2013-10-24

Aprioristic Theory

If you read the kind of blogs I read, then you're already aware of the minor controversy sparked by Jason Brennan's dramatized account of a conversation he had with a self-declared Austrian School economist. His post isn't that lengthy, so read it.

No? Okay, fine. I'll summarize it for you. The conversation goes something like this:
Brennan: Behavioral economist seems to suggest that people sometimes behave irrationally. 
Austrian: There's a difference between "behavior," which is the purview of behavioral economics, and "action," which is the purview of Austrian School economics. 
Brennan: This should challenge your view of economics, since empirical behavioral economic research seems to suggest that people contradict your a priori predictions.
There have been a couple of responses written to this already. I haven't read them. (Okay, I skimmed the one that was posted on the Mises Institute Blog.) But I do have a few thoughts on this.

Fallacies
First, I think Brennan correctly described a "no true Scotsman" fallacy. Humans act rationally, at least insofar as the study of rational action (Misesian economics) is concerned. If someone discovers empirical evidence for apparently irrational action, the only valid responses for an economist of the Misesian tradition would be: (a) come up with a theory that shows how the action is actually, on second thought, rational and not irrational at all; (b) account for methodological errors in the empirical research; or (c) withdraw the claim that economic actors always act rationally. One cannot simply dismiss empirical research by saying, "No true human action is irrational!"

Rationality
Second, I think Brennan's interlocutor was incorrect when he stated that there is a difference between "behavior" and "action." If there is a difference, it is merely semantic. On the other hand, it could be that Brennan didn't fully appreciate the Austrian School economist's point. A more charitable interpretation of his comment is as follows: Psychology is psychology, and economics is economics; they describe different aspects of human decision making and ought not be mixed. If this is what Brennan's interlocutor had in mind, then the question is very different indeed.

To wit, action that is psychologically irrational is not necessarily economically irrational. Here's a good example: Eating so much pie and ice cream that your stomach hurts. On a psychological level, this defies rationality, because the purpose of eating all that dessert was to feel good and be happy and enjoy ourselves. In light of that fact, it makes no rational sense to keep eating when you're already feeling bloated and uncomfortable.

But the economist has a much lower standard of rationality. The economist need not reconcile competing psychological urges, because they don't impact the economy. Only action impacts the economy. Thus, it doesn't matter to the economy whether you have a stomach ache from eating so much pie; it only matters how much pie you ate and why. Once you have a stomach ache, that becomes a different economic question entirely; namely, which over-the-counter stomach medicine will you buy? how much time will you have to take off work? if you do this every day, how much will it cost you to manage your eventual type two diabetes? and so on.

The psychologist wants to study and describe the tension that exists between the desire to eat a boatload of pie and the desire to act in one's own best interest. The economist doesn't care how much tension exists between those two motives. The economist acknowledges that some people eat a lot of pie, some people eat only a little bit of pie, some people prefer cake, some people cannot eat pie due to dietary restrictions, and there are prices and quantities involved.

In short, an apparent psychological conflict should not pose a conflict to the economist. It's not a subject of economic purview.

But Then Why Do Economists Keep Saying People Are Rational?
The economist knows why someone would eat too much pie: it tastes good; the actor is moved to act on that opinion; some subset of people have poor impulse control; it is what it is. But there is nothing irrational about the eating of a large quantity of pie. Pie tastes good, that's why someone eats it. There isn't much more to it than that. (Remember, economic standards of rationality are lower than psychological standards of rationality.)

This even holds true for the various other quirks discovered by behavioral economists: People tend to sacrifice some personal monetary benefit for the sake of others, people sometimes make calculation errors that cost them money, people subscribe to superstitions, etc., etc.

The only reason a behavioral economist would see this as "irrational" is that perhaps the behavioral economist holds the misguided viewpoint that economic actors are strictly money-utilitarian in absolutely every circumstance. In that case, why wouldn't someone keep all the money for himself? What-ho! We've proven that even when people have a chance to take all the money, they leave some for others! Irrational!

No, it's not irrational. It's perfectly rational. People derive utility aka happiness from things other than money. They derive utility from justice, and morality, and altruism, and all sorts of stuff.

What's disappointing is that everyone already knows that. Behavioral economists who want to make the claim that people do not always act rationally - and let's be clear that this is not all behavioral economists, only the bad ones - are really just saying that some economic decisions cannot be fully accounted for using a framework of continuous demand functions that express utility only in terms of the monetary value of quantities of goods and services.

Most people don't need to be told that there's more to life than money and wealth, and I don't know a single person who would describe that fact as "irrational."

A Couple Of Loose Ends To Tie Up
I might prefer two oranges to one apple. I might prefer four apples to three oranges.

How is this possible? Doesn't this mean that my indifference curves are all discontinuous and arbitrary and we can't predict how many apples correspond to how many oranges in my mind? Yeah, I guess it does mean that. That's because there are all sorts of things that play into my economic decision making. Like, maybe I prefer an even number of fruits to an odd number in all circumstances. This might because I have a psychological problem like OCD, which would mean that I am psychologically irrational, but not economically rational, since I am acting according to my preferences. Or, perhaps I'm interested in juicing the fruit rather than eating it, and I can get more fruit from four apples than I can from three oranges, but more fruit from two oranges than one apple.

Or, perhaps a million other things. I'm just making stuff up here. The point is that there are many conceivable reasons why a demand schedule might not perfectly translate into a homogeneous function. One of the great strengths of the Austrian School of economics is that there is no great need to fit human behavior into calculus functions. This enables us to examine economic behavior first, and draw lines on charts second.

Granted, the Austrian approach might not be appropriate for absolutely every situation. If the majority of market-makers in the finance world use elaborate macro-models to invest millions of dollars for their clients, it might be in my best interest to use a similar model, myself. Refusing to do so for the sake of methodological purity would just be stupid.

So the various "camps" in economics shouldn't really be arguing about "behavior" versus "action," they should simply choose a variety of different methodologies and go with the one that has the greatest explanatory power in the situation being analyzed.

Conclusion
I don't think I've "resolved" any apparent "conflicts" here. I just wanted to get all this off my chest. It is kind of a stupid argument. Economics has the power to offer great insight into the world of human decision making in environments of competing resource allocation. But it also has the power to be so obtuse that the various debates cause more confusion than they clear up.

Also, I think most economists understand this. I think some non-Austrian-School economists dislike the general attitudes of some Austrian School economists, and thus like to make things personal while giving the situation an academic veneer. I'm not accusing Brennan of that, but I do think he could have thought a little more carefully about what his interlocutor was saying. Likewise, that Austrian guy, whoever he was, could probably benefit from thinking through what behavioral economists are saying.

Or maybe he already did all that, and he's good.