Economics is the science of understanding choice in conditions of scarcity. We have scarce resources available to us (even Bill Gates, for whom time rather than money is likely the most constraining factor, experiences scarcity) and must decide how to spend those resources. Should I work more to earn money for a vacation at the beach or spread my leisure over the course of the year? Should the country buy guns or butter? Should we invest more in the search for the perfect mate or marry our current sweetheart? Economics has given us powerful insights into all these specific questions and many more. We know that incentives matter, that higher prices mean lower demand and greater supply, and that markets are the most effective means of allocating goods and services to their highest valued uses.
Despite these successes, economic reasoning generally and markets in particular have been under attack for centuries for getting choices “wrong.” An early wave of criticism, only now receding, centered on markets’ inability to get prices “right.” Religious critics argued (and some continue to do so) that market prices varied from the “just price” and that excessive interest charges constituted usury. Karl Marx attacked the market economy for its extraction of “surplus value” from workers. Communists in the early 20th century attempted to substitute central planning for market-determined outcomes; some attempted to do so by substituting administratively-set prices for market prices to “correct” the price mechanism. Even in predominantly market economies such as the United States, regulators have “adjusted” regulated prices to accomplish various ends-regulated utility prices, for example, traditionally included extensive subsidies for favorite groups, paid for by higher charges for the less favored. Green critics of markets today seek to adjust prices of commodities such as oil to include “social” costs. For example, the green Left sees markets as undercharging consumers for the cost of their purchases—my consumption of a gallon of gasoline imposes costs on the rest of society that I do not pay, leading me to consume “too much” gasoline. Although the green critique is that prices are too low, while the red critique is that workers are paid too small a share of the price, these criticisms share a common theme: markets do not work because the prices of goods and labor are “wrong.”
The problem with this type of critique is the lack of a consistent alternative to replace market prices. Calculating a “just” price turns out to be extraordinarily difficult. If the price is below market, then producers will make too little to satisfy demand, and if the price is above market, producers will produce more than demanded. The result is either rationing by means other than price or warehouses full of unwanted goods. Today, a similar problem plagues the green Left’s attempts to calculate “social prices” for commodities. There is simply no non-arbitrary manner of calculating prices other than making use of the market. Of course not everyone is convinced, and one can still find plenty of advocates of just prices, surplus value, and social pricing. Nonetheless, price-based criticisms of market economies are no longer real threats to the dominance of markets.
As a result of this failure of price-based critiques of market economics, and the resounding success of market-based economies relative to the competition after the collapse of the Soviet empire revealed the truth about socialist economies, critics of markets have had to develop a new set of objections. Rather than focusing on a divergence between some hypothesized “true” price and observed prices, and thus a process flaw in the market mechanism, modern market-critiques focus on humans as market actors, postulating flaws in human nature that prevent markets from functioning efficiently. (To distinguish them from the price critiques, let’s call these the “psychology-based criticisms.”) Since the observation that human beings lack perfect reasoning is so obviously true as to be trite, the psychology-based critiques of market actors are much more powerful than the process criticism of the price critics. The two recent books reviewed here make strong cases for these psychology-based criticisms.
The first argument rests on the claim that markets provide too many choices and that making all those choices causes us psychological pain. In The Paradox of Choice, Barry Schwartz, a psychology professor at Swarthmore College, relates an experience familiar to many of us: he set out for the mall one day to buy jeans and found himself enmeshed in a lengthy process of choosing among a bewildering array of options. Did he want “slim fit, easy fit, relaxed fit, baggy, or extra baggy? … stonewashed, acid-washed, or distressed? … button-fly or zipper-fly? … faded or regular?” The problem with this array of choices, which could in theory allow him to get a pair of jeans that closely matched his style, color, and fit preferences, was that he now had to invest in making the decision. “Before these options were available, a buyer like myself had to settle for an imperfect fit, but at least purchasing jeans was a five-minute affair. Now it was a complex decision in which I was forced to invest time, energy, and no small amount of self-doubt, anxiety, and dread.”
At this point, many of the readers of this article will be thinking what I thought when I first read this account: Thank God I am not a psychology professor at Swarthmore! The ability to buy jeans without experiencing even a small amount of self-doubt, anxiety, or dread, something I had taken for granted before reading this book, now appears to be a major accomplishment. Nonetheless, Schwartz does set out a compelling case, built on psychological research and experiments, for the possibility that increased choice makes decisions more complex and so more difficult. As a result, Schwartz argues that people are better off at times with restricted choice.
