Obama's Economic Plan: "Barack Von Neumann?"
June 10, 2008 • 5:42PM

The economic team of presumptive Democratic candidate Barack Obama has just been "outed" as part of a sub-cult at the University of Chicago known as "behaviorist economics." Behaviorists see their theories as the middle ground between Keynesian (regulated) and Friedmanite (free market) economics. Their thinking is that, while Milton Friedman's theory of "self-correcting markets" is correct on the surface, the problem is that humans act irrationally, causing panic selling, runs on banks, freeze-ups of credit markets, and other undesirables. This is where government regulation comes in, they argue, not to restrain the markets, but to restrain the humans.

Obama adviser Austan Goolsbee's mentor, Richard Thaler, and colleague Cass Sunstein are leading lights of this school, which exists as a radical fringe of the mainline Friedmanites at Chicago University, where Obama taught law for 10 years. Thaler and Sunstein have just authored a book, Nudge: Improving Decisions About Health, Wealth and Happiness, where they apply their theories to different problems, something they call "choice architecture." Their solutions, as presented by John Cassidy in this week's New York Review of Books, run to things like transparency in credit card (and presumably home loan) disclosures, and public Greenhouse Gas Inventory, designed to "shame" offending industries to "clean up" their act.

There is an uglier side to this program, however, as revealed by Goolsbee in an article for Slate in 2006, "Where the Buses run on Time: The Lure of Incentive Pay." This study of the Chilean economy, where "incentives" are given to bus drivers for punctuality and passenger totals, shows where this "behavior modification" is leading. Chile's program is a remnant of its fascist past, and has many similarities to the "Opportunities NYC" welfare incentive program implemented by mayor Michael Bloomberg last year, with the help of Rockefeller Foundation's Judith Rodin. Here, the idea of "state regulation" is turned on its head, to protect the market economy and reduce the human population to "incentivised" roles.

Finally, the Behaviorist economists trace their roots back to two Israeli psychiatric trained mathematicians, Amos Tversky and Daniel Kahneman. The two taught in Israel during the sixties, Khaneman having received training from the Israeli Defense Forces as well as from Cambridge. The two teamed up and moved to North America, becoming fellows at Stanford's Center for Advanced Studies in the Behavioral Sciences in 1978, which is where their association with Thaler began. The two received the Nobel Prize in Economics in 2002, although Tversky had died in 1996.

Although the commentaries don't identify it, Tversky's and Khaneman's work carries on the path blazed by mathematician and behaviorist John von Neumann during the 1940s and 50s, with his work, "The Theory of Games and Economic Behavior," a book which was condemned as fascist by economist Lyndon LaRouche already in 1948. Although they are not the whole of Obama's economic team, it may give new light to what he means when he talks about "regulation."