By FERNANDO NOGUEIRA DA COSTA*
Behavioral economics recognizes that agents do not always behave in a purely rational manner.
In a Whatsapp group – “Observatório do Banco Central” –, the news was shared that the Brazilian Monetary Authority is studying the formulation of a system for collecting expectations from businessmen and researchers on economic indicators, such as inflation and GDP. Today, the autarchy collects expectations from members of approximately 160 institutions, mostly from the financial market.
O Focus Bulletin presents, on a weekly basis, the projections of these agents as one of the crucial components for the Central Bank of Brazil's decision on interest rates every 45 days. In other words, The Market, a supernatural being due to its omnipresence, omnipotence and imaginary omniscience, guides the decisions of the COPOM (Economic Policy Committee) so that its interests are served!
Faced with criticism of being only members (not managers) of the financial market, the current Director of Economic Policy seeks to respond to it by expanding contacts with companies and researchers. It copies other Central Banks with an increase in a biased research sample for the so-called, mistakenly, non-financial sector, after all, we are all customers of the financial system, which encompasses this “sector”.
The director defines this new mechanism as a “complementary metric with a maturation time until we believe in the results”. Can you believe it...
His concern is to refute the argument of parliamentarians who are critical of the monetary autarchy: “the Central Bank of Brazil only listens to the financial market”. As it is a supervisory and regulatory body, “listening to them contributes to making the best decision, although not to the detriment of reducing conversations with the non-financial sector”, said the director.
With the crazy real interest rate in Brazil, there is no concern from the Monetary Authority with the economic growth of income and employment. Quite the contrary, it celebrates the recession as a method to fight the so-called “euthanasia of rentiers”, that is, the rise of inflation above the fixed interest rate.
Faced with the praise for the expansion of the Focus survey, made by a member of the group, based on the argument “the expectations of those who make the decisions ('the guys at the ends') are super fashionable”, I couldn't resist venting: “ New-classical trust economics: fool me I like it! Decisions are reactive upon facts!”
Expectations about the uncertain future by definition are…uncertain. Economics has become a psychologism that justifies wrong measures. Does anyone order goods based on expectations or a planned out-of-stock record? Are expectations synthesized into an average between optimists and pessimists extracted from biased research?!
When asking Artificial Intelligence (AI) about this dominant line of economic thinking (mainstream), until its cut-off date in September 2021, ChatGPT claims that there is no consolidated concept called “Economy of trust”. However, speculate about it based on what is known so far.
I add, for clarification, that in the early days of political economy, the aim of understanding the laws of social motion took the place of understanding moral sentiments. A Theory of Moral Sentiments, the title of Adam Smith's book published in 1759, offers a comprehensive perspective on human nature, morality, and the formation of social bonds.
Although The Wealth of Nations, a book published in 1776, is best known for his contributions on how the individual is led as if guided by an “invisible hand” to promote the public interest, without this being part of his decision-making intentions, Smith's philosophical work points out how human beings develop a sense of morality and empathy towards others. Emotions and moral sentiments – such as sympathy, impartiality, moral judgment, self-interest, moral approval and conscience – would guide social interactions and shape human behavior.
Throughout the history of economic thought, psychology and behavioral aspects have been progressively disregarded or minimized in favor of more rational approaches based on simplified assumptions about human behavior. This happened mainly during the period dominated by the Classical School (XNUMXth century and beginning of the XNUMXth century) and the Neoclassical School (end of the XNUMXth century and beginning of the XNUMXth century).
This approach was based on assumptions of rationality and maximization of self-interest in wealth accumulation. Ignored the psychological factors that induce deviant behavior. Individuals would make optimal decisions when solving their economic problems. Economics has been reduced to theories of the best decisions.
However, this abstraction of the ideal (“what should be”) instead of studying the real (“what is”) was confronted with the reality that human behavior is not always rational and that simplified assumptions are insufficient to understand the consequences. decisions. In the 1940s, Game Theory began to explore strategic interactions between individuals, considering decision-making in conflict and cooperation situations.
Later, in the 1970s, behavioral economics emerged as an approach capable of incorporating insights of psychology in economic science. It emphasizes the importance of cognitive biases, heuristics, form dependence, market inefficiency and other psychological elements in influencing economic behavior.
Earlier, in the 1950s and 1960s, there was the rise of Monetarism as an alternative to the Keynesian theories prevalent at the time. Milton Friedman rescued the Quantitative Theory of Money by defending the importance of the role of money supply as a crucial variable in determining economic activity.
The 1970s was a period of stagflation, characterized by a combination of high inflation and unemployment. This scenario without trade-offs (exchange between these variables) contradicted Keynesian economic policies and, in the absence of an alternative, monetarism gained notoriety through an intense media campaign, with Milton Friedman advocating for monetary programming as a way to control inflation.
During the 1980s, after the election of Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States, both countries adopted monetarist policies.Chicago's Boys went to work in the dictatorship of Augusto Pinochet in Chile. In the 1990s, it became clear that monetarist policies were not producing the desired results in terms of price stability and heterodox approaches were called for against inflation.
Other economic theories, such as the Theory of Rational Expectations and Behavioral Economics, together with the financial crisis of 2008, whose “monetary easing without inflation” put the last lime on the burial of monetarism, stimulated a reassessment of traditional economics . They paved the way for the inclusion of psychological factors in economic models to the current exaggeration of psychologism.
Economists increasingly claim that expectations, emotions, perceptions, risk aversion and other psychological aspects are the fundamental elements for understanding the behavior of individuals, the functioning of markets and general macroeconomic dynamics. Well, psychology doesn't explain everything!
The Theory of Rational Expectations, the basis of the Economy of Trust and/or Credibility, assumes that economic agents (consumers, entrepreneurs, rentier investors) make predictions about the future based on all available information and on “new-foundation” economic models. consistent classics. People are assumed to be rational in their decision-making and not be influenced by systematic errors or biases in their expectations.
If policymakers change their strategy, imagine economic agents adjusting their expectations accordingly. Monetary or fiscal policies would not have the expected effect on the economy if agents had already anticipated such changes and adjusted their expectations according to a presumed inconsistency in future results. They become omniscient!
Unlike trust economics, behavioral economics recognizes that agents do not always behave in a purely rational manner. Other factors, such as cognitive biases and social influences, also affect their decisions based on uncertain expectations. After all, the future itself is uncertain because it is the result of decentralized, uncoordinated and uninformed decision-making interactions with one another.
Although the term “Economy of trust” may not yet designate a well-defined school of economic thought, it describes a society where trust is seen as the central factor in economic-financial activities. It would be the crucial element in economic and social interactions by leading people to take risks, make investments and lend money.
Institutionalist economics forgets to highlight the key role of institutions such as financial institutions, non-financial companies and governments. Wouldn't it be simple-minded reductionism to focus only on personal psychology?
*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP)
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