The claim that the concept of rationality offers only a partial account of economic behaviour

Topic: BusinessLeadership
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Last updated: April 16, 2019

The concept of rationality is part of a broader concept of consumer culture, which spring from the liberalist school of thought. In this essay therefore, we will be discussing the claims of not only the rational model, but of much of liberalist thought as well.

As we go along, we will be discussing weather the concept of rationality offers a good account of economic behaviour or not. We will be looking at some of the problems that the concept of rationality has managed to overcome, and how both the rational model and liberalist thought in general are useful tools in theorizing and in allocating resources in the market.At the same time, we will also be looking at the criticisms that can be made on the concept of. It’s major criticisms may be said to be that it tends to avoid taking any form of action (weather abstract or real) on the expansion of its own ideas to the social, and is incapable of giving any moral collective values.

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Therefore leaving the individual as ‘dope’. According to liberalism, the consumer is an individual, which rationally pursues his self-defined interests through the market. The individual acts ‘rationally’ by “maximising satisfaction and preferences (or utility) subject to the constraints faced”1 and minimising the costs and losses.Therefore, liberalism theorises how consumers pursue what they want, not what they want or why they want it. Liberalists separate between what they call formal rationality and substantive rationality.

Formal rationality is concerned solely with what consumers want; substantive rationality deals with the values and reasons related to the consumer- in consumer culture, this is called ‘cultural thinking’. In here lies our first problem; by restricting themselves to analysing only the formal, calculating rationality, liberal economics can refrain from making any judgements about the substantive needs and desires of individuals.Therefore, liberals can only ask the question of how individuals ‘calculate’ what they want.

If liberals defined ‘what people want’ instead of ‘how do they calculate it’ they would be going against their very own principle of privacy and individual interests. Although liberalist thought is capable of depicting the economic study of ‘rational action’, it is incapable of studying those needs that led to ‘rational action’. It is then quite ironical to see that although liberalism places individual choice at the centre of its moral and social world, it is something it knows almost nothing about.Therefore, all our wants and desires are formulated prior to entering the market. The individual forms his desires and wants outside the market- in the private sphere. This idea has managed to ensure the privacy of individuals is safeguarded and has made of it a source of trying to discipline the power of social institutions. This means that by making personal liberty its fundamental goal and by preserving the ‘private sphere’ of the individual, personal interests become the only source of legitimacy.In this way, liberalists bring the image of the consumer as a hero in so far as he is a rational, self-interested economic man.

For that reason, the individual becomes sovereign and social institutions have a right in so far as they represent the individuals’ needs, when this fails to be the case, the institution should be dismantled. Unfortunately, these are things easier said than done. Liberals move from the formulation of desires in the private sphere, to the rational action pursued in the market by defining utility as the “property in an object whereby it tends to produce benefit, advantage… 2 Therefore, we are able to find out what consumers want by looking at utility in terms of what ‘satisfies them the most’. This idea is extremely successful in meeting consumers’ demand and in coordinating the economy, but at the same time it poses an incredible number of problems.

It may be said that liberal thought only looks at the market, and thereby avoids looking at the market place. By doing this, liberalists completely avoid the idea that the market place in itself may influence the decision making of the individual.Which one of us has not come home wondering why on earth we had spent that sum of money on something useless?! Factors such as shopping malls are all important in that they may affect the individual in an irrational manner. Unfortunately, one thing liberalists definitely do not address at all is that of irrational behaviour. They are only capable of relating irrational behaviour to a feminine character, and therefore they also completely ignore women even though these are central actors in the sphere of the market.Also, by bringing all commodities down to one single quality, that of utility, liberalists completely ignore the actual commodity itself.

Whatever the commodity may be, weather heroin or milk, nuclear weapons or clothes, in liberal thinking desires and preferences are of no relevance, what matters to them is to rationally maximise utility. Another problem is that it reduces the mass amount of desires to one single common desire, again that of utility. We previously said that liberalism places the consumer as a hero and its fundamental goal may be said to be personal liberty.The consumer became a hero when the bourgeoisie connected this concept to that of material gain, technical progress and individual freedom through the motivation of the pursuit of self-interest. The consumer is a hero because he is sovereign over his needs and desires (as these are formulated in the private sphere).

The most powerful example of the consumer acting as a hero is in his sovereignty in the market. Because of competition, this should ensure that producers meet consumers’ needs in the best possible way. But in order for the consumer to be sovereign in the market, he must first be sovereign of his needs and desires.Here a problem with the concept of rationality arises, as it is unsure weather the consumer is really free and sovereign in his desires and needs. Although liberals make no claim as to where and why these needs arise in the individual, they are able to make claims on our reasoning. For Hume, a key liberal thinker (who also came to LSE), reason rose only from observation, and that otherwise it was impossible for reason to move from ‘is’ to ‘ought’ because “reason is the slave of passion”.

Reason is incapable of moving from what it knows to be the case to stating what it should be, of deriving values from factual knowledge.Thus reason can’t prescribe the ultimate ends or meanings of life and therefore, individuals’ desires can’t be regulated by others not only because they should not be (in the name of liberty and privacy) but also because they can’t be. By doing this, liberal thinkers avoid judging and therefore giving any form of collective, moral values to people, which it believes other practices such as religion, should be doing. Also, this theory works well as it allows for growth, wealth, and technological progress to happen and was the only way to coordinate securely personal freedom and progress.

