ECONOMICS A N D POLITICS 0954- 1985

Volume I Spring 1989 No. 1

THE ECONOMICS OF ILLUSION*

GEORGEA. AKERLOF

When individuals choose not only goods, but also how to process informa-
tion, there is a bias: people tend to process information so that they feel good
about themselves. This bias is particularly important in voting behavior, where
agents have almost no individual effect on public choice outcomes, and
therefore almost no incentive for unbiased use of information. Two examples
are given. In one example, an adaptation of the classic overdepletionproblem,
the public chooses not to counteract externalities by appropriate tax policy.
In the second example public policy follows the choices of experts, contrary
to the interest of the public.

THEREIS a common view that economic theory takes preferences as given while
other social sciences - anthropology, psychology, and sociology - are Concerned
with the nature and formation of those preferences. For example, Debreu describes
preferences as abstractly as possible in terms of mathematical axioms (1959, p. 54)
while Evans-Pritchard describes preferences as concretely as possible in terms
of the Nuers’ love of cattle (1940, pp. 16-50). But this popular dichotomy misses
the point that these other social sciences are mainly concerned with how people
differently conceptualize. A conceptualization concerns more than preferences;
it also concerns biased uses of information. Key concepts from anthropology,
psychology and sociology (as shall be discussed below) all explain dramatic
examples of the role of conceptualizations in the determination of real events.
These other social sciences also stress the importance of conceptualizationswhich
are subconscious or, at best, ill-perceived, by the agents who have them.
Traditional economic models of public choice are built in this paper; these
models are based on maximization theory and market clearance. There is one
major innovation: information is interpreted in a biased way which weights two
individualistic goals; agents’ desires to feel good about themselves, their activities
and the society they live in, on the one hand, and the need for an accurate view
of the world for correct decision making, on the other hand. Due to this innova-
tion regarding the way in which information is processed, these models differ
dramatically from traditional models with externalities: because any individual’s
influence on the public choice outcome is close to zero, each individual has an
incentive to choose a model of the world which maximizes his private happiness
without any consideration of the consequences for social policy. The examples

*The author would like to thank Laura Nader, Hajime Miyazaki, Joseph Stiglitz and Janet Yellen
for valuable help and comments. He would also like to thank the National Science Foundation for
generous financial support under research grant number 84-01130, administered by the Institute of
Business and Economic Research of the University of California, Berkeley.

1
2 AKERLOF
are intentionally chosen to highlight the potential effects of such biased choice
of world view.
Key concepts from the other social sciences which motivate such biased
processing of information are culture from anthropology, repression and cognitive
dissonance from psychology, and the dejnition ofthe situation and Durkheimian
structuralism from sociology. I shall explain at some length how each of these
concepts applies to a model in which agents’ views of the world are in part chosen
subconsciously so as to feel good about themselves and their world.

