Old Chicago Against Static Welfare Economics

Abstract

Although behavioral economics has criticized the empirical accuracy of the neoclassical rationality assumption, it supports the normative view that welfare-increasing choice presupposes stable and context-independent preferences. We argue that this position neglects important features of decisionmaking that were essential to the thinking of Frank H. Knight and James M. Buchanan (“Old Chicago” Economics). Knight and Buchanan embrace the idea that well-integrated preferences are an intellectual construct that cannot be the normative basis for welfare assessments. They argue that the only trait that is stable in real time and across individuals is their urge to have some vaguely-defined better preferences. In other words, exploring, learning, being contradictory, and ambivalence are all part of the process both prior to and after a temporary maximization. We illustrate their view, present some empirical evidence and discuss the normative implications especially for the character of a liberal social order such as Richard Epstein has advocated.

Keywords: Frank Knight, James Buchanan, behavioral welfare theory

JEL Classification: B2, B53, D6.