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How the market gives us what we want – even if we are irrational

Keynes Lectures in Economics, delivered by Professor Robert Sugden FBA, on 20 October 2010 (venue: Royal Society of Arts).

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Since Adam Smith, a liberal tradition in economics has seen the market as an institution in which privately-motivated individual actions produce socially beneficial consequences.

This idea is usually theorised by assuming economic agents to be rational and by treating the satisfaction of rational preferences as the standard by which institutions are evaluated. However, the consensus around this view of markets has been disturbed by recent developments in behavioural economics, which point to the cognitive limitations of economic agents, the instability of preferences, and the existence of pro-social motivations which self-interest can ‘crowd out’. A common inference is that traditional presumptions in favour of the market and against paternalism are invalidated.

This lecture develops a different understanding of markets which retains the insights of the liberal tradition but is compatible with behavioural findings. It starts from the idea that economic institutions should be evaluated in terms of the opportunities they provide, not the degree to which preferences are satisfied. Even if individuals recognise that their preferences are unstable, they can meaningfully value opportunities to make their own choices and to take responsibility for the consequences.

Competitive markets can also be shown to provide individuals – rational or irrational – with maximal opportunity for voluntary transactions. Market transactions can be understood as belonging to a wider class of reciprocal relationships in civil society, based on joint intentions to achieve mutual benefit.

About the speaker
Robert Sugden is Professor of Economics at the University of East Anglia, Norwich. One of the pioneers of experimental and behavioural economics, he uses theoretical, experimental and philosophical methods to investigate the foundations of decision and game theory, the evolution of social conventions, and the methodology of economics.

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