered in Mont Pèlerin, Switzerland, to challenge Keynesian economics. They advocated that governments should limit their involvement in the economy and let free markets prevail. These ideas later influenced global policies through Reaganomics and Thatcherism in the 1980s.

This free-market ideology has had far-reaching consequences. For example, during the 2007 global financial crisis, banks and markets failed while governments bore much of the blame. People overlooked the risky behavior of financial institutions, as the ideology emphasized limiting government regulation. This mirrored the philosophy of blaming overzealous “regulators” rather than the actions of corporations.

The influence stretches as far as climate change policies. Free-market thinking encourages "free-rider" behavior — believing individual actions don't matter if others won't act either. This mindset justifies inaction and is instrumental in the ongoing environmental crisis.

Examples

• The rise of free-market policies in the 1980s through Reaganomics and Thatcherism.
• Blaming regulators instead of banks during the 2007 financial crash.
• "Free-rider" excuses delaying climate initiatives worldwide.

2. Game theory encourages selfishness, but we aren't always selfish

Game theory, popularized by John Nash, assumes people act in rational self-interest, often at the expense of others. The Prisoner’s Dilemma, a classic scenario in game theory, predicts that people will betray partners to minimize their risk — highlighting a seemingly selfish human nature.

However, humans are inherently more collaborative than game theory predicts. International treaties on reducing nuclear weapons and coordinated environmental policies show that people often choose cooperation over self-interest. Believing everyone acts selfishly can spread selfish behaviors, creating a self-fulfilling prophecy of distrust.

This game-theory mentality skews how we view human decisions. If adopted fully, it might lead to a colder and more self-serving approach to problem-solving, masking the collaborative nature of humanity.

Examples

• The Prisoner’s Dilemma encourages betrayal as the “rational” choice.
• Successes like the Paris Climate Agreement show nations can cooperate for the greater good.
• Many people still prioritize altruistic choices over benefits, such as volunteering or donating to charity.

3. Ronald Coase's theories were misinterpreted to idolize dealmaking

Ronald Coase’s insights focused on transaction costs — the time and resources required for economic exchanges. One of his observations was that decisions should weigh costs like legal fees against practical outcomes. However, economists later twisted his work into arguments for minimizing government interference altogether.

This reinterpretation led to questionable ideas, like Illinois's 1983 experiment that rewarded employers with $500 for hiring jobless people. Employers largely rejected the bribes, finding the moral implications and dynamics distasteful. Similarly, carbon markets, where corporations trade emissions permits, prioritize financial transactions over committing to reduced pollution.

Coase never envisioned his ideas would justify extreme free-market policies, yet modern economics has weaponized them to put markets over fairness or responsibility.

Examples

• Illinois introduced financial incentives for employers to hire unemployed workers with poor results.
• Economists suggested bizarre policies, like a “free market” for adopting babies.
• Carbon markets prioritize costs over environmental damage, undermining true progress.

4. Economic theories unfairly criticize democratic governments

Ken Arrow’s "Impossibility Theorem" claimed that democracy can’t align perfectly with collective preferences. This idea laid the groundwork for economists like James Buchanan, who portrayed governments as inherently self-serving. Buchanan’s public choice theory argued that voters, politicians, and civil servants all act from selfish motives.

Yet real-world evidence doesn’t fully support these claims. Voters often support long-term interests over short-term gains, as seen when Ronald Reagan ran on a platform to slash public spending and still won. Contrary to the premise that government workers are selfish, many public servants genuinely prioritize the common good.

By perpetuating the idea that democracy is "impossible," these economic models undermine trust in governance, entrench negative stereotypes, and fuel selfish political behavior.

Examples

• Arrow’s theory suggested that democracy can’t perfectly balance everyone's desires.
• Reagan’s election showed voters sometimes prioritize long-term goals.
• Public choice theory encourages self-serving behavior in politicians and civil servants.

5. Free-rider logic worsens global problems

Free-rider thinking claims people or entities have no reason to contribute to collective efforts if others will do the work. For example, a single taxpayer or recycler might argue their actions are trivial in a broader system. This mindset has drastically impeded progress in issues like combating climate change or addressing global poverty.

