[MUSIC] Hi, I'm Richard McKenzie. In previous lectures, I have hammered a a! on the meanin" o# rational $ehavior.

In a nutshell economists $ase their anal!sis on the presumption that people act purposel! ith the "eneral "oal o# #i"urin" out hat the! ant and are ma%imizin" their el#are as the! determine their el#are individuall!, all ithin the constraints o# limited resources or limited income. &eople, !ou and me, and the vast ma'orit! o# people out there in the mar(ets and al(in" the streets o# the cit!, o# cities, 'ust don't respond in some predeterimed a! to e%ternal #orces. )he! act purpose#ull!, people aren't li(e chemicals or roc(s. &eople have minds and a capacit! to place valuations on alternative courses o# action, and di##erent "oods and services. *s noted, people's $ehavior are constrained $! the availa$ilit! o# resources and the structure o# mar(ets and, and cultures. +ut the! are not determined or predetermined. )here is in other ords some domain ithin hich a can $e said that people $a(e choices and I mean real meanin" #or choices as that ord is commonl! understood. M! "oal in this lecture is to clari#! the economic a! o# thin(in" $ased on rational $ehavior $! considerin" the a! man! social scientists #rom other disciplines vie $ehavior. ,ot all social scientists see the orld, and people, the a! economists do. -$viousl!. .or e%ample, $ehavioralists. .ollo ers o# the late, ps!cholo"ist, +. .. S(inner, )heir historical $ac("round, their immediate environment. /h! am I doin" hat I am doin" ri"ht no 0 *ccordin" to the $ehavoralists, I'm not doin" hat I am doin" $ecause I choose to do this, that is "ive this lecture $e#ore camera, $ut I'm doin" this $ecause o# #irst. )he "enes I inherited #rom m! parents and their parents. ,o , the causal lin(s #or m! doin" hat I am doin" can $e traced $ac( to m! ancestors, ho al(ed the plains o# the Seren"eti in *#rica, eons a"o. I am doin" hat I am doin" ri"ht no , $ecause o# all the thin"s that have happened to me. In m! li#e that caused me to $ ecome the person I have $ecome. *n economist ho teaches in universit! classrooms, and $e#ore this camera. -# course, m! li#e path as shaped $! the li#e paths m! parents and their parents, too(. *s ell

as $! the li#e paths m! #riends too(. *ll o# hom. In#luenced me as e%ternal #orces on m! $ehavior. /h! am I sa!in" hat I am at this moment0 I said hat I said $ecause o# all those "enetic and historical #orces that came $e#ore +ut also $ecause o# the e##ects o# m! immediate environment, the li"htin" in this room and, and the camera on me included. I# the li"htin" had $een di##erent, sli"htl! di##erent or the camera had not $een on, I ould $e sa!in" somethin" else, at least accordin" to the $ehaviorals1", ma!$e a$out $ase$all. pla!ers or #oot$all pla!ers or #or that matter inners o# american idol, accordin" to strict $ehaviourist i have had no sa! In the matter. .rom their anal!tical perspective it is i# I am nothin" more than a puppet ith strin"s attached to me. *nd there is some "reat puppeteer in the s(! or in m! past ho is manipulatin" all o# those strin"s. *nd as a result, is manipulatin" m! $ehaviors $oth lar"e and small. Moreover m! #uture is as determined as m! past accordin" to the $ehaviorist. I# e (ne the #ull details o# all the #orces at or( in the orld e could predict e%actl! hat I ould do in the #uture. -# course prediction is e%traordinaril! di##icult $ecause it is e%traordinaril! di##icult to identi#! all o# those #orces. I# people's $ehavior ere so #ull! determined $! outside #orces I have to onder h! the $ehaviourists ant to discuss human $ehavior. Much less "ood and $ad human $ehaviors or "ood and $ad policies. -ther than that the! ere predetermined. &redesitned, to articulate, the vie s that the! do. )hat is, the! articulate their $ehaviorless vie s $ecause o# all the "enetic, historical #orces, and immediate environment, the! came, the! came to or(, on, on them. Most $ehavioralists don't $elieve that people, that people's $ehavior is #ull! determined, or at least it doesn't seem so. +ut the! do seem to $elieve that people's $ehavior is lar"el! determined. So much so, that assumin" people's $ehavior is #ull! determined does little dama"e to their anal!tics $ehaviorists also need to simpli#! their $asic premise to move the anal!sis alon", 'ust as economists do hen the! assume #ull rationalit! or per#ect rationalit!. *nother alternative vie o# the orld is captured in somethin" called Maslo 's hierarch!. *$raham Maslo proposed $ac( in