Culture
The key concept in anthropology is culture. According to Geertz culture is “an
historically transmitted pattern of meanings, embodied in symbols, a system of
inherited conceptions expressed in symbolic forms by means of which men
communicate, perpetuate and develop their knowledge about and attitudes toward
life.” [Geertz (1973, p. 89), italics added]. The words I have italicized, mean-
ings, symbols and conceptions suggest strongly that culture more concerns ways
in which people think about the world than differences in preference relations.
It is true that Japanese prefer sushi while Americans prefer hot dogs, but Ruth
Benedict’s classic on Japanese-American cultural differences concerns almost
exclusively how they differently conceptualize social relations. The classic
anthropologist’stale is not one of differences in preferences, it is the tale of cultural
misunderstandings. Perhaps the best known such tale is Geertz’ story of Cohen,
a Jewish trader in Morocco in 1909 whose tent was raided by a Berber tribe with
the resultant death of his guest. As compensation he asked for and was granted
500 sheep by the Berber sheikh. The French authorities, thinking he could have
only obtained such a settlement by force, took away his sheep and imprisoned
him [Geertz (1973, pp. 7-9)]. As Geertz’ longer account makes clear this is a
tale not of different preferences, but of misperceived meanings, due to the three
different conceptions of the world of Cohen, the sheikh, and the French
commandant.
The anthropologists’tales of misunderstanding are sufficiently exotic and rare
that it is worthwhile giving an example, which demonstrates that biases in
perception occur in modern contexts as well as among backward tribes and that
these biases also concern central issues. It is often mentioned that two of the leading
commentaries on American society have been written by foreigners rather than
by Americans, despite the much greater volume of native writings on the subject.
In particular I have in mind de Tocqueville’s study of American democracy (de
Tocqueville 1945) and Myrdal’s study of the position of American blacks (Myrdal
1962). These two examples suggest that what is apparent to an outsider to a culture
may not be apparent to insiders; and this can only occur if the insiders have
unperceived cultural biases in the way they interpret information.
While it would be possible to give an almost unlimited number of examples
of cultural biases and misunderstandings, at the same time it is difficult to see
 THE ECONOMICS OF ILLUSION 3
the precise psychological or sociological mechanisms as to why these biases occur.
An incident reported by the anthropologist Laura Nader gives a clear-cut example
of an elementary event in which a point of view contrary to individuals’ culture
(or self-image) was repressed. Nader (198 1) reports on the taboo of discussing
safety by those who work for institutions which are directly or indirectly part
of the nuclear power industry. She attended a seminar on breeder reactors at the
Lawrence Berkeley Laboratory given by two men from Atomics International
as part of the exploration of whether the laboratory should engage in research
on breeder reactors. The talk was introduced and motivated by the statement that
“breeder reactors are the way we’re going to go.” In the course of the hour
presentation safety was not mentioned. Outsiders to the laboratory, professors
and graduate students from the local Berkeley campus, asked questions about the
obvious safety problem, but no insider from the laboratory asked such a ques-
tion. Since “the definition of the situation” had been that breeder reactors were
“the way to go,” questions regarding safety could be construed as against the
policy of the laboratory. Curiously, however, the seminar was open to all
questions, and, given the professional environment of the laboratory, no scientist
at the laboratory would feel constrained in asking any relevant question. The
laboratory scientists themselves later explained their own silence regarding safety
on the grounds that it was outside their area of expertise. Nader (1981) reported
similar responses to the safety issue in another similar environment. Although
I shall give other examples from other disciplines the Nader story about the breeder
reactor and the safety taboo is the canonical example of this paper: somehow
people have an ability to censor their thoughts so as to avoid thinking the deviant
or the uncomfortable. And, it turns out, as with the Lawrence Laboratory scientists,
they are unaware of these biases.

Psychology
At least two important concepts in psychology, Freudian stage theory and cognitive
dissonance, suggest biased information so that people feel good about themselves.
One interesting modern interpretation of Freudian stage theory has a direct
interpretation in economic terminology. According to Breger (1974) neurosis
develops when people have fixations on false views of reality. This fixation occurs
because there is too much anxiety associated with giving up the illusions to make
any attempts at giving them up worthwhile. In standard economic language the
cost of attaining more realism in terms of the anxiety caused exceeds the benefits.
Or, in the language of the psychologist, “The general answer to the question of
why certain individuals remain stuck or fixated with dissociative solutions is that
excessive anxiety has become connected with the original conflicts, that this anxiety
was the original motivation for the dissociation, and that attempts to reopen the
area to nondissociative reality-testing rearouses the anxiety. [Breger ( 1974,
”

p. 216)].
Irrespective of the precise merits of Freudian stage theory, Freudian psychology
4 AKERLOF

leaves us with the general insight that the organism receives an overabundance
of information. Unlike a camera film or a filing cabinet, the human mind must
“choose” which stimuli to process and store and which stimuli to ignore or to
repress. It is all but inevitable that this choice process involves the aims of the
organism, so that its view of the world is all but inevitably biased by its aims.
Lest repression seem a peculiarly Freudian concept, it is worthwhile pointing
to its existence in another context. The Wallerstein-Kelly study on the aftermath
of divorce (1980) reports the great frequency of bitter family fights once a deci-
sion for divorce has been reached. Presumably, once this decision has been reached
the costs relative to the benefits of the repression of marital grievances have
abruptly changed and old previously repressed grievances become sources for
new conflicts.
Cognitive dissonance theory provides a second psychological model in which
information is used selectively according to subjects’ desires [Akerlof and Dickens
(1982)l. As Elliott Aronson (1979, p. 109) describes cognitive dissonance,
individuals want to have a positive self-image as good, smart, or worthwhile.
They tend to protect such a positive self-image by rejecting information which
tends to lead to the opposite conclusion. This results in a choice of information
(which relative to the true state of the world) preserves peoples’ good feelings
about themselves, but in other ways may lead to foolish decisions.
The social psychologists have also provided a dramatic series of experiments
in which, to a surprising degree, people interpret information so as to conform
to their wishes. In the Asch experiment [Asch (1951)l subjects are put in a room
with a confederate of the experimenter and then asked to match a line to three
others, one of which has the exact same length. The task is in no way difficult
(with almost 100 percent correct answers when the subjects are alone in the room).
In the Asch experiment the confederate is first asked the question and then gives
the wrong answer. Surprisingly, when this occurred 30 percent of the subjects
also chose the wrong matching line.
Nor can the results be entirely explained by the Bayesian argument that subjects
changed their answers because they had the additional information of the
confederate’s answer: because in trials with varying degrees of privacy of response,
subjects gave fewer wrong answers the greater their degree of privacy [Argyle
(1957); Mouton, Blake and Olmstead (1956)l.

