Countless economic theories exist, and for many scores of years, believers in their economic theories of choice have argued with believers in other economic theories quite frumiously. With this post, I am not advocating any particular economic theory, simply panning Capitalism as defined. As I complete my thoughts for why other economic theories are impossible to implement in reality, I will also post on them, but for now, I must start with Capitalism as people are still foolishly attempting to implement it.
The fundamental core of Capitalism rests on all of the participants behaving rationally in every economic decision that they make. A large reason for the popularity of Capitalism is the fact that most people like to think of themselves as rational individuals, but rationality (economically speaking) is much harder to achieve than we’ve been led to believe. Rational decision making has recently received a lot of criticism from economists, however, as it has been shown again and again that human beings are NOT primarily rational creatures. The data shows that human beings do not tend to use ration when it comes to economic decisions, to the point that major billion dollar industries exist that would not exist if people actually behaved rationally. How can we depend on the rationality of humans to guide the “invisible hand of the free market” when it is clear that we are not rational?
I know that saying people are irrational makes a lot of people angry because they like to think of themselves as rational. So, I think it is probably best to prove just how irrational people really behave, by comparing rational and irrational behaviours which are fairly common in today’s society. If you don’t fit into these examples, then simply take them as examples of the necessary thought process behind a rational decision, and honestly assess your own decision making process.
If you do not have a simple table in your car of how far you can drive to save a given amount of money on gasoline(or a calculator), you’re irrational. Because it is a fairly complex task to figure out exactly how much money you can save by driving X miles to save Y cents per gallon on gasoline, this task can be simplified to both save on thinking time (thinking time over decisions is a major limiting factor in rational behaviour) by making a few quick assumptions. First, you have to know how large your tank is, and how many miles you get per gallon. Most people do (though if you don’t, you might want to really rethink your choices) so this is not a big problem.
The assumption which saves time is to make one table: how how far can you drive to save Y cents for a fill up of quarter tank of gasoline. Why one quarter? Because it makes the other math easier: if you have to fill up a half, simply double the numbers. Three quarters or full tank, triple/quadruple. That way, most of the math is already done, and rather than having to divide by four, which takes slightly longer for most people, you can multiply by four. This simplification isn’t necessary, but it helps a bit.
The real rational thought comes in with the data in the table itself. I’ll run a quick example to show the calculations necessary for a rational gas buying decision. Say your car has a 20 gallon tank, and is three quarters full, IE you’re going to buy only a quarter tank of gas, which is 5 gallons. Say also that your car gets 25 miles per gallon, just to have a figure to run the calculations with. If you can save a single cent per gallon by using an alternative station, then you can save 5 cents worth of gasoline by filling up at said station. The rational question therefore is: how far can you drive on 5 cents worth of gas? This of course depends on the price of gasoline.
Lets assume for a minute that gas is $4 a gallon. 5 cents worth of gasoline at $4 a gallon is 0.0125 gallons of gasoline, which at 25 MPG is 0.3125 miles. Tada! We just calculated how far you can drive to save a single cent on a gallon of gas! If you drive more than 0.3125 miles to fill up at a cent lower, you’ve just made an irrational decision. The same can be said in reverse: If you DON’T drive less than 0.3125 miles to save a single cent on a gallon of gas, you’ve also made an irrational decision. If you have to fill your whole tank up, then that single cent per gallon of savings stretches out to 1.25 miles. What these calculations show is that if you have to travel less than the distance calculated, it is rational to do so, and if you have to travel more, then it is not.
The time saving table is in two dimensions: the first dimension is the overall price per gallon of gasoline, and the second is the amount saved per gallon. The data points in the table are the maximum miles you can drive to fill up a quarter of your tank and still remain rational. Simply locate the proper data point for current price of gas and potential savings per gallon, and compare the distance to how far you’ll have to travel to save. If you’re travelling less than the rational cutoff, do it! It is a rational choice. If you’re travelling more, it is an irrational choice, despite the fact that you are paying less for your gasoline!!
I can hear a bunch of people screaming “that’s still way too much work just to buy gas!” and you’re right. Irrational, but correct. Using a calculator to figure out the exact numbers for having used 28% of your 22.6 gallon tank when gasoline is 3.979 a gallon takes more time, but this type of table is accurate enough to make well informed decisions, while also saving time which could be spent making money elsewhere, but it still will take you a few seconds to minutes to check nearby gas stations to figure out where the best deal is. Rational decision making takes a good deal of work, more than most people are willing to invest, especially for the minor economic decisions in their life which are repeated frequently, requiring this type of thinking often. Ergo, Capitalism cannot work: most people do not want to or simply do not apply their rationality to EVERY SINGLE economic decision they make, which is a prerequisite of a Capitalist system dependent on rational individuals. If you think it is absurd that Capitalism demands you do these kinds of calculations every time you buy anything from gas to a pack of gum, you might want to reconsider living in a strongly Capitalist society such as America.
