The Psychology of Money and Public Finance_1 potx

The Psychology of Moneyand Public Finance Günter Schmölders... The Psychology of Money and Public FinanceGünter Schmölders Selected and introduced by Björn Frank and Erich Kirchler Trans

The Psychology of Money

and Public Finance

Günter Schmölders

The Psychology of Money and Public Finance

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The Psychology of Money and Public Finance

Günter Schmölders

Selected and introduced by

Björn Frank and Erich Kirchler

Translations by

Iain Grant and Karen Green

© Claudia Schmölders 2006

Selection and Introduction © Björn Frank and Erich Kirchler 2006

Translation © Iain Grant and Karen Green 2006

All rights reserved No reproduction, copy or transmission of this

publication may be made without written permission.

No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency,

90 Tottenham Court Road, London W1T 4LP.

Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages The authors have asserted their rights to be identified

as the authors of this work in accordance with the Copyright,

Designs and Patents Act 1988.

First published 2006 by

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Björn Frank and Erich Kirchler

1.1 Methodology: the long way towards empirical research 2

1.3 Schmölders and public finance today 6

2.2 A contrasting programme to rational theory 26

2.2.2 From historicism to prediction 322.2.3 Borrowed from psychology? 352.3 Socio-economic behaviour research 39

3.1 How money is managed in private households 493.1.1 The head of the house and the housewife 49

3.1.3 Income as a characteristic and a determining

cause of behaviour in households 62

3.1.5 Rationality and the household budget 773.1.6 The goals of household budget management 853.2 A behavioural approach to monetary theory 89

v

vi Contents

3.2.3 Monetary theory and empirical research 933.2.4 Consequences for monetary theory and policy 1163.3 Level of aspiration and consumption standard: some

general findings (with Bernd Bievert) 124

4.2 The entrepreneur in the economy and in the society

of the Federal Republic of Germany 149

5 Psychology of Taxation and Public Finance 157

5.1 Fiscal psychology: a new branch of public finance 1575.2 Tax morale and tax resistance 164

5.5 Tax mentality in international comparison – an

5.6 A theory of incentive taxation in the process of

6.1 The problem of economic prognosis 2116.2 The liquidity theory of money 219

List of Tables

[Note: Schmölders did not provide all tables with titles; titles in brackets

were added by the editors in this list.]

3.1 Money management by professional and income groups 523.2 Financial assets and financial management 533.3 Influence of income and age on expectations of income 683.4 Influence of positive income experiences on income

3.9 Marital status of respondents 1013.10 [Reasons for saving, by account type] 1043.11 [Reasons for saving, by account type, in more detail] 1043.12 [Usual mode of payment, by account type] 1053.13 People’s information about changes in interest rates by

3.14 Consumption standard and income (in DM) 1253.15 Consumption standard (in DM) and occupational groups 1263.16 Consumption standard, occupational groups and income 1273.17 Consumption standard (in DM) and education 1283.18 Consumption standard (in DM) and life cycle 1303.19 Consumption standard (in DM) and age 1303.20 Consumption standard (in DM) and size of household 1303.21 Consumption standard and expectations regarding the

5.1 [Germans’ attitude to tax, by gender and age group] 1875.2 [Germans’ attitude to tax, by education, profession and

viii List of Tables

5.6 [Perceived fairness of taxation and meaning of ‘tax’ for

List of Figures

1.1 Tax morale and the size of the shadow economy 123.1 Factors influencing saving behaviour (‘tree analysis’) 112

ix

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G ¨unter Schm¨olders and Economic Psychology: an Introduction

Björn Frank and Erich Kirchler

Günter Schmölders (1903–91) is one of the major figures in Germanpost-war economics Despite his fruitful influence on economics, beha-vioural economics and economic psychology in German-speaking coun-tries, his scientific œuvre is largely unknown outside Austria, Germanyand Switzerland Most of his publications are available only in German,unavailable for many colleagues working in the fields of economics andpsychology This volume aims to overcome that barrier by presenting

a selection of representative publications in English, enabling a widerinternational audience to have access, for the first time, to GünterSchmölders’ pioneering and seminal work

In general, there are three main possible triggers for the rediscovery

or renaissance of a social scientist, and all of these apply to GünterSchmölders:

• Firstly, he pioneered research in a field which only later began toflourish and to be recognized as important

• Secondly, he was previously masked behind a language barrier whichhas now been overcome

