Down the Rabbit Hole with Capitalist “Rationality”

Richard Thaler, Professor of Economics at the infamous Chicago School recently claimed the coveted Nobel Prize. As a “behavioral” economist, he has helped his colleagues, and no doubt  many Liberals and Conservatives, understand that humans are not wholly rational creatures. We applaud Professor Thaler’s contributions in helping economists understand that “irrationality” is part of the equation, as it always has been.

Good to see progress in academia.

In conversation with Malcolm Gladwell at the New York 92nd Street Y Professor Thaler gives us a glimpse into the world of “rational” economics:

I had friends over for dinner when I was a graduate student, and served a bowl of cashews and cocktails. While dinner was cooking we started devouring the cashews, and at some point, I took the bowl and hid it in the kitchen — eating a few more as I went to the kitchen. And I came back and — we were economics graduate students, so we all started analyzing that. . . . pretty soon somebody had a napkin and a decision tree, and could prove — it’s a pretty elementary proof — that we had just made ourselves worse off because we removed an option that we kind of liked, which was eating cashew nuts. We used to have that option, now we didn’t. But we were happy! That’s not allowed.

The Conundrum of the Cashew Nuts is not an interesting one. You remained happy despite the cashews being taken away. There does not seem to be a mystery here. We speculate that the happiness of being young and at dinner with friends with kindred interests, and looking forward to fabulous careers ahead of you, overrides the sorrow of no more cashews to enjoy, and only dinner to look forward to. Or, perhaps, could it be that the loss of cashews was not really felt because the subjects knew that they could always have some at a later time, or because everybody knew the cashews were withdrawn for the purposes of this “exciting” thought experiment?

It seems that joining the economics department is like going down the rabbit hole. Who but a mentally unstable individual could feel a real loss simply because the cashews have been withdrawn from a party at which the individual was having a good time at? That individuals are able to handle such situations as losing access to cashew nuts at a dinner party with composure and even a sense of humor is not unusual. It makes sense to rational individuals.

* * *

Professor Thaler is most well-known for the “nudge”, a small “non-intrusive” incentive to herd the masses to act “responsibly” and “rationally”.

An example of a nudge: concerned with a low rate of savings for retirement, the nudge “would require any employer that doesn’t offer its own plan to enroll workers automatically into individual retirement accounts, with the option to opt out.”

And who will manage these accounts? The same corporations lobbying to get their hands on social security? Would it be a surprise to the reader to discover many of Us here at the Preservation Society contribute to this lobbying effort?

Nudging is supposed to be in recognition that individuals sometimes need to be led to “rational” decisions because they won’t do it on their own for whatever reason. “In order to do good economics, you have to keep in mind that people are human,” says Professor Thaler.

The New York Times reports:

The Nobel committee, announcing the award in Stockholm, said that it was honoring Professor Thaler for his pioneering work in establishing that people are predictably irrational — that they consistently behave in ways that defy economic theory.

But are we talking about irrationality? Note the implication that “rational” behavior is assumed to conform to “economic theory”. No wonder the individual is described as “irrational”, for reality looks nothing like Establishment economics as illustrated by the Conundrum of the Cashew Nuts. But beyond this, how can one call the masses “irrational” when they respond more or less logically to their given circumstances? The individual’s “irrational” actions are not the mystery.

The masses can not act any more rationally than the system allows, but they are very much encouraged, coerced even, to act against their own interests. This has not been addressed in “behavioral” economics. The starting point for this “science” is the individual guilty of “irrational” behavior, and not to the inherently corrupt system that naturally comes with economic disparity. Thus, at the end of the day it is your fault because you are not rational, silly creature. The guilt society in full display.

None of Us at the Preservation Society known Professor Thaler personally, and his pro-ruling class findings do not mean some kind of collusion with the one percent. Rather, his findings come out of the Liberal Capitalist milieu which encourages such thinking.

* * *

“One of Professor Thaler’s most profound findings,” the Times tells us, “involves the importance of fairness. He showed that people will penalize unfair behavior even if they do not benefit from doing so.” This might explain, “for example, why an umbrella store may choose not to raise prices during a rainstorm.” The Atlantic put it like this:

Perhaps $5 for an umbrella is fair—but what if the price was raised from $1 during a downpour? That familiar feeling that one is being gouged might discourage sales in ways that have nothing to do with the utility of the umbrella.

How is this a real world example? If “$5 for an umbrella is fair” then how realistic is a $1 umbrella? Conversely, if an umbrella costs $1 then $5 is too much. Unless you have no choice, just go down the street and get a cheaper one. It may “have nothing to do with the utility of the umbrella”, but getting a fair deal is rational to the utmost.

