The evolution of economic theory has gone something like this: First set up a nice target, and then line up Nobel-prizewinning economists to shoot it down.

The target is the assumption that economic agents (people, consumers) are rational, that they reveal their rationally determined preferences through their economic actions and that this produces an optimal equilibrium.

Economists load their weapons with ammunition to shoot these targets down. That ammunition has been multiverse: externalities and “market failure”; “animal spirits;” “irrational exuberance”; the principal-agent problem; regulatory capture; information asymmetry and the market for lemons; then finally, behavioral economics.

And now, a new book, Phishing for Phools, by Nobelists George Akerlof and Robert Shiller – respectively, authors of the phrases “market for lemons” and “irrational exuberance” – says that all of these should have been central to economic theory in the first place.

Why? Because the exact same free-market process that Adam Smith lauded for doing a great job of satisfying mutual self-interests, also incentivizes scamming. It is not possible to separate the two; they must be part and parcel of the same economic theory.

Watch out for the “ph”

Akerlof and Shiller take their title from the word “phish,” which, according to the Oxford English Dictionary, was coined in 1996. It originally meant, “To perpetrate a fraud on the Internet in order to glean personal information from individuals.” They generalize this term by saying, “It is about getting people to do things that are in the interest of the phisherman, but not in the interest of the target.”

If you are successfully phished, you are a phool. There are two types of phools: psychological and informational.

Psychological phools are people who have an urge to do things that they know are not in their own best interest. All of us are psychological phools from time to time. Akerlof and Shiller refer to psychological phools as people who exhibit – occasionally or incessantly – “monkey-on-the-shoulder” tastes. There are plenty of examples of this: people who can’t stop smoking, gambling addicts, alcoholics and so on. Sellers of cigarettes, casino gambling, and alcoholic beverages willingly and eagerly take advantage of these monkey-on-the-shoulder inclinations, tailoring their marketing to, and generally aiding and abetting their customers’ self-victimizing tastes.

Information phools are different. They are presumed to know what they want, but they don’t know that the product or service they are being sold won’t give them what they want because the seller is, in one way or another, either distorting the facts or not revealing them.

Akerlof and Shiller cutely substitute the “ph” for “f” in any word starting with “f”, to indicate that someone is phishing and making a phool out of you. They provide interesting historical information on several industries to show how common phishing and phoolery are. There’s no problem, of course, about the spelling when it comes to the pharmaceutical industry. They describe how Big Pharma inveigles doctors into recommending their medications, even when they may have flaws in them or their efficacy hasn’t been proven. But they also cover the phood industry, in which obese-making phoods are peddled to Americans, 69% of whom are overweight, according to the U.S. Centers for Disease Control and Prevention. Their monkey-on-the-shoulder lack of resistance to these phoods makes them easy marks, even if they know that the phoods aren’t what they “rationally” want or should have.