Ben Bernanke has gone soft. The chairman of the Federal Reserve said this summer that economics should “understand and promote the enhancement of well-being.” His fellow economists have long worked with an ideal version of rationality to explain the “what” of how our economies function, he argued, while ignoring the irrational foibles of real people trying to grasp the “why” of the world.
I would argue that this is precisely the space in which theology should be speaking into economics. Yet for the most part, it doesn’t seem to be.
In recent years, economists have turned to psychology to better understand the realities of human behavior. While it’s been easy for economists to craft models based on their ideals of rationality, their understanding of humanity has been incomplete. As a result, behavioral economics has begun to influence economic assumptions about the rationality of man and markets in profound ways.
English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)
Economics traditionally places humanity at the center of its study. Homo economicus roams freely in this area of study in all of his rational, self-centered glory. Birthed by John Stuart Mill, raised in its infancy by David Ricardo, and seen off to college by later economists like Gary Becker, homo economicus formed, in Becker’s words, the “heart of the economic approach to human behavior.”
The rational actor model of human behavior is a rough caricature, but it’s been incredibly useful as a basic assumption. It presupposes that at the micro level, human behavior can be subjected to rigorous examination with consistent outcomes. The broader market can be organized along certain set rules. The results can be tested, modeled, and invested with.
Most of the time, we look and sound pretty rational (or at least I like to think so). Our markets seem to function as they should and efficiently absorb much of the available information. Yet when rationality fails us, it can do so quite spectacularly. Financial crises lurk where logic has long since departed.
In hindsight, it was only a matter of time before scholars decided that it might be useful to apply what psychology was learning about humanity to the study of economics. Daniel Kahneman and Amos Tversky provided the watershed moment for the nascent field of behavioral economics by publishing a groundbreaking study on what they called “loss aversion,” or how losses seem to hold disproportionately more sway in our minds than gains.
The main thrust of behavioral economics is that we often make bad choices and rely on logical fallacies. We are not so rational and calculating after all it seems, at least not in practice. And individuals separately making less-than-ideal choices can, in turn, throw off even the most well-oiled markets.
Yet ironically, homo oeconomicus at this point somehow became more human. No longer was he unswervingly rational. He was bound by a lack of information and time, by a brain that often falls back on mental short-cuts, and an emotional circuitry that sometimes goes haywire for seemingly no reason. He did not always do as he should. His interests and actions fell out of line, as did his values.
Of course, Christian theology came to similar conclusions a long time ago. We are fundamentally fallen creatures who act and think in ways that run against God’s created order. Original sin is woven through the Biblical narrative. Economists did not need psychology to tell them that people can act irrationally and unjustly—if they had listened to the theologians, anyway.
Why don’t we study the links between the two fields? Both economists and theologians operate on the basis of certain fundamental beliefs on the nature of humanity. They are subjects under the sway of irrationality. They are both, as Michael Jinkins put it, “in the business of constructing belief systems based on faith assumptions, and both of us are subject to irrational forces.”
Economics is a long way off from developing a fully coherent and versatile alternative to the rational actor model. The alternative is a certain bounded rationality, informed at turns by psychology and theology. Individuals become more than creatures bent solely and selfishly on maximizing utility. Humanity is seen as both created and creator, fashioned in the image of God and yet embedded in its fallen nature and institutions. The potential ultimately is for economics to be both a hard science and a social science.
Theology can and should serve as a foundation for interdisciplinary study into economics, especially its behavioral kin. Economics needs to know why humans act the way they do and begin to construct a more complete science that reflects human nature. To be clear, Christian anthropology and secular psychology are not quite on speaking terms, but their contributions to economics may prove far more complimentary than most people think. Groups like the Acton Institute and the Institute for Faith, Work & Economics are blazing a path toward the reconciliation of these disciplines in the economic sphere.
In turn, policymakers should begin to assume a moral view of economics that’s much more wide-ranging in its aims. They need to begin constructing institutions that reflect a humanity that is at once made in the image of God and yet fallen, rational and yet bound by limitations. In short, economics should become more humble.
Theology has something to say on all of these fronts. But the real question is whether economics will be willing to listen.