Economic Decision Making and Libertarianism

I’ve touched briefly before on how behavioural economics makes the central libertarian mantra of being ‘free to choose’ completely incoherent. Libertarians tend to have a difficult time grasping this, responding with things like ‘so people aren’t rational; they’re still the best judges of their own decisions.’ My point here is not necessarily that people are not the best judges of their own decisions, but that the idea of freedom of choice – as interpreted by libertarians – is nonsensical once you start from a behavioural standpoint.

The problem is that neoclassical economics, by modelling people as rational utility maximisers, lends itself to a certain way of thinking about government intervention. For if you propose intervention on the grounds that they are not rational utility maximisers, you are told that you are treating people as if they are stupid. Of course, this isn’t the case – designing policy as if people are rational utility maximisers is no different ethically to designing it as if they rely on various heuristics and suffer cognitive biases.

This ‘treating people as if they are stupid’ mentality highlights problem with neoclassical choice modelling: behaviour is generally considered either ‘rational’ or ‘irrational’. But this isn’t a particularly helpful way to think about human action – as Daniel Kuehn says, heuristics are not really ‘irrational’; they simply save time, and as this video emphasises, they often produce better results than homo economicus-esque calculation. So the line between rationality and irrationality becomes blurred.

For an example of how this flawed thinking pervades libertarian arguments, consider the case of excessive choice. It is well documented that people can be overwhelmed by too much choice, and will choose to put off the decision or just abandon trying altogether. So is somebody who is so inundated with choice that they don’t know what to do ‘free to choose’? Well, not really – their liberty to make their own decisions is hamstrung.

Another example is the case of NudgeThe central point of this book is that people’s decisions are always pushed in a certain direction, either by advertising and packaging, by what the easiest or default choice is, by the way the choice is framed, or any number of other things. This completely destroys the idea of ‘free to choose’ – if people’s choices are rarely or never made neutrally, then one cannot be said to be ‘deciding for them’ any more than the choice was already ‘decided’ for them. The best conclusion is to push their choices in a ‘good’ direction (e.g. towards healthy food rather than junk). Nudging people isn’t a decision – they are almost always nudged. The question is the direction they are nudged in.

It must also be emphasised that choices do not come out of nowhere – they are generally presented with a flurry of bright colours and offers from profit seeking companies. These things do influence us, as much as we hate to admit it, so to work from the premise that the state is the only one that can exercise power and influence in this area is to miss the point.

The fact is that the way both neoclassical economists and libertarians think about choice is fundamentally flawed – in the case of neoclassicism, it cannot be remedied with ‘utility maximisation plus a couple of constraints’; in the case of libertarianism it cannot be remedied by saying ‘so what if people are irrational? They should be allowed to be irrational.’ Both are superficial remedies for a fundamentally flawed epistemological starting point for human action.

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  1. #1 by JMRJ on April 21, 2012 - 4:10 pm

    It’s a paradox. It is often said that you can’t have freedom without the law, and yet the law imposes restrictions on freedom. People are free, up to a point. Past that point, which they are ironically free to exceed, their freedom diminishes even as it may appear otherwise. So it might be best to say that for purposes of economics, assuming rationality allows for a flawed but meaningful and coherent set of principles by which anticipated human action can be incorporated into models.

    This would not account for irrationality, of course, and to the extent irrationality is part of the real world the model would be limited. But what is the alternative? How does any model account for irrationality? Irrationality is, by definition, unpredictable and unscientific.

    And yet. The world isn’t perfect, and these are not perfect concepts. It may be that over a broad enough sample, even irrational behaviours follow a pattern. Again, up to a point. Being inherently unstable, though, irrationality will often wind up making a mockery of attempts to encompass it with rationality.

    So what you’re left with is a “science” that is not just dismal, but not really a science at all. More like an art, or a philosophy, or a religion. Which I think might be, at least in part, your ongoing point: you have to unlearn the science of economics to understand it in a different way where it might better reflect the true state of things.

    • #2 by rf on April 21, 2012 - 4:52 pm

      I think you’re committing a fallacy of equivocation here. Rationality in the economic sense essentially means utility maximization. Characterizing irrationality as “by definition, unpredictable and unscientific” would be a misrepresentation of the economic definition.