Consider the following example, used by Schwartz. Until recently, American universities offered comparatively few curricular choices to students: “a largely fixed course of study, with a principal goal of educating people in their ethical and civic traditions. Education was not just about learning a discipline—it was a way of raising citizens with common values and aspirations.” Today, in contrast, colleges offer an extensive array of courses (he notes Princeton has more than 350 that satisfy its general education requirement alone; the much smaller Swarthmore has about 120). There certainly is little common learning going on among either Princeton or Swarthmore students, spread out among these disparate offerings. While recognizing the benefits of the expanded choices offered, Schwartz also argues that the intellectual freedom comes at a price: “Now students are required to make choices about education that may affect them for the rest of their lives. And they are forced to make these choices at a point in their intellectual development when they may lack the resources to make them intelligently.”
Choices do have consequences, and to the extent we are offered meaningful choices we will not only reap the benefits but also bear the costs of our choices. Schwartz identifies some more subtle problems with expanded choice: with more options, the information costs of decision making go up; the psychological costs of commitment rise; and the disappointment of not having the best increases. (Schwartz does a fine job of explaining the underlying psychological literature on which he bases his case for restricting choice, making it understandable for a lay audience without leaving out important details.)
The power in Schwartz’s critique is the resonance it has with the feeling of despair we may experience, at least briefly, when stepping into a massive shopping center and the overwhelming array of varieties of the item we seek turns a five-minute visit into an hour of comparison shopping. But is the problem really “too much” choice being generated by the market? In the case of jeans, it is easy to make fun of the vast array of options available if one is a fashion-impaired professor like myself and, presumably, Schwartz. For some consumers, such as my 16- and 12-year-old daughters, the expansion of jeans-options is a great benefit. The 16-year-old wears only boot-cut, traditional Wranglers—a negative fashion statement that clearly states her preference for the company of horses and her self-image as a cowgirl. My 12-year-old favors jeans with embroidered butterflies, fashionable colors, and accessory belts. The 16-year-old cares only about finding the appropriate size. The 12-year-old enjoys the hunt for the perfect pair of jeans. I find it remarkable that both can satisfy their preferences for the type of jeans and shopping experience. One buys hers from Western wear catalogues, the other from the mall. Each gets exactly what she seeks.
Many of the examples Schwartz gives fall into this category—choices he doesn’t value and so finds not worth the effort to make. It may be that he is correct, that expending effort on choosing the right pair of jeans is a waste of intellect. Yet it is also a chance for people to learn about making choices in an environment in which the wrong choice carries few consequences. The act of choosing, so painful to Schwartz, may bring joy to another with different preferences. Moreover, the market provides the means for those who dislike clothing shopping to avoid choices. Many clothing stores provide salespeople who know the stock and fashion trends. I know from experience that confessing ignorance to such a salesperson will enable me to quickly accumulate a reasonable wardrobe. Thus the market can solve the problem of choice while still providing the power of choice to those who seek it in a particular area. Once we recognize the diversity of human desires that prompts the provision of both boot-cut and embroidered jeans, the market’s responses to those desires are more understandable.
The second set of psychological criticisms comes from the work of Amos Tversky, accurately described by the introduction to Preference, Belief, and Similarity—a massive volume of his selected writings—as “a towering figure in the field of cognitive psychology and in the decision sciences.” He would surely have shared the Nobel Prize in economics won by his frequent collaborator Daniel Kahneman in 2002 had he not died of cancer in 1996. (The Royal Swedish Academy of Sciences does not award posthumous prizes.) Tversky documented carefully and thoroughly numerous instances in which people make recurrent and systematic errors in judgment, and offered a theoretical framework (known as prospect theory) to explain why such errors exist. This collection brings together papers spanning his career, which amply display both Tversky’s insights and his skill as a writer. Although the papers are technical ones, they are among the most accessible such writing I have ever encountered and most readers will be able to understand the important points even if some of the details of the underlying experiments or psychological theories are obscure.
To give but one example, Tversky and Kahneman’s 1974 paper “Judgment under Uncertainty: Heuristics and Biases” examines a series of common mistakes in reasoning. Consider the following description of an individual: “Steve is very shy and withdrawn, invariably helpful, but with little interest in people, or in the world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for detail.” When asked to rank in order the probability that Steve is engaged in a list of professions (e.g. librarian, farmer, airline pilot, etc.), people regularly rank “librarian” more highly than farmer because they associate the description of Steve’s personality with librarians. There are so many more farmers than librarians (at least there were in 1974) that the correct ordering is farmer, librarian rather than the reverse. Because the information about the base rate of librarians and farmers does not affect our stereotypes of personalities, people overestimate the likelihood that Steve is a librarian. Tversky and Kahneman did several clever experiments that tested variations on this and found that there is a general problem in reasoning that causes people to ignore base rate information and make decisions based on representativeness. Even worse, when subjects were given information that conveyed no relevant information (e.g. an uninformative description), they made similar errors.
