Economic rationality

Economic Rationality

Mahmood Ansari 1 | P a g e

Economic Rationality: An Evaluation1

Abstract

The neoclassical thought constitute the base of the most dominant school in the discipline of economics, and economic rationality of an individual agent is the principal postulate of such a thought associated with neoclassical economics. The postulate of rationality has been questioned over the years. There have always been doubts expressed against such a conception of the individual human actor transacting business in a market. The theoretical postulate has often been pitched against not only the alternative theoretical frameworks but also the empirical judgments arrived at in the background of a broader canvas of the actual social economy.

Key Words: Rationality, maximization, neoclassical economics, bounded rationality, utility,

utilitarianism, libertarianism

Introduction The neoclassical thought constitutes the base of the most dominant school in the discipline of economics, and the economic rationality of an individual agent is the principal postulate of the thought associated with neoclassical economics. The postulate of rationality therein makes the individual human actions intelligible in a typical neoclassical world; it also confers order on the vagaries of social phenomena and processes, analysed in the neoclassical fashion of scrutiny. In short, the postulate provides the much-required theoretical rationale of stability of the capitalist social system. It is therefore considered to be a necessary benchmark in understanding human behavior, particularly, in a capitalist economy by the theoreticians of essentially neoclassical persuasion in the discipline of economics. Historically, the rationality postulate descended from the Marginalist Revolution in the 1870s in economics. It was reinvented in the 1930s, and became highly popular, almost getting a pride of place in all the principal textbooks of economics in the post-1950s era. Given the intellectual hegemony established by the neoclassicists, the required modifications in the postulate were always however considered inevitable, and the same have been brought about by various generations of economists of neoclassical conviction. The canon of individualistic rationality as a refined category has at present acquired the status of virtually the metaphysical proposition in the neoclassical scientific research programme - a ‘hardcore’. The contemporaneous evaluation indicates that there has been no peace all around. There has always been rather a knock here and there at the very gate of neoclassicism in economics,

1 It was originally published in the Journal of Assam University, vol.5, no.1, 2000, with an extended title.



amounting to a doubt expressed against such a conception of the individual human actor transacting business in a market. The theoretical postulate has often been pitched against not only the alternative theoretical frameworks but also the empirical judgments arrived at in the background of a broader canvas of the working of an actual social economy. It is then the motto of present chapter to strike a note of caution on the theme. It is divided into five sections: the first outlines the concept; and, the second section elaborates it. The significance is underlined in the third, and the application in the theoretical economic literature is enlisted in the fourth section. At the last, the critical evaluation is furnished. The conclusion is then sharp and precise: it is high time that the textbook glorification of a neoclassical ‘rational’ man must be supplemented with an alternative conception of reason, judiciousness and prudence itself.

1. Concept

An individual human person is the unit of analysis in neoclassical economics. S/he is a glorified, conscious economic entity, who is claimed to be using ‘reason’ in the economic realms. The reason invariably leads him/her to fulfill the self-interest. In other words, the individual is portrayed to be pursuing his ‘self-interest’ in the material conduct of life. An individual human person is invariably interacting with nature in the course of search for the means of survival. In the man-nature relationship, the resources are posited to be finite and limited. The human wants are however unlimited, and the application of reason has therefore a well-defined meaning in economics. Given the scarcity of economic resources, the individual economic agent must make ‘choices’ between alternative uses about the disposition of resources; this is so contingent in order to realize his ends (Amaraglio, 1991, p.64). Precisely speaking, s/he must operationalise a rational choice. Once premises of such fundamental nature and significance are laid down, in the neoclassical means-ends framework of economic analysis, the resource endowments and technology are treated as natural constraints in the individual’s pursuit of self-interest. In such a case, the modeling of rational choice explanation shows that the action was rational and that it was performed because it was rational. Given the beliefs of the individual agent, the action was the best way for him/her to realize the plans or fructify the desires or meet the ends (Elster, 1985, p.76), under the constraints. It is immediately clear that the postulate of rationality in such a perspective is concerned with some form of maximizing behaviour. It is methodologically and theoretically the attempt of economists to derive

all economic behaviour from actions of individuals seeking to maximize their utility, subject to the constraints of technology and endowments (Blaug, 1992, p.229).

