Stephen asked me this question: Are consumers 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 point with an example: Many people will buy tattoos before saving up for an emergency fund. He concludes, “[i]What is more important than financial security to have a tattoo? 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.
Economics and Value
Imagine you live in a country with just 100 acres of farmland. Farmers can plant either orange or peach trees depending on the amount of land available. Let’s say that the two types of trees are equally productive.
What kind of plants should we plant? If you’re a peach lover, it may be tempting to say society should only plant peach trees. They are delicious! However, it is possible to recognize the differences in how people value oranges and peaches by doing some honest self-reflection.
For a single orange, some may be willing to give up two peaches in exchange for one. Some would be reluctant to sacrifice their peaches to get a greater number of oranges. Different people would value an extra orange or peach in different ways. This is the economic term for it. Subjective theory of value.
What will society do then? Farmers would be wise to plant peach trees if they are dominated by peach lovers. For example, if farmers divide the land 50-50 and discover that people will pay $10 per peach and $2 for oranges to get started, they will be able to make extra money by removing orange trees and planting peach trees.
This allows the market prices and subsequent profit from selling good cause resources to flow to the highest value use. Economists consider the value of consumers to be given. They explain how market institutions allow these values to be reflected by resource owners.
People pursue the ends they desire, and it’s not the job or responsibility of economists to oppose their goals. Economic analysis is, in this sense, just like any scientific analysis. No cost to you.
This doesn’t mean we have to think everyone is making Good decisions. This is because we understand that they make decisions according to what is most satisfying to them. Ludwig von Mises sums this up succinctly in Socialism: A Sociological and Economic Analysis.
The deciding factor is man’s subjective will. 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. I can’t say that a man who drinks wine but not water is acting irrationally. I can at most say that I wouldn’t do this in his place.
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. The idea of weak rationality allows us to see that we can’t change people’s decisions. We are simply substituting their ends with ours.
Murray Rothbard, economist, points out the fact that government policy is often just a political force for consumers to accept 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, State, and Power with 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 farmers had private property rights. This meant that they could use their land in any way they chose and then sell it.
But what if farmers didn’t get to sell fruit? Imagine if the law forced farmers to produce and give away fruit. It’s not too hard to imagine the “food is a human right” campaign slogans which bring this about. Are farmers going to grow peaches for the peach-loving population?
There’s no reason to think so. We would expect farmers to plant orange trees if orange trees are easier to care for. 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
It is possible that the answer to the above question is still not satisfying for some. It will be unsatisfying to some degree. While we might not like the idea that people place alcohol above their health, decisions have shown that many 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!
Peter Leeson is an economist who has extensive research that reveals how many cultural practices, which many might consider irrational and crazy, actually fulfill a difficult to see purpose. He wrote a book about this topic. WTF?!WTF?!.
For example, take trial by ordeal. This was a method of determining guilt or innocence during Medieval times. These types of trials were used rarely— only when there was no clear evidence. Hot water trial is another type of trial. This trial saw the accused stick their arm into a pot of boiling water. They were guilty if they burnt their arm. If God miraculously preserved their arm they would be declared guilty.
Crazy? Not at all. Imagine you’re a medieval peasant who believes in the authority of the church. If you are innocent, God will preserve your arm. You will believe God will punish your guilt if you are found guilty. Instead of having your arm burnt and being declared guilty, you will accept your punishment.
Both innocent and guilty suspects will self-sort during the trial. The trial will only be open to innocent probands, as the guilty believe that they will lose.
Leeson has evidence to support this theory, even though it sounds a bit unlikely. He first reveals significant details that suggest that the clergy who conducted the trial could manipulate the results so that the majority of people are not burnt.
And that’s exactly what the evidence suggests. According to the trial data, the majority of the accused were not boiled with 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.
Are you still not convinced? Consider another type of ordeal— the cold water ordeal. The cold water ordeal is a way to prove innocence. Someone who sinks in coldwater will be found innocent. While someone who flounders will be found guilty. Because of differences in body composition, men sink more than women. We would expect more men to undergo the cold water ordeal if it is intended to exonerate those who are willing.
That’s exactly what happened. Leeson actually finds two cases in which a woman and a man are charged together for a crime. In both cases, the man is sent to trial with cold water while the woman is sent to another type of ordeal (trial with a hot iron).
It is not true that trial by ordeal can be used to determine guilt and innocence. Alternative arrangements such as trial by ordeal might be the best way to determine guilt or innocence in times when forensic evidence is not available. In Leeson’s words,
My analysis of ordeals indicates that objectively truthful beliefs can sometimes be replaced by objectively false beliefs. This is even more important because it indicates that in some cases, society is actually better off for having this belief. 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. This is a form of insistence on such a result. Strong rationality This is not incompatible with weak rationality.
What does all this have to do 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. These groups are able to successfully weed uncommitted members from the group by wearing unconventional clothes in public. By weeding out uncommitted members, everyone benefits from being in the group.
Some people think that tattoos can signal a willingness or need to go against the grain, which could lead to more social cohesion. 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.
*About the author: Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. His graduate education was at George Mason University.
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