Economists and the Crazy Things People Do To Themselves
The following passage from St Paul's letter to the Romans is justly famous:
I do not understand what I do. What I want to do I do not do, but what I hate, I do... I have the desire to do what is good, but I cannot carry it out. I do not do the good I want to do, but the evil I do not want to do—this I keep on doing. In my inner being I delight in God’s law; but I see another law at work in me, waging war against the law of my mind and making me a prisoner of the law of sin at work within me. What a wretched man I am! Who will rescue me from this body of death?
Any one of us who has struggled to improve a bad habit knows how this feels. Human beings are crazy, self-sabotaging creatures. Who would try to deny it? Except economists. They deny it, right?
The following two quotes go out to all of us who have ever wondered why economists assume that people are rational, even though, well, we aren't:
First, from Ronald Coase:
The rational utility maximizer of economic theory bears no resemblance to the man on the Clapham bus [the British equivalent of the man on the street] or, indeed, to any man (or woman) on any bus. There is no reason to suppose that most human beings are engaged in maximizing anything unless it be unhappiness, and even this with incomplete success...
[W]hatever makes men choose as they do, we must be content with the knowledge that for groups of human beings, in almost all circumstances, a higher (relative) price for anything will lead to a reduction in the amount demanded. This does not only refer to a money price but to price in its widest sense.
Whether men are rational or not in deciding to walk across a dangerous thoroughfare to reach a certain restaurant, we can be sure that fewer will do so the more dangerous it becomes. And we need not doubt that the availability of a less dangerous alternative, say, a pedestrian bridge, will normally reduce the number of those crossing the thoroughfare, nor that, as what is gained by crossing becomes more attractive, the number of people crossing will increase.
The generalization of such knowledge constitutes price theory. It does not seem to me to require us to assume that men are rational utility maximizers. On the other hand, it does not tell us why people choose as they do. Why a man will take a risk of being killed in order to obtain a sandwich is hidden from us even though we know that, if the risk increases sufficiently, he will forego seeking that pleasure.
-- The Firm, The Market, and the Law, pp 3-4
Next, from Friedman. No, not Milton Friedman, but David Friedman, spawn of Milt (ichthyology joke!):
The fundamental assumption of the economic approach, to law and everything else, is that people are rational. A mugger is the mugger for the same reason I am an economist: Given his tastes, opportunities, and abilities, it is the most attractive profession open to him...
Rationality does not mean that a burglar compiles an elaborate spreadsheet of costs and benefits before deciding whether to rob your house. An armed robber does not work out a precise analysis of how shooting his victim will affect his odds of being caught, whether it will reduce the chance by 10 percent or by 20. But if it is clear that will reduce the odds of being caught without increasing the punishment, he is quite likely to pull the trigger.
Even in this weaker sense people are not always rational. I, for example, occasionally take a third helping of spaghetti when a careful calculation of my own long-run interests would lead me to abstain. I am well acquainted with my own irrationality and can take steps to deal with it. Having discovered that bowls of potato chips located within arm's reach empty themselves mysteriously, I at least sometimes take the precaution of putting the bowl somewhere else.
But I do not know other people -- the vast masses of other people to whom economic analysis of the law is intended to apply -- well enough to incorporate their irrationalities into my analysis of the effects of legal rules on their behavior. What I do know about them is that they, like me, have purposes they wish to achieve and tend, albeit imperfectly, to correctly choose how to achieve them. That is the predictable element in human behavior, and it is on that element that economics is built.
--Law's Order, pp 8-9