• Thirdly, the time has come to look back and sort the lasting butions from those of only temporary importance or interest.Concerning the first point, it was only about ten years after GünterSchmölders retired in 1972 that the International Association for

contri-Research in Economic Psychology (IAREP) and the Journal of Economic

Psychology were founded Today, modern economists are not only aware

of the richness of motives that drive human behaviour, they also porate theories on human motivation into their models, and theymeasure their theories against data often collected or generated withgreat effort This was not the case in Schmölders’ time Schmölders’

incor-1

2 The Psychology of Money and Public Finance

generation was preoccupied with exploiting the plain homo economicus

model, which even so gave us many new insights We will return to theissue of methodology shortly

While Schmölders increasingly gained recognition in the 1960s and1970s in Germany, his work did not really transcend the languagebarrier, which seemed a matter of regret to him (Schmölders, 1988,

p 169) However, could anything else have been expected of him, interms of his publication strategy? Schmölders belonged to a genera-tion of researchers who had few incentives for publishing in a foreignlanguage (even the Nobel prize-winning work by Reinhard Selten (1965)was first published in German), and English was in fact the fifth foreignlanguage Schmölders had learned as a doctoral student (Frank, 2003) Hepublished only one book and 17 articles, including some minor ones, inEnglish His total output, on the other hand, can be quantified only in

so far as it exceeds the 457 items listed in the incomplete and inaccuratebibliography in Schmölders (1973)

This leads on to the third reason why Schmölders is currently stillunderrated: the sheer volume of his publications is impressive, butwhich of his works should the newcomer to Schmölders begin withtoday, given that economic psychology and behavioural economics arenow well-accepted fields of research? In fact, they are so well recognized

by the Nobel Committee that in 2003 it lauded Daniel Kahneman’spioneering work and innovative research, conducted together withAmos Tversky This book is intended to provide the answer It collectstogether his writings on topics relating to economic psychology whichwere originally published in English but are no longer conveni-ently accessible These are complemented with selected sections trans-lated from Schmölders’ books, together resulting in a true Schmöldersmonograph

1.1 Methodology: the long way towards empirical research

Schmölders’ academic teachers were proponents of the final phase of thehistorical school The futility of much of their efforts offered Schmölders

a salutary example; he often emphasized that mere data collection,without a guiding idea from the outset, is often destined to be fruitless

But as Schmölders took the view that the homo economicus model was not

qualified to generate useful hypotheses, what was his approach to be? His

early work can be seen as exemplifying the Verstehen approach, or

’recon-structive imagination’ (see Frank, 2003) For example, he analysed theorigins of alcohol prohibition by trying to see alcohol and temperance

G ¨unter Schm¨olders and Economic Psychology: an Introduction 3

through the eyes of nineteenth-century Americans, and conceiving what

it must have been like to be a politician shortly before prohibition.His next research topic was not too far removed from this: the taxa-tion of alcoholic beverages in Germany and other countries A spin-offfrom this research was a small booklet on tax morale and tax burdens(Schmölders, 1932) which he later considered as the starting point forhis research into economic psychology or, more specifically, ‘humanbehaviour under taxation’ (according to Schmölders, 1959, reprintedhere as section 5.1)

It was a small beginning; however, the main point he makes is that the

‘tax morale’ depends on tax rates, but also on other determinants whichrelate to the loyalty of citizens and how much they trust state authorities

He might already have planned to explore this line further throughempirical investigations, but the years after 1932 were not accommo-dating to anyone looking at the relationship between citizens and thestate in this way

And indeed, Schmölders quickly turned to other topics, receivinghis first professorship in Breslau in 1934 and giving the impression ofbeing both inconspicuous and having adapted to the difficult circum-stances of that time However, after accepting a call to the University

of Cologne in 1940 he became a member of the Kreisau Circle aroundHelmut James Graf von Moltke and Peter Graf Yorck von Wartenburg,

a resistance group which helped those being persecuted, supported amilitary coup d’état and – above all – planned a new, humanistic orderfor the time thereafter Schmölders served as an economic adviser, andsought to advocate competition and reliance on the market mechanismagainst the more or less socialist ideas of some other members He was aprospective finance secretary of state, but military service kept him frombecoming more deeply involved in the activities of the Kreisau Circle,and from the fate of about half of its inner circle, who were executed in

1944 and 1945

After the Second World War, Schmölders’ intellectual freshness andproductivity were those of a man at the beginning of his career, notthat of an established researcher over 40 According to Guy Kirsch,Schmölders never thought much of methodological discussions, andbeing ahead of his time he needed to build bridges, as Kirsch put

it, to enable his fellow economists to see that his questions and hisanswers mattered (Kirsch, 1993, pp 13–14) He did make efforts in thatdirection This book starts with a few of his attempts to promote hisapproach

