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Reinventing Homo Economicus?

Paul Dumouchel
p. 237-246
Référence(s) :

Maurice Lagueux, Rationality and Explanation in Economics, London: Routledge, 2010, xx + 275 pages, ISBN 978-041555121-2

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Crédits : Routledge

1Rationality and Explanations in Economics is an interesting book which defends a challenging thesis, but, as we will see, all three terms, rationality, explanations and economics, raise problems and require specifications. Maurice Lagueux proposes the provocative thesis that explanation in economics rests on a very minimal conception of rationality, one which corresponds more or less to Karl Popper’s principle of rationality: that agents act in a way which is appropriate to the situation in which they are, given their beliefs and desire. More powerful or rigorous conceptions of rationality implicit in the idea of maximization and exemplified in the requirements of consistency, transitivity and completeness of preferences, argues Lagueux, are not necessary, nor do they play any important role in economic explanations. Not so long ago Lagueux’s claim would have been dismissed out of hand, but times have changed. Results in behavioural and experimental economics, as well as numerous studies on the limits of rationality have shaken many economists’ confidence in the superiority of highly formalized models incorporating an axiomatization of rationality and have made them sensitive to the need for a conception of rationality which is closer to the way economic agents actually choose. Lagueux’s book can be seen as a contribution to this overall project. One however which does not proceed directly from these new findings, but which takes advantage of the uncertainty they created in the economic community, to promote a different—and, in a way more traditional—image of homo economicus.

  • 1 “Animates,” the term was first used by Popper in reference to the rationality principle.

2Lagueux’s book begins with two chapters dedicated to the history of economic theory. His thesis in fact implies that (modern) economics began when authors started to assume that the rational actions of agents were explicative of economic phenomena and these chapters are dedicated to retracing the presence of such rational explanation in the early history of economics. This in turn leads him to a certain reading of the history of economics according to which progressive refinements in formalization and ever more abstract models of economic phenomena correspond to the dissimulation and neglect of this fundamental principle of rationality which is, and has always been, what “animates”1 economic explanation. Hence, his diagnostic of our present situation: “much of the confusion surrounding the role of rationality in economics is due to this increasing gap between the notion of rationality invoked in modern economic models and the rationality principle properly understood.” (31) Therefore, our present predicament according to Lagueux, results in a large part from our failure to understand what really lies at the heart of economic explanation. If real economic agents often appear irrational, it is because what our models require of them is not only impossible for limited beings, but actually contradictory. If nonetheless our models succeed in explaining and predicting, when they succeed and to the extent that they do, it is because a minimal rationality hypothesis is embedded within them, and it is what does the real explicative work. This is a very strong thesis, which questions the received understanding of economic history and progress, but is it true?

Instrumental rationality and the explanation of economic actions

3What is then “the rationality principle properly understood” which lies at the center of Lagueux’s claim? I said above that it corresponds ‘more or less’ to Popper’s rationality principle because Lagueux insists that the only form of rationality involved in economic explanation is instrumental rationality, while Popper to my knowledge did not impose that restriction on his famous principle. This qualification is important, because it helps us determine exactly what Lagueux is claiming and also because it points to one of the major difficulties of the thesis he defends. Instrumental rationality, claims Lagueux, is the only form of rationality which plays a role in economic explanation. Other types of rational actions which have been invoked by some economists, he argues, either boil down to a form of instrumental rationality, or they do not directly intervene in economic explanation. For example, concerning rule following, Lagueux claims that “the decision to follow a rule that was socially established is explained by the fact that individuals who decide to follow it estimate this option is the best available for reaching their goals” (p. 13) and therefore that as far as economic explanations are concerned rule following should be understood under the heading of instrumental rationality. Nonetheless Lagueux does recognize that other forms, at least one other form of rationality exists, which following Max Weber he refers to as “value rationality” whose role is to determine the ultimate goals of agents. Yet, “while economists”, he says, “should not reduce rationality to instrumental rationality, the rationality that is involved in the rationality principle and that allows us to explain economic phenomena is instrumental rationality and not value-rationality.” (9)

4His claim therefore is different from that of many among those who have been called heterodox economists. Unlike Hargreaves Heap (1989) or Sen (2007) who argue that different forms of rationality are important to economics, Lagueux in conformity with a tradition which received its classical statement in Lionel Robbins Essay on the Nature and Significance of Economic Science argues that economic rationality is instrumental rationality and nothing else, and that the determination of ultimate ends lies beyond the scope of the discipline. Thus, his goal is not to expand our conception of rationality, but to remain faithful to what he sees as the fundamental intuition of past economic luminaries.

