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Bad Behavior

Analagous to the foundation for Schumpeter’s belief in the imminent decline of capitalism (it was too successful) – one of the achievements in economics has been the “field’s”ability to criticize itself. These criticisms were advanced in the spirit of scientific inquiry – to better understand the causes and consequences of human actions, but have been picked up by people who have an aversion to commercial society as capitalism-kryptonite.

For decades people that have demonstrated a penchant for government idolotry, elitism, a belief in utopia, egalitarianism, and all manner of perverse ideas (can I call them looters?), have jumped on the idea of “market failures” as justification for their invasive policies. For example, no private individual has an incentive to build a light house (it is claimed), because it is impossible in a market economy to prevent non-payers from taking advantage of the light house. This is a classic “free-rider” problem inherent in so called “public-goods” that markets are unable to provide. The looters actually delight in this, because of a belief that it gives them a right to confiscate the private property of individuals in order to buid lighthouses for the public good. I use this as an example because lighthouses are often THE example of a public goods failure cited in economics textbooks. But the lighthouse market failure is more legend than fact. Ronald Coase famously detailed (later described in a 1993 Journal of Legal Studies article by David van Zandt) that lighthouses were privately provided, not government provided, for an extensive period of human history. The lesson of course is obvious, rather than armchair theorizing, generalizations for policy purposes should depend on how activities are actually carried out. A lesson that Coase did not draw out in that original article, but which has been well laid out since then, is that even if lighthouses had been inadequately supplied by private enterprise (I emphasize again that they were not), it does not follow that a government entity would do a better job – and that an appropriate policy analysis would be to compare the private and governmental outcomes against one another, not against some text-book ideal.

This leads me to the point of the post. The capitalism-kryptonite du jour is in a field called “Behavioral Economics,” which really is just a questioning of the rationality assumption that pervades neoclassical economics. For me, rationality means nothing more than, “man acts purposefully to achieve an objective.” That objective does not need to satisfy anyone other than himself, though it can. Behavioral economics deals with questions such as why do individials seem to be risk averse when it comes to gains but risk seeking when it comes to losses? Or why do workers not sign up for 401k contributions from their employer when it is at no cost to them? Or what really makes people happy?

In any event, one of the things the looters like about behavioral economics is that it has produced some evidence that after some point, money does not buy you happiness; or that absolute levels of income do not matter for happiness, but how your income relates to others in society. This last observation is interesting in light of the many looter proposals to make the rich pay their fair share (wait ’till Obama is elected and you will see what I mean). But if they truly believe that changes in relative income are what really matter, then what policies do they plan to put in place when formerly rich people lose their fortunes – it is far more common than you think? After all, their happiness should be impacted far worse than someone that has a steady and low income. Does the happiness of the formerly rich not matter?

Next comes the notion that the rich do not deserve their money because many of them happened to win the lottery at birth. This is nothing more than a myth – for it takes any responsibility away from any parent or child, for anything that they might do in their own lives. It also takes as given, that anyone born into a poor family is destined to stay poor, and that anyone born to a wealthy family is destined to stay wealthy. This is, of course, the message the looters wish to spread – to suggest otherwise would undermine the entire looter agenda. If it was possible to work hard, be responsible, stay disciplined and to rise out of low income – then how should society decide fairly which low income people should get a handout and which should not? How does society choose which kids are likely to overcome their bad luck? And how does society choose which rich families to loot? How can it know which ones would lose everything they had? And beyond these intractable questions, do the looters not find notions of birth lotteries ridiculous in light of the fact that they have put in place specific policies to encourage/discourage parents from having children – particularly through the structure of the welfare programs and the tax code? And what does this behavior say about what they think of parents’ abilities to raise their kids right? If we admit that children of poor families have no chance of getting out of poverty, is this not an implicity declaration that the poor parents are unfit? If you say no to this notion, I’d argue then that there is no bad luck birth for children – responsible, yet lower income, parents decided smartly to have a child and do the best they can to raise it.

Finally, even if we ignore everything I mention above, and we do agree that there are bad luck and good luck situations at birth, the question still remains, who is to decide what is good luck and what is bad luck? How much bad luck is enough to warrant attention? How much good luck is too much? There is no way out of this conundrum, and the reality is that a small group of elites will make these decisions on behalf of “the people.”

One Response to “Bad Behavior”

  1. Michael says:

    I’m doing my thesis in the Behavioral Economics area. I’ll have to read “Nudge,” which I just got from the library. This article (http://money.cnn.com/2008/07/24/magazines/moneymag/105711588.moneymag/index.htm?postversion=2008072405) is meant to be like the book. If it is, then it really scares the heck out of me. Why is it that people always assume they know what is best for others without regard to situational awareness? This isn’t even arm chair quarterbacking, because they aren’t even bothering to watch the game play out. It would be like watching the Dodgers play the Cubs and telling Eli Manning what to do.

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