Human Irrationality is an Argument For – Not Against – Free Markets

If everyone was irrational all of the time we would be in big trouble. You’d never know when someone was suddenly going to swerve off the road for no apparent reason and drive into a building, or start babbling to you in tongues over the phone when all you wanted to do was order a pizza.[1]

That being said – people are irrational enough of the time, that behavioral economists are never done telling us that they are not suitable for a market economy and need regulations to “nudge” them in the right direction. They illustrate the point with examples such as the fact that if you want to motivate someone to run you are better giving them $105 dollars a week then fining them $15 a day every day they don’t run, than rewarding them with $15 a day every day they do run ~ even though these things essentially amount to the same thing. So, naturally, we need policymakers to save us from ourselves and make us do the right thing. The irony of this position is that it presupposes that people are rational enough to respond to the incentives the behavioral economists want to mete out to them. Meanwhile, entrepreneurs have been doing more to devise apps that interphase with human psychology and help them adopt better habits than governments ever have! After all, it was the market that gave us Fitbit, mindfulness apps, nicotine gum, calendar apps with build in alarms to make sure we don’t forget appointments; the list goes on and is ever increasing.

For the main part, the market is what defends us against the consequences of the irrationality of others. I will define, for our purposes, rational as: having and acting upon beliefs that are in accordance with reality.[2]

If someone was irrational at all times in all respects, they could not meet the demands of life or sustain themselves, therefore they would either be dead, under the care of others, in a mental institution, or in prison. So, while no one is rational all the time, most people are at least rational enough of the time to exist within a society.

The great thing about the market is, as far as we are concerned, others only need to be rational upon the basis we deal with them. My mechanic might be a raving lunatic who drives his wife up the wall (no pun intended) with his crazy theories about the flat earth and interdimensional big foot people when he is at home, but so long as he is rational when it comes to the operations of fixing my car, it need not be any concern of mine. The pizza delivery guy could have views on race that most people find abhorrent, and I would never even know so long as he delivered it on time! The architect hired to design a bridge for a new highway might be a fanatical communist who thinks all property should be publicly owned, but as long as he is rational enough to follow the laws of physics when it comes to the blueprints, the bridge won’t be built upside down and will not collapse under the weight of the vehicles crossing over it. No one is remunerated on the market for doing irrational things, for example, bringing Squid Waffles to market. No one is interested in buying or eating Squid Waffles. Therefore, they don’t exist.

Now, need I point out, that none of this is the case when it comes to the alternative to the market, which is the political process. All of a sudden everyone’s crazy, irrational views that were none of my business become very real problems to me, because they are going to entre the voting booth and try and model a society that is fashioned based upon them. Someone might even lobby for a government subsidy to open up the first ever Squid Waffles diner! Sound crazy? Well how come the government both subsidizes and taxes tobacco at the same time? This is seemingly “irrational” but it makes sense when you understand that one lobbying block wants tobacco farmers to remain in business, and another wants people to smoke less.

While people’s performance on the market is tied to their rationality, ie., the fact that their views conform to reality and therefore they can deliver the desired results, there is no such failsafe at the ballot box. In fact, as the public choice theorists have been pointing out to us, it’s rational for voters to be ignorant about abstract topics like economics, political science, sociology, statecraft and basically anything necessary to cast a good vote, because learning the facts is time consuming and costly with very few payoffs.[3]

Typically, when you go into the world with irrational views that affect your day-to-day life you will be met with negative consequences. If you have irrational views about eating, you will get sick; if you have irrational views about how to treat your spouse, you will have unpleasant arguments or even a divorce; if you have irrational views about how to run a business, you will soon go bankrupt. In other words – reality provides a corrective against irrational views, or at least tries to!

The dirty secret about government is that replacing the market with its “democratic” control – be it public institutions or regulations – ends up removing this corrective mechanism and encouraging irrational behavior. No one wants to suffer the negative consequences of their own irrational behavior, whether it be an illness resulting from not having taken care of their health, or having a child they can’t support, or setting up a business to sell a line of products for which there is no demand. But democracy is inherently a system where people can make bad decisions and then vote to expropriate the consequences of those decisions to everyone else via the tax system. Those people who conform to reality by building products and providing services that meet the real needs of other people will essentially be punished for good behavior when the tax man comes around to expropriate their gains to pay for rent seekers and vagrants. This creates a tendency towards more costly, irrational behavior and less beneficial, rational behavior in society relative to what there would be on a free market. Over the long term, everyone will be disadvantaged on the whole, including those who seemingly profit from exporting the negative economic consequences of their actions to the body politic because the society they live in will be far less prosperous.

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[1] I note that some economists, following Ludwig von Mises, take the position that people are always rational. What they mean by that is that all human behavior is goal-directed behavior and that when someone makes a choice they are choosing what they think will make them achieve that goal. (Mises: “A historian can say... In invading Poland Hitler and the Nazis made a mistake... All that another man can say about it is: I would have made a different choice.” – Theory and History) In my view that is a very specialized usage of the world rational, so I am going with the more commonly used understanding of the term.

[2] Please spare me debates about what reality is or how we know we can know it, Mr. Descartes.

[3] See, for example, Caplan, B. (2007) “The Myth of the Rational Voter.”

Is Wholefoods "Conscious Capitalism" Effective Altruism?

Wholefoods, one of the most consciously ethical companies in the world, was picketed by animal rights activists in 2003. At first, CEO John Mackey was incensed. After all, Wholefoods are the good guys! Couldn't these would-be revolutionaries take their complaints to McDonalds or Walmart?

After some reflection Mackey, the libertarian author of Conscious Capitalism (2013), decided that it might not be a bad idea to sit down with the activists and hear what they had to say. Asking them, “Why did you attack us?” he received the rather touching response: “Because we thought you would listen. Nobody else will.” 

