What Does Economic Rationality Do?
 

(Very Impressive, my colleague....
but does it also work in theory?)

(More here)

Economists never claim that their assumptions are realistic, and critics of economics who attack the realism of the assumptions of economics have been routinely ignored ever since the publication of Milton Friedman's 1954 book Positive Economics. (In chapter 7 of his book Debunking Economics Keen critiques economists' justifications  of the use of unrealistic assumptions, but I'm taking a different tack here.)

The "rational individual" discussed by economics is often said to be simply a modeling convention rather than a description of human behavior or an ideal to be followed. It's not as simple as that, however, because it seems that economics (and sometimes individual economists) equivocate on the question. (Tyler Cowen has sketched the various ways of defining economic rationality here, though he doesn't discuss the possibility or consequences of equivocation.)

Economists are formalizers and system-builders, and the rational individual might be thought of as the stipulated atom of economics -- the unanalyzed simple of which the complexes are formed. One problem with this way of thinking about it is that physicists actually do analyze their atoms and electrons, and do recognize the differences between a hydrogen atom and an oxygen atom, or between a meson and a lepton, whereas economists assume a population of identical rational individuals. A second problem, as Mirowski, Georgescu-Roegen, Mandelbrot, and  Hodgson have pointed out, is that the physics which formal economics has modeled itself on is classical mechanics, which tends toward equilibrium and is conservative, frictionless, ahistorical, and reversible, whereas the economy functions within the creative, historical, irreversible, sticky, non-equilibrium  world of entropy.

The rational individual with his tastes and wants is supposedly the basic economic unit, but the economic individual as defined really serves as a screen obscuring everything that's individual about individuals. Actual individuals exist within their various social, cultural, communal, political, ethical contexts, but the function of the concept of the economic individual is to exclude all these contextual aspects of individuals from consideration.  In Wicksteed's words, the distinctive feature of "an economic transaction is that I am not considering you except as a link in a chain." (Hodgson, How Economics Forgot History, p. 233). Economics is thus the study of the outcomes of the  instrumentally rational behavior of individuals in groups. (For Wicksteed and most early economists, this meant that economics described only part of human social behavior, but economists have always tended to valorize economic behavior and economic descriptions of behavior over other kinds of behavior and other kinds of descriptions.)

One problem with the use of the economic individual as a stand-in for the generic or universal individual is that the economic individual is not a mean but an extreme. The economic individual is not in the middle of a bell-curve, halfway between people who are not rational enough and people who are in some way too rational, and the stipulated economic individual is not even an attempt at a representation of characteristic human behavior. The normative definition of "rationality" never quite disappears, and the economic individual always remains not only an extreme, but surreptitiously (at least to some extent) an ideal.

As a rule, actual economies (to the extent that they are uncorrupted by non-economic principles) do treat deviations from instrumental rationality simply as irrationality and error. They reward the instrumentally rational and punish those who make their choices on different principles of whatever kind. If you grant that everything but individual instrumental rational is error, the economy can still be thought of as a fine normative system, and while this point is seldom spelled out in detail, it seems that many economists still think of economics as a way toward the Utopia of rational individualism.

Economic imperialists either want to make the world economically rational, or else to show that all seemingly non-economic behavior (e.g. altruistic behavior) is really economic behavior (i.e., selfish). When Adam Smith talked about his butcher's selfish motives he was describing a specific sort of useful selfishness, and explaining that it did not deserve the condemnation moralists usually gave it. He explicitly recognized that the economy is, and should be, embedded in a non-economic world organized around different principles. This understanding was commonplace within economics up until about 1950 (though economists have always valued economic behavior more than non-economists do), but after 1950 it tended to dwindle and fade. As time went on, increasingly the well-theorized economic aspects of social life came to be regarded as more real than the various other badly-theorized, poorly-understood, un-mathematized aspects of human life (community, family, nation, etc.), thus becoming dominant over (and parasitical upon) them. Many economists recognize that a healthy economy requires an array of non-economic, non-market social forms, but few will concede that these forms are anything more than useful servants of the economy, or that it might often be beneficial to foster  non-economic forms even at the cost of interfering with the economy.

The problem with economic man is not that he is an imaginary  theoretical fiction, but that there are too many of him. Economic rationality, which is supposedly a purely formal assumption, has bled out into the community and has become a foundation for ethics. Anyone who's spent any time out in the world has met heartless rational calculators who verge on the psychopathic, ideologues who justify selfishness as such (regardless of context), and many instantiations of "the last man", who is offended by nothing:

Comparing formal concepts to the original natural-language terms they replace is generally thought of as naive or stupid, but it's a good stupidity. The fundamental definitions of a science (especially a human science) tell you what its skew or intention is. By examining the natural-language origins of technical terminology, you access the always-incoherent scientific  unconscious, false consciousness, shadow self, lack, or primary process. This is the place  science comes from, and it is also the place where science reinserts itself into the unformalized natural-language reality within which all of us (even economists) actually live.

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Cowen on rationality

Me on Cowen

Sen on rationality

Gintis on rationality

Becker's economic imperialism

Lazear's economic imperialism

Steven Durlauf's economic imperialism

The unconscious of "material implication"

Emersonj at gmail dot com.

Original materials copyright John J Emerson

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