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2010 | Buch

Predictably Rational?

In Search of Defenses for Rational Behavior in Economics

verfasst von: Richard B. McKenzie

Verlag: Springer Berlin Heidelberg

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Mainstream economists everywhere exhibit an "irrational passion for dispassionate rationality." Behavioral economists, and long-time critic of mainstream economics suggests that people in mainstrean economic models "can think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the will power of Mahatma Gandhi," suggesting that such a view of real world modern homo sapiens is simply wrongheaded. Indeed, Thaler and other behavioral economists and psychology have documented a variety of ways in which real-world people fall far short of mainstream economists' idealized economic actor, perfectly rational homo economicus. Behavioral economist Daniel Ariely has concluded that real-world people not only exhibit an array of decision-making frailties and biases, they are "predictably irrational," a position now shared by so many behavioral economists, psychologists, sociologists, and evolutionary biologists that a defense of the core rationality premise of modedrn economics is demanded.

Inhaltsverzeichnis

Frontmatter
Chapter 1. Economists’ “Irrational Passion for Dispassionate Rationality”
Abstract
Economists have sometimes described themselves as having an “irrational passion for dispassionate rationality,” a sentiment widely attributed to the late antitrust economist John Maurice Clark (with the original source, to my knowledge, not traceable). Indeed, few would dispute that rationality is firmly lodged at the core of contemporary neoclassical microeconomic theory and in neo-Keynesian macroeconomics and financial economics through the premises of rational expectations and the efficient-market hypotheses. By rationality, economists generally accept three levels of meaning. The first level is the simplest and least constrained: rational people act purposefully. People who do not act with a preconceived purpose – that is, who behave as they do because they have no other options or because their actions are determined by external, genetic, and historical influences (as was assumed by, say, the late Harvard behavioral psychologist B.F. Skinner and his followers) – can be said to be nonrational (which describes actions that are mere chemical and mechanical responses with no guiding evaluations of conditions or consequences), if not irrational (which describes actions that are contrary to welfare-enhancing cost–benefit calculations of people making considered judgments Otherwise, people who make decisions consciously with some sense of purpose or intent are rational (which describes actions made with deliberate, conscious, and careful consideration of the relative value, or the costs and benefits, of alternative courses of action).
Richard B. McKenzie
Chapter 2. The Methodological Constraints on the Rationality Premise
Abstract
The last chapter described how modern neoclassical economic theorists (mainly those who have an allegiance to the Chicago price-theory traditions) choose to define rationality in economics. That is, in that chapter, I considered the basic rationality premise without any consideration for how that premise might square with the theorists’ more broadly conceived philosophy of knowledge and without consideration of how that premise is influenced by the methodologies and technologies theorists use in their inquiries. This chapter explains more explicitly and formally how the methodologies that theorists employ in their inquiries more or less constrain the assumed nature of the rationality premise and how the assumption of rationality connects with their theory of knowledge.
Richard B. McKenzie
Chapter 3. Human Motivation and Adam Smith’s “Invisible Hands”
Abstract
The foundation for the eventual emergence of economics as a distinct discipline was laid with the publication of Adam Smith’s Wealth of Nations in 1776. The potential power of competitive market economies became widely recognized over the following 100 years through the works of David Ricardo, Thomas Malthus, Frederick Bastiat, and Karl Marx, among others. The discipline went through a revolution in the last third of that century when “marginalists” William Stanley Jevons in England, Leon Walras in France, and Carl Menger in Austria separately recognized how marginal values (as distinct from the prior focus on total or average values) carried great weight in determining the levels of consumption, production, and price levels. David Ricardo in the first quarter of the nineteenth century began formalizing economics as a deductive science, relying heavily on simplifying assumptions, with the publication of his On the Principles of Political Economy and Taxation in 1817. Alfred Marshall institutionalized the discipline’s graphical techniques for generations of budding economists with the publication of his widely and long-adopted textbook, Principles of Economics, in 1890. Through this history, some form of self-interest, if not less narrowly constrained rational behavior, remained embedded in economic discussions. This chapter will be concerned with the motivational foundations of Adam Smith’s political economy. I devote a separate chapter to human motivations in Smith’s writings not only because he is now recognized (but not in his own time) as a founding father of economics, but also because Smith’s construction of human motivations was far more complex and comprehensive than most of his supporters and detractors seem to believe.
Richard B. McKenzie
Chapter 4. Rationality in Economic Thought: From Thomas Robert Malthus to Alfred Marshall and Philip Wicksteed
Abstract
In the last chapter, Adam Smith’s perspective on what, at a fundamental level, makes people tick was explored. We found that he placed great emphasis on the drives of self-interest and self-love. However, we also found that even in commercial settings in which people sought the cooperation of a multitude of others, Smith held strongly to a form of self-interest and self-love, bounded by innate and learned morality and restrained by laws and market competition. In this chapter, my main interest will be Alfred Marshall’s perspective on human motivation, especially, in commercial dealings. I offer two reasons for the focus of the chapter. First, Marshall (1842–1924) remains a towering prominence in the history of economics mainly for making key economic concepts centerpieces of the economic way of thinking, including supply and demand curves, equilibrium, consumer and producer surpluses, time periods (market period, short period, and long period), and elasticity. Toward the end of the nineteenth century, he gave coherence to the then-budding neoclassical economics, sparked by the marginal revolution in the 1870s.
