Ritchie’s new economics

And there, in a nutshell, John Kay has summarised why we are still in an economic mess. The syllogism that underpins neoclassical economics (and in turn much of neoliberal and neoliberal economics) is firstly that people are always and only self interested (the major premise) and secondly are rational (the minor premise( form which it follows that they maximise their well-being. This is the foundation of the logic of most prevailing economic thought and almost all econometrics.

There are, however, three faults with this a priori thinking. People are a long way from being solely self interested. Secondly they are not rational. And thirdly, as a result, they probably never maximise, although they do undoubtedly compete (which is a very long way from being the same thing, as first noted (I think) be Thorstein Veblen.

This has profound consequences. When models are built on the basis of behaviour that does not exist, giving rise to policy recommendations that conflict with the reality of the human condition then stress happens.

And that’s exactly what is going on now.

If you want a better syllogism this is it: firstly, people want to live harmoniously in community whilst, secondly, wanting to achieve for themselves and those they care for and so thirdly they seek to fulfil as much of their potential as is possible within the constraints imposed upon them.

No one at all is stupid enough to think that humans are solely self-interested. It is, even in Smith’s version, enlightened self-interest that counts. We cannot explain, for example, the adoption of unrelated children without assuming some motivation beyond pure self-interest. The second assumption, that humans are rational: well, do we think that it would be better if we based our worldview on the idea that humans are all mad and irrational? But the rationality assumption isn’t even that human beings are entirely rational. For a start there’s vast areas of neoclassical economics exploring where we know that people are not so: hyperbolic discounting anyone? We also don’t assume that people maximise: we do think that people have a pretty good go at getting the best deal they can but we also know very well that most people, most of the time, satisfact. That’s why most of us are shagging the people we are rather than holding out for Scarlett Johannson or George Clooney (to taste).

But even if we leave all of that aside and take Ritchie’s arguments at their face value.

“wanting to achieve for themselves and those they care for and so thirdly they seek to fulfil as much of their potential as is possible within the constraints imposed upon them.”

How the hell is that different from the idea that people maximise rationally?

36 thoughts on “Ritchie’s new economics”

  1. Can Ritchie provide an economic model to suggest why he and his Mrs need to live in one of the most expensive houses in town.

    Clearly no self interest there!

  2. “…within the constraints imposed upon them.”

    Imposed! Not “within whatever constraints affect them”. No; imposed.

    I’m getting that shivering down my spine again.

  3. As Richie believes that the citizenry are gagging to ‘invest’ their pensions in the NHS, rationality cannot form any part of their thinking. QED.

  4. The “rationality argument” is one of a series of what amount to Straw Men used by Proggies and their kin; by applying a gold standard of “perfect” rationality (see also: “perfect competition”, “perfect knowledge”).

    The only (purported) being with perfect rationality, or indeed perfect anything, is God. Anyone else- including Ritchie and the State- have imperfect knowledge, rationality and everything else. But all markets require is that people do the best they can. What is rational will vary from person to person based upon their own subjective goals- for instance, the balance between risk for gain and caution for security is different in each person.

    Markets don’t rely on perfect anything. Ironically, the State does, and Progressives do in general, with their idea that there are objectively correct (for everyone) decisions to be made. The market is a system for dealing with the reality of people just bumbling along based on their own guesswork. We try to act in our own best interests (or in the interests of others- family, community, waifs in need of charity) and that’s the best we can do; and the market deals with the myriad conflicting imperfect impulses of the people within it; something the central planner simply cannot do.

  5. But even if we leave all of that aside and take Ritchie’s arguments at their face value [………….]How the hell is that different from the idea that people maximise rationally?

    May I suggest you have missed the critical sentence in Ritchie’s blog:

    “[The answer is contained in] the Courageous State [helpful link to online store here]”

  6. What IanB said.

    Murphy only and ever has the one “argument”–the tyranny of he and his pals is better than your freedom. Cos he says so.

  7. The latest gem

    ‘The logic of price comparison websites is that people want to do better than others’.

    And there’s me thinking it was to get the best deal for me.

    Ah well.

  8. Ironically Kay was the inaugural Director of the Oxford University Said Business School. I think Ritchie’s betenoire the Oxford Tax Centre is part of that School?
    And no doubt the desire to live harmoniously in community and fulfil potential explains all manner of disturbances, from people near Ritchie not welcoming new EU arrivals into that community, to crime, slavery and war.
    Or maybe that’s because too many people have a false consciousness and don’t realise they’re meant to live harmoniously?

  9. Hmm, people do not act in their own interests, but we need a bigger State to make them not act in their own interests.

    But anyway, they are all mad so we need a bigger State to make them act rationally.

    A bigger insight into The Big Dick’s nature than ours, I think.

  10. Mr. Ecks, as always has it spot on – read the last comment on the blog:

    ‘Krugman is also wrong… as are many neo- Keynesians’

    Ironically, I happen to think Krugman is often wrong, but the clear conclusion I draw from this is that, in his mind, only Murphy has the requisite understanding of how economics works. Unfortunately the need to earn an income prevents me from taking the necessary time to critique the Courageous State on a page by page basis but Tim, given your expose of Ha Joon-Chang’s 21 fallacies, surely a Kickstarter campaign to fund you to do a complete rebuttal of the cretin would seem to be in order….

