Most of us are predictably irrational

When it comes to the artful science of economics, most American farmers and ranchers are classic Ricardians, or followers of David Ricardo, an 18th-century English stock trader whose influential book, On the Principles of Political Economy and Taxation, explained what he saw as the market’s guiding lights.

Any ag econ student from the last 150 years can spot a Ricardian principle a mile away.

Some of his classics include comparative advantage, the law of diminishing returns, opportunity cost, and the ever-useful “theory of economic rent.”

All, not coincidentally, fit snugly into most U.S. farmers and ranchers’ near-sacred belief that, given free markets and free trade, they’ll out-produce everyone else.

Not reality

Maybe, but production doesn’t mean profit, and free trade and free markets are ideals, not realities.

In fact, there are huge barriers to both: over-the-moon land prices, soaring seed costs, market bubbles, currency manipulation, price inelasticities, monopolies, monopsonies, tariffs, weather, sanitary barriers, ongoing global conflicts …

And any of these external influences can lead to negative market consequences like market losses and even bankruptcy.

That’s one reason why Ricardo’s economic principles are labeled “theories,” not “truths” or “facts.”

An even better reason, explains Richard Thaler, a non-Ricardian economist at the University of Chicago, is that humans are not always rational, so, the markets they live and operate in won’t always be rational either.

Irrational behavior

That makes sense. Why else would hardware stores put the cherry licorice display next to the checkout lane if they didn’t want me to make a completely irrational purchase? Does anyone really need two pounds of chewy, artificially flavored fructose?

Irrational behavior, in fact, explains so many market consequences that the Nobel committee just awarded Thaler its 2017 Memorial Prize in Economics.

In announcing the award, the committee not only honored his work on how people are economically irrational but how “they are predictably irrational — that they consistently behave in ways that defy economic theory.”

Predictably irrational?

For example, Thaler explained to the New York Times, the theory of supply and demand clearly states that people will pay more for an umbrella during a rainstorm. In real life, however, many people will become angry if you charge more for one during a rainstorm. Most, in fact, won’t buy it.

That’s predictably irrational: you really need an umbrella because it’s raining but refuse to buy one because, well, it’s raining.

Explains ag world, too

We down-to-earth farm and ranch folks are predictably irrational, too. How else can you explain why some of us only buy green machinery and others only red? Right… it’s complicated. And predictably irrational.

If that’s complicated, how do predictably irrational people around the world design and implement farm and food policies that are effective both nationally and internationally?

Enter ‘Econ Man.’ Thaler, the newly minted Nobel laureate, might call on his fictional friend, Homo Economicas, to tackle that knotty problem. Econ Man, as Thaler calls him, is part of a group of “highly intelligent beings that are capable of making the most complex of calculations but are totally lacking in emotions…”

In other words, Econ Man is always predictable and perfectly rational.

On one occasion, Thaler put Econ Man to work in his classroom after a group of high-achieving students averaged 70 points on an exam. When their bitter complaints over the test scores finally ebbed, Thaler assured the students that, on his grading curve, 70 still equaled a “B.” That meant nothing to the students; all they saw was “70.”

Econ Man’s solution was beautiful: Thaler raised the value of the next exam from 100 points to 137 points. As a result, the average score on this second exam hovered near 100, not 70. The relative letter grade, however, still was a “B.” The students didn’t care; they saw 100, not 70, and were elated.

Predictably irrational? In spades.

How would Econ Man score the 2018 farm bill? I don’t know but on his principle alone, Ricardo would give it a 100.