This week I have a question from Stephen who asks about whether consumers are really rational. Stephen says,
“One pillar of economic theory is that scarce resources will be put to the highest and best use. I find this difficult to understand, given the number of broke people in our society and their choices.”
Stephen illustrates his question with the example that many people will purchase things like tattoos before saving for an emergency fund. He concludes, “[i]s a tattoo more important than financial security? What is the economic value of a tattoo?”
Stephen’s question is hotly debated in the social sciences, and in order to answer his question I want to first explain what economists mean when they say scarce resources will be put to their highest-valued use.
Value and Economics
Imagine we live in a small country with only 100 acres of farmland. With the acreage, farmers can either plant peach trees or orange trees. Let’s say that the two types of trees are equally productive.
What should we plant? If you’re a peach lover, it may be tempting to say society should only plant peach trees. They taste better after all! But with some honest self-reflection, we can recognize that people value peaches and oranges differently.
Some may be willing to sacrifice two peaches just to get a single orange, for example. Others would be unwilling to sacrifice their peaches for any obtainable number of oranges. Different people value an additional orange or peach at different amounts. Economists call this the subjective theory of value.
So what will society do? Well, if the society is dominated by peach lovers, farmers would do well to dedicate a majority of the acreage to planting peach trees. If, for example, farmers split the land 50-50 to start, and they discover people will pay $10 for peaches and only $2 for oranges, the draw of extra profit will cause them to uproot orange trees and plant peach trees.
In this way, the prices generated by markets and the subsequent profit obtained by selling a good cause resources to flow to their highest valued use. Economists take the values of consumers as given and elucidate how market institutions enable these values to be reflected in the decisions of resource owners.
So individuals pursue the ends that they want to pursue, and it is not the job of an economist to disagree with their ends. In this sense economic analysis, like all scientific analysis, is value free.
This doesn’t mean we have to think everyone is making good decisions. It only means we accept they are making decisions according to their beliefs about what will satisfy them. Ludwig von Mises makes this point succinctly in Socialism: An Economic and Sociological Analysis.
The subjective will of man is the deciding factor. A man’s preference for water, milk, or wine does not depend on the physiological effects of these drinks, but on his valuation of the effects. If a man drinks wine and not water I cannot say he is acting irrationally. At most I can say that in his place I would not do so.
To keep things straight, I’ll call this concept weak rationality. One hang-up people often have is that people choose to use their resources in ways that we don’t like. But, the idea of weak rationality helps us understand that when we attempt to change their decisions, we are merely substituting the ends they value with the ends we value.
Economist Murray Rothbard points out that government policy is often just politicians forcing consumers to take on their valuations.
“Moreover, government enterprise, basing itself on coercion over the consumer, can hardly fail to substitute its own values for those of its customers,” Rothbard explained in Man, Economy, and State with Power and Market.
It’s important to note that people pursuing the end they desire was not the only thing necessary for resources to go to their highest valued use in our example. We assumed that farmers had private property rights. That is, they were able to use their acreage the way they wanted and sell the fruits of their decisions.
But what if farmers didn’t get to sell fruit? What if, instead, the farmers were forced by law to produce fruit and give it away for free. It’s not too hard to imagine the “food is a human right” campaign slogans which bring this about. Will farmers produce peaches for the peach-loving society?
There’s no reason to think so. If orange trees, for example, are easier to maintain, we would expect the farmers to plant orange trees. If the farmers aren’t allowed to sell what their trees produce (i.e. they don’t have secure property rights) they will not use their trees in the way society most desires.
People Are Smarter than We Think
The answer above is likely still unsatisfying to some. And to some extent, it will remain unsatisfying. We may not like, for example, that people value alcohol more than their health, but as decisions demonstrate, many people do.
But it’s also the case that sometimes people with widely different valuations from us often have very good reasons for those valuations, even by our own standards!
Economist Peter Leeson, has a large research program covering how all sorts of cultural practices which many would call irrational or crazy are actually fulfilling some difficult-to-see purpose. He has a whole book on this subject: WTF?!: An Economic Tour of the Weird.
Take, for example, trial by ordeal, which was a way of assessing guilt or innocence in Medieval times. These types of trials were used rarely— only when there was no clear evidence. One kind of trial by ordeal was trial by hot water. In this trial, the accused would stick their arm in a cauldron of boiled water. If they burned their arm, they were declared guilty. But if God miraculously preserved their arm, they would be declared innocent.
Crazy? Not at all. Imagine you’re a medieval peasant who believes in the authority of the church. If you are innocent, you will truly believe that your arm will be preserved by God. If you are guilty, you believe God will punish you, and, rather than have your arm burned and be declared guilty and thrown in prison, you accept your punishment and admit guilt to avoid the trial.
The trial causes guilty and innocent suspects to self-sort. Only innocent probands will be willing to undergo the trial, because the guilty believe they will fail.
This may sound a bit speculative, but Leeson brings evidence. First, he gives significant detail which suggests clergy who administered the trial would have the ability to manipulate the results such that most people are not burned.
And that’s exactly what the evidence suggests. From the data we have about trial results, most of the accused were not burned by boiling water. This means either clergy didn’t know how to boil water or they “fixed” the results to make sure those who were innocent and therefore willing to undergo the trial were not burned.
Still not convinced? Consider another type of ordeal— the cold water ordeal. The idea behind cold water ordeals is that someone who sinks in cold water will be found to be innocent whereas someone who floats will be found guilty. Men tend to sink more than women due to differences in body composition. So, if the point of an ordeal is to exonerate those willing to undertake the ordeal we would expect more men to be assigned the cold water ordeal.
That’s exactly what happened. In fact, Leeson even finds two cases where a man and woman are jointly charged for a crime. In both cases the man is sent to trial by cold water and the woman is assigned to a different type of ordeal (trial by hot iron, for example).
The point is not that trial by ordeal is an ideal system for determining guilt and innocence. The point is in a time where things like forensic evidence are simply non-existent, alternative arrangements like trial by ordeal may be the most accurate manner of evaluating guilt or innocence which the society has access to. In Leeson’s words,
My examination of ordeals suggests that objectively true beliefs do not necessarily supplant objectively false ones. More important, it suggests that, in some cases at least, society is better off because of this. If institutions based on objectively false beliefs, such as the belief that God intervenes in man’s judicial proceedings to ensure that the righteous party prevails, produce social outcomes that are as good as, or better than, the social outcomes that institutions based on objectively true beliefs produce, there is no pressure for the former beliefs to give way to the latter.
In the paper, Leeson provides even more evidence for this theory if you’re still skeptical, but the basic point is this: sometimes decisions and rules which appear foolish are, in fact, ingenious. The insistence on this sort of result is a kind of strong rationality which is not mutually exclusive with weak rationality.
What does this have to do with tattoos? Admittedly, people may just get tattoos because they like them, but it’s possible tattoos serve some other function.
For example, Laurence Iannaccone argues many activities of members of religion and cults which cause them to modify their appearance (e.g. wearing uncommon clothes in public) actually allow these groups to successfully weed out uncommitted members who would hurt the experience of others. In weeding out these uncommitted members, the experience of being in the organization improves for everyone else.
Perhaps tattoos, in some social circles, signal some willingness to deviate from the norm which allows more social cohesion in those circles. I’m not sure this is right, especially given that tattoos seem to be the norm now, but the point is they could be serving some other function that is more valuable than $50 towards an emergency fund.
In any case, if the work of Leeson (and economics more generally) has taught me anything, it’s that humility goes a long way in understanding how resources should be used in society.