Musings

The assumption that agents are rational provides the intellectual foundation for libertarian approach to public policy: do not interfere with the individual’s right to choose, unless the choices harm others. Libertarian policies are further bolstered by admiration for the efficiency of markets in allocating goods to the people who are willing to pay the most for them. A famous example of Chicago approach is titled “A theory of Rational Addiction,” it explains how a rational agent with a strong preference for intense and immediate gratification may make the rational decision to accept further addiction as a consequence. I once heard Gary Becker, one of the authors of the article, who is also a Noble laureate of the Chicago school, argue in a lighter vein, but not entirely as a joke, that we should consider the possibility of explaining the so-called obesity epidemic by people’s belief that a cure for diabetes will soon become available. He was making a valuable point: when we observe people acting in ways that seem odd, we should first examine the possibility that they have a good reason to do what they do. Psychological interpretations should only be invoked when the reasons become implausible – which Becker’s explanation of obesity probably is.

In the nation of Econs, government should keep out of the way, allowing the Econs to act as they choose, so long as they do not harm others. If a motorcycle rider chooses to ride without a hamlet, a libertarian will support his right to do so. Citizens know what they are doing, even when they choose not to save for their old age, or when they expose themselves to addictive substances. There is something hard edge to this position: elderly people who did not save enough for retirement get little more sympathy than someone who complains about the bill after consuming a large meal at a restaurant. Much is therefore at stake in the debate between the Chicago school and the behavioral economists, who reject the extreme form of rational-agent model. Freedom is not a contested value; all the participants in the debate are in favor of it. But life is more complex for behavioral economists than for true believers in human rationality. No behavioral economist favors a state that will force its citizens to eat a balanced diet and to watch only television programs that are good for the soul. For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of Chicago school do not face that problem, because rational agents do not make mistakes. For adherents of this school, freedom is free of charge. Pages 411/412 (Thinking Fast and Slow ~ Daniel Kahneman)