The Problem with Macroeconomic Rationality

Today’s Public Choice Seminar at George Mason University featured Yale University’s Truman Bewley.  His talk was on his interview study of pricing practices.  The talk featured many good points (which can be found in the first link I provided), but he also said something important.  Dr. Bewley said (and I am paraphrasing as I do not recall the exact quote): “If you find someone is acting irrational, you may not understand the person’s objectives or the constraints they face.”

This is an incredibly important fact to remember when discussing economics: rationality is about a person acting to achieve a certain goal.  An act in one context may be rational but in another context it is not.  For example, if a person’s goal was to lose weight, then not exercising and eating junk food would be irrational.  Conversely, if a person’s goal was to gain weight, eating junk food and not exercising would be rational.  The end objective is different.

This explanation of rationality is not problematic when doing microeconomic analysis.  We reasonably assume that people have a goal in mind and a way to achieve it; that is, they are rational.*  However, problem arise when discussing a collective (a town or a nation, for example).  Given multiples of people, it becomes more and more difficult to determine what objectives are, and even more so what rational courses of action are.  Remember that collectives do not make choices; only individuals choose.  Therefore, there cannot be a “collective” decision, or a “collective” goal.  Furthermore, measuring those outcomes becomes problematic.  What one person might consider a step forward, another might take as a step back.

As an extreme example of my point, let’s take a look at a recent campaign slogan: “Make America Great Again.”  That is an objective.  But what does that mean?  To some, it means preventing non-whites from entering the country; they feel our culture is being tainted.  For  them, it’d be perfectly rational to erect a border wall, deport, or disenfranchise those groups.  For others, making America great means lifting the economic welfare and standard of living for all.  To this group, kicking out non-whites would be irrational, as would be scaling back international trade.  For a third group, it may mean increasing funding for social programs.  For that group, raising taxes and building redistribution programs would be rational.

You can see the problem of looking at collective (or macroeconomic) rationality; it doesn’t really exist.  Often, as pointed out by James Buchanan, the “rationality” and “objectives” are determined by the analyst’s prejudices.  As we just demonstrated in the paragraph above, that can cause problems.

None of this is to say macroeconomic or collective analysis serves no purpose.  Despite my obvious Austrian economic sympathies, I’m not ready to jump on the “Macro is voodoo” bandwagon of many of my colleagues.  What this is to say is one must be careful in analysis and interpretation, especially when discussing the collective “we.”

*Some do object to this assumption by pointing out mistakes that people may make or how they may be manipulated.  While this is true, no part of economic analysis assumes perfect rationality 100% of the time.  We’ve quite a lot of tolerance for mistakes.  However, it is a general assumption that has been shown to be reasonable over time.  Generally speaking, people are smart.  To quote Walter Williams, if your theory requires people to be stupid, it’s going to be a bad theory.

23 thoughts on “The Problem with Macroeconomic Rationality

  1. Jon wrote: ‘Therefore, there cannot be a “collective” decision, or a “collective” goal.’

    I’m confused by that.

    If some guys get together and start a company with the goal of profitably selling some widget or other, are those guys not a collective who have made a collective decision about a collective goal? Heck, if some guys get together and decide to go to a bar for a few beers, isn’t that also a collective decision and a collective goal? And a worthy one as well?

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    • But it’s still in their capacity as individuals that they choose. The fact that it happens to be made in a group only signals that each person in that group agreed on the end, or on the means to the end.

      On a side note I think the thing that bugs us libertarians(?) about ideas like “collective decision making” is that it drags us into decisions we want no part of. Like when a politician says “we decided collectively on” action x, most of the time we find that decision morally reprehensible and would not as an individual take that action…

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      • Jon,

        The company came to a decision somehow. That’s what people mean when they say the company decided.

        This idea that using the plural pronoun means that someone thinks the group has an independent consciousness – or that there is unanimity – is a straw man. Who is it you think thinks that?

        Libertarians really do themselves a disservice when they use this argument with non-libertarians. It bores us and makes us tend to tune out. To us, it sounds like arguing that we know molecules don’t exist because, when we examine them closely, we always find they are composed of nothing but atoms.

