Rationality in Society

Economics Political Theory
1

It is generally considered (at least in economics) that humans tend to (or always) make rational decisions. Rational decisions can vaguely be defined as actions with the benefits exceeding the costs (a decision arrived after a cost-benefit analysis).

According to classical view of economics, it is these rational decisions that will ensure the harmony of a market. The invisible hand.

But this brings about a lot of criticism and skepticism because there are a lot of everyday decisions that people make that don’t necessarily make “sense” or at least fail the cost-benefit analysis. In fact, there are numerous irrational decisions people make all the time. For instance, texting while driving, being religious and believing in a God, election of Obama, etc. are example of certain irrational behaviors humans perform.

So does this mean the classical view is flawed and that we humans don’t always make the right choice and therefore need intervention? No and there is a reason why.

In order to answer the question, there needs to be a little tweak in the assumption of the rational behavior in humans. It is a simple change with wide implications.

Instead of saying “People exhibit rational behavior in a market” it should be changed to “the successful decisions made by people in a market tend to be rational (in the long run).”

By successful decisions, I mean decisions that satisfy the cost-benefit analysis (i.e. benefits exceeds the cost).

So a person who texts while driving is likely to crash and so will punished (either through injuries or financial loss).This person is now at a disadvantage in comparison to others. The person who was not texting will escape these costs and thus will likely have more chances in trying to achieve whatever he desires. The same applies to someone who elected Obama. He will likely suffer more compared to a nation that did not elect him. Therefore putting him at an disadvantage.

So in the long run, the decisions made (intentional or unintentional) that end up being rational are more likely help the individual/group to survive and excel at life.

The astute reader might have already drawn some parallels between this contention and the theory of natural selection. Just like old adage “survival of the fittest” by Herbert Spencer is the common notion in nature, “survival of the rational” is the rule that applies more specifically to humans. Nature “selects” the most rational of decisions and let them survive over time. Of course, nature in this sense can be described as the market aka “the invisible hand” fueled by the drive of self interest (will to power).

Of course, all of this applies only if it is assumed that people are truly let to be free. I.e. a limited government with laissez faire approach to markets.

All of this will be distorted in a society that is based on force. Then, the whole rule flips. It will no longer be the "survival of the rational’ but rather “survival of the powerful”.

In a society based on force, there is no competition. For instance, A society where the government controls everything (central planning) usually leaves no choice for the people regarding any aspects of their lives. The basic necessities for survival such as food and shelter are dictated by the state. Now that the officials in the state control the population, we have therefore given way for a society that disciplines its inhabitants based on the level of power rather than extent of rationality. In this society, the higher up an individual is in the state (aka higher power), the better chances he has at excelling at his life. Thus, everyone will strive to be part of the state because that is the only way to be prosperous. The worst part is that they achieve power not by following by being rational but rather through corrupt practices such as bribery and political linkage.

On the other hand, a society based on freedom will fine tune nature to select only the rational because one of the consequences of freedom is competition. The competition between private individuals will keep a constant check on every person and especially on private businesses. The opposing interests will keep trying new ways to defeat each other until one of them hits the chord. This usually occurs when the rational choice has been made.

From this perspective, the fight between “good and evil” becomes much more black and white. It is now a fight/choice between the rational or the powerful. In other words, the choice is between the survival of the rationalist and the survival of the powerful.

It is up to us to decide which one we want. Or maybe we don’t have the choice. Maybe the powerful (current and past) have made the choice already.

2

Austrian Economics only reqires that humans act with a purpose. These acting humans then create the economy and society. The freer the humans are to act in their own interests without someone else imposing violence or coersion on them, the more prosperous the humans will become. The properties of the purpose, rational or not, mean or not, good or not, profitable or not, etc are important but do not make the economy and will get sorted out preferable by profit and loss, or by others defending themselves.

3

Bogart is right. Whenever humans act and something doesn’t go according to our plan, the culprit is misinformation. Whenever we act purposefully, there is a conscious goal in mind. I think that’s what praxeology attempts to define and explain.