Richard B. McKenzie
Chapter 5. Rationality in Economic Thought: Frank Knight, Ludwig von Mises, Friedrich Hayek, and James Buchanan
Abstract
The discipline of economics includes severe critics of rational behavior as postulated by modern neoclassical economists. These critics, mainly among economists with a decidedly subjectivist orientation, disagree with the proposition that economics’ main concern is (or should be) with the allocation of scarce and known means of production among essentially unlimited but known human wants. Generally, if subjectivists accept a role for rationality in economic inquiry, they see the analytical role as strictly, but imprecisely, limited, and they posit that the discipline’s real core concern is the development of principles on the efficient allocation of scarce resources among competing wants that emerge from individuals’ explorations into the field of potential values and as they interact with others (with the wants never given to external observers-qua-economists) and that are known only to the individuals themselves. Subjectivists reject the strictly self-interested model of human behavior captured in homo economicus. Such a construction of human decision making is excessively narrow and confining. Subjectivists tend to insist that wants involve evaluations of real-world goods that are the objects of trades conducted to serve the larger and more ephemeral ends of individuals. People might participate in markets to buy goods based on evaluations not only of the goods but also the ends the goods might serve. Such evaluations of both the goods and the ends require individualized evaluative, mental processes that are extraordinarily difficult, if not totally impossible, to measure in a way that allows for scientifically valid empirical assessments of any theoretically derived predictions. Subjective evaluations, which imply the conception of some action (a key behavioral consideration) that results in improvement for the acting individuals, necessarily mean, according to subjectivists, that any attempt to transfer the analytical methods of the hard sciences to human behavior involves a grave misunderstanding of human behavior, including the more narrowly focused subset of human behavior, economic behavior, that emerges from action (as Ludwig von Mises would define action).
Richard B. McKenzie
Chapter 6. Behavioral Economists, and Psychologists’ Challenges to Rational Behavior
Abstract
Behavioral economics has emerged as a subdiscipline in economics over the last half of the twentieth century because of the work of scholars whose main contributions were outside the strict boundaries of economics, most prominently Herbert Simon and Daniel Kahneman. Simon won the 1978 Nobel prize in economics for his work on “bounded rationality” applied to firm organization, collected in his three-volume set published in 1982, and Kahneman received the 2002 Nobel prize in economics, for his work on “prospect theory” developed largely in collaboration with the late Amos Tversky (Kahneman and Tversky 1979, 2000a, among a host of citations). Behavioral economics now covers a massive scholarly literature and, more recently, a growing list of widely read trade books on the subject. In this chapter, I seek to cover only a portion of the literature, but enough to establish credibility of the formidable challenge that behavioral economics and behavioral psychology present to conventional, neoclassical economics. Mainly, reservations and criticisms regarding this literature are covered in Chap. 10.
Richard B. McKenzie
Chapter 7. The Evolutionary Biology of Rational Behavior
Abstract
Modern neoclassical microeconomics has developed in an era in which evolutionary biology and neurobiology have flourished with their many important insights on why people today behave the way they do. And the experts’ explanation is fairly straightforward: There remains a great deal of noise in people’s behavior (mainly because human intellectual, physical, and emotional evolution has never stopped), but when the noise is stripped away, today’s people do what they do in large measure because of how their basic physiological and mental functionalities evolved long ago. Those evolved functionalities continue to constrain modern human behavior. These insights from evolutionary theory (and neurobiology that will be considered in the following chapter) have been integrated into a number of physical and social disciplines, most notably psychology. “Evolutionary psychologists” have posited evolutionary grounds for human behaviors, not the least of which are entrenched mating behaviors that help explain male/female interactions today. Although evolutionary and neurobiological theories have filtered into modern microeconomics (mainly through developments in the emerging subdisciplines of bioeconomics and neuroeconomics, initially pushed forward with the work of Rubin and Paul [1979] and Hirshleifer [1982, 1984, 1993]), standard microeconomics textbook discussions of rational behavior continue to stand largely apart from the evolutionary and neurobiological influences that must have shaped exactly how rational people can be today.
Richard B. McKenzie
Chapter 8. The Neuroeconomics of Rational Decision Making
Abstract
