The economics of incapacity

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The “rational man” assumption of mainstream economics is alternately defended and pilloried presuming that it stands or falls on the capacity of a fully functional human adult to understand, and act on, his personal self-interest. Yet large chunks of our population are not fully functional adults. Do they have a role to play in economic models?

Children are usually incorporated either as mute drains on resources, or as part of a second generation who are decision-less in the first period but in whom the first generation can invest, hoping for productive returns in the second period. Mentally unsound people, including those living in insane asylums, together with those whose capacity as economic agents is physically restricted by the state (i.e., prisoners), are generally paid no notice in economic models. Older people whose minds have gone down the gurgler but whose bodies carry on are either ignored or considered mute drains, like children. Yet all of these groups have independent needs and resources of their own. Do these needs and resources get counted in actual economies? Let’s consider this question for each case in turn.

Kids. Indirectly, they contribute hugely to the economy, to which any parent glancing at the recent transactions on his bank account can testify. The usual idea is that parents, acting as children’s agents, buy things for kids in a more or less rational manner, knowing what is in kids’ best interests and purchasing those things. One might claim that this is not always true – does private school really deliver a benefit compared to public school for every child enrolled, for example, or are those French fries really a good idea in the long run? – but any departures from rationality committed by the parents can be argued to be merely outgrowths of the parents’ own irrationality, rather than the irrationality that kids’ incapacity would lead to if they were let loose on markets to make their own decisions.

Next up are the crazy people and the convicts. Every society has them, whether or not the bulk of them are institutionalized. For mentally sick people cared for by the state, representatives of that state serve as the agents who compensate for their incapacity by purchasing things, typically from state funds, that are deemed to be required. Like those in insane asylums, prisoners too are at least temporary wards of the state, whose representatives decide what is required for them during the period of their (forced) incapacity. For mentally unsound people cared for within families or living on their own, it is usually loving relations or friends who act as agents, compensating for incapacity when that seems necessary.

Older people professionally judged to lack the capacity to manage their own affairs make up a sizeable chunk of our societies, and this chunk is growing by the day as our lifespans increase and our ability to combat mental deterioration fails to keep pace. As with crazy people, the irrationality of older people who have become incapacitated is potentially compensated for either by the state or by loving family and friends.

In all of these cases, the big question for economists is why we do not see more rampant exploitation of these groups in our societies who are so vulnerable. They are in many cases simply ripe for the picking: easily manipulated, sometimes with access to significant resources (particularly in the case of older people with large estates), and/or completely at the mercy of their so-called agents. Why are there not huge numbers of cases – rather than the under 10% that has been estimated – of abuse and theft of elders, as well as of prisoners, children, and the mentally unsound? Why instead do we see the purchases of vast quantities of medicines, child enrichment services, mental and physical health services, and so many other goods and services that directly nurture the incapacitated? Why do the needs and resources of these groups feed into the economy, through their agents, more or less as they would if the incapacity did not exist?

The answer I believe fits best is that most incapacitated people have been adopted psychologically, either by individuals or by collectives such as the nation state. The loving parent has essentially re-defined his own identity to include that of his child, so that when he acts to further the child’s interests, he feels his own interests to be furthered. Members of the nation state have re-defined their identity to include the welfare of all Australians (or Germans, or French), including those who are insane or have strayed. It is then our collective will to care for our group members, enforced both by our identification with each group member and by our identification with the ideal of “caring for all Australians”, which motivates the state representative serving as an agent to indeed further the interests of his incapacitated ward. This re-definition of self, central to the continued contributions of all of these groups to the economy in line with their actual needs, is called love. It is high time that economists gave it a nod.

4 Responses to "The economics of incapacity"
  1. Well, in the past those groups have been massively exploited. Prison systems in the USA are probably a current example of the exploitation you’re talking about. But if we just consider that the exploitation of the past was much worse, I suppose the question becomes: what changed to diminish that exploitation?

  2. see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2004362 “Error is Obvious, Coordination is the Puzzle” by Peter Boettke et al

    Abstract:

    Behavioral economics has made its mark by bringing under intense scrutiny the limitations of individuals’ cognitive abilities.

    The conclusions of such inquiries call into question results from standard economic modeling dependent on assumptions of strong epistemic rationality. Most conspicuously, behavioral economists have introduced a host of new potential causes for market failures.

    F. A. Hayek likewise famously questioned the cognitive abilities of real world actors, but drew radically different conclusions.

    We argue that, for Hayek, market institutions rather than individual agents bear the primary cognitive burden in coordinating economic activity. Gaps in individual rationality thus fail to provide adequate grounds for positing market failures.

    Vernon Smith’s body of work, with its distinction between ecological and constructivist rationality, provides powerful support for the Hayekian position on which it draws its inspiration.

  3. Chris,
    Yes, there are certainly cases of exploitation in modern developed economies, but i would consider them the exception to the rule. Clearly much has changed in our societies over the past few hundred years, and one could undoubtedly get several historical anthropology dissertations out of an attempt to determine what aspects of those changes have been key in freeing our loves and loyalties to contribute to our economies. Check out my new book with Paul to find out what i think. See ad to the right, she says cheekily.

    Jim,
    Without an introductory statement from you i can only guess at the response you mean to send with this quotation. You could be trying to say that it doesn’t matter if some people lack capacity, since institutions will compensate for them, ergo love is not necessary. My argument is that that line of reasoning hits a sudden stop with which i am not satisfied. The big bang did not create institutions, so where did those institutions themselves come from? If you dig down enough, it becomes clear that raw human tendencies and abilities are needed in order to explain, from first principles, the development of those very institutions which in today’s modern economies support and temper our actions.

    Cameron,
    I’m glad you agree, but the problem is that economists do not have a simple, unified way to incorporate tribalism into our models. Yet.

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