This is all very well, but liberalists tend to ignore the very dangerous risk of mixing together liberal thought and a desire to guide people. We may surely say there is much tension between the amoralism of a system based on individual preferences and the need for collective cultural values as a basis for social order. Examples are Thatcherism and Raeganomics who promoted consumer culture and liberal thought as part of social life, as they believed it was the only way to coordinate reason, freedom and progress. Furthermore, it is true that economics not only explains, but also interacts with the consumer, and therefore with society.

For example Bentham, another leading liberal thinker, believed that all individuals were not driven by individual desires and passions. But rather, they were driven by a general desire to increase pleasure and minimize pain. Therefore all actions and social policies should be judged accordingly, in a rational manner where the consequences are producing pleasure and satisfaction. This is obviously missing much in the understanding of the consumer as it completely ignores things such as irrational behaviour or ignorance.Also, because the individual is in contact with the market a large part of his life and he is himself a commodity of the market in his labour, he must also be affected by it and therefore by its way of thinking. We now have ‘needs’ instead of ‘wants’ is an example of this.

This means that more and more people are becoming rational, self-interested and with personal values. It asks the question on weather there is, or should be a distinction between good/bad and what should be/what shouldn’t be, and it therefore poses a problem as to controlling society.The questions ‘by what common principles should people live by? ‘ spring from everywhere On the other hand, we may argue that liberalists separates reason from values in the very idea of utility and preferences and therefore, in its basic image of the consumer. Utility is specifically not thought of in terms of pleasure or satisfaction. But to make such distinctions between basic needs and desires presumes an ability to make certain empirical and moral distinctions. To be able to do this we need to have knowledge of comparison and the moral conception of what humans should or should not do.Liberals believe that the individual becomes conscious of him/herself through the gaze of others. And therefore they don’t claim to have such highly moral judgements but that they believe that to be morally good is to be happy in society, and to be happy in society is to be happy with themselves in relation to others.

By thinking in this way the risk of leaving the individual as ‘dope’ once again rises. But for liberalists this is no problem because they position the consumer himself as the rational, self-interested modern hero sovereign over the market.Once again, this is all very well in the abstract, but it takes for granted the idea that the market is stable and constant. But this, we know to be false as the boundaries and contents of markets are being constantly redefined. Although as individuals we are not completely brain washed by everything we see, read and hear; it is true that we are very much influenced by factors such as marketing and advertising, which consequently create in us new needs and desires.

Therefore one may argue that exactly that market that should be able to give personal liberty and place the individual as a hero in liberal thought is actually the one putting the consumer as a ‘dupe’. We can comfortably say that the market is an efficient allocator of resources, capable of producing wealth under competition but the way in which liberalists measure the efficiency and welfare in the market is in itself very controversial. Liberalists believe that preferences can’t be a standard for judging and that therefore, the only possible solution is by means of price.Price here is related to the idea of the individuals socially averaging their preferences. The one aspect in which I would be very weary about in the concept of rationality and liberalist thought is this idea of separating between the amoralism of individuals pursuing their self interest and a need for collective values. By looking at the general criticisms previously made, one may notice that the core problem lies exactly in this. Due to this constant decrease in social order through collective values may be a major cause in why people are getting more and more influenced by external factors such as advertising and marketing.

By making the individual become conscious of him/herself only in the eyes of those around him, the individual must compare himself to others in order to determine his position in society and weather what he is doing is good or bad. But to say this would mean leaving the consumer to be exploited by those in power, as it knows no better. Also, due to the increase in technology our means of communicating have become increasingly numerous and present.

The means of communications we use are often themselves a source of influence on the decision making of the individual.Such factors as advertising and marketing -which constantly come up in almost every means of communication! (for example we now get advertisements through sms), often attach certain life-styles and labels to products greatly, influence the individual. To some extent, we can say that the new means of communication nowadays have become our main source of information for comparing ourselves to others, and therefore being able to define ourselves. For example, Big Brother has shown to be a great success.Could this be because of the need in people to look at others in their most intimate moments just to check we are like the others? Although we may say that it is rather presumptuous to define a discipline (economics) in terms of a particular theory, and that even if economics studies the relation between the economic and the social, there is actually no such study on this relation to be found within the consumption structure, we may say that maybe these aspects should be studied by other disciplines such as sociology or psychology.The decision-making way that is present in economics is that of utility reflecting individual desires, achieved through rational action, which is very successful in looking at and defining the market. Weather liberal thought has influenced the market or vice versa is a tough question. But one may note that the risk of liberal thought actually imposing its ideas on the market is increasingly ever-present.

The World Bank for example uses theories such as the market being the best allocator of resources and applies them to several different countries, which in turn must change and reshape the markets of these countries.To conclude, if we take the liberalist value of economic amoralism as a way of thinking the individual comes to have three distinctive dimensions. His ethical basis: which deals with his personal liberty and desires (which are formulated in the private sphere). His cognitive basis is the limits of reason when it comes to values and the technical basis, all that is substantive (which are treated as background). In this latter dimension of the individual we may say that liberalist thought, and therefore the concept of rationality, are very well in their study of economics.For example biology takes the social for granted.

Although the social is still very central in the interactions with economics, one may say that it is still the most effective theory in organising the market and affectively allocating resources. It may therefore be said that the rational model, and liberal thought in general are very effective in analysing the market and therefore are extremely successful in predicting and looking at the general wants and desires, but also those desires and wants which are more specific (such as niche markets) and therefore are able to organise and coordinate resources effectively.

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