The mainstream theory of economics, neoclassical economics, is based on a very peculiar model of human behavior and social interactions. The core assumption is that people’s behavior consists in maximizing “utility”, which is a measure of personal preferences. That is, each situation is assigned some utility and people choose the situation with maximal utility, by making the best possible use of available information. This is called “rational behavior” (this is somewhat related to the view in psychology that perceptual behavior is optimal, which I have criticized on similar grounds).
This model has been criticized repeatedly on empirical grounds, in particular on the grounds that humans are actually not that rational, psychology has documented numerous cognitive biases, and so on. This line of criticism forms an entire field, behavioral economics. Epistemologically, economics is quite a particular field because lack of empirical evidence for its core models or even direct empirical contradiction does not seem to be a problem at all. One reason is that the ambition of economic theory is not just empirical but also normative, i.e., it also has a political dimension. In other words, if reality does not fit the model, then reality should be changed so as to fit it (hence the prescription of free markets). It is of course questionable that theories can be called scientific if they constitutively offer no possibility of empirical grounding.
Thus, although the assumptions of neoclassical economics have been pretty much demolished on empirical grounds by psychology (actual behavior of people) and anthropology (actual social interactions; see for example David Graeber’s “Debt: The First 5000 Years”), it still remains the dominant mode of economic thinking because it is intellectually appealing. Of course, political interference certainly has a role in this state of affairs, but here I want to focus on the intellectual aspects.
When the field of behavioral economics points out that humans actually do not behave “rationally”, those deviations are depicted as flaws or “bounds on rationality”. If you are not rational, then you are irrational. This is really not a radical criticism. We are bound to conclude that the rational agent is an approximation of real behavior, and everybody knows that a model cannot be exact. Perhaps the model could be amended, made more sophisticated, or perhaps we should educate people so that they are more rational (this seems to be Daniel Kahneman’s view). But fundamentally, “rational behavior” is a sensible, if imperfect, model of human behavior and social interactions.
What these criticisms miss is the fact that both “rational behavior” and “irrational behavior” have in common several implicit assumptions, which are not only empirically questionable but also absurd foundations for an economic theory – and which therefore cannot ground a normative approach any more than an empirical approach.
1) The first problem is with the idea of “rationality”. Rationality is something that belongs to the domain of logics, and therefore which can only be exerted on a particular model. Thus, to describe human behavior as “rational”, we must first assume that there exists a fixed model of the world and personal preferences, and that this model is not a subject of inquiry. In particular, personal preferences are given and cannot be changed. If, however, the advertisement business is not totally foolish, then this is wrong. Not only do personal preferences change, but one way of satisfying your own desires is by manipulating the desires of others, and this appears to be a large part of the activity of modern multinational companies. The fact that personal preferences are actually not fixed has two problematic consequences: 1) you cannot frame behavior as optimization if the optimization criterion is also a free parameter, 2) it becomes totally unclear how satisfying people’s preferences is supposed to be a good thing, if that means making them want what you sell, rather than selling them what they need; what preexisting economic problem is being solved in this way? Personal preferences can also be changed by the individual itself: for example she can decide, after reflection, that buying expensive branded clothes is futile (see e.g. cognitive dissonance theory about how people change their preferences and beliefs). But again, if that possibility is on the table, then how can we even define “rational behavior”? is it to buy the expensive cloth or is it to change the “utility function”? Assuming preferences are fixed properties of people is the move that allows economic theory to avoid philosophical and in particular ethical questions (what is “good”? see e.g. stoicism and buddhism), as well as the possibility that people influence each other for various reasons (manipulation, but also conversation and education). Unfortunately those questions do not disappear just by ignoring them.
2) The assumption of “rationality” also assumes that people have a fixed model of the world over which that rationality is exerted. They do not learn, for example, and they do not need to be taught either. They just happen to know everything useful there is to know about the world. Building an adequate model of the world, of the consequences of one’s actions, is considered outside the realm of economic theory. But in a normative perspective, this is really paradoxical. One aim of economic theory is to devise efficient organizations of work, in particular which ensure the distribution of accurate information to the relevant people. But by postulating that people are “rational agents”, economic theory considers as already solved the problem it is supposed to address in the first place. In other words, the problem of designing rational organizations of production is dismissed by postulating that people are rational. No wonder that this view leads to the bureaucratization of economy (see David Graeber’s Bullshit Jobs and Béatrice Hibou’s The Bureaucratization of the World in the Neoliberal Era).