the 2345s that people ill develop a p!ramid o# ver! speci#ic ants and then clim$ that p!ramid o# ants hich has come to $e (no n as the Mans 6a o# hierarch! o# needs.the, )he p!ramid loo(s ver! much li(e, li(e I have here on m! camera, on m! overhead camera. )he presumption here, is that there are several la!ers o# $ehavior. )here is the ph!siolo"ical la!er o# needs. &h!siolo"ical needs includes individuals desires #or #ood, se%, sleep. sensor! pleasures and sheer activit!, meanin" the need to $e $us!. )he ne%t level o# anal!sis includes sa#et! needs, hich is ne%t in prepotent. . *nd this ma! include the desire o# the individual to secure sa#e, securit!, order, protection, and #amil!, sta$ilit!. )he ne%t level o# needs is $elon"in"ness, and love needs. this includes, amon" other thin"s, the desire #or companionship. acceptance and a##ection. 7steemed needs, that's the ne%t level o# needs. )he individuals desire #or achievement and ade8uac!, reputation, dominance, reco"nition, attention, appreciation, and importance *ll o# that is included in this, ne%t la!er, need. )he hi"hest level o# needs is that o# Sel#9*ctualization, ,eeds, hich Maslo tells us, and I 8uote. )his re#ers to mans desire #or sel#9#ul#illment. Mainl! to the tendenc! that mi"ht $e phrased as a desire to $ecome more and more hat one is. )o $ecome. 7ver!thin" that one is capa$le o# $ecomin". I "uess that means that people hen the! reach this sel#9actualization level $ecome poets, son" riters, or ma!$e video "ame architects. .or that matter, I could $e sel#9actualizin", ri"ht no , as I "ive !ou, er, this lecture. Maslo tells us, and I 8uote a"ain, i# all the needs are unsatis#ied. )he or"anism is then dominated $! the ph!siolo"ical needs. *ll o# the needs ma! $ecome simpl! non9e%istent, so it'll $e pushed into the $ac("round. It is then #air to characterize the hole or"anism $! sa!in" simpl!, it is hun"r! #or Consciousness is almost completel! preempted $! hun"er. *ll capacities are put into the service o# hun"er. Hun"er satis#action. *nd the or"anism, the or"anization o# these capacities is almost entirel! determined $! the one purpose o# satis#!in" hun"er. Capacities that are not use#ul #or this purpose lie dormant or are pushed into the $ac("round, or so Maslo tells us. I# the most $asic needs are satis#ied, Maslo

rites *nd at once other and hi"her needs emer"e, and these other than ph!silo"ical hun"er dominate the or"anism and hen these in turn are satis#ied, a"ain ne and still hi"her needs emer"e, and so on. one "ets the impression #rom readin" Maslo , that the individual ill not attempt to satis#! her second most pre9potent needs until the most pre9potent needs are #ull! or almost #ull! satis#ied. She ill not move to the third tier #or e%ample. in the hierarch!. Until the needs o# the second tier are, are satis#ied. -r, as Maslo sa!s, #airl! ell, "rati#ied. Maslo also rites, i# $oth the ph!siolo"ical and sa#et! needs are #airl! ell "rati#ied, there ill emer"e, the love and a##ection and $elon"in"ness. ,eeds. *pparentl!, the individual ill not attempt to e##ect an! sel# actualization until she has moved throu"h all the #ormer tiers. I# an! tier in the hierarch! is s(ipped entirel!, it is $ecause o# insurmounta$le. 7nvironmental or ph!siolo"ical, $arriers. &eople aren't #ull! loc(ed into clim$in" the Maslo p!ramid as, as descri$ed, $ut the! have ver! little choice, in the matter and people certainl! aren't vie ed as ei"hin" o## the additional value o# the additional needs, on the mar"in as economists do. )here are similarities and "reat di##erences $et een the econo mics approach. Maslo approach to human motivation and $ehavior reseml$es the approach o# economists in one and ma!$e onl! one respect. In $oth the Maslo s!stem o# thou"ht and the economists a! o# thin(in". Individuals are a$le to ran(, all o# their ants, or needs, accordin" to their importers. )he Maslo approach, and the economists a! o# thin(in" di##er ho ever, in that Maslo 's speci#ies the ran(in" o# needs #or ever!one, at least in $road cate"ories. 7conomists are not illin" to do that. 7conomists thin( o# people as havin" individual orderin"s, or p!ramids o# an! num$er o# "oods that, not 'ust cate"ories o# "oods. )he Maslo and economists s!stem o# thou"h, are di##erent $ecause o# their vie s, o# the constraints that operate on the a$ilit! o# individuals to ma%imize their utilit!. )he constraints in the Maslo hierarch! include environmental, "enetic, historical, and cultural #actors. *nd the individual's character. -r his $elie# a$out hat is ri"ht and ron". )here is no mention o# the individual's productive a$ilit! or