5This insistence on instrumental rationality is important for another reason; it makes clear what Lagueux is not claiming. In spite of what it may seem at times, Lagueux is not simply equating economic action with meaningful action. For example, at the very beginning of the introduction he says: “People are said to act rationally when their actions are motivated by intentions that can be construed as reasons.” (2) In consequence it may seem that all that the rationality principle requires is that agents act meaningfully, that we be able to make sense of their action. It certainly requires that, but it also requires more. Economists assume, Lagueux goes on, that agents’ actions “correspond to means for satisfying what they (the economists) suppose to be the agents’ goals” (2). In other words, as applied to economics the rationality principle constitutes a stronger hypothesis than the simple intentional stance and corresponds to instrumental rationality as seen from the agent’s point of view. Economists “assume that these actions are appropriate from the point of view that they suppose to be the agents’ one” (2).

6This limitation, I said earlier, also proves to be a problem for Lagueux’s thesis. The main argument of his excellent analysis and criticism of the consistency and transitivity of preferences as fundamental requirements of rationality is that rationality supposes an agent’s ability to adapt to changing circumstances. A rational agent is one who changes the order of her preferences when she learns something new about the world, who may prefer B to A now that she has tasted B even if yesterday she preferred A to B and who adapts to changing circumstances rather than relentlessly pursue the same clearly unattainable goal. The fundamental axioms of rational choice theory to the contrary require a-temporal agents whose order of preferences is complete and determined once and for all. It is true that economists have tried to deal with the problem associated with change of preferences through time, either by postulating that in such circumstances we are dealing with different agents or by re-describing the set of preferences in such a way that they remain stable in spite of the agent’s changing behaviour. Both strategies, rightly argues Lagueux, lead to the proliferation of ‘epicycles’ which makes the standard model a highly implausible explanation of the actions of real economic agents. (56) We should therefore, concludes Lagueux, replace this cumbersome apparatus by a minimal conception of rationality for which the transformation of preferences through time is part of the very essence of rationality.

7Yet, if it is our preferences that change in the face of renewed failures or simply because we have learned more about the world, isn’t it also our ends that are modified rather than only the means we use to reach them? Furthermore, in his analysis of irrational phenomena, and especially of weakness of the will (94-99), Lagueux argues that there is no fast and sharp distinction as to what constitutes an agent’s ultimate goal. If the ability to adapt to a changing environment is a fundamental aspect of the rationality principle which, argues Lagueux, is at the heart of economic explanation, then it seems difficult to claim, as he does, that instrumental rationality is the only form of rationality which this principle involves and that it is sufficient to explain economic phenomena; for the revision of one’s ends and of one’s choice of means to reach them is a continuous process that cannot be divided in two strictly separated boxes. A rational agent is also one who learns that certain objectives are unattainable or grossly inappropriate and who reviews her goals in consequence. Such changes must have important economic consequences and explaining them will require going beyond purely instrumental rationality, at least if our goal is, like Lagueux, to base the explanation of economic phenomena on the understanding of the action of economic agents.

