Behavioural psychology can’t avert economic crisis

The idea that human beings are driven by emotion on the one hand and by rational thought on the other has been around for a long time. Somewhere in the Vatican is a 16th-century fresco by Raphael called 'The School of Athens'.

Depicted in the centre are Plato and Aristotle. Plato is pointing up to the sky expressing his commitment to intuition and he is flanked by the intuitionist philosophers including Xenophon and Socrates. Aristotle holds out a steady hand of reason and is flanked by the empirical thinkers including Euclid and Plotinus.

The fresco beautifully captures the balance between impulse and reflection. Living a life driven only by impulse and emotion would lead to disaster with rash decisions eventually taking their toll. But living a life driven only by reason and conscious reflection would be paralysing because each decision would take an intolerable amount of time. We need to think but we also need to act.

It became accepted wisdom that people do not know what motivates their behaviour

Since the 1960s there has been an increasing emphasis on situational, nonconscious and irrational factors predicting economic decisions and thus predicting economic problems.

In 1975, for example, a group of US shoppers were asked to evaluate four identical pairs of socks and pick the best. The researchers discovered that position was a key factor: the socks placed to the right were proclaimed as the best four times as often as the socks placed to the left.

When asked to explain their choice the shoppers pointed to the better feel of the socks on the right or stated a preference for the colour. When it was suggested that position played a part in their choice, the shoppers looked at them as though they were slightly mad.

In another experiment, a researcher stood outside an underground station and stared up at the sky. When he did this alone he was ignored but when he did this with four other people then passers-by also stopped to look up.

It has also been demonstrated that people leave a larger tip if their waiter draws a smiley face on their bill and people are more likely to reuse their towels in hotels if they are told that the other guests do the same. Yet those same people absolutely insist that other people's behaviour does not influence their own.

Thus it became common to suggest that people do not have insight into what motivates their behaviour and this idea began to catch on amongst economists.

The Journal of Economic Psychology was launched in 1981. The first article explained that the aim of the journal was to encourage people away from studying the laws of interest rates, inflation, unemployment and the like. Instead of such traditional focuses, the new journal would support studies of 'the behaviour of people who set the prices and whose actions bring about the higher or lower interest rates, inflation rates, or unemployment'.

The editors of the new journal viewed economic problems, such as falling profitability, as not necessarily stemming from problems with production and distribution, but from problems with individual behaviour.

There is undoubtedly some truth in the idea that people do not behave so as to produce the ideal or most 'rational' economic outcome. When making choices consumers do not deliberate and balance all the available information.

Quite often they may not 'see' all the information that is available and they will make an intuitive decision based on information they are not even aware of. But does this make their behaviour irrational? Not in the slightest.

This recession is down to structural rather than psychological problems

To understand whether someone is being rational we have to consider the totality of their intentions and goals. Although people like to shop they clearly also have other priorities including getting the shopping done in a reasonable amount of time and having fun. Constant deliberation and reflection on the unconscious influences that might be causing a decision would take an awful lot of time and would not be much fun. Behaving in such a rational manner would be irrational.

Regardless, does any of this predict economic performance? Although it might be academically worthwhile, and somewhat entertaining, to uncover the unconscious forces driving consumer behaviour, it is a reach to suggest it is the way towards a more productive economy.

We are in the current recession because of a collapse in the financial sector brought about by structural rather than psychological problems. The absence of any alternative meant that profits were pursued parasitically and absurdly on the back of a financial bubble that has now burst.

It is to the serious detriment of the British economy that there has been such dependence on finances, services and product enhancement but very little development of new productive industries.

Recovery can only come about when we address those structural economic problems. Psychology really matters very little and is an unwelcome distraction from addressing much more pressing issues.

Stuart Derbyshire will be speaking at the Battle for the Economy public summit on the economic crisis with leading economists, political commentators and policy makers at London's Goodenough College on Saturday 16 May 2009. For tickets phone  0207 269 9220. For programme details and to book online go to battleofideas.org.uk ·