Sociology
Much sociology concerns how “the definition of the situation” determines
outcomes. The description of this concept in the leading sociology text [Broom
and Selznick (1977, p. 23)], like Geertz on culture, stresses unconscious meaning
which is taken for granted:
“To define the situation is to give it meaning and thus to make it part of the social
order. Social order exists when people share the same definition of the situation.
They then have similar expectations and know how to orient their conduct. Most
 THE ECONOMICS OF ILLUSION 5
of those shared definitions are acquired unconsciously. They constitute u world taken
for grunred.” (italics added)
“The definition of the situation” usually refers to micro situations, whereas
“culture” usually refers to a society’s grand vision; the definition of the situation
is often manipulable by the actors involved. Nevertheless both the anthropologists
and the sociologists by somewhat independent routes have discovered aspects of
the same phenomenon: that individuals often process information in biased ways
because of unclearly perceived assumptions.

Lang ’s “File”
An interesting collection of letters and documents published by the mathemati-
cian Serge Lang (198 1) illustrates the concept, the dejnition of the situation. This
collection grew out of an initial letter of protest by Lang concerning a question-
naire sent out by Seymour Martin Lipset and Everett Ladd on “the opinions of
the American professoriate.” Lang, who was aware that his own political opinions
differed considerably from those of Lipset, and, suspecting that Lipset’s inter-
pretation of the results of the questionnaire would in all likelihood be rather
different from his own, wrote a letter of protest regarding the request to fill it
out; Lipset replied immediately and in some detail. The File was generated as
Lang replied to any letter received and contacted any third party mentioned in
any letter for confirmation (or denial) of their alleged role regarding the question-
naire, the initial third parties contacted being those mentioned in Lipset’s initial
reply. Lang’s letters and their replies were added to the file along with any relevant
material sent to Lang by any third party who had become aware of the growing
dispute between Lang and Lipset and Ladd; furthermore the number of third
persons aware of the dispute was growing, as any person who was previously
mentioned in The File was placed on the “cc” list of recipients of new material
sent to Lang or sent out by him regarding the questionnaire.
Reading The File makes clear two points of relevance to this paper. First,
answers to questions very frequently are imprecise because respondents often try
to answer an alternative question which “defines the situation” more favorably
for the respondent. It is for this reason that The File is replete with answers Lang
finds unsatisfactory, with the result that a typical reply by Lang to one of his
respondents begins: “Dear Ms Friedman, Thanks for the letter. I shall deal with
the points you raise and repeat important points from my previous letter since
you did not address yourself to them. [Lang (198 1, p. 405)]. The letter writers
”

including Lang are all trying to define the situation favorably with regard to their
own position, and it is rare in approximately five hundred pages of letters to find
a question directly answered.
A second implication of The Fife is the difficulty of attaining unambiguous
language. There is probably no reason to doubt the intention of Lipset and Ladd
that they designed their questionnaire to have as little ambiguity of interpretation
as possible. Nor is there reason to doubt the sincerity (or accuracy) of Lipset’s
6 AKERLOF

complaint against Lang’s “vendetta” [Lang (1981, p. 517)] on the grounds that
the problems of his survey were in no way unusual in survey research. Never-
theless, the mathematician Saunders MacLane found that out of 84 questions which
were not purely factual, 38 were ambiguous, had different meaning to different
people, used loaded words, or had socially approved norms [Lang (1981, pp. 276,
279-288)]. This general problem of ambiguity, etc. occurred despite the use of
questionnaire format, which is intended to reduce ambiguity of interpretation to
a minimum.
I have described Lang’s File at some length, partly because Lang’s brilliantly
intransigent letters (e.g., “Dear Ms Friedman, . . . I still have two questions
unanswered.”) uniquely make clear the extent to which disputants try to define
situations in their favor, while at the same time the critique of the Lipset-Ladd
questionnairemakes clear the extent to which ambiguity appears even where there
is attempt to eliminate it.

