A Reflection on Businesspeople

“Human Beings Are Not Really Rational”

This phrase, which sounds bold enough to suggest some profound revelation about human nature, began circulating widely among the general public as behavioral economics started to rise in the early 2000s. Some people, treating the fact that human beings are not rational as though it were a revolutionary discovery, forcibly infer from it that “capitalism is therefore unsustainable.” That is understandable enough, since a deep conceptual discussion of “rationality” was never once a central subject in economics to begin with. In the world of modern mainstream economics, which has been reduced to natural science, this is hardly surprising. But unless a clear understanding of what that “rationality” actually is comes first, this kind of discourse amounts to nothing more than wordplay.

In this article, I will first show that the definition of rationality inevitably changes depending on how one sets the scope of the discussion. Then I will examine the relationship between mainstream economics’ assumption of rationality and its empirical methodology.

Various Understandings of Rationality

One hard-to-deny fact is that countless intellectuals have arbitrarily interpreted the proposition “man is a rational animal” to suit their own tastes. A good example is Bok Geoil’s essay “Reflections on Economic Man,” which appeared in Hankyung Commentary. The piece criticizes Richard Thaler, the godfather of behavioral economics, for saying that “human beings are not rational beings capable of knowing and judging all information.” Bok Geoil says the following about human rationality:

“Since the goal of life is continuity, the rationality of living things means an attitude oriented toward choices suited to their own survival. Because living things have adapted to their environment over 4 billion years, they are essentially rational. If they had possessed irrational traits, they would have lost in competition and disappeared over that long span of time.”

On Herbert Simon’s theory of “bounded rationality”—that because of constraints on the information and time required for choice, people follow “satisficing solutions rather than optimal solutions”—he says this:

“[On the contrary,] his argument demonstrates people’s ultimate rationality. Human beings must constantly make decisions in order to survive, but the time and energy available for that task are limited. Therefore, spending time and energy trying to choose the optimal option in less important matters is irrational. In the context of an individual’s survival, a ‘satisficing solution’ is precisely the ‘optimal solution.’”

This clearly shows how many different perspectives can emerge depending on how one defines “rationality.” Bok’s criticism certainly offers much to think about, and it is valid. But that does not mean Thaler’s view is completely dismissed. This is because Bok’s “rationality” and Thaler’s “rationality” operate within different scopes of discussion. Bok sets the scope relatively broadly. Thaler, by contrast, limits the scope to the “rationality” defined in homo economicus, the image of man used in mainstream economics. Here, this “difference in the scope of discussion” is determined largely by two conditions. Whether mainstream economists intended it or not in their conceptual discussion of homo economicus, this is clearly a real issue.

Two Conditions That Determine the Scope of Discussion on Rationality

First, does one fully acknowledge the subjectivity of the individual?

Homo economicus is often used in a highly objectivist way. Of course, this does not mean mainstream economists acknowledge objective value or objective utility. But take, for example, the definition “maximizes profit by using all available information.” What counts as “all available information,” and what is “maximized profit”? If economists fully acknowledged individual subjectivity, they could never know what these things are unless they entered each individual’s mind. But they have to know. Only then can they draw the various curves and mathematically analyze and predict the behavior of economic man. Mainstream economics requires not a universal image of man but a “model,” and it does so by sacrificing individual subjectivity to some extent.

Bok Geoil, by contrast, understands “rationality” more subjectively than the “rationality” of homo economicus, and so the scope of discussion necessarily becomes broader. Bok says that “a satisficing solution is the optimal solution.” But in mainstream economics there are only “optima” and “equilibria”; there is no “satisfaction.” That is because “satisfaction” can be understood only subjectively. Therefore, with Bok’s broad understanding of “rationality,” it would be difficult for mainstream economists to produce meaningful mathematical or quantitative analysis.

Second, does one consider only material things?

In the definition of homo economicus, “maximized profit” is limited solely to material things. To be sure, this is not always explicitly stated in the definition. In fact, the expression “subjective utility” found in some definitions makes it appear as though the concept includes not only material things but also mental or even spiritual ones. But in reality, all mainstream economic analysis based on homo economicus considers only material things. In truth, it can hardly do otherwise. Only material things are measurable—for example, in dollars—and only measurable factors make mathematical analysis and quantitative prediction possible.

Bok Geoil, by contrast, does not consider only factors that can be quantified or measured. He expands the scope of discussion to include “the survival of the individual.” But nothing related to the survival of the individual can be meaningfully quantified or measured.

The Unrealism of “Economic Man” and the Methodology of Mainstream Economics

As can be inferred from the two conditions above, there is a deep connection between the methodology of mainstream economics and homo economicus. The positivist and quantitative methodology of mainstream economics secures its academic legitimacy by narrowing the scope of discussion surrounding homo economicus. The more unpredictable elements such as subjectivity enter the picture, the more the validity of mainstream economics—with all its various “models” and “curves”—is inevitably damaged. At the same time, homo economicus grows increasingly detached from actual human beings.

When Richard Thaler received the Nobel Prize in Economics last year, The Atlantic ran a headline proclaiming, “Richard Thaler Wins Nobel Prize in Economics for Killing Homo Economicus.” It was written as though Richard Thaler were the first person to successfully refute homo economicus. But homo economicus had already been demolished more than 100 years earlier by the Austrian School economist Ludwig von Mises. Mises said that a person who satisfied homo economicus would quite literally be a “perfect entrepreneur.” He then pointed out that “traditional classical economics does not deal with actual human behavior, but with [homo economicus], something fictitious and imaginary.”[1]

The Austrian School has a solution to the confusion caused by non-value-neutral and ambiguous terms such as “rationality.” That is because the Austrian School assumes purposive man, homo agens. Homo agens is not a “model,” but man himself. Borrowing Mises’s words, it is man “who errs, who is not omniscient, and who at times seeks comfort rather than running a profitable enterprise.” Economics that assumes such unpredictable human beings—in other words, “real human beings”—can never construct theory out of mere mathematical symbols. That is to say, it cannot be quantitative or positivist. If one adds here the proposition that economics must deal with “real human beings,” one may arrive at the conclusion that “economics cannot be a quantitative discipline.”

Thaler, Simon’s “bounded rationality,” and Bok Geoil’s subjectivist insight are all, in part, absorbed into Mises’s insight. The only difference is that Richard Thaler, motivated by such concerns, merely presented another straw man—homo reciprocans—as an alternative. Mises is the pioneer of modern praxeology. He was the first economist to study and analyze human action in depth, and for that reason many new disciplines, including behavioral economics, are highly likely to be absorbed into Misesian praxeology.

1.

If you are interested in the Austrian School’s critique of homo economicus, I recommend the following two articles.

Ryan McMaken, “The Homo Economicus Straw Man”

https://mises.org/wire/homo-economicus-straw-man

Doug French, “Mises Killed Homo Economicus Long before Thaler”

https://mises.org/wire/mises-killed-homo-economicus-long-thaler

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Original title: 경제인에 대한 소고

Author: Beom-su Jo

Date: 2019-11-29

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=17&idx=22102