4 The Psychology of Money and Public Finance

1.2 Plan of the book

These attempts are subsumed under the title ‘Economic Psychology’(Chapter 2) The main point made in section 2.1 (‘Man as a socialbeing’) is that economic behaviour can be analysed and understoodonly against the background of society as a whole Section 2.2 ismore concrete Schmölders discusses the role that disciplines such aspsychology can play when it comes to developing theories on whicheconomic prognoses can be built, which Schmölders sees as the ulti-mate touchstone for theories It is remarkable that as early as 1956,

Hedwig Reinhardt tried to alert American Economic Review readers to the more unconventional parts of Schmölders’ German book Finanz-

politik (1955, 3rd edn, 1970a): ‘It may seem strange to encounter Freud in government finance, but it certainly opens some challen-

ging prospects’ (Reinhardt, 1956, p 1007) To typical readers at thattime, however, this must have seemed quite odd, all the more so asSchmölders even brings ethnology into play We imagine that he wouldhave been excited by recent research conducted by experimental econo-mists, running the same experiments in very different cultures (e.g.Henrich et al., 2001; Ockenfels and Weimann, 1999; Roth et al., 1991).Section 2.3 is less conceptual; Schmölders gives a brief overview of theprecise focus of the work of his empirical research institute during itsearly years

Chapter 3 deals with the private household In section 3.1, the blackbox of the decision-making unit that is the ‘household’ is opened,and the individual actors within the household are looked at Currentresearch is returning to precisely this topic (e.g Kirchler et al., 2001).The title of section 3.2, ‘A behavioural approach to monetary theory’,

is a bit misleading, as the larger part of this investigation is economic in nature (however, it concludes with reflections on theconsequences for monetary theory and policy) It includes originalsurvey evidence on attitudes towards saving and borrowing Though it

micro-is partly outdated because monetary institutions have changed in themeantime, it contains real treasures worthy of replication today, e.g

40 per cent of the respondents expect the value of the currency to fall,while 70 per cent expect prices to rise

Section 3.3 presents empirical evidence on levels of aspiration By andlarge, survey respondents do not seem to desire anything which is out oftheir reach (determined by income) These results are mainly static Thedynamic view, only noted in passing by Schmölders and the co-author

of this chapter, Bernd Bievert, would be that saturation does not last

G ¨unter Schm¨olders and Economic Psychology: an Introduction 5

for long; comparison with others urges people to acquire new (durable)goods (Frank, 1997, 1999; Layard, 2005)

At the end of his academic career, Schmölders turned to investigatingentrepreneurship (Chapter 4) At that time, he had a number of contactswith entrepreneurs or consultancy services, and held posts on the boards

of individual firms and associations Another stimulus for him mighthave been the changing public climate at the end of the 1960s, whichturned against entrepreneurs In section 4.1, Schmölders discusses thevariety of motives which drive entrepreneurs, such as prestige, and thesociocultural determinants of entrepreneurship Modern research clearlyconfirms Schmölders’ view According to Köllinger et al (2005), starting

a new business does not pay on average, and those who less become entrepreneurs share certain subjective perceptions of theiropportunities Adam Smith’s classical view was that society benefitsfrom entrepreneurs who coolly and rationally maximize profits, whilethe modern view is that society benefits from entrepreneurs’ overcon-fidence In section 4.2 Schmölders further elaborates on the role ofthe entrepreneur in capitalist societies, while also trying to explain thenegative image of the entrepreneur at the time of writing

neverthe-In comparison to Schmölders’ work on public finance (Chapter 5),

to which we devote a separate section of these introductory remarks,his contributions to macroeconomics (in a narrow sense) are relativelysparse His primer on the problems of economic prognosis (section 6.1)

is a natural extension of his methodological remarks in Chapter 2 Heargues convincingly that the ‘mechanical and mathematical methods

of prognosis’ are suited only for the prognosis of persistent trends, butnot for business cycles under the impact of expectations and psycho-logical factors This point is further elaborated in section 6.2 of thisbook on ‘The quantity theory of money’ This paper had been prom-inently published, but the terminology proposed in the title did notprevail Nevertheless, the main points made by Schmölders are undis-puted nowadays: neither quantity theory nor its successor, the ‘incometheory of money’, can explain, under modern money and credit condi-

tions, the causal relations between money and the volume of business

activity, let alone its relation to the general price level The concept of

‘volume’ of money and credit is more a consequence than a cause of agiven volume of business activity Schmölders proposes to start from awider concept of liquidity than the mere cash liquidity of banks Theoverall liquidity position, which is related to the buying and invest-ment decisions of businesspeople in general, includes not only cash andstocks in trade, but also potential credit lines from banks and other