Ed Lotterman: 'Stupid' decisions require a closer look

May 9, 2014 

Many women are willing to put enormous effort into becoming NFL cheerleaders, even though the job pays virtually nothing - at least according to a reality TV series now running on cable. Some viewers find that hard to understand.

Similarly, farmers buy more and larger machines than seems necessary in the average year. Some ag engineers and economists once thought that a mistake.

Are these really examples of people not knowing what is best for themselves?

Ted Schultz, the Nobel Prize-winning South Dakota farm boy, who died in 1998, would urge caution in making this conclusion. When he started working on how to "transform traditional agriculture" in poor countries, many outside "experts" thought peasant farmers did not know what was best for themselves. But Schultz found that these small farmers, even though often illiterate, were "poor but efficient."

By "efficient," he meant that no one else, facing the same resources, incentives and limitations, could produce more outputs. Poor, low-resource and poorly educated third-world peasants certainly produced less per acre and per hour worked than farmers in wealthy countries. But they did the best with what they had. Their decisions on use of scant resources maximized their well-being.

The general lesson from this, applicable to evaluating cheerleader wannabes and U.S. farmers, is that before concluding that someone else's economic decisions are mistakes, one probably needs to re-examine one's own understanding of the situation. All the relevant factors probably are not being appreciated.

Some decisions by peasant farmers are driven by risk management. If there is no life insurance, disability or crop insurance available, no Social Security, no medical coverage, no pension plans, then one needs to take all sorts of risks into account in managing one's own affairs.

If you have no access to credit outside of a village loan shark, if government imposes policies that suppress farm prices so as to favor urban populaces, or if one doesn't have secure title to one's land, one allocates resources differently than farmers without such constraints.

Peasants might be illiterate, Schultz argued, but they are not stupid. Neither are women aspiring to lead cheers for football teams.

Immediate pay is not the only compensation for these cheerleaders.

There are opportunities for well-paid public appearances at grand openings of stores or conventions. There are chances to meet well-heeled potential partners. Being one of the few chosen out of a horde of applicants looks good on the resume of someone who wants to dance for a living. So the possible monetary rewards of getting a job as a cheerleader are greater than the nominal pay per game.

Forty years ago, some ag professors looked at how much machinery farmers bought. Using data from ag engineering and climatologists, it seemed as if they bought tractors and tillage, seeding and harvesting implements that could cover their acreages in far less time than the average number of suitable work days available each year. Were these farmers all spending unwisely?

One initial observation by the ag economists is that for farmers, machinery is a "consumption good" as well as an investment in physical capital. The pleasure of cruising along a line fence in a shiny new green or red combine, while your neighbor lies underneath his with tools spread all around, is not negligible.

Being able to say, "Boy, I can really cover the ground with my BelchFire 2200" over coffee at the local cafe produces a lot of "utility," the term economists use for "satisfaction."

Such direct satisfaction certainly played a role, just as it does for women who enjoy the public dancing and acrobatics of cheerleading. But further study showed farmers' economic understanding was far more sophisticated.

The average number of suitable work days was not really the relevant bit of data in the decision.

The important factor was what sort of a penalty one paid in terms of foregone yields or actual production abandoned under the snow in the one or two years out of 10 with really adverse weather during crucial planting or harvesting periods.

In a cold, wet spring, if you did not have the machinery capacity to plant the crop quickly when you finally got good weather, you got seeds in so late that there was not enough growing season left for a good crop. If you had a rainy, muddy fall, you might be forced to leave thousands of dollars of crops to rot if the fields filled with snow before you finished because of your limited harvesting capacity.

If you had only enough machinery to get the job done in an average weather year, you lost big in a bad year. There was a crucial asymmetry.

There was only a modest cost to paying for capacity you didn't need most years, but a tremendous penalty for inadequate capacity in a few adverse years.

The farmers were not economically stupid. In fact, they were smarter than the professors who first examined the situation.

Yes, there are cases where people are irrational in their decision making. How and when and why that happens is one of the brightest areas of study in economics right now. And there are many sources of direct satisfaction from career or business decisions that cannot be expressed in money terms.

But if your first look at an economic decision made by someone else leads you to the conclusion that they are stupid, the lack of brains is likely to be your own.

Economist Edward Lotterman writes in St. Paul, Minn. Write him at boise@edlotterman.com.

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