The more than 1,000 pages of articles reprinted in Preference, Belief, and Similarity document numerous examples of flaws in human reasoning that conclusively establish that people are remarkably bad decision makers under a startlingly wide range of circumstances. (Indeed, those looking for a catalog of tricks to use at cocktail parties can generate a good sized list while reading this book.) How we decide is influenced, Tversky found, by how the problem to be decided is framed for us.
This insight can be used as the basis for a powerful critique of market economies. If the actors in the marketplace are systematically making mistakes in judgment, then how can the market outcome derived from their decisions be “optimal,” “efficient,” “just,” etc.? Tversky’s critique is powerful because, like Schwartz’s, it taps into a deep sense of unease. Before us is spread a vast array of choices on everything from retirement investments to the type of spread to put on our morning toast (butter? regular margarine? what about trans fats? the new cholesterol-lowering spreads?). How can we be certain we’ve made the right choice? Some mistakes are unimportant, but when even the choice of what to spread on our toast affects our long-term health, some level of serious consideration seems warranted. It would be so much easier if someone else would make the choice simpler for us.
I think one reason both Schwartz’s and Tversky’s critiques strike a chord is our guilt over the material abundance that our vast number of choices reveal. We have many choices because we are rich; even the poorest American today lives a life of unimaginable luxury compared to Americans in the 19th century. Diseases are vanquished, fresh fruit and vegetables are available year round, uncountable books are available for free at public libraries, and clean water pours from taps. Can it be right to have such luxury when, as our grandparents regularly remind us, they walked uphill both ways three miles in the snow to fetch water every day? Or, more seriously, when so many in the world lack food and medicine, should we have the choice of fifty styles of jeans?
It is right, and we should. We have this abundance of material goods and choices in part because we live in a society that has made some crucial choices itself. Our ancestors chose a regime of property rights and rule of law that led to material abundance beyond their wildest dreams. With that abundance we have our own choices to make: should we buy those $100 jeans or drop the money in the mission box at church? We are fortunate to have the choice but, to paraphrase Spiderman in last summer’s blockbuster film, “with many choices comes great responsibility.” We are ultimately responsible for our choices and, as flawed human beings, we (or at least I) often make bad choices.
Schwartz’s and Tversky’s accounts are attractive to many in our society because they are completely secular critiques of the problem of choice. There are too many choices, and we feel bad because it is too hard to make so many. Schwartz’s prescription is that we should make fewer choices and be happier in those we do make, not that we take responsibility for the choices we make. Tversky relocates the blame to unconscious decision rules. (Although these papers do not address many policy prescriptions, others have relied on Tversky’s work to justify a variety of interventionist policies.) Market forces and psychological characteristics beyond our control are to blame for offering us too many choices and limiting our capacity to make good choices.
This secularism is ultimately the major flaw in the psychological critiques of the market. God gave humans free will to allow us to make choices as a moral matter. Because of our fallen nature, we often make bad choices with that freedom. To pin the blame on the market or on our psychological makeup is to blur our responsibility for our choices and to attempt to wriggle free from accountability for those choices. In contrast, Christianity asks us to make choices according to some relatively straightforward but difficult-to-live-up-to principles. With the vast array of easy, bad choices before us, that’s a tough thing to do. But we can’t evade that responsibility as easily as these accounts would lead us to believe.
Just as the price critiques of the market ultimately foundered on their inability to provide a plausible account of what prices should be, the psychological critiques founder on their inability to offer a convincing alternative account of human nature. Economics succeeds at explaining much of human behavior in making choices because of the power of its simple and straightforward assumptions about human nature (e.g., when the price of something goes down, people want more of it). Enriching the economic model with the insights of psychological research, as Schwartz and Tversky have undoubtedly done in their careers, offers the potential to extend that explanatory power to previously inexplicable cases. The temptation to embed our own preferences for the good into others’ lives—while we “fix” those choices that the enriched theory predicts people will get “wrong”—is almost overwhelming. It must be avoided if we take individual freedom seriously. Just as we cannot know the “just” price, we cannot know the “just” number of varieties of jeans (or anything else) that ought to be on sale. What we can know through resort to prayer, study, and meditation on our religious obligations is how to make our choices when next we walk into the mall to buy jeans. Focusing on getting our own choices right, something Schwartz’s and Tversky’s insights can help with, is surely going to be difficult enough that we can leave others’ choices to others.
Andrew P. Morriss is Galen J. Roush Professor of Business Law and Regulation at Case Western Reserve University School of Law and Senior Associate, PERC—The Property and Environment Research Center.
Copyright © 2005 by the author or Christianity Today/Books & Culture magazine. Click here for reprint information on Books & Culture.