In an uncertain world of individual action, introduction of the element of uncertainty into the account of rational action requires a few more axioms. Provided that the uncertainty can be captured by a probability distribution over the events (or ‘states of the world’) which determine the relation between the actions and outcomes, the utility maximization becomes ‘expected



utility’ maximization in the basic model (Heap, 1989, p.45). In other words, the rationality principle states that an individual chose in accordance with

a preference ordering that is complete and transitive, subject to perfect and costlessly acquired information; where there is uncertainly about future outcomes, rationality means maximizing expected utility, that is, the utility of an outcome multiplied by the probability of its occurrence (Blaug, 1992, p.229).

Consequently, rationality is the maximization, and maximization is the rationality.

In short, the axiomatic definition of rationality is an attempt to develop the concept of rational behaviour on the vital assumption made by the neoclassicists that all human behaviours are to a large extent ‘goal-directed’ behaviour. The secondary definition is then a derived one: the centrality of utility maximization and/or expected utility maximization (Harsanyi, 1982, p.44). In economics, the popular Hicks-Allen ordinalist theorem and Neumann-Morgenstorm theorem are respectively credited with such a conception of the economic rationality.

2. Elaboration

Utility is simply defined in terms of ‘desires and their fulfillment’ by the individual actor (Sen and Williams, 1982). The concept of subjective utility is attributed to the marginalist economists, such as, Gossen, Jevons, Walras and Marshall. The ordinal measurement of utility and associated indifference curve analysis was however perfected by John Hicks and Hicks-Allen (Koutsoyiannis, 1985, pp.14-7). The uncertainty refers to a situation in which many outcomes of an action of an individual agent are possible but their likelihood is unknown. Each situation/state of the world is a description which is complete for all relevant purpose. The uncertainty consists in not knowing which state is the true one (Arrow, 1974, p.33). The broad conception of it is however that an individual can be uncertain not merely about which pre-given state will obtain, but also about which states are possible, according to GLS Schackle (1967). The probability simply refers to the likelihood that an outcome will occur. The subjective probability is the perception of an individual that an outcome will occur, and different individual may attach different probabilities to different outcomes, and thereby may make different choices. In objective sense, it nonetheless refers to the frequency with which certain events tend to occur. Moreover, a distinction is to be made between rationality as a personal attitude (of which all individual with a healthy mind are capable of possessing) and the rationality principle. Rationality as a personal attitude consists in the disposition to correct the ideas – a disposition to examine the ideas in a critical spirit and to revise them in the light of critical discussion. The rationality principle however has nothing to do with the hypothesis that men are rational in this sense and that they always adopt a rational attitude (Popper, 1967, p.149). Rather, it has to do with the maximizing (utility) behaviour. The criterion for the principle is the logical consistency of man’s actions with his explicit knowledge and preferences (Langlois, 1989, p.226). It is a robust heuristic device to construct logical explanations of social phenomena in which the specific level of description, and of course, the unit of analysis is the individual actor (Elster, 1985). Such a heuristic device involves an element of psychology. To quote:



The principle of maximizing behaviour programmed into the neoclassical ideal type is not innocent of the psychological conception of rationality merely because the psychology it embodies is an abstract and simplified one (Langlois, 1986, p.231).

What is further noteworthy about the individualistic maximizing rationality of neoclassical economic literature is the homogeneity of individuals i.e., the economy is the sum total of similar individuals. That is to say:

The rationality postulate refers to individual motivation but the behaviour in which economists are interested is the behaviour of aggregates of consumers and producers in different markets. Typically, this problem of aggregation is waived by the tacit assumption that all individuals are alike and hence have the same utility function (and even that all firms are alike and have the same technology) (Blaug, 1992, p.231).

Be that as it may. The movement from the primary definition to the secondary definition of rationality is a ‘straight forward’ mathematical problem in all cases (Harsanyi, 1982, p.44). The derivation from the axiomatic conception of individualistic (maximizing) rationality in economics is a mathematical exercise, and the enterprise of mathematization of the problem of maximization behaviour of homogeneous individuals is accomplished through the application of the principle of ‘reductionism’ in the neoclassical economics. The latter is a device of regarding all human interests, ideals, aspirations and desires to be on the same level – all representable as ‘preferences’. The preferences are different degrees of intensity, but may be treated otherwise as alike (Sen and Williams, 1982, p.8). Such a reductionist device makes the conception of rationality obviously true and sacrosanct. The argument in defense of the device is equally powerful, worth a quotation of an authority:

There is much of economic theory which is pursued for no better reason than its intellectual attraction; it is a good game. We have no reason of be ashamed of that, since the same would hold for many branches of pure mathematics (Hicks, 1979, p.viii).

