1. Introduction
Rational Choice Theory is an approach used by social
scientists to understand human behavior.
The approach has long been the dominant paradigm in economics, but in
recent decades it has become more widely used in other disciplines such as
Sociology, Political Science, and Anthropology.
This spread of the rational choice approach beyond conventional economic
issues is discussed by Becker (1976), Radnitzky and Bernholz (1987), Hogarth
and Reder (1987), Swedberg (1990), and Green and Shapiro (1996).
The main purpose of this paper is to provide an overview of
rational choice theory for the non-specialist.
I first outline the basic assumptions of the rational choice approach,
then I provide several examples of its use.
I have chosen my examples to illustrate how widely the rational choice
method has been applied.
In the paper I also discuss some ideas as to why the
rational choice approach has become more prevalent in many disciplines in
recent years. One idea is that the
rational choice approach tends to provide opportunities for the novel
confirmation of theories. I argue
that these opportunities are the result primarily of the mathematical nature of
the approach.
I then consider several issues raised by rational choice
theory. First, I compare the limited
meaning of “rationality” in rational choice theory with the more general
definitions of the term use by philosophers.
Second, I describe some of the main criticisms that have been levied
against the rational choice approach.
Third, I consider the limitations of rational choice models as guides to
public policy. Fourth, I review some
Christian perspectives on the rational choice appraoch.
I end the paper by outlining three sets of questions I would
like us to discuss in the faculty development seminar.
Before I proceed, an apology and a caveat are in
order. I apologize for the length of
this paper. The British publisher Lord
Beaverbrook once apologized to a friend for sending a five- page letter, saying
he did not have time to write a one-page letter. I have the same sentiment here.
The caveat is that my discussion of the rational
choice theory in this paper is necessarily simplistic, so the reader should not
take it as definitive. If some element
of the theory seems suspect in some way, there will nearly always be an
advanced version of the theory published somewhere that is more subtle and
nuanced. Most statements in this paper
are subject to qualification along many lines, so the reader should view what I
present here keeping in mind the goal of the paper, which is only to give the
reader some sense of the overall flavor of the rational choice approach.
2. Basic Assumptions about Choice Determination
Rational Choice Theory generally
begins with consideration of the choice behavior of one or more individual
decision-making units – which in basic economics are most often consumers
and/or firms. The rational choice
theorist often presumes that the individual decision-making unit in question is
“typical” or “representative” of some larger group such as buyers or sellers in
a particular market. Once individual
behavior is established, the analysis generally moves on to examine how
individual choices interact to produce outcomes.
A rational choice analysis of the
market for fresh tomatoes, for example, would generally involve a description
of (i) the desired purchases of tomatoes by buyers, (ii) the desired production
and sales of tomatoes by sellers, and (iii) how these desired purchases and
desired sales interact to determine the price and quantity sold of tomatoes in
the market. The typical tomato buyer is
faced with the problem of how much of his income (or more narrowly, his food
budget) to spend on tomatoes as opposed to some other good or service. The typical tomato seller is faced with the
problem of how many tomatoes to produce and what price to charge for them.
Exactly how does the buyer
choose how much of his income to spend on tomatoes? Exactly how does the seller choose how
many tomatoes to produce and what price to charge? One could imagine a number of answers to
these questions. They might choose based
on custom or habit, with current decisions simply a continuation of what has
been done (for whatever reason) in the past.
The decisions might be made randomly.
In contrast, the rational choice approach to this problem is based on
the fundamental premise that the choices made by buyers and sellers are the
choices that best help them achieve their objectives, given all relevant
factors that are beyond their control.
The basic idea behind rational choice theory is that people do their
best under prevailing circumstances.
What is meant, exactly, by “best
achieve their objectives” and “do their best?”
The discussion in this section will emphasize the choices of consumers.
The rational choice theory of consumer behavior is based on the following
axioms regarding consumer preferences:
(1)
The consumer faces a known set of alternative choices.
(2)
For any pair of alternatives (A and B, say), the consumer
either prefers A to B, prefers B to A, or is indifferent between A and B. This is the axiom of completeness.
