1799. The meaning of “rational”

There is a lot of provocation today. Start with Sheila Dow’s paper  on our website, “The people have had enough of experts”, and the comments on Twitter in response, such as the paper posted by John Boit in Medium,


These are worth serious reading for their hints about new economic thinking. Dow writes for example ” but the fact remains that these models are by their nature incapable of predicting a crisis because of the way they are constricted to ensure settlement on equilibrium.” Great language.

As it is, wrongly constructed economics is blamed on excess formalism whereas it might be understood as making systems that support, or do not undermine, the economics of the one percent.

The reason a math approach gets it wrong is because you cannot do math without assuming some things in the system are constants or constantly distributed. The interesting things about life do not fit such assumptions. As  a society we may want steady state security but our social rhetoric is all in the direction of innovation, competitive advantage and change.

But l will add a few thoughts from a slightly different angle.

What is often rational is, in economics, called irrational and what is irrational called rational. The use of “rational” in economics generally refers to calculating probabilities.  What is not calculable  is called irrational.

This conflicts with classical thinking which treats rational as the use of the mind in the service of life and irrational what does not.

we have



This throws cold water on the dream of linking psychology with economics, since it means that seemingly irrational economic behavior results from the sum of a whole plethora of psychological effects.


The implication is that all things psychological are not rational,  like mood, shifting preferences, concern for how a purchase looks in our community. From a human point of view such considerations are the height of  rationality. If my mood tells me “no” perhaps the mood reflects some state of my being I should take seriously. To call it irrational is to suggest that major structures that arose through evolution are irrational – do not serve a life purpose. This is a very strange place to end up, calling the results of evolution irrational.

 When interest rates or gross domestic product change, people in Gabaix’s model don’t quite realize that things are different. Even more importantly, they’re short-sighted — they don’t think as much about the probability of a recession happening 10 years from now as they do about one occurring in the next six months.

People have a lot on their minds, and limited bandwidth. To ignore something is not irrational. If we ignore something because our mind is preoccupied and we fail to make all the calculations , this is “irrational” in a way that discounts reality.

One example is a paper by Northwestern University’s Lorenz Kueng. He adds yet another piece of evidence against the so-called permanent income hypothesis — the theory that rational, forward-thinking consumers don’t increase their consumption when they get a temporary boost in income. When the Alaska Permanent Fund — a pot of money funded mostly by oil revenue — gives people their annual handouts, they go out and binge instead of sticking it all in the bank as standard rational theory would predict. Kueng shows that this is consistent with a behavioral theory in which consumers are close to rational, but not quite.


Why isn’t a binge  rational? What is life for? The model of rationality here is a caricature of a character type that sacrifices pleasure to savings.  Who is rational,  the saver or the pleasure seeker? This cannot be answered except in the assumption of a framework of values.  I think of William Saroyan’s “Every man knows his true destiny, but he likes his detours because they take time.

To equate rational with the results of calculation is to reduce rational to means-ends consistency, kind of like engineering. A design of a bomb can be rational from an engineering view, but its irrational when considered in the framework of life giving.

Want to see how “irrational” this gets?

Another example is a paper by Rawley Heimer, Kristian Myrseth and Raphael Schoenle. The authors document how young people save too little, and the elderly spend too little, relative to standard fully rational theories. The latter might be explained by old people wanting to pass money to their children, but low savings among the young require an explanation. Heimer and Schoenle’s theory is that young people don’t realize how long they’re going to live. Far from believing in their own immortality, Heimer et al. posit that young people spend like there’s no tomorrow. Presumably, once they reach middle age, people regret their youthful binges.

So I will live a long time. I will save everything I can  year after year – and then I die. Rational?

Rational comes from ratio, balance, proportion. Machine logic is not life  Logic and economics should be aware of the difference and not subordinate our description of people to an economy where at its most “rational” neither workers (low wages) nor owners (savers) get to benefit from the regime.

Economics avoids the flowing world and tries to replace it with a solid abstract model. Such solidity is not given to humans, though they yearn for it.

“Men find it difficult, Machiavelli noted, to accept a world of becoming; they hunger for constants. This leads them to create an illusory world which is then treated as though it were a real basis for action. In terms of human behavior this often took the form of clinging to certain habits despite their having been long outdistanced by the pace of events.”


from  Wolin Politics and Vision.





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