Some people are by now about to spout off on how they are still rational, and that if enough people are rational it’ll still work well enough. I also mentioned billion dollar industries which exist only because of irrationality, so I feel I should explain the tobacco industry. If Capitalism actually worked, if enough people were actually rational, pre-packaged cigarettes would be a niche market, conservatively 5% of the size it currently is. Liberal estimates of the same thing would put the tobacco industry out of business. Why?
Because if you don’t make more than $60 an hour, it is irrational for you to buy pre-rolled cigarettes. Yet some 19% of Americans smoke cigarettes. If we take some reasonable estimate (or even unreasonable estimates) for how many of these people make more than $60 an hour, as well as those who roll their own, we still get ridiculously large quantities of people who behave irrationally on a regular basis, perhaps without even understanding the concepts. Assuming an equal incidence of smoking among people who make more than $60 an hour (which is not reasonable, but more reasonable than the other estimate I’ll make; chances are that there is a lower incidence of smoking in higher income brackets, but I’ll make my error in the other direction for safety) results in approximately 3% of smokers making more than $60 an hour. For an extreme estimate, we’ll assume ALL people who make more than $60 an hour smoke. This results in somewhere between 16%(extreme) and 18.5%(reasonable) of Americans making less than $60 while also smoking. I found no good data for how many people roll their own cigarettes, so again I’ll take a reasonable and unreasonably high estimate for safety’s sake: somewhere between 3% and 15% of smokers roll their own. (This is a wild assed guess, so if anybody knows the actual figures, please correct me and I’ll edit.) This results in somewhere between 13.5% and 18% of Americans (by my W.A.G.) who buy pre-packaged cigarettes, that also make less than $60 an hour.
I keep quoting this $60 an hour figure, so I feel I should explain it. For a savings of $5, you can take 5 minutes to roll your own pack of cigarettes. The cost of a roll-your-own pack is approximately $5 less (depending on brand, you can save more) including tubes, filters, and tobacco, and with a rolling machine it takes approximately 5 minutes to roll the entire pack. This results in a one dollar per minute savings, or a $60 per hour net savings if you were to spend an hour rolling up packs of cigarettes. This is the rational dividing line for whether or not you should buy a pack, or roll your own, the amount of money which can be saved.
It is reasonable to buy a pre-rolled pack of cigarettes, for a person who makes more than $60 per hour. Why? Because if you can make $70 in that hour you spent rolling your own and saving $60, you could have made $10 more by buying cigarettes instead. This is the crux of rational decision making: figuring out what decision is economically best for you. For those making greater than $60 an hour, it is rational to make your bank at your job and not waste your time rolling your own at a mere $60 an hour. By working and buying cigarettes, you use your time most efficiently for the most personal gain. This is the basis of rational decision making.
For the estimated 42 to 55 million Americans who are currently buying cigarettes while making less than $60 an hour, I’m sorry to be the bearer of bad news, but you are acting irrationally every time you buy a pack. I’m not trying to offend, I’m simply pointing out the facts, according to Capitalist economic theory, which our country is currently running under. You are not spending your money in the way which benefits you the most. This is the definition of irrational behaviour.
So, at a bare minimum, tens of millions of people either do not understand how to properly operate in a Capitalist society, or they actively choose to behave irrationally. Of course, these examples are greatly simplified simply to make the point; in reality, economic decisions become increasingly complex very quickly, as you have to weigh the need for cigarettes against whether or not you’re going to eat Ramen noodles for the next few days, whether or not you’ll have enough gas to make it to work, mortgage/rent payments, etc. To make every economic decision as rationally as possible requires a lot of thought, and a lot of considering alternatives. Not only that, but it requires research into new alternatives, as well as considering the health effects (is saving time and money by eating fast food worth the gym membership and/or hospital bill? How can you really do the math on something like that before it happens?) along with other factors which are nearly impossible to quantize.
Is Capitalism possible in today’s society? No. Most definitely not. Most people are too ill-informed about the mechanics of economic operation, as well as the details of the products they buy, to make properly informed rational decisions. Could it work? Maybe, if everyone wanted to spend their free time researching economic theory and the products they are interested in buying.
The problem is that in an ideal world, Capitalism would work marvellously. It has so much appeal to many economists because with that simple assumption of rationality, all the pieces fall into place and it looks like it would work perfectly. Truly, it is a magnificent economic theory, and if we were living in an ideal world, I would support it hands down, as if our society were comprised solely of rational individuals, it would indeed perform as intended. We don’t live in an ideal world though, so any ivory tower theories have to account for reality: Capitalism has no way of dealing with the real world irrationality of human beings. Its dependence on rational individuals which the entire theory is set upon is its downfall. Capitalism is like a castle built on sand: no matter how well designed and built the castle, the foundation is shaky and will cause the castle to fall before its time.