(3)
These preferences are transitive. That is, if a consumer prefers A to B and B
to C, then she necessarily prefers A to C.
If she is indifferent between A and B, and indifferent between B and C,
then she is necessarily indifferent between A and C.
(4)
The consumer will choose the most preferred alternative. If the consumer is indifferent between two or
more alternatives that are preferred to all others, he or she will choose one
of those alternatives -- with the specific choice from among them remaining
indeterminate.
When economists speak of
“rational” behavior, they usually mean only behavior that is in accord with the
above axioms. I consider the definition
of “rationality” in more detail near the end of the paper below.
Rational
choice theories usually represent preferences with a utility function. This is a mathematical function that assigns
a numerical value to each possible alternative facing the decision maker. As a simple example, suppose a consumer
purchases two goods. Let x
denote the number of units of good 1
consumed and y denote the number of units of good 2 consumed. The consumer’s utility function is given by U
= U(x,y), where the function U(·,·) assigns a number (“utility”) to
any given set of values for x and y. The properties of a large number of specific
function forms for U(·,·) have been considered. The analysis is by no means restricted to two
goods, though in many cases the analyst finds it convenient to assume that x
is the good of interest is and y is a “composite good” representing
consumption of everything but good x.
The function U(·,·) is normally
assumed to have certain properties.
First, it is generally assumed that more is preferred to less –
so that U rises with increases in x and with increases in y. Another way of saying this is to say that
marginal utility is positive – where the term “marginal utility” is the change
in utility associated with a small increase in the quantity of a good
consumed. The second property of U(·,·)
is that of diminishing marginal utility, which means that the (positive)
marginal utility of each good gets smaller and smaller the more of the good
that is being consumed in the first place.
One’s first Dr. Pepper after a workout yields quite a lot of
satisfaction. By the fifth or sixth, the
additional satisfaction, while still positive, is much smaller.
An important result in consumer theory is that a
preference relationship can be represented by a utility function only if the
relationship satisfies completeness and transitivity. The converse (that any
complete and transitive preference relation may be represented by a utility
function) is also true provided that the number of alternative choices is
finite. [Mas-Collel, Whinston, and Green
(1995, p. 9)] If the number of possible
alternative choices is infinite, it may not be possible to represent the
preference relation with a utility function.
Rational choice analysis generally begins with the
premise that some agent, or group of agents, is [are] maximizing utility – that
is, choosing the preferred alternative.
This is only part of the story, however.
Another important element of the choice process is the presence of constraints. The presence of constraints makes choice
necessary, and one virtue of rational choice theory is that it makes the
trade-offs between alternative choices very explicit. A typical constraint in a simple one-period
consumer choice problem is the budget constraint, which says that the
consumer cannot spend more than her income.
Multi-period models allow for borrowing, but in that case the constraint
is that the consumer must be able to repay the loan in the future.
The use of utility functions means the idea of
agents making the preferred choices from among available alternatives is
translated into a mathematical exercise in constrained optimization. That is, an agent is assumed to make the
feasible choice (feasible in a sense that it is not prohibited by constraints)
that results in the highest possible value of his or her utility function. Constrained optimization methods (based on
either calculus or set theory) are well developed in mathematics.
The solution to the constrained optimization
problem generally leads to a decision rule.
The decision rule shows how utility-maximizing choices vary with changes
in circumstances such as changes in income or in the prices of goods.
A third element of rational choice analysis
involves assumptions about the environment in which choices are
made. Simple economic models are often
restricted to choices made in markets, with emphasis on how much of each
good or service consumers want to purchase (or firms want to produce and sell)
under any given set of circumstances.
A fourth element of rational choice analysis is a
discussion of how the choices of different agents are made consistent
with one another. A situation with
consistent choices in which each agent is optimizing subject to constraints is
called equilibrium. In the fresh
tomato market, for example, the choices of buyers and sellers are consistent if
the quantity of tomatoes consumers want to purchase at the prevailing price is
equal to the quantity that firms want to produce and sell at that price. In this as in other simple market models,
price plays a key role in the establishment of equilibrium. If consumers want to purchase more than firms
are producing, the price will be bid upward, which will induce more production
by firms and reduce desired purchases by consumers. If consumers want to purchase less than firms
are producing, the resulting glut will force prices down, which will reduce
production by firms and increase purchases by consumers.
