Economics Without the Rationality Postulate Part 2

economics without the rationality postulate part 2

Why such unrealism matters

But why does this unrealistic assumption of rationality matter? The claim for market efficient allocation, under certain ideal conditions rests 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 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 would be completely disempowered without the assumption of rationality.

Given the typical assumptions coupled with the rationality postulate an air tight case is 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. 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 by 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, globally. It is one aspect of economics heartily embraced by a 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. It is quite delusional and dangerously so.

Rational Calculation is not what we do, but why is it inherently dangerously as an assumption or a belief? The rationality postulate besides establishing a moral equivalence between the selfish and the selfless, or with a certain sleight of hand, the selfless becomes selfish, and emboldening the cult of Narcissism and beyond the cult of Market Totalitarianism, there is more. If we don’t know who we truly are as human beings, we can unwittingly hurt other people, the earth, and even ourselves, and our interconnections.

Assuming, believing in or trusting in our supposed rationality too easily allows us to ignore the damages we do to others and to our relationships and interconnections or to not see the damage or to think it inevitable. The delusion of rationality may even perceive
the harm it causes, or the harm done by atomistic calculation as somehow good , a transfiguration of dangerously delusional proportions.

Beyond Rationality: Why this unrealistic and tired assumption is so dangerous

1. 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 makes it possible to claim that markets are efficient under theassumptions made, even though actual markets (without the assumptions) are rarely if ever efficient.

3. 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. 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 (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. 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.

Economics Without the Rationality Postulate – Part 1
Economics Without The Rationality Postulate Part 3