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Search Results for: Thaler


“You want to nudge people into socially desirable behaviour, do not, by any means, let them know that their current actions are better than the social norm.”

Nudge: Improving Decisions About Health, Wealth, and Happiness
Richard H. Thaler and Cass Sunstein

“Today, as you go through your day, notice how many times people have tweaked the environment to shape your behavior. Traffic engineers wanted you to drive in a predictable, orderly way, so they painted lane markers on the roads and installed stoplights and road signs. Grocery store managers wanted you to spend more time in their store, so they positioned the milk coolers all the way at the back. Your boss’s boss wanted to encourage more collaboration among employees, so she approved an “open floor plan” layout with no cubicles or dividers. The bank was tired of your leaving your ATM card in the machine, so now the machine forces you to remove it before you can claim your cash.”

Dan and Chip Heath

“Students get the message about what adults want. When 4th graders in a variety of classrooms were asked what their teachers most wanted them to do, they didn’t say, “Ask thoughtful questions” or “Make responsible decisions” or Help others.” They said, “Be quiet, don’t fool around, and get our work done on time.”

Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A’s, Praise and Other Bribes
Alfie Kohn

Let’s imagine that you’re a principal and you have a problem at your school with boys peeing on the floor near the urinal. What do you do? Before you read on, stop and have a think and let me know if you didn’t choose one of the following options.

You ask the male staff members to be more vigilant and attempt to catch culprits.
You call an assembly of the boys and tell them that it’s becoming a problem and ask them to try and aim straighter.
You send a letter home to the parents asking them to “have a word to their child” about the need for better habits in the bathroom.
You call an assembly and warn them that there will be consequences if this doesn’t stop!
You ignore the problem and hope that it’ll go away.
You delegate the problem to someone else.

Of course, some of you may have used choice architecture to solve the problem.
Choice architecture is about structuring the world so that people are encouraged to make good choices. Thaler refers to it as “libertarian paternalism”. I suspect that this is mainly to satisfy the many Americans for whom any attempt to influence people’s decision is viewed as an infringement of their rights, or an attempt to create a “nanny state”.
Of course, most schools have no problem with imposing a “nanny state” and most schools are more than happy to make all sorts of decisions on behalf of their students. Naturally, this often leads to conflict, and I very much doubt if many teachers in this country haven’t heard a sentence starting with: “Yes, but why can’t we…” And I’m also sure that nearly as many teachers have at some point replied with: “Look, I don’t make the rules, I just make sure people follow them.”
So let’s think about the potential for choice architecture to solve the problem. Those of you who’ve read “Nudge” by Thaler and Sunstein will be familiar with this approach, but for those who haven’t, at Schiphol Airport in Amsterdam, the image of a black housefly was drawn on each urinal. Without any prompting, this simple act reduced spillage by about 80%. Having something to aim at increased the men’s attention, which increased their aim.
At another urinal, a good aim made a “poster” appear, advertising a coming event.
An approach like this has a greater chance of being effective than most of the strategies that your average school would apply.
As with behavioural economics, even if people know what’s good for them, but that doesn’t mean that they’ll always do it. In explaining choice architecture, one person suggested that while most of us belief that we think as rationally as Mr Spock, in reality, we’re more likely to behave like Homer Simpson, because, apart from not having enough willpower, we’re also likely to be subject to a number of the following biases.

Potential Biases

Anchoring bias
We often use the first piece of information as an “anchor” when making decisions.
A number of years ago, I was looking at the wine list in a restaurant. On the first page, the cheapest bottle of wine was in the seventy dollar range. On the second and third pages, there were wines costing three and four times that. On page five, when I saw a bottle for a mere forty dollars, I was happy to purchase it. At the time, I would have considered spending thirty dollars on a wine excessive, but the other wines had given me a more expensive “anchor”.
Try this for yourselves. Ask a group of people to estimate how much the most expensive Rolls Royce costs. Ask another group of people how much their first car cost (if they’ve never owned one the answer should be zero). Then ask both groups to guess how much a new model family car from any known company will cost. There’s a very high likelihood that the first group will guess significantly higher than the second group.

Availability bias
This is a person’s propensity to give a greater weight to recent occurrences when evaluating a topic or concept.
For example, someone tells you that today’s students waste too much time on social media. You immediately recall the fact that over the past few days you’ve caught three students on Facebook in the past week. Yes, that’s right you decide, without seeking any independent studies or data.