Fifth and last, in the absence of strong reasons
to do otherwise such as the imposition of price controls by the government, the
analyst employing rational choice theory will generally assume that equilibrium
outcomes in the model are adequate representations of what actually happens in
the real world. This means, in the
above example, that a rational choice theorist would explain changes in the actual
price of tomatoes observed in the real world by looking for possible causes of
changes in the equilibrium price of tomatoes in her model.
Extensions
The basic rational choice theory described above
has been extended in a number of ways. I will consider four important ones in
this section, though there are of course many others.
First, the basic theory accounts only for choice
at a given time – that is, the model is static. In contrast, a dynamic
(or intertemporal) model allows the agent to plan for the future
as well as make choices in the present.
In a dynamic model, the agent is still assumed to maximize utility, but
the concept of utility is generalized to include not only present satisfaction
but also future satisfaction. The agent
does not just make choices today – he makes a plan for current and
future choices. In this case, it may
well be “rational” to sacrifice (e.g., consume less or work more) today in
order to obtain some better outcome tomorrow.
The dynamic formulation is an essential element of theories of saving
and investment.
One issue that arises in dynamic models is that of
discounting. In most dynamic
models, the agents under consideration are assumed to prefer (other things
equal) a given level of consumption in the present to a given level of
consumption in the future. Consider a
model with two periods, 1 and 2.
Let U1 denote the agent’s utility in period 1
and U2 denote utility in period 2. (U1 and U2
can depend on a number of factors, some of which can be controlled by the
agent.) The agent would then be assumed
to formulate a plan for periods 1 and 2 to maximize the sum V = U1
+ ·U2, where 0 < < 1 is the “discount
factor.” A specification of < 1 means that
a given utility is worth less to the agent in the future than in the present,
and is denoted a “positive rate of time preference” or simply “time
preference.” A justification for time
preference is given by Olson and Bailey (1981).
Elster (1984, pp. 66ff) summarizes the opposing view that “... for an
individual the very fact of having time preferences, over and above what is
justified by the fact that we are mortal, is irrational and perhaps immoral as
well.” In any case, dynamic models with
positive time preference are pervasive in the rational choice literature.
The basic rational choice model assumes all
outcomes are known with certainty. A
second extension of the basic model involves explicit treatment of uncertainty. This is important in rational choice models
of crime, for example, where a rational agent is assumed to consider the chance
he or she will be apprehended while committing a criminal act. The rational choice model is extended to
allow for uncertainty by assuming the agent maximizes expected
utility. Uncertainty is characterized by
a probability distribution that assigns a likelihood (probability) to each
possible outcome. Suppose there are two
possible outcomes (for example, the prospective criminal is apprehended while
committing a crime, or not apprehended while committing the crime), which we
can denote outcome A and outcome B. Let pA denote the
probability that outcome A will occur pB denote the
probability of outcome B. With
these as the only possible outcomes, it is clear that pA + pB
= 1 -- that is, there is a 100%
chance that either A or B will occur. Let U(A) be the agent’s utility with
outcome A and U(B) be the agent’s utility with outcome B. The agent is then assumed to maximize
expected utility, which is the sum of utility in each outcome weighted by the
probability that outcome will occur: V
= pA·U(A) + pB·U(B).
In general, the choices of the agent can affect pA and
pB as well as U(A) and U(B).
A related (and third) area in which the rational
choice model is extended involves incomplete information. In the basic model described above, the agent
knows perfectly all the qualities of the goods under her consideration. More generally, an agent may have to make
choices when she does not have full information. A university generally does not have full
information about the future research productivity of a new assistant
professor, for example, and a used car buyer cannot be certain that he is not
driving a “lemon” off the lot.
