Bryan Caplan  

Doug Campbell's Five-Page History of Public Choice

Overtreated... Free Disposal...

Doug Campbell's written a great short history of public choice for Region Focus, the newsletter of the Richmond Fed. Or at least that's what my Inner Megalomaniac thinks, since 50% of this short history is about my work! One highlight:

To Caplan, his work adds up to something in between a reorientation and a debunking of public choice theory. “I can still accept 75 percent of [public choice theory], but with a big asterisk,” Caplan says. “It’s not so much about sneaking bad policy underneath the radar as it is tapping into public opinion.”

Campbell also describes some critical remarks from Cato's Bill Niskanen:

The weakness in Caplan’s premise, Niskanen says, is his reliance on a survey with open-ended questions. It may be that the general public believes that raising the minimum wage is a good idea while economists disagree. But if you extend the question with the information that raising the minimum wage may decrease employment for the least-skilled workers, the public may be less enthusiastic. And if so, then that is evidence against systematic irrationality. It is, quite plainly, rational ignorance.

I have a whole chapter ("Chapter 4: Classical Public Choice and the Failure of Rational Ignorance") on this point, but to give the quick version:

1. Rational ignorance doesn't explain why the ignorant make the same kind of errors.

2. Rational ignorance doesn't explain why people are not agnostic about fields - like economics - that they haven't studied.

3. Rational ignorance doesn't explain why most people resist and even get angry when economists explain the negative side effects of popular policies.

Niskanen's right that people would favor different policies if you changed their minds about the facts. The problem is that changing their minds about the facts is like pulling teeth.

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COMMENTS (12 to date)

People are social mammals first. We only became rational thinkers within full economic systems. Thus, while it would be more rational to accept whatever someone offered us in the classical game theory example where I give person A $100 and he has to split it with person B, who gets to accept or reject the offer, what we see is the kind of thing one would expect in a socially-evolved species: an insistence on fairness of distribution, followed by punishment if fairness is not perceived to have happened. Rationally, it makes sense to accept a dollar if that is all that is offred, because you are now at least a dollar better off, whereas if you don't accept anything, you are no better off, and you have just punished someone else. This way of thinking is the foundation of human thinking -- we have to learn to think in a rational-economic fashion. In fact, it is free markets which push us into becoming increasingly rational-economic in our thinking. Economic thinking energest later -- it did not evolve with the human species. That is why it does not occur naturally, and why people consider it to be counter-intuitive.

This is a problem I have been increasingly been thinking about based on these kinds of questions. There may be some sort of interdisciplinary paper coming out of it soon.

Matt writes:

We seek to hold pricing over a transaction range, and we seek to make transactions over a price range. We will accept a small amount of price fixing if it is within our uncertainty range.

So, its perfectly reasonable for voters to make a bad choice for 8 years, as long as they get an update every 8 years. Rationality is a prediction based on past results, and we accept some error in those predictions.

The amount of irrational voting we have is about the right amount, but we need to update our irrationality more often.

Sean writes:

You addressed the second set of objections Niskanen raises in your book as well.

Is he really all that familar with it?

EM writes:

Dr. Camplin,

As a species, we have evolved game theoretical maximization strategies. For instance, although it may be "rational" to defect in a given Prisoner's Dilemma, in repeated Dilemmas, the better answer is to cooperate and build trust (and a reputation for punishing those who defect) and thereby end up with better results over the long run. When it comes to the evolution of fairness, use similar thinking, and don't simply look at modular rationality.

John Thacker writes:

Eh, it's not all that irrational. I'd say that given that one vote is unlikely to affect any outcome, it's fairly rational to avoid changing one's views. Also, most of the very real biases you discuss have to do with feeling that one can avoid trade-offs. Many of them are things that people wish were true (that it's possible to protect people from foreign competition without hurting ourselves, and in general to protect people from negative outcomes without penalty or trade-offs to others), though that hardly explains the pessimistic bias you note.

As far as 3) goes, if something is a popular policy, favored by someone, and likely to be adopted, learning about and accepting the negative side effects is likely to only make them more dissatisfied and upset than they were previously. Since changing their mind is unlikely to affect policy (as they are only one vote), it affects nothing except to make them more unhappy. Is it any wonder that people resist?

It is precisely because of game theory that we are beginning to understand just how non-rational many of our decisions are. The predictions based on rationality of the outcomes of many of the games in game theory have not panned out. But the outcomes do make sense if you take into consideration the fact that humans evolved in a social setting, in a pre-economic world. Then those cases where someone will choose a "just" outcome over a "rational" one make sense. The just outcome has been shown to occur if the game is only played once, so repetition doesn't quite explain it. If we are going to have a fuller understanding of economic man, we have to recognize the failures in current assumptions of "rational" behavior. The behavior is still rational, I would argue, just not in the same way we typically think of it when engaged in economics discourse.

8 writes:

Forget minimum wage. Price gouging is economics boiled down to a single, albeit repetitive short-term event.

Find a wealthy donor to foot the bill for an axperiment to determine if voters are rational. Pick a state with relatively frequent natural disasters and a ballot referendum process. Place a referendum on the ballot repealing the price gouging law which probably already exists, if it doesn't exist pass a law explicity protecting gounging during an emergency. Carry out an advertising campaign as much to pass the referendum as to educate the voters. See what happens.

There are enough eccentric billionaires out there.

spencer writes:

The perfect example is your absolute refusal to accept that their is absolutely no data to support your theory that the minimum wage wage hurts the working poor and a wealth of data that directly contradicts your theory.

You are the perfect example of "do not confuse me with the facts".

EM writes:

I completely agree, Dr. Camplin.

Dog of Justice writes:
Economists have done an immense amount of work trying to measure these effects and the overall impact on the poor. The overwhelming consensus has been that minimum wages serve the poor very poorly. The standard finding is that a 10% increase in the minimum wage reduces employment among low-skilled workers from 1% to 3%.

Wait, this is supposed to be bad for the poor? I'd very gladly take a 10% pay increase just for the achievement of not being in the bottom 2%. (Okay, I know there is a significant element of chance in what 2% lose their jobs, it's not gonna be the "bottom 2%". Still, it's a highly +EV gamble as long as you don't have a perverse dynamic like the best 2% losing their jobs.)

In the meantime, I think the standard economic analysis of the minimum wage misses something big -- fixed costs. To a businessman, a person who is only 51% as productive as average, but has a net cost of only 50% of the average, is a good deal. But society as a whole pays fairly large fixed costs per person in health care, infrastructure, etc. not all of which are (or should be) borne by the businessman. As a result, there is a level of productivity below which a person cannot be a net contributor to society, even if they work for free. To justify the fixed costs, they need to upgrade their skills, not just be willing to accept less money. If they are incapable of doing so, we should at least do everything we can to ensure their offspring don't have the same problem.

There is a crossover point at which the fixed costs tend to be recouped, and the interests of businessmen become aligned with that of the rest of society. That is roughly where the minimum wage should be.

Dog of Justice writes:

Oops, my first paragraph was dumb; I implicitly assumed that all low-skilled workers had their wages raised by 10% when the minimum wage was raised by that amount, which is nonsensical. So, uh, just ignore all that. :[ At least it doesn't get in the way of the other paragraphs.

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