If there were three beautiful, naked women standing in front of you, which one would you pick? And does this have any relevance to economics? (PPE, Oxford)

What an absurd, offensively sexist question! I’m going to assume the questioner is being deliberately provocative to make a point. The idea of posing such a question is indeed deeply relevant to economics, or rather to economists, and in particular to a misguided strand of economic thinking that presents human choices in terms of hypothetical games.

Choice has been at the heart of much economic theory ever since Adam Smith wrote his great book The Wealth of Nations in 1776. Choice is the very essence of the logic of the free market. If left free, Smith insisted, the market will always expand to produce the right amount of goods because it is guided by the invisible hand of self-interest, expressed through our choices.

If people are left to make free choices, the theory goes, it will produce the best results for the economy and society, and maximise people’s welfare and well-being. Twentieth-century theorists like Milton Friedman and Friedrich Hayek argued that no one can know better than you what’s in your best interest – and any attempt to guide your choices, such as state allocation of resources, is doomed to failure. A free market, they suggested, lets you do far more than choose what to buy; it allows you to choose how you live your life.

In an attempt to pin down the effects of choice mathematically, economists in the post-war years in the USA in particular developed the idea of rational choice theory. The underlying assumption in this theory is that we are all ‘individual utility maximisers’. That means each of us is focused entirely on getting what’s best for us. In other words, every choice we make in life is a rational pursuit of our own self-interest and inner desires (you can begin to see where the question comes in).

It’s a very neat way of looking at how choices in the marketplace can be analysed and predicted mathematically, which is why it has come to underpin a vast swathe of economic thinking in the last half-century, and has spawned a number of influential theories.

One of these was Kenneth Arrow’s social choice theory. Arrow used the 18th-century political thinker Marquis de Condorcet’s three-way voting paradox¹ to show that consensus is impossible (the ‘impossibility theorem’). So all political decisions – however well-intentioned – must be an imposition on individual liberty, Arrow stated, and only the market mechanism can make valid social choices.² (Again there are echoes of our question, with its three choices.)

Another theory to emerge from rational choice theory is game theory.³ Game theory tries to mathematically pin down the choices people make as if they are games of strategy between two players who are each trying to win at all costs. It’s rational choice theory in its most abstract, purely mathematical form, and has been applied to everything from how people shop to animal evolution. Its classic example is the ‘prisoner’s dilemma’ game in which two accomplices in crime are imprisoned separately – and promised a shorter sentence if they spill the beans on their accomplice. According to the theory, the only rational choice is for each to assume the worst of their accomplice and squeal.

The big problem is that scientific experiments that try to replicate games like the prisoner’s dilemma with real people show that people actually very rarely behave like this. Most people have an innate sense of fairness and trust, and do not base their choices on calculated self-interest alone. Indeed, games like the one suggested by the question – which woman do I pick and how will she respond? – have only a tangential relationship to real-life behaviour, thank goodness.

Rational choice and game theory paint us in a very odd and rather contradictory way – as calculating, highly logical robots driven only by our individual animal desires. But actually we are very complex beings, and this is only part of the picture. On the one hand, we very rarely behave with complete rationality. On the other, we are social animals whose need to relate well and connect to other human beings often far outweighs our desire for self-gratification. That’s why consensus, for instance, is not only possible but, ironically, desirable.

Amazingly, though, a whole edifice of economic theory and policies has been built on rational choice theories and dreadful laddish choice games like the one posed by the question, even though they bear little resemblance to how people really behave. Theories like this underpinned the charge to liberalise and deregulate markets in the 1980s and 90s, and shaped the economic models that guided policies which ended so disastrously in the global meltdown of 2008. Since then, great champions of rational choice, such as Alan Greenspan, the retired head of the US Federal Reserve, have admitted that economists got it badly wrong – and in recent years ‘behavioural’ economists have begun to challenge the orthodoxy of rational choice.

The problem is that many economists still believe that posing and trying to answer questions like the choice between three naked women actually illustrates something about the choices we make in real life. With a massive leap from reality, some might talk about its relationship to Akerlof’s ‘market for lemons’ theory (originally devised in relation to buying dud used cars), which was about the choices people make when they’re uncertain of just what they’re getting – a dilemma which the removal of the women’s clothes seems to avoid. The conclusion would be that you would go for the most beautiful of the three. Others might talk in terms of ‘hedonic pricing’ or of ‘an experience good’ – a commodity that you only have full information about once you’ve experienced it.

The whole idea of speculating like this is, of course, deeply unpleasant, and only something an (usually male) economist would find instructive. For a start, my own response to this bizarre hypothetical situation is hugely more complex and nuanced than any orthodox economic analysis would allow. Secondly, it completely ignores the massively offensive idea of my being able to ‘pick’ one of these women like some slaves at a market – and the utter stupidity of not considering they might have any mind or influence in the matter.

I am going to hope the interviewer was indeed hoping to provoke me into challenging orthodox economics and the absurdity of the ‘dilemma’. If not, and the scenario was posed in all seriousness, I may just have cost myself a place – and earned myself the ridicule of the three women standing completely astonished as I rambled on about economic theories and missed out on all the fun …

Footnotes

1 Condorcet explained that in a three-way electoral race, the outcome can easily be deadlock – and then, whoever wins, two-thirds of the electorate will have preferred someone else.

2 ‘In a capitalist democracy there are essentially two methods by which social choices can be made: voting, typically used to make “political” decisions, and the market mechanism, typically used to make “economic” decisions’ – Kenneth Arrow in Social Choice and Individual Values (1951).

3 Game theory was the brainchild of John von Neumann, the extraordinary and brilliant Hungarian emigré later pinpointed by many as the model for the unhinged nuclear scientist Dr Strangelove in Kubrick’s film. Von Neumann invented the theory in 1928 but it first hit the headlines in 1946 following the publication of the book he wrote with Oskar Morgenstern entitled Theory of Games and Economic Behaviour, written while simultaneously working on the Manhattan Project to develop the atom bomb.