The fourth area in which the basic rational choice
model is extended involves strategic behavior. This generally occurs in situations in which
there are only a few agents. The key
issue is that each agent must take into account the likely effect of his
actions on the decisions of other agents, all of whom are looking at the
situation the same way. A classic
ongoing example of this kind of interaction involves the crude-oil production
decisions of the Organization of Petroleum Exporting Countries (OPEC). Acting collectively, OPEC members have an
incentive to restrict production to keep the world price of crude-oil
high. Thus each OPEC country is given a
production quota – a limit on the amount it can produce. Each country acting individually, however,
has an incentive to “cheat” on its quota and thereby be able to sell more
crude-oil at the high price. This will
only be successful if the other countries maintain their quotas, however,
thereby keeping the price high. Thus
when a country is contemplating the breach of a quota, it must consider how
other member countries may react. The
branch of economics that deals with strategic interactions is called game
theory.
3. A Brief Description of the Rational Choice
Method
Like most scholarship, rational choice analysis
usually begins with a question. What
determines church attendance? Are
suicide rates affected by the state of the economy? Do seat belt laws make highways safer? Under what circumstances are “cold turkey”
methods necessary to end addictions? Why
are drivers of certain minority groups more likely to be pulled over by
police? Which soldiers are most likely
to suffer casualties in a war? Why can’t
Yasser Arafat and Ariel Sharon just get along?
Why did large mammals become extinct in the Pelistocene era? When are workers most likely to “shirk” their
job responsibilities? Does a reported
decline in “consumer confidence” portend a slowdown in the economy?
Varian (1997, p. 4) describes the model-building
process as follows:
...
all economic models are pretty much the same.
There are some economic agents.
They make choices in order to advance their objectives. The choices have to satisfy various
constraints so there’s something that adjusts to make all these choices
consistent. This basic structure
suggests a plan of attack: Who are the people
making choices? What are the constraints
they face? How do they interact? What adjusts if the choices aren’t mutually
consistent?
I will provide a slightly more detailed
description here. Rational choice analysis may be characterized as working
through the following steps:
(1) Identify the relevant
agents and make assumptions about their objectives.
(2) Identify the constraints
faced by each agent.
(3) Determine the “decision
rules” of each agent, which characterize how an agent’s choices respond to
changes of one kind or another – for example, how the quantity of tomatoes
purchased might change with price or income.
This task is usually accomplished mathematically by the solution of a
constrained optimization problem.
(4) Determine how the decision
rules of various agents may be made consistent with one another and thereby
characterize the equilibrium of the model. Effective analysis of complex interactions
between agents normally involves the use of mathematical methods, which can
sometimes be quite sophisticated.
(5) Explore how the
equilibrium of the model changes in response to various external events. That is, determine the predictions or implications
of the model. Again, this step can
involve substantial use of mathematics.
(6) Examine whether the
predictions determined in step (5) are consistent with actual experience. This step often involves the statistical
analysis of data and can involve sophisticated techniques (to control sample
selection bias, for example).
(7) Draw conclusions and any
implications (for government policy, for example) implied by (6).
It is often the case that
the question at hand may be addressed by reference to standard theoretical
results (e.g., people generally want to consume less of a product when its
price increases). In these circumstances
the analyst often will not specify and solve a rational choice model
explicitly. Instead, she will assume the
reader understands that the model could be specified and solved if necessary
and would have conventional implications.
A. Preference Specification
In rational choice theory behavior follows from
the pursuit of objectives, so preference specification is crucial. Frank (1997, p. 18) describes two general
approaches. The self-interest
standard of rationality “says rational people consider only costs and
benefits that accrue directly to themselves.”
The present-aim standard of rationality “says rational
people act efficiently in pursuit of whatever objectives they hold at the
moment of choice.” Frank contends that
neither approach is obviously satisfactory.
Many people would seem to care about more than their own material
well-being, so the selfish egoism implied by self-interest standard is probably
too narrow. In contrast, the present-aim
standard puts no restrictions at all on preference formation, which means that anything
can be explained by an appeal to preferences.
Again quoting Frank (1997, p. 18):
Suppose,
for example, that we see someone drink a gallon of used crankcase oil and keel
over dead. The present-aim approach can
“explain” this behavior by saying that the person must have really liked
crankcase oil.