Durkheimian Structuralism
In the models developed in the next section agents select their view of the world,
perhaps subconsciously, so as to maximize their well-being which depends partly
on their psychological state and partly on the realism of their actions. In the case
of extreme chameleonlike behavior such maximization imposes no problem:
individuals could adapt their view of the world to each and every situation so
that their desire for a view of the world which promotes their psychological
happiness never imposes a constraint on their actions. The Woody Allen movie
Zelig is instructive in suggesting that such behavior does exist but also that in
extreme form such behavior is fairly rare.
Sociologistsand anthropologists have asserted that patterns of thought concern-
ing one area are duplicated in other seemingly unrelated areas.’ For example
Durkheim (1915) has asserted that aboriginal Australian natives have the same
forms of thought regarding their religion and the organization of society. Subse-
quent criticism has shown that many of the details in Durkheim’s argument are
incorrect. Nevertheless the general point that there are patterns of thinking which
affect real outcomes is widely believed. The classic ethnographers Malinowski,
Mead, Benedict and Evans-Pritchard all attempted to document the patterns of
thought in the societies they described. Kroeber’s famous textbook (1948) suggests
that the frequency of coincidences of great inventions is the result of patterns
of thinking in the societies in which the inventions took place. The coincidence
of the short skirt and military activity are also argued as examples of events in
seemingly unrelated areas of life which are, nevertheless, governed by similar
patterns of thought. In a similar vein Goffman argues that in U.S. mental hospitals
the “medical model” carries over into areas of endeavor in which it has no clear
relevance; “it is a perspective ready to account for all manner of decisions, such
as the hours when hospital meals are served, or the manner in which linens are
folded.” [Goffman (1961, p. 84)].*
 THE ECONOMICS OF ILLUSION 7
I. PUBLIC CHOICE MODELS OF ILLUSION

The somewhat lengthy introduction in the last section was intended to show that,
unlike economics, other social sciences do not assume unbiased processing of
information; on the contrary, central concerns of anthropology, sociology and
psychology are ways in which information processing is unconsciously biased.

A classic problem of externalities and social choice

This section presents a model of externalities and voting behavior which modifies
the classic example of overfishing in a depletable pond. Consider the simplest
example, which could be standard homework for a microeconomics course, of
individuals living around a pond and having utility for fish and leisure
J
,' = ( L - L)"F1-" (1)
where F is their consumption of fish
L is their total time available for labor and leisure
L is their labor time in catching fish
L - L is their leisure.
The externality in this example occurs because, as more fish are brought out
of the pond, there are fewer fish available to the remaining fishermen; and, as
a result, the time to catch a fish rises. Or, alternatively stated, in the aggregate
there are diminishing returns to fishing. These diminishing returns can typically
be brbught into the standard homework example by letting fish be produced
according to the production function
F = Lo (2)
with /3 < 1.
In the absence of taxation the private return to labor is the average product,
L B - l , which is more than the marginal social return to labor, which is /3LB-'.
A tax t on fish production equal to (1 - 0) will equate the private return to the
marginal social return and will lead to Pareto optimality. Lump sum subsidies
can distribute the proceeds from the tax.
In the usual models of voter behavior there should be no trouble in enacting
the tax 1 - /3, given the unanimity of opinion in this model. Voters understanding
the model and knowing the degree of diminishing returns will unanimously prefer
tax t = 1 - /3 to any other uniform.tax. So standard analysis of externalities
with standard social choice theory suggests that taxes will be 1 - /3 and Pareto
optimality will be restored through the intervention of a collectively approved
tax system.

