by Kevin D. Rollins
“Rationality” is a quality that we ascribe to those who make reasonable, good decisions. In economics, it is tied to the concept of means-ends matching – choosing the right tool for the job, so to speak. Economists model human beings as utility maximizers – creatures of self-pleasure and self-reward who make decisions within a system so as to best satisfy their preference sets. Homo economicus could be anyone -- Tony Soprano and Mother Teresa are both self maximizers.
From such non-specific, non-saintly notions of humanity, economists can derive basic logic about the functioning of supply and demand and how free market interactions between such Rational Men will result in a cornucopia of goods and services. Trade expansions increase the bounty and spread the wealth. In transactions free of coercion, utility maximizers help others by helping themselves.
This sort of rationality does not necessarily contain what other members of society would consider “objectively” good. Thieves and politicians (but I repeat myself), act rationally to self-enrich according to the incentives they are given. Just as we can predict from rational actors playing the competition game, we can predict that the same incentives in political systems will result in ignorant, careless voters, corrupt politicians, power-expanding bureaucracies, and misguided, yet locked-in policies (e.g. the drug war, Cuba trade embargo, simultaneous subsidization and discouragement of automobile use, payments to rival nations such as Egypt and Israel, etc.). Any shortcomings of the market can thus be contrasted with shortcomings of any political system that would attempt to remedy the market, all based on the same basic premise of human rationality.
Whether the rationality assumption holds true thus becomes a philosophical football. To engage the debate, advocates of government control and expanded largesse must demonstrate that there is a systematic irrationality that only a person that does not have a stake in the game can address. Rather than view market actors as essentially rational from a policy-making standpoint – which suggests a humble program of force and fraud prevention – we construct a model of society of misguided individuals in need of a navigator. Intentionality replaces rationality as the force for uplifting society. The government rule-maker, by intending to make the world better, can thus direct the non-rational, "little people" to the best outcome.
There is a good-sized range of views denying rationality. The new OIRA head Cass Sunstein, who wants to Nudge people in the right direction, offers a “libertarian paternalism,” while Washington Post columnist EJ Dionne suggests temporary nationalization of troubled banks (Feb 12, A17). The latter policy proposal is clearly an opening for a command-and-control economy. Meanwhile, the entire discussion of stimulus and more tightly regulating Wall Street is supported by the denial of the rationality assumption. The focus of would-be reformers is on the mistakes of market actors, rather than the regulatory frameworks they operated within. While it might be legitimately argued that government has a role in untangling a mess it helped create, the rhetoric tends towards blaming unbridled markets, which were in no sense “unbridled” before the current crisis!
In 1962, Nobel laureate Gary Becker argued that market functions as though it is populated by Rational Men even if the players themselves are irrational. The point of the paper is that despite a person being individually irrational, the price system constrains behavior such that irrational actions cannot be sustained. The market enforces the rationality that drives the market.
One of the missing parts of this conversation is that we use the word “rationality” yet we do not recognize that the word itself is a like a tool in hand. I write “rationality” because it means something to me and I believe that it means something in your mind. It may bring up different patterns of thought in each of us, but nonetheless, it works as conveyance of meaning because it has some kind of definition that more or less adheres to a conception of reasonableness or prudence – a characteristic we find valuable in modern man.
This seems like a rudimentary (and perhaps side-tracking) point, but in fact it orients us to the true danger of abandoning rationality assumptions. Just as the word “rationality” occupies a place in our webs of thought, so do our conceptions about markets and government. To give the intentionality theory of society a home in our “reasonable” mindspace, and to toss out expectations for behavior of others and the resulting outcomes that would be given by a rationality assumption, we abandon our own ability to navigate the world and to clearly choose between vastly alternate courses. Accepting the rationality assumption as a model for how the world works, makes us more rational. The meme anticipates the behavior.
On the other hand, consider the individual who truly believed that the new president could squash all inequities and solve all problems – that intentionality engenders the outcome. Such thought processes would rationally lead such an individual to seek aid from government. Rather than seeking out mutually beneficial trades, the intentionalist seeks a program of support. Individuals cry out for help, and so do companies. But, what sort of society do we end up with?
Rationality would tell us (if we could hear it speak): As “competition” becomes the battle for handouts, and as “business planning” takes the form of the rain dance, rationality becomes “rationality” in quotes, and society devolves. By moving more decisions into the venue of government, self-maximizing behavior is channeled into a pie-eating rather than pie-baking contest.
While the public choice theorists show that it is not in voters’ individual interests to support the policies that derive from the rationality assumption, it certainly is in the voters’ collective interest to have a society that does not abandon rationality.
My point is that the more we say (and believe) that we live in an irrational society, or that individuals choose erroneously in a systematic fashion, the less able are we as individuals and as a society to behave rationally. Maximizing individual choice – whether we might view it case-by-case as "rational" or "irrational" – allows for the evolution of a self-correcting social order. The more government steps in to artificially correct the social order, the very means of aggregate self correction are hamstrung.
Kevin D. Rollins is publisher of The Free Liberal. Email him at publisher@freeliberal.com.