Representativeness bias
We tend to make judgements based on limited information, and we often make assumptions based on the idea that if a person has one characteristic of a group then they’ll share all the characteristics of that group. For example, “nerds” are portrayed as unathletic and “jocks” are portrayed as bone-headed in a lot of fiction. If you’re told that Eugene is hopeless at sports, you may incorrectly presume that he’s clever, or, if you’re told that Fred has just been given a science scholarship, you may jump to the conclusion that he isn’t also a gun basketball player.

If you ask a group of people the following two questions, then obviously the odds of the first is much, much higher. What are the odds that a randomly chosen person will have above a science student?
What are the odds that a randomly chosen person will be a male physics students who needs glasses?
There are a limited number of science students, but the number of people who are above average and also wear glasses is significantly less than this. So, to find someone who fits all three criteria is going to be harder than finding someone who’s only described by the first. However, because of the stereotype of science students, a number of people will incorrectly suggest a higher likelihood to the second category.

Confirmation bias
When we already “know” something, we notice evidence that confirms it.
If Liz believers that students at her school are lazy, she’ll notice the two kids reluctant to work and ignore the fact that all the others have happily commenced and are working as hard as possible.
If Tony believes that women are illogical, then the fact that one of them argues with him, just proves it, because his ideas are based on evidence that he’s found on the internet, whereas hers are based on what she read somewhere.
If one politician is caught lying, well, what can one expect? Let’s not talk about the ten politicians that told truth so that the lie was discovered.
If it’s a cold morning, then that proves that there’s no such thing as “global warming”.
And, just to be fair about this, if there’s a very, very hot day, then that’s proof that climate change exists.

Status quo bias
The tendency to stick with what is.
You remember that magazine subscription that you could cancel at any time that you still remember each month when it’s delivered and you think, “I’m must cancel that before the next delivery”?
You know how you can now move your superannuation? Done anything about it yet?
Your remember how you’d decided that you were going to look for a new job because it’s about time you moved on?
As Thaler suggests in Nudge:

“First, never underestimate the power of inertia. Second, that power can be harnessed.”

We’ll come back to some of these in more detail in looking at the features of choice architecture.

Choice architecture helps to push us in the right direction.Who determines what that actually is? Sometimes, it’ll be the person themselves; other times it may be a government or employer or school which wants us to make what it believers are the “right” choices.

“Nudge” uses the mnemonic

Understand mapping
Give Feedback
Expect Error

So what does these actually mean, and how can they be applied to education?


The first is pretty straightforward and using incentives is hardly a new idea for teachers. An incentive is something that motivates or encourages someone to do something, and most classroom teachers apply “carrot and stick” consequences for behaviours. From the elephants stamps to the “If you don’t complete up to question nine, you need to stay behind” most schools are familiar with the reward and punishment strategy as incentives.
Of course, sometimes the activity itself acts as an incentive. Students who are expected to perform a play in public rarely ask, “How many of my lines do I need to learn to pass?”
When considering incentives for students, it’s always worth asking:

Does the student have a real short-term incentive to complete the work to the best of his or her ability, or will just dashing something off to satisfy the teacher work just as well?
Can the learning activity have a real life purpose?
What incentives do you use unconsciously?
Do you ever think of new ones?
Can the learning activity be linked to the individual student’s area of interest?
If the activity needs external incentives – like fear of punishment – is it worth doing in the first place? (I’m not saying that it isn’t. I’m just suggesting that the question needs to be asked)
Can the incentive be embedded in the work itself? (See the next chapter on Progress and Video Games)
And most importantly, how well do your incentives work?

Of course, many of these work if you’re in a leadership position as well. As a leader, when was the last time you asked yourself if your “incentives” were working for everyone, or whether, for example, there was a real short-term incentive to have a survey completed by Friday?


