ECON Lecture 1.2: Rational Economic Man and the Foundations of Human Behavior
Foundations of Rational Economic Man (The Core Concept)
The Purpose of Studying Rational Economic Man (REM): This concept is introduced to provide a deeper understanding of why secondary effects and the law of unintended consequences—concepts introduced in previous lectures—occur in human systems.
Predictability of Behavior: By understanding what is in an individual's interest, observers can see how human beings change their behavior in predictable ways when circumstances or rules change.
The Football Helmet Analogy Revisited:
In the NFL, players began "spearing" (using their helmets as a weapon in tackles) because the introduction of hard plastic helmets removed the immediate fear of self-injury.
Tacklers changed their behavior because their self-interest (stopping the offense) was now facilitated by equipment that reduced the personal cost of aggressive physical contact.
Definition of REM: A conceptual model of human behavior that posits humans respond logically to changes in the "rules of the game" or environmental shifts to serve their own ends.
The Three Pillars of Human Behavior (Scarcity, Rationality, and Self-Interest)
Economists identify three primary classes of reasons to explain why people behave the way they do. Two are psychological in nature, while one is a statement about the physical reality of the world.
Scarcity (The Statement of Fact):
Scarcity refers to the reality that there is not enough "stuff" (goods and services) to satisfy everyone's unlimited desires.
Because resources are finite and desires are infinite, people are naturally and perpetually in competition with each other.
In football, both the offense and defense want a "winning season," but because for every win there must be a loss, they are in direct competition for a limited resource (victories).
Rationality (Psychological/Logical Requirement):
In economics, rationality is defined in a narrow, specific sense: the consistency between ends (goals) and means (actions).
Economists assume historical agents are generally rational, meaning their behaviors are explainable as logical paths toward achieving their perceived goals, even if those goals seem opaque to outsiders.
Self-Interest (The Biological Imperative):
This is considered a fundamental fact of human nature.
It applies universally across all societal roles: the President, judges, legislators, mayors, captains of industry, workers, shoppers, and consumers are all subject to the biological drive to prioritize their own welfare.
Technical Definition and Dynamics of Scarcity
Technical Definition: Scarcity exists when the desire for a good exceeds the amount freely available from nature at a zero price.
Non-Scarce Goods (Free Goods): These are items provided by nature in such abundance that everyone can have all they want without needing to compete.
Sunshine at Noon in the Sahara Desert: There is so much sun that people do not fight for it; rather, they seek shade to avoid it.
Salt Water in the Middle of the Ocean: If on a raft, survivors can dip cups into the ocean without depleting the supply or infringing on others' ability to take as much as they want.
Scarce Goods (Economic Goods): Almost all tangible items and services fall into this category because the desire for them exceeds supply.
Luxury Items: There are not enough BMWs for every person in the world who would take one if offered for free.
Education: The demand for seats in specific online classes (specifically at KSU) often hits a capacity cap set by the university, leading to students being unable to register.
The Professor's Perspective on Online Scarcity: Mr. Petrono notes that online courses at KSU are scarce because many older professors prefer face-to-face instruction and personal interaction, avoiding technology and thus limiting the number of sections offered.
General Examples: Housing, food, medical care, clothing, and rooms on cruise ships.
Movement Between Categories (Transitions of Scarcity): Goods can shift from "free" to "scarce" as circumstances, technology, and populations change.
Case Study - Fish on the Grand Banks: The Grand Banks is a shallow body of water extending from Massachusetts to Nova Scotia. Arctic currents bring nutrient-rich water, making it once one of the most productive fishing grounds in the world.
Historically, before Columbus and during the era of the Vikings, the supply of fish was so vast that it was essentially a free good.
In the modern era, overfishing nearly wiped out the population. This led the United States and Canada to pass laws restricting seasons, catch sizes, and the number of fishermen, officially making the fish an economic (scarce) good.
Case Study - New York City Water: In the , when aqueducts were first built to bring water from the Catskill Mountains to the city, the supply so vastly exceeded the small population's needs that New York City did not install water meters.
As the city grew to millions of people in the and , the water supply became scarce. The government now mandates water meters so landlords can bill tenants to incentivize conservation, transitioning water from a free good to an economic good.
Rationality vs. Irrationality in Economic Theory
Rationality Defined: The ability to set a well-defined goal and take actions that are logically designed to achieve that specific goal.
Irrationality Defined: The inability to set a well-defined goal OR the inability to take actions that align with the achievement of a set goal.
The Surfer Hypotheticals:
The Irrational Surfer: A surfer claims their goal is to get into a surgery residency program at Harvard Medical School, but instead of studying or attending college, they spend all day surfing. Because there is no mechanism connecting surfing to a Harvard residency, the behavior is irrational.
The Rational Surfer: A surfer states their goal is simply to have a great tan, enjoy the beach lifestyle, and meet people ("check out the chicks"), while having no regard for material professional success. For this person, skipping college to surf is a perfectly rational action because it aligns with their stated goals.
The Economist's Focus: Economists do not judge the specific "concrete" goals of an individual (whether they want a BMW or to live on a beach); they focus on the intellectual concept of the goal-seeking process and the actions taken to reach them.
Self-Interest: Human Nature and the Distinction from Selfishness
Technical Definition of Self-Interest: A person is self-interested if they place more weight on the accomplishment of their own goals than on the goals of others.
Hypothetical Scenarios of Self-Interest:
,The Yard Work Example: Mr. Petrono wants to go to Pensacola to sail on his boat and asks his students to mow his grass for free this weekend. He anticipates zero volunteers. The students are self-interested because they have their own goals for their free time; the professor is self-interested because he only thought of his sailing trip when asking.
The Textbook Example: A student would generally refuse to give up their textbook to another student permanently for free. While the act would help the second student achieve a better grade, it conflicts with the owner's goal of their own academic success.
Self-Interest vs. Selfishness:
Self-Interest: This is a natural, legitimate condition of human beings. Individuals have a right to pursue their own lives and goals.
Selfishness: This is defined as taking self-interest beyond "legitimate bounds." This involves the use of fraud, force, or violence to compel others to serve one's own goals.
The Distinction through Quid Pro Quo: If Mr. Petrono offers a student to mow his lawn, it is a voluntary exchange where both parties fulfill their self-interest (the student gets money, the professor gets to go sailing). This is legitimate. However, if he uses a gun to force the student to work, that crosses the line into selfishness.
Applying the Concepts: Why People Change Their Behavior
The Football vs. Rugby Comparison:
Both rugby and football players are rational, self-interested, and operate under scarcity (the limited supply of wins).
Neither group is inherently "evil."
The reason football players hit with their heads while rugby players do not is that the physical "rule" (the inclusion of a protective helmet) changes the personal cost of the behavior.
Without a helmet, hitting with the head is irrational because it causes self-injury; with a helmet, it becomes a rational tool for achieving the goal of winning.
General Principle: The theories of self-interest and rational economic behavior explain that humans change their behavior not because their nature changes, but because the rules and context change what constitutes rational action within the framework of scarcity.