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        • That kind of rhetoric is used all the time, especially by socialists. Donald Trump has used it repeatedly. Obama has done so repeatedly. In fact, it’s what is often called “collective decision making.”

          You understand the difference. You and many other smart people. But a vast majority do not.

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          • Jon,

            Collective decision making simply refers to the fact that groups of people (like companies) normally have procedures for making decisions as a group. When those procedures are followed the group has made a decision as a group. THAT is what people mean when they say things like “the company decided.”

            I have never met a single one one of these people who thinks that saying “the company decided” means that everyone in the company necessarily agreed with the decision. I have never met a single one one of these people who thinks that “the company decided” means that the company has some consciousness independent of the individuals that comprise it.

            I do NOT understand this difference you speak of. You said that Obama does it. Please cite an example of him doing it.

            Even when people use phrases like “the will of the people” that is obvious shorthand for “popular opinion” or “the will of the majority of the people.” This is simply the prevailing language convention whether you like it or not.

            As I never tire of pointing out, it is deeply ironic when libertarians object to popular language conventions because language conventions are established in the most libertarian way possible. Everyone gets to decide for themselves what the words they hear and speak mean. There is no higher authority than social convention when it comes to word meanings. If you think there is some higher authority I would like to know what you think that authority is.

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          • Greg

            You must only deal with smart people. As Jon wrote, you (and other smart people) know the difference. In my experience people frequently refer to “Republicans” or “government” or “evil corporations” or “China” in a way that indicates they are indeed referring to a monolithic sentient being rather than a collection of individuals. Even you once suggested that there is something emergent about government that transcends the individuals that constitute “the government”.

            It’s also very noticeable that statists, collectivists and those on the left pretentiously refer to “We” far more often than others to imply a collective view or position that doesn’t really exist. It may be that libertarians are just more attuned to this sloppy use of the language because they hold individualism in high regard.

            Or, I guess it’s just possible that statists really believe they can speak for everyone.

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          • Ron,

            Well, I prefer dealing with smart people, but it doesn’t take a lot of smarts to know that will often not be possible. But I don’t know anyone dumb enough that when they say “China decided to do X” they really mean “Everyone in China agrees with doing X.” Thinking they mean that kind of unanimity is a silly straw man.

            Of course there are emergent properties of groups of people acting as a group. And not just people. There are emergent properties in large groups of atoms and molecules and bacteria. The scientists who study emergence without any political agenda have a saying to describe this: “More is different.” Government is one of countless examples they study. It is an interesting case, not a special case of something we don’t see lots of other places.

            So then, when human groups reach a certain size we see things we don’t see at smaller scales. Small groups of humans never form corporations or nation states. Those things emerge only in larger groups and they are capable of things that individuals and smaller groups are not capable of. If you could only study a group of a dozen people you would not be able to predict the emergence of corporations and nation states from what you would see. This things are emergent. They emerge because they make new things possible and those things have a survival value.

            A few years ago Russ Roberts did an EconTalk on emergence in ant colonies. We see amazing things in ant colonies that you will never see with just two ants. The practice agriculture, warfare (with group level tactics and co-ordinated attacks) and slavery. Yes, that is “something emergent” that transcends the individuals in the group. The group now has characteristics that are never seen in the individuals or even in smaller groups. Those characteristics “emerge.” These things only emerge at a certain group size.

            Do you really want to say that Russ is wrong to describe that as emergence? Do you want to say it is possible for ants but not for humans?

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          • Ron,

            In English, the plural pronoun “we” refers to the speaker and ANY number of other people higher than zero. If you want to know how many other people, you have to tell from CONTEXT. I hope we agree on this much but I’m not really even sure of that since you seem to think there are people who believe that everyone in China might agree on something.

            The pronoun “we” DOES include cases where there is unanimity on a decision but ALSO often includes cases where there is not. Only libertarians seem to have trouble with this concept. Libertarians are actually much LESS “attuned” to the prevailing language convention here. When ANY group (not just modern government) comes to a decision as a group, that decision will make group members who disagree with it unhappy about the decision. The next person I learn about who doesn’t understand that will be the very first example I am aware of.

