Coordination Problem

Humanly Rational Choice

As a follow-up to Steve's post on how Mises can be read to have anticipated Smith's concept of "ecological rationality", and also to counter a current prevailing trend to trash rationality and embrace irrationality, I would like to point to a sentence of the philosopher David Schmidtz discussing his essay "Choosing Strategies".  "To identify genuine, substantive connections between being rational and being moral, I now believe, we will have to work with humanly rational choice and humanly moral agency as they really are, not with the mathematically tractable idealizations of them."*

Schmidtz's book Rational Choice and Moral Agency is brilliant, and in fact one of my favorite books in philosophy.  The fact that Schmidtz has always seemed to carve out the intellectual niche in his profession that moral theorizing and political theorizing is impotent unless it takes seriously the world in which we live both in terms of social relations and the constraints of the natural world has always struck this political economist as the most level headed in the genre.

I am fond of saying that "praxeology puts parameters on people's utopias" and David's use of humanly rational choosers in his approach to moral and political philosophy is consistent with this understanding of praxeology even though David would not necessarily draw that same conclusion.  The basic point is that study of purposive human action need not entail maximizing agents, but cannot make use of such a stripped down model of man, if an accurate picture of man and society is to come out of the analysis.  Why else do you think Mises spends so much time and mental effort in the first 100 pages of Human Action, trying to establish for the reader the uncertainty of the environment, the ignorance of the future, and the open-ended nature of the human choice problem?**  Mises is a rational choice theorist, but one that focused on "humanly rational choice" and not "mathematically tractable idealizations" of choice.  And his entire analysis from the logic of human action to the dynamics of the entrepeneurial market process is dependent on this human, as opposed to mechanical, perspective.

If this is so, then what does this have to say to those critics of the excessive ambitions of rational choice theorizing in the social sciences and how would the social sciences be reconstituted given both the critique and this avenue for reconstruction?

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*Schmidtz, Person, Polis, Planet (New York: Oxford Univesity Press, 2008), p. 5.

** William Jaffe in his classic paper on the marginal revolutionaries argued that Menger differed from Jevons and Walras and was not vulnerable to the Veblen-type criticism of the "lightening calculator" because to Menger man was forever caught between alluring hopes and haunting fears.  The poetry of Jaffe aside, he hit the nail on the head with respect to the Austrian tradition of economic theorizing --- undestanding "humanly rational choice" not "mathematical tractability" has always been the goal of the enterprise, and sees its most complete defenses in the works of Mises and Hayek.

An Example for the Next Edition of The Economic Way of Thinking?

From a CNN.com column today on airlines charging baggage fees:

A decade ago, who could have imagined paying for airline food? Today, we're lucky if there are bland snacks for sale. Checking two or three pieces of luggage was considered the air traveler's inalienable right. Today we're paying through the nose for our checked bags.

How do we fix this? I can think of two solutions. First, air travelers can buy tickets on airlines that don't charge outrageous fees, like JetBlue and Southwest.

And second, our government can say, "enough!" It wouldn't take much. The Transportation Department could rule that the price of an airline ticket must include at least one piece of checked luggage, and that would pretty much end this debate.

Questions:  what is the likely result if his second proposal were to happen?  Who would benefit?  Who would lose?  Can we say with a high degree of certainty that it would be a welfare reducer?  Why or why not?  Does it matter that utility is subjective and not inter-personally comparable?  And why might the airlines charging for bags support this proposal?

The Harmony of Interests in Practice

Just after dinner tonight, the phone rang.  Our local cable monopoly (Time-Warner) provides "caller ID on TV" if you have their digital phone service like we do.  The TV showed an "866" number and "private caller," which immediately made me think it was a sales call of some sort.  Jody answered it and listened without talking for a bit, suggesting it was a computerized sales call no less.  She then handed me the phone and said "the computer's for you."

As it turned out, it was my local Rite-Aid pharmacy calling to note that a monthly prescription I last refilled in late June was due to have run out on July 25.  For reasons that aren't relevant, I had refilled that prescription very shortly after getting the previous month's prescription, so I actually hadn't even started the bottle they were calling about.  The call was both a reminder to refill it as well as an opportunity to do so using their computerized system.

Now Rite-Aid, of course, is interested in reminding me for their own interests as much as any "concern" about my well-being.  Nonetheless, their profit motive, combined with the wonders of 21st century technology, including the replacement of human tasks by machines as no store could have likely justified the use of human labor necessary to make all of those calls in years past, makes it possible for them to call and remind me that I might have forgotten to refill a potentially important prescription.  Just another little example of how life is getting better, I might note. I was genuinely appreciative that they have a system for doing that (having never "forgotten" to refill in the past) and it matters to me not one bit that their doing so is a matter of their own self-interest, either partially or mostly. 

This is what markets are all about at the end of the day:  the harmonization of the self-interest of actors via decentralized coordination.  That harmonization allows us to live in peaceful cooperation and extend the benefits of Mises' Law of Association to more and more of humanity.  A computer calling me to remind me to refill my prescription might seem like a little thing in the broader scope of human accomplishment, but it symbolizes the real processes that have made possible the levels of peace and prosperity that we have. 

Mises anticipates Vernon Smith

Preparing my notes for my talk on the socialist calculation debate at FEE next week (I'll be doing my best Pete imitation), I decided to include this quote from Mises from his 1920 article on economic calculation (pp. 120-1):

“A popular slogan affirms that if we think less bureaucratically and more commercially in communal enterprises, they will work just as well as private enterprises.  The leading positions must be occupied by merchants, then income will grow.  Unfortunately ‘commercial-mindedness’ is not something external, which can be arbitrarily transferred.  A merchant’s qualities are not the property of a person depending on inborn aptitude…The entrepreneur’s commercial attitude and activity rises from his position in the economic process and is lost with its disappearance….It is…his characteristic position in the production process which allows of the identification of the firm’s and his own interests.”

