Enough with the GOP's Faith-Based Economics
"I will do all I can to help you," Montague answered. "And you must be very severe with me," Lucy continued, "and not let me spend too much money, or make any blunders. That was the way [former business advisor] Mr. Holmes used to do, and since he is dead, I have positively been afraid to trust myself about."
-Upton Sinclair, "The Moneychangers"
From Ron Paul to Mitt Romney, politicians consistently employ their own framing of why the economy is performing poorly, and thus, promote a consistent remedy for how to improve it. Government doesn't need to do more, they contend, it needs to do less - less regulating, less spending, less taxing. They believe in these solutions, I argue, not necessarily because of some secret allegiance to the rich, but because of their longstanding blind faith in the ability of the so-called "free market" to correct economic problems on its own.
During a recent appearance on The Daily Show, the libertarian Sen. Rand Paul (R-Kentucky) championed the need for free-floating interest rates by analogizing interest rate movements to the human body's production of insulin. That such a complex economic process could be equated with an automatic physiological process was not at all accidental. Just as though it were a natural science, free-marketers firmly believe in capitalism's ability to self-correct. Government, they argue, will only mess up (or, as they like to say, "distort") this process. This is precisely what Ronald Reagan was intimating when he famously declared, "Government is not the solution to our problems, government is the problem."
The Myth of Self-Correction
But how could an economy correct itself, and what does that even mean? Basically, the argument proceeds as follows: the economy comprises economic actors (consumers, workers, households, firms, investors, etcetera) who operate rationally - that is, according to their individual self-interest, maximizing the things they want (economic and material gain) and minimizing the things they don't want (economic loss and material deprivation). Thus, economic outcomes are determined by what is fondly referred to as "the democracy of the marketplace": bad products don't get purchased, so the producers of those products stop producing them. Alternatively, the makers of good products are able to sell their products, which consequently encourages new producers to also make those good products. But, if those new producers want to be competitive and capture market share (which they do, because they are rational), they must figure out a way to make those good products at a lower cost. They thus relentlessly increase efficiency so as to lower prices and outcompete their competitors, which leads into a virtuous cycle of efficiency increases, falling prices and ever-rising standards of living. In the end, we have a society filled with goods and services that we enjoy, in the quantities we want, at prices we can afford. Government intervention can only do harm, for how could a bunch of bureaucrats possibly know what the people want more so than the people themselves?
The late economist Robert Heilbroner beautifully captures this "rational economic actor"-based worldview when he writes that, in effect: "The complex irrational world is thus reduced to a kind of rational scheme where human particles are magnetized in a simple polarity toward profit and away from loss. The great system works, not because man directs it, but because self-interest and competition line up the filings in the proper way; the most that man can do is to help this natural social magnetism along, to remove whatever barriers stand before the free working-out of this social physics, and to cease his misguided efforts to escape from its thralldom." The entire free-market argument must therefore begin with the existence of the rational economic actor already assumed.
Unreliable Information's Effect on Rationality
Before dealing with this directly, consider the following point regarding democracy. Representative democracy, as a political arrangement, could be idealized as a situation in which voters/citizens act rationally upon information and support candidates/policies that represent their interests. In this view, policies are therefore simply the expression of the largest section of rational citizens. The same logic applies when measuring public opinion: it is often simply taken for granted that what respondents believe is well founded. Where people get their information, whether they adequately understand and can evaluate the various tradeoffs of a particular policy, how much time they have spent seriously considering an issue - these questions are all essentially rendered irrelevant. We treat voters as self-evidently rational and, therefore, their opinions as self-evidently valid. Arguing to the contrary smacks of elitism and is thus rarely stated in public (politicians never say that, "Voters do not know what they want"; rather, we, "the American People," are constantly assured that we are, in politicians' words, "smart," that we always "understand" a given situation). Thus, when we leave the rational-voter assumption unchallenged, we can confidently declare that, ultimately, the purportedly free democracy will decide the best policies for that society, because those policies will be the willful expression of a rational populace which is always acting in its self-interest.
But is this reality? When justifying the 2003 invasion of Iraq, for example, it was easy for politicians and pundits to say something to the effect of, "Well, after all, 72 percent of the public believes we should intervene (which, in March of that year, it did). Democracy has clearly spoken." However, what if some large portion of that 72 percent is basing its decision on inaccurate information, baseless intuition or pure emotion? What if, for example, nearly 70 percent of the public, in deciding whether to support the invasion, also believed (which it did) that Saddam Hussein was complicit in the 9/11 attacks?Well, we then run into a serious problem: we began with the assumption that voters were acting in a universally rational manner, with assumedly well-founded opinions, but it turns out many (if not most) of them were actually acting irrationally. In other words, a supposedly rational public supported an action, in part, because of a completely irrational belief. Moreover, when the somewhat less rational made these decisions, it is not as though the somewhat more rational were unaffected - whether one supported the invasion or not, millions of people around the world must live with the human, social and monetary consequences of invading Iraq.