income unless these are implied in environmental and cultural constraints. )hat is, there's no mention o# these #actors in the Maslo s!stem o# thou"ht. *nd there's also no mention, o# the cost o#, o# the means $! hich a persons $asic needs, can $e #ul#illed. )hese considerations are $asic constraints in the econ, economics, and the economists a!, o# vie in" human $ehavior. +! not considerin" cost, Maslo appears to assume, implicitl!, either that there is no cost to need "rati#ication, or that the demand curve #or an! need, is vertical. /hich is to sa!, people don't respond, to the prices, o# the needs. )his means that the 8uantit! o# the need #or #uel is una##ected $! the cost or $! the price o# the "oods ithin the cate"ories o# needs. *nd implied assumption o# the vertical demand curve is that the $asic needs are independent o# one another. )he!'re not su$stitutes. .or e%ample, a unit o# an esteemed need #ul#illed, does not appear, in Maslo 's s!stem to $e a$le to $e, to ta(e th e place, o# even a small #raction, o# a unit, o# a ph!siolo"ial need. +! a! o# contrast, economists vie people as $ehavin", $ehavin" purposel!. )hat is, rashl!. )his means that the! aren't #i%ed into clim$in" an esta$lished p!ramid set #or all human $ein"s. )he! construct their o n individual p!ramids. -ther people simpl! can $e vie ed as ei"hin" o## the additional $ene#its and needs at an! and all levels in their heirarch!, a"ainst their costs. 6oo(in" #or that com$ination o# all "oods that ma%imizes their ell $ein". /hich implies that the! ill e8uate at the mar"in, and then the! ill move alon" their demand curves in predicta$le a!s. .or e%ample, Maslo $asicall! sa!s that people ill move #rom the ph!siolo"! needs up to the sa#et! needs once the ph!siolo"! needs are almost satis#ied, then up to here. *nd then up, and so on up, the ladder. 7conomists vie the orld, in di##erent terms. )hat is, the individual is constantl! loo(in" at all o# these needs as alternatives. *nd the individual. Is "oin" to tr! to e8uate the mar"inal utilit! o# the ph!siolo"ical need over the price o# the ph!siolo"ical need as it e8uates ith all the other mar"inal utilities over their prices. ,o the 8uestion e have to as( Is, ho did Maslo come up ith his hierarch!0 He, he, durin" the 2345's, he studied some ver! $ri"ht

under"raduate students, ma!$e he de#ined his p!ramid #rom, hat the! told him. /hich ma!, o# course, not $e representative o# the #ull population o# under"raduate students, much less the #ull population o# the 2345, 45s. *pparentl!, he came up ith his p!ramid $! surve!in" onl! a #e dozen students. In the 2345s. Can his su$'ects $e representative o# the hole population o# the orld0 Can his p!ramid there#ore, $e representative o# the hole population o# the orld0 )hese are 8uestions that reall!, economist, can't help $ut, $ut as(. In addition, mi"ht the prices o# Maslo 's various need cate"ories have impacted, 'ust ho satiated people ere at each level0 )hat is, one o# the reasons that people ma! have $ een "reatl! satsiated ith ph!siolo"ical needs is that the cost, or prices o# these ph!siolo"ical needs as lo er than the price o# sa#et! needs, hich as lo er than the price o# $elon"in"ness needs, esteem needs, and so on, up the ladder. /hat I'm tr!in" to "et at is that, hen Maslo did his or( and, and surve!ed his su$'ects, there ma! have $een a demand .or ph!siolo"ical needs that loo(ed li(e this. * demand #or sa#et! needs that loo( li(e this, and a demand #or love needs, that loo( li(e this lo er "raph here. )hat is, ho much people ere satiated in teh various levels o# needs, could $e a #unction o# 'ust ho "reat the demand curve as on each o# these cate"ories. It could also have $een that in the 2345s the price o# ph!siolo"ical needs as relativel! lo . 6eadin". )o a relativel! hi"h level o# consumption o# ph!siolo"! needs. *nd, close to satiation, i# e assume this point is satiated. the same could $e true o#, o# sa#et! needs. *nd then e mi"ht #ind that people are not as satiated ith love needs $ecause it's price. :iven it's lo demand, could have le#t people #ull! unsatis#ied. ,o ima"ine those perception o# peoples hi"harch! ma! have $een "reatl! chan"ed. Had e moved the price #rom the previous "raph, hich as do n here, up to here. In hich case, )he 8uantit! consumed o# these ph!siolo"ical needs ould have $een much lo er. )he level o# satiation ould have $een much, much lo er relative to these other needs. I# the price, o#, o# love needs had $een lo er than it as in the previous case then love needs mi"ht have $een more #ull! satiated than hat Maslo

#ound. /hat I'm tr!in" to su""est here is that 'ust ho satiated people are at. )he various cate"ories indeed can $e a #unction o# their demand, and then ho satiated the! are can $e a #unction o# the relative prices o# the, o# the various "oods. *nd these demands and these prices, can chan"e dramaticall! over time and certainl! pro$a$l! have chan"ed ver! dramaticall! in the ;5 or <5 !ears since Maslo did his or(. In our ne%t several lect ures, e ill consider the #oundation o# trade amon" people ithin countries, and $et een countries, and then consider the operation o#, o# mar(ets. :iven our understandin" o# ho people can $e e%pected to $ehave rationall!. )here's a lot o# #un in store. I than( !ou #or $ein" ith me.