The Market Improves Decision Making (For People and Government)


Whether for individuals in a job market or nations dealing with trade, the competition of the market leads us to make better decisions.  The cause is not only the motivation that competition creates, but also the ability to learn from each other.  Such was Richard McKenzie’s argument in a Wall Street Journal op-ed this weekend:

… While some behaviorists support government “nudges” to improve human decision making, politicians and bureaucrats often are no better at making rational decisions than ordinary citizens. Markets are a more effective mechanism for rewarding rational thinking. Persistently irrational decision makers in a competitive marketplace can be expected to misjudge costs and overlook profitable trading opportunities—and, consequently, lose access to resources. They can also be pressed to move from highly competitive markets to low-pressure venues (for example, university and government bureaucracies), leaving markets to more (though not perfectly) rational decision makers.

The more rational decision makers can, by their market decisions, show their irrational counterparts how they can be more prosperous by altering their working heuristics. This means competitive processes can make remaining participants more inclined to consider opportunity costs, ignore sunk costs, and discount future opportunities more accurately.

McKenzie is an emeritus professor, so presumably he wouldn’t argue that “low-pressure venues” do not have value, but his point is an important one.  The dynamics of a collective entity, like a nation, are similar to those of individuals.  People can make irrational decisions, and because government is made up of people, we err if we rely too heavily on them to make decisions for everybody.

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And just as individuals thrive when they have to compete and have examples around them of those who are competing better, so too can states or nations advance through rational competition.  If only Rhode Island’s politicians would come to understand competition in this true sense, rather than irrationally focusing on competing on subsidies for major companies and movie producers.