Rationality as Unfalsifiable

Andrew Lilico recently wrote a bizarre article in the telegraph titled, Good economists are almost always right about almost everything. At first Lilico makes a valid point. Many people misinterpret what “rationality” means in economics. But he also ironically exposes what’s wrong with the assumption while purporting to show why it’s so important:

But rationality is not an assumption of orthodox economic theory in that sense. Instead, it is what is called an “axiom”. No behaviour can prove that people aren’t, in fact, rational, because for an orthodox economist the only kind of explanation of any behaviour that counts as an economic explanation is an explanation that makes sense of that behaviour — that shows why the behaviour is rational.

Irrationality and other heterodoxy is usually little better than an all-encompassing conspiracy theory, explaining everything and thus nothing — for while many behaviours may not be rational, there is no behaviour that is not irrational. In the process, heterodoxy misses all that is fruitful and important. To see why, let us take a famous example.

The “rationality” assumption in economics is a long debated. There is simply no way I can cover everything, but I’ll try to keep things short and sweet. When most people criticize the “rationality” assumption in economics, they are usually criticizing Paul Samuelson’s axioms of revealed preference:

Completeness: When given two combinations of goods A and B, a consumer can decide which one he prefers. So A > B, B > A, or A = B (he can get the same degree of satisfaction from both combinations, in which case he is indifferent).

Transitivity: If A is preferred to B, and B is preferred to C, then A is preferred to C.

Non-satiation: More is always preferred to less

Convexity: The marginal utility a consumer receives from each commodity falls with additional units consumed.

This is what you usually see in undergraduate economics textbooks. However, after years of theoretical work, economists adopted a much weaker version of Samuelson’s axioms during the 1960s. There was little restriction on preference ordering with the exception of transitivity, convexity, and what is known as monotonicity. However, it was also agreed upon that in certain contexts, even these restrictions could be violated and eventually rationality was reduced to consistency conditions. As Gary Becker puts it, “their behavior is forward-looking, and it is also assumed to be consistent over time.” That’s rationality in a nutshell and I’m assuming it’s the definition that Lilico is using.

Now look at what Lilico writes in the first paragraph. Any behavior that seems to violate the rationality assumption in economics can’t possibly prove that people sometimes act irrational. Why? Because we can just frame that behavior as rational behavior! So this argument bypasses the many critiques of rationality in economics. The work of George ShackleHerbert Simon, and the many empirical studies that have critiqued the assumption of rationality, all of this is thrown out the window.

Well on a not so close inspection, this argument has serious problems, especially when he goes on to claim that, “irrationality and other heterodoxy is usually little better than an all-encompassing conspiracy theory, explaining everything and thus nothing.” Based on the claim of his first paragraph, any critique or experiment that suggests non-maximizing behavior can be dismissed by changing the assumptions on what is being maximized. The maximizer could always be maximizing something else. And according to Lilico, there is no way to prove otherwise. In other words, this characterization of rationality is unfalsifiable. Any assumption that is consistent with everything describes absolutely nothing and that’s my main issue with the rationality assumption in economics. It’s not that it explains too little, but rather it explains too much, rendering it pretty much useless.

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2 Comments

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2 responses to “Rationality as Unfalsifiable

  1. Blue Aurora

    I wouldn’t say that the definition of rationality in economics is “unfalsifiable”, only excessively narrow and limited. (Especially if you define the axioms of choice to be under Subjective Expected Utility decision theory.)

    However, I do have two questions for you…

    1.) Have you read Paul A. Samuelson’s classic 1948 textbook?

    2.) Have you read the original article by Paul A. Samuelson about revealed preference? It was actually an attempt to shed the last bits of utility theory.

    http://www.amazon.com/Economics-The-Original-1948-Edition/dp/0070747415/

    http://www.jstor.org/stable/2548836

    • True, it’s not always unfalsifiable. It depends on the definition you use. If you use Lilico’s definition, then it is unfalsifiable, but mainstream economists also use other definitions. However, one thing that I’ve noticed is that when you press some mainstream economists, they fall back on the unfalsifiable definition and I don’t find that very useful.

      Also, I have not read Samuelson’s textbook. I have read that paper of his though. How much of the math I understand is a different question altogether!

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