Irrational Behavior and Rational Addiction

6 March 2009 at 2:39 pm Dick Langlois 10 comments

| Dick Langlois |

In 1962, Gary Becker published an article in the JPE called “Irrational Behavior and Economic Theory,” which prompted an interchange with Israel Kirzner (here, here, and here). Becker had tried to argue that one could derive the law of demand without recourse to an assumption of rationality: when relative prices change, the budget constraints of consumers will also change, making some previously available combinations infeasible. This will mean that, in the aggregate, consumers will demand less of the good that has become relatively more expensive. Kirzner pointed out that Becker still hadn’t eliminated rationality, since he is assuming that the consumers are price takers and that the prices are set on the supply side, presumably by firms who notice and respond rationally to price changes. (I discussed the issues here in some detail back in my 1986 book, which, by the way, is back in print in paperback thanks to the new technology of on-demand printing.)

I thought of the Becker-Kirzner exchange recently when I saw the abstract of this article: “So You Want to Quit Smoking: Have You Tried a Mobile Phone?”

Tobacco use, which is rising quickly in developing countries, kills 5.4 million people a year worldwide. This paper explores the impacts of mobile phone ownership on tobacco consumption. Indeed, mobile phone ownership could affect tobacco consumption because individuals might pay for their communication with money they would have spent on tobacco. Using panel data from 2,100 households in 135 communities of the Philippines collected in 2003 and 2006, the analysis finds that mobile phone ownership leads to a 20 percent decline in monthly tobacco consumption. Among households in which at least one member smoked in 2003, purchasing a mobile phone leads to a 32.6 percent decrease in tobacco consumption per adult over the age of 15. This is equivalent to one less pack of 20 cigarettes per month per adult. The results are robust to various estimation strategies. Further, they suggest that this impact materializes through a budget shift from tobacco to communication.

I leave it as an exercise to the reader to decide whether this sheds any light on the Becker-Kirzner exchange. Extra credit: what does this say about Becker’s theory of rational addiction?

Entry filed under: - Langlois -, Austrian Economics, Evolutionary Economics.

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10 Comments Add your own

1. Thomas Esmond Knox | 7 March 2009 at 4:01 am

Put me in the Vernon Smith context of Gary Becker camp.

Then again, I’m just a market guy. Not much theory.
2. Thomas Esmond Knox | 7 March 2009 at 6:26 am

Correction. Gode-Sunder-Becker-Vernon Smith context of Gary Becker camp.

P.S. When my eldest son started his Insurance Brokerage (after resigning from Marsh) I gave him “Do Firms Plan” to read and digest.
3. Marcus Linder | 8 March 2009 at 6:39 pm

I read only the abstract above but it strikes me as possible that this is a case or co-correlation with a third variable. E.g. “ambitious people” or “young people” or some other group of people or a set of trends among same people that make them both more interested in phones and less in smoking.
4. REW | 8 March 2009 at 11:13 pm

I suspect overthinking here. The switching phenomenon is not mediated by price and income. It is simply a substitution of one oral-centric addiction for another. Peter Klein may suggest that this is the substitution of an aural addiction for an oral addiction, but I will argue with him if he does.
5. Peter Klein | 8 March 2009 at 11:49 pm

Hmmm, I sense an entrepreneurial opportunity for developing a phone that incorporates a nicotine patch into the receiver or earpiece.
6. Dick Langlois | 9 March 2009 at 11:50 am

In response to Marcus: I’m usually the first person to suspect an endogeneity problem in someone’s argument. But in this case (A) I suspect these authors are clever enough to have at least tried controlling for that and (B) I find the budget-substitution argument intuitively more compelling than the demographic taste-change alternative you offer.
7. Lisardo Bolaños | 9 March 2009 at 6:03 pm

In Guatemala there is a “urban legend” about the diminishing sales of a national fast food chain due to the increase in mobile phone use. Unfortunately, there is no public data available.
8. Thomas Esmond Knox | 10 March 2009 at 1:08 am

Gode & Sunder’s “Zero Intelligence Traders” have the following rules of action (derived from Becker and Smith)- Always have a positive cash balance; Never pay too much; Never sell for less than you paid.

I’d say more intelligent than many on Wall Street, who would be “Less than Zero Intelligence Traders”.
9. Michael F. Martin | 11 March 2009 at 12:50 am

Nobody is biting? Well I’ll try a naive answer:

Becker wins against Kirzner, but in so doing proves his own theory of rational addicition wrong.

That seems like a weird stance for Becker to be taking though. Did he end up agreeing with Kirzner thereafter?

Also, for some reason I can’t think about these facts without wondering “over what time period” — only a bit of that information creeps into what is quoted. Kirzner might have been right if we looked at demand and price within a longer time window.
10. Michael F. Martin | 18 August 2009 at 7:15 pm

Becker’s article is also cited in the conclusion to Bronars’ comment on Hal Varian’s 1982 article on nonparametric tests of GARP. Bronars poitns out Becker’s point that data on aggregates puts strict limitations on tests of GARP as a hypothesis about individual behavior.