Foundation for Economic Education
December 14, 2015
The phlaws in George Akerlof’s and Robert Shiller’s Phishing for Phools are many — phar too many for me to have addressed in the review of the book that I wrote that is forthcoming in Barron’s. One phlaw is Akerlof’s and Shiller’s inadequate appreciation for the role of entrepreneurship.
Akerlof and Shiller would likely dispute the above contention. They would insist that they treat entrepreneurship more fully than does standard microeconomic theory. This insistence would be correct, but that standard (please pardon the double entendre) is too low to be relevant. Genuine entrepreneurship seldom, if ever, appears in formal mainstream economic theory.
Akerlof and Shiller argue that people — as consumers and investors — are plagued by such a plethora of psychological quirks and informational deficiencies that their decision-making very often makes them prone to buy things that they don’t really want to buy and otherwise to act in ways that they don’t really want to act.
Arguing correctly that profit opportunities are not long left unexploited by profit-hungry entrepreneurs, Akerlof and Shiller insist that entrepreneurs predictably exploit people’s psychological quirks and informational deficiencies. Entrepreneurs do so by offering goods and services that appeal to those desires that spring chiefly from people’s psychological quirks and informational deficiencies. The result is a “phishing equilibrium” in which all opportunities for entrepreneurial profit are fully exploited.
But Akerlof’s and Shiller’s “phishing equilibrium” is no such thing. The authors fail to apply the logic of entrepreneurship as fully as it should be applied; they apply it only half-way.
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