Or is it that they’re both?

As a young libertarian first exposed to economics (actually it was my third exposure where it took) I was struck with an exciting proposition: people don’t need the government to look after them because (we’ve assumed that) they’re rational! In that case, government can almost only ever do harm. Add in some public choice and Austrian insights and you’ve got a water tight defense of liberty.

But actually you don’t. Because as it turns out, people might actually be complete morons. I’ll bet if you marketed a brand of bottled water as having never been warm–cleaned with pre-chilled filters made in iceland, and never poured into room temperature bottles–it would sell. But if that’s the case, the world should be a scary place. People would be doing ridiculous things and electing ridiculous politicians to help them act even more absurdly.

I’m an economist and I still do plenty of irrational things. But it turns out that first taste of economics was econ of a particular variety: the study of what is rational. Not the study of how people rationally act. That’s not to say it’s worthless. David Friedman put it well in Hidden Order: if people are rational some times and act randomly other times, then we can still make useful predictions about their behavior. But I don’t think that economics is some sort of half-science that assumes away randomness in order to study some portion of people’s actions.

Mostly, I think the study of rationality lays a foundation, and offers a puzzle, to allow further study of ecological rationality. The world is orderly and roughly follows the predictions we make when we assume individuals are rational. And yet people seem far from rational. What gives?!

It turns out we have to pay attention to institutions. These often hidden rules of the game direct our actions and embed our learning in social rules. Those crazy (probably imaginary) sociologists might have been on to something when they said that individuals’ actions are shaped by social forces. It’s not that people don’t have autonomy, it’s that people don’t exist in a vacuum.

Yes they are.

What’s my point? Learning a little bit of economics goes a long way to making good arguments for liberty, but it doesn’t go far enough. We live in an a much more interesting world than the one we learn about in econ 101.