As a consequence, Wholefoods made the decision to undertake a long and wide-ranging ethical review of how they sourced their meat. In meetings spanning months, they consulted experts in farming, sustainability, animal welfare, economics and lord knows who else. They brought ranchers together with animal rights activists and scientists and worked collectively on establishing objective standards to measure animal welfare. Ultimately, they were able to significantly improve the living standards of the animals they sell. Mackay himself was motivated by what he learned to go vegan.

 

Mackey is extremely keen to rehabilitate the image that capitalism has, especially among young people who tend to perceive the market economy as cutthroat, exploitative and alienating. He believes the perception that businesses as driven entirely by the “selfish” profit motive is partly responsible for capitalism’s poor standing. He is eager to help people understand that business enriches lives, and fears that unless we rehabilitate the image of capitalism, we may soon slay the goose that lays the golden eggs. After all, free markets have created unprecedented leaps in living standards since the industrial revolution.

I agree with Mackie that business is about creating value for others rather than cutthroat competition. I think most people go into business because they have an idea for a product or service which they think is cool and that people would benefit from, and fantasize about making large sums of money helping people – rather than exploiting them. 

Mackey’s vision, and the story of Wholefood's ethical reforms is awe-inspiring in a way, and certainly demonstrates what big business can achieve in serving a higher purpose that speaks to the values of consumers. After all, a man does not live by organic, wholegrain, einkorn bread alone! 

However, in the interests of rigor, I would like to open a discussion about whether this kind of “ethical” or “conscious” capitalism is really the most effective way for companies to “do good” in the world.

I confess I have not been able to reach an answer yet. 

 

On one hand, the standards that Wholefoods have created for measuring the welfare standards of animal rearing will help all consumers and businesses who want to make ethical choices and minimize the suffering of the animals which they buy and sell.

On the other hand, everything comes at an opportunity cost.

The book Doing Good Better (2015) demonstrates that if you want to donate money to charity then making a choice based upon the best data will make a tremendous difference, because the best charities are literally thousands of times more efficient at allocating resources than the least efficient ones. (Happily, the entire audiobook is available free of charge on YouTube.)

The book was written by William MacAskill, professor at The University of Oxford. MacAskill is one of the pioneers of Effective Altruism, a philosophical movement seeking to bring empirical evidence to people on how to best have a positive impact in the world, be it by their choice of where to donate and spend their money, what career to pick, or where to volunteer their spare time.

Some of the fascinating conclusions MacAskill’s book presents are counterintuitive, and may even infuriate many a would-be conscious-consumer, for example:

1) If you want to reduce your carbon footprint, a donation of $110 a year to the most efficient carbon-offsetting company will help more than giving up your car, turning off all your lights, and taking a train instead of a plane. In fact, it will make you carbon negative, which not even giving up electricity in your house will do!

2) If you want to reduce the suffering of animals you better achieve that by donating to an efficient pressure group than by going vegetarian. (MacAskill is nonetheless a vegetarian.)

3) If you want to help the world's most impoverished people, buying fair trade products is not the way to do it. If you take the difference between the cost of the cheaper non-fair-trade product and the fair-trade product and donate it to one of the most effective poverty charities, your money will do hundreds or even thousands of times as much good per penny.

 

To summarize the key insight here: most well-intentioned people will assume that the best way to make a positive impact in the world is to make better consumption choices, but usually, donating a relatively small amount of money to an organization that knows how to spend it efficiently will often have a far greater impact then buying a product with ethical credentials or abstaining from the luxuries of civilization.

This is similar to how critics of capitalism tend to think that taxing the rich and giving it to the poor is the best way to alleviate poverty, when actually this creates a trade off in capital investment, which drives all the technology and innovations that increase living standards.

It is well known that our brains wired to respond to stories rather than statistics. For example, people are more likely to donate to a cause advertised by the moving story of one little girl and her tragic disaster than the details of thousands in dire straits, even if the second cause is more urgent and would allow fewer resources to go farther.

If the defence of capitalism is what we seek, then perhaps it will prove to be more important that businesses are seen to be doing good than the measure of how much good they are actually doing. It certainly seems to be important enough for many consumers to pay more for products or round up the cost of their purchases to donate to whatever inefficient charity has been selected by the owner of the kiosk they are shopping at.

 

As we know, shopping at Wholefoods is expensive. The question for the conscious consumer is whether they are doing better for the world by shopping there to support their policy of ethical meat sourcing, or if they’d have more impact by grabbing cheap animal products in a budget store and donating the difference to the right cause. (My writing on this matter, may strike some as somewhat ironic, as I, mystelf, am known by some in the libertarian community for being an ethical vegetarian.)

A more profound query still might be to ask whether Wholefoods would have reduced more animal suffering by investing in the best evidence-based causes than holding expensive consultations with environmentalists and agriculturalists.

The Whole Planet Foundation, which has alleviated poverty by issuing microcredit loans, is a credit to the world. The question is whether this is a case where the conspicuous benefit is seen, while what is unseen is that the same amount of resources allocated to the most efficient already existing organizations would have done far more good.

I don’t know how we would get the evidence to answer these questions, but there is someone out there who does. (Perhaps we could consult William MacAskill.)

 

I do not mean to be cynical. This is not an attempt to condemn Wholefoods, or the great John Mackey for their attempts to do good by consumers, animals, and the capitalist system. What Wholefoods have done is revolutionary, and I am happy that there is somewhere where people know for certain that they can get meat that is reared humanely.

But for us nit-pickers – obsessed with hard facts, efficiency and clear answers – the question will remain, what is the ideal libertarian strategy for is doing good in the world?

It is not a trivial question either. The welfare – and even lives – of real people depend upon the answer.