Thursday, December 01, 2005

A case of Behavioral Economics

My Final paper for Behavioral Economics is due tomorrow, so here's what I started writing:

Several months ago, France and Denmark held votes on whether to approve the EU constitution. Both countries decided not to accept it. One of the main reasons for this, at least in France, was an antipathy to Globalization and world trade. France, as a country, has not welcomed free trade for a number of years now, but lately the antipathy has grown. After the election, even politicians of all stripes started denouncing the Evils of trade and liberal economics. This paper will endeavor to show that France’s population is acting in an irrational manner, as well as the fact that French politicians know this, and therefore are very experienced in many tenets of behavioral economics. Were the French to embrace globalization, the country as a whole would be much better off, while were the French people to close themselves off completely (as they say they want to do), they would be much worse off.

Many of the roots of this antipathy towards globalization can be found in the inception of the Common Agricultural Policy, or CAP. This policy established subsidies for farmers, mainly French, who were trying to survive after the destruction of World War II. In these days, the idea that Europe should try to be self-sufficient in case of another world war (and because it was not able to feed itself after the war) was the main reason for establishing the CAP. Today, almost 50% of the EU budget is spent on CAP, with French farmers still the main beneficiaries. Because of this, farmers in other countries, including other countries in the European Union, are not able to access the French market, which creates ill-will towards the French government. French citizens are also paying more money to maintain these farmers. This is because the farming subsidies need to be paid for with taxes. These taxes are then paid to farmers, who produce too much, and sell the remainder of their goods very cheaply abroad. Therefore French citizens are paying for cheap foodstuffs to other nations.

If the French had no CAP in place today, and were given a choice between installing it or not, they would probably choose not to. But, given the fact that it is already in place, they choose not to do away with it. This is because they are told it maintains their way of life. In a sense, they are scared of the changes that may occur. This is an example of Loss aversion. It is curious, however, because an entire population exhibits it collectively. One could try to argue that the French are just being Risk Averse, which may still fall under economic rationality. However, any careful analysis of the situation shows that their welfare would be much higher as a whole without these agricultural subsidies. The only ones acting rationally in this case are French farmers (about 4% of the population), who receive the benefits, as well as French politicians, who benefit off the French population’s irrationality.

Dealing with globalization in general, however, the French tend to have a general antipathy. They see foreign companies as encroaching upon their territory, and taking over. President Chirac said that “France will never let Europe become a mere Free-trade area” . Using that wording is a manner of attracting sympathy. The French population, generally speaking, does not like free-trade. The negative incidents and effects of free trade tend to be highlighted, while the benefits are rarely discussed. This is an example of Confirmation Bias of the population as a whole. The suffering and bad effects of globalization are talked about much more frequently, and the politicians know it, while the more positive effects are not, so the politicians also decide not to discuss them.

Only farmers benefit. People lose out (higher prices, other countries mad)
Loss aversion: Risk averse.
(Representativeness: Evil companies, corporations)Confirmationan Bias.
Other companies M&A: more FDI, more jobs.
Allow more French M&A: Expect retaliation
New news: Confirmation Bias (African countries not doing well).

And at this point I realized I was just trying to find more reasons to say bad things about the French and that, although it's plenty fun, I probably shouldn't turn it in as my Final paper.

Not to mention the fact that the case for average citizens being Economically Irrational and politicians being more Rational, as weird as that may sound, can probably be made in every country. Most forms of subsidies, especially in developed countries, can constitute some form of Inefficiency, and I'd probably say that any time there are lobbyists involved, the final outcome will be Inefficient and therefore Irrational in terms of the average citizen. So in conclusion this would mean all countries are Irrational and therefore all economics is irrelevant.