Tyler Cowen on Economic Rationality
 

This look at the rationality postulate may not satisfy those critics who, in any case, do not like the content of economic theory.
                                                  Tyler Cowen


Tyler Cowen (p. 3) wants to pluralize economic rationality:

In particular, I stress that there is no single, monolithic economic method or approach to rationality....We should think of this competitive process [between different kinds of rationality] as fundamental to contemporary economics, more fundamental than any single account of rationality that might be provided.

Working at the meta level, Cowen describes five different ways rationality functions in economics:

1.) "Rationality" can be a falsifiable description of characteristic human behavior.

2.) "Rationality" can just be the principle of transitivity: if A is preferred to B, and B is preferred to C, A will be preferred to C. (This is actually a version of the descriptive function).

3.) "Rationality" can be a possibly-useful tautology (e.g., revealed preference: if A ends up choosing X, let's say heroin addiction and early death, it's because for him heroin addiction and early death is what he really wants).

4.) "Rationality" can be a heuristic fiction or simplifying assumption allowing systematic economic work to proceed.1

5.) "Rationality" can be a norm which people should try to follow.

Cowen's three middle versions are purely methodological and are not really much like real-world natural-language rationality (whether rationality is defined normatively or descriptively). There is also a tension between the descriptive use of the natural-language term ("Genghis Khan's decision to massacre the entire population of Bukhara was quite rational") and the normative use ("If people voted rationally this country would be in better shape than it is" or "Many social problems are simply the outcome of individual irrational behavior".)

I should also add that the tautological definitions of economic rationality in #3 seem like drawing the bulls-eye wherever the arrow happens to hit, and as a result are especially appealing to economics-skeptics such as myself.

Cowen believes that the multiple definitions of "rationality" are not a problem, either because they can co-exist as long as it's realized that each definition is only valid within its proper range, or else because the better definitions will eventually drive out the worse. Since he makes no criticism of any of the definitions and seems to be arguing against trying to come up with a unified definition, it seems that he's arguing for coexistence. This does not make sense to me: the various ways of treating rationality he describes are not merely slightly-different overlapping definitions for specific purposes -- they're  often incompatible.

Within an academic, disciplined environment populated by skilled jugglers who are all in on the game, rationalitya, rationalityb,.....rationalityn probably can all be kept separate. But economic thinking has enormous importance in public opinion and law, and laymen are seldom able to juggle that carefully. Unsophisticated laymen are tempted to suspect that models built on false  descriptions of individual behavior might turn out to be bad models, even though all economists (except Donald Keen, Debunking Economics, Chapter 7) believe Milton Friedman has proved that unrealistic assumptions are no problem at all.

At the same time, other unsophisticated laymen (enchanted by the rational self-interest model) might decide that rational self-interest is an ideal to which everyone, especially themselves, should aspire. And in fact, the supposedly-fictitious "economic man" whom economists giggle about is something which actually exists in this world. "Rational self-interest", of course, does not exclude those whose concern for others causes them to behave in a seemingly-altruistic way, but everyone also knows of self-interested individuals who have no taste for generosity, and many of us have also encountered self-interested individuals (sociopaths) who prudently satisfy their taste for cruelty. It is true that the two latter principles of behavior are condemned by folk ethics, but isn't it the whole point of rationality to refine, improve, or replace archaic, credulous beliefs based on musty old texts?

Occult hermeneutics, as seen in Becker's study of the family, is another way of relating economic rationality to the real world. This involves showing that all seemingly altruistic behaviors are really governed by self-interest. Since this approach is used by advocates of economic rationality, it seemingly would also require distinguishing the rational forms of "altruism" from its irrational, non-self-interested forms, and condemning the latter, but my research has not brought these studies to my attention yet.

Cowen believes that he is defending the economist's idea of economic rationality, but his defense will only be persuasive for someone who is already committed to economics and wants to preserve it. However, he may be correct in thinking that that's the only audience he needs to bother with. Economics is institutionally invulnerable, and everyone in the biz has a stake in the profession's continued dominance. To an outsider it seems that Cowen is running around patching leaks, but insiders are unlikely to be upset by ad hoc epicycles and kludges as long as they allow them to continue their work unimpeded.

FOOTNOTE

I think that the economists' technical definitions of "rationality" are analogous to the logicians' technical definitions of "implication". "Material implication" really has only a most distant relationship to real-world natural-language implication, to the point that it's misleading to identify them in any way, but this does not prevent formal logicians from believing that they have somehow clarified the ordinary-language concept and made it rigorous. (See here).

Sen on rationality

Gintis on rationality

Becker's interpretation of marriage

 

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Original materials copyright John J Emerson

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