            Anyone who wants to indicate a group decision was unanimous has available a perfectly good way to do that. They can simply use that word “unanimous.” When the topic is an issue known and understood to be controversial, referring to the group as having come to a decision as a group should NEVER simply be assumed to imply unanimity.

            As for people who think that all corporations are evil, their method of categorizing things resembles nothing so much as people who think all governments are evil.

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          • Greg

            Speaking of strawmen:

            . But I don’t know anyone dumb enough that when they say “China decided to do X” they really mean “Everyone in China agrees with doing X.”

            And I don’t either, nor did I say anything like that. The misframing is not by people dumb enough to believe that all people in China agree on anything but by people who apparently see China, or any other group as a monolith, and there are plenty of examples. Here are just a few easy ones:

            – “These devaluations have fueled long-standing outcries that China is playing dirty.”

            – “Let’s just say it: The Republicans are the problem.”

            – “Why Do Mexicans Like to Deny Parts of Their Ancestry?”

            Each of these sloppy statements makes a claim about an enter class of people as if the group was homogeneous, and every individual member an exact substitute for every other member, when in each of the above cases there is most likely only a small number of individuals in each group who actually are or who do what is claimed. It’s common form of sloppy shorthand used by people who like to imagine simple explanations for the world they see around them.

            Of course there are emergent properties of groups of people acting as a group. And not just people. There are emergent properties in large groups of atoms and molecules and bacteria.

            Yes, of course. No one suggests otherwise. The emergent order of free markets is the best example we have. There are no collective decisions or actions required for the wants and needs of billions of people to be met by millions of efforts by others who have no connection to, or even awareness of, each other.

            So then, when human groups reach a certain size we see things we don’t see at smaller scales.

            Yes – and not all of them provide positive benefit to the individual members of the group. At some not clearly defined size it becomes possible for a small number of people to use coercive force to control much larger numbers of people.

            “Those things emerge only in larger groups and they are capable of things that individuals and smaller groups are not capable of.”

            Nation states appear when group sizes reach some critical mass beyond which individuals may not recognize others as members of their group. Beyond that groups may be pitted against each other to create a common focus by those who wish to gain and maintain control.

            A few years ago Russ Roberts did an EconTalk on emergence in ant colonies.

            Yes, we see specialization and division of labor among ants, as we do in humans. In ants this behavior promotes survival of the colony, while in humans it also promotes increased well being of individuals, and thus the survival of the species. With humans, unlike with ants, survival of the individual is most often a stronger instinct than survival of the species.

            Humans generally place a higher priority on filling their bellies and escaping predators than seeking to procreate. In some other species, males regularly risk their lives, and forgo eating in order to procreate until they have lost dangerous amounts of weight.

            Do you really want to say that Russ is wrong to describe that as emergence? Do you want to say it is possible for ants but not for humans?

            No. Emergence is commonplace. IIRC your previous claim about emergence was that some form of authority emerged in the nation state beyond that available to each of us as individuals, even though the state is composed entirely of individuals. Our current Dear Leader certainly must have believed that when he confidently declared: ” This was the moment when the rise of the oceans began to slow and our planet began to heal!” Laughable stuff.

            In English, the plural pronoun “we” refers to the speaker and ANY number of other people higher than zero.

            O course. “We” agree on the conventional usage of the word. My point, which you seem to have missed, is that people sometimes use the word to include others who aren’t members of that group, who haven’t really agreed to be members of that group, and who probably have no idea they are being used for that purpose, whatever it is.

            “We don’t need no ejukashun!” is an example.

            “We don’t want those foreigners to come here.” is another.

            It’s just more sloppy thinking and speech, often by the same people who feel more comfortable referring to entire classes of people than to individuals, and who are pretending there’s more agreement than actually exists.

            The pronoun “we” DOES include cases where there is unanimity on a decision but ALSO often includes cases where there is not.”

            No doubt about that. No one has claimed otherwise.

            Only libertarians seem to have trouble with this concept.

            What concept? that individuals are only amorphous portions of an homogeneous lump of Play-Doh?

            When ANY group (not just modern government) comes to a decision as a group, that decision will make group members who disagree with it unhappy about the decision.