      As with most things, we should start with observed real world behaviour. Preferably scientifically observed, rather than superficially appealing assumptions. Whether that behaviour conforms with some definition of ‘rational’ or ‘irrational’ is irrelevant.

      And, yes, human bahaviour does have unpredictable outliers. Which is why aggregation and uncertainty are methodologically extremely important, IMHO.

      • #3 by JMRJ on April 21, 2012 - 5:43 pm

        Respectfully, the “fallacy of equivocation” has nothing to do with it:

        http://en.wikipedia.org/wiki/Equivocation

        Irrationality is not the province of economics or any other “science”. “Defining irrationality” is an oxymoron.

        In any case, word games can be fun sometimes but generally don’t go anywhere.

        Is “uncertainty” extremely important, “methodologically”? Are you certain? Do you propose that it is possible to accurately account for uncertainty; that is, to make the uncertain certain?

        That would be quite a trick, and very entertaining, but I don’t think it would result in a better understanding of the world as it “really is”.

    • #4 by rf on April 21, 2012 - 7:31 pm

      The equivocation is between rationality in the economic sense of utility maximization and rationality in the everyday sense of acting with logical purpose. If you define rationality as acting in a way that is predictable and scientific, then there is no equivocation (and I would agree with the argument that this should be the basis of economic theorizing). But that isn’t how “rationality” is usually incorporated into models.

      Regarding uncertainty, I don’t mean to say that we should try to predict uncertain events (because that is, by definition, impossible). Rather I mean that a model should take into account the fact that people hedge against uncertain events and outcomes in predictable ways. And part of the source of this uncertainty is that people often act in unpredictable ways.

      That’s also why I think aggregation is important. Individuals are too complex for economists to predict their behaviour accurately. But if you aggregate, then the unpredictable actions of individuals often even out, leaving a predictable trend. Realistically modelling trends is a tractable problem. Realistically modelling individuals is not. Of course, understanding individuals can help us understand trends.

      • #5 by JMRJ on April 21, 2012 - 8:48 pm

        Two quick things: in insurance, which is now often called “risk management”, aggregation is indispensable for calculating losses to to events which, as it relates to this discussion, can have nothing whatever to do with volitional conduct, rational or irrational, because volitional acts as a cause of loss violate the basic principle of insurability. Perhaps you’d like to comment.

        Second, would you characterize yourself as a “postivist”?

      • #6 by rf on April 22, 2012 - 12:56 am

        To be clear, I mean aggregation as it relates to human action. I’m opposed to methodological individualism. Other types of aggregation may vary.

        I don’t know much about the philosophy of science, so I’m somewhat wary of labelling myself. I would probably characterize myself as a Critical Realist (at least going by the Wikipedia description of critical realism) with some reservations.

  2. #7 by stickman on April 21, 2012 - 4:57 pm

    On advertising and free will, this old post might interest you.

  3. #9 by Jon Finegold on April 21, 2012 - 5:09 pm

    The only starting point for “human action” considered by Mises is rational action when rational is defined as purposeful action. What this means is action meant to achieve ends. Mises was not a behavioral economist.

    • #10 by stickman on April 22, 2012 - 9:28 am

      Jon, on a related topic that I’ve previously wondered about…

      Don’t you think that Mises’s specific, limiting definition of “purposeful action” makes his appeal to Kantian reasoning totally unnecessary?

      Or, as I wrote here: When you have already specified the terms and limits of your engagement — i.e. purposeful behaviour — all this Kantian talk about (non) self-contradicting synthetic a priori truths becomes redundant. I mean, would it really be that different to saying “Homo economicus is only concerned with explaining human behaviour to the extent that agents are rational and narrowly self-interested”?

      • #11 by yorksranter on April 24, 2012 - 12:15 pm

        That says nothing about whether such action is effective, whether such action is genuinely directed to ends (rather than, for example, the ends as a stated aim or indeed as a felt wish being an ex-post rationalisation for the action), or how the ends are selected.

    • #12 by Unlearningecon on April 23, 2012 - 5:27 pm

      On a semi-related note, can you find me a relatively short article that explores the basics of deducing Austrian economics from the human action axiom? Honestly to me it seems like you can deduce anything or nothing from that statement.

