Adam Smith Kahneman

by Don Boudreaux on October 21, 2011

in Adam Smith, Hubris and humility

Here’s a letter to the New York Times:

David Brooks properly applauds Daniel Kahneman, the late Amos Tversky, and other behavioral economists (“Who You Are,” Oct. 21).  But it’s untrue that “Before Kahneman and Tversky, people who thought about social problems and human behavior tended to assume that we are mostly rational agents.”

While too many economists – from George Stigler on the right to Paul Samuelson on the left – committed the methodological offense of assuming a wholly unreasonable degree of human reasonableness, the single most significant economist of all time did not: Adam Smith.  One can’t read Smith’s works without recognizing that the father of economics was acutely aware that people’s mental processes routinely deviate from what later economists defined as “rational.”*

And the fact that Smith was a behavioral economist long before behavioral economics was cool is significant.  It reveals that an understanding of human foibles, passions, and cognitive quirks does not (contrary to today’s irrational presumption) necessarily strengthen the case for greater government intervention.  Smith, remember, strongly advocated keeping markets free.  He did so not because free markets are perfect or because individuals are “rational,” but because free markets are less imperfect than regulated ones and because he wisely distrusted any of us disposition-effected, loss-averting, confirmation-biased, hyperbolic-discounting, and otherwise foible-infected humans with the power to order each other about.

Donald J. Boudreaux

* See, e.g., Nava Ashraf, Colin F. Camerer, and George Loewenstein, “Adam Smith, Behavioral Economist,” Journal of Economic Perspectives, Vol. 19, Summer 2005, pp. 131-145.

Also, don’t miss Bryan’s and Arnold’s takes on Prof. Kahneman’s new book.

UPDATE: My colleague (and EJW‘s) Dan Klein wisely reminds me of the relevance of the final paragraph of Ronald Coase‘s essay “Adam Smith’s View of Man“:

It is wrong to believe, as is commonly done, that Adam Smith had as his view of man an abstraction, an “economic man,” rationally pursuing his self-interest in a single-minded way. Adam Smith would not have thought it sensible to treat man as a rational utility-maximiser. He thinks of man as he actually is-dominated, it is true, by self-love but not without some concern for others, able to reason but not necessarily in such a way as to reach the right conclusion, seeing the outcomes of his actions but through a veil of self-delusion. No doubt modern psychologists have added a great deal, some of it correct, to this eighteenth century view of human nature. But if one is willing to accept Adam Smith’s view of man as containing, if not the whole truth, at least a large part of it, realisation that his thought has a much broader foundation than is commonly assumed makes his argu- ment for economic freedom more powerful and his conclusions more persuasive.

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vikingvista October 21, 2011 at 3:31 pm

I thought human foibles disappeared upon government appointment.

Stone Glasgow October 21, 2011 at 4:26 pm


Methinks1776 October 21, 2011 at 5:03 pm

Slam dunk, Viking.

kyle8 October 21, 2011 at 5:29 pm

Absolutely, and never forget that all government workers are pure, wholesome, caring, and they know what is best for you. For your own good of course.

Jon October 21, 2011 at 3:33 pm

In my younger economist days as an undergrad (read as 2 years ago) I made the mistake of assuming total rationality. It was not until I read, actually read, Smith did I see the folly of my ways. And it was not until I read this letter that those errors were realized.

Will October 21, 2011 at 3:59 pm

“He did so not because free markets are perfect or because individuals are “rational,” but because free markets are less imperfect than regulated ones.”

The idea of a pure communist system (which is not what the USSR or any political communist nation has ever tried), where everyone works hard and share all property in common and according to one’s needs is impossible. (The closest thing to it was the disciples of Christ right after his death and that did not last but a very short time). Although it would be nice to live in “utopia”, we live in a real world and in the real world the best of imperfect is what we should all strive to accomplish. That is why the free market makes sense. It encourages imperfect people to reach solutions that although not perfect are efficient. Anyone who disagrees with free markets believes they are smarter than others (which is why there will never be utopia) or they are only disagreeing to achieve their own ambitious desires knowing they will gain more by convincing others to hate free markets.

