Ok, so I am having a debate about the the pros and cons of regulation within the market place. At first I'm thinking to myself "hey, this is going pretty well", I had managed to talk about distortion effects created by regulation, consumer choice, how companies would fail if they produced shoddy products etc etc. So at this point I'm feeling pretty good about the points I had managed to put across. But then someone throws a complete curveball which stumps me: he stated that my arguments in favour of the free market were all based upon the assumption that consumers are rational. The rational consumer, he goes on, "has all pertinent information at his fingertips about all products and can always make a cost/benefit analysis of every transaction. Instead we have the "Irrational consumer" - the person that only has fragmentary and possibly incorrect information available to him at any time, a consumer that uses rules of thumb and momentary impulses to decide on his consumption rather than hard evidence." Try as I might, I just couldn't see a way around this argument. People are irrational, and therefore it must follow that the market place is irrational as well. So my argument, pretty much became dead in the water.
Any thoughts on what I could have used as a counter-agrument?
The free market also regulates consumers. It forces them into being rational so that they don't get taken all the time. They have no false sense of security that anybody has their back if they fail at buying the correct items. It makes them go out and weigh risks in the proper weight and to educate themselves about the products they are buying. This usually leads to the rise of information sources which people subscribe to who make money purely because they are trusted, and have a profit motive to providing you truth in the market place.
Government distorts this by creating things like the FDA, FDIC, and the millions of other regulations which entice consumers to forego research and/or paying for good information on products they would potentially buy. It both lures them into a false sense of security, and crowds out many of the institutions which would exist in the lack of a forced monopoly on these types of products. Many companies would try to get their products certified by these institutions, and those institutions reputations would be at risk, which in their business, means their profit is at risk. So they have vested interests in being rational and informing their consumers accurately.
LockeandSons:he stated that my arguments in favour of the free market were all based upon the assumption that consumers are rational. The rational consumer, he goes on, "has all pertinent information at his fingertips about all products and can always make a cost/benefit analysis of every transaction.
Advertisements also serve to educate consumers about prices and quality of services, so that they don't have to go store to store checking price tags on every item. The internet makes all this faster. They're basically just worried that without an FDA you don't have any product quality control, but there's no reason the FDA has to be a government entity. If product quality is *THAT* important to these anal people, they can always set up a FDA which they pay for to oversee and stamp products of approval.
And it should be obvoius how easy this argument is to turn back on them. If consumers are stupid how will they elect a wise leader? Politicians rely ENTIRELY on advertising. There is very ability for consumers to repeat consume, or for products to get a bad reputation. Everyone buys the politician all at once! Consider that back when televisions were first getting started, rich people were the only ones who would take the risk to deal with the imperfect, unfamiliar technology. Once people saw that televisions were a good thing, more of them purchased TVs. So, in politics, there are no consumption pioneers. There's no trust established through repeated consumption (4 yr election cycles) and there's no free entry into the marketplace, since the parties have the whole thing locked down through the state controlled media. Barf. Way worse.
The Austrian concept of rational doesn't mean that man will make the "right", "rational", or "perfect" choice. Rational just means that we are living, thinking, emotional beings. We make choices that we think will satisfy our needs ex ante, but ex post, it may not be as satisfactory. As strange as it may sound, the IMHO, the Austrian concept of rational actually means irrational.
Mainstream/Chicago screwed up the definition of rational, with all the fancy graphs and charts. Austrians do not use mathematics at all, but rely on verbal logic. One of the pillars of that verbal logic is that man is rational in the Austrian sense.
"Instead we have the "Irrational consumer" - the person that only has fragmentary and possibly incorrect information available to him at any time, a consumer that uses rules of thumb and momentary impulses to decide on his consumption rather than hard evidence." Try as I might, I just couldn't see a way around this argument. People are irrational, and therefore it must follow that the market place is irrational as well. So my argument, pretty much became dead in the water." - Lockeand Sons
I) Rational means based on reason, not necessarily 'correct'. It is possible to be rational and still make a 'bad' decision.
II) When people use the word 'rational' in such a debate, turn it back on them; ask them what the 'rational' decision is? Invariably it comes to light that decisions are not irrational, they simply call decisions they disagree with irrational.
III) In terms of access to information, if the individual consumer can't have access to enough information to make 'rational' decisions, the idea that a government bureaucrat far removed from both the buyer and seller can access such information is laughable. Remember, government only enjoys the illusion of superior knowledge because they can use tax money to pay a whole lot of people to collect impressive amounts of data which are totally irrelevant in the end. The majority of the information that matters vis a vi any particular exchange is in the buyer's and consumer's heads.
LockeandSons:"Irrational consumer" - the person that only has fragmentary and possibly incorrect information available to him at any time, a consumer that uses rules of thumb and momentary impulses to decide on his consumption rather than hard evidence.