In short, on the theme of economic rationality, it goes without saying that the methodological individualism forms the core of philosophy adopted and principle of reductionism the device of mathematics utilized in the neoclassical paradigm of analysis. The psychology has also its own place, almost providing the base of theorization about human behaviour. The rationality exercise is a kind of causal essentialism as well – activities seen as consequences of intentional individual choice.

3. Significance

In retrospect, the neoclassical economics has been influenced by the philosophy of Enlightenment, and thereby shares a vision and version of physical science. The postulate of maximizing rationality is the cornerstone of positivism in philosophy and the foundation of utilitarianism and libertarianism in the neoclassical economic literature. The principle of rationality is closely connected with the rationalist tradition in the discipline of philosophy which is usually traced from Plato and Descartes. The tradition sees ‘reason’ as conscious, logical deduction from explicit premises.



The science of economics was fashioned according to the Newtonian principles of physical science as well. The Newtonian model of matter was atomistic, and the matter was assumed to be homogeneous, and the system was simply its units put together. The neoclassical theory took over the mechanical analogue from the Newtonian science, and also adopted its procedures of enquiry (Langlois, 1986, p.226; Kurien, 1996, pp.210-11). The basis of neoclassical economics taking homogeneous individuals (all self-interested) as the basic unit in the economic universe and treating the economy as the sum of its individuals is the mechanical analogue from the Newtonian science. Moreover, the aims, criteria and methods of natural science are actually upheld in economics; the methodological prescription in support of demarcations, distinctions and discipline are promoted by the criteria of testing and testability today. This is what is described and denounced as ‘positivist’ (Kurien, 1996, pp.10-12; Hutchison, 1981, p.284). The postulate of rationality is the standard category of positivist economics analysis.

A case in point is the understanding economists of most schools have of the positive/normative distinction introduced in economics in the late 19th century by John Novelle Keynes, but elaborated thoroughly in positivist philosophical terms by Friedman in 1953 (Amaraglio, et al, 1991, pp.57-8).

The Newtonian basis of neoclassical economics is reinforced by the Cartesian heritage of dependence on a priori reasoning as well (Kurien, 1996). There are two schools of thought in economics which have championed the cause of such heritage. Utilitarianism treats human persons simply as locations at which activities like desiring, having pleasure and feeling pain take place. In other words, human persons are locations and sites of their respective utilities. An individual market participant in the utilitarian paradigm of analysis acts only as a dummy with prescribed attribute called rationality (Rawls, 1972, p.29), and nothing more is needed. That is to say:

Once note has been taken of the person’s utility, utilitarianism has not further direct interest in any information about him ….………………. persons do not count as individuals in this any more than individual petrol tanks do in the national consumption of petrol (Sen and Williams, 1982, p.4).

It is the typical neoclassical conception of maximizing rationality which provides the base to such a philosophy of utilitarianism, which has dominated for centuries in economics. The libertarian theory in economics about the nature of human actions holds that some human actions are not causally explicable or not wholly so. A peculiar exception to the general reign of causal law is the free and responsible human action. The libertarianism of neoclassical fashion posits freedom of individual to be of supreme importance, and market as the only distributive mechanism that ensures the satisfaction of needs and preferences of individuals most effectively. In this tradition, the state is considered an evil in all cases except in a ‘night watchman’ form – the minimalist interventionist form. In other words, the bilateral market exchange is claimed to be a paradigmatic exemplar of want satisfaction of individual (Haworth, 1994, pp.3 & 30). The principle of rationality, i.e. maximizing behaviour of individual economic agent, provides the needed base for such claim and its effectiveness. Without the assumption of optimality of particular course of action of individuals, the glorification of market as the seat of liberty of individuals would become a hallow exercise. The structure of libertarianism would fall.



