Aquinas and the Market: Part 7, They Have a Utility Function for Mother Teresa

Another moment in Mary Hirschfeld's book Aquinas and the Market: Toward a Humane Economy that made me sit up and take notice was when she turned to common critiques of the rational choice model and dismissed them as superficial.

As discussed in the last post, the model of human behavior in economic modeling is the rational choice model. This is homo economicus, human persons who are rational, self-interested, and utility maximizing animals.

The rational choice model takes a lot of heat because it's so central to economic modeling. If the rational choice model is wrong, then the economic modeling based upon it going to be wrong.

So a lot is hanging on the rational choice model. And over the years, there have been a variety of critiques of the model. Two of the most important, as reviewed by Hirschfeld, have to do with rationality and self-interest.

Let's start with rationality.

Are humans really rational?

There have been a host of findings from the field of behavioral economics that have shown that human decision-making is often irrational. In addition, the long, sad history of financial panics and bubbles provide case studies in how irrationality and emotions can trouble and crash markets.

So, if humans are irrational then the models of economics are fundamentally flawed and untrustworthy. Correct?

No so fast, says Hirschfeld.

It is true, Hirschfeld points out, that the findings of behavioral economics and recent market collapses like the 2008 US housing bubble have chastened and challenged the assumptions of mainstream economic modeling. But she also goes on to point out that there's a rapidly growing literature among economists working to accommodate and model various sorts of "irrationality" in human choice and market behavior. The point here is that economists are aware of the problem and are on it.

True, we might find this work inadequate, or complain that it has yet to impact real-world economic modeling in any broad or comprehensive way, but the point here is simply to say that if your theological criticism of the rational choice model is that humans sometimes behave irrationally this will be very old and uninteresting news for any economists in the audience. They will yawn at you.

Let's now turn to the issue of self-interest, which is, probably, of most concern to theologians.

Are humans wholly self-interested? Aren't we fundamentally social, cooperative creatures? Can't we make decisions based on love, self-sacrifice, altruism, and compassion?

This is, perhaps, the most common theological criticism of modern economics. So, again, I sat up and took notice when Hirschfeld also dismissed this criticism as superficial.

Hirschfeld dismisses the criticism that, since humans can behave altruistically then the rational choice model is false, in two ways.

First, Hirschfeld writes: "A second set of common misconceptions cluster around the idea that economists falsely assume that human beings are purely self-interested. In point of fact, homo economicus [economic man] is not identical to homo avidus [greedy man]."

Again, to review from the last post, in economic modeling "self-interest" simply means "preference satisfaction," that if you prefer A over B you choose A. Self-interest in economic modeling isn't competitive nastiness or selfish indulgence. Self-interest isn't greed or Machiavellianism. Self-interest simply means that if you like Dr. Pepper more that Coke you buy Dr. Pepper. That's it, that's all it means.

Once that clarification is made you can see how this whole line of criticism evaporates. More, and this is Hirschfeld's second, related point, economists can model altruism and social consciousness within the rational choice model.

For example, if you prefer to spend more for fair trade products, because you value making sure that the person picking the coffee is getting a fair wage, then that's your preference. Your utility function ranks the fair trade coffee over Folgers, so that's what you buy. Your "preference satisfaction" reflects your social consciousness. The same goes for a company that wants to go green and reduce carbon emissions. Or a nation that wants to expand healthcare. All these social goods can be easily handled by the rational choice model. As Hirschfeld bracingly points out:

The content of Bernie Madoff's utility function may well differ from that of Mother Teresa's, but formally there is no difference in the logic of maximizing utility...[T]he model of utility maximization can handle altruism.

To be sure, as with irrationality, the degree to which altruism plays a role in markets remains an open question. But that's a question of values, not of models. The point to be observed here is that raising the issue of altruism and cooperative motivations in human choice isn't really a challenge to economic thinking and modeling. When we realize that "self-interest" simply means that if you prefer A over B you choose A, for whatever reason, then this entire line of criticism is effectively shelved. A theologian who challenges homo economicus by pointing out that humans can behave altruistically and cooperatively is also going to elicit yawns. The economists have a utility function for Mother Teresa.

To wrap this up, it's clear the reason that Hirschfeld can dispense with these criticisms so quickly is that she has a PhD in economics. She listens to the theological criticisms, and she knows exactly how economists in the audience would hear and respond. So she's uniquely equipped to get past the first unhelpful rounds of theological conversation--But aren't people irrational? Aren't people altruistic?--and move us on down the road.