False Promises? A Sociological Critique of the Behavioural Turn in Law and Economics
Sabine Frerichs
The final publication is available at Springer via
Please cite as:
Frerichs, Sabine, 2011: False Promises? A Sociological Critique of the Behavioural Turn in Law and Economics. In: Journal of Consumer Policy, Vol. 34, No. 3, pp. 289-314
Abstract
Economic bestsellers like Freakonomics and Nudge that mainly address outsiders of the economic discipline are also consumed by lawyers. The latter has already become an important reference in the field of consumer law and policy. In principle, this is nothing to complain about but part of law’s encounter with science, namely the social sciences. Notably, the law and economics movement proved successful in importing economic perspectives into legal discourse. However, it would seem questionable if the law followed each trend on the academic book market. While there has been an increasing emphasis on economic perspectives at the expense of sociological perspectives within the field of law, economy, and society, a major shift can now also be observed in the field of law and economics. With the behavioural turn in law and economics, homo oeconomicus seems to be transformed into Homer Economicus, and consumer law prone to be Simpsonized. In this paper, the turn from neoclassical law and economics to behavioural law and economics will be analyzed from a third, namely sociological perspective: the economic sociology of law. In this framework, it is possible to compare and confront the ‘old’homo oeconomicus rationalis and the ‘new’homo oeconomicus behavioralis with a third model – homo oeconomicus culturalis – which demonstrates the limits of the previous models, not least with regard to explaining the recent financial crisis. While governance by nudges might look, at first sight, as a tempting idea, I will question the normative side of this project and emphasizeits possible effects on our legal culture and, thereby, our human condition.
Keywords
behavioural economics;consumer law;economic sociology;culture;human condition;governance
1
Introduction: Lawyers as Consumers and the Economic Sociology of Law
This paper starts with a simple equation, or rather a metaphor: Scholars are consumers.[1]They are consumersnot only outside of academiabut also in their daily work of consuming literature.Furthermore, the books and articles that are advertised in the supermarket of sciencemay also be subject to impulse-buying, just as any other well promoted product. Due to clevermarketing, some ideas and arguments might thenbe used in aless critical way thanscholarly standards,or scrutiny,would generally require.
This notably includes academicbestsellers, such as Freakonomics (Levitt and Dubner 2005) or Nudge (Thaler and Sunstein 2009). On the one hand, they further the public understanding of science and, thereby, also facilitate cross-disciplinary discourse. These effects are naturally welcome in a highly differentiated‘science society’(Wissenschaftsgesellschaft). On the other hand,popular science bookstend toappeal to the common senseand not tothe critical mind of scholars. Moreover, the handy format does not always allow for a detailed account of alternative positions. Especially outsiders of the represented discipline are thus left with an incomplete picture.
In explaining “the hidden side of everything” (ibid., cover), Freakonomics contributes to the popularization of modern standard economics, yet with few references, orsuggestions, to the law. Its twin brother Nudgenow obviously plays a similar role in the dissemination of behavioural economics. By developing “recommendations for public policy and law” (ibid., p. 14), itexplicitly aims at legislation and legal scholarship. With considerable success: In the field of consumer law and policy, it seems thatNudgehas almost become a must-read today. However, Freakonomics and Nudge offer only partial views of what law, economy, and society is all about, and of consumers in the midst of it.
The present paper is concerned withthe relations between law and economics within the broaderfield of law and the social sciences.Overall, economists are the ‘producers’ and lawyers the ‘consumers’ofeconomic wisdom, which isthe main good to be exchanged in this relationship. Of course, economists also take in some legal wisdom, namelywhen they learn about the given state of the law (and all its subtleties). However, today’s law and economicsis dominated by the “economic analysis of law” (Posner 2007).[2]The field is thus characterized by an asymmetric relationship between lawyers and economists. This relationship is notably based on the asymmetry of information about the good to be transferred, namely economic expertise.[3]In other words, lawyers are often lacking information about the economic paradigm they are adopting, or adapting to, in many ways.
My take on this unequal relationshipisnotsimply to reverse the premise(as legal scholars might be inclined to do) but to develop an economic sociology of law which puts the encounter of the two disciplines into a sociological perspective (Frerichs 2009; Frerichs 2011). Schematically, the economic sociology of law is located between economics, sociology, and the law, that is, three differentiated scientific disciplines with distinctive domains, theories, and methods. But it is also located between three interdisciplinary research fields that focus on the relations of economy and society (E&S), law and society (L&S), and law and economy (L&E), respectively. The point of departure is, thus,an integrated view of law, economy, and society, bothas a sphere of reality and a field of scholarship.