A modification to the classic problem

This classic example will be modified in two ways. First, it will be assumed that
work time does not enter the utility function as a complete blank (as in (I));
8 AKERLOF

individuals in the modified utility function get some enjoyment out of their work,
although less enjoyment if an hour of work is substituted for an hour of leisure.
Additionally the utility function is modified so that an individual's enjoyment of
work depends on the social good he conceives himself as doing. The more the
individual feels that his fishing depletes the fish in the pond, and, consequently,
makes fishing difficult for others, the less he enjoys fishing. To be more precise,
the individual has an estimate of 0, which is a parameter which represents the
degree of depletion. The lower the individual's estimate of 0, the more depletion
is estimated to come from fishing, and the less the individual enjoys fishing. The
preceding arguments suggest the modified utility function: . .

u = (L - L + ByL)aF'-a O < a < l , O < y < l (3)

where L - L is leisure time
L is time fishing
F is consumption of fish
and B
is the individual's estimate of 0.
As can be seen this new utility function (3) conforms with the earlier argument:
because y and 0 are less than one an hour of leisure, rather than an hour of fishing,
increases utility; and, also, the individual enjoys his work more the higher is 8,
and consequently the less he conceives his work as depleting the pond.
The second major modification in the preceding classic externality model
concerns the individual's estimation of 0. It is assumed that the individual knows
the structure of the model, including its property, 0 I0 I 1. Subject to this
knowledge there are no constraints on his estimate of 0: he can choose as he B
wishes, subject to 0 I0 I 1.
B
The individual agent with the utility function (3) chooses L, F and to maximize
u = (i- L + fiyL)V'-a (4)
subject to the constraint about his knowledge of 0, so that
O r 0 5 1 (5)
and subject to his budget constraint
F = (1 - f)LwF S (6)
where wF is the average product of an hour's work in terms of fish,
s is the lump sum subsidy in terms of fish,
and t is the tax rate on income earned by fishing.
Solution of the maximization problem (of maximizing (4) given the constraints
(5) and (6)) shows that the individual consumer with a wage wF,a tax rate on
fishing of t and a lump sum subsidy of S, will choose
 THE ECONOMICS OF ILLUSION 9
and
8 = 1
For society as a whole the subsidy s must meet the balanced budget constraint
tw,L = s . (9)
From (7) and (9) it can be calculated that with the tax rate t , and the balanced
budget constraint on subsidies,
(1 - a ) ( l - t )
L = L.
(CY + (1 - C Y M f - r))(l - Y)
The individual voter now chooses r to maximize welfare given the behavior
of individuals who choose 8 according to (8) and L according to (10). In other
words the individual voter chooses t to maximize welfare (1 1)
(L - L +yO~)a~l-a (1 1)
subject to individual maximizing behavior

8 = 1 (13)
and subject to the assumed behavior of the economy
F = LB
and
P = 8. (15)
Solution of this constrained maximization problem yields r * = 0, where t *
is the individual's preferred tax (given his estimate that P = 1 and given his attempt
to see which tax would maximize social welfare).3

Comments on the preceding model

The usual rational expectations models view individuals as viewing the world
with no biases relative to the truth. The purpose of this model is to demonstrate
some consequences of an alternative point of view. It shows logically how a
standard proposition in social choice theory - that taxes cum subsidies will be
chosen to reach social optima when there are simple externalities - can be altered
when individuals (perhaps subconsciously) choose their beliefs, in part, to feel
good about themselves. In this example, if people engage in fishing they have
an individual incentive to believe they are not depleting. And if voting behavior
is consistent with those beliefs, taxes will be zero. Furthermore, taxes will be
zero irrespective of the size of y (as long as y is strictly positive) and in that
10 AKERLOF

sense independent of the magnitude of the effect of beliefs on the utility function
U.The gain in this model from wrong beliefs are private; and all the gains from
correct beliefs are public; because each agent has only negligible effect on the
public choice decision regarding the level of taxes, he has no reason to select
his beliefs to balance his private gain against the gain from better social choice
decisions (in terms of better tax-cum-subsidy decisions than occur with t = 0).
The private gain dominates the choice of 8 for that reason.
It is usually assumed that individuals vote in their own best interest. But this
best interest may be neither obvious nor pleasant to contemplate. Unless the innate
desire to believe the truth is strong or those who know the truth are persuasive,
the desire and ability for self-delusion can lead to poor social decisions. This is
the leading message of the preceding model. It should be understood, however,
that the model is intended as a parable, in the same spirit as the pure exchange
economy is usually considered. It is meant to show how the potential modification
of chosen self-delusion can dramatically alter the consequences of the textbook
model of externalities. For y arbitrarily small, and therefore for a model arbitrarily
close to the standard textbook example, taxes will be chosen equal to zero rather
than at their optimal level.

