1. Economists’ “Irrational Passion for Dispassionate Rationality”

If by not raising the price high enough he discourages the consumption so little that the supply of the season is likely to fall short of the consumption of the season, he not only loses a part of the profit which he might otherwise have made, but he exposes the people to suffer before the end of the season, instead of the hardships of a dearth, the dreadful horrors of a famine. It is the interest of the people that their daily, weekly, and monthly consumption should be proportioned as exactly as possible to the supply of the season. The interest of the inland corn dealer is the same. By supplying them, as nearly as he can judge, in this proportion, he is likely to sell all his corn for the highest price, and with the greatest profit; and his knowledge of the state of the crop, and of his daily, weekly, and monthly sales, enable him to judge, with more or less accuracy, how far they really are supplied in this manner. Without intending the interest of the people, he is necessarily led, by a regard to his own interest, to treat them, even in years of scarcity, pretty much in the same manner as the prudent master of a vessel is sometimes obliged to treat his crew. When he foresees that provisions are likely to run short, he puts them upon short allowance. Though from excess of caution he should sometimes do this without any real necessity, yet all the inconveniences which his crew can thereby suffer are inconsiderable in comparison of the danger, misery, and ruin to which they might sometimes be exposed by a less provident conduct. Though from excess of avarice, in the same manner, the inland corn merchant should sometimes raise the price of his corn somewhat higher than the scarcity of the season requires, yet all the inconveniences which the people can suffer from this conduct, which effectually secures them from a famine in the end of the season, are inconsiderable in comparison of what they might have been exposed to by a more liberal way of dealing in the beginning of it. The corn merchant himself is likely to suffer the most by this excess of avarice; not only from the indignation which it generally excites against him, but, though he should escape the effects of this indignation, from the quantity of corn which it necessarily leaves upon his hands in the end of the season, and which, if the next season happens to prove favourable, he must always sell for a much lower price than he might otherwise have had (Smith 1776; IV.5.42).

Each individual, we believe, is able, when confronted with a choice between two combinations of goods, to express either a preference for one of the combinations or indifference as to which he acquires. Moreover, the choices will be well ordered and consistent (except when tastes change): if combination A is preferred to combination B, then B is not preferred to A; and if A is preferred to B, but B and C are indifferently chosen, than A is preferred to C (1952, pp. 68–69).

Another reason for defending rational expectations is that the consistency condition can be interpreted as describing the outcome of a process in which people have optimally chosen their perceptions. That is, if perceptions were not consistent, then there would exist unexploited utility- and profit-generating possibilities within the system. Insisting on the disappearance of all such exploited possibilities is a feature of all definitions of equilibrium in economics (1993, p. 7).