4

“The culprit is misinformation”

Not always true. If you were to show Obama or Bernanke an article on the detrimental effects of Federal Reserve, they will still continue to deny it even if the information has been presented to them.

5

Alright. I didn’t entirely mean it in that sense. The problem is when you get to that level, bad philosophy will doom any project so Bernake would look for any excuse to continue the same policies because he believes he is in the right. He’s still working off of misinformed philosophy. Bernake wouldn’t believe you because he has an alternative theory, but that theory could be incorrect.

6

Not always true. If you were to show Obama or Bernanke an article on the detrimental effects of Federal Reserve, they will still continue to deny it even if the information has been presented to them.

Just because they disagree with your conclusions doesn’t make them irrational.

7

Right which was my second point in the article. The conflict between the powerful and the rational are what we are in the middle of. The reasonable decision would be to abolish the Fed but a decision that favors the powerful is expanding the money supply. Since Bernanke is on the powerful end of it, he choses the latter.

Everyone… Please read the whole article because reading only the top half distorts my whole viewpoint and creates confusion.

8

You’re conflating objective rationality (which doesn’t exist, because that would mean that something is objectively right) with the general definition of rationality, which describes a thought process in which individuals weigh benefits and costs. Therefore, the Federal Reserve is rational for those agents who are responsible for its actions.

9

Okay, reading the whole opening post.

None of these actions are irrational. The mistake in your logic is made further down the post, so I will save my main rebuttal for then. However, all of these actions fulfill a cost-benefit analysis (which doesn’t necessarily have to be rigorous and/or based on perfect information) at the time the decision was made. I chose to text and drive because I believed that it woud bring me benefits that would justify the cost, while at the same time it was perceived to be (by me) to be the most beneficial action I could have taken.

This is where you make your mistake. Human rationality doesn’t mean that the action is absolutely and objectively the best action someone could have taken, with perfect knowledge and forethought. Human reason is a thought process in which prior to the action the agent does a cost-benefit analysis, at varying levels of rigor, at which that agent perceives (based on this cost-benefit analysis) the action to be the best he can take at the time. That the action was mistaken post hoc does not make that action irrational.

As such, mistakes are not irrational. They are poorly made rational decisions. Furthermore, I would go as far as to claim that irrational action is simply biologically impossible (excepting natural impulses, which I would call neither rational nor irrational).

By the way, those who have the advantage of a monopoly on force are using this advantage rationally. There is no difference, in terms of rationality, between Ben Bernanke and Ron Paul.

10

The problem with that is that people add in false information while contemplating the decision and therefore construing the quality of the decision. For example, some people decide not walk on cracks on the ground because they use the false information that cracks are bad luck. Sure the bad luck theory explains why people avoid the cracks because no one wants bad luck per se but it is not neceassarily a rational decision, a made up “fact” was added in to the equation.

We just have to face the fact that some people are “stupid” (atleast in some aspects) and dont necessarily come up with the same solutions from the thought process; though the mechanics of the thought process are similar.

11

The problem with that is that people add in false information while contemplating the decision and therefore construing the quality of the decision. For example, some people decide not walk on cracks on the ground because they use the false information that cracks are bad luck. Sure the bad luck theory explains why people avoid the cracks because no one wants bad luck per se but it is not neceassarily a rational decision, a made up “fact” was added in to the equation.

Again, a rational decision is one in which at the time the decision was made it was perceived that the benefits outweighed the costs. That someone is superstitious, and therefore that their superstitions are weighed into the decision making process does not change the fact that that thought process is rational. Furthermore, just because you believe something to be wrong, it doesn’t mean that the person who is making the decision believes that same thing to be wrong.

We just have to face the fact that some people are “stupid”…

When talking about rationality, whether someone is “stupid” or not has absolutely no bearing.

…dont necessarily come up with the same solutions from the thought process

It was never implied that two people had to come to the same conclusion. That is not a precondition of rationality.

…though the mechanics of the thought process are similar.

It’s the “mechanics” that rationality is.

EDIT: By the way, by your definition, one of us here is irrational.

