The politics of irrational economics

Ever hide goodies from yourself because you know you don't have the self-control to moderate your own impulses? Ross Gittins, the Sydney Morning Herald's Economics Editor, has been focusing more and more on such behavioural traits as he transitions from being a rational economist to an irrational one. Not that he is irrational, but he has of late been helping us explore how the assumptions of rational economic behaviour do not always bear out in the real world, with massive implications for the traditional precepts of economic theory and resultant political policy. His lesson today is "Why labour market 'flexibility' can be bad." (http://www.smh.com.au/news/business/why-labour-market-flexibility-can-be-bad/2005/08/28/1125167552433.html)

"... Conventional economics is grounded in the political philosophy of individualism. It's the interests of the individual that matter above all.... And this is as it should be. After all, how could any other person know better than you what purchase or activity would yield you greatest satisfaction? In particular, how could any government do a better job of spending your money than you could?

"It's because individuals are rational that governments can never out-guess their best interests. Trouble is, the burgeoning school of behavioural economics has borrowed from a lot of psychological research to demonstrate convincingly that people are often anything but rational in their decision-making. People regularly ignore any number of economists' rules: opportunity cost, the irrelevance of sunk costs, the fungibility of money and many more.
People are often inconsistent in the choices they make, are confused by too much choice, are unduly influenced by the way decisions are "framed", are susceptible to fads and fashions, are deeply concerned about fairness and are often led by their emotions to do silly things.

"Recognising their problem with self-control, people often impose "commitment devices" on themselves so as to force themselves to behave in the way their long-term selves know they should. These commitment devices often involve some cost, inconvenience or interest forgone. This suggests that, were workers asked to vote on whether the cashing out of working conditions should be permitted, more might opt for less choice than economists would expect. Workers might want to avoid having temptation put in their way."

And this is the conclusion that he draws from that (and one which has got a lot of former "rational" colleagues and supporters wondering if he's turning commie):

"When you properly appreciate the fallibility of humans, you realise it's quite possible for governments to understand their best interests better than they do themselves. Historically, governments imposed annual leave, public holidays and meal breaks on employers for good reason. It makes perfect sense for governments to insist that these costly conditions continue to be used for their intended purpose."