The main strength of the
self-interest standard is that the associated preference specifications are
generally straightforward. This
approach, which dominates basic economic theory, usually assumes that utility
depends only on the consumption of material goods and services and that, for
any given good or service, more is strictly preferred to less. Bergstrom (forthcoming) presents an analysis
based on evolutionary considerations showing circumstances under which selfish
behavior will become dominant.
The present-aim standard has also
been used in rational choice models, but its use is nowhere near as prevalent
as use of the self-interest standard.
The reasons are threefold. First,
the self-interest standard has often been successful in the sense of yielding
predictions that are consistent with experience. Second, there is no compelling way to specify
preferences when the only criterion is “more than self-interest matters.” (People may care about others, but are teh
jealous or altruistic?) Third,
self-interest standard models are more tractable analytically and are more
prone than present-aim models to imply specific observable predictions. In particular, models in which agents care
about each other in some way are prone to have multiple equilibria (sometimes
an infinity of equilibria). Frank (1987)
makes an evolutionary argument that preferences should include concerns for
others. Bergstrom (1999) explores some
possible solutions to the “multiple equilibrium” problem.
B. Theory Revision
It many instances step (6) will find that one or
more of the predictions of a model are not borne out by the data. In these cases, the typical rational choice
theorist will not even consider abandoning the assumption of utility
maximization. Instead, she will conclude
that she must have missed something about constraints or preferences and
attempt to revise her theory accordingly.
This issue of theory revision is very tricky, and
space limitations (not to mention by limited understanding) permit only a brief
discussion here. Suppose a theory T
has prediction P, when in fact available data indicate the opposite (not
P, or ~P). The theory might then be
revised in some way to become theory T’, where T’ predicts ~P
rather than P. My impression is that
most economists would much rather change assumptions about constraints rather
than change assumptions about preferences. This viewpoint reflects a desire to avoid
meaningless tautologies such as “he consumed more tomatoes because his
preferences changed in such a way that he wanted to consume more
tomatoes.” One can explain any
choice in this way.
Hausman (1984) summarizes the thinking of Lakatos
(1970) as follows:
A
modification of a theory is an improvement if it is not ad hoc. Modifications may be ad hoc in three
ways. First of all, a modification of a
theory may have no new testable implications at all. Lakatos regards such modifications as
completely empty and unscientific.
Modifications that are not ad hoc in this sense are “theoretically
progressive.” It may be, however, that
the testable implications of the theoretically progressive modifications are
not confirmed by experiments or observations.
In that case modifications are theoretically progressive but not
empirically progressive. They are ad hoc
in the second sense. An extended process
of theory modification is progressive overall if the modifications are
uniformly theoretically progressive and intermittently empirically
progressive. As one is modifying one’s
theory in the hope of improving it, modifications must always have new testable
implications, and those testable implications must sometimes be borne out by
experience. But one crucial feature of
science has been left out. Throughout
this history of repeated modifications, there must be some element of
continuity. No theoretical progress in
economics is made if I modify monetary by theory by adding to it the claim that
copper conducts electricity. The
expanded theory has testable (and confirmed) implications, but something
arbitrary has simply been tacked on.
Such a modification is ad hoc in the third sense. One needs to recognize the role of something
like a Kuhnian “paradigm.” Modifications
of theories must be made in the “right” way.
(p. 23)
I believe that most rational
choice theorists would adhere to these criteria for effective theory
modification. As Stigler and Becker
(1977) note:
What
we assert is not that we are clever enough to make illuminating applications of
utility-maximizing theory to all important phenomena – not even our entire
generation of economists is clever enough to do that. Rather, we assert that this traditional
approach of the economist offers guidance in tackling these problems – and that
no other approach of remotely comparable generality and power is
available. (pp. 76-7)
…. We also claim … that no
significant behavior has been illuminated by assumptions of differences in
tastes. Instead, they, along with
assumptions of unstable tastes, have been a convenient crutch to lean on when
the analysis has bogged down. They give
the appearance of considered judgement (sic), yet really have only been
ad hoc arguments that disguise analytical failures. (p. 89)
In any case, one can
change assumptions about preferences only if the new assumptions not only fix
the failure of the previous model (that is, they imply ~P rather than P)
but also have new predictions that are not rejected by the data.