This sounds like a good description of the people who write the regulations. A government bureaucrat is just as "irrational" as a consumer is, except he can't take personal preference into account and has very little incentive to make smart decisions (assuming he is capable of doing so).
It's funny, you've got people trying to refute an incorrect definition of irrationality with an irrelevant definition of rationality.
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It's not irrelevant at all. Mainstream economists, such as Paul Krugman, simply don't use the word 'rational', they use 'thinking on the margin'. Except, a lot of economists like Krugman throw out 'thinking on the margin' when they need a convinient excuse to blame economic woes on 'animal spirits'.
I wasn't actually criticizing that definition here. I was pointing out that it's irrelevant to refute this definition of irrationality by providing Mises' definition. The point made in the OP was that consumers can be systematically incorrect about in the market place isn't affected by stating that actors always purposefully use means to attain their ends.
LockeandSons wrote: The rational consumer, he goes on, "has all pertinent information at his fingertips about all products and can always make a cost/benefit analysis of every transaction. Instead we have the "Irrational consumer" - the person that only has fragmentary and possibly incorrect information available to him at any time, a consumer that uses rules of thumb and momentary impulses to decide on his consumption rather than hard evidence."
The rational consumer, he goes on, "has all pertinent information at his fingertips about all products and can always make a cost/benefit analysis of every transaction. Instead we have the "Irrational consumer" - the person that only has fragmentary and possibly incorrect information available to him at any time, a consumer that uses rules of thumb and momentary impulses to decide on his consumption rather than hard evidence."
There is a cost involved in getting more information. The buyer made the evaluation to go ahead with it based on his personal values. This includes his valuation of the price of getting more information for a lowered risk. Now if the deal turns out to be bad, that doesn't mean he made a bad trade. That would simply be results oriented. Now when someone else takes over your decision making power then they are screwing with your personal valuation of the price of getting more information.
See also this thread: http://forumserver.twoplustwo.com/41/politics/information-constraints-economincs-acist-question-590287/
Now when someone else takes over your decision making power then they are screwing with your personal valuation of the price of getting more information
Why? Information is costly, you said it yourself. The costs of gathering information, pecuniary or otherwise, may stop many potential gains from trade. I'm not sure why you seem to rule government regulation out as a way to mitigate this need to gather information or subsidize said information.
How will government do so without doing it at someone else's expense?
>>I'm not sure why you seem to rule government regulation out as a way to mitigate this need to gather information or subsidize said information.
what incentives do parasites have to provide these wonderful services?
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hayekianxyz wrote: I'm not sure why you seem to rule government regulation out as a way to mitigate this need to gather information..
I'm not sure why you seem to rule government regulation out as a way to mitigate this need to gather information..
Only if it's voluntary does it respect people's personal, contextual, subjective valuation of the price of information.
If some persons think they're good at dealing with information, they should just offer their services. If they instead forcibly impose it you know and I know that it's a scam and has nothing to do with helping people.
The idea of coercive regulation of free markets is a complete joke. Any organization offering ratings and valuations should itself be open to total scrutiny by the consumer.
You think the AMA is the only organization that can rate doctors?
You think the FDA is the only organization that can rate drugs?
And so on..
No, of course not. These organizations tremble at the thought of having to compete.
They will all die out and all they'll have left to show is a long trail of economic destruction and death.
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The rational consumer, he goes on, "has all pertinent information at his fingertips about all products and can always make a cost/benefit analysis of every transaction.
So, according to him, telepathic supermen would do better than ordinary people.
The whole NeoClassical 'rationality' has nothing to do with human rationality, it doesn't even make internal sense. The whole problem of economics is in the coordination of resources without impossible-to-achieve omniscience, to develop methods of production without absolute technological knowledge, and to explain why things ever are coordinated; not to construct some imaginary, counter-factual and impossible world of unreality and then criticize reality for failing to correspond to their deluded fancies.
“Socialism is a fraud, a comedy, a phantom, a blackmail.” - Benito Mussolini"Toute nation a le gouvernemente qu'il mérite." - Joseph de Maistre
We have to be careful not to commit logical fallacies or misuse words like 'rational' when Liberte is around, she will call you out anytime, anywhere. =p
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I guess so. I think his argument was that regulations existed in the market because ordinary people wouldn't spend hours poring over what was the safest product to buy or had the best build quality etc, they would simply go out and purchase items with fragemented knowledge and a desire to spend money. Hence, many could be purchasing products that are genuinely unsafe - lead paint on a childs toy I think was the example he used. The free market essentially relies, (in as far as huge swathes of people not being injured/killed), on rational actions by the consumer. Of course people aren't 100% of the time in their day-to-day lives rational - hence the need for regulation.
