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Endogenous Preferences: A Historical View

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)

Marriott Marquis, Vista
Hosted By: History of Economics Society
  • Chair: Mario J. Rizzo, New York University

Unstable and Endogenous Preferences Are Normal

Mario J. Rizzo
,
New York University
Malte Dold
,
Pomona College

Abstract

Behavioral economics has criticized the empirical accuracy of the neoclassical rationality assumption. However, it supports the normative view that welfare-increasing choice presupposes stable and context-independent preferences ("exogeneous preferences"). This position neglects important features of decisionmaking that were essential to the thinking of Frank H. Knight and James M. Buchanan. Knight and Buchanan embrace the idea that preferences are self-created in the process of their emergence. People are, in a sense, dynamically dissatisfied. As soon as they attain the satisfaction of existing preferences, they want something more and better ("endogenous preferences"). In addition to this “inner urge”, Knight and Buchanan emphasize the crucial role of external constraints (especially in form of self-imposed rules) upon individual preference formation processes. This dynamic view on preferences and rules has deep roots in the thinking of many liberal intellectuals including Wilhelm von Humboldt and John Stuart Mill. It also can be found in the worldviews of such process philosophers as Henri Bergson, William James and Alfred North Whitehead. This paper will explore these interrelations and outline a "liberal" theory of preferences.

Persuasion Endogenizes Preferences in Adam Smith’s Work

David M. Levy
,
George Mason University
Sandra J. Peart
,
University of Richmond

Abstract

Economists have occasionally noticed that Adam Smith explains trade in the Wealth of Nations by appeal to an instinct that might be reason and speech. If we examine his two known Lectures on Jurisprudence we see how the argument is developed. People need to be persuaded that a trade is in their interest. Thus, Smith’s traders do not begin with well-populated preference orderings. In the Lectures Smith assumes that the persuasion is truthful; in the Wealth of Nations this is dropped so he can explain deceit in transactions without violating his larger program.

The Role of Preferences and Motivations in the Economic Approach to Human Behavior: Becker, Buchanan, and the Austrians

Rosolino Candela
,
George Mason University

Abstract

This paper explores Gary Becker’s account of preferences and motivations in explaining human behavior. We argue that the Beckerian framework of economic analysis both strengthens and limits the scope of economic analysis. Taking preferences as given, the rationality postulate can be applied to explain human behavior that would otherwise be regarded as “irrational.” The optimality of observed human behavior can be inferred from choice within given constraints. Taking preferences and motivations as stable and invariant over time is a double edged sword. Such an assumption renders explanations of institutional changes across contexts of time and place as “non-economic.” By pushing the Beckerian approach to its logical conclusion, we wish to illuminate the limits of the fixed preference approach, just as there are limits to the preference-based approach it was intended to critique.

Sympathy, Preferences, and Commerce in Hume

Erik Matson
,
New York University

Abstract

This study considers some aspects of David Hume’s political economy in connection with his broader social philosophy. It is at once an exercise in the history of economic thought and, more generally, a consideration of a perspective on the connection between the nature of preferences and the assessment of political and economic arrangements. I advance two claims. First, Hume has what would today be considered a theory of endogenous preferences. He understands preferences to be developed and affected socially through the faculty of the imagination by the exercise of sympathy. Preferences in Hume are sensitive to context and the particulars of the social and political arrangements in which interaction takes place. Second, Hume’s understanding of the endogeneity or the sympathetic formation of preferences is an important reason for his high estimation of commerce and the liberal political arrangements necessary to support it. He sees commerce in a free society as putting into play a dynamic that increases the quantity and diversity of social interactions. By his reckoning, this dynamic will tend to encourage reflection and improve preferences, in aesthetic and moral terms. Relatedly, he understands commerce to generally have positive effects on the nature of social and political power. In his account of sympathy, Hume is clear that power exerts a strong influence on various aspects of attitude and behavior. In his historical account of English politics, he understands commerce as altering power structures and inadvertently spreading society’s sympathetic focal points. Such spreading increases the diversity of characters sympathized with and conduces to reflection. By Hume’s calculus, this creates a proper social space for subsequent preference improvement.
JEL Classifications
  • B0 - General
  • D0 - General