C. Why is the Rational Choice Approach so
Popular?
Defenders of the rational choice approach – e.g.,
Becker (1976) -- argue that the approach
is useful because it tends to generate non-tautological
predictions. Suppose a scholar wants to
account for some observed phenomenon P.
For example, P might be the fact that wage rates paid to workers
(after adjustment for inflation) tend to rise during good economic times
[expansions] and fall during bad economic times [recessions]. It is generally
quite easy to develop a theory T that predicts P, especially for
someone who has studied P carefully.
In fact, many such theories can be constructed.
Importantly, however, it is generally
not good scientific practice to use the same data to both formulate and test
a hypothesis or theory. If so, all
theories would be confirmed. Instead,
good methodology will develop a theory T that not only predicts P,
but that also has other predictions Q1, Q2,
Q3, … Ideally, many of these predictions will be observable –
that is, one should be able to determine if Q1, Q2,
Q3 …. do or do not in fact occur. If these predictions are not observed – say not
Q1 (~Q1) is observed rather than Q1
– the theory may be judged inadequate and either revised or discarded. If I may be allowed a lapse into imprecise
language, a theory can never be right if there is not at least some possibility
in the first place for it to be wrong.
This is not to say that rational
choice theorists are pristine with respect to this requirement. The history of economic thought is no doubt
full of bad theories (“bad” in the sense that one or more key predictions are
not consistent with the data) that have been saved by ad hoc
modifications. It is to say that
proponents of the rational choice approach contend that ad hoc
theorizing and the resulting empty tautologies may be less prevalent with their
approach than with other approaches.
I certainly agree that the rational
choice method does in fact tend to generate many testable predictions, and in
Sections 4 and 5 below I discuss several illustrative examples. Despite the fact that advocates of rational
choice theory justify their approach in this way, I know of no study that
explicitly compares methodologies along these lines. Is it really the case that rational
choice models have more non-tautological implications than the models implied
by other approaches? I am not sure
anyone has examined this issue carefully.
I believe the rational choice
methodology is gaining in popularity not just because it tends to generate lots
of observable predictions, but also because it tends to generate novel
predictions. This is an extension of the
idea of novel confirmation.
Novel confirmation embodies the sentiment
expressed by Descartes (1644) that we know hypotheses are correct “only when we
see that we can explain in terms of them, not merely the effects we originally
had in mind, but also all other phenomena which we did not previously think.”
[Quoted by Musgrave (1974), p. 1)] Campbell and Vinci (1983, p. 315) begin
their discussion of novel confirmation as follows:
Philosophers of science generally agree that
when observational equivalence supports a theory, the confirmation is much
stronger when the evidence is ‘novel’.
The verification of an unusual prediction, for example, tends to provide
much stronger confirmation than the explanation of something already known of
something the theory was designed to account for. This view is so familiar that Michael Gardner
has recently described it as ‘a lengthy tradition – not to say a consensus – in
the philosophy of science.’
As seems to often be the
case in the philosophy of science, the usefulness of novel confirmation is not
as well established as the above quote implies.
Campbell and Vinci (1983) also note that “... the notion of novel
confirmation is beset with a theoretical puzzle about how the degree of
confirmation can change without any change in the evidence, hypothesis, or
auxiliary assumptions.” (p. 315) Kahn,
Landsburg, and Stockman (1992) maintain that the question of novel confirmation
can be addressed meaningfully only in the presence “of an explicit model by
which hypotheses are generated.” (p. 504)
They find that the idea of novel confirmation is valid if there are
unobservable differences in the abilities of scientists or if there is some
chance of error in observation.
Campbell and Vinci (1993) distinguish between epistemic
novelty and heuristic novelty.
Epistemic novelty occurs when a theory has an implication that would be
considered highly improbable in the absence of the theory. There is of course a question over the proper
definition of “highly improbable.”
Heuristic novelty occurs when the evidence predicted by a theory plays
no heuristic role in the formation of the theory. Descartes would seem to be referring to
heuristic novelty in the above quote.