            That’s exactly why those who disagree shouldn’t be forced to remain members of a group whose decisions they disagree with, nor should they be forced to comply with decisions they haven’t made. If a majority of those considering a proposal to go out for a drink as a group decide in the affirmative, those who decided against the proposal shouldn’t be forced to go along anyway, nor should they be forced to pay a share of the tab.

            When the topic is an issue known and understood to be controversial, referring to the group as having come to a decision as a group should NEVER simply be assumed to imply unanimity.

            No it shouldn’t, nor should it be considered a collective decision for the same reason. Only individuals think, feel, or decide. Collectives have no sentience. They are only the sum of the individuals who do.

            As for people who think that all corporations are evil, their method of categorizing things resembles nothing so much as people who think all governments are evil.

            I don’t know anyone who thinks all governments are evil, only those who force otherwise peaceful people to act against their own will and that also force those unwilling people to pay for it.

            Bowling leagues are often structured to include functionaries who could be considered government, they’re not evil.

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          • Ron,

            The fact that you think a bowling league is adequate for an analogy that provides everything we really need to know about existing modern nation states (which is that we ought to get rid of them) illustrates our disagreements beautifully.

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          • Greg

            A bowling league is one of my favorite examples of a *voluntary* organization whose members may create whatever structure of government they choose, and can decide on any rules, and require whatever payments and place any obligations on members they wish.

            Multiple bowling leagues typically exist in a given area that are easily accessible to anyone interested in bowling, so competition for members requires that leagues provide benefits that exceed the costs in the judgement of each bowler. No one is forced to bowl or join a league, and if enough bowlers are unhappy with the existing choices they are free to join together to form a new league for themselves. In addition, bowling alleys, ball, uniform, and shoe manufactures, as well as all other providers of bowling accessories and services must compete for bowlers dollars in a free market.

            I can’t imagine a better example of anarchy at work among self-owning individuals.

            What we know about modern nation states is that they are the opposite of bowling leagues in almost every way. everyone must join and everyone must pay under threat of violence, without regard to the interests of, or the benefit provided to individual members. Some other person or group of people make arbitrary choices for everyone – most of whom are people they don’t even know exist. And you think this is desirable….why?

            Everything currently provided by the nation state could be provided by voluntary organizations and private providers of goods and services on the free market at much less cost.

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          • Ron,

            If it works for a bowling league, then it will work to replace nation states.

            In internet debates this is called a non sequitur. In bowling I believe it’s just called a gutter ball.

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          • Greg

            If it works for a bowling league, then it will work to replace nation states.

            In internet debates this is called a non sequitur. In bowling I believe it’s just called a gutter ball.

            Heh! That WOULD be a non sequitur if that’s what I had written, but it isn’t.

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          • Ron,

            Are you a creationist or do you believe in Darwinian natural selection?

            If you do, then you believe that humans evolved from much simpler forms of life, like bacteria and fish. I trust we can agree that the morality of a bacteria or a fish and a human are quite different things. New things emerge from natural selection.

            If humans evolved, then their morality and rights evolved right along with them.

            Of course it is true that evolution can be understood as a process of the realization of the potential that was there all along in the original parts. The realization of the unpredictable potentialities in the simpler entities is the thing people are referring to when they describe emergent properties. No group of people could make decisions that changed the policy of a nation state before nation states and their policies emerged. At that point it began to make perfect sense to talk about nation states doing things and having properties as nation states. They do things bowling leagues just can’t do with or without unanimous approval.

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          • Greg

            I believe in natural selection as a fairly random and somewhat haphazard process. We see lots of wrong turns and dead ends. Over the long term, Some adaptations that initially selected for survival became less useful or even harmful as natural environmental changes occurred and as other species evolved different adaptations that were more successful.

            The evolution of higher, more complex organisms seems to be a perfect example of specialization and division of labor which leads to better adaptation and survival, although some bacteria and other simple creatures have been with us much longer than more highly developed creatures.

            Yes, Human rights and morality have evolved with us, and are part of our nature as human beings. I’m somewhat surprised to see such an individualistic and libertarian statement from you.

