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Economics

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Licence to be Bad summary

Name: Licence to be Bad
Rating: 3.9 (139 reviews)
Author: Jonathan Aldred

Jonathan Aldred

How Economics Corrupted Us

3.9 (139 ratings)

27 mins

Brief summary

Licence to be Bad by Jonathan Aldred is a thought-provoking book that explores why we tolerate bad behavior from corporations and individuals. It challenges the assumption that selfishness is a necessary driver of economic growth and offers alternative ways of thinking about our social and economic systems.

Topics

Economic Theory Ethics & Morality

Table of Contents

Licence to be Bad
Summary of 9 key ideas

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Key idea 1 of 9

What’s in it for me? Find out why we shouldn’t trust everything economists tell us.

What is economics? Is it a science? A humanities subject? Does it deal with truth, or opinion?

In recent decades, many economists have defined economics as a hard science, just like engineering or physics. That means that it deals in objective truths, and cold, hard numbers. But this isn’t true. Economics isn’t as objective as economists would have us believe.

In these blinks, we’ll unpick some economic concepts and laws, and show you how fallible and human they actually are. In the process you’ll learn just how many of the “truths” that underpin society aren’t really true at all.

In these blinks, you’ll learn

why bribing employers doesn’t work;
why democracy is not, in fact, impossible; and
what the stock market and a snowflake have in common.

A set of controversial, free-market economic views have come to dominate our way of thinking.

Let’s travel back to 1947.

It’s two years after the end of World War II, and economies across Europe are in ruin. In an international effort to stimulate growth, a policy of increased public spending is underway. Leading this movement is esteemed economist John Maynard Keynes. Keynes is convinced that public spending initiatives are the only way to get the economies of Europe back on track.

But a small, renegade group of economists, led by Friedrich Hayek, disagree. Hayek organizes a conference of this group on Mont Pèlerin, high in the Swiss Alps. While Hayek’s followers were in the minority back in 1947, it wouldn’t be too long before they rose to ascendancy.

The key message here is: A set of controversial, free-market economic views have come to dominate our way of thinking.

Some of those at Mont Pèlerin would go on to form the Chicago School of economics. At the heart of the Chicago School is the idea that governments and regulators should stay out of the economy as much as possible. The free market should decide where money is made and spent, not public officials.

The school provided the theoretical backbone to Reaganomics and Thatcherism, which introduced radical free-market ideology to the US and UK respectively in the 1980s. Along with some other ideologically similar ideas, it’s been dominant ever since, and many see it as the only correct way of thinking about economics. But are they right?

Well, let’s look at a couple of examples to see how such economic thinking works in the real world.

In 2007, the global economy came crashing down. Markets and banks nosedived, and countless people lost their jobs and livelihoods. But whose fault was it? A lot of people have blamed the financial regulators – pointing toward governments and lawmakers, rather than the banks themselves.

If you think about it, that’s like blaming the police for a burglary, which doesn’t really make sense. So why should it make sense when it comes to finance? Well, this is exactly the kind of thinking the Chicago school encourages.

Economic theory is also behind how we think about climate change. It’s common these days to adopt free-rider thinking – the belief that because our own contribution to change is so minimal, it’s not worth doing at all. This pessimistic worldview was granted economic legitimacy by American economist Mancur Olson in the 1960s. And it’s already helping to destroy our planet.

Free-rider thinking and Chicago School thinking are far from the objective truth. But many people think about the economy and society in this way. In the following blinks, you’ll find out why a lot of this thinking just doesn’t add up.

Game theory encourages an atypically selfish view of the world.

You’ve probably heard of game theory. This is the famous way of thinking that predicts people’s behavior based on rational decision-making. Game theory rose to prominence in the post-war years, when mathematician John von Neumann used it to advise the US government to bomb the Soviet Union as soon as they could. Thankfully, President Eisenhower disagreed.

Fellow American John Nash pushed game theory further by emphasizing the role of self-interest. Nash believed that people always acted selfishly. If people looked like they were cooperating, it was only because it suited their own interests at that moment.

Ronald Coase inadvertently inspired economists to put dealmaking on a pedestal.

