T C A Srinivasa-Raghavan: The myth of rational man

OKONOMOS

It is widely agreed that economic issues don't frame election issues in India; emotive ones arising from religion, caste and so on do.

An important assumption underlies these collective sighs of despair. It is the belief that economic issues are based on fact, if not also personal experiences of hardship; and emotive ones are based on opinion, hearsay and so on.

Nonsense, say Alan S Blinder and Alan B Krueger*, albeit in the US context. (I am often asked how relevant these findings about Americans are relevant to us. My answer is that if these are not, then every other finding must also be irrelevant, including the entire body of American economic literature).

Blinder and Krueger conducted an exhaustive survey to find out how the American people learn about economic issues and how public opinion there is formed.

They find, not surprisingly, that television is the main source of information. Economists, alas, come near the last. Interestingly, politicians have a very small role in forming public opinion.

They also find that, and this is the surprising bit, that "on a variety of major policy issues, ideology is the most important determinant of public opinion, while measures of self-interest are the least important. Knowledge about the economy ranks somewhere in between."

While this rather puts paid to the pretensions of this column, their survey also underlines another important factor, one that the Left can have great comfort from. This is that "Left-right ideology seemed to shape opinion more than parameter estimates did."

That is, parties that appeal to the innate sense of goodness in people and to their sense of equity get a better hearing. The political science wallahs have their finger on this phenomenon.

They say that when it is hard to reach an informed decision because the facts are confusing, people use ideology as a short-cut to reach a position.

Ignoring that religion performs a similar role, these findings provide a useful basis on which political parties can and should base their appeals.

Or, as the authors put it, "the contrast with homo economicus "" who is well-informed, non-ideological, and extremely self-interested "" could hardly be more stark."

The question they try to answer is whether it is confusion or generosity of spirit that makes people behave they way they do, or is a combination of the two?

"Both explanations start from the premise that people typically develop conventional ("ideological") beliefs about how the world works and about what is good for them and for the commonweal. Thereafter, the two explanations diverge."

Basically, people tend to have misperceptions of their own self-interest. This leads them to act against their best interests.

The great subsidies provided to the middle class in India are a case in point. They make them feel better off in some but they also make them much worse in many other important ways.

Generosity is more difficult to explain. The authors say that "when it comes to national economic policy, people are often more interested in what they perceive to be the common good than they are in their own narrow self-interest."

If one studies animal behaviour, though, this is probably a common enough occurrence. One can see it amongst soldiers in battle as well.

*What Does the Public Know about Economic Policy, and How Does It Know It? NBER Working Paper No 10787, September 2004