The Varieties of Economic Rationality

Michel Zouboulakis

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317817482
• Edition: 1
• Topic: Économie
• Subtopic: Théorie économique

The concept of economic rationality is important for the historical evolution of Economics as a scientific discipline. The common idea about this concept -even between economists- is that it has a unique meaning which is universally accepted. This new volume argues that "economic rationality" is not not a universal concept with one single meaning, and that it in fact has different, if not conflicting, interpretations in the evolution of discourse on economics. In order to achieve this, the book traces the historical evolution of the concept of economic rationality from Adam Smith to the present, taking in thinkers from Mill to Friedman, and encompassing approaches from neoclassical to behavioural economics.

The book charts this history in order to reveal important instances of conceptual transformation of the meaning of economic rationality. In doing so, it presents a uniquely detailed study of the historical change of the many faces of the homo oeconomicus.

1 Adam Smith and the idea of morally constrained rationality

Economics is the scientific study of human activities aiming to produce and distribute wealth, explicitly goods and services that help people to survive and do well. The study of the phenomena of wealth was for a long time connected with the seeking of the best way of social governance and with the finding of solutions to the vital problems of every society. Historically, the development of social sciences is marked by the emancipation of the social endeavour from ethics, in the general movement of the Enlightenment. In that crucial period of the second half of the eighteenth century it was acknowledged that interfering in the evolution of societies was logically following the objective knowledge of social laws. Observation and explanation became an autonomous and self-sufficient goal for all social thinkers who wanted to deal scientifically with social problems. While, thus economic phenomena such as production and commerce in a monetized economy were present since at least the eighth century bc, political economy emerged as a scientific discipline only around 1750, after the stage of commercial capitalism was completed and the significance of economic processes became autonomous and widely visible. What is more significant from our point of view, is that political economy followed historically a great social transformation, as Karl Polanyi has emphasized long ago, “a change in the motive of action on the part of the members of society: for the motive of subsistence that of gain must be substituted” (Polanyi 1944: 41). Adam Smith’s work arrives at the edge of the new era of the emancipated economic discourse.

Rationality enters first

The first abstract economic model was plainly established by David Ricardo in 1817. The “Tableau Economique”, constructed by Francois Quesnay some 60 years later, was essentially a descriptive model not oriented to explain scientifically the workings of economic mechanisms. Ricardo’s non-formal corn model concerned the explanation of long-term evolution of the different shares of national income between the three classes – landowners, capitalists and workers – in such a way as to guarantee the continuous reproduction of the economic system itself. Without fracturing the social frame of economic activities, Ricardo is responsible for offering to political economists the priority to explain theoretically and objectively the mechanisms of the economic system, before any political and practical decision making.¹ In the pre-Ricardian era of political economy, economic thought was still a descriptive intellectual activity normatively oriented. Thus Adam Smith, in his battle against the fallacies of mercantilist policies was forced to explain how an economy would prosper if left to itself to function freely, without the visible hand of the sovereign ruler. To conclude, his brilliant theoretical insights were subordinated to his policy interests.

Yet, the idea of economic rationality – of how a thinker believes people rationally behave in economic activities – emerges long before the establishment of political economy as an autonomous scientific discourse. In David Hume’s work (1739) for example there is a clear intention “to posit rationality as the basis of a theory of action” (Lagueux 2010: 50). Hume defines reason as the corollary of human volition, or will. Volition, together with other direct passions – such as joy, grief, hope, fear, desire, aversion – is the internal feeling that people have when they decide to act properly (Hume 1739: 207; cf. Diaye and Lapidus 2005). Yet, reason alone “can never be a motive to any action of the will”. According to his famous dictum, “Reason is, and ought only to be the slave of the passions” (Hume 1739: 216). In other words, passions are the generic causes of any feeling of pain or pleasure, and among them it is desire and volition that are at work before any human action (Diaye and Lapidus 2012). But, desire can move a person without the interference of reason, which according to Hume exists to guide human actions through will: “The will exerts itself, when either good can be achieved or evil averted by some action of the mind or body” (Hume 1739: 227). Good and evil are externally given to reason. In that sense reason is only an instrument for achieving ends, and Sugden (1991: 753) rightly says that “Hume provides the most famous statement of the instrumental view of rationality”. As seen extensively below, Hume’s definition of rationality inaugurates the way the modern theory of rational choice deals with the subject.