Economists appropriately stress the problem of scarcity of resources in the external physical world where people seek to maximize their gain from an array of individually conceived wants that far exceed their capacities to fulfill their wants. A nontrivial portion of life for almost everyone is spent making choices and tradeoffs, some made unconsciously, which is to say, automatically or by instincts, routines and habits (regardless of whether or not the routines and habits are set by rational processes). A major goal of conventional microeconomics is to understand how the particulars of alternative institutional settings will encourage people to use their scarce resources efficiently in the external physical world, given whatever rational capacities people possess. And people’s rational capacities are typically viewed as fixed (more or less), not as a variable, subject to more or less activation. The so-called “economic problem,” which reduces, in conventional neoclassical microeconomics, the inherent difficulty of achieving economic efficiency in the external physical world, has been qualified in key ways throughout the discipline’s intellectual history, most notably by Frank Knight and Friedrich Hayek (see Chap. 5). Knight insisted that economics was concerned with the “rationale of life,” but he also recognized that a central problem for the discipline was how far life was, or even could be, rational, or (as rationality is normally conceived by neoclassical economists) as a matter of people deliberately choosing to allocate known resources among known wants. Knight mused that much time and human energy is soaked up in a life-long exploration into the field of alternatives and their evaluations in order that people can determine what ends can be and should be pursued (Knight 1935, p. 105). Hayek’s major concern was that information on people’s wants and the scarcities of resources is scattered among individuals who are the ultimate (and, according to Hayek, only) wellspring of wants. Moreover, subjectively conceived wants determine what physical things in the external world can, indeed, serve as resources; that is, as material and nonmaterial inputs that can be used to actually satisfy individually determined wants (Hayek 1945 and 1952b). Subjective evaluation, accordingly, is at the foundation of both sides of the scarcity dichotomy, wants and resources, the market values of which are necessarily determined interactively in social settings in the external physical world, which means that as a discipline, economics could not, and should not, imitate the methods of the physical sciences. Since Lionel Robbins defined the economic problem as that of coping with scarcity, Knight’s and Hayek’s (and other subjectivists’) methodological concerns have been largely sidelined, if not dismissed, because, if taken seriously, economists’ pursuit of empirical science would be seriously hobbled.
Richard B. McKenzie
Chapter 9. Economic Defenses for Rational Behavior in Economics
Abstract
The various historical and disciplinary analyses of rational behavior in this book lead inextricably to an overarching conclusion: Perfect rational behavior, the type widely presumed in neoclassical economics – a decision making process in which people flawlessly (with impeccable consistency and transitivity) make choices among known alternatives with known resources at their disposable – is not, and cannot be, descriptive of the full scope of the human predicament. Frank Knight’s observations regarding “scientific economics” is key to understanding the limits of rational behavior for people and the limits of economics as a means of understanding human behavior: “The first question in regard to scientific economics is the question of how far life is rational, how far its problems reduce to the form of using given means to achieve given ends.....[L]ife is at bottom an exploration in the field of values, an attempt to discover values, rather than on the knowledge of them to produce and enjoy them to the greatest possible extent” (1935, p.  105). Nevertheless, there can be a rationality of a sort – and an economics of a sort – so far as wants are determined and to the extent that people can and do contemplate the relative merits of alternative courses of production and consumption. Behavioral psychologists and economists have more recently documented many imperfections in human rationality, and its derivatives, decision making, and behaviors (see Chap. 6), but neoclassical economists should neither consider such findings unexpected nor deny them. Oddly, as will be seen in Chaps. 10 and 11, the behaviorals’ findings should even be welcomed as a reason d’être for the economics as a course of study and method for thinking and deducing insights about real-world human behavior.
Richard B. McKenzie
Chapter 10. Problems with Behavioral Economics
Abstract
Behavioral economists and psychologists feel confident, if not cocky, that they have substantively undermined the methodological approach to neoclassical economics identified in modern times with the two branches of the Chicago school associated with Milton Friedman and, more pointedly, Gary Becker. Certainly, the behavioralists have contributed to our understanding of people’s decision-making abilities, especially their limits, and have caused neoclassical economists (including me) to rethink their (my) methodologies. This in turn has led me to a new understanding of the role of the rationality premise in economics and of a budding economic theory of the human brain. There are, however, several good reasons for caution in siding with the behavioralists on all critical fronts, even if their research findings on people’s decision biases and irrationalities are confirmed time and again. Let me count the ways.
Richard B. McKenzie
Chapter 11. Rationality and Economic Education
Abstract
Economists have long prided themselves on the positive intent of their work as researchers and teachers. That is, as scientists, economists insist that their goal has always been largely directed toward understanding the world as it is, not as they would will it to be or as it “ought to be,” to draw again on John Neville Keynes’ words. Thus, Milton Friedman contends that “positive economics is, in principle, independent of any particular ethical position or normative judgments” (1953, p. 4). As did Friedman in his seminal methodological essay (1953), many economists are willing to acknowledge the existence of normative economics, or the imposition of personal values – their own or others’ – into the selection of institutional and policy options. But, economists often hasten to add that their personal values should not be given any special consideration because economists’ professional skills lie in analyzing and empirically assessing the effects of proposed changes in institutional and policy options, not in judging their relative merits. Any instructional intention of the rationality premise has been limited to exploring the logic of how rational people, intent on maximizing their personal welfares as they themselves individually define their personal welfares, can be expected to behave, given changes in the “essential features” of their environment, not how they should behave or are advised to behave.
Richard B. McKenzie
Backmatter
Metadaten
Titel
Predictably Rational?
verfasst von
Richard B. McKenzie
Copyright-Jahr
2010
Verlag
Springer Berlin Heidelberg
Electronic ISBN
978-3-642-01586-1
Print ISBN
978-3-642-01585-4
DOI
https://doi.org/10.1007/978-3-642-01586-1