There is an old joke that goes as follows:
A physicist, an engineer and an economist are stranded on an island. With a serious stroke of good luck, canned food items begin washing up on shore. In an attempt to open them, the physicist creates a contraption that is designed to use a rock and the force of gravity to open the lid. He is not successful. The engineer crafts a simple device using two rocks to create enough pressure to pop the lid off, yet to no avail. Suddenly, the economist jumps up and shouts to the others. Possessed with the excitement of a brilliant idea, he exclaims: “I’ve got it! Why don’t we just assume a can opener?”
The joke, however dry, actually cuts to the heart of a serious issue in the realm of social science, one in which a critical unveiling must be made. Mainstream economics, which constitutes a mix of neoclassical and Keynesian economics, continues to populate textbook pages without so much as a footnote discussing the uncertainty of it’s theoretical underpinning. Rational choice theory dominates neoclassical economics as the fundamental framework for modeling behavior, and although it is flawed critically by poor statistical methods, it continues to maintain an overwhelming prevalence in literature (see Green & Shapiro 1994). The theory, in short, posits that each individual within a social system makes choices based on his or her preferences and constraints, and that the sum of all those individual decisions produces the aggregate behavior of society. Rational choice theory makes two weighty assumptions and a variety of secondary assumptions about its actors. The theory mainly rests on the premise that rational actors can always make complete decisions (i.e., they can always say whether they prefer A to B, or B to A) and that those decisions are transitive, meaning if A is preferred to B, and B is preferred to C, then A is always preferred over C. There are many different “versions” (see Hodgson 2012) of rationality, but in the version fundamental to modern economics, gain maximization is the primary motivator for human action, creating a scenario in which individuals choose and rank preferences based on highest net benefit. Despite it’s widespread employ, there is a rich literature discussing various critiques of the concept of rationality that deserves attention.
Theory formation: a battle of disciplines
In The Method of Decreasing Abstraction, Siegwart Lindenberg claims rationality faces a challenge that is two-fold: economists require it be simple enough to be applied across a wide range of systems and sociologists need it be complex enough to be sufficiently descriptive of the phenomena in question. Lindenberg characterizes rational choice theory as a nexus between “theory-guided research, as found in economics,” and the “strong empirical tradition of sociology” (p. 3). The battle that affects theory formulation is quite simple: empirics versus analytics. Sociologists prefer a complex theory that models the phenomena in question as closely and realistically as possible, thus producing the most reliable empirical data. Economists, on the other hand, favor a theory that can be applied across a diverse set of circumstances. In order to achieve this level of analytical power, economists must simplify the phenomena immensely. In sum, one party wants a simple, diversifiable model while the other wants a complex, realistic one and “the truth does not seem to lie in the middle” (p. 4). Lindenberg attributes this divergence to differences in the goals of each discipline. Economists seek to explain the social system, whether a group of individuals or even a world system, but the unit of analysis remains the system and not its components. Still, its components cannot be completely ignored. Social systems are derived from the aggregate result of individual behaviors. Thus, in seeking to explain the social system itself, one must also focus on the individual. The theory becomes a trade-off between realism and applicability because the more we generalize about the individuals that comprise a social system, the less representative it becomes of that system, yet the more applicable it becomes.
Rationality: no longer the only game in town
This perspective is useful in analyzing the core assumptions of rational choice theory. Are they specific enough to be realistic yet simple enough to be applicable? Has rational choice theory truly achieved the optimal balance between empirics and analytics, or is the scale tipped in favor of one over the other? I would argue it leans heavily toward simplicity. For instance, a premise implied in the assumption of complete and transitive preferences is that actors constantly reevaluate their preferences over time. Since, according to rational choice theory, actors can always form a preference based on their choices (even if that preference is indifference), it implies they always have access to at least partial information about their choices, otherwise they would not be able to form a preference. Rationality does not account for behavioral aspects like traditionalism, in which an individual adds intrinsic value to an object or choice, simply by virtue of ownership or past association. For example, if John prefers A to B today, and John also prefers A to B tomorrow, rationality assumes that, in both instances, John evaluates the information he has available to him and forms his preference based off which option he believes would yield him the maximum utility. However, it is also possible that if John chooses A over B today, based off the information available to him, he will also choose A over B tomorrow, even if circumstances have changed and A no longer provides the highest probability of achieving his maximum utility. John may choose A simply because he has become more comfortable with A than B.
Real world examples that showcase the shortcomings of rationality are burgeoning. A notable one can be found in an article called The Very Idea of Applying Economics: The Modern Minimum-Wage Controversy and Its Antecedents by Thomas C. Leonard, an article I cited a while ago when I wrote about why raising the minimum wage did not matter. Leonard mentions a survey of various manufacturing executives, the results of which revealed the majority of the CEO’s who participated “did not know marginal costs and revenues,” indicating their firms might not always maximize profits (p. 11). Profit maximization is a basic tenet of rational choice theory; it is the primary motivator for preference formation. Since rational choice theory is, at it’s core, “inextricably intertwined” with gain maximization, the entire theory must be abandoned in instances in which it does not occur (Lindenberg 1992, p.6). There are a variety of reasons why utility maximization does not occur. On an individual level, altruism is not conclusively prevalent, but persistent enough to warrant consideration. On a collective level, preferences can subject to a certain degree of traditionalism. This lends credence to the criticism that rational choice theory may lack complexity and as such, lacks the degree of realism that would make it effective.
This particular critiques mentioned in this article fall squarely in the realm of methodological individualism.The basic question, in terms of the scope of this article, is whether rationality gives appropriate weight to each of the various individual motives that comprise a social system. Rationality establishes profit maximization as the baseline behavioral expectation and states other motives, such as altruism, while existent, do not occur with enough frequency to affect the norm. This is due, in part, to the simplicity that drives analytics. Consequently, rationality represents a social system that lacks the “necessary explanatory detail” concerning the individuals that comprise it (Hodgson 2012).
This article was intended to be a very brief insight to a single aspect of a multifaceted criticism, shedding light on the ongoing intellectual volley regarding a concept that dominated economics for decades. Relative to the wealth of literature that exist on this topic, I have barely scratched the surface. Nonetheless, it seems clear to me that we are on the cusp of a major transition in the realm of economics and social science. Weak and oversimplified, the concept of rationality seems less like a reliable starting point and more like a convenient one. It’s core assumptions may be simplistic enough to provide the level of analytical power economists require, but it seems as though they have abstracted too far from reality, with empirics not nearly strong enough to singlehandedly sustain an entire social discipline. Yet, the incredible amount of evidence notwithstanding, some still refuse to accept that they may have been wrong for close to 40 years.
EDIT: This article is still a work in progress.
The Very Idea of Applying Economics: The Modern Minimum-Wage Controversy and Its Antecedents, Thomas C. Leonard, Princeton University, 2000
The Method of Decreasing Abstraction, Siegwart Lindenberg, Sage Publications, 1992.
Pathologies of Rational Choice Theory: A Critique of Applications in Political Science, Donald P. Green & Ian Shapiro, Yale University Press, 1994. (Link is to Chapter 2 only)
On the Limits of Rational Choice Theory, Geoffrey M. Hodgson, Economic Thought, 2012.