Don Boudreaux's Review of Phishing for Phools

I'm a regular reader of Don Boudreaux's (George Mason U) blog Cafe Hayek so I was glad to see his review of George Akerlof's (Georgetown U) and Robert Shiller's (Yale U) recent book "Phishing for Phools." Boudreaux's review is very good and I recommend you read the whole thing. If you're not a Barron's subscriber, you should be able to bypass the gate by searching "Boudreaux ivory tower economics" in Google News.

The review begins with a short synopsis of the book. Akerlof and Shiller argue that most people, as consumers and investors, suffer from weaknesses and informational problems that lead them to buying things they don't really want or need. Entrepreneurs who take advantage of these problems are "phishermen" and those who fall prey are "phools."

As you might expect, food is a popular topic in the book. The folks at Cinnabon are said to create a product so irresistible, yet full of empty calories, that passersby are helpless to resist. Another example are "Sunkist" oranges. According to Akerlof and Shiller, this advertising "trick" causes consumers to buy too many oranges.

It's certainly true that these products are tempting and likely deliberately so. The questions are 1) whether these temptations amount to a moral problem and 2) what is to be done. Assuming that there is a moral problem, it's difficult to know what should be done. As I've discussed previously here on the FH blog, it's not enough to criticize real-world market results relative to perfect theoretical policies drawn out on a black board. We have to compare said market results relative to policies that operate in the real world.

Here's Boudreaux's analysis of Akerlof and Shiller's solution:

Suppose it’s true, however, that modern markets are chock-full of devious phishermen preying successfully upon helpless phools who buy too many oranges in the belief that each has been “kist” by the sun. What’s to be done? The authors offer no specific proposals. Yet they clearly imply that more government regulation is a key part of the solution. At one point, for example, they advocate “more generous funding” for the Securities and Exchange Commission; at another, they speak approvingly of greater regulation of slot machines.

Solutions via government are based on a glaring fallacy: that people deficient in choosing for themselves in the marketplace will automatically shed those deficiencies once the government authorizes them to choose for others. Ironically, while citing slot machines, the authors make no mention of a related scam: government-run lotteries. The lotteries are perhaps the most obvious example of how those who are supposed to protect us from phishing scams themselves eagerly phish for phools.

Nothing, indeed, could be more phoolish than for ordinary men and women to submit to elites who are as confident as professors Akerlof and Shiller that they know best how other people should behave. Such elitism poses a far worse danger to society than entrepreneurs offering aromatic pastries for sale.

Even if people are terrible at making choices in their own best interests, a fundamental truth is that they own their lives. Self-respecting people want to be free to consult those with greater knowledge. But they would much prefer to risk undermining their own well-being through their own choices than to be saddled, bridled, and steered by self-appointed experts.