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: 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: 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.