A new breed of economists is discovering something new about sex, crime, gambling, war, marriage, ghettos, racism, politics, and the last million years of human history. These economists are using the assumption of rational behavior as a way of focusing on something important about all these subtle, complicated topics. This is not to dismiss the contributions of psychology, history, sociology, and all the other ways we might seek to understand the world. But since we cannot apply all these disciplines at once, we have to simplify. Economists hope that their way of simplifying the world will provide more insight than it destroys. But why should you believe them, and why should you listen to what I have to say about them?
First, because it can be useful: The assumption that people are rational leads us to some clear and testable theories about the way the world works. It can help us to strip forbidding layers of complexity from intractable-seeming problems — for instance, inner-city deprivation — and guide us toward possible solutions. If crime rates are high in some areas, then rational choice theory says that crime must pay in those areas: We need to look for a way of raising the cost or lowering the benefit of committing crime. If inner-city teenagers don’t have qualifications, then rational choice theory says that they must believe the benefits of getting the qualifications are outweighed by the costs: We need to work out if they’re right, and see if we can change the incentives for them. And so on. A rigorously simplified view of the world can help even when it is oversimplified, because the simplicity makes it easier to spot the unexpected implications of your ideas, to uncover inconsistencies in your view of the world, and to test your ideas against the evidence.
Of course, there isn’t much use in producing clear and testable theories if the theories are always wrong. But they aren’t — economists’ faith in people’s rationality is usually about right. Now, I’m not claiming that people are always and everywhere rational — as we shall see, it is easy to find instances where that is not true—but I do hope to convince you that people are rational nearly enough and often enough to make the assumption of rational choice a very useful one. Later in this chapter I’ll say more about what it’s useful for.
But rational choice theory is not merely useful — it’s also fun. The new economics of everything — sex and crime, racism and office politics — offers us perspectives that are unexpected, counterintuitive, and refreshingly disrespectful of the conventional wisdom. The economists behind these iconoclastic ideas are often fascinating characters, too, and we’ll get to meet them throughout the book.
In the rest of this chapter, I aim to flesh out the concept of rationality with some more examples, from collectible sports cards to Mexican prostitutes. But before I get to that, it’s time to say some more about what I mean — and don’t mean — when I talk about rational behavior, and why the idea is often seen as controversial.
Let me remind you of the simple definition of rationality I laid out earlier on. Rational people respond to incentives: When it becomes more costly to do something, they will tend to do it less; when it becomes easier, cheaper, or more beneficial, they will tend to do it more. In weighing their choices, they will bear in mind the overall constraints upon them: not just the costs and benefits of a specific choice, but their total budget. And they will also consider the future consequences of present choices. As far as my definition goes, that’s pretty much it. (It is true that economists sometimes use the word rationality to encompass more shades of meanings than this, but the technical distinctions are not important for our purposes.)
The definition doesn’t seem controversial when I put it down in black and white. It’s so obvious. So true. If the price of a Toyota rises, you buy a Honda instead. (People respond to incentives.) When your income rises, you plump for a Ferrari. (People consider their budget.) You know that the loan to buy that Ferrari must eventually be repaid. (People are mindful of future consequences.) It’s almost banal. But if it’s so banal, why have some of the economists we’ll meet in these pages prompted storms of invective by reasoning from these first principles?
The controversy comes only when people realize that economists are not restricting their brand of analysis to straightforward financial transactions, such as buying cars. Cost is not just about money. The cost of sex includes the risk of AIDS and the risk of unwanted pregnancy; if that cost rises, you’ll tend to choose a safer kind of sex. Your total “budget” isn’t just the cash in your bank account. It also encompasses your time, energy, talent, and attention, and it determines not only what make of car you end up with, but also what kind of spouse. You bear in mind the future costs of an addiction to cigarettes just as much as those of your loan repayments. It is when I make this kind of claim that you may stop feeling that my statement “people are rational” is not banal at all, and might even be a little dangerous.