People are Rational and Self-Interested

by Don Boudreaux on August 27, 2013

in Economics

Perhaps the most common way for people who do not like the conclusions of basic economic analyses to dismiss those conclusions is to allege that the assumptions used in the analyses are absurd.  And while some economists do indeed sometimes employ absurd assumptions, most basic microeconomic analyses are founded on quite reasonable (and, hence, secure) foundational assumptions.

The microeconomic assumptions challenged most often are the assumptions that human beings are rational and self-interested.  Here’s all that I mean – and that, I believe, most good economists mean – by these assumptions:

A person is rational if three things generally hold about that person’s manner of assessing and choosing among different options:

(1) he or she acts purposefully in ways that he or she believes will best lead to the achievement of his or her goals; that is, human action is goal-oriented and everyone seeks to achieve his or her goals at as low a cost (broadly reckoned) as possible (e.g., if my goal is to get from Washington to New York City as quickly as possible within a certain budget, I might drive north using mostly I-95, or I might take the Acela express train from Union Station to Penn Station; I will not first drive from D.C. to Miami and then to New York, and nor will I first fly from D.C. to Chicago and then hop a train from Chicago to New York); the goals can change – and they can be, by different ethical criteria, good or bad – but each individual, at each moment in time, acts to achieve goals and as many goals as possible;

(2) he or she learns, if only imperfectly;

(3) he or she has preferences that are transitive; that is, at the moment of choice, if Smith prefers A to B and prefers B to C, then Smith prefers A to C.

A person is self-interested if he or she cares more about himself or herself and about close loved ones and friends than he or she cares about strangers and about acquaintances more ‘distant.’  Imagine Smith as a point at the center of concentric circles emanating out from this point – that is, from Smith.  The further out the circles from Smith, the more distant and less intimate the connection between Smith and the individuals on the circles.  The closer someone is to the center of the set of concentric circles, the greater is Smith’s degree of genuine concern for that person.

These assumptions strike me as quite reasonable descriptions of human motivation as we encounter it daily.

….

I was inspired to write the above not only because this evening I will meet for the first time my Fall 2013 Principles of Microeconomics class at George Mason University.  It’s always a class that I love – dearly and deeply love – to teach.  But another inspiration for the above arose when I was watching the crime show Castle last night with my son, Thomas.  One of the main characters, a tough detective Kate Beckett, asked a prison inmate about information regarding a murder suspect.  The incarcerated inmate sneered back at Det. Beckett and replied “Why should I answer you?”

Everyone understands that people respond rationally to incentives.  The writers of this show (and, I dare say, of all other shows, of all movies, of all plays, of all novels, of all you name it) rely upon this widespread understanding.  The inmate had nothing to gain by answering the question, so Det. Beckett spelled out some terms – something like, “If you level with me, I’ll see what I can do to get you out of prison earlier.”  (She could have, by the way, also threatened to make his life in prison even more unpleasant than it already is.  Carrots.  Sticks.  Doesn’t matter here for my point.)

The writers know that audiences understand that an inmate with information valuable to the police will try to get something in return for his giving that information.  A newspaper t.v. critic would be laughed out of a job if that critic were to write, after seeing this show, “Silly crime-show writers: they assume that people are rational!  We all know that human motivations are far more complex.  These writers and their shows make no sense at all!”

….

“Why would someone want to kill the victim?”  ”What was Jones’s motivation for committing murder?”  ”Why was the victim in this place when he was shot?”  Questions such as these are at the heart of every good (and bad) crime story – and at the heart of every real-world criminal investigation.  And questions such as these are sufficient to justify the assumptions that economists make about individual human motivation and behavior.  Questions such as these justify economists assumptions if only because questions such as these are solid evidence that we all, in every facet of our lives, make the very same assumptions about human motivations and behavior.

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