When I sign up for a different way of accessing my cable TV, the person assures me that it’s really simple to install.
The box needs to be plugged into the antenna as well as the Internet. These are on opposite sides of the room. I ring back.
I need a power-line adaptor, so I order one.
Three days later, it arrives. After setting it up, I have a new problem. It needs to connect to the modem, but that means that I can’t connect my wireless to the modem.
So, I go and purchase a device which enables me to connect more than one thing to the modem.
When I get home, I discover that I now need another ethernet cable, so after another journey out, I’m all connected. Simple really.
Except that it took two weeks to do. Why?
Well, my choices weren’t made clear to me at the time of sign up. It’d be quite simple to have a series of questions for the salesperson to ask. Or even a survey for me to fill in before I spoke to anyone. That way, the person could have explained exactly what I needed, so that I could have made an informed choice at the time of signing up. Perhaps the logic was that, if I’d known how complicated it was, I wouldn’t have agreed, so hide it all until after. Except that it was far more complicated than it needed to be.
“Mapping” – What does this actually mean?
Well, basically, it means laying out the choices so that we know exactly what they mean. If there had been something that explained that I’d need an extra couple of devices as well as another ethernet cable the whole process would have been less stressful.
While firms may wish to hide any extra costs in the hope of making a sale, in this case the extra cost wouldn’t have been the issue, and, if I’d had some easy way of pulling the plug on the deal halfway through, I would have, because it just seemed too complicated.
Another example of “mapping” of where better mapping would be the purchase of a mobile phone. While many people wouldn’t understand exactly what they need, the shop is likely to be advertising extra power or data, but do you really know what phone will best suit your needs? Are you aware of how much data are you likely to use? Or whether you need 64 or 16gb? Do you even know what the gb is? A series of questions could help you “map” what you need and lead you to a better choice.
So how do students make choices at school? Are choices largely made for them?


The “status quo bias” means that any default option will end up with large numbers. The difference between an “opt-in” and an “opt-out” is extremely significant. A number of Australian primary schools have religious instruction classes where parents have the option to opt out. Compare the number of students taking these at primary school compared to the number of those attending church or Sunday School.
Schools have many other default options. In many cases, they’re almost invisible because the very nature of them means that nobody ever “opts out” or even questions them. In fact, your local school is itself a default — it’s where you go when you don’t make a conscious decision to go somewhere else.
Electronic roll-marking systems are often set up so they default to present, meaning that the teacher has to make a conscious decision to mark a student absent.
Another example of a default is the subjects which a student does. For many subjects, this is not even considered something that anyone has a choice about, and it’s only when schools are dealing with an atypical student that they may consider that he or she may be given extra help in a particular area instead of doing one of the normal “core” subjects.

But defaults don’t simply have to be about things that already exist. Does your school have any areas where you’d benefit from creating a default?


“Learning is most likely if people get immediate, clear feedback after each try.”

Nudge: Improving Decisions About Health, Wealth, and Happiness
Richard H. Thaler and Cass Sunstein

Yep, I know. You spend most of your time “correcting things” or “marking”, don’t you? So you’ve got this one covered. We get feedback when we receive information about what we’ve done and it works best when it’s immediate. Teachers often receive immediate feedback from their class, and I don’t just mean when the students complain. Body language will usually tell you whether the students are engaged or uninterested, understanding or confused. You can adjust a lesson according to the feedback you’re given. However, not everything in education is so immediate. When you actually look at the sort of work you’re correcting and the sort of feedback you’re giving, you may start to question whether it’s worth the time you’re spending on it. Giving effective feedback is important, but how much of your time is being wasted by reading student work with the sole aim of checking that they’ve actually done it? Are the demands placed on you, leading you to be more concerned with auditing student work than improving it? How much of the work you’re taking away from the students tells you much about their capabilities? To what extent does your feedback improve their future work? Do they read it avidly or are they more concerned with what “mark” they received?
For feedback to be most effective, it needs to be as close to immediate as possible
How do you help students to improve with timely feedback, when you have several classes each with a large number of students?
Of course, not everything relies on detailed feedback from a third party. If shoot an arrow at a target and miss, you receive immediate feedback, and you adjust your aim accordingly for the next shot. When it comes to your classes it’s worth asking:

Could you be using technology to speed up the feedback? Some tests and quizzes can be done on computer and the results calculated immediately, While this won’t work for every activity, it’s worth considering if there’s technology that can save you time and effort.
Can the feedback be embedded into the activity itself? Just as with the bow and arrow example, some tasks will have the learning embedded into it, and the student knows immediately that what they’re doing isn’t succeeding.
Can you use peer feedback in any way? Placing students in pairs, for example, and asking each student to give written feedback on each other’s work before you even look at it, can be a help to both, as well as the teacher. This can structured with specific questions to help students to know what to look out for.