Just as it would be political suicide to suggest that a large swathe of the public might not be rationally forming its opinions, we run into a similar battle if we try to suggest that economic agents (consumers, workers, households, firms, investors, etcetera) may, similarly, act less than fully rational in an economic context. There are countless microeconomic examples that free-marketers will put before us to demonstrate the infallibility of the free market. If your local butcher wants to increase profits by using expired beef, for example, he or she will quickly run into a problem: you will stop buying meat there. Hence, the butcher is forced to charge reasonable prices and serve only safe products, lest business be lost to a more honest competitor. This, again, is a microcosm of the seductively simple, rosy presentation of the self-correcting free marketplace that is relentlessly proffered by every Republican currently running for the party's nomination (and by many Democrats, as well). And each time they prescribe "freer markets" (that is, less government involvement) to cure our economic ills, their dogmatic determinism is operating on an absolutely fundamental assumption - that of the rational economic actor, or what is sometimes half-seriously referred to as homo economicus.
The Faked Evolution of Homo Economicus
There exists, to be sure, a vibrant literature of challenges to free-market ideology, some of which dates back centuries. But, quite often, even these criticisms still implicitly accept the assumption of homo economicus, whereas the argument here is that this fiction should be challenged head-on. As the economist Duncan Foley argues, the only theoretical setting in which an entity like homo economicus could possibly exist is, "fully attained competitive economic equilibrium," which, among other things, assumes the existence of what Foley calls "full information" (that is, virtually no uncertainty in the marketplace). Needless to say, it is an extremely unlikely - if not impossible - situation. In a similar vein, the economist Ha-Joon Chang writes that, rather than the theoretical society of rational actors who are intimately in tune with their own economic self-interest, the reality is that, "People do not necessarily know what they are doing, because our ability to comprehend even matters that concern us directly is limited ..."Borrowing slightly from George Orwell, we might more accurately say that all citizens are rational, but some are more rational than others.
But how could people ever act against their own economic self-interest? Many social scientists have spoken to this question, but, unfortunately, much of the discussion exists purely within the realm of academia and is usually couched in nearly impenetrable jargon. Nevertheless, there are many familiar scenarios that we can easily identify. The first, and most obvious, clue that "rationality" is not a universal truth, but exists along a spectrum, is the simple fact that some people are better able to act in their economic self-interest by virtue of greater mental ability. Calculating which economic decisions make the most financial sense can, at the very least, require some arithmetic and, even if we were able to perform the arithmetic on a calculator, we would first need to use our minds to figure out the various options (or, "contingencies") to be calculated in the first place.
It may very well be that, rather than shopping for our weekly groceries at one single store, it would actually be less expensive, overall, to drive to three different food stores, a drugstore and a convenience store to buy the same bundle of goods. But to figure this out, we would need to first identify and accurately price the various combinations of options, and then do the tricky arithmetic to find what makes the most financial sense. Even with this relatively simple example, we can see that some may be more intellectually equipped to do this than others.
Another problematic area is information - both in terms of our respective abilities to access pertinent information, and our respective abilities to process that information.Economists recognize that when there exists "asymmetric information," we run into a problem. Remember that in our earlier example of the butcher and the expired beef, the customer was only able to make a decision because s/he knew that the meat was expired. Therefore, access to, and comprehension of, all relevant information becomes an essential precondition for the existence of homo economicus and, consequently, for the mythical self-correcting market that conservatives relentlessly preach about.
A consumer who knows nothing about cars, for example, may be at the complete mercy of an auto mechanic. He or she may consent to what the mechanic recommends simply because he or she has no way of verifying what the mechanic says is true. Thus, a sneaky, unproductive mechanic is rewarded as though she or he were an honest, productive mechanic, which thereby de-incentivizes honesty and undermines nearly the entire premise of the self-regulating market. So, if consumers were truly rational, we should see "asymmetric information" withering away. People would spend their free time reading about cars and trying to narrow the gap between what they know and what mechanics know, and they would do this because it would put them in a better place to make a rational decision (that is, a decision best suited to their economic self-interest). But is this theoretical scenario even close to what exists in reality? Do people spend endless hours trying to close gaps in information between themselves and mechanics, doctors, lawyers and various other specialists? If it is not even an emerging trend, then we again need to question why the "rational economic actor" character can simply be assumed into existence.
Consumerism and Other Irrational Economic Behavior
The weaknesses of the rational-economic-actor argument do not end there. When we consider the manipulative, deceptive practices of advertisers, the illogic of retail therapy and impulse-buying, the strong preference for short-term gratification over long-term economic security, addiction , the force of habit, herd mentality , purchases that we almost instantly regret, baseless intuition  and the staggering amount of waste our society produces (which, in one way or another, someone is always paying for), and add it to what economist Richard Parker identifies as, "the reality of ignorance and miscalculation, and the inescapable uncertainty of life," the notion that society is basically a group of cost/benefit-calculating, self-interest maximizers is revealed as an impressively oversimplified, theoretically convenient assumption.