  4. #13 by gastro george on April 21, 2012 - 5:45 pm

    There’s another dimension to the “too much choice” angle, and that is the “too complex to calculate” dilemma. At it’s simplest, this is reflected by the futilty of trying to compare different telephone company’s pricing schemes (which one might be the cheapest this month, but will it still be cheaper if my usage changes next month … how much time do I have to spend doing these calculations, are the savings greater than the costs of my time …). What would the “rational” choice be in such a situation?

    Companies know all about this – and the inertial “stickiness” of choice that is the result – which is why we end up such a bizarre array of “choice”.

  5. #15 by invisiblebackhand on April 21, 2012 - 11:41 pm

    I’ve noticed they lose enthusiasm for ‘free to choose’ when it means the freedom to choose to co-operate in groups to accomplish things individuals can’t. They may allow co-operation in the form of corporations, or sports teams, or armies, but democratic government and trade unions is anathema.

    • #16 by Unlearningecon on April 22, 2012 - 3:11 pm

      I nearly linked to Bryan Caplan’s ‘Myth of the Rational Voter’ somewhere in this post. He basically claims that, because voters do not support the same policy conclusions as neoclassical economists, they are stupid. Another example of the futility of rational versus irrational framing.

    • #17 by Oliver on April 24, 2012 - 3:02 pm

      Libertarians believe consenting adults have the right to do whatever they choose, except band together.

      Emo Philips

  6. #18 by TheKeynesianDemise on April 22, 2012 - 6:57 am

    You’re attempt to grasp the basics of Libertarianism, despite your desperate attempt to sound intelligent simply by using obscure verbiage in an attempt to make your opinions “seem” valid because someone who uses such big technical words must be intelligent right? Haha your pathetic.
    “The best conclusion is to push their choices in a ‘good’ direction”. “YOU” or “I” have no right to tell you what is “good” for you. Ex. “Quantitative Easing is good for the economy”. Well what if your a prudent saver that is retired and lives off fixed income who’s saving is being leeched away low interest rates and inflation. Behavioural sciences, if you’ve read more than a single article in the Wall Street Journal, tell you that rarely a decision is “good” for all. This is where complexity theory comes into play. There are many different people in different situations, that need different solutions. This fact clouds the “line” of good and ventures into the realm of tyranny. YOU DO NOT KNOW WHAT IS GOOD FOR ME!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! You claim to respect “freedom of choice” but apparently only if you’ve deemed that person responsible to make their own decisions. What are these guidelines of “intelligence”? Who set them? YOU? People like you? lol Another thing I just had to bring to your attention. Another “intelligent” quote from you, “For an example of how this flawed thinking pervades libertarian arguments, consider the case of excessive choice. It is well documented that people can be overwhelmed by too much choice, and will choose to put off the decision or just abandon trying altogether. So is somebody who is so inundated with choice that they don’t know what to do ‘free to choose’? Well, not really – their liberty to make their own decisions is hamstrung”. So you’re saying someone who is confused, and doesn’t have a confident, distinct opinion of something isn’t really “free to choose.” I sincerely hope this example took more than 3 seconds to conjure up from your limited cerebral reservoir. You sir are just another example of our failed educational system as I would bet you’ve spent over 100k in tuition and they didn’t even teach you the golden rule of journalism. “Don’t write what you know NOTHING about.” Now wipe that dumbfounded look of your face, clean up the drool, and try again!

    • #19 by Unlearningecon on April 22, 2012 - 3:17 pm

      Thank you for completely falling into my initial characterisation of a libertarian faced with this problem:

      Libertarians tend to have a difficult time grasping this, responding with things like ‘so people aren’t rational; they’re still the best judges of their own decisions’.

      After sifting through your arguments from personal incredulity, ad hominems and spelling mistakes, I ventured across something that resembled substance:

      So you’re saying someone who is confused, and doesn’t have a confident, distinct opinion of something isn’t really “free to choose.”

      I’m saying that bombarding people with so many different options that they end up putting the decision off or not making it is not the epitome of the word ‘freedom’.

