In my previous post (Keynes vs. the Chicago school of economics), I posted a link to an article written by Paul Krugman regarding the current state of macroeconomics and its salient failures. One thing I pointed out is Krugman’s advocacy for a higher reliance on behavioral economics, which is a branch of economics that “applies scientific research on human and social, cognitive and emotional factors” to economic decisions. Essentially, it’s a combination of economics and psychology.

One thing behavioral economics helps us do is find differences in assumed, theoretical economic behavior and actual economic behavior. For example, in a recent paper by Congdon, Kling, and Mullainathan, the authors write, “Behavioral economists have now accumulated several decades of findings indicating that the standard economic assumptions about individual behavior are not accurate, that people do not act rationally, that they are not perfectly self-interested, and that they hold inconsistent preferences. Moreover, and especially in recent years, policy economists have increasingly come to see that these deviations from the standard assumptions about behavior matter for economic policy.” The authors point out that while such faulty assumptions about human behavior are used in modern economic theory, some justify it on the basis that they are simple and useful for modeling purposes and crafting new theories. However, write the authors, “behavioral economics argues that the standard assumptions are so consistently violated as to be neither literally true nor useful as modeling assumptions.” (Emphasis mine.) What this tentatively suggests is that some of our assumptions about economic decisions are so fundamentally disconnected from reality that they serve no relevant purpose in economic models that use such assumptions. This might also suggest that Krugman is correct that macroeconomics has a long way to go yet (and that perhaps behavioral economics should play an important role in crafting future theories).

This paper specifically deals with behavioral economics as it relates to taxes. On this, the authors declare, “Behavioral economics stresses that individuals are not, in practice, perfectly self-interested.” In fact, “They care about the welfare of others and they care about the fairness of the process that generates outcomes.” And this, I think, relates to some comments I made in a SCSU Scholars post regarding health care reform. The point I try to make is that I think there are some goods and services that we can call essential, that we can reasonably say no person should have to go without (at least in a highly developed, industrialized, and wealthy country such as the United States). For example, I think most people would agree policing, firefighting, and defense under law are all reasonably essential and that people should be entitled to such things even if they cannot afford them. My argument is that health care is something we can reasonably say people deserve to have even if they can’t afford it.

Now, I concede that this might just require taxes in the same way taxes are used to fund police protection, firefighting, and public defenders. Some people may say taxes are a “road that leads to slavery.” I don’t like taxes either, but I won’t go that far; the question isn’t whether there are taxes, per se. What we should ask ourselves instead is, To what end does this taxation go and does it represent what most Americans want? As the authors of the paper point out, people do actually care about the welfare of others and how welfare is achieved. So I think in answering the two questions I asked, and as someone who believes strongly in democratic principles, I think a tax in this case can be justified. For example, poll after poll show the American public favor a public health care system (and by wide margins). And it’s been like that for decades. Of course, if this were a functioning democracy, I think that would be the case by now.