4. Applications

An ‘entry point’ is the concept which a theorist uses to enter into and begin discourse about some object of analysis. It is taken as a primary truth, a primary determinant cause, an essence. The entry point of neoclassical economics is the combined notion of individual preferences, resource endowments and technology (Amaraglio, et al., 1991, pp.60-61). The rationality postulate is taken as an axiomatic truth a priori, and therefore, the main assumption of a large number of economic theories propounded by the neoclassicists in particular. As an axiomatic truth a priori, it has been applied in many fields of enquiry. The rationality principle has been extended to form a core category in the economics of development. Majority of the development theories take for granted that the actual actions of peasant and other agents in rural areas of underdeveloped agrarian economics as observed to have been undertaken are the best way to realize their respective plans.

In much of this empirical literature rationality has often been interpreted in the very narrow sense of price responsiveness. But even where a farmer is not very sensitive to market prices or the market themselves are inadequately formed, the evidence is still clear that there is a consistent pattern in his behaviour which indicates has attempt, by and large, to improve his condition under the given constraints and that transactions can no longer be described as mere expressions of social obligations (Bardhan, 1984, pp.4-5).

In agricultural sociology and economics, the principle has equally been applied to form the rational peasant hypothesis by Samuel Popkins (1979). This is contrasted with the works on the moral economy of peasant anthropology. The new off-shoot of neoclassical economic literature called the New Classical Economics of Sargent and Lucas considers even any attempt to introduce parameters in an economic model that are not motivated by the individual optimization (i.e. maximizing rationality) to be merely an ‘adhoc adjustment’ (Blaug, 1992, p.230). The macroeconomics created under such an inspiration has full ramifications of such a belief. In Microeconomics, the mainstream demand theory, production theory and distribution theory of popular text-books are all based upon the inspired by the vital assumption o rationality. The neoclassical consumer theory, to illustrate, is the standard application, summarized as follows:

U = f (x1, x2, …., xn) It represents the utility function, subject to the budget constraint of

Y = P1 .x1 + P2. x2 + …………...+ Pn .xn

The resulting equilibrium condition, in case of a consumer, is

MU x1 / P1 = MUx2 / P2 = ………. = MUxn / Pn And in case of two consumers and merely two commodities is



MRS x2, x1 = MUx2 / MUx1 = P2 / P1 and MRSA x2, x1 = MRSB x2, x1

In the above formulation, U stand for total utility, MU for marginal utility, MRS for marginal rate of substitution, and x1, x2, ………….xn refers to the quantities of n-number of commodities, P1, P2, …….…., Pn to the relative prices of n-number of commodities, Y for total income of a consumer, and A and B represents two individual consumers in the market.

The preference ordering must be complete, consistent and transitive in nature. In other words, a consumer is rational and that is why the completeness criterion requires that two bundles of commodities can always be compared i.e. either X is preferred to S or S is preferred to X. If a bundle of commodities is chosen by a consumer in one period over another bundle, the choice is not reversible in the next period i.e., if X>S, then S<X can not be under consistency criteria; and, again if a bundle over yet another bundle, the first bundle is ultimately preferred over the last one i.e., if X>S, and S>T, then X>T as per the transitivity (no internal inconsistencies) criteria. In all cases, there are various distinguishable bundles of commodities chosen by a consumer as economic agent who is endowed with rationality (Koutsoyiannis, 1985, pp.15-23). The general equilibrium analysis and modern welfare economic theorems are equally standard examples of application of the neoclassical conception of rationality. Recently, Douglass North, a neoclassical historian-economist, has developed a model of the State with a wealth- or utility-maximizing ruler who is at the centre of public economic activities. Whereas such an attempt to incorporate a rational ruler helped in developing a microeconomic focus in the public economics on the one hand, it equally countered the allegation by the most famous exponent of neoclassicism, Paul Samuelson, on the other. The allegation was that the market failure is posited to be common in case of public goods only because of lack of cooperation among self-seeking utility-maximizing agents in trading (Ghosh, 1995, p.152). A theory of the state with a ruler endowed with rationality solves the problem.

Neoclassical theory conceived as a theory of choice has provided at the very least a disciplined and logically consistent approach to a study of the State ……………………. A satisfactory theory of the firm would contribute immensely to the development of a theory of the state (North, 1986, p.248).