Even if it is not in one’s immediate self-interest, one might understand the rationality of asserting fairness. It is the maintenance of a certain standard of conduct that benefits society and the individual who is not an immediate party to the particular situation. The masses generally want fairness for obvious reasons.

One sees the attempt to disassociate emotion and intelligence, the individual against their own nature. One must ignore a sense of “fairness” for the sake of ruling class democracy, after all, unfairness is a hallmark of ruling class societies. We in the higher orders like to think the lower strata are not intelligent enough to understand “fairness”. The utility of “fairness” is not what the ruling class wants among the masses.

A sense of “fairness” only interferes with the privilege of employers to reduce costs or discard employees at their leisure. The Times article:

Standard economic theory predicted that during an economic downturn, employers would cut wages to a level consistent with the demand for goods or services, meaning there was no reason to think a downturn would produce unemployment.

But workers regard wage cuts as unfair. And so employers, seeking to avoid angering the workers they plan to keep, prefer to cut employees rather than wages.

There is a better reason for laying employees off rather than pay cuts across the board, and it has nothing to do with “fairness” but divide and conquer. Are you going to complain when you still have a job at full pay? No, especially after lay-offs. But cutting wages across the board encourages solidarity among the laborers. It puts them in the same position. Job security trumps “fairness”.

But how unfamiliar “fairness” looks under different circumstances. The Mondragon Corporation in Spain’s Basque country treats employment radically different due to the worker cooperative structure it operates under. The “superstructure” dictates the character of social relations. Started in 1956 by a Priest and five of his students, Mondragon has grown to over 70,000 employees. Though they have had their troubles, one can not deny their spectacular success.

Following the 2008 crash, Mondragon’s flagship cooperative called Fagor, which manufactured household appliances such as washers and dryers, dishwashers, etc., did not recover and filed for bankruptcy. The corporation decided, through its insurance arm, to pay 80% of their employees’ salaries for 2 years, while attempting to relocate as many of the laid-off as possible within other sections of the company. That is an alternate form of fairness from the lay-off variety.

* * *

The Atlantic tells us, “[s]ome of Thaler’s most interesting work studied the predictably irrational effects of ownership, confidence” and of course our aforementioned fairness. Notice these are all ideas that could help the individual in practice, and when rule of law is sovereign could work in the individual’s favor. Do economists really see this? Don’t they see the elemental and rational basis for these things? Must it be spelled out for them?

What most often makes individuals “irrational” are not the benefits of ownership, confidence and a sense of fairness, it’s living in a society that contorts values and logic into Profit Logic. It is very difficult to behave in a thoroughly “rational” manner in this environment.

The behavioral economic “discipline” does not ask why, in the first place, must the masses struggle while a minority live in luxury. Is such a superstructure rational? On the contrary, it has proven to be quite unstable. Does that not speak of failure on the face of it, not to mention “irrationality”? The Supreme Executive directs social focus at the stupidity and irrationality of the individual not at the system that forces them into it.

The 2008 financial crisis is a perfect example. In their blog Nudge Professor Thaler and his frequent collaborator Cass Susnstein quote Greenspan, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief.”

“Why did Mr Greenspan, along with the rest of the world’s regulators, fail to foresee that this could happen? We think their mistake was to neglect the role of human nature.”

Did these distinguished economists look at the “self-interest of lending institutions” for the fallacy of being human? Did they think: human nature, being what it is, and being subject to the profit imperative above all else, produces a situation where the powerful will seek to deregulate to promote maximum profits, thereby encouraging the creation of fraud and toxic financial instruments without regard for transparency or oversight. Is that not a more or less rational proposition?

Their assessment assumes mortgages just somehow got more complex:

. . . the financial world has become more complex in the past two decades. Not so long ago, most mortgages were of the 30-year fixed-rate variety. Shopping was simple: find the lowest monthly payment. Now they come in countless forms. Even experts have trouble comparing them and a low initial monthly payment can be a misleading guide to total costs (and risks). A main cause of the mortgage crisis is that borrowers did not understand the terms of their loans. Even those who tried to read the fine print felt their eyes glazing over, especially after their mortgage broker assured them that they had an amazing deal.

It is the borrower’s fault even though their mortgage broker “assured them that they had an amazing deal”. Isn’t the mortgage broker the “expert”, the gatekeeper who is supposed to reject bad risks? Why are is this specimen not subject to being an irrational human? Is it because deregulation created a wild west in mortgages in which it was eminently rational to create as many mortgages as possible, regardless of quality?

Instead, the hapless individual of the masses is faulted. “Humans are not stupid,” we are informed, “but when things get complicated they flounder: they suffer from bounded rationality.” They are not talking about banks and lenders here.

