Sunday, January 15, 2012

Ricardian Equivalence And Unequal Vividness

It's not that often that my research directly addresses a major issue of the day, but I had a little footnote on Ricardian equivalence in "The Humean Theory of Practical Irrationality," just out in the Journal of Ethics and Social Philosophy. So I'll say something about that.

The paper tries to solve a problem for those who accept both of two popular theses about desire and action. First, people do whatever they believe will get them what they want. This is a psychological thesis about how people actually act. Second, it's rational for people to do whatever they believe will get them what they want. This is a normative thesis about what the right choice is. It's only about the right choice in the sense of being rational -- in the sense where it's right for the assassin to load his gun before trying to shoot -- not in the sense of being the morally right thing to do or anything like that.

Here's the problem with the two theses: since what we do and what it's rational to do are defined in exactly the same way, it seems that we can never act irrationally. And that's trouble, because it's pretty clear that people do act irrationally sometimes.

In the paper, I argue that "desire" in the psychological theory should be understood as the immediate motivational force that desires exert on you right when you act. Meanwhile, "desire" in the normative theory should be understood in terms of the dispositional strength of desires. We usually describe a sleeping person as desiring various things, even though no immediate motivational forces are operating then. Similarly, we can say that someone desires to marry his girlfriend even if he's on a roller coaster or something and he's not thinking of his girlfriend at the moment. This is the dispositional sense of desire -- it treats our desires as disposition rather than as immediately active forces.

Setting up the theories that way leaves just the right amount of room for human irrationality. Usually, we pursue what we desire more in the dispositional sense. But if we're presented with much more vivid images of the thing we desire less in the dispositional sense, we may pursue it anyway, because vivid images of something make the desire for it more forceful. Someone who's trying to quit smoking will find it easier to give into temptation and smoke again in a smoky bar than while jogging, because the representations of the pleasures of smoking will be much more vivid there.

What is Ricardian equivalence, and what does this all have to do with it? It's the hypothesis that fiscal stimulus can't actually get the economy going, because any money you spend now will have to be paid back in the future, and people will just save the money you give them to pay taxes towards future debts. Paul Krugman and Brad DeLong have been criticizing this idea lately on grounds that there's no reason people would just save the whole amount of the stimulus immediately.

The commonsense psychological point I'd like to add (it's in footnote 20) is that people have a natural tendency to satisfy desires whose objects are vividly represented before them at the moment. So when someone at the bar chooses between buying another drink and saving to pay future taxes, the drink is going to have a pretty big advantage. Our desires are stimulated by the things right in front of us, not the tax burden 30 years in the future.

I kind of wonder if some economist could make a career out of re-running economic models involving how people plan for the future under psychological assumptions that actually fit how people make decisions.
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