Everybody knows there’s no such thing as money. So how come everybody acts like it’s real?
In particular, why do economists and other similar creatures find the lack of “rationality” curious when reviewing the transactions, and game-theory simulations of transactions, between real people?
There do exist bits of shiny metal, certain organic byproducts, and slips of paper that are called “money.” But these objects have no intrinsic value. Money is a concept, not a thing. It is a proxy for agreements between people, a mechanism to ease the trading of things that do have value.
Like I said, everybody knows this. So why has it been so difficult—why did it take so long—to see the logical consequences of this truth? Why, that is, is there the consternation over the lack of “rationality” when it comes to theories of money.
Use an example of buying a six-pack of beer from a bodega in New York City. Not some homeopathic brew like Coors Light. Real beer, like Brooklyn Brewery’s IPA.
The Korean lady in charge can announce that the beer is “Regular price $10; Today 10% off” or she can say “Regular price $8, plus New York City health tax surcharge of $1.” (This example is not fictional: NYC is always pegging up its sin taxes.)
Which would you prefer? According to classic economic and game theories, you’re not supposed to have a preference. Any deviation from indifference is considered “irrational” because, either way, you’re out nine bucks. Either way gets you the six-pack.
But nobody buys just a six-pack. You don’t “buy” anything, actually. You make an agreement between you and the shopkeeper; or, more realistically, between you and your crew of family and friends against the shopkeeper and her organization.
Your contract negotiations are short; much is agreed upon before you walk into the store. When our lady offers the beer for $1 less than usual, there is at least the appearance that she is giving a gift. What I receive is the beer, plus the good feeling that I am being treated nicely.
As all marketers know, I am negotiating for both the beer and the experience of buying it. Management with experience in negotiating with unions know experience counts. What often becomes a sticking point in these, obviously more formal, negotiations is not money but respect.
A union will sometimes accept fewer dollars in return for more autonomy, or better toilets, or anything that awards its members more esteem from the suits. This makes sense—it is rational—because the non-economist union members know that money isn’t everything.
Lack of respect—between me and my rapacious government—is why I would be in a bad mood after shelling out eight bucks for beer plus yet another one for tax.
That extra dollar might be so irksome that I am willing to take a car to Jersey—New Jersey!—to give my $8 to a different family-owned organization. I’d pay more money for this, but I’d receive the additional experience of being able to shop for beer and wine simultaneously; an experience New York State forbids. (Oh, yes.)
Over the past decade, the field of “experimental economics” has grown fat. It’s the same old economics, but married to the more practical mathematics of game theory, with the addition of college students corralled into prisoner’s dilemmas.
It was from these fields that economists are finally accepting that money isn’t real. Only they don’t put it that way. The say, in wonderment, that “man is not rational”—by which they mean that we don’t function as if money were real.
They carry out various simulations and discover, like our example above, that the “optimal” solution is often neglected for an “irrational” one. But “optimal” means quantitatively optimal given that money is real.
We’ll have to talk more about this, but these experiments suffer from an irremovable fault. Since money is not real, and since our economic transactions are really just negotiations and agreements, then the experimenters can never remove themselves from the experiment. They are just as much a part of it as the volunteers are.
Those volunteers will, of course, react differently to different experimenters. The hope is that the differences in oddities, irascibilities, quirks, and other weirdnesses of these volunteer-experimenter interactions will even out somehow. This is a matter of faith, and misplaced faith at that.
Even when they recognize this, it will difficult to shake economists loose from money. It’s so quantitative! It can be p-valued, plotted and pie-charted, set into percentages. Mostly, it can be modeled with soothing mathematics.
But how do you quantify my willingness to drive to Jersey to avoid a tax, or a student’s distraction due to the “teacher pants” the experimental economist wears to the game?
You cannot. So—once more: everybody all together now—in the end, the conclusions will be too certain, too sure.
The idea of this post came from Karl Sigmund’s interesting review of Herbert Gintis’s The Bounds of Reason: Game Theory and the Unification of the Behavioral Sciences. Linked on—where else?—Arts & Letters Daily.