The Economics of George Orwell

Diane Coyle has a nice review of Richard Thaler's new book, Misbehaving. Diane's review is, for the most part, appropriately laudatory. But she does voice a concern that I share. Here is Diane...
"Behavioural economics is now one of the most popular areas of the subject, ... but the new embrace by economists makes me uneasy. This is not just because of the well-known debate about paternalism (as discussed by Gilles St Paul in The Tyranny of Utility or Julian LeGrand and Bill New in Government Paternalism: Nanny State or helpful Friend?) It is because the sight of economists delighting in a new tool to engineer society is alarming –"
I agree. Here is a quote from my review of Akerlof and Shiller's 2009 book Animal Spirits, another piece that draws on behavioural economics to engage in social engineering. Akerlof and Shiller want to replace rational choice with behavioural economics. And here is what they mean by that...

Behavioural economists assert that what makes individuals truly happy can be different from what they in fact choose to do. In Akerlof and Shiller’s words, ‘...capitalism...does not automatically produce what people really need; it produces what they think they need...’ (p. 26). 
To a classical liberal like me, this is a scary proposition since it gives a licence to someone else, someone who knows my true preferences, to act on my behalf. Is this the government or the church? Both institutions have claimed that right in the past, with disturbing outcomes.
The idea that the government knows my preference better than I do is a little too Orwellian for me. 

I went on to criticize Akerlof and Shiller for tearing down too much of classical theory and failing to replace it with a credible alternative. You can read my full review here

In my view, we can understand all of the failures of classical macroeconomics without giving up on rational choice. Heres what I said in 2009

I personally find it much more credible to believe that markets may sometimes misallocate resources and that this misallocation is directed by self-fulfilling crises of confidence. There is an existing agenda (part of neo- classical economics) that integrates psychology with economics by constructing economic models in which market fundamentals do not uniquely determine outcomes. In these models, it is the self-fulfilling beliefs of market participants that fill the gap. In my view, this idea of a self-fulfilling belief is a more appropriate candidate for what one should mean by animal spirits than the ... alternative meanings proposed by the authors. This narrower established definition is already widely used by a large existing body of researchers.
Here is a link to a survey paper that discusses this alternative approach.