The Irrationality of “Economics”


May 29, 2007


Browse in Economics

Garrison Keillor says that if you go fishing with a member of the church in Lake Wobegon, you had better take two of them.  Take one out in your boat and he’ll drink all your beer.  Take two, and neither of them will drink any.

Sometimes we make better decisions together than apart. The presence of others can remind us that our own needs and opinions aren’t the only ones.  It also can evoke our better natures, or at least restrain our worse ones; the compulsive eater eats alone. This is the wisdom of the New England town meeting.  That salutary social effect can diminish as the scale increases, but it still can operate in a useful way. We support bottle bills even though, left to our own devices, we might be tempted to toss our own bottles into the trash.  Or maybe it’s because we would be so tempted.

Just because we want to do something doesn’t make it right.  Part of us knows that; and social settings of the right kind can reinforce that knowing.  This capacity to get outside our own skins – whether socially or through inner work —  gives economists no end of grief.  An integer of behavior that does not worship at the altar of its own “preferences” and “utilities” – which is to say, is free of its own internal tyrants as well as of external ones — is not predictable in terms of standard economic inputs.  It is not going to make decisions solely on the basis of prices, tax rates and the rest.

This unpredictability throws a monkey wrench into the elaborate regression analyses and computer models that are the tools of the economic trade.  It exposes the pretense of economic “science” for what it is.  Not surprisingly, most economists do not take kindly to the idea.  They cling instead to homo economicus, the comically myopic model that inhabits their theories, who calculates every life decision upon a relentless and unfailing calculus of personal loss and gain.

A recent example is a new book by Bryan Caplan, an economist at George Mason University, called The Myth of the Rational Voter: Why Democracies Choose Bad Policies.Caplan’s argument is that public policies are doomed to failure precisely because they embody some measure of we-thinking rather than the isolated me of the economics texts.  There long has been an awkward gap in the logic of such libertarian arguments.  How could people who are so unfailingly “rational” – as economists define that term – in the economic arena, turn to gullible saps the moment they enter a voting booth?

Caplan resolves that by positing in effect a money gene.  We are “rational” when our own money is on the line, and saps when it is not – or when the connection between the money and the result is diffuse, as in the case of taxes.  This is a comforting notion for the economic mind, affirming as it does all that it is disposed to believe.  But there are a few problems.

For one thing, where is the empirical evidence of “rationality” in the market arena, even in the narrow way in which economists define that term? A multi-billion diet and exercise industry has arisen on the proclivity of people to eat food they wish they hadn’t.  The proliferating “garage-mahals” – three and four car garages used primarily as warehouses for unused stuff — are testimony to the way we buy things that we do not need.

A survey by appliance manufacturers a while back found that the typical blender sits unused in the kitchen for a month or more.  You are shocked, I know.  You use yours every day, along with your treadmill and your table saw.  But many of our fellow Americans are not so “rational” with their money. A visit to a local bookstore will reveal shelves of volumes aimed at people who make bad decisions with their money as in the rest of their lives. There are support groups for people who use credit cards too much and want to stop.

The supposed “rationality” of homo economicus is necessary for the computer models.  But in terms of reality it’s out to lunch.  I haven’t even gotten to the other assumptions packed into that model, such as the notion that this hypothetical “economic actor”  has perfect knowledge of both the present and the future.  Nor am I dwelling on people who buy a Hummer, say, despite the implications for the atmosphere and for oil-based geopolitical turmoil. To regard that as  “rational” you really have to want to.

So the baseline for the argument that public decisions are inherently errant, is shaky to put it mildly.  Shaky and also tendentious, because the baseline itself becomes the metric by which those public decisions are judged.  That ultimate metric is the Gross Domestic Product or GDP, which is more commonly known simply as “growth.” But growth is just the sum total of all our buying, much of which is questionable even by the people who do it.

Spend a fortune on cigarettes, develop lung cancer, spend another fortune on medical treatments – and voila, growth up the kazoo.  Americans spend over $5 billion a year on gas they burn while they sit in traffic, going nowhere. If public policy decisions reduce such expenditures – through restrictions on smoking for example, and mass transit – and the result is less of the statistical artifact called “growth,” those policies are “irrational” only in the tautological terms of “economics” itself.  To the rest of us they make pretty good sense.

This is why we vote to support libraries and parks, even though the taxes to support them might leave us a few dollars less to buy things for ourselves.  As some level we know how many books sit unread on our shelves while those in libraries circulate constantly; and how our kids rarely use the swing set we got for them while the ones at the playground are in constant use.  That there is waste in government is obvious; but the question is compared to what?

We individuals are wasteful too.  Corporations are paragons of waste, as a glance at executive compensation packages would suggest, Without waste, this thing we call an “economy” would grind to a halt.  Put two of us in the boat together, and sometimes we really do make better decisions than if we were in the boat alone.