Free exchange contained by mutual sympathy

From its very first steps, political economy was influenced from Newtonian celestial mechanics and economic thinkers were moved by the conscious effort to find the general causal laws of the “economic universe”. In that sense, Adam Smith tried to establish the free – from state interference – market as the natural system of economic transaction, following the naturalist ideas of the French physiocrats. As will be shown below, in a society of free transactions, if everyone follows his/her natural motive of selfinterest and insofar as he/she is guided by the moral rule of sympathy toward his/her fellow people, a general agreement is conceivable towards material welfare and social progress (Smith 1759: 9–13; 1776: 477).

Adam Smith’s “Economic Man” so to speak, referred to a person belonging to a specific geographical and historical context and that during his/her real economic activities he/she “endeavours to produce the greatest possible value” (Smith 1776: vol. i, 477).² While people are supposed to act at their best personal interest, Smith explicitly condemned the egocentric view of the individual action. There are two major reasons supporting this judgment: the existence of many antagonistic motives governing human nature, and the human faculty of “sympathy”.

Many different motives act concurrently upon individuals themselves, while “sympathy” connects individuals to one another. Smith believed that individuals are constantly under the influence of many antagonistic motives, whereas “sympathy” is the most important human faculty. In his Theory of Moral Sentiments, Smith did recognize that individuals are undeniably self-interested: “Every man is, no doubt, by nature first and principally recommended to his own care; and he is fitter to care of himself than of every other person” (1759: 82). Had he limited his analysis there, he would open the road to “utilitarian” calculativeness. But Smith insisted that although “self-love” is a natural impulse, it is not alone in governing and directing human action. There are many psychological motives that counteract the instinct of “self-love”, such as the “desire for social esteem”, “vanity”, and the “desire for an easy life”.³ The first of these, the “desire for social esteem”, means that people living in societies, besides seeking for “bettering their own conditions”, seek also for the “approbation” of their fellow men (1759: 50). His very well-known figure of the “impartial spectator” is constantly present, “as a moral hector”, looking over our shoulders to “scrutinize the propriety of our own conduct” (1759: 112).⁴ The second motive, “vanity”, comes into play when individuals acting in their “desire to be praised for what they themselves do not think praiseworthy” (1759: 64), promote “many respectable and amiable virtues”, such as truth, integrity, sense of honour, cordial friendship, humanity, politeness, etc. (1759: 258).⁵ As to the third motive, the “desire for an easy life”, it stresses that the natural “interest of every man to live as much at his ease as he can”, can be excessive when revenue predominates as a source of wealth leading to indolence and idleness, which

definitely “corrupts the industry of those who ought to be maintained by the employment of capital” (1776: vol. i, 358). Consequently, Smith made systematic use of moral factors when he believed them relevant to his economic analysis: “Capitals are increased by parsimony, and diminished by prodigality and misconduct” (idem).

Moreover, the very idea of “civilized society” is founded upon the relationship of “mutual sympathy” connecting fellow human beings. For Smith, what distinguishes “civilized” from “savage” society, is not the fact that in the former most of the people are better off enjoying more goods, but principally that the greater part of the people also enjoy being “frugal and industrious” living under the rule of the law (Smith 1776, vol. i: 2). From the very first lines of the Theory of Moral Sentiments, it was clearly affirmed that

How selfish so ever man may be supposed there are evidently some principles in his nature, which interests him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

(Smith 1759: 9)

Smith’s genetic concept of “sympathy” is a counter motive to “self-love”, since it represents one’s interest in the happiness of other people (Peil 1999: 59). Through “sympathy” one is imagining himself/herself in the situation of the other in order to share his/her feelings. In that sense it should not be confused with benevolence or altruism; neither should be treated as being opposed by self-interest.⁶ It is rather a fundamental principle of human conduct that controls and complements the motive of “selflove” (Maitre 2000: 59). “Mutual sympathy”, guarantees both the morality of human actions, together with social order and cohesion. Without it, as Evensky (2001: 515) has correctly observed, no ethical citizenry is possible.

