Sunday, November 18, 2012

Voter and Consumer Irrationality: An Extension

Questioning rational choice is not a sufficient basis for arguing for government intervention. But my past few posts questioning standard market propositions in the case of health care are not meant to promote every single government regulation. Rather, I wonder if we can try to further the study of economics and public policy by reversing the typical way public choice economics is applied.

When I think of public choice economics, I think of papers about how the marginal costs and benefits of lobbying lead to poor government policies or how decentralizing the functions of governments leads to a competitive equilibrium with better governmental policies. At its core, I interpret this line of analysis as using the success of markets to explain why governments fail. Markets succeed because marginal costs line up with marginal benefits, and thus governments fail because these costs and benefits are distorted. Markets succeed because there is competition between firms, and thus governments fail because there is no competition. What I want to propose is that we change the direction of this line of thought, and start from the vast literature on why governments fail, and see if that can teach us about why certain markets fail. 

This is why I think behavioral economics is so important. By reducing biases down to core psychological first principles, it highlights the connection between government and market failure. But we should also make sure to avoid thinking that policy makers themselves are perfectly rational. As John Papula pithily points out:
Why in the world do behavioral economists who study our flaws and irrational quirks advocate centralized power in the hands of a small group of flawed overlords? If people are irrational, so are government regulators, only they have corrupting monopoly power.
As such, I agree that it is important that behavioral economists grasp the concept of public choice, but also for public choice to grasp the concept of behavioral economics. There exist reasons for why the market often overcomes behavioral biases, but then there also exist markets in which those mechanisms don't function well. And most likely, we can trace these mechanism failures to arguments past public choice economists have made about the failure of government. That is my conjecture, and I hope to be able to pursue further analysis of health care under this framework.


  1. Ok, I still have some criticisms, but I'm going to stop haranguing you now. You've been very generous in responding to my criticisms; thanks! I hope your further researches are fruitful.

    (I'll just say one thing though: stop being obsessed with the labels "market" and "government". Just try to predict the outcomes of human behavior wherever you find it. That's economics.)

  2. Saturos,

    That's a good call on focusing on behavior. Again, I just mean to work on frameworks for now. I had a conjecture about the "specialty doctor" argument that I've heard from both sides that is based on these kinds of psychological principles, and I hope to attack this more concrete issue soon.

  3. Government and economics can not be always right, so if they make the policy on the basis of for the best interest of majority is a key point.

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