If I wasn’t paying attention, it was easy to leave the headlights on in my first car. Result – a flat battery. A few years after that, I bought a car where I’d hear a buzzing if I turned off the ignition and the headlights were still on. Then my next car simply turned off the headlights when I turned off the ignition. The designers of this car really understood that people make errors, because the petrol cap was attached by a short chain so it was impossible to drive off and leave it on the roof or the petrol bowser.
Basically good choice architecture understands that people aren’t perfect and works toward overcoming their shortcomings. Think about the birth control pill as example. Why is there a pill for every day of the month when there’s only a need to take them for three weeks out of four? While it’s still possible for people to forget, it’s a lot less likely when it’s part of a daily habit.
How does your school plan for error? One school rewrote its Internet Usage Policy and sent forms home for students to have their parents sign and return. A few weeks later, any student who hadn’t returned the form was cut off from the internet, including their school email account and their access to various learning tasks and resources that had been posted on the school’s website. This was about thirty percent of the school. Needless to say, if the aim of the person in charge was to discourage teachers from ever using technology again, then they were very successful, because a number of students still took their time returning the form as it was a great excuse not to do any work. In circumstances like that one, it’s only realistic to expect that a large number of students won’t have returned the form, so would there have been a better way to have encouraged students to return the forms?
Many teachers are in the habit of taking extra resources into class, because they expect that some students will have forgotten or lost theirs. While supplying a student with a pen may not be teaching self-reliance, it’s a good example of the “expect error” concept. Similarly, having a back-up plan for when the overhead projector doesn’t work, or the sound won’t play on a film is something that most teachers do.
So where could you or your school improve in this area? Are there “errors” that constantly happen, and each time, it’s as though nobody expected it. For example, do you leave space near the entrance when running an assembly so that any latecomers can enter quickly without creating a distraction? Does your electronic roll marking system fail to work one morning in ten, and paper rolls aren’t readily available? Does the system for late passes break down when Person X is away, because nobody is ever assigned to replace them? Do students have clear instructions for what to do if a teacher fails to show for a lesson (or do they all believe the urban myth that after fifteen minutes they’re allowed to go)?

Originally published on “Rossleigh’s Education Blog”

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Misbehaving, My Ex-wife and Money

When I first started reading Richard H. Thaler’s “Misbehaving – The Making of Behavioural Economics”, I couldn’t help but think of my ex-wife.

Now, I realise tales of one’s ex are always problematic. As Christine Keeler so eloquently said all those years ago, “Well, he would say that, wouldn’t he?” However, I’m going to step right in and risk it.

My ex-wife had a credit card with a limit of $2000, which used to hover somewhere between $1700 and $1950. When I suggested taking out a personal loan and paying it off, she rejected the idea on the grounds that she didn’t like borrowing money.

“What do you call that stuff on the credit card then?” I said, demonstrating to everyone reading this both my superior grasp of economics, and why the marriage was doomed. This brought an end to the conversation.

Every now and then, she’d get some windfall money like a tax return and pay most of it off, and resolve never to use it again, but this usually only lasted a couple of months. When I suggested that rather than paying the minimum off, that she pay off a large chunk of the credit card and put the petrol and groceries on, which would mean that she wasn’t paying interest on that chunk of money until the next month where she could do that again. This would mean that she was paying down more than if she simply paid the minimum. (And also, I suspected would mean she was less likely to make an impulse purchase than if she had money left in her actual account, but that’s a whole other story!)

No, I didn’t understand, she was trying to not use her credit card, at all.

Richard H. Thaler’s book is full of examples of how people think about money, and how much economic theory works on the basis that we’re all rational people who do what’s best for ourselves in the long run.

He gives the example of people purchasing wine which appreciates in value. When they drink it, many of them argue that it’s not like they’ve gone out and purchased the wine for what they could sell it for – it only cost them what they paid, so therefore, it’s quite ok to drink it, even though they’d baulk at paying the $XX.

Another good example is how people feel about “sunk costs”. Sunk costs are the costs of what you can’t get back whatever you decide to do. For example, if I pay a deposit of $400 and organise construction of gigantic statue of Tony Abbott in our front yard costing $4000, when I argue that we have to go ahead with it, or else we’ve just wasted $400, my wife can correctly argue that if we do go ahead with it, we’d actually be wasting a further $3600 and we could do better things with the money.