Stone Glasgow October 21, 2011 at 4:31 pm

Nah, they just focus on the people whose lives are improved by having someone smarter telling them what to do. Free market supporters focus of the opposite people, but both sides are correct.

Patriotic American October 21, 2011 at 4:43 pm

…and regulated free markets are less imperfect than unregulated free markets. As evidence I present the entire 20th century.

Ken October 21, 2011 at 4:50 pm


The 20th century shows nothing of the kind. The 20th century shows very clearly Smith’s wisdom when saying free markets are less imperfect than regulated ones. The evidence: USSR, North Korea, North Vietnam, China, etc.

Regulators are not somehow imbued with any more knowledge than consumers or producers. The perfect example of that is the housing and financial market meltdowns, two of the most heavily regulated industries in the US. These regulations distorted prices to such a degree for all sorts of products that it served as the spring board into this government created recession.


Patriotic American October 21, 2011 at 5:51 pm

Now present the cases where markets without enough regulation have fucked things up…

Ken October 21, 2011 at 10:33 pm


You’re the one who seems to think free markets “fucked things up”. You present that evidence.


Dan J October 22, 2011 at 12:15 am

Housing……. Banking……. Two of thee biggest industries with thee biggest amount of regulations….. Each industry can barely sneeze without going thru a govt bureaucracy and going over the thousands upon thousands of rules and regulations.

MortgageGuy October 21, 2011 at 5:55 pm

Housing is one of the most regulated industries in the US? Are you high or did you just make that up? Or did you mean residential mortgages?

Sam Grove October 21, 2011 at 6:36 pm

The industries around housing are highly regulated.

Locally, there are zoning and permitting issues.
Nationally there is the mortgage and financial industries, not to mention HUD as a bureaucracy that has something to do with housing.

Will October 21, 2011 at 7:31 pm

Yes, housing is highly regulated. Not just the mortgages, the zoning, and other things associated with housing, but the house itself. Have you ever looked at all the codes builders are required to follow to build a house?

Will October 21, 2011 at 7:31 pm

Not to mention all the permits required to remoldel houses.

Ken October 21, 2011 at 10:36 pm


I’m not high, nor did I just make anything up. If you think it’s not regulated, buy some land and start building in on it without consulting the government. You should hope they don’t notice. If you really are a mortgage guy, then you know all about how regulated simply buying property actually is. Additionally, since you claim to be a mortgage guy, you cannot fail to be aware of zoning laws.

Perhaps you are high or are just making things up. What do you think?


Nikolai Luzhin, Eastern Promises October 23, 2011 at 10:22 am

China is growing at 8/10% a year, out performing our “freer” economy

Will October 21, 2011 at 5:13 pm

Regulated. To me this is government interference which is the exact opposite of a free market and the description “regulated free market” is an oxymoron.

vikingvista October 21, 2011 at 5:37 pm

Except in the Milton Friedman sense of free markets having their own inherent regulatory mechanisms. Government regulations DEregulating natural market regulations is one of the biggest sources of economic problems and what statists call “market failure”.

Nikolai Luzhin, Eastern Promises October 23, 2011 at 10:23 am

Friedman sense of free markets having their own inherent regulatory mechanisms

which we now know, as proved by the Lesser Depression, is false. We moved toward “unregulated” banking and securities and blew up the World.

vikingvista October 23, 2011 at 12:50 pm

Selective reading will cause you to utter such mistakes. Why don’t you strain yourself and see if you can make it to the second sentence?

J. W. October 21, 2011 at 5:22 pm

Could you have chosen a worse century to make your point?

Sam Grove October 21, 2011 at 6:33 pm

I need you to explain what you mean.

What do you mean by “perfect” for example.

Lot’s of things have been happening concurrently and it is often very difficult to sort things out.

Markets have evolved extensive regulatory mechanisms which are not readily apparent to the casual observer.

Problems do arise when people turn to government in order to avoid the effect of those mechanisms.

