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« The Most Important Economics Debate of the Interwar Period | Main | Smothering the Consequences of Natural Disasters »

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"We tend to think of ourselves as rational actors - yet ultimately, we are very fallible creatures. We need regulation and restraint to overcome our irrational tendencies and to achieve better outcomes for ourselves and the world around us."

"And I think the role of both, regulation and technology, is basically to get us to not be the people that we are in the moment."

Thar she blows: an "agent failure" argument, just as I note here: http://www.coordinationproblem.org/2010/09/agent-failure-and-market-failure.html

And now I wait for that certain someone to come along and tell me that Ariely is not saying exactly what he is clearly saying and that therefore my view of the matter is wrong.

Pete, you should have put "contribution" in the scare quotes, not "debate" :)

Ariely never explicitly called for more government intervention, to be fair.

Cornelius:

Well he never calls for "more" intervention, but he argues explicitly that the role of regulation and technology "is basically to get us to not be the people that we are in the moment." I don't know how to interpret that in the context of his argument other than to say that regulation is one, though not the only, way to overcome our failures of rationality.

That's another reason for which I wish Armen Alchian would get the Nobel Prize. At least it would force a lot of the folk using Kahnemanesque arguments against the market, to acknowledge some of the arguments he made. That it doesn't matter if you think somebody is motivated by profit or not. Or if he is rational or not.

Profit and loss work whatever the motives and methods the entrepreneur uses. That's the beauty of it.

PS. I thikn Cornelius is technically right, you could end Ariely's text with a sentence "the thing, that keeps us on track best is a free market", but thats clearly not what he is trying to say.

I think Dan Ariely's version of 'the free market' is some sort of weird free-for-all with zero rules.

The key is - where do the rules come from? I'm thinking of Prof. Leeson's pirates, for example. Spontaneous order isn't just about profitable trade - it's also about facilitating human interaction.

So if Dan is saying "we need rules" then fine. Of course we as humans develop rules as we go along. They can be imposed laws or traditions or whatever. Of course, tradition has a lot to recommend it (see Hayek in the Constitution of Liberty on this one).

If Dan is saying "we need exogenous rules" then that's a high burden of proof. The first argument you have to make is that the rule will actually correct some negative behavior. Dan talks about texting & driving. Anti-texting & driving laws are put into place and what happens? People still text but have to hide it resulting in more accidents (maybe). http://smallbusiness.aol.com/2010/09/29/are-anti-texting-laws-causing-more-accidents/

Prohibition? Drug laws? Really? You want to argue that you can use rules to change peoples' desires? That sounds like pie in the sky to me.

Second, you have to argue that the rule-makers are behaving rationally (whatever that means to Ariely) when they make laws. It seems Ariely means that behaving rationally is having the long-term consequences in mind. Well sir, then politicians should make zero laws. They have the shortest-term in mind. Need I point out the popularity of 'named' laws that are invariably introduced after some horrible thing is done/happens to a child?

If Dan really wants us to focus on the long-term, he should be arguing against stupid regulations and favor markets-based rule development. I wonder what he thinks about Ostrom's work?

You might want to correct his name: it is Dan Ariely.

Yes, one wonders whether Ariely thinks all of his cautions about rationality apply to political actors and, if so, what that implies about their ability to design regulations that address our failures of rationality.

The more important issue, of course, is not the rationality of agents but the ecological rationality of the set of institutions within which they act. Good institutions are not just those that are conducive to better decision-making at any point in time, but rather those that enable us to learn from our very frequent mistakes by providing us with the knowledge and incentives to learn that we have erred and how we might start to correct such errors.

One of the presumptions (and "irrationalities") of arguments of many of the Behavioral Economists is that they take it as given that others in society are "irrational" by some benchmark such as the neo-classical model or some conception of "statistically correct" decision-making, which requires "them" to set up limits or rules or regulations to get people to act in a more "objectively rational" manner.

While, at the same time, taking it for granted that they, themselves, are not like the "ordinary people" whom they assert need to be "helped" through their paternalistic guidance.

This is merely a pseudo-scientific version of the "leader" who claims to have the "intuition" or "special insight" into the "people's true interests."

Rather than assume that man's way of thinking, evaluating, anticipating is only "correct" if following the "objectively" rational or statistically "logical" formula, we should ask ourselves:

If man has evolved and successfully survived, maybe it is because the way he thinks, evaluates, and anticipates is the way that is appropriate to him?