8This said, it is likely to assume that Lagueux’s criticism of consistency, transitivity and maximization was not done for purely logical or theoretical reasons, but also because, according to him, the dominant approach fails to take into account important economic phenomena. Lagueux however does not in any way suggest how an account based on the rationality principle could explain changes of preferences through time, and especially how it could do so without involving a form of rationality that is distinct from instrumental rationality. This absence is perhaps due to the fact that he takes it for granted that such an explanation could be given by the rationality principle since it explicitly assumes the reality of such changes, or perhaps is it because he believes that the rationality principle already provides a sufficient explanation by recognizing the meaningfulness of these changes. This uncertainty points to the question of what should be explained by economic explanations: economic phenomena or the action of economic agents? Both, would probably respond Lagueux, for the program of methodological individualism he defends implies explaining the first, economic phenomena, through the second, the actions of economic agents. The rationality principle also requires that we make sense of the actions of economic agents in terms of instrumental rationality and that this understanding of the agents’ action constitute the core of the explanation of the phenomena. Yet, with all its insistence on making sense of the action of economic agents this book, in spite of its title, provides very few examples of explanation of economic phenomena. This is not really surprising for what is at the heart of Lagueux’s project is not really the explanation of economic phenomena, but the claim that explanation in economics should explain economic phenomena through making sense of the actions of economic agents. As he explicitly laments, “mainstream economics has introduced a gulf between human beings who need to understand and the formally defined agents from whom ‘human’ behaviour is supposed to originate.” What is at stake then in the book is a certain conception of economic science.

Darwinian selection and rationality

9That this is the case is also suggested by his somewhat unfortunate criticism of evolutionary explanations in economics. At first sight, the precise target of Lagueux’s criticism is not very clear: Is it some evolutionary or selective explanations which have in the past been proposed in economics, by economists like Alchian (1950) or Nelson & Winter (1982)? Is it appealing to evolutionary or selective explanations as such? Is it having recourse to natural selection in economics? Progressively however what exactly according to him is wrong with evolutionary explanations in economics becomes clearer. Evolutionary explanation, or as he says ‘natural selection’, excludes rationality. This claim is rather surprising, but as we will see it is also revealing of his fundamental position.

10Suppose your friend is teacher of a kindergarten in which at the very beginning of the year all 20 children already know how to read. If you ask him for an explanation of this surprising fact you may be told: “Well Jessica is a very smart child who learned how to read by herself by the age or 3; Henry’s parent are highly ambitious and they started training him very early; Irene comes from a country where they begin school younger and immediately learn how to read…” and so on for all 20 children. Alternatively you may be told “Only children who know how to read are accepted in this class.” This last answer is a selective type explanation.

11Note two interesting characteristics of this explanation. First it does not tell us anything about the mechanism through which each individual child has learned how to read. Second, what it explains is not why this or that child knows how to read, but the distribution of certain traits – here the ability to read – within a given population. Selective explanations do not target the individual level, but the whole population and they can only explain indirectly the characteristics of individuals. Because of that they are compatible with a very large range of hypotheses or of mechanisms which explain how at the individual level the given trait is implemented, including of course rationality. If the trait whose distribution is to be explained is, for example, the ability to read it is clear that at the individual levels it requires children to be rational and intentional creatures.

12This may be true of selective explanation would respond Lagueux but not of natural selection. Natural selection and rationality according to him are fundamentally incompatible. If something is the result of the aggregation of rational intentional actions then it cannot be the result of natural selection or if you prefer of a Darwinian process. The reason why this is so says Lagueux, is because what characterizes a properly Darwinian mechanism is “the absence of recourse to teleology whether at the level of individuals or at the overall level” (190). In other words, Darwinian explanations could only be applied to economic phenomena, argues Lagueux, if entrepreneurs acted “perfectly randomly” (196-197). Yet strangely enough, Lagueux also recognizes that the actions of an animal hunting a prey or of one who tries to avoid being eaten are goal directed, and he often repeats that entrepreneurs succeed either by skill or by chance. It is not clear in this context what is the difference between “by chance” and random?