Russell Nelson October 23, 2011 at 12:58 am

“regulated free markets” are where vegetarians go to buy their meat, where atheists go to church, and pacifists wage war.

kyle8 October 21, 2011 at 5:31 pm

God protect us from any more Utopias. Those have killed millions.

vikingvista October 21, 2011 at 5:38 pm

Oh come now, Kyle. Isn’t that a small price to pay for utopia?

Dan J October 22, 2011 at 12:18 am

Just millions? Try hundreds of millions. China under Mao was about 70million or so. Russia- 30-50 million? That’s just two.
You can take your elected aristocracy and shove it.

vikingvista October 22, 2011 at 2:06 am

Yeah, but come on. This is Utopia we’re talking about here! We have to keep trying! We’ll get it eventually. Just have faith. And be strong. The sacrifice will be worth it.

Greg Webb October 22, 2011 at 2:08 am

Okay.. But only if we sacrifice George first.

Arizona Pundit October 22, 2011 at 6:56 pm

I should start writing emails.

Ken M October 21, 2011 at 4:22 pm

I consider myself fortunate that I didn’t jump into Econ until late in my senior year. By that time I had read Smith with a mind untainted by later distortions of what he wrote, or blinders on anything beyond the manufacturing of pins. I found so few things in grad school or in the years since both teaching and doing economics that Smith hadn’t grasped clearly, from behavioral economics to human capital and areas usual considered the domain of sociology.

Becky Hargrove October 21, 2011 at 4:41 pm

Adam Smith lived in a time when he could directly observe the ways in which (growing) economic interaction actually changed people for the better especially in their relations with one another. That must have been a really powerful takeaway, one that he spent a lifetime trying to explain to others.

muirgeo October 21, 2011 at 8:18 pm

Yeah I wonder what he would have thought of quants and CDO’s.

Dan J October 22, 2011 at 12:21 am

He certainly would have been appalled by govt propping up Fan/Fred and then setting quotas for loans to people who can’t afford it or threatening banks who did not meet quotas on loans to high risk of default people. I feel confident he would have recognized the major role govt played in creating the housing boom and bust.

Nikolai Luzhin, Eastern Promises October 23, 2011 at 10:26 am

I wonder what Smith would have thought of someone like you who spins and distorts facts

quotas, even if true (but actually more than false) do not lead to people being willing to commit loan fraud.

Stone Glasgow October 21, 2011 at 4:45 pm

How can one trust others to run the military, capable of harming all of us with its power, but not regulators, who have the same ability to hurt (or help) us with their decisions? Why are police a good idea, and food-inspection is not? Both are designed to protect citizens from physical harm.

vikingvista October 21, 2011 at 4:56 pm

All of those services are desirable. The incentives are such that putting them in the hands of an invulnerable politicised monopoly is not desirable.

SmoledMan October 21, 2011 at 5:07 pm

I never understood why government employees are 100% trustworthy and incorruptible but we can’t EVER have them contract out for those services as private sector guys are just horrible and evil.

vikingvista October 21, 2011 at 6:46 pm

Because putting a gun in your hand turns you into a saint, while having to persuade people to voluntary action makes you a fiend.

Stone Glasgow October 22, 2011 at 12:46 am

Viking – right, they are all good services. Why do libertarians want police and military to be government-run, and food inspectors to be privately organized?

vikingvista October 22, 2011 at 2:07 am

Status quo bias. Sad, really.

Stone Glasgow October 22, 2011 at 4:07 am

Do you think military should be privately run? If so, how and why?

ArrowSmith October 22, 2011 at 4:31 am

Why not? Let the mercenaries do the grunt combat, the rest of it is UAVs, cruise missiles and air force.

vikingvista October 22, 2011 at 7:08 pm

In one comment?! In short, my answer for everything is simply that the only approved actions among voluntary actors should be voluntary ones. They are the only ones I approve of, and I think they should be the only ones you approve of.

To get started, let me say this: the question in the minds of those posing it usually translates to this:

“How do you plan to centrally plan a centrally planned order that looks just like the current centrally planned order, but without central planning?”