12

Ok there seems to be a confusion with the definition. How about if I define rationality as any reasonable decisions? In other words, the decisions that were taken with reason as driving mechanism by evaluating the factors that are acting and the quality of the outcome. Sometimes, decisions that resemble those made by reason is good enough.

13

Ok there seems to be a confusion with the definition.

There is no confusion. You tried to redefine the word under false premises.

How about if I define rationality as any reasonable decisions?

How about we define it as it has already been defined?

14

The Mises definition of rational is the most historically literal one. To ration is to be rational. Value statements about how “reasonable” are actions don’t qualify as value free science.

15

You can certainly definite it that way, if you’d like. It invalidates your criticism of economic theory however, as the theory makes claims based on a different definition.

16

The “Austrian” definition of rationality is so broad as to be trivial or practically useless. There’s nothing inherently wrong with defining things one’s own way, but to insist that this is the definition of rationality is a silly move. In the context of most linguistic practise, the term “rational” has normative connotations. For the purpose of economics, “Austrians” may prefer to remove all normative connotations in a way that almost defines “irrationality” out of existence, but economics or economists can’t rightfully enjoy a monopoly on the use of the word or concept.

At a broader philosophical level, there is no requirement that anyone be “value-free”, to abstain from normative judgements about decision-making processes. IMO, insisting on this is by the very least a categorical error in which one tries to use economic methodology outside of its proper context or scope, as if it dictates what is philosophically warranted altogether.

As a related side-note, I don’t believe there is such thing as “value-free science” (science, “natural” or otherwise, is governed by epistemic normatives and progresses through value-laden conventional processes), or that there is such thing as an economist (“Austrian” or otherwise) that genuinely avoids normative judgements within their practise of their field. In fact, this pretense to being “objective” via eschewing the value-realm is something “Austrians” seem to have in common with none other than positivists, who they otherwise would rant and rave against.

17

"Rational decisions can vaguely be defined as actions with the benefits exceeding the costs (a decision arrived after a cost-benefit analysis). "

i still dont see why this is not a valid definition. You guys are confusing the similairty in mechanics of thoughts process between humans with the actual rationality that not all humans possess (atleast, not all the time).

18

Either way, you’re attacking the definition rather than the argument. The argument uses the word in a specific, well explained manner. If you disagree with the argument, it is disingenuous to attack it using a different definition. Austrians claim X,Y and Z, which they define as “W”. The fact that they may be misusing the term “W” in no way invalidates the claims X, Y and Z.

19

The “Austrian” definition of rationality is so broad as to be trivial or practically useless.

The Austrian definition of rationality is not broad at all. Would you care to substantiate this claim? Furthermore, how can you say it’s “practically useless”, if it is the only axiom of Misesian praxeology, which is not useless.

…but economics or economists can’t rightfully enjoy a monopoly on the use of the word or concept.

We can if the purpose of the definition is to critisize our conclusions.

As a related side-note, I don’t believe there is such thing as “value-free science”…

Your point that all science tends to be value-driven is not incorrect, however, it nevertheless stands that logically rigorous economic theory is value-free in the sense that the relationship exists regardless of values. In other words, that an increase in the supply of money will lead to an increase in the prices of goods towards which this new money is bid is true whether you think an increase in the supply of money is moral or not.

So, when we discuss the notion of value-free economics it is only within the context that economic relationships are objectively true. Concretely, the two following sentences say different things, one is value-loaded and the other is value-free,

“Taxation reduces incentive for investment.”

“We should tax, because poor people need money more than rich people.”

One explains a relationship independent of value, and the other is a normative, ethical premise.

In fact, this pretense to being “objective” via eschewing the value-realm is something “Austrians” seem to have in common with none other than positivists, who they otherwise would rant and rave against.

All economic theory, whether Keynesian, Austrian, or Neoclassical, if it is logically rigorous and therefore objective true, is value-free. The judgements economists make based on this theory will most likely be value-loaded, but this has no bearing on the characteristics of the theory itself.

I hope this clarifies what is meant by value-free economics.

20

The argument essentially is the definition, especially given the extremely aprioristic nature of it.