            Humans have a relatively short history on earth, and it may be too soon to pronounce them the most advanced species ever from a survival standpoint, considering the great success of much older species such as sharks and cockroaches. However, self awareness and high level cognizance are rare in other species, and the ability of humans to adapt to a wide range of environments by changing those environments instead of adapting to them is truly unique.

            Of course it is true that evolution can be understood as a process of the realization of the potential that was there all along in the original parts

            While I don’t disagree with that idea, I don’t give it a lot of weight either. It’s not clear that any particular potential, other the ability to adapt to changes, exists in any creature. Changes to a creature’s environment can’t be predicted or anticipated by that creature, and we don’t see adaptations occurring until those changes occur that require them, and then we see that only some of the adaptations were actually useful.

            No group of people could make decisions that changed the policy of a nation state before nation states and their policies emerged.

            Um…obviously.

            They [nation states] do things bowling leagues just can’t do with or without unanimous approval.

            Exactly! That’s my complaint.

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          • Ron,

            Bret was saying that he was “confused’ as a polite way to say that he didn’t think Jon was making sense on this point.

            Unfortunately he chose examples where there may well have been unanimity when he could have made his point much more effectively if he had chosen examples of groups making decisions as groups in the absence of unanimity.

            There is still not the slightest reason to think he is unaware that groups of people often do make decisions as groups in the absence of unanimity.

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          • Greg

            Bret was saying that he was “confused’ as a polite way to say that he didn’t think Jon was making sense on this point.

            I couldn’t have made up a better example to illustrate the problem you’re having with this subject. When bretwallach very clearly stated “I’m confused by that”, how is it possible that you believe you have better insight into his intended meaning than he has? It’s truly bizarre. And, as you wrote, his examples do nothing to dispel the notion that he is using exactly the conventional meaning of that short string of words.

            But even if the examples included unanimity, which is likely, they STILL represent individual decisions to take a collective action. Those individuals who decide to go for a drink may go for a drink as a group, but each individual member of that group has made their own decision about going. There is no collective decision, but a collection of individual decisions. Those who have decided against going for a drink are part of another group. I doubt you would claim that those individuals made a group decision to not go for a drink.

            There is still not the slightest reason to think he is unaware that groups of people often do make decisions as groups in the absence of unanimity.

            Nor is there any reason to think he IS aware. The best we can say is that there is no reason to think anything beyond what he actually wrote.

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          • Ron (and Bret)

            >—“how is it possible that you believe you have better insight into his intended meaning than he has?”

            It’s not possible. I am NOT saying MY insight into his meaning is better than HIS. I’m saying it is a lot better than YOURS.

            I could be wrong. This is getting very interesting because we both agree that Bret can settle this. So please help was out here Bret.

            When you said you were “confused” was that a polite way to disagree with Jon or were you really saying you just find this all too hard to understand? It’s possible it could be either or some of both but I understood you to mean the first.

            Do YOU think that when a very large group is referred to as having a group position on a controversial issue that implies either unanimity or an independent consciousness for the group?

            This could be one of those extraordinarily rare cases where one of our disputes is decided decisively.

            Counting on you to do that for us here Bret. You are the ultimate authority on your meaning and Ron and I disagree on your meaning.

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          • Greg

            It’s not possible. I am NOT saying MY insight into his meaning is better than HIS. I’m saying it is a lot better than YOURS.

            But you clearly imputed meaning to bret’s statement that isn’t apparent in the conventional meaning of the words themselves when used in a sentence as bret did, whereas I implied NO meaning at all, other the one provided by the words themselves, as commonly understood by a vast majority of English speakers. Nor did his examples help much to dispel our ignorance.

            I could be wrong.”

            Yes, that IS possible.

            This is getting very interesting because we both agree that Bret can settle this. So please help was out here Bret.

            Yes, help us out here.

            This could be one of those extraordinarily rare cases where one of our disputes is decided decisively.

            Indeed! I’m on pins and needles. This is so exciting!

            Realistically, I suspect Mr. bretwallach has moved on to greener pastures. He hasn’t been very responsive to previous comments of mine on this blog. Maybe it’s just me.

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