Remark
The model has another feature which is an interesting curiosity, even if of no
great economic significance. Suppose a government in the above model could
choose 8 (perhaps by propaganda), but would nevertheless be constrained by the
public’s choice of taxes consistent with that value of 8. In this model as long
as y is strictly positive the socially optimal 8 exceeds the true value 0. Why?
Because the optimum value of 8 puts some weight on knowing the truth, which
prevents unrealistic actions, and some weight on an optimistic view of the world,
which makes 8 as large as possible. As long as the optimal value places some
weight on an optimistic view of the world, it will exceed the true value of 0.
This is the daily stuff of the newspaper advice columns. Dear Abby, should Aunt
Jane be told of her problem so that she can act wisely, or should Aunt Jane not
be told so she can preserve her ~elf-image?~

11. WARRIORS AND VICTIMS

The provocative book on nuclear strategy by Freeman Dyson has dichotomized
the population into two groups: the warriors and the vicrims [Dyson (1984,
pp. 4-5)]. The warriors are those involved with the military establishment,
including both hawks and doves and including scholars of military and international
affairs as well as the members of the armed forces, their civilian overseers, and
the civilian producers of military hardware. Their dominant characteristic,
according to Dyson, is their concentration on detail which is reducible to
quantitative calculation. In contrast the victims are the rest of the population,
 THE ECONOMICS OF ILLUSION 11
usually depicted as mothers and children. The warriors are the agents for the
victims; they speak a technical jargon which makes it difficult for the victims
to understand the actions which are taken on their behalf.
Does Dyson’s terminology make sense? In a democracy why should the wamors
not on the average be the executors of the will of the majority, in this case the
so-called victims? Why should military strategy and military policy not be the
result (perhaps with some chance for error in either direction) of the wishes of
the majority? A model is developed here to answer this question, which may apply
to professional experts other than the military who are acting as agents for the
public. This section for that reason could perhaps have also been titled profes-
sionals vs. victims or experts vs. victims rather than warriors vs. victims. I shall
use the terms warriors, professionals and experts interchangeably in this section.

7he model
There is an economy which produces guns and butter according to the production
function

G + B = X (16)
where G is guns
B is butter
and X is a technologically determined constant.

The public’s preferences are represented by a Cobb-Douglas utility function.

Its utility depends on the production of guns and butter and also on its confidence
in the incumbent military experts, which is the variable qnC. This utility function
is

u=A ( ~ ~ ~ ) G ~ B I - ~ . (17)

The higher the confidence in the current incumbents the greater is A (cine) and
in turn the greater is U . In this model individuals choose the variable c,,, to
maximize their utility, while the incumbent experts choose the society’s allocation
of guns and butter.
Elections are held at which the incumbent experts may be thrown out of office.
The voters have a degree of confidence in nonincumbent challengers c*. This
variable is exogenous since it is unaffected by any choices, because it does not
enter the utility function. The challengers have a platform which is a proposed
allocation of guns and butter. The most threatening platform to the current
incumbents would be a division of X,so that G = aX and B = (1 - a ) X . That
is the platform most preferred by the public.
Voting behavior is as follows: voters will prefer the challenger over the
incumbents provided
c A ( C *) ~ ~ h hBLGP
A ( Cmc) G P , ~ Ba~ L al (18)
12 AKERLOF

and will vote for incumbents over the challengers provided

A (cine) G%cBk" 2 A (c*) GfhalBk?
where Ginc = guns chosen by incumbent
Binc = butter chosen by incumbent
Gchal = guns chosen by challenger
Bchal= butter chosen by challenger.
The incumbent experts have their own preferences, which are not the same
as the preferences of the public at large.
Uinc = (20)
And, presumably, /3 > a.
It is, of course, a key assumption that the warriors have a greater preference
for guns than the public, which is reflected in the parameter /3 being greater than
a. This bias reflects the usual bias of most experts: they have a bias in favor
of resources being used on their own specialty. In the case of warriors, they are
responsible for national security. An anthropologist or sociologist could tell
complicated stories whereby experts whose careers generally depend on the
resources available for their pursuits will tend to want a greater allocation of
resources in that area. For the purpose of this example the motivation supplied
by such stories should be taken to explain why 0 is greater than a.
I shall assume that the incumbent experts choose the guns-butter combination
according to their preferences, subject to the constraint of their reelection, or
mathematically stated, that the incumbent chooses Gincand Bincto maximize

