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.

---

[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.”

Private Ownership of the Means of Production confers a Social Benefit

Perhaps the most difficult battle faced by the advocates of free markets it to convince people that Private Ownership of the Means of Production is not some special privilege conferring and advantage to "greedy capitalists" at the expense of everyone else, but that it serves a social function that is beneficial to all.

Private ownership makes the accumulated wealth of the entrepreneur a slave to the consumer - that is - to everyone else. We commonly understand private ownership to mean "for our own use," eg. the use of a toothbrush or a private residence, but in the case of private ownership, what is owned is almost exclusively for the use of others, placed at their service.

The capitalist keeps his wealth only to the extend he continues to use what he has accumulated in the interests of the masses, as they judge them, by churning out whichever goods and services they demand. To the extent he succeeds, his wealth will grow. This is the economy’s way of saying that he makes sure and wise decisions with the capital we have amassed as a society - not wasting them on projects that the public have no interest in paying for. To the extent he fails to do so, those factories, machines and companies that his investments represent will be sold on at knock-down rates to whoever thinks they can do a better job of managing them in the public interest. This allows for the constant re-allocation of capital to those who can best manage it, and engenders the accumulation of more capital over time. As the capital stock increase there is more wealth generation and technological advancement can be expected, and this will necessarily be largely led by the preferences of consumers, not those who actually "own" the capital.

Three Psychological Stages of Political History

I have a wacky theory about the history of ideas (or history proper as Mises would consider it.) When a child is born as far as s/he is concerned the parents are God. They are the authority on what is correct and what is false, they are also morally absolute. Their defining attitude towards their parents is a big "yes." Even if the parents are cruel or abusive, it must be me at fault not them - since they are the authority. At some point between 2 and 7, then later again in the teens, the youngster begins to assert their individuality by rebelling against the parent, the more the parent tries to apply authority and demand certain behaviours, the more the child will rebel against this authority with a resounding "no!" The child feels empowered by making the parents feel out of control emotionally, s/he asserts their dominance over them because the parents want compliance, and the child has the power to mete it out or not - causing the parents an easy time or grief. If the response to this "no!" is overly authoritarian or permissive and lacks engaging with reason and appropriate boundaries bad patterns can be set for life. The child can become compliant and later susceptible to peer pressure as he gets stuck in "Yes" or overly rebellious (even to his/her own detriment) and stuck in "No." From this point on any instructions or even mere advice from others - sometimes even from oneself - result in the involuntary impulse to rebel, stick heels in, and refuse to comply even if the request is in the child-now-adult's interests. This can create tremendous problems including a lack of self-discipline and relationship tumults. A wise parent manages to avoids unwittingly molding this kind of character by creating opportunities for his children to say no and rebel to safe and relatively trivial things. For example s/he does might not tell them not to smoke, know that if s/he does they will smoke. Perhaps they will be told not to climb that tree or to play in the muck instead, something relatively innocuous.

A mature person is able to say "yes" or "no". Without the ability to say "no" a "yes" is utterly meaningless because it does not come from the person's individuality. A "no" without consideration is also a counterfeit individuality, it makes one feel like they are having a say but actually they are purely governed by involuntary impulses as sure as those of the "yes man" or people-pleaser. The new man says "yes" to life; and in that he in many ways seems similar to the primordial man, but there is a critical difference - his yes to life is out of fully integrating all previous stages of development rather than an arrested development.

It's my assertion that maybe we have seen a similar evolution in the political sphere. Classic Liberalism arose as a response to a form of conservatism that was very much a "yes" to authority; the authority of the state, aristocracy, church, powers that be. The authorities of the time were very puritanical and their morals and social norms severely restricted the freedoms of people in terms of whom they could marry (usually whom their parents decided) what they could do for a living (what their parents did) what they could own (most of it belonged to their lord, many could not own land) what they could put in their body (moralizations about alcohol) what they should learn and read (mostly the bible) how they could pray (no pagan gods, no Judaism, etc.) and so forth. Now the arrival of liberalism was a resounding "No!" to authority. In a Hegelian fashion it formed an antithesis to the prevailing mores of the time. It continued to develop into other rebellious schools of thought that claimed to rebel against the prevailing authorities: socialism, marxism, communist, progressivism, &c. and reached its hedonistic peak in the 60s with the free love movement and all the big government and welfare programs - but it went to far too fast for a first attempt and soon there was a reaction against it which turned the tide back for a while. After the 80s it came back swinging though and has reached its second crescendo today with the social justice warrior movement. This has become the new thesis and it required an antithesis to counteract it. Clearly I believe that is libertarianism. It is the new man who integrates all previous stages of development in his evolution. In many ways it seems to harken back to certain "conservative" concepts which liberalism reacted against, but in reality the context of the acceptance of certain aspects of authority and tradition is now based on reason ("they have been shown empirically to work better than all that libertinism") rather than authority alone.

What do you think of my thesis? Are you the new wo/man?