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Behavioral Economics-based Alternative to Austerity Announced

Posted: 6th October 2016 09:13

A new study has been announced which uses behavioral economics to introduce a new approach to increase exports, policies to create stronger companies, and a mechanism to better balance the budget.

"At first glance, behavioral economics seems unorthodox because it's so different than what mainstream economists say. However, corporations work in the way behavioral economics describes, so it's actually the norm, which means that the other types of economic ideas are the ones that are unorthodox!" Sérgio Pires Afonso, the study's author, said.

Old economic thought had it that man was mainly rational. The new discipline of behavioral economics paints a different picture. The new research shows that people are more emotional, and their economic actions are a far cry from being fully rational. However, economic policy is still designed with the obsolete way of thinking in mind. That is why it fails so often.  

"Nobody buys a cell phone because it costs 4% less than the competitor's. People do if they like the brand, if they have been in constant contact with ads for it, if their friends recommend it, etc. Unfortunately, the only focus of economic policy is to lower costs for firms, when there are countless other factors responsible for a product's attractiveness to consumers," Mr. Afonso said.

For one of the measures to lower costs for firms, the Portuguese government would have to get 1.6 billion euros yearly. That is much more than what most corporations spend on ads. Advertising the country's tourism sector abroad would be significantly more effective. The same can be said for promoting the various economic sectors, or attracting investors and retirees. This is already done to a very small extent, but if done to the same scale it would create a boom in exports, without risk.

Other factors that affect firms' competitiveness need to be addressed through the promotion of better management using cultural change combined with a mix of more favourable taxes and the transfer of subsidies from less well run companies to professionally managed ones.

Behavioral economics also teaches us that positive reinforcement is more effective in changing people's behavior than draconian measures. It should be applied to create a culture where people feel better about paying their taxes and to reduce the size of the grey economy, which is a serious problem in most countries undergoing austerity measures. The measure proposed in the program consists of creating a threshold for the government tax revenue, near the expected annual revenue, after which tax revenue is partially redistributed to taxpayers, with the rest balancing the budget.

The paper has been published on the Social Science Research Network, the main social science preprint site, by Portuguese author and independent researcher Sérgio Pires Afonso.

"It's possible to have a fairer and more effective alternative to austerity," Mr. Afonso said.

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