Within this context, my ambition is to strengthen the sociological point of view,both with regard to the law and the economy and, notably, law and economics.In a way, the economic sociology of law thus combines the viewpoints of economic sociology, on the one hand, and legal sociology, on the other hand. In merging both perspectives, the economic sociology of law helps to understand how legal and economic spheres interact,and how this is, in turn, reflected inlegal and economic theories. In the present context, my focus isnotably on the recentjoint venture between law and economics which is fostered, not least, by this Special Issue. In the following, I will thus put the projected fusion, or confusion, of behavioural economics and consumer law into a sociological perspective.
In the relationshipbetween law and the social sciences, the acceptance of behavioural economics as an ‘ancillary science’ to the lawis only the latest twist.Thehistory of socio-legal thinking can be divided intohistoricalscholarship, realist scholarship, and constructivist scholarship (Frerichs 2010a). At the outset, the field of law, economy, and society was not fully differentiated yet. Instead, the early social sciences all shared a historical, and somewhat holistic, interest in the foundations of modern society. With the establishment of independent social scientific disciplines in the late 19th and early 20th century, law, economics, and sociology lost a great part of their interconnections.However, at the margins of the legal discipline, realist scholarship emerged as a corrective to legal solipsism.Other than historical scholarship, it isless interested in the historical genesis of society than in empirical facts about its present functioning and, notably, characterized by an optimistic belief in scientific and social progress (which includesan instrumental understanding of the law).
While this‘social engineering’ perspectivehas lost much of its plausibility in the recent decades andgiven way to more critical and constructivistaccounts, the paradigm of behavioural economics,whichis at stake here,isstill representative of the ‘age of realism’. In the second half of the 20th century, this has notably brought about two big ‘movements’, namely the law and economics movement and the law and society movement. Both form part of the ‘social scientization’ of the law (or ofcertain fields of the law), that is, law’s increasingorientation towards the social sciences.However, it makesa difference if law chooseseconomics or sociology as its ‘ancillary science’. Even though the two disciplineshave a lot in common as empirically oriented social sciences, they have come to stand for quite different models of social reality and, hence, for different forms of(legal and scientific) realism. This shows, not least, in theirdistinctive models of actorhood, which are also used to describe consumers: homo oeconomicusand homo sociologicus.Similarly, the two ‘law and’movements seem tofollowlargely different agendasas regards the role of the law and the state in economic and social life.[4]
Legal scholars consume social science, and they notably choose between the offerings of economicsand sociology. However, in addition to theinformationasymmetry that characterizes anyimportation of scientific theories into the law, there is apparently alsoanasymmetryof knowledge about the different viewpoints of these two disciplines.[5]Law’s relation to the social sciences is thus characterized by a double asymmetry which makes it difficult to criticizeeconomic wisdom, in the first place,and to confrontor complementit with sociological insights.Legal scholars are thus prone to make the same mistakes as ordinary consumers: Theysimply buy what is offered to them, or advertised best. What else can they do? Yet in doing so, they neglect the‘hidden costs’of their decisions and the ‘opportunity costs’ of alternative options – just as ordinary consumers do.
Legal scholars have recently proclaimed a “new legal realism”, which notably includes behaviouraleconomicsas one of its “varieties” (Nourse and Shaffer 2009).[6]They thus emphasize the discontinuity between neoclassical law and economics, on the one hand, and behavioural law and economics, on the other. More specifically, neoclassical law and economics iscriticized for having brought about a ‘new legal formalism’ which is no longer based on legal buteconomic principles. By replacing abstract (axiomatic)principles with concrete (empirical)findings, behavioural law and economics would thus renew the old, realist agenda (ibid.).
While this account has certainly its merits, it also tends to underestimate the continuity between neoclassical and behavioural law and economics.According to the above argument, they are in the same epistemological position and, by and large,equally influential when it comes to the ‘scientization’ of law through economics. In this sense, the behavioural turn in law and economics is only the latest twist in an enduring – but somewhat skewed – relationship between lawyers and economists. In emphasizing the relative one-sidedness of this relationship, I do not want to claim that lawyersfall prey to any hypeon the market of economic textbooks. Nor do I disregardthe benefits of a more empirical approach to economics. Nonetheless, it is worthwhile to put the behavioural turnin law and economics into a broader perspective, and this can best be done from a sociological point of view. What results is a piece of ‘background information’which can be ignored – or not.