Status quo bias is an intellectual trap of circular reasoning for those blinded by the bias. Why should individuals be beholden to the current institutional structures for their security? And second, you would not have expected in a discussion 200 years ago about the future of transportation for someone to describe the semi-automated computerized air traffic control centers for commercial jet airliners. Markets are neither static nor predictable, and that’s part of what is good about them.

So, it is *impossible* for there to ever be a reliable detailed answer regarding the appearance of a future voluntary order. That would require a forceful imposition, which contradicts the purpose. Libertarians seem to accept the glories of those uncertain dynamics for most things in their lives (from clothing to housing to nourishment to health care to life insurance to individual self defense), but not large scale security. The contradiction was described well by Bastiat’s peer Molinari.

It is a self contradiction to give a central plan or attempt to preserve the current centrally planned regime voluntarily. But what I can do is pretend to be an entrepreneur, coming up with a business plan, and make some general if still unreliable observations…

I look at the facts of the market–many people fear terrorism and the threats of some foreign state armies believe they have *much to lose* from attacks, many people enjoy and are talented at being warriors, many people love “our troops”, many people are part of a long military tradition. And finally, the wealth exists in this market to support the world’s single largest defense structure under a coercive state regime, without particularly severe deprivations.

As an entrepreneur, I see that many people want security, many people are capable and willing to provide it, the necessary resources have been proven to exist, and I set out to find a profitable way to bring these elements together in the marketplace. I have the advantage that people are not likely to be willing to suffer death or large scale property damage for reasonable costs of positive externalities. People

Aside from that, I can only imagine that the market will be very heterogeneous and localized, possibly best served by sub-specializing competitors. Those on the coast looking to convince prospective tenants of their security will likely have a different need than those in the Midwest, or along the Mexican border, or in high profile cities. Those looking to sell travel security or insurance to business travelers or vacationers will likely have different needs still. Undoubtedly professional security associations would develop, and perhaps some of these would increase the marketability of their members by implementing a mechanism for rapid coordination and mobilization of resources in case of invasion. And just like people today would like to know they have some security against some portion of their own military turning on them, market participants would undoubtedly also want such assurances, creating a demand for still other firms.

And just as with any free enterprise, the processes of firm failure and entrepreneurial innovation, and other market forces would almost certainly produce a more relevant, efficient, dynamic, and I suspect safer, set of defense institutions than exist today.

The other question is how, if public sentiment did change accordingly, would such privatizations occur to take us from the here to there.

Jon October 21, 2011 at 5:00 pm

In the case of the military, we in America safeguard that by having a mostly part-time army (National Guard) and a somewhat small standing army. Same with the police; limit the power by limiting the size. Same argument for regulations; limit the power by limiting the size.

vikingvista October 21, 2011 at 5:20 pm

The “limiting” has proven to be the chimera. Such is the nature of Monopoly.

Will October 21, 2011 at 5:01 pm

“Why are police a good idea, and food-inspection is not? Both are designed to protect citizens from physical harm.”

If this is a serious question, it is simple incentives. People selling food have an incentives to make the quality of food better to compete in a huge market. Have you ever noticed how fast do restaurants go out of business. It is a highly competitive market. One wrong review or bad experience with people getting sick from the food and the business will find it hard to stay open. The business relies on customer satisfaction.

When it comes to crimes, criminals respond to incentives too, but it is not related to customer satisfaction. Criminals don’t have an incentive to keep their victims happy. Criminals have an incentive to avoid being caught and going to prison. The lower it is the more incentive to commit crimes. Police raise the possibility of being caught which makes the cost of crime go up and creates an disincentive to commit crimes.

Nikolai Luzhin, Eastern Promises October 23, 2011 at 10:31 am


You present a false choice

Making it a crime to sell tainted food doesn’t remove incentives to make the quality of food better to compete in a huge market.

kyle8 October 21, 2011 at 5:35 pm

I have no problem with those basic functions of government. Those are situated around the government taking steps to protect the population, which is it’s job.

When it starts to subsidize some industries, punish others, and place all sorts of market distortions into place, that is where it has overstepped it’s bounds.