Rational choice theory is a useful methodology in
part (perhaps in large part) because it tends to lead the researcher to novel
implications, thereby making novel confirmation more likely than may be the
case with other methodologies. Space and
time considerations do not allow me to attempt a full-blown analysis of this
conjecture, which in any case I am not really qualified to undertake because of
my limited exposure to alternative social science methodologies not based on
rational choice and my limited knowledge of the philosophy of science. In Sections 4 and 5 below I describe several examples of rational choice theory
and some associated novel implications.
I should note that the mathematical nature of
rational choice theory would appear (to me) to be crucial here. Mathematics allows the theorist to make some
sense out of complicated interactions between decision-making units that would
otherwise be difficult or impossible to untangle. It is precisely those kinds of situations in
which rational choice theories are most likely to have novel implications,
because the implications are not immediately apparent even to scholars with
knowledge, experience, and intuition.
We now proceed to Section 4, which provides a
detailed discussion of a rational choice model of church attendance. Section 5 gives shorter summaries of several
other rational choice models, including models of suicide, auto safety
regulation, addiction, racial profiling, Congressional influence on military
assignments, political revolutions, megafauna extinction, and the
predictability of consumption spending.
4. A Detailed Example:
Church Attendance
Azzi and Ehrenberg (1975) develop a rational choice model of
church attendance. This is a classic
paper, which Iannaccone (1998, p. 1480) calls “... the first formal model for
religious participation (within any discipline) and ... the foundation
for nearly all subsequent economic models of religious behavior.” [Italics in
original.] Their analysis begins with
the assumption that the utility of a household consisting of two members, a
husband and a wife, is given by:
(1) U = U(C1, s1, C2,
s2, ..., Ct, st, ..., Cn, sn,
q),
where Ci
is the household’s consumption of market goods and services in period i (i =
1, ... n), and si denotes religious participation in
period i. The model assumes “for
simplicity” that both members of the household know how long they will live and
that both will die at date n.
This is a dynamic model, because the household cares about future as
well as current consumption.
The remaining variable in the household utility
function, q, is the “expected value of the household’s afterlife
consumption.” Azzi and Ehrenberg assume
that church attendance follows from a “salvation motive” (the desire to
increase afterlife consumption) and a “social pressure motive” (where church
membership and participation increases the chances that an individual will be
successful in business), rather than necessarily a pure “consumption motive”
(people simply enjoy the time they spend at church).
Consumption in period i (any year during
which the husband and wife are alive) is given by:
(2) Ci = C(xt,
h1t, h2t),
where xt
is denotes the consumption of goods and services purchases in markets, while h1t
and h2t are the amounts of time devoted by the husband and
wife, respectively, to market-based consumption. The idea here is that satisfaction involves
not only the purchase of a good (such as a television) but also time spent
using the good.
The social value of church attendance in period i,
denoted by si, is determined as follows:
(3) si =
s(r1i, r2i)
where r1i
and r2i denote the time spent on church-related activities by
the husband and wife, respectively, in year i.
People get more current satisfaction from going to church the more time
they devote to church-related activities.
After-life consumption q is determined as
follows:
(3) q = q(r11, r12,
r21, r22, ..., r1n, r2n),
That is, the more time
spent on church-related activities during all periods of life means the more
the household members will enjoy their afterlife. Azzi and Ehrenberg (p. 33, fn. 7) note that
“Our household’s view of the afterlife is not one of an all-or-nothing
proposition (heaven or hell), it is rather that there is a continuum of
possible outcomes.”
The choices of the household are constrained by
time and money. The two household
members can allocate time in labor [which generates income that can be used to
purchase the goods and services denoted by xt in equation (1)
above], consumption-related activities [reflected in h1t and h2t
in equation (2) above], and church-related activities [reflected in the r1i
and r2i in equation (3) above]. The constraint here is that each day has 24
hours. Hence the couple can spend more
time on church-related activities only if they spend less time earning income
and/or consuming.