The Modern Saga of Homer Economicus or: How to Simpsonize Consumer Law
Thaler and Sunstein’s Nudge(2009) is occasionally referred to as the “bible” of behavioural economics and libertarian paternalism.[7] But it is marketed as if it was a work of the devil.[8]Not surprisingly then, one of its core themes is temptation and how to overcome it.Nudge namely aims at “[i]mproving decisions about health, wealth and happiness” (ibid., subtitle).[9]The mantra of behavioural economics, which is repeated throughout the book, is that we are “Humans” not “Econs”. “Econ” is the acronym for homo oeconomicus, the actor model of neoclassical standard economics.“Human”means real human beings, or what behavioural economics considers as such. Thaler and Sunstein claim: “Whether or not they have ever studied economics, many people seem at least implicitly committed to the idea of homo economicus, or economic man – the notion that each of us thinks and chooses unfailingly well, and thus fits within the textbook picture of human beings offered by economists (ibid., p. 7; original emphasis).A few lines later they assert: “Real people [...] are not homo economicus; they are homo sapiens.” (ibid.)[10]
With these statements, Thaler and Sunstein distance themselves from modern standard economics and its ‘unrealistic’model of man. However, they do not mention thathomo oeconomicus is itself nothing but an ‘as if’ assumption (Friedman 1990 [1953]): asimplified model of human decision-makingmeant to facilitate predictionsand not to picture real humans.Economists are generally well aware that human beings are much more complex than their models suggest. But, at leastin statistical settings, they prefer parsimony to precision. ‘As if’ assumptionsallow calculations fora high number of cases butthey are less useful for the reconstruction of individual decisions.Nevertheless, the benchmark ofeconomic theories is their explanatory power, and not how ‘humane’ they are.[11]
At the same time, amismatch between axiomatic assumptions and empirical findings also calls for bettertheories. This is where behavioural economics comes in.Whereas standard economics seems to suggest that empirical ‘anomalies’ indicate human failures (such as a lack of rationality) and not model failures, behavioural economics would reverse this claim: If real human beings do not behave liketheir economic role models, something is wrong with the theory and not with reality (Camerer 2010). In other words, the proponents of a behavioural turn in (law and) economicswould rather re-educate the researchersthan the research subjects.Moreover, as the above quotation demonstrates, behaviouralists not onlycriticizethe economic paradigmbut also the widespread belief in it. It is as ifhomo oeconomicus –an artefact of economic thinking – had finally come true: if not in ‘reality’, so at least in the minds of scholars andregulators.
Already at this stage, it becomes clear that Nudgedoes not further so much the academic discussion notably the exchangebetween different schools of economic thinkingbutfuelsapopular discourse: the never-ending debate about the human condition. In the perspective of social constructivism, the human condition cannot be determinedonce and for all. What we really are (as humans) affects our beliefs, and our beliefs about ourselves affect what we really are. We thereby constantly define and re-define our human condition. Last but not least, the human condition is not simply found but also fabricated by science.To be sure, theorizing on the human condition rather seems to fall into the domain of the humanities than of science properwith the social sciences somewhere in-between. But in the end, science is itself nothing but a humanistic enterprise. As such, it is built on human reason which is typically understood as a capacity that lifts our species beyond its animal nature.
Against these rationalist assumptions, behavioural economists bring the fragility of human reason to the fore, including economic rationality.[12]InNudge, the guiding idea is, therefore, not that humans are rational (orreasonable)but that they arefallible.This is emphasizedthroughout the book: We are homo sapiens and not homo oeconomicus. With these notions behavioural economics purports to have a more general understanding of human beings than standard economics. This is partly right but partly also misleading. It is true thathomo oeconomicus is a highly specific model of action (even if it is advertised as a one-fits-all solution), and behavioural economics aims to overcome at least some of its restrictions. However, the result will not be a general model of man (if there is any) but the economic model will only be specified differently.
At any rate, it is questionable if the notion of homo sapiens, which is the proper, biological name of our species, is really helpful to condense the ambitions of behavioural economics. Literally, it means ‘wise man’ or ‘knowing man’, and this wisdom has escalated in modern humans (‘modernity’ here meaningthe last hundred thousand years and not only the last few centuries), which are therefore called homo sapiens sapiens.This definition rather furthers the rationalist hubris of human beingsand, as a side effect, the proliferation of rational models of action.[13] The behaviouralist movementaims, however, exactly for the opposite: to be more realistic about our (social) animal nature – not least within law and economics.[14]In order to capture these divergent ambitions, it would therefore bepreferable to distinguish between homo oeconomicus rationalis, the actor model of neoclassical (law and) economics, and homo oeconomicus behavioralis,[15] the actor model of behavioural (law and) economics.
Behavioural economics thus promotes a shift from a rationalist to a behaviouralist model of (economic) man. What Thaler and Sunsteinactually offer in their book are two different specifications of the latter, a naive one and a sophisticated one.[16] I will refer to thesealternative (but also complementary)role models as the ‘two Homers’.The reason for this somewhat curious label is that Thaler and Sunstein resort themselves to Homeric characterswhoserespective tragediesare meant to illuminate the human condition. The naive oneis Homer Simpson, the sophisticated one is Homer’s Ulysses. It might add to the understanding of these exemplary characters that the Greek term hómēros (ὅμερος)originally means ‘hostage’. The question is thusby whom or by what the two Homers are taken hostage. This inquiry can also be framed in terms of losing self-control (in the case of the naive consumer) and regaining self-control (in the case of the sophisticated consumer).[17]