(This is an interesting one in the context of the East-West link in Victoria. There were many people arguing that because it was going to cost money to get out of the contract, then it was better to build the road, because at least we’d get something for the money. The question is not about the sunk costs, the question is whether the several billion extra to actually build the road could be better spent on other projects.)

As I read on, I started to think of my ex-wife less, and more on the whole way we’ve been encouraged to think about the economy and debt.

And in particular this week, as Tony Abbott responded to the Infrastructure Australia audit  which told us that traffic congestion could be costing $53 billion a year (or over a billion a week as the PM helpfully added, once again doing our division for us. Give him credit, he’s always been good at division!)

What I find interesting is the notion that we can’t land future generations with “debt”, but apparently it was OK all through the Howard years to put off infrastructure spending because there’s nothing wrong with giving them inadequate infrastructure.

Or inadequate education.

Or not enough hospital beds.

Like my ex-wife’s refusal to take out a loan to pay off her credit card, it’s all in how you look at it.


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Who Needs A Society; All We Need Is A Workforce! Or Zed’s Dead, Baby, Zed’s Dead!

Ok, I’m going to ask you a simple question:

You are sitting in Emergency. The hospital has decided to admit you as you are in severe pain. You need to be in hospital.

Alas, there is no bed available. You need to wait there till someone either goes home or dies. How long? Well, who can tell? Now just wait over there on the gurney and we’ll get back to you just as soon as we can. If the pain gets worse, try and grab one of the people rushing by, because you don’t have a buzzer to press. But you’ll have one just as soon as you’re admitted, and we’ve decided that you’re not dying, so we have more important things to do in Emergency!

So would you be prepared to pay $50,000 to reduce your wait by an hour? No, well what about $5 then?

You’re saying, of course: It’s just unacceptable that I have to wait so long.

Ok then, what if we put your taxes up by ten dollars a week. NOW. Before you need to be admitted. NOW. Before it happens.

Screw that! Some of you are thinking. I’ll take my chances. Why, with that ten dollars, eventually I could save enough to buy a beach house or at least a bottle of Grange! Why should I pay my hard earned money just so someone else can avoid spending a night – or two – in Emergency…

Others, perhaps, are thinking that this would be a small price to pay. Shouldn’t we try to find a way to make sure that nobody ever has to feel unnecessary pain? Shouldn’t we be training more doctors and nurses and opening more hospital beds? Gee, I’d be prepared to pay that…

But I suspect our current government will tell you that there are lifters and leaners, and nobody who’s paid by the public purse ever does anything that contributes to overall benefit of society, and that a bit of pain never hurt anybody.

Except that – as I wrote a few months back, when everybody thought that I was joking – this is an election year… And while the only election that Abbott may be concerned about is the one in the Liberal Party room, so some of it is just to give him a boost in the polls, this is not a Budget about improving anything.

This is just the Budget you have when you don’t want to let the Treasurer inflict “necessary pain”.

Why am I suddenly thinking about “Pulp Fiction” and remembering the scene where they say:

Bring out the Gimp.

But the Gimp’s sleeping.

Well, I guess you’re gonna have to go wake him up now, won’t you?

Ok, sometime soon, I’m going to write something about Richard Thaler’s new book, “Misbehaving” which is about Behavioural Economics, and is a damn fine read. Remind me, if I get distracted by the turkey shoot that’s going to follow the Budget.

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How Tony Abbott Got Elected!!

Ok, I’m not sure that I need to comment much further than the actual quote here:


“Imagine that you find yourself in a group of six people, engaged in a test of visual perception. You are given a ridiculously simple task. You are supposed to match a particular line, shown on a large white card, to the one of three comparison lines, projected onto a screen, that is identical to it in length. In the first three rounds of this test, everything proceeds smoothly and easily. People make their matches aloud, in sequence, and everyone agrees with everyone else. But on the fourth round, something odd happens. The five other people in the group announce their matches before you—and every one makes an obvious error. It is now time for you to make your announcement. What will you do? If you are like most people, you think it is easy to predict your behavior in this task: You will say exactly what you think. You’ll call it as you see it. You are independent-minded and so you will tell the truth. But if you are a Human, and you really participated in the experiment, you might well follow those who preceded you, and say what they say, thus defying the evidence of your own senses. In the 1950s Solomon Asch (1995), a brilliant social psychologist, conducted a series of experiments in just this vein. When asked to decide on their own, without seeing judgments from others, people almost never erred, since the test was easy. But when everyone else gave an incorrect answer, people erred more than one-third of the time. Indeed, in a series of twelve questions, nearly three-quarters of people went along with the group at least once, defying the evidence of their own senses. Notice that in Asch’s experiment, people were responding to the decisions of strangers, whom they would probably never see again. They had no particular reason to want those strangers to like them. Asch’s findings seem to capture something universal about humanity. Conformity experiments have been replicated and extended in more than 130 experiments from seventeen countries, including Zaire, Germany, France, Japan, Norway, Lebanon, and Kuwait (Sunstein, 2003). The overall pattern of errors—with people conforming between 20 and 40 percent of the time—does not show huge differences across nations. And though 20 to 40 percent of the time might not seem large, remember that this task was very simple.”

Nudge by Richard Thaler and Cass Sunstein


Ok, that may not be enough, but I also have this (Sherif being the man who was conducting the experiments, not the person arresting the people who have down something wrong!):

“Sherif also tried a nudge. In some experiments, he added a confederate—his own ally, unbeknownst to the people in the study. When he did that, something else happened. If the confederate spoke confidently and firmly, his judgment had a strong influence on the group’s assessment.”

Nudge by Richard Thaler and Cass Sunstein

Now, I suspect that sounds like someone we all know!

But this is the thing. Every time you assert that Tony Abbott is a complete idiot, it may have just as much effect as all the rational argument you’ve tried.

After all, when one thinks about it, this was his tactic during his time as Opposition Leader. And it seems to be his only tactic as Prime Minister. “In assessing my goverment I’d give it an A+, because, well, we’re the government now, and when you compare us to the previous mob, you’d have to say that we’re not the sort of government who changes our leader… Or our minds, no matter what!”

Anyway, Richard Thaler is coming out with a new book on behavioural economics, which I’ve always intended to write about in one of my blogs, but I get distracted by current events. One should never be distracted by current events. Which – strangely enough – is sort of what behavioural economics tells us about the whole human race.

Yep, I think that the important thing is to focus on the birth of our new potential leader. Princess Whatshername. She is only three people away from the throne. And, while I haven’t watched “Game of Thrones”, I understand from someone who watches it, that it’s closer to reality than “Big Master Block”, and that being that close almost guarantees an arranged marriage and a bloodbath.

Poor thing.

Personally, I think she should be called “Charlotte” because my wife told me that she’d call her that and that my suggestion of “Peggy Sue” wasn’t ever going to even be considered.

I didn’t like to point out that her grandfather is Charles and he didn’t turn out all that well and that Charlotte could be called “Charlie” for short, but not for long because good Queen Betty would put a stop to that!

Mm, I’m wondering about that Nudge thing, and how my wife’s assurance just left me not even thinking that “Peggy Sue” was an option…


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Why Joe Hockey (and most others) haven’t adapted to economic change

“Chapter 1: Economics:
The Study of Choice.”


“Ultimately, Economics is the study of choice.”

Economics Textbook.


How do people choose between a number of alternatives?

“One strategy to use is what Amos Tversky (1972) called ‘elimination by aspects.’ Someone using this strategy first decides what aspect is most important (say, commuting distance), establishes a cutoff level (say, no more than a thirty- minute commute), then eliminates all the alternatives that do not come up to this standard. The process is repeated, attribute by attribute (no more than $1,500 per month; at least two bedrooms; dogs permitted), until either a choice is made or the set is narrowed down enough to switch over to a compensatory evaluation of the ‘finalists.’”

Nudge by Richard Thaler and Cass Sunstein

So let’s go back to Economics 101 for a moment. The first thing that many textbooks start with is explaining scarcity and the role of choice within economics. It’s carefully explained that we have limited resources and the economics is the study of how we choose to use these resources.

