[26 September 2009]
Behavioural economists have uncovered much evidence that market participants do not act like conventional economists would predict “rational individuals” to act. But, instead of jettisoning the bogus standard of rationality underlying those predictions, behavioral economists have clung to it. They interpret their empirical findings to mean that many market participants are irrational, prone to emotion, or ignore economic fundamentals for other reasons. Once these individuals dominate the “rational” participants, they push asset prices away from their “true” fundamental values.
This helped me clarify in my own mind the muddle I’ve been in about the ideology of “perfect markets” and how that ideal is possibly used ideologically. The economists quoted, Roman Frydman and Michael Goldberg, seem to lay it out pretty clearly. At the behest of most economists, neoclassical or behavioral or otherwise, we’ve fallen into the habit of elevating what economists normatively deem rational to the only true form of rationality, while ignoring what human behavior seems to suggest should be called “rational”—that is, what ordinary people tend to do when confronted with various incentives or dilemmas.
And the motivating force behind all this is the effort to isolate “true” asset values—a quest that has had an ignominious journey through the history of political economy as Justin Fox’s The Myth of the Rational Market well documents. (For what it’s worth, I reviewed that book here.) “True” asset values underpin the financial sector, motivate its investment strategies and analysis. The pursuit of them keeps money circulating, which keeps economies growing (on paper, anyway).
Determining what constitutes value has vexed economists from the beginning of the discipline. Marx’s Capital is essentially a long meditation on the origin of “surplus value” as it arises out of exploited labor—a notion that depends on his definition of value as socially necessary labor time. The labor theory of value has been discarded by economists in favor of marginalism, which to remain coherent requires a human subject that exhibits the sort of “rationality” behavioral economists are undermining.
The alternative (and I am not entirely sure it is prefereable) would seem to be to render “rational” those “other reasons” that people have for behaving—the decision-making approaches that are not driven by straightforward utility calculus. That means returning to a morality or an ethos that is not based on the market but on other norms of human interaction, ones that evolve not from impersonality (the market’s liberating feature) but from integrative social ties. The danger is that this would reinstitute tribalism and ethnocentirism as the source of norms—a return to feudalism or something worse instead of the development toward cosmopolitanism that arguably the globalization of market forces has ushered in.