Rational Self-Interest, Irrational Self-Deceit

The brand of economic theory loosely known as the Chicago School gets much of the credit — or blame, these days — for promoting the existence of “rational economic actors” who keep a free market churning along smoothly. The idea is that each participant in an economy, whether an individual consumer or a large corporation, makes rational, self-interested choices based on the best available information. The more complete the information, of course, the better the choice. But the “rational” part is assumed.

The notion is attractive. If every actor in an economic system behaves rationally and with complete information, then all economic decisions, freely made, will work to enhance the efficiency of the system and increase the prosperity of all concerned. Inefficient or incompetent enterprises will fail, but, ultimately, they fail to the advantage of everyone. Employees at factories that manufacture cars that break down or zippers that jam will suffer when their company goes under, but only in the short term. Sooner or later, they'll be hired by more successful businesses, which, by virtue of their competence and profitability, will be able to offer more stable employment, higher salaries and better benefits. Plus, cars and zippers that remain on the market will actually work as advertised.

Corporations that find cheaper labor in the developing world will move their factories there, leaving their employees in the lurch. But, like a beautiful machine, a free-market economy will pick them up, dust them off and put them to work in another, more dynamic sector. The blacksmith's assistant lost his job when the horseless carriage came, but he found another one at an automotive garage.

When an ostensibly free market system goes into recession, Chicago School economists explain, it's not because of inherent contradictions in the theory, but rather because information is sometimes incomplete or inaccurate. When we rational actors jumped lemming-like into the derivatives market, we got burned primarily because we didn't have full information. We were acting rationally; the fault was with the information. This explains why corporations that mislead stockholders deserve, and occasionally receive, such harsh sanctions. Had we only known we were being sold snake oil, we would have refrained from buying it. Snake oil would have quickly disappeared from the shelves, and we would have spent our money on something of real value.

Here's where it seems the Chicago folks have missed the mark. I, for one, am not a rational actor, and neither is anybody else I know, with the possible exception of my high school geometry teacher. Instead, we are beings who frequently make wrongheaded decisions, whether or not we have full information. Inasmuch as General Motors and Citibank are just groupings of other not-so-rational individuals, led by small cadres of not-so-rational individuals, there's no reason to expect corporations to behave any more sensibly than you or I do.

We often not only ignore complete information; we can encounter it, suspect that it has substance, and then turn tail and run. A painful example: There were warnings about the danger of derivatives as early as 1994, from the Government Accountability Office, no less. The financial industry pooh-poohed the carefully documented GAO report, and the business press followed suit.

If I made truly rational decisions, would I eat more calories than I need, even when there's no threat of famine? Would I drive too fast for conditions or procrastinate with my work responsibilities? Would I yell at my 4-year-old? Would I push the snooze button three times when I really need to go over my report before the 8 a.m. business meeting?

Would I cut class? Would I take on a fourth credit card? Would I have that extra drink? Would I keep smoking? Would I fail to keep four car lengths between my vehicle and the one in front of me?

Would I ever, ever watch reality television?

No. I would be the kind of guy who regularly gets eight hours of sleep, eats plenty of fruit and vegetables, never forgets his wife's birthday, irons his own shirts, keeps the gutters clear, does his taxes in January and his Christmas shopping by Thanksgiving, and is always ready to help Junior with his homework.

I would do these things not because I'm good, but because I'm rational. I would do these things in my own self-interest.

This is how rational actors behave and, when all rational actors do all these rational things, we end up with utopia. The beauty of it is that, while my many acts of kindness, consideration and efficiency may have a rationally self-serving basis, the result is the same. The whole world is a better place.

Now, Chicago School economists and their fellow travelers are in no way blind to the irrationality of some people most of the time and most people some of the time. But in the aggregate, they say, the rational, informed self-interest of the members of our species can be put to the service of all and is, in fact, the best way to insure the creation of wealth accompanied by an acceptably just distribution of same.

If, out of self-interest, I start a business so I can get rich, my efforts will benefit a wide circle of others, from the consumer who buys my company's useful products; to my efficient and productive employees, whose salaries will rise and whose self-worth will be enhanced; to the producers and distributors of the raw materials I purchase to manufacture my useful products. And so on.

Free-market economists have always charged socialists with naiveté, since pure socialism, they argue, depends upon the inherent goodness of mankind. In its most distilled form, socialism holds that individuals, being inherently good, will ultimately act in the interest of the group and the group, in turn, will ultimately act in the interest of its members.

In this, it does seem the free-marketers come closer to the truth. Almost without exception, people want to further their own interests, however they construe those interests. Even actions that seem most altruistic nearly always have a self-interested component.

But both sides are still well off the mark: While we may not be inherently good, one thing we human beings definitely are not is rational, either as individuals or in the aggregate. We're not even very good at acting in our own best interest.

We're creatures of habit who are bewilderingly subject to impulse. We want to buy now and pay later. We want to pass Go and collect $200. We want the bank to make an error in our favor. We secretly expect to win the lottery, or at least the Publishers Clearing House sweepstakes. We think that what happened in Vegas will actually stay in Vegas. We want to eat, drink, be merry and otherwise abuse our own bodies, but still never grow, or even look, old. We peruse Internet porn and wonder why our love lives suffer. We believe the proliferation of firearms will make us all safer. We want Mexico and Colombia to eradicate coca and marijuana production without acknowledging that our own appetites drive the whole horrid business. We'll use the oil till it's gone and then ask where it went.

In truth, there's a frightening kernel of self-deceit and self-destructiveness in all of us.

Even when we think we're acting in our own interest, we're equally as likely to be deceiving ourselves, and not simply for lack of complete information. We're just plain bent, not to say twisted.

This isn't only a modern predicament. The Apostle Paul talked about it (“I do not understand what I do. For what I want to do, I do not do, but what I hate I do.”), as did the Roman poet Ovid (“I see and approve the better but follow the worse.”)

I remember as a high school student being moved by William Faulkner's Nobel Prize acceptance speech. You know the one: “I believe that man will not merely endure; he will prevail.” Stirring words. But wrong.

All the evidence says otherwise: If man endures, he will merely muddle through.

Let me qualify that: Left to his own devices, if man endures, he will merely muddle through.

I wouldn't want to discount divine intervention.