[MUSIC] Hi, I'm Richard McKenzie. In previous lectures, I have hammered away on the meaning of rational behavior.

In a nutshell economists base their analysis on the presumption that people act purposely with the general goal of figuring out what they want and are maximizing their welfare as they determine their welfare individually, all within the constraints of limited resources or limited income. People, you and me, and the vast majority of people out there in the markets and walking the streets of the city, of cities, just don't respond in some predeterimed way to external forces. They act purposefully, people aren't like chemicals or rocks. People have minds and a capacity to place valuations on alternative courses of action, and different goods and services. As noted, people's behavior are constrained by the availability of resources and the structure of markets and, and cultures. But they are not determined or predetermined. There is in other words some domain within which a can be said that people bake choices and I mean real meaning for choices as that word is commonly understood. My goal in this lecture is to clarify the economic way of thinking based on rational behavior by considering the way many social scientists from other disciplines view behavior. Not all social scientists see the world, and people, the way economists do. Obviously. For example, behavioralists. Followers of the late, psychologist, B. F. Skinner, Their historical background, their immediate environment. Why am I doing what I am doing right now? According to the behavoralists, I'm not doing what I am doing because I choose to do this, that is give this lecture before camera, but I'm doing this because of first. The genes I inherited from my parents and their parents. Now, the causal links for my doing what I am doing can be traced back to my ancestors, who walked the plains of the Serengeti in Africa, eons ago. I am doing what I am doing right now, because of all the things that have happened to me. In my life that caused me to b ecome the person I have become. An economist who teaches in university classrooms, and before this camera. Of course, my life path was shaped by the life paths my parents and their parents, took. As well as by the life paths my friends took. All of whom. Influenced me as external forces

on my behavior. Why am I saying what I am at this moment? I said what I said because of all those genetic and historical forces that came before But also because of the effects of my immediate environment, the lighting in this room and, and the camera on me included. If the lighting had been different, slightly different or the camera had not been on, I would be saying something else, at least according to the behaviorals/g, maybe about baseball. players or football players or for that matter winners of american idol, according to strict behaviourist i have had no say In the matter. From their analytical perspective it is if I am nothing more than a puppet with strings attached to me. And there is some great puppeteer in the sky or in my past who is manipulating all of those strings. And as a result, is manipulating my behaviors both large and small. Moreover my future is as determined as my past according to the behaviorist. If we knew the full details of all the forces at work in the world we could predict exactly what I would do in the future. Of course prediction is extraordinarily difficult because it is extraordinarily difficult to identify all of those forces. If people's behavior were so fully determined by outside forces I have to wonder why the behaviourists want to discuss human behavior. Much less good and bad human behaviors or good and bad policies. Other than that they were predetermined. Predesitned, to articulate, the views that they do. That is, they articulate their behaviorless views because of all the genetic, historical forces, and immediate environment, they came, they came to work, on, on them. Most behavioralists don't believe that people, that people's behavior is fully determined, or at least it doesn't seem so. But they do seem to believe that people's behavior is largely determined. So much so, that assuming people's behavior is fully determined does little damage to their analytics behaviorists also need to simplify their basic premise to move the analysis along, just as economists do when they assume full rationality or perfect rationality. Another alternative view of the world is captured in something called Maslow's hierarchy. Abraham Maslow proposed back in the 1940s that people will develop a pyramid of very specific wants and then climb that pyramid of wants which has come to be known as the Mans Law of hierarchy

of needs.the, The pyramid looks very much like, like I have here on my camera, on my overhead camera. The presumption here, is that there are several layers of behavior. There is the physiological layer of needs. Physiological needs includes individuals desires for food, sex, sleep. sensory pleasures and sheer activity, meaning the need to be busy. The next level of analysis includes safety needs, which is next in prepotent. . And this may include the desire of the individual to secure safe, security, order, protection, and family, stability. The next level of needs is belongingness, and love needs. this includes, among other things, the desire for companionship. acceptance and affection. Esteemed needs, that's the next level of needs. The individuals desire for achievement and adequacy, reputation, dominance, recognition, attention, appreciation, and importance All of that is included in this, next layer, need. The highest level of needs is that of Self-Actualization, Needs, which Maslow tells us, and I quote. This refers to mans desire for self-fulfillment. Mainly to the tendency that might be phrased as a desire to become more and more what one is. To become. Everything that one is capable of becoming. I guess that means that people when they reach this self-actualization level become poets, songwriters, or maybe video game architects. For that matter, I could be self-actualizing, right now, as I give you, er, this lecture. Maslow tells us, and I quote again, if all the needs are unsatisfied. The organism is then dominated by the physiological needs. All of the needs may become simply non-existent, so it'll be pushed into the background. It is then fair to characterize the whole organism by saying simply, it is hungry for Consciousness is almost completely preempted by hunger. All capacities are put into the service of hunger. Hunger satisfaction. And the organism, the organization of these capacities is almost entirely determined by the one purpose of satisfying hunger. Capacities that are not useful for this purpose lie dormant or are pushed into the background, or so Maslow tells us. If the most basic needs are satisfied, Maslow writes And at once other and higher needs emerge, and these other than physilogical hunger dominate the organism and when these in turn are satisfied, again new and still higher needs emerge, and so on. one gets the impression from reading Maslow,

