"Nothing Human is Alien to Me": The Liberality of Rational Choice
What makes economics a liberal discipline? It is time to tackle this question head-on. As it turns out, what many detractors of economics point to as evidencing its illiberality is actually the key to its liberality. I am speaking about the rationality postulate: the fundamental assumption economics makes with respect to human behavior, and how it can be made intelligible.
First, we need to make clear what rationality is not. Rationality does not mean that people never make mistakes. And it does not mean they are “lightning calculators of pleasure and pain.” These careless accusations are strawmen. Admittedly, economists bear some of the blame for this misunderstanding. Graduate textbooks of microeconomic theory present a set of conditions for rationality that are as unlikely to obtain as they are irrelevant to human decision-making.
Rationality is actually very simple. When economics assumes people are rational, it is (properly) assuming no more than this: that they are goal-oriented. When people make choices, they are looking to move away from a less-satisfactory state of affairs, towards a more satisfactory state of affairs. That is all. While various models of rationality often need to make additional assumptions about what rationality means in specific social situations—well-known examples are expenditure minimization by consumers and profit maximization by firms—rationality itself does not depend on these assumptions. People try to make themselves as well-off as they can, given the constraints they face. This is rationality in a nutshell.
At the individual level, rationality is inherent in human action, as such. There is a reason Ludwig von Mises, in my opinion the premier economists of the 20th century, titled his greatest work Human Action: A Treatise on Economics. “Human action is purposeful behavior,” Mises writes. “Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life.” Furthermore, Mises is clear about the link between action and rationality: “Human action is necessarily always rational. The term ‘rational action’ is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man.” To Mises, the intrinsic rationality of human action provides a formal architecture of choice, which enables us not only to predict, but understand, other human beings. Because we are purposive, acting individuals—we are what we study—the rational choice framework is the key to interpersonal comprehension.
Gary Becker, the economist most associated with the phenomenon of “economic imperialism,” had the same view of rationality. Becker’s pioneering research, which extended the economic way of thinking to various nonmarket phenomena such as crime and the family, abstracted from motivations and focused on rationality as such. Becker’s economics “assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward-looking, and it is also consistent over time. In particular, they try as best they can to anticipate the uncertain consequences of their actions. Forward-looking behavior, however, may still be rooted in the past, for the past can exert a long shadow on attitudes and values.”
Importantly, rationality is not just about individual human behavior. Although it is often difficult to generalize from individuals to institutions (or, alternatively, organizations to orders), the rationality postulate provides us as sturdy a bridge as any for getting across this chasm. Becker goes on to write, “While the economic approach to behavior builds on a theory of individual choice, it is not mainly concerned with individuals. It uses theory at the micro level as a powerful tool to derive implications at the group or macro level. Rational individual choice is combined with assumptions about technologies and other determinants of opportunities, equilibrium in market and nonmarket situations, and laws, norms, and traditions to obtain results concerning the behavior of groups. It is mainly because the theory derives implications at the macro level that it is of interest to policymakers and those studying differences among countries and cultures.” Economists use rationality in a social context to find the durable properties of institutions that enable them to survive. Perhaps the best example is Armen Alchian’s reframing of the profit maximization criterion for businesses. We model businesses as profit maximizers, not due to any intention on the part of whoever runs the business, but because markets select for the businesses that make the most profits over time. As the great experimental economist Vernon Smith recognized, rationality is a tatonnement process between goal-oriented minds and the environments they inhabit. Rationality is how we get from purposiveness at the individual level to functionality at the institutional level.
Some may object this conception of rationality is a useless tautology. It is a tautology, but it is far from useless. Rationality is an interpretive framework for understanding human behavior. This framework has two very important features. First, it captures an essential feature of the human condition. The rationality postulate “says something” about the people economists study. Second, it places limits on the economist himself. When economists commit to finding rational explanations for human behavior, they necessarily close off one tempting, but ultimately shortsighted, explanation: that the behavior in question is irritational. In fact, this is not an explanation at all, but the repudiation of an explanation.
This is why there is a necessary link between the rationality postulate and liberality. Rationality forces the economist to look for reasons even in the most unlikely of circumstances. It forces us to “walk a mile in the shoes” of the people we purport to study. If their behavior seems so odd that it defies a rational explanation, that means we, the students of society, have failed to understand them on their own terms. In other words, the rationality postulate commits us to “analytical egalitarianism” in two dimensions: that of the investigators and the investigated. In recognizing men’s equal agency, it treats men equally.
In contrast, the diagnosis of irrationality forecloses the possibility that the subject’s reasons and purposes can be understood. The structure of human decision-making is an essential feature of agency. We deny that agency, and by extension personhood, when we make a pronouncement of irrationality. In other words, we implicitly treat them not as a subject, but as an object. Subjects can be understood, but objects can only be described. Mises was absolutely correct when he described the illiberal tendencies of those who sought not to understand human behavior, but to control it: “No man is qualified to declare what would make another man happier or less discontented. The critic either tells us what he believes he would aim at if he were in the place of his fellow; or, in dictatorial arrogance blithely disposing of his fellow's will and aspirations, declares what condition of this other man would better suit himself, the critic.”
Verdicts of irrationality are parochial. Discovering the hidden rationality in even the strangest behaviors and institutions is the hallmark of a truly liberal worldview. A liberal mind endeavors to understand, before passing judgment. Human history is full of astoundingly odd practices, from trial by battle to human sacrifice. Both of these strike us as barbaric. But are we brave enough to investigate, before we castigate? Can we understand the problems the societies that used these practices confronted, and the constraints they faced? Will we make the effort to put ourselves in their place, to understand the beliefs that made these institutions work? And even if we ultimately condemn them—I certainly do—by confronting their essential humanity, can we perhaps even sympathize? Let no man claim the mantle of liberality unless he is willing to make this journey.
George Stigler, Gary Becker’s colleague, supposedly remarked, “There is one social science and we are its practitioners.” This is as naked a statement of economic supremacy as you will find! But the universality of economics is why it is liberal. A liberal mind is nowhere a stranger. Thus, to acquire “a liberal frame of mind or way of thinking,” we need to embrace the cosmopolitan perspective on human behavior provided by the rationality postulate. Without rationality, we are left adrift in a stormy sea of meaninglessness. But with rationality, we have the blessing of a “tall ship, and a star to steer her by.”