Behavioural economics and national development


Adam Smith defined economics as “an inquiry into the nature and causes of the wealth of nations”. This definition is centred on quantitative development that involves the physical edifices around us. Smith’s critiques said that: “He over-emphasised the material aspects of well-being and ignored the non-material aspects. It was assumed that human beings acted as rational economic agents who mindlessly strove to maximise their own well-being”.

Lionel Robbin, another British economist, defined: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. Robbin’s critiques said: “His definition prevented the subject from analysing topics such as social choice and social interaction theory, which are important topics within the modern microeconomic theory”.

The 20th century economist Paul Samuelson defined: “Economics is the study of how people and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses to produce various commodities over time and distribute them for consumption now and in the future among various persons and groups of society.”

Unfortunately, none of the above evolving economics theories made provision for wealth sustainability and the influence of technology at the time. These emerging issues are rendering classical economic theories out of place. The price determination theory – demand and supply – with other things being equal, those factors refused to remain at still. Behavioural economics is forcefully taking over the classical economic theories; hence, if strategic measures are not put in place to redirected the emerging demand, our economic crisis would worsen in the not too distance future.

Behavioural economics

According to Oxford Dictionary, behavioural economics is a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making.

Also, Will Kenton defined and explained behavioural economics as: “The study of psychology as it relates to the economic decision-making processes of individuals and institutions. The two most important questions in this field are: i) Are economists’ assumptions of utility or profit maximisation good approximations of real people’s behaviour? ii) Do individuals maximise subjective expected utility?

“In an ideal world, people would always make optimal decisions that provide them with the greatest benefit and satisfaction. In economics, rational choice theory states that when humans are presented with various options under the conditions of scarcity, they would choose the option that maximises their individual satisfaction. This theory assumes that people, given their preferences and constraints, are capable of making rational decisions by effectively weighing the costs and benefits of each option available to them. The final decision made will be the best choice for the individual. The rational person has self-control, and is unmoved by emotions and external factors and, hence, knows what is best for himself. Alas, behavioural economics explains that humans are not rational and are incapable of making good decisions.”

Ghana’s perspective

The long and short of it is that Ghana is currently facing the threat of behavioural economics, among other things, which is accelerating inflation rate as well as ‘cedi diarrhoea’ against other foreign currencies. Some businesses and individuals in the supply chain can decide to increase prices without value-addition or increased quantity supply. Most of these people cannot even define the costs build-up to ascertain the actual costs of their products or services but are quick to increase prices at the least opportunity. Macroeconomics misfortunes might not be the sole cause of the unprecedented price increase, high inflation rate and the free fall of the cedi, but also the behavioural economics attributes that are moral issues.

Economic cabal

There are many economic interest groups for best of reasons known to them. These could increase prices of their goods and services since we operate in free market economy. The decision holds in them once they have not violated any law(s) of the land. Individual vendors trade with discriminative pricing model of which I am a victim on countless occasions. One of my encounters is that an orange seller sold three pieces of it to a paddler for GH¢2, and when it was my turn, she said one for GH¢1. When I asked why she changed the price, she replied: “Because of the car you are driving”. I left her without buying. In fact, even within 100 metres radius prices of goods and services vary from one vendor to another. This kind of subjective attitude has infected all aspects of our business lives, adding more burdens to the already weak macroeconomics atmosphere.

Political tool                      

People could also use pricing as political tool to fight government in power if they are dissatisfied just to make it unpopular as a way of protest. Sometime ago, the Association of Spare Parts Dealers reduced prices of their stocks to show appreciation to a new government as a sign of solidarity since they were fed up with outgoing administration at the time. As if buying of foreign currencies could be a hedge against the cedi depreciation, it could also be a vehicle to frustrate government’s effort of saving the fall in value of the cedi. This could be another tool for disgruntled citizens to wrestle the economic system with the ruling governments.


Many Ghanaians want to get rich in the shortest possible time (get-rich-quick syndrome); and for that, they believe that such income must come from price hikes instead of volume. This belief, couple with economic cabal, political tool as stated earlier and a few others form part of the economic drawbacks and untold hardship facing Ghana at the moment. The current high cost of living, high rate of inflation (44.3 percent), shortage of forex, and cedi depreciation are all direct effects of behavioural economics, among other factors.

Going forward

It is frustrating to resolve the challenges posed by behavioural economics since it is influenced by individualism, perception of expectations, social leads, political antagonism and many others. This moral decay can only be addressed through vigorous educational drive. Producers of goods and services must give price cap or seal for their commodities in consultation with the distributors and retailers. Verna Mineral Water and Pepsi Cola producers are typical examples of this model. They prohibit selling above their price seal and determine the average margin for every seller. Government should also allow democratic opinions on major decision-making to free itself from congregated political tools against its policies since the task of fighting behavioural economics is a difficult one.

The writer is a Post graduate candidate in Development Studies, IDTM, Cape Coast

Contact: 0244 263816.Email: [email protected]

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