Economics without the Rationality Postulate: Why it is needed and what it would look like
Prof. Steve Szeghi, Professor of Economics, Wilmington College
The world is in desperate need of a new economics that goes beyond the tired and unrealistic assumption of rational calculation also known as Homo Economicus or Rational Man.
It is needed for the following reasons. First rational calculation is quite simply not what we human beings do at least not for much if not most of the time. The assumption of rationality is quite unrealistic even dangerously delusional. Who do we imagine ourselves to be, or what are we imagining about human nature when we make such an assumption? It is quite heroic; grandiose in breadth and arrogant in depth. Through the assumption of rationality we attach undue importance to every human want and whim. We enshrine human decisions in an importance they do not deserve. Given the assumption of rationality, many come to the not necessarily logical conclusion that want fulfillment is synonymous with happiness and may, even take the next step and associate want fulfillment with well-being.
Human Beings are subject to powerful emotions, passions, and impulses. We act on impulse much if not most of the time, and then after the fact easily rationalize what we have done or felt. There is nothing rational or objective or constant about how we perceive benefits and costs. Our perceptions are made to fit the impulses of the moment. Many of our impulses are based upon habits, customs, and past decisions, while others derive from transitory sensations. Far from rational decision making, we instead merely rationalize. We talk ourselves into viewing our decisions as rational. We act on impulse and every kind of passion but our perceptions stand ready for alteration and tailoring in an ex post rationalization.
But why does this unrealistic assumption matter? The claim for market efficient allocation, under certain ideal conditions is impossible without rationality. Assuming rationality makes it far too easy to claim that markets are efficient when they are not in fact so.
Standard economics teaches that markets fail to be efficient because of a lack of competition, and the existence of externalities. Standard theory also teaches that markets fail in the case of public goods. In short, the market will not produce an adequate quantity of any public good such as clean air and biodiversity. But in the event of a workable level of competition, zero externalities, and the case of private goods, standard theory does teach that markets are efficient. Standard theory also clearly states that even where efficient markets cannot be counted upon for social justice or for a reasonable or socially acceptable level of equality. Equality and fairness or justice is a separate consideration, in standard theory, from efficiency, and unlikely to be produced by the market. Market fundamentalists who seek to undo every type of role for government in regulation and law ignore the issue of market failure but they would be completely disempowered without the assumption of rationality.
Given the typical assumptions coupled with the rationality postulate an air tight case is indeed made for market efficiency. This makes it possible to remain stuck on efficiency and not consider what is more important, social justice, ecology’s intrinsic value, as well as values and ethics. It also empowers and emboldens market fundamentalists, who could alternatively be called market totalitarians as they seek to subordinate all aspects of life to the marketplace.
This assumption of rationality, with individuals weighing their benefits and costs according to their perceptions and then acting accordingly is traditionally referred to as hedonistic calculus. The individual seeks her own gain and is a maximizer of utility. This assumption sets up a moral equivalence between all human beings. Jesus of Nazareth, Buddha, Francis of Assisi, Cesar Chavez, along with Michael Milken, Donald Trump, and William Keating are all explained in exactly the same manner. All are merely responding to their given tastes and preferences, and acting according to what happens to be in their respective utility functions. There is no judgment from economics on what is in an individual’s utility function, no personal responsibility or moral culpability for what is in an individual’s utility function. Economics is value free. There are different items in individual’s respective utility functions, but all are engaged in self-interest, making one feel good; gaining more utility. So a moral equivalence between Francis of Assisi and Donald Trump is established. Trump receives utility from wielding power while Francis of Assisi received utility from giving power away. But everyone is a utility maximizer. This moral equivalence between the selfish and the unselfish is dangerous and comes replete with deleterious spiritual and ethical effects upon a society that takes it seriously.
In addition the rationality postulate enshrines greed and narcissism as a virtue. Through the use of circular reasoning it even turns the selfless act into a selfish one. Well beyond the profession of economics this has had a tremendous impact upon our society and our culture. It is one aspect of economics heartily embraced by an increasingly global, materialist, consumerist, and atomistic capitalist culture. It is a culture that seeks to subordinate all aspects of life to the market and ignore ethics and values.
What would an economics beyond the rationality postulate look like? Without Rationality we could still count the GDP, but GDP would be robbed of some of its current undeserved significance. We could still equate quantity demanded with quantity supplied as with market prices but could not be so confident of the result being efficient in a social sense. We could say that fewer firms in an industry results in higher prices and lower production. We could even show the loss of consumer surplus from less competition, but we couldn't make grand social welfare claims. Without rationality most of the bold claims about market efficiency would be suspect as would consumer sovereignty although it could still be trumpeted in weaker form such as the consumer being the best judge of her own welfare. The claims for market efficiency could be more effectively questioned as meaningless in comparison to more important considerations such as social justice, ecology, values, and ethics.
Economics would still exist but it would be less grandiose, far more humble in what it claimed. We would still study what is produced, by whom and for whom. Although we would still count GDP we might regard human connections and relationships, community, between people and between people and the rest of nature as far more important to happiness than GDP. And we might even regard ethics, doing our duty to community and nature, as far more important than even happiness. The economy would then seek to serve basic human needs. It would be freed to allocate goods and services in a manner that supports and sustains the relationships that make for happiness. And economics the science of studying how choices are made could finally give due regard to values and ethics.