In the post-War era of domination and diversification of areas of interest of neoclassical economic analysis, a wide gamut of sphere of application of the rationality postulate has opened up. Significant advances in understanding human behaviour and actions have been produced. Professor George Akerlof of the University of California at Berkeley argues that people not only make choices about what to consume they also make choices about what to believe (Pennant-Rea and Crook, 1986, pp.170-71). Professor George Becker of Chicago University has extended the application of rationality principle to the extent of understanding and analyzing such diverse actions like that of fertility, marriage, divorce, crime and human capital formation. He argues that almost all human behaviour can be viewed as involving participants who maximize their utility from, however, a stable set of preference and accumulate an optimal amount of information in a variety of markets (Becker, 1986, p.119). The optimizing behaviour under Beckerian paradigm is not merely an assumption but also a method of analysis. The approach however assumes a stable preference to avoid reduction ad absurdum.



The definition of economics in terms of scarce means and competing ends is the most general of all ………………….… the combined assumptions of maximizing behaviour, market equilibrium and stable preferences, used relentlessly and unflinchingly, form the base to economic approach as I see it (Becker, 1986, pp.109-10).

5. Evaluation All said, in neoclassical economics, whose foundations lie in utilitarianism, positivism,

libertarianism and causal essentialism, the theorization and model-building exercise, centering on individualistic (maximizing) rationality, are in essence a master representation of the Euro-centered mind-set as produced by the Western society and economy. In such a society, the principles of individualism, market setting and capitalist efficiency machine constitute the essential elements of faith. These have decisive intellectual and scholastic impact upon the minds of academicians in the Western culture. The cannon of rationality and, in particular, its manifestation in the form of maximizing behaviour on the part of an individual actor provides reasonable rationale for justification of such a belief system. Nonetheless, it is equally true that the conception such as ‘rationality’ has continuously been challenged within the mass of theoretical literature produced within the Western academies. It is of course too eccentric and nearly probably eclectic a remark that humans can not be rational and only the arguments can be rational (Boland, 1982, p.38). The fact is that most modern behavioral theories of choice take as their starting point some simple ideas about rational human behaviour. This process of discovering sense in human behaviour is however conservative with respect to the concept of rational man and to behavioral changes. In other words, much theoretical work searches for the intelligence in apparently anomalous human behaviour. This is undoubtedly questionable. Moreover, the fact of the situation in many cases is that the individual preferences often appear to be fuzzy and inconsistent, and the preferences appear to change over time, at least in part as a consequence, of actions taken. The choices under ambiguity where goals are vague and problematic are also to be discovered (March 1936, pp. 144-5). How to deal with such issues is still a problem.

The neoclassical postulate of economic rationality has been criticized at least at three further levels: first, it is claimed to be based on a narrow conception of rationality – substantive, calculated, systemic, Cartesian constructivist and instrumental. The narrowness lies in its confinement to the substantive rationality i.e., the optimality of particular course of action in the economic realm in particular. In the theoretical literature, broader concepts like those of procedural and bounded rationality have been put forward (Langlois, 1989, p.225). Herbert Simon (1976, 1978, and 1982) proposes that the individuals do not have the wits to maximize, and of course, they can not at all be expected to solve decision-making problems optimally and instantly. They would be almost prevented from taking correct rational action because of the difficulty in processing masses of information and computing optimal solutions, coupled with natural biases assorted human frailties (Langlois, 1989, p.226). He proposed the alternative – procedural rationality, which refers to the attributes of the dynamic process seen in all its dimensions (including disequilibrium). The behaviour is procedurally rational when it is the outcome of appropriate deliberation, depending on the process that generated it (Vercelli, 1991, p.93). Simon himself remarked lately:



The shift from thesis of substantive rationality to theories of procedural rationality requires a basic shift in scientific style, from an emphasis on deductive reasoning within a tight system of axioms to an emphasis on detailed empirical explorations of complex algorithms of thought (Simon, 1982, p.442).

Another conception of Simonian rationality called the ‘bounded rationality’ starts from the proposition that all intended rational behaviour is behaviour within the constraints. It is therefore the case that the list of technical constraints on choices must include some properties of human beings as processors of information and as problem-solvers. The limitations are the computational capability and the organisation and utilization of the memory and the like (March, 1986, p.146). The alternative literature does not stop here only. Alassendro Vercelli (1991) coined a novel category of ‘creative rationality’ in juxtaposition of the adaptive rationality of Herbert Simon. The agent is here conceived to be an option-taker when s/he applies creative rationality. S/he selects and realizes adequate conditions for action, aiming at modifying the structure of the environmental conditions that affect the economic system.

