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The Logical Basis is a Difference in Incentives

Summary:
British economist Charles A. E. Goodhart writes: Thus, people voting with their dollars are supposed to be rational and to reach an efficient outcome, but when they vote with their ballots, they may not achieve their own best interests. I have always found it difficult to perceive the logical basis for this dichotomy. This is from his “The Free Banking Challenge to Central Banks,” Critical Review, Summer 1994. The basis for the dichotomy is a difference in incentives. When people are spending their own money, their expenditures have a strong influence on what they get. If I decide to buy a Camry, for instance, I get a Camry. But when people vote, their vote is not determinative. To continue with the car case, if we were voting on whether Toyota Camrys or Honda

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The Logical Basis is a Difference in Incentives

British economist Charles A. E. Goodhart writes:

Thus, people voting with their dollars are supposed to be rational and to reach an efficient outcome, but when they vote with their ballots, they may not achieve their own best interests. I have always found it difficult to perceive the logical basis for this dichotomy.

This is from his “The Free Banking Challenge to Central Banks,” Critical Review, Summer 1994.

The basis for the dichotomy is a difference in incentives. When people are spending their own money, their expenditures have a strong influence on what they get. If I decide to buy a Camry, for instance, I get a Camry. But when people vote, their vote is not determinative. To continue with the car case, if we were voting on whether Toyota Camrys or Honda Accords are provided, our individual vote has a tiny, tiny probability of influencing whether Camrys or Accords are provided. Therefore, we have little incentive to compare the two.

Economists call this “rational ignorance” and it sometimes bleeds over into what co-blogger Bryan Caplan calls “rational irrationality.”

By the way, this article is a reading for Jeff Hummel’s Masters course in Monetary Theory and Policy, a course offered by San Jose State University’s economics department. I’m watching it on Zoom, doing all the reading and homework, and learning a lot.

David Henderson
David R. Henderson (born November 21, 1950) is a Canadian-born American economist and author who moved to the United States in 1972 and became a U.S. citizen in 1986, serving on President Ronald Reagan's Council of Economic Advisers from 1982 to 1984.[1] A research fellow at Stanford University's Hoover Institution[2] since 1990, he took a teaching position with the Naval Postgraduate School in Monterey, California in 1984, and is now a full professor of economics.[3]

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