Akerlof Says Free Markets May Manipulate Our Thinking
Ever since Adam Smith, the central teaching of economics has been that free markets provide us with material well-being, as if by an invisible hand. In a recent book, Phishing for Phools—The Economics of Manipulation and Deception, Nobel Prize–winning economists George Akerlof, University Professor at the McCourt School of Public Policy at Georgetown University, and former resident scholar at the Fund, and Robert J. Shiller, Professor at Yale, deliver a fundamental challenge to this insight. They argue that markets are inherently filled with tricks and traps and will “phish” us as “phools.”
Akerlof and Shiller use the word “phish” defined more broadly as businesses getting people to do things that are in the interests of the phishermen (such as banks, drug companies, real estate agents, and cigarette companies) but not in the interest of the target (such as investors, sick people, homeowners, and smokers). The authors bring this idea to life through fascinating stories and examples that show how phishing affects every walk of life.
Hui Tong, Senior Economist at the IMF’s Research Department caught up with George Akerlof to discuss his book.
Tong: Phishing for Phools argues that manipulation and trickery play a significant role in free markets. Could you elaborate on that?
George Akerlof: The book is based on conversations with Danny Kahneman [Economics Nobel laureate in 2002] some 25 years ago. In a conversation then, Danny told me that the basis for psychology was that humans are machines that are prone to error. The job of the psychologist is to ferret out that error. In contrast, he said, the basic, fundamental notion of economics is equilibrium. That equilibrium means that if there is a profit left on the table, someone will take up that opportunity for profit.
Danny’s insight says that free markets will not just provide what we really want. That is only the case if those human machines make the right choices. But free markets will also provide us with dysfunctional choices as long as there is a profit to be made.
These principles mean that if we have weaknesses in the equilibrium, the weakness will be exploited if there is a profit to be made. Among all those business...
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