Greg Webb October 21, 2011 at 11:33 pm

Exactly! Government is necessary because men are not angels. And, governmental powers must be limited because the men who operate that government do not become angels by becoming government officials.

Bastiat Smith October 22, 2011 at 12:21 am

We often forget that a Republic, the a rule of law, is only possible if the government has the ultimate coercive authority. It would be unwise to increase this power any greater than that which is necessary to limit the most robust aggressor.

There is little justification for the current breadth of the USA military.

vikingvista October 22, 2011 at 2:23 am

“the a rule of law, is only possible if the government has the ultimate coercive authority.”

I know that I, for one, forgot it long ago, and forever.

Darren October 21, 2011 at 5:01 pm

…human foibles, passions, and cognitive quirks…

And we’re supposed to believe government employees do not possess these same foibles, passions, and quirks? I suppose if we also believed they weren’t human, there might be a point.

SmoledMan October 21, 2011 at 5:02 pm

Why do you hate unions so much reich-winger?

Greg Webb October 21, 2011 at 11:39 pm

Typical statist incoherence. Daren never mentions, nor do his words infer, unions. Yet, SmoledMan falsely accuses him of hating unions. More evidence that there is only one type of statist – stupid.

Dan J October 22, 2011 at 12:23 am

I have problem with unions. Worked at union shop and watched and lived in union towns. Oh the wastes, drunkards at work, doing cocaine at work, etc.,….. Intimidating folk like the mafia……. Stealing union dues and giving to elected officials as bribes….

Nikolai Luzhin, Eastern Promises October 23, 2011 at 10:34 am

Dan J

Do you have the same problems with Capitalist that engage in the or similar behaviors, or are they the Rich you worship?

LowcountryJoe October 21, 2011 at 5:39 pm

I always assume that people ARE rational and make decisions based on what will bring themselves the most expected utility as they attempt to balance utility maximization across a lifetime…given their person knowledge, resources, and life experiences to date.

To suggest that someone may be irrational makes me feel very uncomfortable when I give this idea some really deep thought. To me it puts in in the very same class of people who actually enjoy coercion in order to obtain so-called ‘desired’ behavior/actions.

muirgeo October 21, 2011 at 5:50 pm


Far more significant than people acting irrationally is the ability of grifters, con-men and wall streeters types to fool people into a bad deal. The system is stacked for this purpose and explains massive concentrations of wealth among people who add nothing productive to society making all their gains from those who follow thee rules.

LowcountryJoe October 21, 2011 at 6:32 pm

I wanted so badly to give you a flippant reply but then decided against it. You are right, of course. There are people in this world who are dishonest; who steal; and who cheat. Many of these same people will do all three. One has to safeguard against this as best as they’re able to by striving to obtain knowledge. But I take some serious exception to your wording — wording [and past posting history] that left me with the impression that you seem to think that only these types of individuals are able to gain wealth. If this is, in fact, how you intentionally made this to sound I believe you are wrong…dead wrong. In fact, I think very few liars, cheaters, and thieves ever manage to amass wealth for any length of time. I thing that those that manage to for any length of time ARE the exception.

muirgeo October 21, 2011 at 8:29 pm


Do you know anything of the GAO’s recent fed audit of which self described socialist Senator Bernie Sanders from Vermont along with Ron Paul were instrumental in getting placed into the Dodd Frank Financial Reform bill? Almost no one seems to know of the audits results but they are a staggering reminder that I and the OWS crowd are right with regards to how tilted things are. Everyone should be in the streets marching to the Fed offices, the Capital and the banks.

I see you guys worried about $200 million dollar blunders to Solandra. The Fed over the last 3 years has made secret loans totaling $16,000,000 million dollars to a handful of mega banks. That’s $16 trillion dollars. How can that not infuriate you? How does that NOT bring some justification to the rage we see from Occupy Wall Street and most reasonable people who understand this. $16 TRILLION DOLLARS but when Obama ask congress to pay about $0.05 trillion to fund some firefighters and teachers the Republicans say NO because we can’t afford it.

It also infuriates me that the professors here are unaware of this or feel it’s insignificant and not worth comment. It underscores ALL that is wrong.

