So often I hear the claim that "people" are stupid. Not just on the left, but on the right as well. They nominate the wrong candidate, they don't save enough, they have too many children, they don't do what is in their own interest. I wrote before about how many bad ideas in government are based on viewing our fellow citizens as stupid, and about the arrogant individuals who call others "sheep", but since I hear this so often, I feel the need to show again that what appears to be "stupid" to some arrogant souls is really quite rational behavior.

I would be tempted to argue against the left wing Zero Population Growth types, but Julian Simon beat me to it. He showed quite well that even in the most poor and "backwards" countries, most parents do actually plan the number of children they want, at least to a degree comparable to that of "enlightened" wealthy nations. The large families they have are not the result of ignorance or a lack of understanding about birth control, but of the economic realities of those nations where a large family is seen as a form of old age insurance.

But even if it were still possible to add to Simon's argument, I think arguing against ZPG might not have as much impact as arguing against a sacred cow of the right. So, to make my point most forcefully, I will instead argue against the theory that people "aren't saving enough".

First, let me say that this is a very non-economic statement. Economically there is no "right" amount of savings. Capital investment is just another choice one can make to allocate his money, and is valued individually just like any other choice. We can say that this or that level of savings is required to reach a specific goal, but the desirability of that goal is still established by the collective valuation of every person participating in the economy¹. Thus there is no optimal level of savings. It is just a legacy of silly Keynesian theory that we even think there is some economic ideal toward which we can strive. Economics does not define ideals, it simply recognizes that individual valuations set the relative values and then asks how best to achieve those goals.

Some will respond that "clearly" it is bad when we spend more than we take in, but even that is not true.There are any number of circumstances under which it makes sense to spend up one's accumulated capital and even add additional debt.  For example, if a state enacts very liberal bankruptcy laws while at the same time penalizing investment, it only makes sense to live paycheck to paycheck while piling on debt to accumulate material goods, as bankruptcy provides an easy forgiveness of debt, allowing the debtor to retain most material goods. In other words, bankruptcy laws allow one to essentially buy things cost free. Of course, one must have no investments to cash in on bankruptcy laws, but that is not a problem, as punitive capital gains taxes make savings unattractive anyway, as the investor loses a fixed precentage of all gains, but suffers all losses himself. It makes investment less rewarding than it would otherwise be.

Of course, this is looking only at the individual incentives, but the aggregation of all thsoe individual pressures creates our overall societal pressure, and, at present, those point rationally toward a life deep in debt without savings for many people. Obviously there are circumstances or personal beliefs which cause many not to follow this mdoel, but, when one looks at it honestly, the bankruptcy laws and tax structure really do make it rational for some to live in debt.

Now, having said that it is rational for individuals to fail to invest, or to live in debt, I have to ask if, as a whole, we are pursuing our goals rationally. As a whole, we seem to desire economic growth, increasing affluence, and the other outcomes that follow investment. However, we also want to forgive debtors without imposing heavy burdens and we appear to want to tax heavily those we call rich. Unfortunately, those goals are mutually exclusive. You cannot have capital formation with punitive taxes and liberal bankruptcy laws.

So, we must decided what we want. Do we value more highly the ability to soak the rich and forgive debtors or do we want a strong economy? If we decide for the former, don't accuse those who bow to the legal pressures and spend up their capital of being stupid. They are simply accepting the logical consequences of the laws we have enacted.

And this does not just apply to savings and investment. In almost every field, the actions that some call "stupid" or "mindless" make perfect sense. Of course there are individuals who do stupid things, but, as a whole, people tend to behave in sensible ways. Much as it may gall some to believe, the vast majority of mankind is just as clever as those who look down on them. They do not mindlessly follow trends, but look at the world around them and make decisions based on the available information.

However, that image does not serve the ends of thsoe who press the "sheep" line. Some do it for personal aggrandizement, feeling good for being different and superior. But many others claim that mankind is a herd for more selfish goals. Many bad ideas have been foisted on the public based on the idea that people are not competent to take care of themselves.

I doubt I will convince anyone that man is rational, as many have too much invested in their beliefs that man as a whole is incompetent. So, I would ask only this of those who are not dedicated to an image of "stupid humanity": Whenever you hear someone claim that mankind is a bunch of sheep, realize that he means you, and ask yourself if you really want to follow someone who thinks you are stupid.

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1. In an update to an earlier essay, I dubbed this mistake "producerism" to contrast it with "consumerism", as I think the two are just opposite sides of the same coin. Consumerism focuses on consumption tot he exclusion of all else, and producerism focuses on production. Neither one gives an accurate view of the economy, and both tend to offer bad advice. Admittedly the harm of consumerism is more immediate and painful, but producerism will be just as disastrous if followed rigidly, it will just take a little longer. On the other hand, though we would take longer to crash under producerism, the way there will be very drab and tedious, so maybe consumerism's flashy, quick crash is better.