Eastern Economic Journal: Preference Pollution: How Markets Create the Desires We Dislike

Preference Pollution: How Markets Create the Desires We Dislike. By David George. Ann Arbor: University of Michigan Press, 2001. 201 pp. $60.00, ISBN 0-472-11220-1 (hardcover); $24.95, ISBN 0-472-08949-8 (paper).

In this intriguing and thought-provoking book, David George challenges the view that free choice, as revealed by the preferences of individuals, maximizes the welfare of individuals given their income and market prices. He also discusses the implications of preference formation for economic theory and policy, areas too often neglected in economic discourse. The core ideas underlying George's arguments are succinctly presented in Chapters 1 and 2, to which we first turn.

Unlike other critics of the free market economy, George does not assume that individuals are irrational in terms of being inconsistent or incapable of constructing welfare- maximizing preferences. To the contrary, he argues that the rationality assumption lets us retain the normative power of the rational choice paradigm. It lets us determine the efficiency of individual choices and it maintains the moral responsibility of economic agents.

Even with rational decision makers, George argues, market forces generate an incentive structure whereby choices made by free individuals yield suboptimal outcomes. The market can foster both bad and good preferences, where good preferences are welfare-maximizing preferences from the individual's perspective. In contemporary capitalist society, however, market forces have fostered more bad (undesired) preferences than good ones, thus yielding suboptimal outcomes. Unlike John Kenneth Galbraith, George does not have a problem with markets manipulating preferences, but he has problems with the type of preference change produced.

Drawing on his own experiences, George [7-10] argues that a central dilemma for rational choice theory is that individuals make free and time-consistent choices, such as eating at McDonald's, but then wish that another choice was made, such as eating a healthier meal. This latter preference is not revealed, despite the fact that the goods are readily available and obtainable, given real income and relative prices. Contrary to the conventional wisdom, therefore, revealed preferences do not represent an individual's desired or preferred preferences. How is it possible that free, informed individuals consistently make choices that they prefer not to make?

George provides no empirical backing for his position; his case is largely introspective. An empirical testing of his thesis would be a worthy endeavor. This being said, the potential disconnect between revealed preferences and desired preferences can pose a serious dilemma for rational choice theory and raises intriguing questions with regard to efficiency.

Second-order preferences help us resolve this dilemma. Albert Hirschman and Amartya Sen both used this concept, but George develops it in a truly unique fashion. First-order preferences are the revealed preferences of the individual, such as preferring McDonald's to healthy food (M > H); second-order preferences are the preferred preferences of the individual (H > M). Both preferences occur simultaneously, but in this instance first-order preferences dominate second-order preferences. The rational individual chooses M > H, but would prefer that H > M. While it is possible for secondorder and first-order preferences to coincide, George maintains that this is not typical.

In an interesting example of bad preference formation (from Chapter 3), street hot dog vendors create first-order preferences for unhealthy food that tends to dominate second-order preferences for readily available, healthier food. Hot dog vendors pay no penalty for generating these negative preference externalities, and so some individuals end up with preferences they would rather not have. In this case, first-order preferences dominate because exposure to such food overrides the rational desire to choose the second-order preference set.

Following philosopher Harry Frankfurt, George argues that when first-order preferences dominate preferred second-order preferences, individuals lack free will since they act upon the will they have (first-order preferences) rather than the will they want to have (second-order preferences). Only when second-order and first-order preferences coincide are individuals actually characterized by free will.

Because the market shapes our tastes, our preferred preferences play second fiddle to our undesired preferences. The dominance of undesired preferences is a product of a market for taste formation that generates both positive and negative spillovers. Negative spillovers dominate the positive, yielding a market failure in taste formation. This generates suboptimal choices and economic inefficiency and deprives individuals of free will. Tastes have become polluted in the unregulated market of persuasion. Market failure is largely attributable to the market's lack of sensitivity to second-order preferences.

Chapters 3 and 4 discuss preference formation, which assumes that individuals live with discord between second and first-order preferences. Advertising helps firstorder preferences dominate second-order preferences. This is due to the lack of property rights in preferences and the absence of a mechanism to compensate producers of positive spillovers in preference creation and penalize preference polluters. Once firstorder preferences are set, decision makers do not have the capacity to act on their desired second-order preferences.

Chapters 5 to 9 argue that the mismatch between first- and second-order preferences has been increasing over time. Market production contributes to market failure in preference formation since the market caters to revealed preferences even when these are not preferred. The eroding "buffer zone" between consumption and choosing what to consume, by contributing to impulse buying, has also contributed to the dominance of first-order preferences. These points are fleshed out using real world examples, such as television, the use of credit cards, and legal gambling, which are viewed as instruments of bad preference formation.

George argues that the rise of bad preference formation should be placed in the context of the demise of social institutions and "traditional values," which restrain individual choice in a manner conducive to the dominance of second-order preferences in the decision-making process.

George offers no solution to the problem of individuals unable to achieve their desired preferences, or to the problem of defining "bad" or "good" preferences. But these issues are not the intent of this book. George simply argues that individuals are saddled with preferences that they prefer not to have [37-8]. It is critically important to determine the extent to which free choice is actually a bad choice from the perspective of the decision maker, and the extent to which the domination of bad preferences is a product of poor information, bargaining power in the decision-making process, or historical costs.

By presenting us with an engaging discourse on preference formation, George opens the door to many long-neglected questions and issues related to decision making and the complex nature and ordering of preferences. This is critical since, as George points out, where preferred preferences are not dominant, even in a world of growth, welfare levels are suboptimal. Welfare can be increased irrespective of growth when preferred preferences dominate the market.

Morris Altman

University of Saskatchewan