The information age has empowered consumers and investors alike with access to a vastly increased flow of information, analysis, and insights. But the enormous electronic flow of communication often comes at the cost of attention spans and the depth of discussion of important issues. Anyone who has watched CNBC, BNN, or Bloomberg will be aware of how modern media struggle to deal with complex issues that require lengthy explanations and address their viewer retention imperatives through sound bites and eye-catching presentations. Never is this phenomenon more evident than when Nobel laureates in economics appear as guests on TV programs and are questioned about their work. Not surprisingly, the results are usually awkward and uninformative, and the learned guests’ insights are often left largely unaddressed—a great pity, since the work of recent prize winners has implications for economies and capital markets, not least in Canada, that are potentially very significant.

“Sharp shocks to income do not appear to cause equally large shocks to consumption.”
– Angus Deaton, 2015 Nobel laureate in economics

The winner of the 2015 Nobel Prize in economics was Princeton professor Angus Deaton, recognized for his work in deepening our understanding of the consumption of goods and services and the effects on people’s welfare. He is perhaps best known for the Deaton Paradox, which states that sharp shocks to income do not appear to cause equally large shocks to consumption. He argues that we must understand individual consumption choices more extensively in order to design economic policy that promotes welfare and reduces poverty. Deaton demonstrated that answering the question of how consumers distribute their spending among different goods and services is not only necessary for explaining and forecasting actual consumption patterns but also crucial in evaluating how policy reforms (such as changes in consumption taxes) affect the welfare of different groups.

The shocks to incomes in Canada from the collapses in oil and other commodity prices and the near-term effects on consumers’ purchasing power of the decline in the Canadian dollar give Deaton’s work particular relevance to the task of assessing the current outlook for our economy and for our social well-being. He has demonstrated that even when economists are primarily interested in the aggregate economic data, the key to understanding economic outcomes lies in analyzing data at the individual level and then, with great caution, adding together individual behaviours to determine aggregate numbers for the entire economy.

Last year, two economic laureates—Yale professor Robert Shiller (2013) and Georgetown professor George Akerlof (2001) (spouse of Janet Yellen, the current chair of the U.S. Federal Reserve)—published Phishing for Phools, a book that addresses another paradox: why, at a time when we’re better off than ever before in history by many economic measures, all too many of us are leading lives of quiet desperation.

The book explores the role of manipulation and deception in the economy and argues that sellers of goods and services, among others, exploit the psychological weaknesses and ignorance of consumers and investors, resulting in allocations of resources that do not optimize well-being and the greater good.

Nobel laureates Robert Shiller and George Akerlof advise that we need to ensure that the stories we tell ourselves are not “phishes” and that we are not taken for “phools.”

Their work contradicts conventional economic theory, particularly the fervent beliefs of market fundamentalists, who hold that free markets, as if by an invisible hand, always guide economies toward optimum economic output.

Evidence suggests we buy and/or overpay for products and services that give us little satisfaction, or worse, hurt us—including many drugs, food and consumer products, gym memberships, cars, houses, credit cards, so-called recreational and gambling activities, and questionable, poorly understood investment products.

The stories we tell ourselves can lead us to make decisions that are far from maximizing our own welfare; these stories can be manipulated by individuals, corporations, and governments. At a time when Canada’s national narrative has been placed on the operating table by major economic and political dislocations, there is currently a dire need to ensure that the stories we tell ourselves are not “phishes” and that we are not taken for “phools.”

Perhaps some of the best answers to current economic ills can be found in the 2013 book Mass Flourishing by 2006 economics Nobel laureate Edmund Phelps, director of the Center on Capitalism and Society at Columbia University. In his book, Phelps draws on a lifetime’s work to make a sweeping new argument about what makes nations prosper and why the sources of that prosperity are under threat today. Like most compelling arguments in the social sciences, Phelps’s theories are based on his insight into human nature, his interpretation and articulation of observed history, and his use of empirical data.

Meaningful work, self-expression, and personal growth are the keys to flourishing in the modern world, Phelps maintains, and when people throw themselves into their work because it defines their identities and sense of well-being, prosperity follows. When people abandon these modern values and return to traditional corporatist values that favour the community and the state over the individual, then innovation, job satisfaction, and flourishing prosperity are weakened, he argues.

“Meaningful work, self-expression, and personal growth are the keys to flourishing. When the community and the state are valued more than the individual, innovation, job satisfaction, and prosperity are weakened.”
– Edmund Phelps, 2006 Nobel laureate in economics

In a nutshell, Phelps’s argument can be summarized by saying that economies and societies flourish and prosper when their people are keen to work hard, are inspired by their work, and are good at it. When they are more concerned and preoccupied with organizing and administering the economy and society through government, the opposite will happen. Phelps maintains that the choice between these values is the most pressing question currently facing western nations. Under Canada’s economic circumstances today, most people would agree that the need to make the right choices on these issues has never been greater.

In recent years, the books of Nobel laureates have given Canadian economists and investors a great deal of food for thought and for further research. Eschewing the sound bites and graphically enhanced data that flow from our smartphones, tablets, computers, and TV screens to read these works at length may be the best way of truly understanding what’s driving our economy and how to be best positioned in it.

BIBLIOGRAPHY

Akerlof, George A. and Robert J. Shiller. Phishing for Phools: The Economics of Manipulation and Deception . Princeton University Press: 2015.
Deaton, Angus. The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton University Press: 2015.*
Phelps, Edmund S. Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change. Princeton University Press: 2013.

* Arguably, Deaton’s work is best read in conjunction with the 2014 magnum opus Capital in the Twenty-First Century by Thomas Piketty, professor at the Paris School of Economics. Piketty’s book analyzes the long-term evolution of inequality, the concentration of wealth, and the prospects for economic growth. It has been described by economic Nobel laureate Paul Krugman (2008) as potentially the most important economics book of the decade. However, professor Deaton’s long record of academic achievement and his authoritative, non-ideological approach is thought to have caused the Nobel prize committee to favour him.