Economic Irrationality

Most people on the face of the earth today believe that capitalism is a system of rational economic actors i.e. buyers and sellers, consumers and producers each acting rationally in their own self interest. But an argument can be made that capitalism at its very core is irrational. No, I am not a pinko commie who is going to be quoting you Karl Marx or Das Capital. On the contrary my main source is Adam Smith, the author of The Wealth of Nations and the father of capitalist economic theory.

Economics is generally considered to be a social science which deals with the allocation of scarce resources to satisfy human wants. The allocation of scarce resources, (that is to say the inputs into the products) makes good sense; these are the scarce means to an end, that end being the products or outputs which satisfy our wants. The irrational part which befuddled Smith and other early classical economists was that the ends themselves, the outputs, the products, the wants which people sought to satisfy were also based on scarcity and not necessity. An example is in order. Water and food are necessities for human life; diamonds and other “precious gems” are not; we can live fine without the shiny rocks but it is those rocks that humans give the greater value to. Scarcity trumps necessity. Likewise gold, a soft fairly useless metal is stored idly in vaults while with the much more useful metal, iron (which has been transformed into the plow, every type of useful machinery, skyscrapers, and canned food containers) we have a hard time getting people to bother to pick it up for recycling. Bottom line is that any system that values scarcity over necessity is somewhat irrational. We see this irrationality played out in movies when people lose their lives in a quest for gold or some large gem. You want to yell out, “Hey…it’s just a R O C K!”

This inherent irrationality of capitalism, (or is it an irrationality of human nature only exposed in capitalism?) could cost us greatly if we continue to trade the health of our planet for “must have” products. Eve had everything she needed in paradise but she just had to have that “other apple”.