By Larry Marsh, Kansas City Star Midwest Voices columnist 2009

As the holiday season approaches we remind ourselves once again to avoid overeating at all those holiday parties and family gatherings. Once again we will no doubt fail miserably in our attempts at self-restraint. Perhaps it is not ourselves, but economic theory that fails us.

After our recent recession it has become obvious that traditional economics with its assumption of rational behavior hasn't worked. Despite Adam Smith's famous scenario in his 1776 book ...The Wealth of Nations about the benevolent compatibility of human nature and market forces, economic theory as revealed in the housing and financial markets has let us down. What is not so obvious is that that same economic theory is often also violated every time you skip exercising and wolf down that extra serving of ice cream and cake.

Economic theory assumes not only rationality, but also consistency which implies self-discipline in pursuing one's self-interest. Failure to adhere to these assumptions at the microeconomic level can lead to disaster at the macroeconomic level as we have recently seen.

When facing physical demands such as agreeing to exercise or declining sweet desserts at some date in the future, people will insist that they are determined to maintain discipline only to frequently give in to temptation when the day arrives. Does this reveal irrationality, inconsistency or just a failure to act in one's own long-term self-interest?

In his 2008 book Predictably Irrational Dan Ariely reports the results of experiments where he required students in some of his classes to hand in three papers at evenly spaced intervals while in other classes students were allowed to set their own deadlines or simply hand in all three papers at the end of the term. The results were not surprising. On average students required to meet the evenly-spaced deadlines wrote much better papers than those who chose a less rigid schedule.

Providing students with structure may enhance learning, but professors are leery of providing it. Professors have an incentive to avoid requiring class attendance and giving lots of homework with deadlines since, ceteris paribus, such requirements will reduce a professor's score on the teacher-course evaluation forms that the students fill out at the end of the course and that are so important for a professor's tenure and promotion.

This reveals a problem with traditional economic theory. Rationality and consistency in pursuing one's own self interest appear to require an amount of self-discipline often not forthcoming from many, if not most, people. Incentives are not there to help people stay on track.

Economics fails because people fail. A good theory should be able to describe and predict behavior. Making assumptions that don't work does not provide a solid foundation for a good theory. Saying "The theory hasn't failed. It's people who failed." doesn't cut it. A theory that describes hypothetical people in a hypothetical world is not what we need.

When economists came to recognize market failure in the past, they incorporated it into the theory by calling for corrective policies. When the existence of negative externalities in the form of excessive pollution were revealed, economists proclaimed that the private cost to polluters was lower than the total cost to society so pollution taxes must be imposed on polluters to make up the difference.

How does this apply to your caving in to your cravings at the last minute in spite of your good intentions? Behavioral economists have now developed a concept they call internalities. Your short-term self fails to fully appreciate the long-term costs of your short-term behavior. This means that you are exhibiting negative internalities. The long-term costs need to be more effectively incorporated into your short-term calculations.

So where does the theory of ice cream and cake behavior lead? How does such behavior at the micro level affect macro policy?

The answer is simple. Obesity at the micro level leads to obesity at the macro level. We are becoming one fat nation. Our health care bills are out-of-control. We are heading for bankruptcy at the individual level and at the national level.

Under this new approach to economics, policies are needed to provide incentives to get our short-term self to recognize the goals of our long-term self and to get us to more fully appreciate the long-term costs of our bad behavior.

Trying to fix the problem at the national level is just playing around with the symptoms of the problem. What we really need are policies that help us skip the ice cream and cake and get back on the treadmill.

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Also see:

No-Eat-Day Diet: A good strategy or bad advice?

Spend some of that $650 million for educational video games

Reprogram your subconscious mind to commit terrorism or lose weight

Make people pay extra for their bad health habits

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