      • #20 by TheKeynesianDemise on April 22, 2012 - 6:05 pm

        Haha pick on spelling because your response literally said nothing. “Libertarians tend to have a difficult time grasping this, responding with things like ‘so people aren’t rational; they’re still the best judges of their own decisions.” Are you saying this isn’t a fact? Yes you are. This whole article is centered around if you don’t know exactly what you’re talking about. Your decisions are not in line with true “freedom”. You restated this again. Freedom isn’t about being 100% confident in everything you do. This is impossible.

        Freedom is sifting through all the chaotic information and deciding what is best for “you”, and what makes sense for “you”. You are using the argument of governement. We’ll people don’t really know any better, and we do, so it’s our duty to help them make the right decision. How has that worked out for the economy with the all knowing Federal Reserve telling us whats best for our money/savings. If I choose to go to a professional, and he offers advice that I use, that is still freedom.

        I fell into your characterisation of Libertarianism because freedom is simple. As long as I’m mentally competant, and I want to put all money into the stock market right now and loose it all because I was novice and didn’t know better. That is my right as a human being. Your making it sound like the right to make terrible mistakes isn’t truly freedom? You’ll deny this. You have not discussed the use of “force” to help stupid/confused people. But your perspective can only lead you to that end. A decision cluttered by excessive options, confusion, dis-info is not in line with freedom?!? WHAT!!!

      • #21 by Unlearningecon on April 22, 2012 - 6:28 pm

        Of course the spelling mistake was a footnote, but it was a characterisation of the mess that was your comment.

        Again, you haven’t grasped my point at all, so you are still falling into my characterisation of a libertarian presented with behavioural truths.

        (1) People are not perfectly logical robots who make decisions from a neutral premise in isolation from their environments.

        (2) The government is not the only entity with the power to influence these decisions.

        People do not ‘sift through all the information’ at all – they rely on heuristics, type 1 (‘fast’) thinking and often will do what is easiest rather than make calculations. Companies have known this for centuries, which is why they devote so much time to advertising and marketing.

        Why, to you, is a company exploiting these biases to make people buy their product so much more acceptable than a government using the bias to instead make people eat more healthily? Either way people’s decisions are changed by what’s around them. Furthermore, why is it wrong for the government to *stop* a company from exploiting people’s biases to make money? Surely the idea that people’s decisions are influenced as little as possible is more compatible with libertarian ideals of choice?

        The federal reserve is a massive red herring so I won’t go there.

        freedom is simple.

        No, it really isn’t, which is why political and philosophical debate are ongoing. You can’t capture the nuances of human behaviour with glib ‘I hate government’ catch-alls and hope to be taken seriously. You’re just parroting a bunch of libertarian talking points – I’ve heard everything you’ve said before. You quite clearly have very few critical thinking skills, as you continue to cling to the characterisation of freedom as something that only the government can influence and think you have it all figured out.

        The fact that you characterised my post as me using overly complicated verbiage to try and sound smart also shows that you do not understand the topic at hand and are simply lashing out because your ‘atomistic individual versus government’ world view is being criticised.

      • #22 by TheKeynesianDemise on April 23, 2012 - 4:53 am

        You are the one that is lacking critical thinking skills falling to the same old stereotypes. I never once mentioned anything near “I hate government” rhetoric. You assume that based on your lack on knowledge on Libertarianism. I infact have no problem with governments “influencing” people to eat healthy. But not in the sense of using law and regulations to shut out competition and limit ones options. Nor by owning and steering the direction and information on “mainstream media” to the point that any information outside of the American paradigm of political/commerical dualities is hard to find.

        Putting out “valid” information to try and influence is perfectly acceptable. Now advertising is different as governments don’t really make money. They just take it from others through taxation or borrowing. Paying to advertise for Michelle Obamas healthy lunch program with taxpayer money is unacceptable.

        “It is well documented that people can be overwhelmed by too much choice, and will choose to put off the decision or just abandon trying altogether. So is somebody who is so inundated with choice that they don’t know what to do ‘free to choose’? Well, not really – their liberty to make their own decisions is hamstrung.”

        I simply can’t comprehend the argument that since your human senses(flashing lights,catchy jingle,ect) are being used to “influence” you to pick their product over someone elses, it is no longer free choice? Than you are saying to don’t believe in “free choice”. Every single decision we will ever make is filled with unforseen variables, outside influence, “clutter”. This doesn’t mean I’m a mindless robot who’s decisions are solely based on superficial stimulus!