13The fact is that Darwinian explanations do not rule out purposeful action at the individual level, to the opposite. What random means in the context of evolutionary explanations, is simply that the source of variation is “blind” relative to the selection process. The main difference between Darwinian and Lamarckian evolution is precisely that in the latter case acquired characteristics proceed directly from the efforts which organisms make in order to survive. Therefore if—somewhat like Nelson and Winter (1982)—someone were to suggest that within an enterprise routines are like genes which are passed from enterprise to enterprise and which give rise to different phenotypes in different types of environments and are selected by their contribution to the enterprises success, then this it seems would be the description of a typically Darwinian process. Even if these routines are (often but not always) chosen deliberately for a reason, these reasons generally have little to do with the overall goal of maximizing profit or market share, and much with more immediate preoccupations, like limiting conflict among employees, taking advantage of reduced space or protecting stored products from internal theft, making internal bookkeeping easier, etc. so that relative to the goal of the enterprise’s success they constitute random variation which are produced by a relatively blind mechanism. Maybe this particular evolutionary explanation is not a very good one, but it is hard to see why such type of explanations should be ruled out a priori from economics.

  • 2 See Godfrey-Smith (2009) for an interesting analysis of those necessary conditions.

14The reason is, I suspect, because Darwinian explanations, even if they do not exclude rationality, nonetheless radically limit its explanatory power. They reduce rationality to a source of variation. In consequence it is not the agent’s rationality which is really explanatory, but the evolutionary mechanism or the Darwinian process which applies just as well to irrational creatures. In other words, even if in this case humans are rational and choose this or that routine after extensive reasoning, it is not their rationality which explains the routine’s (and the enterprise’s) success but the selection process. It is not therefore the rationality principle which explains economic phenomena, but a selective process in which rationality (and not only instrumental rationality) enters as one element among others. Such an explanation corresponds to a radically different type of explicative enterprise from the one that Lagueux recommends for economics. If however we do not reject a priori this type of explanation, the question which arises, and which is an empirical question, is whether or not economic phenomena satisfy the necessary conditions for Darwinian processes to take place.2

Redefining economic science

15If this analysis is correct then the real issue involved in Lagueux’s book is the definition economics as a science that explains economic phenomena not simply as the result of the actions of economic agents, but through making sense of those actions, where the meaning of the action to the actor plays a fundamental role in explaining the phenomena. Lagueux is probably right to believe that this conception of economics played a major role in the development of the discipline at least until the Second World War and even later in the development of game theory and of microeconomics. Nonetheless one can wonder if today this project really has future. I can see two general reasons to doubt that it has.

16The first, as mentioned earlier, is that it seems difficult to limit the type of rationality involved in economic explanation to instrumental rationality. This limitation expresses in fact a desired continuity, which is postulated between the actions of economic actors and economic phenomena; what it fundamentally means is that economic phenomena are conceived as essentially being the result of exclusively economic actions. Both the imperialism of ‘economic explanations’, which are more and more applied to other non-economic domains, like law, politics or even biology and neuroscience, and attempts to include in economic explanations non-instrumental forms of rationality bear witness, in their different way, to the fact that economic phenomena do not proceed from economic action only. Both trends are characteristic of the development of the disciplines in recent (and even not so recent) years and they strongly suggest that the gulf between the human need to understand and the explanation of economic phenomena cannot be bridged by an exclusive appeal to instrumentally rational action.

17The second reason is that Lagueux’s project, under a certain description at least, is not so different from the standard approach that he criticises. Thus in chapter 4 “Is still some room left for irrationality?” he endorses Popper’s claim that, viewed as an empirical statement the rationality principle is false. Agents, says Popper and Lagueux agrees, often act in ways that are not appropriate in view of the situation they are facing, and even which are inappropriate to the situation as they see it. Therefore the rationality principle should be primarily construed as a methodological principle, as a heuristic guide which directs us in (re)constructing the situation in which the agents act. In as much as it is viewed as empirical the rationality principle is ‘nearly empty’, yet “this principle need not have a very specific content since, as Popper explains, it is the refinements in model making—and the fact that the models include more and more detailed pictures of mechanisms involved—that is responsible for progress in social sciences.”(106) And a few lines later he adds: “In economics, for example, sophisticated models define parameters, variables and relations in such a way that the appropriate thing to do, whether corresponding to an equilibrium point, a maximal gain or a minimal cost, is logically determined by the model itself. In such a model, the role of the rationality principle is nothing more than insuring that the agents are sensible enough to make the choice suggested by the model.” (107) This description however raises the following question: What is it that does the explanatory work in this case? Is it an empirically false, ‘nearly empty’ principle or is it the model and its detailed representation of the mechanisms involved?