  11. Is it not the case that while economists theorise on the individual being rational, self interested etc, the predictive nature of such theorising relates more to an aggregate representative individual than a specific person? Thus economists might say ‘If you reduce the price of X people will buy more of it’ which will be true in the aggregate, but for any given individual perhaps not true. I’m never going to buy more sprouts than I do now, however cheap they are, because they are the work of the devil, and I’d rather eat grass.

    So given that economics is about trying to predict aggregate behaviour over time, not what Mrs Smith from Acaia Avenue will do next Tuesday, then it is perfectly reasonable to work on the basis of rational self interest, even if the individual choices are often at odds with the mainstream choice.

  12. Hmm, I think that most people would regard the conclusions that Richard is taking fault with as ‘a posteriori’ thinking, rather than ‘a priori’ thinking. They are, after all, conclusions based on observation of the world rather than innately true by logic alone.

    Mind you, he might be using the expression in a nuanced way that relies on his readers drawing the exact opposite meaning of what he says…

  13. ‘If you reduce the price of X people will buy more of it’

    No, it’s actually if you reduce the price of X, more people will buy it, up to a point when the market saturates. Doesn’t matter how cheap bread is, I’ll only buy what I can eat. Which is that supply and demand curves thingy.

  14. Bloke in Costa Rica

    It’s an elementary principle of logic (ex falso quodlibet) that if you argue from a false premise then all statements are provable. In fact Murphy’s writings are a zoo of logical fallacies. They could be used in a classroom setting. There’s petitio principii, ad hominem, sundry other argumenta a(d/b) quisquis including auctoritate, ignorantiam, consequentiam and nauseam, ignoratio elenchi, the naturalistic fallacy, appeals to fear, spite, pity, ridicule and motive, the genetic fallacy, no true Scotsman, etc. etc..

    One might be tempted to assume that Murphy is arguing in good faith and is merely a hopeless moron. He is a moron, to be sure, but there comes a point when Hanlon’s razor fails and we are forced to adduce both stupidity and malevolence. He’s a psychopath, but fortunately of the evil cretin rather than the evil genius type.

  15. “Hmm, I think that most people would regard the conclusions that Richard is taking fault with as ‘a posteriori’ thinking”

    Indeed: his words of wisdom spill out of his backside, where the likes of Ivan Horrocks are waiting, tongues at the ready.

  16. If people are not self interested, why does he endorse a system of taxation based on extortion by threat of violence?

  17. people want to live harmoniously in community whilst, secondly, wanting to achieve for themselves and those they care for and so thirdly they seek to fulfil as much of their potential as is possible within the constraints imposed upon them

    This does not suggest these same people are willingly to pay for it, or indeed pay for others to enjoy it.

  18. @Ian B ‘No, he said people will buy more of it. I said more people will buy it.’

    Yes, but you’re actually both right. At £2 a loaf, you may well only buy (as close to as possible) exactly as much bread as you ‘need’.

    If it’s 10p a loaf, you might well buy a bit more, cos who cares if you have to chuck a bit.

    Slightly tangentially, I collect second-hand books, and am in the market for anything from £5 to £2,000 (being the most I’ve ever actually spent on a book).

    I know the market quite well – and I’m a known collector here and abroad – and can say with some certainty what most of the well-known rarities are ‘worth’ at any time (there being an element of elastic in the prices offered).

    Weirdly, I prefer spending £500 on a book than £5, even if £500 is the absolute top price it’s worth and I know the £5 book is usually sold at £25.

    That’s not particularly rational. (I still buy the bargains, I just don’t derive the same pleasure from it.)

  19. @Interested: this is a good example of why the word ‘rational’ is of very little use. It’s completely subjective. For me, buying a book, any book, for £500 would indicate that I’ve taken leave of my senses. For you, buying a book for £500 is something you derive joy/satisfaction from and, therefore is entirely rational.

  20. @MattyJ

    To be fair, I deal (in a minor way) so the collection pays for itself. ie the book I paid £2,000 for I sold £4,000.

    Yes, of course I paid tax on the profit.

  21. Slightly tangentially, I collect second-hand books, and am in the market for anything from £5 to £2,000 (being the most I’ve ever actually spent on a book).

    More tangentially, do you have problems with your household insurance company? A few years ago, now, mine wouldn’t believe the valuation for my books (few of which are worth more than a couple of hundred £) so sent a valuer around. She left quite quickly …

  22. Can’t you claim second hand books as a depreciating asset (like vintage cars and wine) and so avoid tax ?

  23. @SE The most expensive few are insured separately, the rest takle their chance.

    @Shinsei

    To be absolutely honest, I’ve never thought about it. I must mention it to my accountant…

  24. @Shinsei

    Not if he’s trading in them. You’re thinking of a capital gains tax exemption, which doesn’t apply to trading profits.

    Whether or not he’s trading as another matter, but if he’s habitually buying with a view to resale then it looks a bit like a trade.

  25. @Ian B ‘No, he said people will buy more of it. I said more people will buy it.’

    Yes, but you’re actually both right. At £2 a loaf, you may well only buy (as close to as possible) exactly as much bread as you ‘need’.

    If it’s 10p a loaf, you might well buy a bit more, cos who cares if you have to chuck a bit.

    At £2 a loaf I’d buy a shitload and freeze it if I thought the price might go up to £4 next month.

  26. Surreptitious Evil, I had huge problems with insurance and books; previous companies treated them as a “set”, applied just one maximum item value to the whole lot and insisted that the only way to have them treated individually was to have the whole lot catalogued.

    I then switched to Hiscox who just wanted a photo to show that there were lots of them.

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