        The problem with government doing this is for example. A corporations uses a fancy box, household name brands, specifically picked statistics that support their arguement without telling the whole story. First of all we don’t make a big fuss because its a fairly minor situation. But government deals in much more serious matters. If Obama was campaigning for ObamaCare and payed for the best professors and insurance companies to tell people it is good for the country, even though they may not feel that way. Or only speaking too our basic human emotions by saying “poor people are dying and can’t afford healthcare” or “This is what America needs to get back on track” simple empty slogans that play on our emotions without telling us “How much this will cost taxpayers?will the gov’t have power to regulate diet or consumption in the name of lowering healthcare costs? Is it Constitutional?” This to me is the same tactics as “flashy lights, fancy packaging, to fool “consumers”. Yet as you can clearly see, it can be much more devastating, and dangerous when governments are allowed to pursue these strategies.

      • #23 by Unlearningecon on April 23, 2012 - 1:39 pm

        I have plenty of knowledge of libertarianism, and libertarians do consider governments the source of all or most evil in market economies, wanting them only to enforce contracts, law and private property – some libertarians like Milton Friedman might concede environmental and banking regulations and some basic public provisions.

        Behavioural insights are a deeper problem than libertarians make them out to be and you can’t handwave them away by saying ‘so what if I’m influenced? I’m still free!’ If you watch documentaries like Century of the Self you’ll see how Freudian insights have been used to manipulate people into behaving in consumerist ways. If you read books like Nudge you will see how a neutral choice is impossible and so having the government regulate the way things are advertised, marketed and packaged (which costs very little, incidentally) to make them eat more healthily is no more ethically abhorrent than corporations doing the same to make people buy their product.

        All decisions are made with a lot of different influences but some are far more powerful than others. Do you think manipulation is OK? Look at Stickman’s link above (below?) and watch the Derren Brown clip. See how easily those advertising executives were influenced into doing something very specific? I don’t think it’s OK for the government OR companies to do something like that; I do think it’s OK for the former to stop the latter.

      • #24 by stickman on April 23, 2012 - 2:02 pm

        He won’t be to everyone’s tastes — personally, I always find him a compelling writer even when I disagree with him — but George Monbiot wrote a thought-provoking column on advertising not to long ago: http://www.monbiot.com/2011/10/24/sucking-out-our-brains-through-our-eyes/

        @TheKeynesianDemise
        Out of interest, if you’re so vehemently opposed to all kinds of “force and coercion”, how would you characterise the rule and enforcement of law, or a property rights regime?

      • #25 by Unlearningecon on April 23, 2012 - 2:38 pm

        I don’t really want to get into the whole ‘force and tax thing’ but:

        (a) Credible threat of force is a very different thing to actual force.

        (b) Being taxed is a privilege. Even after tax, your income is higher than if the state didn’t exist. On top of that you get public services. Tax isn’t ‘someone else’s money’; it’s the state’s money as the state defines property rights.

  7. #26 by Blue Aurora on April 22, 2012 - 1:16 pm

    There is a problem with behavioral economics that Dr. Michael Emmett Brady has observed upon, and while I do think behavioral economics is better than the decision-making process depicted by neoclassical economics, I think Dr. Brady in this instance may be right…

    http://www.amazon.com/review/ROAFPMVN08CA3

    • #27 by Unlearningecon on April 22, 2012 - 3:32 pm

      Brady appears to have similar views to me on the ‘irrationality’ label.

  8. #28 by Will on April 22, 2012 - 11:44 pm

    Unlearning Economics is clearly correct here. Note the complaints that people make any time a menu has too many options.

    The whole framing that libertarians (and neoclassical economists) use, characterizing the question as, “intervene or let freedom take care of it”. This is a classic instance of the Ricardian Vice, setting up the terms of debate in a way that guarantees the desired conclusion. “State does nothing” is not really a possibility. Only the Rothbardians even pretend it is. The state is already implicated in the economic organization we attribute to “the market”, and is making decisions about how to distribute resources, and whom it protects from whom. Libertarians tend to see only one sort of interventions, and to ignore others.

