Applied Economics Assumes Selfishness, and Rightly So
Klein and Bauman shouldn’t have run away from self-interest in chapter
1. Yes, I know that textbooks love to claim that economics assumes
“optimizing behavior,” not “self-interest.” But whenever economists do
applied work, they quickly slide to self-interest. You know why?
Because although people aren’t perfectly selfish, they’re shockingly
close. That’s why economics tells us so much about the world.
Caplan is right that we start with the basic assumption of “individual
optimization” and not “individual self-interest”. And the reason
is–geez, Bryan, do we really have to rehash this tired old
argument?–that (1) as a theoretical matter, “individual self-interest”
is impossible to define or defend in a scientifically rigorous way,
i.e., I can always say “The soldier threw herself on the hand grenade
because she wanted to” or “Bill Gates is giving his money away because
it makes him feel better about himself”
I agree that “individual self-interest” is not mathematically precise. Interesting concepts seldom are. But if you speak English, you can reliably categorize many actions as “self-interested” or “not self-interested.” Asking for a raise? Self-interested. Giving all your money to a stranger? Not self-interested. Cutting ahead in line? Self-interested. Donating a kidney to a stranger? Not self-interested. Yes, you “can always say” that soldiers jump on hand grenades out of self-interest, but only by torturing the English language.
(2) as a practical matter,
you get into a terrible knot when you start thinking about spouses and
children and friends &etc.
Family provides the best counter-examples to a naive self-interest theory, but there’s a more general view that accounts for them: Dawkins’ “selfish gene” theory. In most economic contexts, however, the two theories make identical predictions, so I didn’t press this point in my review.
Why do I make such a big deal about this? Simple: Because despite Yoram’s protests, applied economists habitually assume that people are selfish in the ordinary language sense of the word. Consider Yoram’s congestion example. Every applied economist says, “Raise the price!” But if drivers were unselfish in the right way, all of the following would be equally economically plausible solutions:
1. Ask everyone to drive less “because they’re inconveniencing others.”
2. Tell people they’re contributing to global warming.
3. Announce that if traffic doesn’t fall by 20%, we’ll abolish foreign aid to Senegal.
4. Denounce materialism so people quit their jobs and stop commuting.
Now you could say that applied economists are being closed-minded. But I think we’re correct to focus on congestion charges. Why? Because the assumption of human selfishness is roughly true. Almost everyone cares a lot about the price they personally have to pay to use a road, and getting their weekly paycheck. Most people don’t care very much about the effect of their driving on other drivers, global temperature, or the people of Senegal.
It’s easy to multiply examples. Rent control leads to shortages and/or declining quality – if landlords are selfish. If they loved their tenants as themselves, it’s a different story. Printing tons of money wouldn’t cause inflation if people were happy to build up unlimited cash balances for the “good of the country.” Yadda yadda yadda.
I admit that Yoram’s not alone. Even though applied economics almost always relies on self-interest, most economists prefer to tell their students about preference maximization instead. So why am I singling Yoram out? Because a cartoon intro to economics is a great opportunity to (a) defy silly academic conventions, (b) bluntly tell the world what economists really think, and (c) use humor to make the hard truth go down easy. Contrary to Yoram, giving his book a B+, then finding fault, isn’t “passive aggression.” It’s my way of saying, “You’ve done a very good job, but I want you to shoot for greatness.”