Creative rationality is almost absent from the ‘hardcore of economic theory, but it is present-though often only implicitly-in the heuristic model and in the vision of individual economists …………………….. This form of rationality is not generally attributed to economic agents, except for the authorities who make economic polity (Vercelli, 1991, p.96).

Further, James March (1986) declares the substantive and maximizing rationality of neoclassical economics to be simply a version of calculated and systemic rationality. The calculated rationality posits intelligent individuals making calculations of the consequences of actions for realizing the objectives, and acting sensibly to achieve these objectives. The systemic rationality proceeds in the environment of knowledge evolving over time within a system and accumulating without complete current consciousness of its history; and thus sensible action is taken by actors without comprehension of its full justification (pp.148-49). March reminds that new concepts of calculated rationality like limited, contextual, game and process rationality, and new concepts of systemic rationality like adaptive, selected and posterior rationality as quite sufficient ideas to discover and celebrate the intelligence of human behaviour are also in sight in the literature. In short,

Learned behaviour, with its claim to summarize an irretrievable but relevant personal history, or conventional behaviour and rules, with their claim to capture the intelligence of survival over long histories of experience more relevant then that susceptible to immediate calculations, are clear alternative contenders (March, 1986, pp. 164-65).

The limited nature of reach of the neoclassical postulate of rationality lies therein as well in sharing the narrow Cartesian constructivist view of reason – naïve rationalism. Either the critical rationalism (to borrow the phraseology used by Karl Popper) or the evolutionary rationalism (to borrow the phrase of Fredrik Hayek) is a broader conception identified with the 18th century Scottish moral philosophers such as Adam Smith and David Hume. For them

reason had meant the capacity to recognize truth, especially moral truth, when [one meets] it, rather than a capacity of deductive reasoning from explicit premises (Hayek, 1967, p.84).



It is in this context that Heap (1989) accuses the maximizing rationality of neoclassical version to be simply a reference to ‘instrumentally rational action’ defined with respect to a given set of objectives of the agent. The instrumental rationality yields a type of explanation which is normally of intentional character. What has been contested is that:

The instrumental account of rationality has proved a powerful generator of explanations in economics, but explanation in economics never relies exclusively on this conception of rationality. There is always some institutional or informational context which helps orchestrate the intentional explanation; and those props can not themselves to be explained through an exclusive reliance on the instrumental postulate. The is an unavoidable something which is non-instrumental in the explanation, even in those accounts which try hardest to make institutions and information sets the result of actions undertaken by instrumentally rational agents (Heap, 1989, p.88).

All these literature in summary point it that the conceptual materials needed to broaden the nature and content of rationality are available within the gamut of western literature.

Second level of challenge has been mounted against the neoclassical rationality on the assertion that the theory of rational choice – of whatever variant – is merely one of the theories of individual action in the Western thought. There exists an alternative tradition as well. There are actually two competing theories in this tradition: choice-guided action and norm-driven action. It is claimed that the norm-driven action theory is superior and relatively more realistic one in comparison to that of rational choice action. In the theorization emanating from the centrality of focus on norm-driven action, it is not the nature and interest of an individual economic agent but nature of the roles assigned to him which is of crucial significance. The community as a whole assumes a central importance in such a conception of individual behaviour and action. The social institutions affect the norm-driven behaviour of individuals by creating and maintaining the social and cultural norms. The process maintains consistency in action primarily though the creation of typologies of similarities rather than through a derivation of action from stable interest and wants. The collective functions and needs of community – consisting of individuals under common norms – are satisfied by improving the effects institutional context and parameters (Oleson and March, 1989, p.26; Knight, 1992, p.16). The recent attempts to enrich the proposition of norm-driven action and behaviour incorporate the elements of ‘sympathy’ and ‘commitment’ along with the material self-interest in explaining the individual behaviour. The identification of rationality with consequentialist act-evaluation is thereby criticized for having narrowly limited structures. The quote the authority:

The economic theory of utility, which relates to theory of rational behaviour, is sometimes criticized for having too much structure; human beings are alleged to be ‘simpler’ in reality. If our arguments so far has been correct, precisely the opposite seems to be the case; traditional theory has too little structure …………..…..….… there is not much merit in spending a lot of effort in debating the ‘proper’ definition of rationality ……………..……. I have tried to analyse the structural extensions in the conception of preference made necessary by behaviour based on reasoned assessment of commitment. Preferences as rankings have to be replaced by a richer structure involving meta-rankings and related concept (Sen, 1983, pp.99-105).