    I know that you know this already.

    • #29 by Will on April 22, 2012 - 11:47 pm

      Should read: “The whole framing that libertarians (and neoclassical economists) use… is faulty

    • #30 by Unlearningecon on April 22, 2012 - 11:59 pm

      Precisely!

  9. #31 by Robert on April 23, 2012 - 12:21 am

    A couple of (neoclassical) references that might be of interest: (1) Glenn Ellison and Alexander Wolitzky, “A Search Cost Model of Obfustcation”, presents an equilibrium solution in which firms deliberately make their contract terms confusing to the consumer. (2) E. Glen Weyl, “Whose Rights? A Critique of Individual Agency as the Basis of Rights”, considers the implications of models of multiple selves for political individualism.

  10. #33 by yorksranter on April 24, 2012 - 12:20 pm

    The Daniel Kuehn point reminds me of something I liked about Daniel Kahneman’s Thinking, Fast & Slow – he’s not judgemental about intuition. After all, our intuitive apparatus must have evolved (where else would it have come from?) and that implies it works. And people do get things right, or at least right enough, a lot.

  11. #34 by yorksranter on April 24, 2012 - 12:21 pm

    Then, Kahneman is a proper scientist (a cognitive psychologist, specifically one who originally specialised in human performance and perception, the most experimentalist and hard-sciency branch of psychology) even if he does have a Nobel in economics.

  12. #35 by crisp on May 14, 2012 - 6:19 am

    Pardon me for entering this conversation much later than the flurry of previous comments, but briefly going through them, here is one thought.
    You say,
    “It must also be emphasised that choices do not come out of nowhere – they are generally presented with a flurry of bright colours and offers from profit seeking companies. These things do influence us, as much as we hate to admit it, so to work from the premise that the state is the only one that can exercise power and influence in this area is to miss the point.”
    Yet later you throw a bit of a confusing line in attempting to strengthen your argument:
    “All decisions are made with a lot of different influences but some are far more powerful than others.”
    I absolutely agree there are indeed multitudes of sources that exercise a tremendous amount of “power and influence” in the individual’s decision making. Yet while this is true, the fact that “some are more powerful than others” as quoted in comment seems to hit in agreement with libertarians’ exact arguments: that no matter how many ways you slice it, the state has the most power and influence in individuals’ choice making through the use of force, “credible threat of force” included. Would not the use of such “threat” be more powerful than the most psychologically influential advertisements? Even if they do “exploit” individuals’ choices to buy their product for the purpose of gaining profit, it would appear that the bottom line still remains: that no matter how hard they try, a company cannot send an individual to jail for not buying their product. In fact, perhaps I’m wrong but it would further seem that companies many times try to lessen their influence when they can (e.g. return policies) by giving people more options. The state in contrast does not present such option and thus cannot lessen the influence on an individual’s choice: no matter how good it the end outcome is, I will most assuredly go to jail and lose my property rights if I wait long enough before paying my taxes. Surely this is the highest form of power and influence.

    • #36 by Unlearningecon on May 14, 2012 - 10:39 am

      I think this is representative of a ‘state versus market’ mindset that many still mistakenly share, myself included.

      The fact is that psychological manipulation in advertising was endorsed by politicians, business leaders and other elites, rather than one or the other. If you have a spare 4 hours (which I appreciate you probably don’t) I’d recommend ‘The Century of the Self’, a documentary by Adam Curtis which explores how the elite class used Freudian psychology to keep people buying once they had everything they ‘needed’. They did this by appealing to how a product will make you feel once you own it, associating it with sexual prowess and so forth.

      My point here is that the fixation on force is misguided. Politicians and business leaders have been in bed with each other from the start and although they historically started with force (e.g. game laws and land repossessions to force peasants off their land and into factories, outlawing unions) they have since moved onto more subtle methods. But both have enormous impacts.

      However, the state isn’t homogeneous across space and time so what I’m saying is that a democratic effort to limit this type of manipulation is desirable, rather than that the state should force us to buy different products.

      P.S. I’m pretty sure most consumer protection rights actually come from law – in places like South Korea where the laws don’t exist, people can’t return stuff.

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