Last night's Corrie highlighted a shortcoming in some neoliberal thinking.
Karl Munro has got into big debt because,having lost a little, he kept going to the casino in the hope of "one big hit, one good night on the tables" - with inevitable results.
Karl's behaviour is, of course, familiar not only to anyone who knows a gambling addict but also to behavioural economists. Prospect theory tells us that people are often (pdf) risk-seeking where losses are concerned; in their attempts to break even, they take bets they would otherwise avoid. Strictly speaking, this is irrational; the attractiveness of a bet should depend upon its expected pay-off, not upon our financial situation.
There is a neurological basis for this irrationality.Camelia Kuhnen and Brian Knutson have found (pdf) that the brain responds differently to the prospects of gains and loss.The prospect of gains is associated with activity in the nucleus accumbens - part of the brain which processes pleasure - whilst the prospect of losses is associated with activity in the anterior insula, a region associated with feelings of disgust.
This means there's a conflict between economic theory and common sense on the one hand and the structure of our brains on the other. Theory says profit and loss are just mirror images of each other. Our brains behave otherwise.
This matters, because it casts doubt upon Adam Smith's claim that all humans have a "propensity to truck, barter and exchange."* If this were so, we'd expect our brains to be structured to facilitate if not optimization then at least the avoidance of the sort of horrible error that Mr Munro made. But they seem not to be so.
On this point, behavioural economics and neuroscience is corroborated by anthropology. David Graeber says it is simply a myth that primitive men truck exchange and barter among themselves:
To this day, no one has been able to locate a part of the world where the ordinary mode of economic transaction between neighbours takes the form of "I'll give you twenty chickens for that cow.(Debt: The First 5000 Years,p29)
All this matters, I think, for two reasons.
One is that it suggests that a free market economy (and its correlate, property?) is not a "natural" phenomenon, but rather an artificial creation - one greatly aided by the state. Such an economy has much to commend it. But it is not in accord with human nature.
Secondly, the fact that there's a neurological basis for bad economic decisions means that we must not assume that a free market "naturally" leads to rational optimization. It doesn't.
* Smith was unsure whether this propensity was "one of those original principles of human nature" or "one of the necessary consequences of te faculties of reason and speech".