Hayek and others such as Douglas North have argued that man is a "rule-following" being, rather than simply "logic" following being (as reflected in the neo-classical and related models of "rational" man).

Maybe trying to impose such "rationality" on man would be "irrational" and inconsistent with his evolved and "action-based" conduct and nature.

Richard Ebeling

If we are so irrational, how would government intervention fix the problem, since government itself is a human institution? Old Lou (Mises) made the same point decades ago, and it's relevant today as it ever was.

"If one rejects laissez faire on account of man's fallibility and moral weakness, one must for the same reason also reject every kind of government action."

Many good comments.

Ariely has rediscovered the problem (impulse control) that occupied the Stoics and other Greek philosophers.

Hardly original.

The Stoics saw it individually as an ethical problem. Societally it was addressed by evolved law (natural law). The legacy of Greek (and Roman) philoosphy was absorbed by Christianity.

In short, impulse control is a problem of ethics, law(not legislation) and religion. The state must be tamed by ethics, law and religion. The state cannot supplant them.

The debate shows the importance of defining you terms before you start. Most socialists today define the free market as one with no rules whatsoever, so that brute force rules.

And they define rationality as Richard describes.

The text for the classes I teach start of with definitions of market failure and rationality, which give me the opportunity to correct them. Although one I used defined rationality in the market as the fact that no one will knowingly make themselves worse off.

And didn't Adam Smith already deal with the problem of impulse control?

I am late to this. But Glen Whitman and I have an article in the Arizona Law Review which applies the cognitive bias research to government behavior. Suppose policy makers are just as "irrational" as ordinary agents, what is the result? One result is slippery slopes. See

http://www.arizonalawreview.org/2009/51-3/rizzo-whitman

So the irrationality of ordinary agents (if they are that) does not itself justify government action.

I am new here. I am not an economist, but I enjoy what I have read here. I only want to put in another point to consider. I do not get the impression from Ariely's article that we must be regulated from one source. In fact, we are "regulated" at all levels. We have the expectations of our work group. We have the company policies. We have local ordinations. We have state laws. We have federal regulations. Finally, we have the social norms (which I believe used to be termed as morals in the early history of this country). We do have rules in our families. At all of those levels, we were dictated how we should function. We never function in solitary. This is why we kid ourselves about working at home and doing it in a bathrobe. Everything we do affect others. Without some kind of boundaries or restrictions, or rather, if we are not a moral people, our society collapse. This is the essential of what happened with the British Riot of a few weeks ago.

So, we need to understand that we already are "regulated" at all levels. The question really is, at what level should we be regulated. The Founding Fathers understood that the ability to govern ourselves must remain close to ourselves. But the issue nowadays is that more and more power are being wield at level higher than they should be. This leaves the companies, cities and towns, and states in bind on how their people should interact with each other. If an unity is not free to define itself, we are losing the freedom to associate. We have the needs for associating - A person may want to work for a certain company because of what it represents. But, if the federal government define how the companies should operate, they became less distinguished from each other. More and more companies end up being similar to each other, and that hurts us.

So, Ariely is correct in that we, as the People, especially the Moral People, do need to be regulated. The question, again, is at what level? Should it be done internally or externally> Should a higher government take over the power from the lower government, which is to say, should this higher government take over the power from the People? In the significant majority of cases, if not in entirety, the answer is no. But this does not change the fact that we must be "regulated" somewhere and somehow.

Something I think is important that not many people have discussed is what regulations are like in reality.

A great many regulations standardise products and say very little about product safety.

In Europe this is funny, if not a little sad...
http://timworstall.com/2011/09/03/hugh-fearnley-whittingstall-6-months-pokey-for-you/

It seems quite clear to me that if one argues for "irrationality" for the private sector then one must also impose the same problem on policy makers; they are after all human.

The big difference, at least to me, is in which of the irrational actors, individuals/businesses vs. Federal policy makers can inflict the most harm. That is what we are after right, limiting harm? Clearly a business that acts "irrationally" or makes bad decisions can inflict damage, but that damage will be local and limited ( unless of course they've grown too big to fail with government help). National policy, which is flawed or "irrational" almost by definition, invites systemic disasters and possible national collapse.

