Rationality will be at work this Christmas


So it is Christmas. And, as every year, people will spend time with relatives they do not much like, give presents that the recipients value at less than they cost, and eat and drink more than they know is good for them. As new year approaches, they will make resolutions not to do these utility reducing things again, resolutions which they will not keep.

Confronted with this evident irrationality, economists conclude that if only more people had taken Economics 101 the world would be a better, happier or at least more prosperous place.

Still we persist in these customs. It is easy to understand why, as the season of forced goodwill approaches, we economists are reflecting on the inadequacies of theoretical models of rational behaviour. But those who applaud our criticisms of these models are, perhaps, too quick to cheer. Economic behaviour may often be irrational — in the decidedly specialist sense in which economists use the term — but it is usually adaptive, and that is often much the same thing as rationality.

Historical scholarship suggests it is unlikely that Jesus was born on December 25, or at any time in the Palestine winter. The festival that the secular world celebrates — even the markets close and the Financial Times refrains from publication on that day — was, it seems, originally pagan. But it was appropriated by shrewd salesmen for the religion of Christianity, who appreciated that a good knees-up would help attract adherents to their cause. Their Christian event has more recently been hijacked by commercial interests that rely on a December rush to empty their shelves.

Such processes of adaptation are the means by which economies and institutions change over time. They are rarely the outcome of careful calculation but they are far from irrational in their origins or their consequences. Evolution can bring about outcomes more complex and sophisticated than any designer could achieve. That is what makes evolution one of the most powerful, and paradoxical, of human ideas.

But successful adaptation looks very like rational decision making. The cynical evangelists who adapted the winter solstice to their Christian purposes, and the mercenary traders who use the nativity to attract us to their stores, may seem to fit the caricature of the rational economic human. Did not Richard Dawkins explain evolution with the metaphor of the “selfish gene”? And, if the selfish gene populates the earth, will not the selfish trader dominate the economy?

No. The selfish gene is not literally selfish — and if it were it would actually be less successful in propagating itself because it does not sufficiently know what its best interests are. Lehman Brothers and Bear Stearns — the latter the broker-dealer whose mission was to “make nothing but money” — failed in the long run because the ethos of making “nothing but money” was not conducive to creating a sustainable organisation. Only profitable companies can survive; but it does not follow, and is not in fact true, that the ones that survive are those most oriented to making profits. Scrooge is not a happy individual because he does not, until his epiphany, understand that happiness lies not in selfish behaviour but in interaction with others. The happiest people are not necessarily those most determined in their pursuit of personal happiness.

Our cousins and parents-in-law may not be people with whom we would naturally have chosen to spend time. But the effectiveness of family bonds in supporting us in childhood, old age and other moments of dependency has ensured that the maintenance of these bonds through ritual occasions is part of every culture. Gift exchange is a means of establishing and reaffirming social obligation and reciprocity, and is similarly universally practised. Our judgment of what the recipient will value is a means of demonstrating intimacy (or failing to do so). Those who discern irrationality in such behaviour display only the limits of their own conception of rationality.

And why do we eat too much, and break our new year resolutions? Because we do not have the consistent preferences that a narrow conception of rationality requires. We want to eat well, and also to be thin — and the preferences wired into our brains when food was scarce are not necessarily appropriate when food is only a call to the pizza delivery service away. We want to be naughty, and also for Santa to bring us lovely presents — and experience shows that usually he will.

Evolution is smarter than you, and smarter than rational economic man.

This article was first published in the Financial Times on December 24th, 2014.

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