subject to
Ginc + Binc= x (22)
and
A ( c ~ ~ ~ ) G $ ~ B1~ , " max A(c*)G:halB:G? = A(c*)a"(l - a)'-"X.
'chal + c'h.1 * (23)
Constraint (23) is the constraint which assures that the incumbents choose an alloca-
tion of resources so that no preferred platform can be offered by challengers.
This behavior ensures the incumbent experts of continuity of office.
There are two types of solution to the preceding maximization problem. If
constraint (23) is not binding, the incumbents will choose to maximize their own
utility subject to the production constraint (22) irrespective of the utility of the
public. In this case the public's utility will be
u = A(q,,)P"(l - o)I-"x. (244
On the other hand, if constraint (23) is binding the utility of the public will be
 THE ECONOMICS OF ILLUSION 13
u = A ( c * ) a ( Y ( I- f2)l-X. ( 2 4 ~
Summarizing the binding and nonbinding constraints, it is found in general that
the utility of the public is
CJ' = max[A(c,,,)/A(c*), a"(1 - a ) " " / ~ ' ' ( l - fi)'-"]A(c*)P"(I - ,6)1-mX.
(25)
Formula (25) makes sense. If the experts and the public have the same tastes
(i.e., if /3 = a ) . the public attains the maximum obtainable utility, which is
A(c,,,)a"(l - a ) ' - " X . Also if the public is willing to vote the experts out of
office for anything less than the optimal choice of allocation, i.e., if A ( c,) =
A(c*), then again U = A(cinc)a"(I - a ) ' - n X , which is the maximum attain-
able utility. If, however, /3 # a , and A(ci,,) > A ( c * ) , then less than the
maximum physically obtainable utility will occur in the equilibrium. The experts'
(rather than the public's) tastes are one factor in the allocation of guns and butter,
and public utility will be less than the maximum attainable with experts maxi-
mizing the public's utility. This maximum is A ( c i , , ) a ' Y ( l - a ) ' - " X .In this
sense the public becomes the victim of the experts, alias the professionals or the
warriors, who are making decisions on their behalf - even though the public
has the right to throw those experts out of office.

A firther remark
It is worthwhile remarking the consistency of the model in this section with the
behavioral experiments by Milgram ( 1975) on Obedience and Authority. In a socio-
psychological experiment Milgram found that more than 60 percent of subjects
were willing to give 450 volt shocks to confederates of the experimenter on the
command of the experimenter. In terms of the preceding model, the subjects have
utility for confidence in the experimenter (who is a profissional or an expert in
the context of the experiment) so that they are willing to override their own
judgment.

111. CONCLlJSION

This paper has analyzed in a context of public choice the consequences of choice
of belief. This paper has de-emphasized the obvious, that our beliefs are in large
part determined by facts, which are sometimes simple and undeniable. Instead
it has emphasized those areas, which include most of the questions of public policy
debate, where simple undeniable facts alone do not determine what to believe.
Where there is such a margin of doubt, individuals have freedom to choose what
to believe and, furthermore, in such an environment there is freedom for people
to choose beliefs which make them feel good about themselves. In the first model
presented (in section I) people chose their beliefs to feel good about what they
do. In the second model they chose their beliefs to feel good about failing to delve
14 AKERLOF

into the workings of expert bureaucracies, whose judgments can in a well-defined

sense make the public the victims of their decisions.
To an economist trained on economic models in which estimations are unbiased
predictors of the truth, it seems unnatural to make any other assumption about
human behavior. Yet to an acute observer of human behavior, Leonard Woolf,
unbiased pursuit of truth is considered a rare trait. He thus describes the philo-
sopher G.E. Moore as “the only great man whom I have ever met or known in
the world of ordinary real life” (1957, p. 131), whose source of greatness was
“a genius for seeing what was important and irrelevant, in thought and in life
and in persons . . . because of the . . . passion for truth . . . which burned in
him.” (1957, pp. 134-135). This paper has presented economic models in which
such pursuit of truth is also unusual rather than the norm - its purposes being
to clarify the differences between economic theory and other social sciences, to
discover potential pitfalls in the use of economic modeling, and to uncover
potentially important reasons for mistakes in public policy.