3) Finally, implicit with the idea of “rational behavior” is caricatural reductionism. That is, the presumption that the optimization of individual preferences is realized at the individual level. This, in fact, amounts to neglecting the possibility that there are social interactions – quite problematic for a social science. A well-known example in game theory is the prisoner’s dilemma: two criminals are arrested; if they both remain silent, they will do one year in prison; if one betrays the other, he is set free and the other goes to jail for three years; if both betray the other, they both go to jail for two years. Whatever the other decides to do, it is always in your best interest to betray him: this would be the “rational behavior”. The paradox is that two “rational” criminals would end up in jail for two years, while two “irrational” criminals that would not betray each other would do just one year. Thus, “rationality” is not necessarily the most advantageous way to organize social interactions. Or to rephrase, individual rationality is not the same as collective rationality. This is of course a well-known problem in economy, in particular in the “tragedy of the commons” version. But again, this tends to be depicted as an amendment to be made to the core assumption of rationality (cf the concept of “externalities”), when it actually demonstrates the fallacy of the concept of “individual rationality”. Accordingly, neoclassical economists propose to solve the problem by incentives (e.g. carbon tax). But first of all, this is not the same as building collective infrastructures. And second, what this means is that anything that cannot be modeled as independent individual actions is not addressed by the economic theory, but instead must be tailored in the form of an “incentive structure”. Each collective problem now requires its own complex “incentive structure” designed in such a way that the “free” play of individual rationalities ensures the collective good, which is to say that each collective problem must be solved in an ad hoc way outside of the conceptual framework of theory. In other words, with its focus on “rational behavior”, neoclassical economics sets out to solve exclusively problems that do not involve social interactions. It is not clear, then, what the theory is meant to solve in the first place (how omniscient independent agents manage to organize themselves?), or to demonstrate (selfishness entails collective good, except when it doesn’t?).
This issue is actually an important theme of evolutionary theory. Namely, how can social species exist at all, if individualist behavior is rewarded by increased survival and reproduction rate? The answer that evolutionary theory has come to, as well as anthropology and ethology of social animals including primates (see e.g. Frans de Waal’s books), is that social animals display a variety of non-individualist behaviors based on altruism, reciprocity and authority, which ensure successful social interactions and therefore are beneficial for the species. In other words, studies in all those non-economic fields have concurred to demonstrate that efficient collective organizations are not based on individual rationality. This conclusion is not immensely surprising, yet it is essentially the opposite of mainstream economic theory.
In summary, the problem with the “rational behavior” model of human behavior that subtends neoclassical economics is not that people are “irrational”. The problem is that framing human behavior in terms of individual rationality already assumes from the outset that 1) people already have an accurate model of the world, and so no social organization is required to ensure that people’s actions have their intended consequences, this is already solved by people’s “rationality”; 2) people have preexisting fixed “preferences”, and so we don’t need to care about what a “good society” might mean, this is already taken care of by the “preferences”; 3) there is no collective rationality beyond individual rationality, and so there is in fact no society at all, just a group of independent people. Thus, the epistemological implications of the “rational behavior” model are in fact tremendous: essentially, the model amounts to putting aside all the problems that economic theory is supposed to solve in the first place. In other words, the “rational behavior” model of neoclassical economics is not just empirically wrong, it is also theoretically absurd.
p.s.: This is partially related to a recent discussion in perceptual psychology on the presumed optimality of human behavior. Rahnev & Denison (2018) review an extensive literature to show that in perceptual tasks, people are actually not optimal. These findings are referred to in the title as “suboptimality”, but in my view this is an unfortunate terminology. My objection to this terminology is that it implicitly accepts the framework of optimization, in which there already is a fixed model of the world for which we only need to tune the parameters. But this means ignoring what perception is largely about, namely modeling the world (object formation, scene analysis, etc).