Justin Lahart has a great piece in the Wall Street Journal chronicling stories of economists who practice what they preach by acting “rationally” — maximizing personal utility. For instance, John Sigfried, a professor at Vanderbilt, bought a black car instead of a gray one, even though he preferred gray, because it was $100 cheaper. Robert Hall, a Stanford professor, wants to hire someone to trim his Christmas tree so he can use the time for more productive things.
Economists typically posit that people act in their own interest — they maximize their own utility, or happiness. It explains why studies have shown that economists free ride — get others to pay for things from whcich they themselves benefit — and contribute less to charity. A purely self-interested person would never give to charity; yet people give to charities all the time.
All of which give rise to the question: are economists cheap because they assume people are self-interested, or do self-interested people gravitate to studying economics?
Tags: economists, rationality, self-interest
Whatever the accuracy of Justin Lahart’s opinion piece may be, I believe he is short-sighted in his view. Economics is a part of the world and how it operates. Therefore, no matter accomplished he may be, an economist can only explain a portion of human behavior and how the world works. There are other forces at work that economics cannot address.
Robert T. Kiyosaki writes in Rich Dad, Poor Dad:
Both of my dads were generous men. Both made it a practice to give first. Teaching was one of their ways of giving. The more they gave, the more they received. One glaring difference was in the giving of money. My rich dad gave lots of money away. He gave to his church, to charities, to his foundation. He knew that to receive money, you had to give money. Giving money is the secret to most great wealthy families. That is why there are organizations like the Rockefeller foundation and the Ford Foundation. These are organizations designed to take their wealth and increase it, as well as give it away in perpetuity.
My educated dad always said, “When I have some extra money, I’ll give it.” The problem was, there never was any extra. So he worked harder to draw more money in rather than focus on the most important law of money: “Give and you shall receive.” Instead, he believed in “Receive and then you give.”
In Become a Better You, Joel Osteen writes:
If you’ve had unfair things happen to you, or people have robbed or cheated you, the Scripture says that God will bring you out with twice what you had before. If you are struggling through rough times, start declaring “I’m coming out of this experience with twice the joy, twice the peace, twice the honor, twice the promotion.” Every day when you get up, declare, “This is going to be a day of victory in my life. I’m expecting God’s unprecedented favor. Promotion, favor, increase, they’re all on the way.”
To my knowledge, these principles are not found in any economics text book. That doesn’t mean they are invalid.
Later in his book, Kiyosaki wrote:
I just trust that the principle of reciprocity is true, and I give what I want. I want money, so I give money, and it comes back in multiples. I want sales, so I help someone else sell something and sales come to me. I want contacts and I help someone else get contacts, and like magic, contacts come to me. I heard a saying years ago that went, “God does not need to receive, but humans need to give.”
All of this begs the question: “What is rational?” Kiyosaki learned from his rich dad that to get money, you need to give money. That doesn’t sound “rational” at all—unless, for some strange reason, for some reason beyond economics, it works.
In Organizational Behavior class when I was an MBA student, we studied The Functions of the Executive by Chester I. Bernard. Back in the 1920s or so, Chester (we felt like we were on a first name basis with him) was the head of New Jersey Bell. He wrote that, beyond the subsistence level, money ceases to be a motivator of people. What I learned when I took a job managing our family’s business is that, while he may be correct in his assertion, he doesn’t tell us how to determine someone’s subsistence level. I came to find out that some people’s subsistence level is way below mine. Our workers were people who would work 32 hours a week even though we operated 40 hours. What I found out was that I had to be careful not to pay them too much money or they would take off until the money was all gone. To me, their behavior was not “rational” but, to them, it was perfectly “rational.” That statement tells as much about me as it does about them.
Our workers may not have been educated but they were no more and no less self-interested than anyone else. They simply placed a higher value on their non-work-related activities. Similarly, if the economist had placed a $200 greater value on gray cars over black ones, he would have chosen the gray car he preferred because, at only $100 more, it would have represented a greater value. The fact that he made his purchasing decision on the basis of price and not value indicates to me that he is, in fact, cheap.
Whether or not that’s “rational” depends on your point of view.