Tag Archives: rationality

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Answers To: “Free markets don’t work because people are irrational”

It’s government planning that depends on rational actors.  Irrational actors will result in a flawed plan, which is then imposed on the entire society.  One irrational bureaucrat at the top could spell disaster for everyone else.

A free market implies nothing about the rationality of its actors.  Those who end up making the best investment decisions get a return on capital, while those who make bad decisions lose.  Over time, this produces a natural selection pressure in the economy, towards more efficient habits, procedures, and technologies; but, this tendency has nothing to do with the rationality of individual actors in the system.  They could be rational or irrational, taking planned or random actions.

This process is analogous to natural selection in biology.  As long as expressions of fitness can be retained over time, selection pressures will produce life forms optimized to their environment.  Those who claim a functioning economy requires an all-knowing, “rational” central planning committee to make order out of the irrational chaos of society, are proposing the necessity of economic “intelligent design”.

That assumes there is and should be an objective and particular purpose for the economy.  But, there is no such thing, because people’s preferences and goals are subjective.  There is no such thing as “market failure”.  It is impossible to objectively evaluate economic outcomes without an a priori ethical framework, but this is what economists pretend to do.  The result is nonsensical arguments like this one.

If we boil it down, this is not an economic argument at all, but an ethical one.  The person making the title argument is saying “People engaged in free, voluntary trade are doing things I don’t like.  Therefore they are irrational and this represents a market failure.”  My response is “live and let live”!