Politicians of all persuasions have been good at reminding us about the “scarcity”, but not so forthcoming when talking about the “choice” side of the equation. Recently, the most obvious example has been the Liberals attempt to tell us that we have no choice but to accept a co-payment for trips to the doctor, other Medicare will become “unsustainable”. Overlooking for a moment the fact that the $7 was meant to go to a separate medical research fund and we were assured it wasn’t meant to discourage people from going to the doctor, it’s clearly not our only way of making Medicare “sustainable”. Even the most feeble minded person could see that raising the Medicare Levy to 5% would very quickly reduce the immediate shortfall in Health spending.

“We couldn’t do that,” is the immediate reaction from a number of people. And while they may have compelling arguments for not doing it, the fact remains it is a choice. It may not be the best one and it may be politically risky, but it is still a choice that we could make.

Now, I have two fears and I’m not sure which one is correct:

  1. The Abbott Government has a plan to cause massive unemployment as an excuse to drive down wages and reintroduce WorkChoices by another name such as WorkyabastardsyouhavenoChoice.
  2. The Abbott Government really are as dumb as they appear.

I am unsure which of the two I find more frightening.

Returning to economics, the first point I wish to make is one that John Kelly made in a previous post on this site: Do Taxes Fund Spending.

We’re encouraged to link government spending and the Budget with our external borrowing. That’s even more dodgy than suggesting that when I give my son money for a school excursion then I’m risking my credit rating because I didn’t bank it. The Australian Government could run an enormous Budget deficit without increasing its overseas borrowing.

Why doesn’t it? Well, there are repercussions to such things. For a start, overseas perceptions that the government is mismanaging its finances can lead to all sorts of problems. People become reluctant to invest in the country and the credit rating may be reduced, leading to higher borrowing costs for the government. And, of course, it could also lead to a devaluing of the currency.

Too much spending could create shortages and shortages lead to inflation. If you announce that your going to build umpteen hundred new schools then you risk creating a shortage of builders which drives their wages up, which in turn makes it more costly to build up a home, which leads to less houses being built which drives up the price of houses.

Market economics, of course, would suggest that this price rise would be only temporary because the higher price would lead to less demand which would eventually create a glut leading to a brake on inflation. However, this theory hasn’t always worked in practice.

Historically, from the 1970’s through to the end of the century, inflation was a major concern for many countries, including Australia, and Budget Surpluses are one of the ways that governments can help contain inflation. The surplus, naturally, shouldn’t be too large or else the risk of creating a recession comes into play.

So let’s consider Australia’s current position. Inflation has been under control for the past couple of decades, apart from the odd jump in the price of bananas or houses. Interest rates are at historic lows. Growth is slowing. Unemployment is rising. And until the recent slide, it was generally conceded that our dollar was far too high.

All this suggests that the government should be targeting spending to ensure that we don’t slip into recession, rather than trying to reduce its own expenditure. Aiming for Budget Surpluses is primarily about fighting inflation. If anything, inflation caused by shortages would be helpful to getting the Budget back into the black because it would suggest increased economic activity, and higher wages would lead to bracket creep where we all end up paying a greater percentage of our income in taxes. A recession, on the other hand, would lead to less revenue from taxation.

Instead of a clear statement of purpose from the Abbott Government,  we have Mr Hockey and his rather confused messages. One day, he tells us not to let Santa down and go out and spend, spend spend; the next he tells an interviewer that the government is just like a household and you have to put money aside for the future. Subtext: We think that you should spend because it’ll help us out, but we also think it’s irresponsible of you to do so.

When he releases an economic statement telling us (or perhaps parroting a phrase he’s been told by someone who actually knows something) that the government will be using the Budget as a “shock absorber”, while at the same time announcing the slashing of hundreds of government programs.

I’ve heard Liberals tell us that the government can’t just print money. Of course, governments can and do. It’s called the Mint. However, printed money has very little do with the total supply of money. The real reasons for governments restricting their expenditure are either due to the other economic circumstances such as inflation, or else they’re political reasons.

Like I said, at the start, economics is all about choice. And it appears that the current government have started by using Tsverky’s method of eliminating one of the choices – we don’t want any inflation – rather than looking at the whole situation and asking what outcome we actually want.

Then again, perhaps the outcome that they actually believe that high unemployment and an economy in recession will give them the excuses to implement their ZombieWorkChoices agenda, all the while blaming Labor for the “mess we inherited”.

Sorry, I keep forgetting. This a “No excuses” government.


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