Unfortunate Economics

In a recent article on The Bleeding Heart Libertarian, Jason Brennan talks about the problem behavioral economics poses to apriorism in Austrian economic theory. He says that Austrian economics, advanced by “hack” scholars such as Ludwig von Mises and Murray Rothbard, bases its theory on the idea that all individuals act rationally. By this, we can assume him to mean that every individual acts purposefully and always makes the best choice given competing ends. Defenders of this Austrian apriorism are, to Jason Brennan, extremely naïve to believe this since behavioral economics data sets empirically refute the Austrian conception of man and choice over and over. For him, anyone with half a brain can figure out that humans don’t make choices that make them the best off economically, viz. they do not make value-maximizing choices. Brennan’s doctrine and perspectives on Mises and Rothbard are extremely convoluted and let’s see why.

Acting rational (redundant), from an outsider’s or non-Austrian perspective, can be defined as choosing the appropriate means to reach a particular end. There are two ways in which we usually characterize human action as irrational. First we may say that the means to achieve an end is irrational; we believe that either better means could be used to reach an end or the means chosen are utterly incomprehensible to the ends chosen. In essence, by saying this we believe that the only way man can act rationally is by choosing the absolute best means suited to reaching a particular end; nothing short of this will do. Second, we may say that the ends trying to be obtained are irrational; we believe the ends an individual has chosen are detrimental to their own well-being and is a foolish pursuit. No doubt, Brennan is focusing on the former.

As Jeffrey Herbener stated in his own refutation of Brennan, “Knowledge about human action learned by experience is contingent on the person, place, time, and circumstances of the action.” The problem characteristic of Brennan’s approach is behavioral economics attempts to define the circumstances surrounding a decision, a monumental task in the first place. Again, how can one truly know all the relevant circumstances surrounding a decision that would enable us to make a truly rational decision? Further, behavioral economics is a foolish pursuit because of one simple fact: value is subjective. Making the attempt (or lack of attempt) to quantify the subjective values an individual (let alone a group of individuals) holds is futile. These are not cardinal values; there is no way to measure them. Hence behavioral economics is going to make questionable conclusions because you have to arbitrarily quantify subjective values to even begin to create the framework for deciding whether someone’s behavior actually maximized value or not.

Moving on, we have to realize what is meant by purposeful human action, or “value-maximizing” human action. Since values are subjective, what is a value-maximizing choice for one individual may be different for another. The choice to go to McDonald’s and eat a double cheeseburger may be value maximizing for one, while staying home and cooking their own cheeseburger on the grill may be value maximizing for another. The science of human action says a priori when a human being makes a choice, he is displaying his preferences, and this action necessarily is a value-maximizing choice.

So many intangible factors go into deciding preferences; just because, given the choice, someone chooses the $7 an hour burger flipping job over the $9 an hour one does not mean that they acted irrationally. The fact that they chose the $7 an hour one means that some other tangible or intangible factors went into their demonstrated preference of the lower paying burger flipping job. Maybe their conscience won’t let them take a $9 an hour job when they know their marginal productivity of labor is only $8. Or maybe they like the number 7. Or maybe they asked their wife what job to choose. Or maybe they wanted to stick it to Austrian economists and try to prove that humans do not act rationally so they deliberately chose the lower paying job. Or maybe they went eeny, meeny, miny, moe and picked the $7 an hour job.

How could we possibly quantify these subjective factors? We cannot. Thus, we must understand that human action is demonstrated preference; a priori, choosing one thing over another means one values the thing they chose over the thing they did not choose, regardless of what we think about the prudence of their decision-making or the way they go about valuing things. That is what is truly meant by acting rational and maximizing values. It is not choosing the thing which will bring someone the greatest $ value, the greatest long-run happiness, the least amount of harm, or any other criterion that a behavioral economist will try to present as “rational.”

As Jeffrey Herbener said, “Whether a person chooses “rationally” in the neoclassical sense or “less than rationally” in the behavioral sense, in a human action the person chooses. Choice is a universal feature of human action. It is no mark against the Misesian conception of economic theory that it does not address the contingent features of human action. That’s the task of economic history.” Our opinion of what ends are appropriate or what means are appropriate to reach a particular end is subjective. To that extent, rationality, in the sense Jason Brennan means, is subjective. Just because the thief chooses to obtain an income by stealing rather than earning it doesn’t mean their decision is irrational; our opinion of rationality depends on our point of view. Similarly, just because the thief chose to steal the $100 cathode ray television rather than the $1000 3-D television does not mean their decision is irrational. Just as when we exchange one item for another it necessarily means that we value the item we receive greater than the item we give up in return, when we choose one course of action over another necessarily means that we believe our course of action is suited to the end we are aiming for. The end itself may not even be totally understood or acknowledged by the individual striving toward it, but it exists nonetheless.

If you want to continue defining rationality as your own subjective opinions on what is rational and what is not, go ahead; but don’t try to present it as scientific or empirical when you are doing nothing more that deifying your own values and doing not much more than palm-reading to try to quantify someone else’s subjective values. As we can see, rationality in the context of Austrian economics does not mean whether we think a means is conducive to a desired ends, or the layman’s definition of rationality. They are not the same thing and cannot be used interchangeably. Nor can value-maximizing be defined as “choosing the thing which will bring someone the greatest $ value, the greatest long-run happiness, the least amount of harm, or any other criterion that a behavioral economist will try to present as ‘rational,'” because that is not what value-maximizing means in the cintext of Austrian economics.

PS. After I wrote this, I found a more eloquent version of what I said on Mises.org by Michael Rozeff, so check that out too.