What is most interesting about that quote is that Mises is clearly claiming that our ability to engage in economic calculation, or to be "commercial-minded" or "economically rational," is not a product of our innate skills or training or anything "inside" of us, but instead the institutional context we find ourselves in.  Some institutions will better coordinate the entrepreneur's and the firm's own interest and lead to efficient resource use, some will not.  This is why, of course, Lange suggested in a footnote in the 1936 paper that Mises was making a quasi-institutionalist argument.

It also tracks Vernon Smith's work on "ecological rationality," which sees rationality as the product of the context, not the individual.  I would add both Mises and Smith are making Weberian arguments here.  The opportunity and need for Austrians to reconnect with Weber and create a truly Austrian sociology has never been greater (right Brian?).

I also hesitate to note that this does bear out Pete's claim over the years, made half-seriously, that all that's good in modern economics can be found in Mises.

Two Recent Publications Available Online

My two recent papers published in The Independent Review are now available online.

“Fascism:  Italian, German, and American,” review of Jonah Goldberg, Liberal Fascism:  The Secret History of the American Left from Mussolini to the Politics of Meaning, The Independent Review, 13 (3), Winter 2009, pp. 441-46.

and

“Wal-Mart to the Rescue:  Private Enterprise’s Response to Hurricane Katrina,” The Independent Review, 13 (4), Spring 2009, pp. 511-28.

Enjoy.

Bill Easterly Writes: A Priest, A Linguist, and an Economist Walk into the General Assembly . . .

 . . . and the economist is Chris Coyne.

Read what Easterly is talking about here.

Is This the Future of "Government"?

Paul Romer is generally recognized as one of the most important economic thinkers of his generation.  His work on endogenous growth theory has influenced modern theory development and informed public policy decision making.  As has recently been reported, Roemer is devoting himself now full time to the idea of "charter cities".

A distilled version of his theory of growth focuses on 2 factors -- technology and rules.  Rules can either stimulate technological innovation and thus growth, or stifile it and lead to stagnation.  The implication for humanity throughout history have been profound.

But how do we get "good" rules?

What do you think of Romer's idea for getting better governance?

Political Failure By Agreement

Gerhard Wegner's book Poliical Failure By Agreement was recently reviewed in one of Germany's leading newspapers. The review emphasised that "this book demonstrates how fruiful non-econometric thinking in economics can be when it combines evolutionary economics with political theory and philosophy".

Wegner's book is part of the New Thiniking in Political Economy book series that I edit for Edward Elgar.

Who Do You Find More Persausive?

Scott Sumner and John Cochrane discuss the financial crisis.   Look especially at around the 8 minute mark, where Cochrane challenges Sumner's idea that the Fed wasn't aggressive enough, and Sumner responses.

Yes, Things are Still Better than They Used to Be

As regular readers know, I'm an incorrigible optimist about the future.  Granted, the last year has shaken that a bit, but I still think my children will have better lives than I did, even if they won't be AS better as they could be.  Just to get some perspective on the "things are getting better" meme, consider the little vacation my family took this past week.

We drove down to PA to drop my son off for rehearsals and then departure for a band trip to Europe.  My wife and daughter and I spent the rehearsal days shopping and going to Hershey.  The whole time I kept thinking about the car trips I took as a kid and how much better things are now.  I grew up with 3 brothers and in the early and mid 70s, we took several cross-country car trips, starting at our home in suburban Detroit and going, in one case, all the way to Salt Lake City and back, seeing the major national parks etc along the way.  We also did the Canadian maritimes and Florida.  

And we did it all in an old AMC station wagon. My dad plotted out all of the stops and hotel using those old AAA tourbooks.  Everything was done by phone and took hours.  We had tons of maps of course, but still got lost from time to time.  And we had to leave a detailed itinerary behind so that people could find us.  And if I had to listen to another crappy local radio station...

Compare that to today:  We drove around in a much more comfortable, safe, and reliable Nissan Altima.  It also got probably twice the gas mileage and produced a fraction of the pollution of the AMC.  (Plus, no one had to ride backward!).  Finding hotels and learning about Hershey took all of 30 minutes on the Web and I didn't have to talk to a human being.  I printed out one map but the rest was all navigated by GPS, which saved us once or twice when we went wandering (which we knew we could, given the GPS).  We didn't leave an itinerary, as our cell phones made it possible for us to be reached at any time by our house/dogsitters.  It also enabled us to coordinate with one another as we separated while shopping or at Hershey.  The cell also served as entertainment for my daughter, who passed the time in the car texting friends at home or taking pictures.  Finally, our whole trip was made much more pleasant by high-quality, user-chosen music on the car CD player.

None of this accounts for the cheaper real cost (in labor time) of our food and hotel nights, not to mention the notably higher quality of both compared to those trips from the early 70s. The very fact that we had quite good Chinese food in the small town of Hazleton, PA reflects the expanding division of labor and growth in choices. 

If one thinks about all the bad economic policies and the general growth of the state that has taken place since the early 70s, the fact that life is still so much better in so many ways should lead one to think, to borrow from Pete, that the Smithian forces of the division of labor and the power of Schumpeterian innovation will indeed continue to conquer the stupidity of the state.  No doubt the fight will be a tougher one in the years to come, thanks to the events of the last year, but both history and theory suggest that the combined efforts of humanity coordinated by even restricted markets will still win out over the stumbling and bumbling of the political class.