Kahneman on the Chicago school of libertarian economics

8 Aug, 2015 at 10:46 | Posted in Economics | 2 Comments

As interpreted by the important Chicago school of economics, faith in human rationality is closely linked to an ideology in which it is unnecessary and even immoral to protect people against their choices. Ratonal people should be free, and they should be responsible for taking care of themselves …

Libertarianism-definition-e1375385430575The assumptin that agents are rational provides the intellectual foundation for the libertarian approach to public policy: do not interfere with the individual’s right to choose, unless the choices harm others … I once heard Gary Becker [argue] that we should consider the possibility of explaining the so-called obesity epidemic by people’s belief that a cure for diabetes will soon become available …

Much is therefore at stake in the debate between the Chicago school and the behavioral economists, who reject the extreme form of the rational-agent model. Freedom is not a contested value; all the participants in the debate are in favor of it. But life is more complex for behavioral economists than for true believers in human rationality. No behavioral economist favors a state that will force its citizens to eat a balanced diet and to watch only television programs that are good for the soul. For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes. For adherents of this school, freedom is free of charge.

Daniel Kahneman


  1. Economics: the honeypot for know-nothings
    Comment on ‘Kahneman on the Chicago school of libertarian economics’
    The core problem of the so-called social sciences is that they cannot rise above the level of gossip, storytelling, and second-guessing other agents’s inaccessible ulterior motives. Thus, subjective belief is substituted for unattainable objective knowledge.
    “By having a vague theory it is possible to get either result. … It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)
    This was already clear to the early Chicago school but later on forgotten or ignored.

    “Human psychology is not available for inductive study, because of the differences between individual minds, the immense multitude of the influencing circumstances, the practical difficulty of experiment upon human beings.” (Viner, 1917, p. 243)

    The foundational error of the social sciences can be traced back to Hume.
    “And as the science of man is the-only solid foundation for the other sciences, so the only solid foundation we can give to this science itself must be laid on experience and observation.” (Hume, 2012, Introduction)
    With Hume and Newton before his eyes, Adam Smith conceived economics as hybrid creature of science of man and natural science.
    “His [Adam Smith’s] method is always the method of Newton, which we have already seen applied to psychology and morals: to attain, by generalization, certain simple truths, from which it will be possible to reconstruct, synthetically, the world of experience.” (Halévy, 1960, pp. 100, 494)
    The simple truth economics was finally built upon was the rationality principle.
    “Its [the rationality principle’s] adoption reduces considerably the arbitrariness of our models, an arbitrariness which becomes capricious indeed if we try to do without this principle.” (Popper, 1994, p. 181)
    It was always clear to methodologists that the rationality principle was a makeshift.
    “Nevertheless, there is mounting evidence that economic behaviour frequently violates any and all senses of ‘rationality’ and it has been argued that economic explanations involving rational choice are a species of ‘folk psychology’, explaining actions in terms of beliefs and desires, variables that cannot be measured independently of the actual choices we want to predict, so so that these are no genuine explanations at all.” (Blaug, 1994, p. 113)
    The discovery that the rationality principle is vacuous has been made over and over again. However, most discoverers, including Kahneman, draw the wrong conclusion. They ‘reject the extreme form of the rational-agent model’ and try to make homo oeconomicus more ‘realistic’.
    Behavioral economists have not yet realized that economics is not a science of behavior (Hudík, 2011). What the behaviorists are talking about belongs entirely to the realm of sociology, psychology, anthropology, political science, history, etcetera. What most behavioral economists are practicing is a dilettantish variant of Psycho-Sociology which is not good enough for science but good enough for political economics.
    In marked contrast, theoretical economics deals exclusively with the systemic behavior of the actual monetary economy. Theoretical economics is objective. There are systemic laws but no behavioral laws. Systemic laws, for instance the Profit Law (2015), have the same methodological status as physical laws. The Profit Law holds always and everywhere. The economist’s task is to find these systemic laws and this implies to leave all speculations about human behavior to the yellow press, talk shows, and sitcoms.
    Does the world expect from economists to find out how people behave? No, this is the proper job of psychology, sociology, anthropology, political science, history, etcetera. Does the world expect from economists to figure out what profit is? Yes, of course, no philosopher, physicist, biologist, or sociologist will ever try to figure this out. Have economists done their proper job? No. They have wasted more than 200 years with second-guessing their fellow men’s behavior and telling stories that have less real-world content than Greek mythology.
    Egmont Kakarot-Handtke
    Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepetant
    Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology,
    pages 109–136. London, New York, NY: Routledge.
    Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
    Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon
    Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of
    Economic Methodology, 18(2): 147–162.
    Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
    Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN
    Working Paper Series, 2575110: 1–18. URL
    Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and
    Rationality., chapter Models, Instruments, and Truth, pages 154–184. London,
    New York, NY: Routledge.
    Viner, J. (1917). Some Problems of Logical Method in Political Economy. Chicago
    Journals, 25(3): 236–260. URL http://www.jstor.org/stable/1819612.

  2. Quite. People who think that the classical and neo-classical economics, let alone the New Classical/RBC/New Keynesian economics are scientific constructs and not fundamentally at their core political and ideological ones, need to do some basic courses in political philosophy. All of these constructs in fact make the same assumptions about how individuals behave and social systems work which are fundamentally Victorian – and their use is even more unscientific because these features are not explicitly pointed out.

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