18Furthermore, this way of understanding the rationality principle appears quite close to the way in which some economists (Binmore, 1994) conceive the role of maximization in game theory as a tool which guides us in constructing an appropriate game model of the situation in which the agents interact, and some, like Ross (2005), also argue that empirically the hypothesis that people constantly maximize a utility function is false, but nonetheless should be retained as a heuristic tool. In such case, maximization is also to be primarily construed as a methodological recommendation that guides us in the analysis of the situation in which the agents act. However, in this case it is the analysis of the situation contained in the game model which explains the agents’ action. Maximization, the ‘principle’ that ‘animates’ the explanation does not really explain anything, it is the reconstruction of the situation that allows us to understand the strategies of the agents. Here also “the appropriate thing to do… is logically determined by the model itself.” My suggestion then is that the progressive disappearance of the rationality principle in economic explanation, which Lagueux regrets, is in fact the predictable consequence, the normal evolution of the explanatory strategy which, following Popper, he recommends.

19In many ways I agree with Lagueux’s reading of economic history and his analysis of the role of rationality in economic explanation. I think that this ideal of explanation of economic phenomena has been central in the history of economics for a long time. However, I also believe that there is more continuity between what he regrets and what he recommends and, for better or worse, that economics has now ‘outgrown’ this explanatory ideal. First, because we have discovered that economic phenomena are too diffuse, that ‘economic-like-phenomena’ exist in too many domains, like biology, from which rationality is apparently absent. Second, because economic phenomena are too complex, they are too massively influenced by the non-economic actions of agents.

20This, I recognize, has been a partial and somewhat biased review since I focussed on what I disagree in Lagueux’s book. That book contains however many important and remarkable contributions, among others, his criticism of the standard notion of rationality as consistency and maximization and his very enlightening analysis of the debate surrounding Milton Friedman’s ‘instrumentalism’. Mainly, it offers an interesting reading of the disarray and confusion concerning the place of rationality in economics. Many economists, I believe, share Lagueux’s explanatory ideal and while he argues that we have unwittingly abandoned it and should go back to it, I suggest that its abandon is final and was the result of the development of economic science.

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Bibliographie

Alchian, Armen A. 1950. Uncertainty, Evolution and Economic Theory, Journal of Political Economy, 58(3): 211-222.

Binmore, Ken. 1994. Game Theory and the Social Contract, volume 1 Playing Fair, Cambridge, Mass: MIT Press, 1994.

Godfrey-Smith, Peter. Darwinian Populations and Natural Selection. Oxford University Press, 2009.

Hargreaves-Heap, Shaun. 1989. Rationality in Economics. Oxford: Blackwell.

Nelson, Richard R. and Sidney G. Winter. 1982. An Evolutionary Theory of Economic Change. Cambridge, Mass: Harvard University Press.

Robbins, Lionel. 1935. An essay on the Nature and Significance of Economic Science. London: Macmillan.

Ross, Don. 2005. Economic Theory and Cognitive Science, Microexplanation. Cambridge, Mass: MIT Press.

Sen, Amartya. 2007. Why Exactly is Commitment Important for Rationality. In Rationality and Commitment (Peter, F. and H. B. Schmid. Eds.), Oxford: Oxford University Press.

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Notes

1 “Animates,” the term was first used by Popper in reference to the rationality principle.

2 See Godfrey-Smith (2009) for an interesting analysis of those necessary conditions.

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Référence papier

Paul Dumouchel, « Reinventing Homo Economicus? », Œconomia, 2-2 | 2012, 237-246.

Référence électronique

Paul Dumouchel, « Reinventing Homo Economicus? », Œconomia [En ligne], 2-2 | 2012, mis en ligne le 10 juillet 2015, consulté le 21 septembre 2017. URL : http://oeconomia.revues.org/1404

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Paul Dumouchel

Ritsumeikan University

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Les contenus d’Œconomia sont mis à disposition selon les termes de la Licence Creative Commons Attribution - Pas d'Utilisation Commerciale - Pas de Modification 4.0 International.

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