Beyond Rationality: Why this unrealistic and tired assumption is so dangerous
1. The assumption of Rationality makes it possible to stay stuck in efficiency
The assumption of Rationality makes it possible to stay stuck in efficiency considerations alone and gives inadequate attention to relationships, community, equality, ecology. Given the assumptions typically made in standard theory coupled with rationality, Perfect Efficiency is indeed possible. It is well defined as to meaning, and the rigors of this model therefore can and usually do overpower other considerations such as social justice or ecology or true freedom.
Other considerations do not lend themselves so easily to the type of rigor or quantification that rationality and the other standard attendant assumptions bring to efficiency as a consideration. Yet what is easily quantified and formatted with rigor and proven given the assumptions made, can nonetheless be terribly wrong and without merit in reality.
2. The assumption of Rationality are rarely efficient
The assumption of Rationality makes it possible to claim that markets are efficient under the assumptions made, even though actual markets (without the assumptions) are rarely if ever efficient.
3. Atomistic self-interested calculation
It promotes a circular reasoning which blinds the adherent to the possibility that some people do not really act out of atomistic self-interested calculation, and Malaya did not do what she did to make herself feel good or to derive utility. She and Donald Trump are not both pursuing their own utility but with different objects in their utility function, there is no equivalence between Trump and Malaya but theory says so. Such an assumption provides for a rather poor ethical foundation, and establishing a type of moral equivalence between all actions. It can amount to a denial of the truly selfless act or individual.
4. The assumption of Rational Calculation
If we keep articulating the assumption of Rational Calculation enough, it blinds us to the fact that it is the system we live in with its cultural values that is rendering individuals self-absorbed and self-interested and continually running after material things. It turns a Pavlovian response to advertising (if it didn’t work on people why would firms engage in it) into something sacred. Perhaps people are actually naturally other-oriented.
There is ample evidence that prior to contact American Indians were of more generous spirits and not possessed of materialism and greed. Sitting Bull once said of the white man, “their love of possessions is like a disease with them”. (Matthiessen, p9)
American Indians were described by countless missionaries upon contact (both in the accounts of New Englanders and the Spanish as well) as being without selfishness, wanting to share everything, and without private property.(Zinn, p1-21)
Centuries later Henry Dawes would find this same characteristic of American Indians to be a fault. He thought that selfishness was at the core of civilization and that the lack of it among American Indians was impeding their progress and development. (Matthiessen, p17)
5. Selfishness and greed and self-interest
Selfishness and greed and self-interest (what we in Economics call the rational) are not really rational, not in the sense of Reason; they are rather a form of insanity–narcissism. They are engendered by the economic insecurity of a dog eat dog society and culture. Selfishness, greed and self-interest are nourished by a loss of connection to others and to community, and to ecology.
6.Rational Calculation or the cult of self-interest
Whether it is Rational Calculation or the cult of self-interest, the cult of narcissism, people become more and more, what they are assumed to be or what they believe themselves to be. Ayn Rand, as well as Gordon ‘Greed is Good’ Gecko are the unintended result of making rational calculation or homo economicus the overarching explainer and motivator for all human activity. People to some extent become what they expect themselves to be, and it conforms to all the advertising impulses to buy, to acquire, to collect, and to own.
7. The Cult of Market
Fundamentalism is unwittingly strengthened by the assumption of rationality. It enshrines the individual and individual choice, making society unreal, or nothing more than the sum of individuals, with moral equivalence between all tastes and preferences. Margaret Thatcher once claimed that there is no such thing as society, but she was merely echoing Jeremy Bentham. And if there is no such thing as society then society or government has no business interfering with individuals or business in the choices they make.
8. Rational Behavior
What people supposedly do, Rational Behavior, spills or bleeds into the theory of the firm, and Law. The assumption that firms engage in profit maximization, has become essentially a Law, in many countries, that firms must be profit maximizers.
Publicly traded companies are legally charged in the United States and many other countries to maximize share-holder value by maximizing profits. They are legally required to ignore what is socially responsible, such as ecological considerations, or just wages; if and when such pursuits could harm shareholder value. The game is rigged for short term profits, and to benefit fast buck operators. What theory assumed firms do, the law now requires that they actually do. Milton Friedman would be proud, but humanity is suffering. It is a slippery slope indeed.
Enshrining individual choice, the rationality postulate promotes Consumerism. Consumerism takes the mirage of the little consumer choices and variations offered in the market by various companies, far too seriously. Consumerism equates this pickiness over little differences with an enhancement of welfare or even thinking of it as ‘freedom’ as did the famous development economist Arthur Lewis. Ponder for a moment the number of flavors that Coke Zero, or Coke comes in. Now does this really have anything to do with welfare or freedom? So what if we get to make these little choices.