Nikolai Luzhin, Eastern Promises October 21, 2011 at 9:04 pm

muirgeo writes:

That’s $16 trillion dollars. How can that not infuriate you? How does that NOT bring some justification to the rage we see from Occupy Wall Street and most reasonable people who understand this . . .

Infuriate who about what? One certainly cannot be mad at the Fed for making the loans. The loans needed to be made, should have been made. The making of the loans is the purpose and function of the Fed. What you mad about?

If you complaint is that the Fed didn’t make you a loan or your friend a loan, that’s jealously.

If your complaint is that the Fed ought to have never let the situation develop, while true, what is your point. The loans still had to be made, when made. As for what happened when Alan Greenspan ran the Fed, what did you expect from a nut job who followed Ayn Rand.

That anyone voted for him shows the madness that is Congress when it comes to the appointment power

LowcountryJoe October 22, 2011 at 12:00 am

I don’t know anything about this. I don’t even know why you went off topic but it’s sort of irritating to me that you did. Something tells me, though, you, in particular, would whine and complain vert loudly if our political dipshit and quasi government run banking system was really allowed to go through a crises brought about through no intervention and a trust that the market would solve the issue over time. I think you’d whine because you seem to lack the stomach to handle far less serious issues that exist.

Emil October 22, 2011 at 8:37 am

Straw man – most of us are infuriated about crony capitalism.

It is however remarkable how you continously manage to blame government interventions on the market.

Sam Grove October 21, 2011 at 6:39 pm

the ability of grifters, con-men and wall streeters types to fool people into a bad deal.

Are you suggesting that politicians are above all that?

Anotherphil October 21, 2011 at 10:16 pm

Far more significant than people acting irrationally is the ability of grifters, con-men and wall streeters types to fool people into a bad deal.

Funny how many run for office when they discover they have this “talent”.

LowcountryJoe October 22, 2011 at 12:53 am

Okay, then, on to flippancy. When were you fooled into believing the childish collective bullshit that you do? And which specific politicians did you enrich [possibly with wealth but certainly with power/leverage while adding nothing productive] because you were duped?

brotio October 22, 2011 at 12:58 am

The system is stacked for this purpose and explains massive concentrations of wealth

In case you didn’t know it, TARP was passed by a Democrat-controlled congress. Among those who voted for it were noted socialist stalwarts Nancy Pelosi, Diana DeGette, Bawney Fwank, Sheila Jackson-Lee, Charles Rangel, and Debbie Wasserman-Schultz. All of these people are at least as regressive as you (although none are as profoundly stupid).

House Democrats voted 172 – 63 in favor of TARP; House Republicans voted 108 – 91 against TARP.

It is amusing that you waddled around Boston Common with a bunch of regressive stooges, protesting those who accepted a government handout, while remaining silent about the Democrats guilty of handing-out.

Nikolai Luzhin, Eastern Promises October 23, 2011 at 10:39 am

TARP worked

Methinks1776 October 23, 2011 at 10:12 pm

Go tell OWS.

Greg Webb October 23, 2011 at 10:33 pm

If by “TARP worked” you mean that government officials got a lot of taxpayer money to reward political cronies and get political contributions, then you are right. But, TARP was morally, ethically, economically, and constitutionally wrong.

Babinich October 22, 2011 at 6:12 am

You left politicians off your list of those acting irrationally. The Speaker of the House of the 111th Congress comes to mind immediately based on this little gem: “we have to pass the bill so you can find out what is in it”.

Chuclehead October 21, 2011 at 9:37 pm
vikingvista October 21, 2011 at 10:48 pm

Praxgirl rules! She RULES!

Stone Glasgow October 22, 2011 at 4:15 am

Each man’s actions are always rational from his own point of view, but some situations demand forceful intervention. Sometimes, the man is so ignorant that forceful intervention from an outsider is something he rationally desires (but doesn’t know it yet).

For example, if a man is about to cross the street, and does not see a bus that is about to hit him, another man who sees the bus coming can make a decision to hold him on the curb, using force, because he has more knowledge. In this example, forcefully controlling a rational man is good for him, from his own point of view (in the future).

