Saturday, December 20, 2008

Homo Economicus?

If you drive in Bangalore (for that matter any city in India), the traffic stops come with a rather uncomfortable experience - interaction with beggars. To begin with the term 'beggar' itself is derogatory - and their very existence is a reflection of a failure of the economic system to provide a safety net for the poorest of the poor. 
Anyway, the other day, I was stuck at one of those interminably long traffic stops when an old man approached me - he was the archetypical 'beggar' with tattered clothes and a ragged look. There was a difference however - instead of pan-handling, he was trying to sell some ear-buds. The underlying approach appeared to be fairly straightforward - trigger a sense of guilt/shame/pity (whatever that is when you are accosted by a beggar), but then follow-it up with an attempt to sell something. A sensible strategy from that individual's point of view I would think - since there could be two possible responses from the 'giver' - 1) you really 'need' the product or you may rationalize that you may need the product at some point in the future or 2) you really don't need the product but you can still rationalize giving money in exchange -you could then rationalize that you are not really giving alms but performing an economic transaction. (The third option is to just ignore - but we shall not be bothered with that class of decision makers for now)

Then the interesting question is - how rational are either of these responses? It does qualify as an economic transaction and hence in a purely economic sense, qualifies as a transaction that contributes to the GDP. But from a utilitarian point of view, it is obviously a sub-optimal situation since the transaction has contributed to two distortionary events:
1. It has created a 'need' where none probably existed - the economic system will now be expected to take this information and feed into its cycle of demand/supply planning. Which in turn, means that the resource allocation has moved away from its pareto-optimal point.
2. It has contributed to creating a sociological dilemma - while everyone seems to agree that begging is demeaning and should not happen, this also sends a signal that getting a begger to sell ear-buds may be all right. Never mind that the actual driver for the transaction was similar to the one motivating the beggar being given alms.

Yet another reason to question the micro-economic edifice based on the purely rational homo economicus.