that the individual will not attempt to satisfy her second most pre-potent needs until the most pre-potent needs are fully or almost fully satisfied. She will not move to the third tier for example. in the hierarchy. Until the needs of the second tier are, are satisfied. Or, as Maslow says, fairly well, gratified. Maslow also writes, if both the physiological and safety needs are fairly well gratified, there will emerge, the love and affection and belongingness. Needs. Apparently, the individual will not attempt to effect any self actualization until she has moved through all the former tiers. If any tier in the hierarchy is skipped entirely, it is because of insurmountable. Environmental or physiological, barriers. People aren't fully locked into climbing the Maslow pyramid as, as described, but they have very little choice, in the matter and people certainly aren't viewed as weighing off the additional value of the additional needs, on the margin as economists do. There are similarities and great differences between the econo mics approach. Maslow approach to human motivation and behavior resemlbes the approach of economists in one and maybe only one respect. In both the Maslow system of thought and the economists way of thinking. Individuals are able to rank, all of their wants, or needs, according to their importers. The Maslow approach, and the economists way of thinking differ however, in that Maslow's specifies the ranking of needs for everyone, at least in broad categories. Economists are not willing to do that. Economists think of people as having individual orderings, or pyramids of any number of goods that, not just categories of goods. The Maslow and economists system of though, are different because of their views, of the constraints that operate on the ability of individuals to maximize their utility. The constraints in the Maslow hierarchy include environmental, genetic, historical, and cultural factors. And the individual's character. Or his belief about what is right and wrong. There is no mention of the individual's productive ability or income unless these are implied in environmental and cultural constraints. That is, there's no mention of these factors in the Maslow system of thought. And there's also no mention, of the cost of, of the means by which a persons basic needs, can be fulfilled. These considerations are basic constraints in

the econ, economics, and the economists way, of viewing human behavior. By not considering cost, Maslow appears to assume, implicitly, either that there is no cost to need gratification, or that the demand curve for any need, is vertical. Which is to say, people don't respond, to the prices, of the needs. This means that the quantity of the need for fuel is unaffected by the cost or by the price of the goods within the categories of needs. And implied assumption of the vertical demand curve is that the basic needs are independent of one another. They're not substitutes. For example, a unit of an esteemed need fulfilled, does not appear, in Maslow's system to be able to be, to take th e place, of even a small fraction, of a unit, of a physiologial need. By way of contrast, economists view people as behaving, behaving purposely. That is, rashly. This means that they aren't fixed into climbing an established pyramid set for all human beings. They construct their own individual pyramids. Other people simply can be viewed as weighing off the additional benefits and needs at any and all levels in their heirarchy, against their costs. Looking for that combination of all goods that maximizes their well being. Which implies that they will equate at the margin, and then they will move along their demand curves in predictable ways. For example, Maslow basically says that people will move from the physiology needs up to the safety needs once the physiology needs are almost satisfied, then up to here. And then up, and so on up, the ladder. Economists view the world, in different terms. That is, the individual is constantly looking at all of these needs as alternatives. And the individual. Is going to try to equate the marginal utility of the physiological need over the price of the physiological need as it equates with all the other marginal utilities over their prices. Now the question we have to ask Is, how did Maslow come up with his hierarchy? He, he, during the 1940's, he studied some very bright undergraduate students, maybe he defined his pyramid from, what they told him. Which may, of course, not be representative of the full population of undergraduate students, much less the full population of the 1940, 40s. Apparently, he came up with his pyramid by surveying only a few dozen students. In the 1940s. Can his subjects be representative of the whole population of the world? Can his

pyramid therefore, be representative of the whole population of the world? These are questions that really, economist, can't help but, but ask. In addition, might the prices of Maslow's various need categories have impacted, just how satiated people were at each level? That is, one of the reasons that people may have b een greatly satsiated with physiological needs is that the cost, or prices of these physiological needs was lower than the price of safety needs, which was lower than the price of belongingness needs, esteem needs, and so on, up the ladder. What I'm trying to get at is that, when Maslow did his work and, and surveyed his subjects, there may have been a demand For physiological needs that looked like this. A demand for safety needs that look like this, and a demand for love needs, that look like this lower graph here. That is, how much people were satiated in teh various levels of needs, could be a function of just how great the demand curve was on each of these categories. It could also have been that in the 1940s the price of physiological needs was relatively low. Leading. To a relatively high level of consumption of physiology needs. And, close to satiation, if we assume this point is satiated. the same could be true of, of safety needs. And then we might find that people are not as satiated with love needs because it's price. Given it's low demand, could have left people fully unsatisfied. Now imagine those perception of peoples higharchy may have been greatly changed. Had we moved the price from the previous graph, which was down here, up to here. In which case, The quantity consumed of these physiological needs would have been much lower. The level of satiation would have been much, much lower relative to these other needs. If the price, of, of love needs had been lower than it was in the previous case then love needs might have been more fully satiated than what Maslow found. What I'm trying to suggest here is that just how satiated people are at. The various categories indeed can be a function of their demand, and then how satiated they are can be a function of the relative prices of the, of the various goods. And these demands and these prices, can change dramatically over time and certainly probably have changed very dramatically in the 60 or 70 years since Maslow did his work. In our next several lect ures, we will consider the foundation

of trade among people within countries, and between countries, and then consider the operation of, of markets. Given our understanding of how people can be expected to behave rationally. There's a lot of fun in store. I thank you for being with me.