The trouble is finding men who see buses and save people. It’s very hard to imagine that men given the power to hold others against their will on the curb will use that power only for moral and life-saving reasons. All too often, they hold men on the curb for other, selfish reasons.

robert_o October 22, 2011 at 2:44 pm

Even saving a man from a bus is not necessarily in that man’s rational interest.

Bastiat Smith October 22, 2011 at 12:28 am

In reading Smith’s TMS, I read nothing that would suggested that people were thought to be irrational. There are plenty of revenues and costs that are not measurable by a third party, nor are they standard across individuals and groups. It is very conceivable that people gain utility from doing for others. Even if no other person provides positive feedback, the internal spectator may provide all the utility that is necessary.

It is silly to say that people are irrational just because you because social circumstance or otherwise immeasurable returns are valued higher or lower than any observer might empathize enough to observe.

GiT October 22, 2011 at 4:04 am

Part I Section III Chapter 2 and 3 seem to suggest just that there is something quite irrational about ambition and vanity (which are,the motors behind aspirations to wealth…)

Nikolai Luzhin, Eastern Promises October 23, 2011 at 10:35 am

had to break it too you Lowcountry, but people are human. You need to start dealing with reality

Bill October 21, 2011 at 5:59 pm

I like the Kling and Schulz “Markets fail: that’s why we need markets.”

Craig October 21, 2011 at 7:53 pm

All too often, rational is defined as “what I would do”.

LowcountryJoe October 21, 2011 at 11:44 pm

Thank you for this; I agree.

Bastiat Smith October 22, 2011 at 12:28 am


vikingvista October 22, 2011 at 2:08 am

Agreed. And it can’t be defined that way, because it is only true for some of us. :)

Stone Glasgow October 22, 2011 at 4:16 am


Stone Glasgow October 22, 2011 at 4:17 am

Everyone always makes rational decisions. The trouble is that children make rational decisions to touch a hot stove.

GiT October 21, 2011 at 8:22 pm

“The subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.”"

“A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be any thing very unreasonable. It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion.”

“The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain. The performance of this duty requires, too, very different degrees of expence in the different periods of society.”

“[The progress of the division of labor] corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.”

“The public can impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education, by obliging every man to undergo an examination or probation in them before he can obtain the freedom in any corporation, or be allowed to set up any trade either in a village or town corporate.”

Guess who…

Bastiat Smith October 22, 2011 at 12:34 am

Smith was torn on education between liberalism and his laissez faire. It is easy to understand that for a population to be governed, they require a certain depth of knowledge, in multiple areas, in order to prevent deception and sectarianism. Similarly, it is easy to imagine a government institution that imposes certain services in the name of education that are neither wanted nor valued by the population. Smith was very torn on this and even his suggestions are flimsy. He cannot be painted with broad strokes on this topic.

Chuclehead October 21, 2011 at 9:31 pm

You have answered your own question beautifully and eloquently.
I simply look at it as economic relativity. Observations are different from different perspectives. To the observer, it is irrational, but to the actor, rational. Often short term utility vs long term utility.

indianajim October 21, 2011 at 11:00 pm

Why does anyone think that Kahneman and Tversky’s prospect “theory” is great?

LowcountryJoe October 21, 2011 at 11:51 pm

I don’t like the update (Coase’s words) either. I agree with those words but do not believe that this negates ‘economic man’ as I like to understand ‘him’. Showing a concern for others — even acting on it by making a sacrifice — can bring the ‘giver’ in this circumstances a vast amount of utility or other perks like the ones some politicians seek…goodwill, praise, and legacy.

Bastiat Smith October 22, 2011 at 12:35 am

Super LIkE

Jim October 23, 2011 at 1:02 pm

The rational theory of markets was always a piece of bunk.

Greg Webb October 23, 2011 at 1:42 pm

Economists make an assumption that markets are rational in order to remove the obvious argument that:

1. Markets are composed of the decisions of millions of individuals.
2. Individuals sometimes make irrational decisions.
3. Therefore, markets may be irrational.

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