Why are so many of us unwilling to save enough for retirement or cut back on the Coke and cookies even though we really want wealth and health? A growing literature in psychology and behavioral economics indicates that we’re “predictably irrational,” as Duke professor Dan Ariely puts it. He believes that these studies show standard economic theory is false — we don’t always make rational decisions, and markets aren’t always self-correcting.
It’s natural to conclude from these sorts of observations that we ought to turn away from the market and toward the government to help promote our best interests.
But hold on a minute. Let’s suppose that consumers are indeed often irrational and that markets often fail to serve our long-term interests. Even so, we should resist leaping to the conclusion that alternatives to the market — specifically, political institutions — will do better.
Why not let the government call the shots?
To see why, remember that consumers and voters are the same people. You’re the same person at Target that you are at the polls. So if we’re irrational in the marketplace, then presumably we’re irrational at the ballot box. We should expect political behavior to be at least as short-sighted as economic behavior.
Take a simple case. Suppose you’re selecting between two candidates in the election: Imprudent Ian and Prudent Patty. Ian promises a heap of debt-financed spending, such that you’ll receive government-supplied benefits now without having to pay for them until later. Patty pledges to keep debt-financed spending low to secure the country’s long-term economic well-being.
All else being equal, we should expect Imprudent Ian to win, since voters will want the smaller-but-sooner payout over the greater-but-later payout. But these short-sighted decisions may work to our long-term economic disadvantage.
Suboptimal doesn’t equal undesirable.
The broader point is this: just because markets are suboptimal doesn’t make them undesirable. As the philosopher Henry Sidgwick puts it, “It does not of course follow that wherever laisser faire falls short governmental interference is expedient; since the inevitable drawbacks and disadvantages of the latter may, in any particular case, be worse than the shortcomings of private industry.”
By analogy, it would be a mistake to infer that the 1929 New York Yankees should have cut Babe Ruth from their team even though he failed to get a hit nearly two-thirds of the time. Batting .345 is pretty bad in absolute terms, but Ruth was nevertheless better than virtually all other hitters in the history of baseball.
We should judge institutions like we judge baseball players — we don’t ask how they stack up against the standard of perfection but rather how they stack up against the standard set by their feasible alternatives. Markets may turn out to be the least imperfect of our imperfect options.