LockeandSons wrote: I guess so. I think his argument was that regulations existed in the market because ordinary people wouldn't spend hours poring over what was the safest product to buy or had the best build quality etc, they would simply go out and purchase items with fragemented knowledge and a desire to spend money. Hence, many could be purchasing products that are genuinely unsafe - lead paint on a childs toy I think was the example he used. The free market essentially relies, (in as far as huge swathes of people not being injured/killed), on rational actions by the consumer. Of course people aren't 100% of the time in their day-to-day lives rational - hence the need for regulation.
I've dealt with this objection already in this post:
http://mises.org/Community/forums/p/16897/333805.aspx#333805
There is nothing wrong with weighing one's degree of certainty about a product with the price of gaining more certainty. The reason is because it is entirely contextual and personal.
For example:
If Bill Gates' car breaks down, and it's 5 years old, it could be perfectly rational for him to go to the nearest car shop of his current brand and buy a new one of the same brand and class.
For most other people it would be rational to let the car be repaired, or at least to read up on, shop around and test-drive multiple car-brands and haggle a bunch of dealers for the best price, before buying one.
The reason is because Bill Gates' time is worth much more than other people's time, to himself. In the same time that people spend coming up with a choice that has a higher degree of certainty of fitting with their needs and situation, Bill could have earned far and beyond the theoretical cost-function that it would save.
So we have two people who's actions can be entirely different yet entirely rational. To suggest that people are irrational simply because they don't spend an arbitrary amount of time to get to an arbitrary degree of certainty is... entirely arbitrary and would lead one to the conclusion that all people at all times are irrational ...even though they are improving their lives!?
Sure, but then your example is a high value product (a car). Most people, I imagine, would spend some time thinking about where they want to get it fixed or what brand they want to buy new from - it's just common sense. For some products though it would be completely impractical and far too time consuming to go through the same process. Using the example of lead paint, how many people are realistically going to check each product they buy that is painted for lead based paint?
ps. I would just like to point out that this is not a side of the argument that I necessarily want to defend; I just found it interesting take on things.
Now you're introducing yet another arbitrary ruler: high or low value. This doesn't exist. There is only personal (subjective) value and personal context, and the concepts I've explained are always at work.
Example:
I've never in my life checked if there was glass in the milk karton (or any other karton) that I've drank directly from. Irrational? No. I'm relying on the fact that multi-billion dollar companies stand to lose massive amounts of money if they aren't 100% careful with that stuff. Every day, millions of these products are consumed and so these products are constantly tested. If something was up it would quickly show up and there would be an immediate big time uproar.
Should all these millions of people tediously check everything they drink? No, that would be a massive waste of time.
Another mechanism that is at work is that if there was product information that could be captured and relayed to consumers at a profit, then we would expect firms to jump at that possibility of profit. And so, for any old and well-developed market, there is little rational reason to worry about that stuff.
It's profitable to provide consumer reviews of computer parts (sell magazines, sell ads, etc). Those reviews exist in abundance and are a strong check on safety, quality and price. There is little reason to worry that you're buying garbage. Companies that underperform are simply outcompeted in this cut-throat industry, and consumer reviews have everything to do with that. It's power is so strong that only a small part of actual buyers has to deeply inform itself for the mechanism to operate.
Here's a fairly well written article to get you started: http://econlib.org/library/Columns/y2010/McKenzierational.html
It delves into the criticism you were faced with and how markets give us incentives to be more rational.
So... the article claims that behavioralists try to empirically falsify the economist's assumption of rationality, but the empirical tests are contrived and don't match up with the real world, which is actually pretty rational.
I think mises does a good job of deflecting critics' fears about consumers getting taken in by flashy advertising etc. He points out that whatever underhanded techniques are available to promote a product are available to everyone, so that purveyors of a crappy product will always be at a disadvantage that no marketing can ever make up for. His competitors with better products can simply employ the same marketing strategies.
Well, not falsify in a malicious manner (at least I don't think). More like their methods of seeing how 'rational' someone really is don't hold much water since the constraints placed on the testee are ridiculous and don't apply to the real world. They also don't take into account the fact that markets provide an incentive to be more rational because being irrational will lead to a loss. Since markets pressure people to be more rational than they would have otherwise been the assumption of a rational consumer is acceptable to make.
Have there ever been any experiments where the participants are rewarded, can communicate, and have repeat trials?
Not to my knowledge, but I barely keep up with behavioral economics/psychology studies (I don't really keep up with the field in general).
I'm not sure why you seem to rule government regulation out as a way to mitigate this need to gather information or subsidize said information.
I'm not sure why you don't. Perhaps you don't understand how useless monopolistic parasites are... Information is a commodity, to be provided like the market like any other one. The FDA is of course a resounding success of the government mandating information to be provided, so who are we peons to disagree?
Freedom of markets is positively correlated with the degree of evolution in any society...