This is not to say, however, that people are categorically irrational - that is, that we only act against our individual economic self-interest - and that there isn't some degree of generalization that we can make about the way individuals, in certain societies and at certain points in history, tend to act when confronted with various economic stimuli, or so-called "market signals"  (indeed, the rational-economic-actor argument is seductive precisely because there is some degree of truth to it). It is, rather, to say that some individuals are far more rational than others in identifying and acting in accordance with their respective economic self-interest. (Interestingly, free-marketers do not claim that children are rational economic actors, but, somehow, adults are deemed categorically rational as though, when we turn 18 years old, we magically receive a blessing from the rationality fairy.) We are not economically rational at all times and in all places, just as we are not economically irrational at all times and in all places; each of us falls somewhere in between, and we can each be more or less rational depending on the particular economic transaction we are contemplating (for example, one might seek out dozens of grocery store coupons each week, but have no idea how much is being automatically deducted from his bank account each month by his cable provider).
But what does it matter that people do not always act rationally? It matters precisely because the more that we concede that homo economicus does not populate the world, the more we concede that free-market economics is precariously unpredictable in terms of its ability to promote the general welfare of a given society. Because some people are more rational than others, the self-correction process cannot possibly be smooth, instantaneous, or "automatic," as Senator Paul might tempt us to believe. The process is, instead, somewhat chaotic. And, if it is somewhat chaotic, it is somewhat unpredictable. And if it is somewhat unpredictable, our ability to forecast how long self-correction would take for a $14 trillion dollar economy comprising over 300 million people and situated within a $65 trillion world economy of 7 billion people is severely impaired, if not entirely hopeless.
In sum, there exists economic irrationality all around us. But of course, devout conservative economists and politicians will say that those who act irrationally will either be punished by the market for being irrational (a concept known as "market discipline"), or that, in some entirely unpredictable matter of time, they will metamorphose into rational, cost/benefit-calculating, profit-maximizing individuals.
What Kind of Economy Rewards Irrationality?
Perhaps. But this deterministic argument is essentially dogmatic, blind faith, and, perhaps most importantly, it obscures the fact that, because the economy is a social system, those that are acting less rationally still have an economic impact on those acting more rationally. Secondly, it is a very different argument than the one which purports that people are self-evidently rational economic actors at all times and in all places. And if people are not actually rational at all times and in all places, to what extent can we really trust the chaotic workings of the free market to solve some of our most important, most urgent economic problems? By acknowledging this logic, perhaps we might finally muster the will to renounce the blind faith that is free-market economics.
1.The Daily Show, March 7, 2011, accessed January 2, 2012. (The point referenced takes place between 1:18 and 2:02.)
2. The market system, writes Robert Heilbroner, operates according to a rule that is "deceptively simple" - namely, "each should do what was to his best monetary advantage." "The Worldly Philosophers," (New York: Touchstone, 1999) 20.
5. "Public Attitudes Toward the War in Iraq: 2003-2008," Pew Research Center Publications, March 19, 2008, accessed January 2, 2012.
6. Dana Milbank and Claudia Deane, "Hussein Link to 9/11 Lingers in Many Minds," The Washington Post, September , 2003, accessed January 2, 2012.
7. It is important to note that one could legitimately make a purely political argument for free markets - for example, "It doesn't matter if people aren't always rational, the point is that government shouldn't be intruding on people's liberty, even if it would mean better economic growth." This is fine, but it is not the free-market argument that conservative economists, nor our Republican candidates, tend to make. They do not say, for example, that free markets may lead to economic turmoil, but at least we will be free from government intervention. Rather, they argue that economic outcomes will, in point of fact, be better if the competitive market is left unto itself. Thus, for them it is not a question of individual liberty so much as a question of what kind of economy will best give people what they demand (that is, what people want and can afford).
8. As Martin Hollis and Edward Nell write of homo economicus (or, "rational economic man"): "He is neither tall nor short, fat nor thin, married nor single.... We do not know what he wants. But we do know that, whatever it is, he will maximize ruthlessly to get it." In "Rational Economic Man: A Philosophical Critique of Neo-Classical Economics" (New York: Cambridge University Press, 2006) 54.
9. One such criticism is the notion of "market failure," which essentially occurs when each actor is acting rationally, but we end up with an outcome that no one wants. For example, when each person rationally buys a vehicle that emits many pollutants because the vehicle is cheaper than its less environmentally damaging alternatives, we end up with more polluted cities (with all the attendant health and cleanup costs), which, arguably, is in no one's self-interest.
13. For example, it is difficult to see how, by any measure, smoking cigarettes could be in anyone's economic self-interest. Between out-of-pocket costs and long-term health risks, cigarettes promise a terrible return on investment. And yet, the Centers for Disease Control and Prevention (CDC) estimates that 46 million American adults smoke cigarettes. Homo economicus, if it were real, would indeed be completely baffled by this.
14. See John Cassidy's "How Markets Fail: The Logic of Economic Calamities" (New York: Farrar, Straus and Giroux, 2009) Chapter 14, for an excellent discussion of this scenario, especially as it exists in the world of investment.
15. Consider, for example, the considerably common notion that a higher college tuition equates to a higher quality of education. This belief is apparently pervasive enough that former Vice President of Boston University Dr. Robert Ronstadt had to dispel it on Forbes.com, confirming that "there's no strong correlation between price and quality." Accessed on January 2, 2012.
This article is a Truthout original.