Thirdly, the methodological individual chosen as unit of analysis in rationality exercises is questioned on various counts by juxtaposing it with a group or an association as the unit of economic analysis. What is being criticized here is that the methodological individual of the postulate of rationality is deprived of historical consciousness and of a practical-moral orientation of future. This is not justifiable since time element is of importance; the passage from the methodological to the moral individual is essentially a journey through time (Kirkpatrick, 1995, pp.270-71), and this journey must be reflected in the broader and realistic conception of rationality in human action. The project of philosophy of the Renaissance and Enlightenment, which have glorified the principle of individualism for almost a couple of centuries, has to create as well the space for a social union. The homogeneity of individuals as an assumption does not solve the problem. The individuals are different in terms of natural endowments, capabilities, inclinations and expectations. They can pool their resources only in a group and an association (Kurien, 1996, p.125). The famous Lord John Maynard Keynes in his “Essays in Persuasion” argued:

It is not correct deduction from the Principles of Economics that enlightenment self-interest always operates in public interest. Nor is it true that self-interest generally is enlightened …………………… Experience does not show that individuals when they make up a social unit are always less clear-sighted than what they act separately (Keynes, 1932, pp.312-13).

A modern philosopher, who proved to be a source of inspiration for a generation of economist, talks of the same prescription, of course in a different spirit of argument:

Different persons with similar or complementary capacities may cooperate so to speak in realizing their common or matching goals ……………..….…. it is through a social union founded upon the needs and potentialities of its members that each person can participate in the total sum of the realized natural assets of others ……………….…..… We depend upon the cooperative endeavors not only for the means of well being, but to bring to fruition our latent powers. And with a certain success all-round, each enjoys the greater richness and diversity of the collective activity (Rawls, 1972, pp.523-72).

In a recent study of the American society entitled “Habits of the Heart”, a group of field researches have come to the similar conclusion. They found out that people as individuals had their own good ahead of the common good and what had failed at all levels – from family to the national society – was integration. They could not find selfish narcissistic “me generation” in America, but they certainly found that the language of individualism was a primary American language of self understanding. And, this language limits the ways in which people out there think (Bellah, et al., 1985, pp.251-90). If integration is to be brought back, a social union has to become a unit of reference. In summary of this section of evaluation of neoclassical maximizing rationality, it is clearly argued that the self-interest realization as the goal behind human action should be supplemented with the elements of sympathy, commitment and capacity to recognize the moral truth. The methodological individual needs to be replaced with moral individual within as association or social union who is not at all deprived of norm-driven behaviour and action backed by historical consciousness. And, ultimately, virtually a social union rather than an individual must creep into to be a unit of economic analysis of phenomena and processes.



Conclusion The postulate of economic rationality of the neoclassicist version and vision has been

domineering a category capable of providing explanation for logically consistent rational choice activity within the means-ends frame-work of analysis of man-nature relationship in the economic realm. It has proved to be a must even for the new generation of academic rebels called the Analytical Marxists ala Rational Choice Marxists; the principle is not so easily demolishable. Notwithstanding the resilience of individualistic maximizing instrumental rationality, it would provide some sort of breathing space to the metaphysical collectivist satisfying human reason which is active only within a social union. This would of course require an acceptance of an alternative choice on the part of economists of an alternative conception of rationality.



References

Amaraglio, J. S. Resnick and R. Wolff (1991), “Division and Differences in the ‘Discipline’ of Economics”, Social Scientist, vol. 19, nos. 3 & 4, March-April

Arrow, K.J. (1974), The Limits of Organisation, Norton, New York

Backer, Gary (1986), “The Economic Approach to Human Behaviour” in Jon Elaster (Ed), Rational Choice, Basil Blackwell, London

Bardhan, Pranab (1984), Land, Labor and Rural Poverty: Essays in Development Economics, Oxford University Press, Delhi

Becker, Gary (1962), “Irrational Behaviour and Economic Theory”, Journal of Political Economy, vol. 70