The assumption of rationality also promotes Materialism. Materialism associates the drive for, and the attainment of, more and more things, with improvement in well-being. The accumulation of things (more houses, more cars, more clothes) without relationships just wets the appetitive for even more. Materialism becomes a substitute for the security that only relationships and connections and collective security can bring. But sanctioned by the rationality postulate most of standard economics does associate more things with more welfare or more well- being. The well regarded economist BenFriedman even associates successful materialism with moral betterment.
The Duty of Society, of the Collective Whole
Returning briefly to the straightjacket of rationality, or at least the language of rationality or rather to think within the current box of the terms of economics, while attempting to broaden it somewhat, what lies within an individual’s utility function should not be regarded as a ‘sacred given’ either for the individual or for society. Individuals are ethically responsible, morally culpable,for their wants, for what they are trying to maximize, just as society is responsible to shape that which individuals attempt to maximize.
Individuals are responsible to put into their utility function that which will make them more relational and responsive to other human beings and other species and the earth, herself. In so doing, individuals will become more relationally oriented and make themselves more capable of happiness and goodness, true wellbeing and freedom. And then there is much that society can do to shape the utility functions of individuals.
Society can and must shape what is in the utility functions of individuals by at least some of the following:
1. teaching through values in education, civil society, civic life, government and other forms of collective, and community life
2. assisting relationships by mitigating fear and insecurity, through merit goods such as
education and health care and establishing and providing access to channels of communication social safety net, defined benefits as in Social Security, public spaces as in National Parks and Wilderness, as well as urban areas.
3. providing a system of rules and laws including the rules of the game in international trade and finance to protect communities, labor rights, the environment, ecological systems, and to limit inequality and to pro-actively shape the income and wealth distributions in the direction of greater equality through an appropriate array of, penalties, taxes, rewards, and incentives.
But ultimately we must for the reasons enumerated previously even move beyond this broadened framework.
We are so much more than atomistic calculators no matter how broadly we make or define the atomistic calculation. Atomistic calculation retains the self or the individual at the center and is thus inherently flawed and riddled with the limitations of Narcissus and a touch of insanity. It is poor soil in which to grow an ethics grounded in the happiness and joy of relationships and an ‘other’ orientation.
What could an Economics without 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, 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. All the claims for market efficiency could be far more effectively questioned as meaningless in comparison to far more important considerations such as unfair income distribution, as well as 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 and
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, once again, give due regard to values and ethics.
Economics Without the Rationality Postulate – Part 1
Economics Without the Rationality Postulate – Part 2
Anielski, Mark. The Economics of Happiness: Building Genuine Wealth. Gabriola Island. BC. : New Society, 2007
Friedman, Ben. The Moral Consequences of Economic Growth. New York: Alfred A. Knopf, 2005
Friedman, Milton. ‘The Social Responsibility of Business is to Increase its Profits’. New York: New York Times, September 13, 1970
Lewis, W. Arthur. The Theory of Economic Growth. Homewood, Illinoi: Irwin, 1955
Matthiessen, Peter. In the Spirit of Crazy Horse. New York: Viking Penguin, 1991
Nelson, Robert H. Economics as Religion: From Samuelson to Chicago and Beyond
. State College: Pennsylvania State University Press, 2001
Polanyi, Karl. The Great Transformation: The Political and Economic Origins of Our Time. Boston: Beacon, 1957
Rand, Ayn.Anthem. New York: Signet Books, 1938
Zinn, Howard. A People’s History of the United States. New York: Harper Collins, 2003
Dr. Steve Szeghi is Professor of Economics at Wilmington College, Ohio, USA. At various times Professor Szeghi has been Department Head and Area Coordinator for Accounting, Business Administration and Economics. In 2009 Steve Szeghi co-authored, with Peter Brown, Geoffrey Garver, Keith Helmuth, and Robert Howell, Right Relationship: Building a Whole Earth Economy. In 05-06 Szeghi’s article, Lessons in Sustainable Development on the Navajo Nation, appeared in the Journal for Economics and Politics. He has been the author of many articles on social justice, environmental economics, primers in economics for social activists, and the economies of indigenous and aboriginal peoples as alternative economic systems, in numerous on-line journals such as Journal of Globalization for the Common Good Initiative, Global Media Journal, Common Dreams, and Share the World’s Resources, as well as printed journals such as Kosmos.
Professor Szeghi writes as well on the spiritual values and ethical aspects of social justice, equality, and ecology as pertaining to the economy and economic ways of thinking. He has had in recent years numerous international engagements as a speaker and presenter focusing on these topics at conferences and forums throughout the world. Starting at the age of 15, Steve Szeghi began working ardently for social justice doing substantial work with the United Farm Workers Union (Cesar Chavez) until his mid-twenties. Steve Szeghi continues to work for social justice, equality, and the environment; working with or consulting for on a pro-bono basis in recent years, environmental and labor organizations, candidates for political office who demonstrate a commitment to social justice and ecology, as well as indigenous groups and tribal governments.