Transcript Freedom and Rational Choice Theory

Positive Political Economy: Freedom
and Rational Choice Theory
Can the liberal model be used to explain social
interaction?
But why do policy-makers often diverge from the
liberal model?
What explains actual policy?
Why doesn’t the market always rule? What other
institutions affect economic choices?
Today’s session we will
• Discuss some of the origins of rational choice theory—
using the methods of liberal theory
• Discuss assumptions of rat choice theory
• Show how the theory works in life: strategic interaction
and prisoners dilemma
• Argue that cooperation is best for all but it’s hard to
get: the problem of collective action
• Argue that Institutions and governments are necessary
to ensure cooperation---ensure competition and more
• Argue that governments are often clunky and that
problems of cooperation can be solved through the
market mechanism: Coase Theorem
Answers come from building blocks of
the liberal economic model!
• Economics seems to be the most successful of
the social sciences
– Assumed that people are motivated by the drive for
wealth
• Success led other social scientists to cast an
envious eye in its direction
– They thought: “If we follow the methods of
economics, maybe we can achieve similar success!”
• So they began to build theories around the
concept that people are rational.
And they came up with rational choice
theory
• Assumptions the same as liberal theory
– Production, distribution, consumption of goods
and services organized through the market
– Market mechanisms can explain human action
around other resources, e.g. time, information,
prestige, etc.
Assumption: Individuals are self
interested
• Individuals are at the center of all social activity
• self-interest is not the same as “selfishness”
• self-interest in rational choice theory is
premised on the idea that all
• individuals have specific (“reasonable”) goals
and that they behave in
• way that best enables them to achieve those
goals
Assumption: Individuals are Rational
– Individuals are
rational
– They are motivated by goals that express their
preferences
• But you can’t always have what you want!
• Goals are shaped by constraints like
– Information (which is always imperfect)
And other Constraints shape
calculations…..
• About the costs and benefits of any action
that might be taken to achieve a goal.
• We sometimes call this the “strategic
environment”
• And in that environment we engage in
“strategic interaction”
• what you do may affect what I choose to do,
and what I do may affect what you choose to
do.
So our calculations are dependent on
what others do
Life is just a Game!
•
These situations can be modeled as a game
–
Model: a simplified version of reality
–
Game: a model of strategic interaction defined by
1. Players (or actors)
2. Strategies: plans of actions for all players that set out
what player i does under all possible contingencies
3. Payoffs
The Relationship Game
In the Game of Life, (Promise of) Rewards are
“Benefits” (Threats of) Punishments are “costs”
•
•
•
•
•
•
•
“utility”
Constraints
incentives
Calculations of probabilities
Profit
utility maximization
Social interaction continues only as long as
participants think they will make a profit—
maximize their utility
We are all caught in a “prisoner’s
dilemma”
Prisoners Dilemma: How the game is
played
Strategic Interaction; imperfect
information
How the Prisoners’ Dilemma explains Doping
Assumptions
• you are earning your living through cycling,
• your team had made performance-enhancing
drugs part of its “medical program”
• You’ll be cut if you’re not competitive.
• You believe that your competitors are doping
• Those who are tested rarely get caught
• Rules are not clear and not enforced.
• authorities look the other way,
• creating a perfect environment for doping.
Probabilities for calculation of rewards
and punishments
• Game Assumptions: Current Competition
• Value of winning the Tour de France: $10 million
• Likelihood that a doping rider will win the Tour de France against
nondoping competitors: 100%
• Value of cycling professionally for a year, when the playing field is
level: $1 million
• Cost of getting caught cheating (penalties and lost income): $1
million
• Likelihood of getting caught cheating: 10%
• Cost of getting cut from a team (forgone earnings and loss of
status): $1 million
• Likelihood that a nondoping rider will get cut from a team for being
noncompetitive: 50%
Why so much doping?
Cooperation is difficult but necessary
How is cooperation ever achieved?
The Problem of Collective Action
• Individuals can aggregate their preferences in groups,
like trade unions, other interest groups, and political
parties?
• Why do rational individuals join groups?
• Because the benefits outweigh the costs of
membership.
• Group membership is a constraint on freedom
• And often individuals can get the same benefits
without joining the group
– They can achieve what they want on their own
– Or they can “free ride” on the group
Game of Achieving what you want on
your own: The Stag Hunt
The Stag Hunt
Chasing the Rabbit
Here is what the calculations look like:
Cooperate
Me
You
Cooperate
Defect
Defect
Why do people always arrive late to a
party?
The problem of Trust
• it is very hard to move from the low-trust
situation, in which both prisoners confess,
each hunter chases his own rabbits, --or
everyone arrives late---to the more trusting
situation, in which both team up to get a light
sentence, to bring down the stag—or
everyone arrives on time. Any move to the
high-trust environment is going to require its
own, possibly costly, attempt at coordination.
Back to doping…..can Lance create
Trust?
Can only higher authorities change risk and
reward calculations and create trust?
• Trust reduces our “transaction costs” in groups
• That’s why we have institutions to help create cooperation
• institutions formalize trust and thus dramatically expand our ability
to interact with those beyond our immediate neighbors.
• That’s why we have laws and law enforcement
• Back to political economy and the market…..
• the U..S. government (an institution) decided to “bail out” the
financial system when the market broke down
• It is a way to bring back trust.
• Markets sometimes “fail” at coordinating economic activity
Governments coordinate economic activity
when uncoordinated markets “fail”
•Prosperity
•Transition
•Trough
•Recovery
Governemt
“bailout
?
Then there is the Problem of Free Riders
Rational Actors have no incentive to
join in collective action
Social Costs complicate social
interactions
Market failure and property rights
• In groups Property rights need to encompass
costs imposed on others
• I have a right to play the piano, while my
neighbor feels he has the right peace and
quiet.
• We could go to court over it…….
Governments don’t have good
information and they make mistakes
Brussels Sprouts Farm using
pesticides
Herb Farm that wants organic
certification
Coase Theorem….back to the grand
piano—Market solution
Property rights must include costs
• as long as the initial property rights are clearly
defined to include social costs and benefits,
the Coase Bargaining Theorem results in a
socially optimal outcome
• A potential market failure is averted using a
purely market-based tool, without relying on
government or the legal system.
So are we really Free?
• Our behavior is not free but determined
• By rewards and punishments
• We do things that lead to rewards and avoid
whatever we are punished for.
• Joining groups restricts freedom
• Social costs restrict freedom
• Isn’t that a kind of prison?
What is “rational”
decision-making?
knowing all information? No
perfect calculation? No
choices that are morally good? Not necessarily
Different in small groups than in big groups? Yes
Rational Choice simplifies a very
complex reality
• Yes, people are self-interested
• But their limited information, preferences,
utility maximization, calculations and
• strategic interaction makes “rational decisionmaking” more complex than it appears on the
surface