Monday, January 9, 2012

Rational -- by definition and ideology

I've been doing some background reading on rationality in economics, and came across this fairly unique perspective offered by economist Duncan Foley. It's from 2003. What sets it apart from most other reviews of the role of the rationality assumption in economics, is that Foley tries to trace the history of this approach as it emerged out of the tradition of Hobbes and Locke in political philosophy. As Foley notes, the idea of rationality is in many ways beyond question for most economists, and not at all an empirical matter:
...an orientation toward situating explanations of economic phenomena in relation to rationality has increasingly become the touchstone by which mainstream economists identify themselves and recognize each other. This is not so much a question of adherence to any particular conception of rationality, but of taking rationality of individual behavior as the unquestioned starting point of economic analysis.
 It has become so, he asserts, because this way of thinking has emerged from the "just so" story developed by Hobbes, Locke and others which allegedly explains how property rights and political institutions solve problems arising from the anarchic struggle of man against man in the original state of nature. They place reason at the core of this project, and essentially use this story to explain why things are as they are -- this is the rational world and the only way things can be, if we are to avoid the chaos of anarchy. In essence, the rationality assumption is part of a propaganda campaign. Foley:
A hallmark of these [rationally designed] institutions is that they are in themselves in principle democratic and egalitarian (everyone has an equal right to vote or to hold property) but lead
inexorably to sharp inequalities in economic well-being. It is not hard to see that an economic science whose philosophical starting point was not rational individual action would create an embarrassing discord with this political tradition. The whole point of the Hobbes-Locke “discourse” (to use the jargon of post-modernism) is to rationalize the existing inequalities of power and economic well-being that arise from the institutions of modern society as being unavoidable consequences of the interaction of naturally constituted rational individuals
confronting each other as equals, given the natural and unalterable conditions of human existence. Economic science has a place in this grand project only insofar as it can relate itself to the same philosophical foundations.
I think there's a strong current of truth here. There is in today's economic theory a standing presumption that people should be modelled as rational decision makers (optimizers), and the argument often seems to boil down (in some disguised form) to "we must, because if we do not, we will not be able to prove theorems about equilibrium and its efficiency." This is of course too strong, and research programs in behavioural economics, information asymmetries and so on seem to be working to correct this, but the effort required reflects how much resistance there is to such change and how much intellectual inertia still resides in the idea of thorough-going rationality. Foley suggests that efforts to bring more realistic perspectives such as bounded rationality into core theory have been resisted precisely because they cannot be used to justify the just-so story of the efficient equilibrium:
...in its pragmatic focus on understanding and explaining how people actually behave in modern society, bounded rationality loses contact with the underlying project of rationalizing the institutions of modern society. For example, there really is no logical place in the discourse of bounded rationality for the Fundamental Theorems of Welfare Economics that purport to establish a connection between competitive market equilibrium and an efficient allocation of resources.
 I think he may largely be right. If so, this would go a long way to explaining why economics has persisted with such a narrow set of theoretical concepts for such a long time. Maybe it's not actually trying to explain and understand the world at all, but to rationalize why it is OK that it is as we see it. And that's not encouraging for those of us hoping it will change in a big way:
It will not be easy to create a social science that transcends the antinomies and limitations of rational-actor theory. Certainly we cannot depend on the “usual” processes of scientific self-criticism to accomplish much in this direction. No accumulation of its empirical anomalies, or demonstration of its logical inadequacies will somehow magically dispel the power of rational-actor theory, because its power does not rest in the last instance on the adequacy of its
explanations or the consistency of its logic.

10 comments:

  1. I highly recommend Albert Hirschman's book "Passions and Interests" about the ideas that led to capitalism and economic thinking. Both rest on the axiom that people act in their (financial) self-interest, an idea that was new and abhorrent to the moralists of the Middle Ages. That mankind is moved by passions is alien to modern economics.

    My personal view is that people individually are not rational, but collectively they may be. In large groups the average is probably "rational". Like in statistical physics, you don't need to know everything about everyone to descrbe the system. What do you think?

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  2. I'm an economist, and one who is frequently annoyed at economics and the all-too-frequent assumption that "everyone" is rational "at all times", that all markets are in equilibrium, and that economics sharply reveals a truth all other disciplines are afraid to see. All the same, I also have problems with this paper by Foley (admittedly based only on your quotes and description).

    My problem with it is that it seems to veer off into conspiracy theory: Economists have developed their methodology and defend their assumptions because these are necessary to defend and justify the inequity-producing institutions of modern society.

    Is this a conscious motive on the part of all economists? If so, how do they make sure only the people who will accept this "task" (of basically misrepresenting the world to serve the rich and powerful)end up in graducate school and on future faculties?

    If it's a conscious motive on the part of some but not all economists, how do they manage to control the work of everyone else and the overall feel of economics?

    If it's an unconscious motive (by all or some), why do these people end up shaping or dominating economics? And why not other disciplines as well? If I wanted to defend the rich and powerful, wouldn't I be more effective changing other disciplines less historically positive to capitalism - e.g., sociology?

    If it's not a motive on the part of economists at all, then wouldn't there have to be some feedback mechanism in place, whereby the rich and powerful interests could select which academic works and methodological approaches economists were able to successfully publish?

    Put differently, I think maybe this "hypothesis" exemplifies the kind of argument it attacks economists for making: A superficially credible story of clear-cut interests pursued rationally, whose assumptions don't bear out when you consider reality.

    I think most academic economists are like most academics. They like ideas, they like pursuing and defending and trying to prove their empirical hypotheses, they like playing with and finding new wrinkles in grand theories. There may be flaws (and I think there are), but my feeling is that these can more credibly be identified at the level where individual researchers work. Good science should result from a strong selection process where solid and credible evidence and arguments weed out false, incomplete claims and methods. If the result of economics too frequently tends to be off or weird, then this reflects problems in the kinds of evidence required by the discipline to make claims about the real world. Not secret, underlying conspiracies attempting to tilt the playing field for big capital.

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  3. Mark,

    Perhaps the economics profession desperately clings to the "rational-man" theories because they do not want to be psychologists.

    This is a somewhat understandable urge (coming from someone who used to be in that field).

    Thanks!

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