Therefore, in Smith’s sympathy perspective, individuals understand themselves as being always part of a social whole and act consequently, with “compassion for their fellowmen”. When someone exchanges goods, he/she is acting reasonably, trying to get the best advantage of it without losing his/her predisposition to mutual sympathy. To obtain what one wants “mere self-love is not sufficient” because he or she has to consider unselfishly what the other party wants too. In a 1764 lecture, Smith made clear the insufficiency of self-love to conclude a commercial deal: “Man . . . works on the self-love of his fellows, by setting them a sufficient temptation to get what he wants; the language of this disposition is, give me what I want, and you shall have what you want” (quoted in Kennedy 2005: 105). The very idea of socialized individuals is founded, according to Smith, upon this relationship of “mutual sympathy” with other human beings.⁷

Consequently, human behaviour and action are not to be considered as the result of rationalistic calculations of personal advantages and disadvantages alone. Individuals never act in isolation, but always within a society, that is in reference to the “moral sentiments” of other people. For that reason it was impossible for Smith to think that political economy is a fully autonomous and autarchic field founded solely on the principle of economic rationality. The “desire for more wealth”, which explains why human beings produce more than their means of subsistence, is the fundamental motive in business relations. But it never works in isolation. As was rightly argued, “the idea of ‘mutual sympathy’ implies that an individual’s personal identity, ambition and needs are not antecedent to the exchange, but are produced in the continuous processes of exchange in which the individual is engaged” (Peil 1999: 92). When someone exchanges, he/she endeavours to get the best advantage of it, always remaining committed to the prevailing social rules and values and continuing to “desire, not only to be loved, but to be lovely” (1759: 113). His legendary invisible hand mechanism (1759: 185, 1776 vol. i: 477) works only with morally constrained individuals who seek reasonably for their own interest and yet “with pity and compassion for their fellowmen”. In modern terms, exchangers act “as having some idea about each other’s preference patterns” (Fontaine 1997: 270; cf. Sen 1987a: 56).

Smith’s social individuals

“Mutual sympathy” is the human faculty responsible for social morality. The pattern of behaviour founded upon it is formed out of a specific social context as a result of the socialization process. Smith explained repeatedly and extensively in his Wealth of Nations how informal social institutions, norms and values shape individual plans and behavior.⁸ Most of the commercial transactions described in the book involve people who know each other belonging to a localized community of exchangers, thus making the importance of informal institutions greater. Whether all this is sufficient to qualify Smith as an early institutionalist is a question lengthily debated elsewhere.⁹ What is significant from our point of view here is that on account of the concept of “sympathy”, economic behaviour is rooted in the concrete social conditions of every particular society. Four examples suggesting social embeddedness of individual morality can be mentioned from the Wealth of Nations.

First, the quality of political institutions affects economic behaviour and subsequently the state of development of a country. To illustrate this, Smith bravely compares not only the despotic China and the democratic Great Britain, but also the two most important British colonies on the issue of the level of wages. He observes that in the constitutionally governed North American colony the “liberal reward of labour” is far greater than “that of the mercantile company which oppresses and domineers in the East Indies” (1776 vol. i: 82). The differences lie not in the fertility of land nor in the number of inhabitants, but mainly in the “genius of the British constitution which protects and governs America” (idem). Economic backwardness in China or even in British India, and consequently lower wages, are explained through the low quality of governance institutions.

A second example is his idea of “trust reposed in the workmen” as an essential quality of labour that should be taken into account ...