presidential economics: the irrational lure of rationality

Picked up on John Cassidy’s NY Review of Books article from Richard Florida discussing the foundations of Obama’s economic thinking as an attempt at a third way separate from classic liberal and conservative positions. Specifically the article reviews Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein and describes a move to incorporate the insights of contemporary psychology into economics, including conducting psychology-inspired experiments:

the experiments confirmed something most people
outside of economics hadn’t doubted for a moment: rational economic
man, the all-seeing, all-knowing figure on whose shoulders much of
contemporary economics had been constructed, was a purely fictional
character. Faced with even simple sets of options to pick from, human
beings make decisions that are inconsistent, suboptimal, and,
sometimes, plain stupid. Rather than thinking things through logically,
they rely on misleading rules of thumb and they leap to inappropriate
conclusions. Moreover, they are heavily influenced by how the choices
are presented to them and, sometimes, by completely irrelevant
information.

No kidding.

Rational thought is impossible because it doesn’t exist. Rationality is a concept that has attempted to explain, or more often judge, thoughts according to an ideological standard of how thinking should occur. In many ways rationality is like prescriptive grammar. That isn’t to suggest that the practices and values associated with rationality are bad. I often strive to be rational, don’t you?

The point is that rationality is not, and never really was, an attempt to understand how humans actually thought, made decisions, or acted upon decisions. I’d say we were never meant to function as "independent thinkers." We aren’t lemmings, but we aren’t shards of divine wisdom being led astray by our flesh either.

If we think about our cognitive evolution as a social species, our symbolic behavior and our other technologies, it’s fairly clear that our minds function as a way for us to rely upon those around us to gather information and act collectively. Of course they aren’t perfect. They’re just meat. As Cassidy notes, we tend to be fooled by irrelevant information, often on a subconscious level (that means you can’t control it, sunshine).

Why anyone living in a culture surrounded by advertising and consumer crap would be surprised that we often act irrationally out of subconscious influences is beyond me. However, mainstream economic theory seems to assume this all the time. Conservatives assume that humans will make decisions out of rational self-interest that will lead to markets self-correcting. Fortunately for them this isn’t true, b/c if Americans acted out of rational self-interest, they’d never get elected. Just go into the supermarket and try to identify what percentage of products a rational person would buy. If the supermarket shelf can’t self-correct, what market can?

But hold on, the liberal side is equally flawed on this point. It assumes that markets need government regulation to insure that they reflect the best interests of citizens. The "best interests," of course, are rational interests. So liberals for example want to insure that I save for retirement. Ok, that’s rational. But we’re not rational. We don’t want the government to tell us what to do with our money. If we were rational we wouldn’t need them to tells us, but since we aren’t rational we don”t appreciate being told.

On top of that, these approaches contain numerous other logic flaws: they assume

  • that rational choices exist as a set separate and discoverable from irrational ones;
  • that a group of humans (e.g. Congress or corporations) can identify what is rational; and
  • that that group will choose to act rationally.

Exactly what evidence is there for rational behavior in Congress. Rationality presumes that an answer is discoverable. What should we do about Iraq? Exactly how many rational answers can there be to that question? Can it be rational to both say that we need to stay and that we need to leave? If so, then what good is rationality? If not, then why doesn’t Congress act in a rational fashion by identifying and acting upon the rational choice?

Uh… see the original point. Humans are rational. That means their self-correcting markets aren’t rational AND that their government-managed markets aren’t rational. But that doesn’t mean that we aren’t capable of occasional thoughts that bear resemblance to rational thinking. The point of Nudge as Cassidy describes it is to suggest that the heavy-monitoring of markets in the liberal approach is unnecessary and that human behavior can be modified by more modest "nudges."

OK. From the brief description the article offers and my nonexpert position, it sounds to me like encouraging people to save for retirement the same way we encourage them to eat Big Macs or buy SUVs. However I think all of this still assumes that we can identify a rational path to follow. I can kind of get behind the elitism here. Smart, educated people can understand the big picture of where our society is going, are enlightened and ethical enough to see these things in social/global terms rather than in self-interested terms, and can devise subtle prods to move the human herd in the right direction.

However I think we can just set aside the use of "rational" here and go with some other ethic, something real and achievable. I think we ought to focus some serious, serious energy and resources on addressing climate change and creating a green sustainable global economy. Is that rational? Maybe. Maybe I could make an argument that it is rational. I could argue that it isn’t rational. Maybe rational isn’t as important as some other ethic that say the planet isn’t "ours" to destroy.

I suppose the thing is that if you "nudge" people toward "rational" behavior then that’s ethical for a government. Corporations can nudge people to make all kinds of bad choices, but governments shouldn’t. But when you dispense with the idea of "rational" then the whole mechanism of democracy and representation starts to come apart.

Who knows where such thinking might lead? Maybe it is just better to keep pretending we’re rational.

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