Perhaps one day, all humans will behave completely rationally at all times. Until that day comes, Capitalism needs to either rethink the very basics, or get out. Until people actually take the time to think through every decision they make to be sure that they’ve spent their time/money in the best possible way, until people behave rationally 100% of the time, Capitalism CANNOT function as intended.
TL:DR; YOU are the reason Capitalism can’t work. Your short attention span and abhorrence of learning prevent rational behaviour. If you can’t afford to spend the time to read this post (time which you’re already wasting right now by being on the computer surfing through random blog posts) then you can’t even begin to understand what is necessary for capitalism to work. Go back to school, take some ritalin and learn to read something longer than a twitter post, and maybe one day you can be a good Capitalist.
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I think part of difference is in what “rational” means with regard to human action. Supporters of capitalism like Ludwig von Mises believes that all human action (even in your cigarette example) is rational in the sense that all human action is purposeful — aiming at attainment of definite ends, but that doesn’t have any significant bearing on their reasons for supporting capitalism.
However, he argued,
Take care!
Thank you for a great reply!
My only difference with what von Mises has to say comes from the fact that people aren’t so different as you’d think. Most people have jobs, apartments or homes, cars, and they eat food. Most people are far more similar than they are different. People love to think of themselves as “unique snowflakes” but unfortunately, advertising proves them wrong.
Externalities do make a difference: For the gas example, it might be worth it to you to boycott a certain gas station, and therefore pay a few more cents per gallon. However, this is clouding the issue of rationality even further. Justifying rationality in decisions is difficult as it is, and the more information you bring to the decision, the harder it gets. I tried to provide a simplified version of rational thinking.
I think that the von Mises quote undermines Capitalism even further; if rational is a meaningless term, then how can we define Capitalism using this meaningless term? The only way for rational to make any sense is to have some external definition shared by all, and I think that the definition provided by Capitalists of the “most personal gain” is a fair benchmark. When everything has a price, this is more easily measurable. So, do we throw out the idea of rationality and therefore the idea of Capitalism, or is it possible to share a definition?
If we do accept this definition, then for the example of cigarette rolling, is the action of rolling your own cigarettes so heinous as to be worth paying $60 to avoid? Including factors which cannot be quantized easily like enjoyment (which is a completely necessary factor to include) increases the difficulty of rational decision making. I know that these days people don’t want to be seen as judgemental of others, and I’m not going to tell somebody they HAVE to roll their own; but I’ll judge you irrational if you make less than $60 an hour and buy cigarettes. On the whole, I’m simply saying that independent of choices actually made, an expenditure of money which is not rationally weighed using all the factors involved in the decision, must needs be an irrational decision. A reflex purchase of your favorite pack of smokes lacks ration on many levels.
Rationality is actually thinking through the choice, trying to make the best decision for you. If it turns out that rolling cigarettes is such a horrific act that enough people will pay $60 an hour for it, that is one thing, but that is not the case. Most people don’t consciously observe that they’re paying $60 an hour to not roll their own, which makes it automatically irrational.
I don’t think I’m getting across the essence of von Mises’ point. He understood the word “rational” to mean purposeful action. As a subjectivist, he thought it didn’t make sense to judge whether someone’s ends are worthwhile. We can only say with certainty that people are aiming toward ends, whatever those might be.
He didn’t think “rational” is a meaningless term in general, just that it had no place in making value judgments for others. For example, we can’t say that the financial cost should be or is the only consideration when buying or rolling cigarettes.
So you’re OK with working 16 hours days for $1 a day?
I think von Mises should get a dictionary. He doesn’t understand “rational” the way the dictionary defines it. From dictionary.reference.com:
If von Mises wants to use a word he doesn’t understand, how much trust can you really put in his theories?
Also, I must point out that assuming everyone’s actions are rational is hopelessly naïve. If everyone can naturally be assumed to choose their best self interest, why do we even have schools? People are naturally smart enough to make the right choices from the minute they’re born, right? We don’t even need parents, really, as according to von Mises, humans can be trusted to be rational, so there’s no way any human would put his hand on a hot stove, excepting the case that it was in his own personal best interest to burn the shit out of his hand.
Also, I recommend researching “Free Market Failures” such as the great depression. Ludwig von Mises missed the mark, I’m sorry to say, and it is because he’s stuck in his ivory tower and he forgot to take a look at reality.
I don’t find where Mises or many other supports of capitalism argue everyone naturally follow their own self-interest, only that fully human adults act purposefully. Many of his most potent points about economic policy is that people support policies that are directly counterproductive to the goals they are trying to achieve.
So what you’re saying is… We’re going to found a societal structure on anarchy, depend on rational action where rational simply means you’re doing something, anything, not that you’re actually using ration to decide upon something sensible to do, and that everything will be better because of this?
I must have missed something, as this sounds like one big oxymoron. I don’t deny many economic policies are counterproductive to the ends they are trying to achieve: I’m pointing out that Capitalism itself, as defined, is one of these policies.