David Friedman - Hidden Order: The Economics of Everyday Life

To most people, economics is a dull science full of statistics and jargon, mainly concerned with money and designed to answer a narrow (but important) set of questions. To economists, economics is a powerful tool for understanding why armies run away, voters are ignorant and divorce rates rise, as well as solving practical problems such as how not to get mugged. Its theme is not money but reason the implications, especially the non-obvious implications, of the fact that humans act rationally. To put it more formally:

Economics is that way of understanding behavior that starts from the assumption that individuals have objectives and tend to choose the correct way to achieve them.

Economic rationality summons up an image of a cold-blooded calculator, perhaps Mr. Spock. But economics is not just for Vulcans; the assumption describes our actions, not our thoughts. If you had to understand something intellectually in order to do it, none of us would be able to walk, as became clear when people started trying to program robot walkers. We learn, not through logic alone, but by a complicated process of feel, feedback, and intuition.

There are lots of ways to behave rationally without reasoning your way to it. Whether or not you have logically deduced that in order to live you must eat, if you dont eat you wont be around long to have your behavior analyzed by economists. So evolution is one source of rational behavior. Trial and error is another. I have never run a map of Santa Clara County through my computer, but I think I know the shortest way home from my office.

For a familiar example of rational behavior without reasoning, consider the situation of an infant, with only one tool available for achieving his objectives. When he is hungry or wet, he makes loud and unpleasant noises, giving any adults in the vicinity an incentive to deal with the problem. I doubt that babies think through the logic of their situation but they take the action most likely to achieve their ends.

Babies are rational. So are cats. If you insist on reading the newspaper when you should be petting your cat, the cat solves the problem by lying down on the paper. I do not know if that tactic is the product of calculation or trial and error, but it works.

In order to get very far with economics, one must assume not only that people have objectives but that their objectives are reasonably simple. Without that assumption, economics becomes an empty theory; any behavior, however peculiar, can be explained by assuming that the behavior itself was the objective. (Why did I stand on my head on the table while holding a burning $1,000 bill between my toes? I wanted to stand on my head on the table while holding a burning $1,000 bill between my toes.)