Grist: Rationality, welfare, and public policy

[marmar]

Rationality, welfare, and public policy

1 Jan 2010 2:07 AM
by David Roberts


In response (I think) to my post on efficiency and economists, Matt Yglesias cautions against abandoning the presumption of rationality just because people don’t consistently maximize profit. It may be rational in some circumstances to sacrifice profit for gains in time and attention. There’s more to personal welfare than money.

Anyone who advocates efficiency runs across this point. Maybe people walk by some/all of these alleged $5 bills on the sidewalk because they have better things to do than watch the sidewalk all the time and bend over every few blocks. I agree, but I think the point ultimately works the other way than Matt intends it—it weakens, not strengthens, the presumption of rationality.

If welfare is some admixture of wealth, time, and attention, it’s many more things as well: physical health, familial and social ties, health/car/life insurance, mobility, freedom of speech and association, etc. These are complex and murky issues about which people make dozens of small decisions a day. Some small fraction of those decisions is part of a conscious weighing of options and planning; most are reflexive. Why would we assume individuals have reliable insight about what best serves their own welfare? Self-destructive behavior is as human as desire, impulse, and limited information. We see through a glass, darkly.

Wealth—GDP at the national level, net assets at the individual level—is often used as a proxy for welfare, but this is problematic for any number of reasons. (Over a certain base level, wealth doesn’t track satisfaction.) Money is often used as a proxy for value: what people will pay (or forego profit) for is what they value, their “revealed preferences.” But this way of looking at things verges on tautology. If rationality is satisfying preferences and preferences are reflected in what people do, then what is rational is what people do. That makes economics easier but it doesn’t really tell us what we want to know. ............(more)

The complete piece is at: http://www.grist.org/article/2010-01-01-rationality-welfare-and-public-policy/