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.
That being said, people are irrational enough of the time that behavioral economists never tire in telling us that they are not suitable for a market economy and need regulations to “nudge” them in the right direction. To illustrate the point, they use examples like: If you want to motivate someone to run, giving them $105 at the top of the week and then fining them $15 a day every day they don’t run will be more successful than rewarding them with $15 a day every day they do run — even though these things essentially amount to the same thing. Since we are irrational, 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 built-in alarms to make sure we don’t forget appointments, cruise control, and whatnot; 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. For our purposes, I will define rational as: having and acting on beliefs that are in accordance with reality. (Let’s avoid for now Descartes-like debates about what reality is or how we know we can know it.)
If someone was irrational at all times in all respects, they could not meet the demands of life or sustain themselves and, 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 need to be rational only on the basis with which 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 in 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 enter the voting booth and try to model a society based on 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” from the perspective that they are two contradictory policies, 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 (i.e., their ability to conform to reality) and therefore their ability to 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 personal payoffs. (See, for example, Bryan Caplan’s 2007 book The Myth of the Rational Voter.)
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, that is normal. 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, that people should suffer is regrettable. But democracy is inherently a system where people can make bad decisions and then vote to disperse the negative 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 toward 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, 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, and they too will be less well off.
This article was originally published in the May 2022 edition of Future of Freedom.
The post Human Irrationality and Free Markets appeared first on The Future of Freedom Foundation.
The Future of Freedom Foundation was founded in 1989 by FFF president Jacob Hornberger with the aim of establishing an educational foundation that would advance an uncompromising case for libertarianism in the context of both foreign and domestic policy. The mission of The Future of Freedom Foundation is to advance freedom by providing an uncompromising moral and economic case for individual liberty, free markets, private property, and limited government. Visit https://www.fff.org