The Nobel Laureate apparently didn’t know something most already do. As the Washington Post reported,

Between roughly 2004 and 2006, at the height of the boom, getting a mortgage too often wasn’t much of a hassle at all. As the saying went, all you needed was to be able to fog a mirror: No down payment necessary. No minimum credit requirements. No verification of income, taxes, assets.

Blaming the “borrower” while ignoring the role of the “professionals” is such a silly and irrational assessment of the circumstances. One might well imagine the implications of such a scenario. A filthy homeless smelly junkie walks into a bank and “irrationally” applying for a home loan. The mortgage broker expert that they are, is outmaneuvered by an individual who’s only credentials are that they can fog a mirror (the “Countrywide standard”).

The expert and rational cannot overcome the irrational power of the powerless and clueless. This happened millions of times over? Profit Logic and behavioral economics says yes. As We’ve mentioned before: When an individual does something, one may call it personal choice, but when many do it the same thing it is, in some way, public policy.

But let us pretend for a moment the behavioralists are correct in saying confusing and complex mortgages were the main issue. What is their solution?  In the same Nudge  post cited above, they reject going back to only the standard 30-year fixed-rate mortgages because “[e]liminating complexity would stifle innovation.” “Innovation” no one except Wall Street is calling for.

Even as they support complexity in the name of innovation, Thaler and Sunstein’s solution to preventing another crisis calls for making mortgages easier to understand. This is like asking the crooked casino to divulge how it will swindle its customers.

* * *

There’s another defect in the “irrational” human. The wretched masses have no self-control: “. . . ‘temptation’ is not a word that exists in the economists’ lexicon. As a result, regulators have not thought much about the problem. But when the dessert cart comes by, we humans often cave in.” The authors claim that lack of self-control among the lowly fueled the mortgage crisis. Homeowners went on an irresponsible refinancing binge:

This crisis was fueled by the seemingly irresistible temptation to refinance the mortgage rather than pay it off. Falling interest rates, rising home prices and aggressive mortgage brokers made re­financing (and second mortgages) seem like the apple in the Garden of Eden. When home prices fell and interest rates increased, the party ended.

The Garden of Eden. More guilt heaped on the overburdened masses. The ruling class is absolved once again. But some don’t buy it, like economist Dean Baker:

It is more than a bit bizarre that anyone could take exception to homeowners borrowing against the equity in their houses. While it is good if people are able to accumulate equity in their homes, often families and individuals need to borrow money. Some borrowing may be for relatively frivolous purposes, but more likely, it is necessary because of a job loss, unexpected medical bills, a child’s education or to start a business.

* * *

During the housing bubble, many people did get in trouble with refinanced mortgages, but the problem was the bubble, not the act of refinancing. Many subprime purchase mortgages were designed to be refinanced before the teaser rate went up, on the assumption that the housing bubble would continue to grow.

It wasn’t the act of refinancing that got people into trouble – the mortgages were unaffordable to subprime borrowers to begin with.

In addition, refinancing a mortgage alone cannot drive up house prices, although refinanced mortgages could conceivably drive up mortgage interest rates, which would put downward pressure on house prices.

But Dean Baker is not a Nobel Prize winner. We may ignore him. Thaler and Sunstein propose that “[c]onscientious lenders could also nudge people to get off the refinancing merry-go-round, by suggesting that the term of the loan be shortened when a loan is refinanced.” “Conscientious lenders”! Does rationality have any connection to reality? Yes, if that is Establishment reality.

Just to make sure everyone understands who the guilty party is, they end their post: “We will not be able to protect against future crises if we rail against greed and wrongdoers without looking in the mirror and understanding the potentially devastating effects of bounded rationality and limited self-control.”

We agree the masses need to look in the mirror not because they cause this or that disaster, but because they are forsaking their duties as intelligent self-interested individuals. Unpalatable as they are, the latter beings are medicine to ruling class excesses.

* * *

There is so much more to write about the irrationality of “economic irrationality” especially as it pertains to these economists and topics. But suffice it to say the Nobel Committee only confirmed the irrationality of the Establishment and its ruling class yet again. In 1980, historian Gabriel Kolko wrote:

The economic history of the U.S. is one in which rationality and intelligence is more notable by its absence or irrelevance than by the degree to which it is employed. And what is true of the economic limits of capitalist intelligence is all the more so when one turns to the role of political intelligence.

“Economic irrationality” is yet another demonstration of how the individual is exclusively to blame for their condition, and not the Great Institution. And yet it is the masses’ fault for not challenging Us.

It’s all about your “irrational exuberance” for the ruling class.


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