Libertarianism and the Economic Man

Libertarians often rely on economic arguments to support their position. Since the economic science usually employs a highly stylized description of human wants, aspirations and individual behavior, libertarians can sometimes fall victim to criticisms of the economic method and its underlying assumptions. Most of the vitriol seems to be directed at the so called homo oeconomicus postulate, which represents people as rational, individual utility maximizers. In this text I will try to outline the precise role of this assumption in libertarian theory, to defend its application and to show why the normative theory of individual liberty does not in fact stand or fall with it.

The Postulate

The main parts of the homo oeconomicus postulate are:

These properties have all kinds of nice consequences which libertarians utilize in their arguments. For example, transitivity implies that if there is a group of choices open to an individual, narrowing this set down can never make the individual better off. This immediately rules out all limitations on individual freedom which do not outright broaden the freedom of others, because such limitations are potentially costly in terms of individual welfare without offsetting gains. Maximization implies that observed choices are always the best ones open to an individual. This rules out paternalism, because an outside observer can never improve upon individual decision making. And so on.

It is easy to see that while the postulate looks innocuous enough, in actuality it cuts a broad political swath. When libertarians wield the postulate, competing ideologies often face the choice between accepting libertarian reasoning or abandoning a reasonable seeming description of human behavior. This is why the postulate invites continuous analysis and criticism.

What if it doesn’t hold?

Usually when confronted with criticism, proponents of the homo oeconomicus postulate try to answer it directly. I’ve decided to go about it the other way around, and argue that the converse of each part of the postulate leads to absurdity. Since politics is about adjusting the prevailing rules in a community, and the rules are upheld by legally induced incentives, the easiest way to derive a contradiction is to look at the kinds of sanctions and rewards we can arrive at by reversing the assumptions.

First, suppose that decisions aren’t made by individuals. What are they made by? The usual answer is that they are made by groups. If this is the case, there is no individual volition, political rules must not dictate individual but group behavior, and the sanctions must also be levied at groups. We never incarcerate a person, but a family, a nationality or a class. Antisocial behavior is impossible by definition, because all behavior is social.

Second, suppose that individuals are not rational. Then the one doing the punishing isn’t rational and the entity being punished will not face calculated responses to its actions. No rules can be upheld. The same holds even if we only assume that the one being controlled is irrational—in this case he will be faced with proper incentives to behave, but he does not possess the ability to do so. He wishes to be happier, but does not know how and will not react to incentives.

Third, suppose individuals do not maximize. Then the decision maker does not maximize. Somebody could be better off without making anybody else worse off and the society becomes inoptimal. We also see that reward and punishment once again become inoperational. People are intelligent but they do not want to be better off nor do they care if they fare less well. You can put them in jail but that has no effect. There is no point in legislating anything.

Fourth, suppose people aren’t egoists, but altruists. In this case any effective punishment would not be aimed at them, but the ones they care about. The society would have to punish children if it wished to control the actions of their altruistic parents, for instance. The philantropist would be controlled by shooting the poor.

The above is a crude simplification, of course, but it does help us recognize the value in the homo economicus postulate. For the most part real people are closer to rational egoists than the other end of the spectrum. If the postulate does not hold, it’s because it is not entirely accurate, not because it is patently wrong.