How should governments reduce unemployment? Here’s one idea – bribe employers.

This actually happened in Illinois in 1983. Almost 4,000 unemployed people were invited to take part in an experiment, where if they found and kept a job, their employer could claim a $500 reward.

Many economic theories are unfairly harsh on government.

“Democracy is impossible.” Catchy one, right? This slogan gained huge popularity thanks to the work of economist Ken Arrow. But it’s debatable at best.

Arrow’s Impossibility Theorem is a mathematical proof that shows that, under a strict set of conditions, no system of collective decision-making can produce a result that’s consistent with what everybody collectively wants. That would mean, for example, that it’s impossible to elect anyone in a truly democratic way.

Free-rider thinking seems tempting, but can have devastating consequences.

Here’s a scenario. Two criminals are pointing their guns at someone, intending to fire. But only one of them actually does. Who is the murderer? The one who fires, right?

Had that criminal not fired, the other criminal would have done so instead. But that doesn’t make the killer less guilty, and every legal system would agree that the criminal who fired the gun is the murderer. Speaking more generally, individual responsibility isn’t lessened, just because other people might do the same thing.

Applying economic thinking to everyday life can take us in some strange directions.

You wouldn’t call most of the examples we’ve seen so far traditional economics. Issues like voting and the climate catastrophe, after all, aren’t quite the same as graphs of supply and demand.

But since the 1980s, there’s been a movement toward understanding the world more broadly in economic terms. The ultimate aim is to be making decisions based on efficient, economically optimal thinking.

People don’t always respond to incentives like economists expect them to.

In the 1990s, several day care centers in Haifa, Israel, had a problem with parents arriving late to collect their children. So they started issuing fines. And the number of late collections rose.

Here’s a different example. In 2011, the UK government wanted to discourage people from using single-use plastic bags, so they started making people pay for each bag – effectively, a small fine. Usage fell by 80 percent.

Our models for calculating probability are fatally flawed.

August 2007 was a hair-raising time for David Viniar, then CFO of Goldman Sachs. In a Financial Times interview, he describes events in the market as “25-standard deviation moves,” happening “several days in a row.”

A 25-standard deviation move is like winning the British lottery 21 times in a row – we’re talking less than once in the history of the universe. Yet during the crash, these events were happening not just once, but over and over. That leaves two possibilities. Either we all just got really, really unlucky, or the statistical modeling was badly wrong.

Modern economics is needlessly tolerant of extreme inequality.

It’s well known that there’s a high level of inequality in the world today. But intriguingly, there’s just as much inequality among the rich as there is overall.

Inequality follows a fractal distribution – just like the stock market and snowflakes in the previous blink. So it’s also scale-invariant. Say you look at a whole nation’s income and see that the richest 1 percent gain around 20 percent of all the income. Scale-invariance means that if you zoom in, you’ll see that within the richest 1 percent, the top 1 percent receive 20 percent of all that income.

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What is Licence to be Bad about?

Licence to be Bad (2019) explains how in the past 50 years a small handful of economists has drastically changed the way we think about the subject. Ideas including game theory, public choice theory, and free-riding have worked their way into our minds and our discourse, apparently permitting us to behave badly.

Licence to be Bad Review

Licence to be Bad (2020) by Jonathan Aldred is an eye-opening exploration of the economic theories and ideas that shape our society. Here's why you should give it a read:

With compelling arguments and thorough research, the book challenges conventional economic wisdom, encouraging readers to critically examine our current economic system.
Aldred presents a fascinating analysis of the relationship between economics and morality, raising thought-provoking questions about the impact of individual and collective behavior on society.
The book's engaging examples and accessible language make complex economic concepts accessible, keeping the reader captivated and ensuring the subject matter never feels dull.

Who should read Licence to be Bad?

Economists interested in rethinking the subject
Ethics enthusiasts with an interest in recent thought
Anyone wondering why we think the things we do

About the Author

Jonathan Aldred is a fellow at Emmanuel College, University of Cambridge, where he teaches economics and land economy. His first book, The Skeptical Economist, was published in 2009 and examines the ethics that lie behind economics.

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