By-Kushagra Aniket, Cornell University.
Rational Choice Theory is essential to the discipline of economics. Although rationality is often taken as an underlying principle behind individual action, its idea is not as simple as we assume it to be. Drawing on insights from ethics and everyday life, I challenge some of the basic assumptions of microeconomic theory in order to develop a more inclusive understanding of rational behavior.
Economics, like any other social science, requires us to make some assumptions before it gives us an insight into human behavior. In fact, one can easily draw disparate conclusions if its basic premises are changed. If all economic theories can ultimately be reduced to a basic intuitive understanding of the behavior of economic agents, then common sense can vary and an element of subjectivity follows in. This leads us to acknowledge that economics is not capable of offering absolute and invariable results. So, to enrich the study of economics, one must be prepared to question some of its central assumptions.
Economists generally assume that individuals are rational. Rational people form meaningful preferences and seek to achieve their objectives given under constraints. To be precise, economists attribute the overarching principle of rational egoism to economic agents. Rational egoism is a doctrine that states that people have reason to do something exactly to the extent that it promotes their self-interest. However, in real life, people are not only motivated by their immediate self-interest but also by a genuine concern for the welfare of others. Therefore, I shall argue that there can be different approaches to the concept of rationality by pointing towards some of the limitations of microeconomic assumptions.
Let us begin by considering that I face a certain set of actions that I can engage in. In other words, I confront a problem of choice. This problem relies on the understanding that I cannot choose any possible option arbitrarily. I must analyze the costs and benefits of the alternatives available to me and choose the course of action that best serves my self-interest. But this apparently simple claim raises some extremely important questions.
First, what is my self-interest? In conventional economics, self-interest is interpreted in extremely restricted terms. My self-interest simply consists in what is directly good for me. But it is routine for people to care about others. It is likely that my self-interest includes the self-interests of some other people, namely those who are close to me. Moreover, just as people are pleased by the prosperity of their friends, it is not uncommon for them to derive satisfaction from the well being of many others. So, to capture the complexities of practical situations, we need to adopt an extensive notion of self-interest.
Second, how do I determine if a particular action is in my self-interest? A number of solutions have been offered to this question. It is frequently presumed in economic theory that an action is in agent’s self-interest if it maximizes his payoffs. But, one of the central limitations of traditional economic analysis lies in its attempt to quantify these payoffs in strictly measurable terms such as utility or profits. In practice, I can decide on my self-interest by taking a number of considerations into account. My motives behind a particular action can be economic, social, aesthetic, moral or political in nature. Many of these motives cannot be objectively calculated. But this does not diminish their importance to me.
It is possible for me to engage in an activity or trade an asset for purely non-economic reasons. People are regularly guided in their decisions by other considerations such as social expectations or ethical perspectives. Social contexts can and often do regulate the payoffs derived from individual choices. For instance, I might wish to purse happiness, but not at the cost of social disapproval. I have every reason to seek power, pleasure, wealth and fame but I also have good reasons to act otherwise, if that benefits me in a different manner.
Alternatively, I can derive satisfaction from actions that involve self-abnegation if the social or moral rewards of sacrifice supersede its economic cost. Morality can provide me with valid reasons to act in a particular way. If rationality lies in the pursuit of one’s own good, then even altruism cannot be termed as irrational because people can derive real benefits from its ethical nature.
On the other hand, there are many actions available to me that might be technically feasible and economically profitable but I do not even contemplate them. It can be argued that most people do not derive overall satisfaction from committing actions they regard as unethical, even though they might gain monetary benefit from them. This might be due to their education or social conditioning. In my observation, many people detest actions that are wrong, unfair or dishonorable even when they serve their immediate self-interest.
For instance, we assume that given some constraints, buyers and sellers interact in a market to maximize their payoffs. But this positive statement does not imply any normative prescription that consumers should be solely concerned with obtaining the best value for money or that they are absolved of all responsibility for the goods and services they purchase. Some people, if cautioned that a certain good was produced under conditions of exploited labor or virtual slavery, will avoid purchasing it even if they receive a good bargain. But it seems unfair to label such behavior as unprofitable or irrational.
Even when we disregard the intrinsic value of altruistic actions, rationality in economics implies making a number of assumptions that sometimes appear unreasonable or unrealistic. To illustrate my position, let me consider the axioms of consumer preference and demand. An underlying assumption in consumer theory is that preferences are monotonic. Monotonicity of preferences implies that more is better than less. But there can be situations in which exactly the reverse is true. Excess of something is often bad. Many commodities that contribute to our satisfaction might diminish our well being if they are consumed in large quantities.
Transitivity is also not an accurate description of consumer behavior. By definition, transitivity of preferences means that if x is at least as good as y and y is at least as good as z, then x is at least as good as z. But this law breaks down if the consumer does not consume a certain amount of a good. If one drop of water is as good as two drops and two drops of water are as good as three drops and so on, then a glass of water is as good as a mere drop.
Rationality also puts demands on agents that are beyond their knowledge and capacity. For instance, an introductory economics course requires consumers to be super-human, so much so that they can determine the variations in their demand due to trivial changes in price. In this way, we get our well-behaved continuous demand curve. But, in practice, consumers usually do not have well defined preferences and make decisions on the basis of imperfect information. Even when the consumers are aware of the conditions prevailing in the market, they neither possess the ability nor the inclination to vary their choice with respect to everyday changes in variables such as prices, income or expectations of future.
Economics asserts that the rationality of an action can be determined by empirical calculation of its consequences. At a technical level, this gives rise to the problems of comparing and measuring consequences in economic terms. It also ignores the fact that rationality in social contexts can involve maximizing benefit subject to constraints that have little economic weight but great social importance. Finally, it rejects the real possibility that people can renounce selfish egoism for other rational considerations.
Kushagra Aniket is a freshman in the College of Arts & Sciences. He can be reached at email@example.com. This article was published in the Spring 2012 edition of ‘The Visible Hand’, Cornell’s journal for undergraduate research in Economics.