GEORGE A. AKERLOF
Economics Department
University of California at Berkeley
Berkeley, CA 94720
USA

NOTES

’ An extreme version of such structuralism is given by Levi-Strauss (1949) who argues that the
thought patterns of French peasants in exogarnously marrying their daughters and convivially trading
wine in cheap restaurants in Southern France are similar.
* A similar point has been argued rather abstrusely by Foucault (1979) regarding the relation
between the architecture of French hospitals and the way in which French doctors view the practice
of medicine. Foucault has argued that their view of medicine as relating almost exclusively to discovering
symptoms from the body of the patient (via “the gaze”) led to unnecessarily uncomfortable French
hospitals so that doctors could observe their patients.
To make this solution feasible it must also be true that y 5 a/(l - a).
Ibsen wrote about this same problem in “The Wild Duck”, with the same conclusion: the
unvarnished truth is not always the social optimum.

REFERENCES
Akerlof, George A. and William T. Dickens, 1973, The economic consequences of cognitive
dissonance, American Economic Review 72, June, 307-19.
Aronson, Elliot, 1979, 7he social animal, 3rd ed. (W.H. Freeman, San Francisco).
Argyle, Michael, 1957, Social pressure in public and private situations, J o u m l of Abnormal
and Social Psychology 54, March, 172-5.
Asch, Solomon E., 1951, Effects of group pressure upon the modification and distortion
ofjudgment, in M.H. Guetzkow, ed.,Groups, Leadership, and Men (Carnegie Press,
Pittsburgh).
Breger, Louis, 1974, From instinct to identity: 7he development of personality (Prentice-
Hall, Englewood Cliffs, New Jersey).
 THE ECONOMICS OF ILLUSION 15
Broom, Leonard and Philip Selznick, 1977, Sociology, 6th ed. (Harper and Row, New
York).
Debreu, Gerard, 1959, Theory of value: An axiomatic analysis of economic equilibrium
(John Wiley and Sons, New York).
Deutsch, Morton and Harold B. Gerard, 1955, A study of normative and informational
social influence upon individual judgment, J o u m l of Abnormal and Social Psychology
51, Nov., 629-36.
Durkheim, Emile, 1915, The elementary forms of the religious Life (George Allen and
Unwin, London).
Dyson, Freeman, 1984, Weapons and hope (Harper and Row, New York).
Evans-Pritchard, Edward E., 1940, The Nuer: A description of the modes of livelihood
and institutions of a Nilotic people (Oxford University Press, Oxford).
Foucault, Michel, 1979, Power/knowledge: Selected interviews and other writings 1972-
1977, Colin Gordon, ed., translated by Colin Gordon, Leo Marshall, John Mepham,
and Kate Sopher (Random House, New York).
Geertz, Clifford, 1973, The interpretation of cultures (Basic Books, New York).
Goffman, Erving, 1961, Asylums: Essays on the social situation of mental patients and
other inmates (Doubleday, Anchor Books, Garden City, New York).
Kroeber, Alfred L., 1948, Anthropology: Revised edition (Harcourt, Brace and World,
New York).
Lang, Serge, 1981, 7he$le: Case study in correction (1977-1979) (Springer-Verlag. New
York).
Evi-Strauss, Claude, 1969, The principle of reciprocity, from chapter V, Le principe
de reciprocitk, in Les structures klkmentaires de la parentk, 1949 (Presses Universitaires
de France, Paris). Abridged and translated by Ruth L. Coser and Grace Frazer, in
Lewis A. Coser and Bernard Rosenberg, eds., Sociological theory, 4th edition
(Macmillan, New York).
Milgram, Stanley, 1975, Obedience to authority: An experimental view (Harper and Row,
New York).
Mouton, Jane S., Robert R. Blake and Joseph A. Olmstead, 1956, The relationship between
frequency of yielding and disclosure of personal identity, Journal of Personalify 24,
March, 339-47.
Myrdal, Gunnar, 1962, An American dilemma: The negro problem and modem democracy,
with the assistance of Richard Sterner and Arnold Rose, 20th anniversary edition (Harper
and Row, New York).
Nader, Laura, 1981, Barriers to thinking new about energy, Physics Today 34:2, February,
99-104.
Tocqueville, Alexis de, 1945, Democracy in America, The Henry Reeve text as revised
by Francis Bowen, further corrected and edited by Phillips Bradley (A.A. Knopf, New
York).
Wallerstein, Judith S. and Joan B. Kelly, 1980, Surviving the breakup: How children and
parents cope with divorce (Basic Books, New York).
Woolf, Leonard, 1975, Sowing: An autobiography of the years 1880 to 1904 (Harcourt
Brace Jovanovich, New York).