Tuesday, June 16, 2009

Irrationality: Normal Goods(?)

A normal good is one that sees a rise in demand as income increases. Demand for an inferior good drops as income increases. For example, I'm happy to cram my piehole full of ramen noodles and PBR when I'm unemployed and living on my musty sailboat in a discount marina just north of Bremerton, but once I've got a job with a decent wage, I'll dine on nigiri sushi and guzzle chilled sake on Lake Union.

On average, products are normal. That is to say, as our income rises, we consume more stuff. This includes tangible stuff like housing, transportation, clothes, and haircuts. More interestingly, it may or may not include intanglibles: friendship, love, faith, curiosity, and humor (among many, many others). Disaggregated, each product will display certain characteristics to certain people. Take the interesting case of gardening... for the very poor, gardening is an inferior good: they will soon substitute away from subsistence farming the moment they are able, but for the wealthy, gardening is a normal good: a charming, rewarding hobby that reconnects the practitioner with the bounty of the soil (or whatever). Point is, the same activity (plowing soil, planting seeds, fertilizing and watering) displays different characteristics depending on the intersection of the person and the product.

To the question of rationality (or lack thereof), context is everything. Most of the time, irrationality is mondo expensive. Imagine walking into a used car dealership and plunking down $45,000 on a '78 primer-gray Pinto with a rusted-out driveshaft. Sometimes, however, irrationality can be pretty close to free, as Bryan Caplan illustrated in The Myth of the Rational Voter. There can be some psychological comfort gained from holding irrational beliefs like "the minimum wage is good for society" or "Wal-Mart exploits its workers" or even "unions were responsible for American prosperity". There are a whole host of irrational, incorrect beliefs that make people feel good but that, importantly, never hit them where it counts: in the checkbook. Where it does hit them is in the voting booth. As Caplan argues, this is why we consistently have bad policy, and why plenty of people support it. Of course, his argument is far more detailed and convincing, and my contribution is to ask a fairly simple question: is voter irrationality a normal good?

I hesitiate to look to cross-sectional data to answer this question. Differences in income and income growth and their correlation to irrationality at the polls face a vexing problem: hidden variables. As a person gets richer, they may or may not consume more voter irrationality, but what if a hidden variable, like talent or good genes could be driving both the increase in income and the tendency to vote one way or another? What if part of the process to becoming wealthy included exposure to economic thinking, either good or bad? No, measuring today's upwardly mobile with today's constant wage earners might be less than fruitful. I think it might be more valid to look at longitudinal attitude changes.

It's far too premature for me to make any definite claims, but I think it might be possible to show some sort of correlation with a rise in income with a rise in irrational policy. This is under the assumption that terrible opinion shows up as terrible policy in accordance with the guidelines of public choice theory. I can cherrypick a few instances in recent US history: the 1920s were a period of general prosperity, but they were followed by close to a decade and a half of abysmally irrational policy, including preposterously high tarriffs, outrageous marginal tax rates, and simply silly price controls. Conversely, the 1970s saw a thundering gut-punch to the American economy, and it was only after we suffered through that we saw the benefits of controlling the money supply (though I might not want to make this a central point) and easing the tax burden on the rich.

Well, whatever the case may be, if I end up nosing more deeply into public choice, I think this would be an interesting question to investigate. I have a follow-up question about the source of irrational beliefs, but I'll tuck that away for another post.

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