"Rational is Not a Synonym for Good"

One of Robert's stochastic thoughts:

Kevin Drum attempts to explain economics to economists, by Robert Waldmann: Kevin Drum attempts to explain economics to economists.

I must be ironic right? I'm not suggesting that this guy with a degree in communications from Long Beach State has a better understanding of economics than most economists am I?

I am.

The man is a genius but makes it easy to miss this because his genius lies not only in his understanding but in his ability to make things obvious.

He argues two things that don't need to be argued.

Rational is not a synonym for good. Is he really suggesting that economists sometimes forget that? He is and we do.

Sometimes people make better choices about what should be done with other people's money than with their own, because when deciding whether to give their money to, say, the hard working poor, they have, uhm, a conflict of interest.

Surely the possible problem that I have a conflict of interest when I am deciding whether to keep my money or use it to help humanity can't be news to anyone?

Sure it can. It is a shocking idea to economists.

Drum does not understand how devastating his critique is (answer totally devastating). Neither did I, until Brad DeLong explained it to me.

Imagine we care about other people but not as much as we care about ourselves (shocking thought eh well a very very radical departure from standard assumptions in economics). This means that we might care a lot about a transaction or transfer which has no effect on our consumption, leisure or wealth. I am very glad that Bill and Melinda (and Warren) gave so much money and did it in such a very intelligent way (although I still hate windows). This is what we call in the biz an "externality" and it implies that the market outcome is not efficient. I don't especially like to pay taxes. I really really like the fact that rich people pay taxes to support social welfare programs (war in Iraq? no thank you). Both desires count to a utilitarian. It means that an outcome enforced through the coercive power of the state can make everyone happier than the free market outcome, because of the externality due to altruism.

To consider with Drum the case of Thomas Jefferson, without anything odd (dynamic inconsistency) the position as a slave owner who advocated abolition of of slavery can be perfectly rational. The slave owner might hate slavery, but not hate the enslavement of his own slaves as much as he loves living in luxury off the sweat of their brows. His ideal outcome would be to have all slaves but his own free. A rational anti slavery slave owner knows he's not going to get away with that. Second best would be abolition of slavery -- the desire to free everyone else's slaves outweighs the desire to keep his own. Third would be continued slavery. Finally the outcome he likes least would be to free his own slaves and live in relative poverty in a slave owning country.

Perfectly clear. So why is it that my "explanation" of Drum is ugly and unclear while his essay was clear and brilliant?

Update: I think Tim Haab's post illustrates Robert's point. Individually, he has no incentive to pay for the externalities he imposes while driving an SUV. As he says,

That's why they're called externalities. Voluntarily internalizing my own externalities would ruin my faith in rationality.

But as I was writing this, I noticed Robert posted an update which says it better:

update II: Tim Haab (who is not a jerk) definitely gets Kevin Drum's point as he clearly understands the fundamental difference between a) advocating policy which causes people to internalize externalities one hand and b) listening to kids in the back seat squabble for hours. Also he doesn't own any slaves which puts him a big one up on Thomas Jefferson.

Further commentary here and right here.

Robert goes on to say:

An interesting example of rational co-operative behavior which is not in the public interest is link begging, where bloggers attempt to reward other bloggers for links by linking back. Not as repulsive as self linking, but the first sometimes enables a rational egoist to trick Google, while the second is just pathetic.