However, collective action demonstrates that change is possible when individuals push past free-rider logic. Many countries have made headway with carbon reduction treaties, and grassroots movements have influenced public policy. Cooperation isn’t just possible — it’s essential for large-scale progress and avoiding major catastrophes.

Free-rider logic, while comforting, denies the truth that solidarity is often the most effective force for change. Without individual participation, collective efforts stagnate.

Examples

• Tax loopholes exploited by corporations are a form of free-rider behavior.
• Individuals dismissing the impact of recycling harm environmental efforts.
• Grassroots campaigns, like climate protests, show the power of collective action.

6. Applying economics to life sometimes leads to absurd conclusions

Economists like Gary Becker expanded economic reasoning into everyday life by framing all decisions as rational price-based choices. He argued for basing immigration decisions on wealth and for legalizing the ability to “buy” citizenship. Disturbingly, these ideas shaped policies in many nations.

Becker further claimed that criminals weigh potential punishment against benefits before committing crimes, justifying reduced police funding. Yet higher crime rates showed his purely economic perspective overlooked social and psychological factors.

Becker’s view of rational decision-making also reduced complex human behavior to impersonal calculations. This approach, though influential, often ignored moral judgment and real-life nuance.

Examples

• Becker claimed people commit crimes only after weighing risks versus rewards.
• Policies offering citizenship for investments are now common in wealthy nations.
• His traditional family model, based on economic efficiency, disregarded diversity in human relationships.

7. People don’t always respond predictably to incentives

Economists often assume financial incentives will work exactly as intended. But this isn’t always true. When day care centers in Israel added fines for late pick-ups, tardiness increased as parents saw it as a "fee" rather than a rule violation. Conversely, the UK’s plastic bag tax successfully reduced single-use bags.

This discrepancy shows financial penalties or rewards are only effective when they align with social or moral messaging. Ignoring human emotions or relationships complicates how incentives work.

Different contexts prove that human motivations are more complex than simple price tags. People value moral integrity and communal responsibility, alongside financial considerations.

Examples

• UK efforts to charge for plastic bags reduced usage by 80 percent.
• Paying blood donors in the US led to reduced-quality donations.
• Parents arriving late at daycares increased with fines that felt like a “service charge.”

8. Economic models inaccurately represent uncertainty

Standard economic models use normal distributions to assess probabilities, assuming extreme events are virtually impossible. This method, however, fails to account for real-life phenomena like financial crashes or climate disasters, which don’t adhere to tidy bell curves.

Fractal distributions offer a better fit for scenarios where patterns repeat at every scale, like stock market fluctuations and even wealth inequality. Unfortunately, economists often stick to oversimplified models, ignoring broader and unpredictable risks.

Misplaced confidence in flawed models leads to poor decisions, whether regarding financial markets or planetary sustainability. It’s time for a broader perspective that considers uncertainty instead of brushing it off.

Examples

• Goldman Sachs dismissed early signs of the 2007 crash using flawed models.
• Bell curves fail to predict fat-tailed distributions in stock market behavior.
• Climate predictions underestimate uncertainty about long-term damage.

9. Modern economics excuses inequality

Economic theories often portray inequality as inevitable or even beneficial. Yet inequality follows the same fractal patterns discussed earlier, showing disproportionate accumulation of wealth amongst the super-rich and further widening income gaps. This raises ethical questions about wealth concentration and fairness.

Countries like the US tolerate high levels of inequality by favoring low taxes for the wealthy, despite historical evidence that higher taxes didn’t deter productivity. Encouraging such disparities undermines trust and divides societies.

Policies that support equality — such as higher taxes on the rich or better social services — can reduce the gap and create more balanced growth for everyone.

Examples

• The richest 1 percent often control 20 percent or more of national wealth.
• 1950s top tax rates in the US were over 90 percent yet supported booming productivity.
• Inequality is far less pronounced in economically diverse nations like Denmark or Sweden.

Takeaways

1. Question the "truths" in economic theories and examine how they shape policies and social attitudes.
2. Collaborate and act collectively to combat issues like inequality, climate change, and voter apathy.
3. Challenge assumptions that frame decisions or behaviors as purely rational by considering morality and emotions.