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Amol Rajan

Amol Rajan is Assistant Editor on the Comment desk at The Independent. He was previously a news reporter and Sports News Correspondent, and writes columns for The Liberal and The Salisbury Review.

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The emerging battle for Homo Economicus

Posted by Amol Rajan
  • Tuesday, 14 April 2009 at 01:41 pm
Can men be rational?
Bertrand Russell certainly hoped so.  In his exquisite essay of that title ('Sceptical Essays', 1928), Russell argued that "all solid progress in the world consists of an increase in rationality, both theoretical and practical".   He defined rationality as "the habit of remembering all our relevant desires" when making a decision, and claimed that "a man is rational in proportion as his intelligence informs and controls his desires". 
Faith in our capacity to be rational has underpinned economic models going back at least to Marx, and the influence of Maynard Keynes tightened its grip on our economic imagination.
That faith is now under attack.  A trend has emerged in political thinking in the West wherein members of a society are no longer portrayed as capable of being rational.  In this new school, they are hard-wired to be the opposite - predictably irrational.  
The consequences of this addition to the landscape of politics are immense.  Let me explain why.
In a piece for the latest edition of Prospect, Anatole Kaletsky of The Times waves "goodbye to Homo Economicus".
Kaletsky has been memorably lampooned in Private Eye recently, but he's worth taking seriously.  The essence of his argument is this:
"The scandal of modern economics is that two false theories - rational expectations and the efficient market hypothesis - which are not only misleading but highly ideological, have become so dominant in academia (especially business schools), government and markets themselves".
In place of these theories, behavioural economics and social psychology are giving us an altogether different model of the standard political, social and moral agent.  Instead of being utility-maximising, rational individuals, we are highly conditioned by tribal allegiances, reciprocity, social norms, and aversion to risk or loss - apparently.
In Britain two centrist political thinkers, one a Tory moderniser and the other an archetypal New Labour brain, have been in the vanguard of making these two fields gain widespread attention. 
The Tory moderniser is Daniel Finkelstein, now of The Times, who lays bare his views on the emerging significance of this development in this column. 
The New Labour man is Matthew Taylor, who has been showing the influence of these fields on his marvellous blog.
And there's an excellent debate on the relevance of behavioural economics in an another recent edition of Prospect.
Until I've read all the books in Finkelstein's piece, I shan't pretend I'm qualified to come down on one side of that debate.
For now I will make two points.
- Though the battle over Homo Economicus may be a contemporary debate, the notion that behavioural economics and social psychology are genuinely new fields is ridiculous (Finkelstein thankfully doesn't go quite this far, but last week David Brooks got excited and called it an "epochal change" signifying "the end of philosophy").  
For example, the discussions of reciprocity which are such a big part of behavioural economics have been a staple of anthropology for decades.  Reciprocity is the central idea in Marcel Mauss' seminal work, 'The Gift' (1923), for starters. 

One should always be sceptical of claims to novelty by non-scientists, because though human history is rectilinear, the history of ideas is not.  There is no such thing as an original idea.   Especially in politics.
- Part of the reason why all this is so contentious is because it can be used to advance the claims of both Left and Right thinking.
On the one hand, behavioural economics contains an essentially conservative message about restrictions on the transformative capacity of reason and rationality.  In 'The Undoing of Conservatism' (1994) John Gray argued that anti-meliorism was one of the three pillars of conservatism (the others being anti-universalism and the primacy of cultural forms).  The case for anti-meliorism, or rather the case against meliorism, might be strengthened by the idea that we're not as rational as we pretend to be. If we really are crap at controlling our desires, and using them to inform what we do - ie, be rational - that might give credence to conservatives who reckon we ought not to try improving things at all.  They like the idea of answering Russell's question with a loud 'No'.
And yet, on the other hand, we also see Kaletsky use it to advance a more centre-left proposition: market fundamentalism is based on a false premise; therefore the State should have a bigger role in intervening to regulate it.
These potentially conflicting interpretations will do much to ensure that the ideas championed by teachers in this new school are with us forever.  People like Finkelstein and Taylor subscribe to the view that politics in the West, being now sequential rather than adversarial, is to be won in the centre.  In a post-ideological age, influencing behaviour will be the chief requirement of politicians.
I'll keep you updated on who's winning the battle, and how it goes about entering the mainstream.

For now, it looks like Russell's faith in rationality has never been less fashionable. 


Rational only more so
swiftlady13 wrote:
Tuesday, 14 April 2009 at 10:29 pm (UTC)
It's not so much that 'men' (sic) are not rational, but that classical economics defines rationality far too narrowly.

The classical economic human buys and sells strictly according to price. There are all these dinky little graphs showing how seller's asking price meets buyer capacity where two lines cross.

But any economics based on such oversimplification as if the economy is a giant impersonal Ebay, is doomed to failure. For example, as a buyer I don't necessarily buy cheapest. I buy from the nearest shop; or the one owned by my friend, the one my friend recommended because we both like the decor and we can have a coffee there as well; or the one that my mates define as 'cool.' Or I avoid the one my mother liked!
Similarly until recently, I might sell to the guy who sincerely likes my house and all the painstaking trouble I put into it. I'll often sell my car or my computer much cheaper to a friend or relative.
Certainly price is powerful, but it's not the only factor.

Yet the other factors, tribe, local clan, partiality, nepotism, aesthetics, geographical distance, these all have their forms of rationality. To buy or sell within tribe or family is not irrational, and it can be factored in to a model. Buying or selling via gendered preference is actually very well understood by business systems who closely monitor and attempt to steer such choices.

Nor does all this dislodge price from the centre spot. Given greater room for manoeuvre, buyers and sellers will act with a greater range of variables. Caution: this is not a 1:1 type pattern.
Less resources *tends* to mean simpler economics cutting close to the price X demand crossover.
But some gender, class, age or religious tenets will stubbornly remain to skew the price axes. We are just not wallets on legs, and in extremis our socially conditioned profile or 'instincts' can seem so much the more important to observe.

So it's not that we are irrational, rather that we are not so robotically simple as the early economists thought. It's time economics grew up.


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