Richard Ebeling,

The basis of Behavioral Economics is the 'other people are stupid' fallacy.

Not me, not you, or others in present company, but some poor anonymous wretches over there walking along the street, competent to vote AND drive cars, but otherwise they are barely able to make it through the day.

"Maybe trying to impose such "rationality" on man would be "irrational" and inconsistent with his evolved and "action-based" conduct and nature."

Richard's comment is one of the significant points stressed by Hayek over and over.

Yet, I'm not so sure that this point has been adsorbed even by many friends of Hayek such as Buchanan and North. I have heard Buchanan express skepticism that we have the luxury of passively sitting around, waiting for the proper institutional rules to evolve, but we are forced in the real world to "take the bull by the horns" and design many of the rules rationally.

Maybe Hayek would not completely disagree, but would stress that in doing so, we actually grope around in the dark, and therefore should expect that our attempts at rational rule creation will often create outcomes that are very contrary to our expectations, yet the very process leads to an evolution where the successful rules are stumbled upon.

This is no good answer, but maybe its the best we can hope for.

Keynesian economics also assumes that people are stupid. The idea of "stimulus" is predicated on that assumption. I see overlap between Keynesian economics and Behavorial economics.

I get grief sometimes form Austrians for saying good things about rational expectations. The core of Retax originates in Wicksell, Mises and Hayek. It is what Mises termed "Lincoln's Law": you cannot fool all of the people all of the time.

Keynesian stimulus assumes the opposite. On that point, Austrians must ally with the core proposiiton of Retax and with people like John Cochran. Nonesnese is nonesense.

IMHO we need to combine symmetry features of Ratex with the stupidity assumption of (a certain kind of) Keynesianism. People *are* stupid. But that means me too and you too. If people are stupid and the policy experts are people, then the policy experts are stupid.

Dumb-anonomics > Smart-anomics.

Whatever the intelligence of ordinary people, markets have error-correction mechanisms. Markets breed rational behavior even if people would otherwise be "irrational."

Political processes also have feedback mechanisms, but they differ from those in markets. And they elicit radiclaly different behavior.

I think we're on the same page as usual, Jerry. The market process is a bit like crowd sourcing and the like, your "error-correction mechanisms." Thus, "the market" is smarter than the average actor in it and maybe smarter than any actor in it. As you say, nothing all that similar goes for policy experts. (The filtering and aggregation mechanisms differ, and the information ecology is way different.) Thus, even if the dumbest policy expert is smarter than the smartest private actor, "the market" is still in some sense smarter than the policy experts. Ratex rightly threw into question the notion that the experts were smarter that markets. But it did so by making both private actors and government experts super-smart. That epistemological symmetry between private and public actors was a huge improvement in macroeconomic thinking over the old "Keynesian" work that assumed the experts were smart and the private actors were dumb. So we need to retain that symmetry. I'd just prefer to have the symmetry joined to less optimistic view of individual intelligence.

Those who want to "free" people from the market simply want to "free" people from having to behave rationally if they want to do well.

Dan is a bright but disingenuous intellectual. Behavioral Economics is not about economics but psychology. Its origin is Behavioral Decision Theory which has done a fine job gathering cases where humans make suboptimal decisions.

It suffers from two material weaknesses.
The first is that it really does not offer a psychological or social basis for why the phenomena arises. More specifically, BE has developed no theory to explain the phenomena that is beyond mere description (anchor and adjust, framing, recency, loss aversion, etc.). cataloging phenomena is part of the practice of science but it is insufficient for theory development.
The second is that it challenges economic assumptions of individual rationality and does not address market level phenomena studied by economists. Economics is the study of exchange not individual decision making.

No economist really believes that the simplifying assumptions made across economic theories are perfect. Assumptions are made as simple as possible to make exchange (market) level predictions. Challenging assumptions is not sufficient to undermine a theory or be called science. The practice of science in this case would be to offer another assumption that enables the theory to operate (describe and predict) more closely to the reality we experience.

Another material failure of BE/BDT as advocated by Dan is to confound contrived experiments with the real world. Choice and action as we all know is bound by the nexus of institutions with which we interact.

Dan is becoming quite prosperous attacking a strawman. He prays upon those who do not understand or care that a material alternative to current economic theory is needed, not just criticism. He is a parasite or simply a journalist, not a scientist.

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