McKenzie on behavioral economics
By Alberto Mingardi
A couple of weeks ago, The Wall Street Journal run a splendid piece by Richard B. McKenzie entitled “People Aren’t Rational, and That’s Why We Need Free Trade”. That was an excerpt from a longer article by McKenzie on the new issue of Regulation, which is now online.
There is much to ponder in McKenzie’s article, which maintains that
In real-world markets inhabited by decisionmakers who have evolved flawed mental resources and thinking processes, competitive market forces can reduce decision-making flaws and thus lower production costs and raise real incomes by more than conventional economists have heretofore claimed. Flawed decisionmakers are led by competitive pressures, as if by an “invisible hand,” toward (not to) improved (not perfect) decision heuristics that, when adopted—even grudgingly—add to the otherwise achievable gains from trade.
If “behaviorists see their catalog of irrationalities or decision-making failures as show-stopping evidence of the bankruptcy of conventional economics and as a scientific foundation for calls for added government market intrusions”, McKenzie argues that “competitive market pressures can improve the brain’s allocation of its own resources through the development of less-flawed heuristics (and fewer irrational decisions than behaviorists have found in noncompetitive market settings)”. This line of reasoning looks powerful and a promising approach to reconciling behavioral economics’ insight and neoclassical economics – or perhaps not to allow behavioral economics to become “the applied theory of bossing people around”, to borrow Deirdre McCloskey’s whit.
In a sort of Chinese box, this article is, in turn, the synthesis of a book. I wonder if Professor McKenzie engages, there, with Nassim Taleb’s view that some simple heuristics are actually better suited to help one navigate in a complex world, than ever-more complicated rules. Are perhaps, in his view, trade and the division of labour proper instruments to develop such heuristics?
A side note. I rushed to Amazon for Professor McKenzie’s book. It costs over 100 dollars — and 86 in the Kindle version. Sometimes we’re left wondering why the publishing industry seems busy to price books precisely to avoid the risk of selling them.