Bellah, R.N, R. Madlen, W.M. Sullivan, A. Swindler and S.M. Tipton (1985), Habits of the Heart, University of California Press, Berkeley

Blaug, Mark (19902), The Methodology of Economics or How Economists Explain, Cambridge University Press, Cambridge

Boland, Lawrence (1982), The Foundations of Economic Method, Allen and Unwin, London

Elster, Jon (1985), Making Sense of Marx, Cambridge University Press, Cambridge

Ghose, Jayati (1995), “State Intervention in the Macroeconomics” in P. Patnaik (Ed), Macroeconomics, Oxford University Press, Delhi

Harsanyi, J.C. (1982), “Morality and the Theory of Rational Behaviour” in A. Sen and B. Willams (Ed.), Utilitarianism and Beyond, Cambridge University Press, Cambridge

Haworth, Alan (1994), Anti-Libertarianism: Markets, Philosophy and Myth, Routledge, London

Hayek, F.A. (1967), Studies in Philosophy, Politics and Economics, University of Chicago Press, Chicago

Hayek, F.A. (1973), Law, Legislation and Liberty, University of Chicago Press, Chicago

Heap, S.H. (1989), Rationality in Economics, Basil Blackwell, Oxford

Hicks, John (1939), Value and Capital, Oxford University Press, Oxford

Hicks, John (1979), Causality in Economics, Oxford University Press, Oxford

Hutchison, T.W. (1981), The Politics and Philosophy of Economics: Marxians, Keynesians and Austrians, Basil Blackwell, Oxford

Keynes, J.M. (1932), Essays in Persuasion, Harcourt Brace, New York

Kirkpatrick, Graeme (1995), “Philosophical Foundations of Analytical Marxism” in T. Carver and P. Thomas (Eds.), Rational Choice Marxism, Macmillan, London

Knight, Jack (1992), Institutions and Social Conflict, Cambridge University Press, Cambridge

Koutsoyiannis, A. (1985), Modern Microeconomics, Macmillan, London

Kurien, C.T. (1996), Rethinking Economics: Reflections based on a Study of the Indian Economy, Sage Publications, Delhi

Langlois, R.N. (1986), Economics as a Process: Essays in the New Institutional Economy, Cambridge University Press, Cambridge

March, J.G. (1986), “Bounded Rationality, Ambiguity and the Engineering of Choice” in J. Elster (Ed.), Rational Choice, Basil Blackwell, London



North, Douglass (1986), “The Neoclassical Theory of the State” in J. Elster (Ed.), Rational Choice, Basil Blackwell, London

Oleson, J.P. and J.G. March (1989), Rediscovering Institutions: The Organizational Basis of Politics, Free Press, New York

Pennant-Rea, R and C. Crook (1986), Economist’s Economics, Penguin Books, Middlesex

Poper, Karl (1967), “La rationalite et le Statut du principle de rationalite”, translated by Langlois, R.N. (1986), Economics as a Process: Essays in the New Institutional Economy, Cambridge University Press, Cambridge

Popkins, Samuel (1979), The Rational Peasant: The Political Economy of Rural Society in Vietnam, University of California Press, Berkeley

Rawls, John (1972), A Theory of Justice, Oxford University Press, Oxford

Schackle, G.L.S. (1967), The Year of High Theory, Cambridge University Press, Cambridge

Sen, Amartya (1983), Choice, Welfare and Measurement, Oxford University Press, Oxford

Sen, Amartya and B. Willams (1982) (Eds.), Utilitarianism and Beyond, Cambridge University Press, Cambridge

Simon, Herbert (1976), “From Substantive to Procedural Rationality” in S.J. Latsis (Ed.), Method and Appraisal in Economics, Cambridge University Press, Cambridge

Simon, Herbert (1978), “Rationality as Process and as Product of Thought”, American Economic Review, vol. -68, no. 2

Simon, Herert (1982), Models of Bounded Rationality, MIT Press, Massachusetts

Tommasi, M and K. Ierulli (1995) (Eds.), The New Economics of Human Behaviour, Cambridge University Press, Cambridge

Vercelli, Alessandro (1991), Methodological Foundations of Macroeconomics: Keynes and Lucas, Cambridge University Press, Cambridge

Economic rationality

Technology

Transcript of Economic rationality