The second constraint in the model says basically
that, over the course of their lives, the couple cannot spend more than their
combined income. “Over the course of
their lives” means that it is possible for them to borrow early in life as long
as they repay the loan (with interest) later in life. It is also possible to lend early in life,
which means that consumption can exceed income later. The amount of labor income the couple earns
depends on the amount of time spent working by the husband and wife and the
wage rate each is paid. The model also
allows for “non-labor income” in each period, which might reflect investment
returns. The distinction between labor
and non-labor income turns out to be rather interesting and important with
respect to church attendance.
Azzi and Ehrenberg’s analysis is complicated in
some respects and simple in others. It
is complicated because it considers consumption over several periods rather
than just one, and it allows for “consumption” to depend on time (the h1t
and h2t) as well as purchases of goods and services in the
market (xt). The
model is simple in that it does not consider the “supply side.” That is, the model simply assumes that the
household can “buy” any amount that it likes of consumption goods (xt)
and that there are no effective limits on religious participation (st).
The power of the rational choice approach is that
rational choice models tend to have lots of observable implications, some of
which are novel. The Azzi and Ehrenberg
model implies that:
·
(i) The frequency of church attendance increases with age;
·
(ii) Females attend church more frequently than males;
·
(iii) Nonwhites attend church more frequently than whites;
·
(iv) People who believe in an afterlife attend church more
frequently;
·
(v) Having a spouse of the same major religion increases
participation;
·
(vi) As health deteriorates church attendance declines;
·
(vii) An increase in the number of pre-school age children
present in the household reduces church attendance;
·
(viii) An increase in the number of school-age children
present in the household increases church attendance;
·
(ix) Females’ hours devoted to religious activities will rise
more rapidly with age than will the hours devoted by males to religious
activities;
·
(x) For males who show sharp earnings increases in their 20s,
religious participation may first decline with age and then increase;
·
(xi) An increase in nonlabor income will increase religious
participation; and
·
(xii) The effect of a proportionate shift in wages (say, a
10% increase in the present and all
future periods) on church attendance is ambiguous.
Many of these implications are not surprising, but
(ix) would appear to be somewhat novel.
Item (ii) means that 40 year old women will attend church more
frequently than 40 year old men. Item
(ix) means that the change (increase) in church participation associated
with aging from 40 to 50 will be greater among women than among
men. Item (ii) follows directly from the
fact that females tend to have lower wages.
Thus if one could find couples in which the wife earns more than the
man, the model predicts for those couples that the wife will probably not be
inclined to attend church more frequently.
Also, allowing for an uncertain time of death may overturn (i): “... once an individual is faced with a
relatively high probability of death in a period it may become optimal for him
to concentrate his religious participation as early as possible, since he may
not survive to ‘invest’ in future periods.”
(p. 38)
5. Several
Brief Examples
This
section presents a brief overview of several applications of rational choice
theory. Unlike the church attendance
example above, in which the form of the utility function was written out
explicitly, the discussions in this section for the most part present only
brief descriptions of the relevant optimization problems and some of the
resulting implications.
A. Suicide
Hamermesh and Soss (1974) develop a
rational choice theory of suicide. They
assume that the utility of an individual in any given period depends positively
on “consumption” and negatively on “a technological relation describing the
cost each period of maintaining [oneself] at some minimum level of
subsistence.” (p. 85) “Consumption” is a function of age and of
“permanent income,” which is a measure of current and expected future
income. Individuals are assumed to vary
exogenously (according to a probability distribution) in their distastes for suicide
– that is, some individuals are more averse to suicide than others. This framework implies that “... an
individual kills himself when the total discounted lifetime utility remaining
to him reaches zero.” (p. 85).
Thus
in this model we have a rational individual who is forward looking, considering
not only his present utility but what his future utility is likely to be. If total utility over the rest of his life is
higher with suicide and life ending in the present than it is with the
continuation of life, suicide is the “rational” option. Here are some of the major implications of
the model.
·
(i) The suicide rate should rise with age.
·
(ii) The suicide rate should fall with increases in permanent
income
and decreases in the unemployment rate.
·
(iii) The marginal absolute effect of permanent income on
suicide declines as permanent income increases.
The first two effects are
by no means surprising, but the third effect is certainly by no means obvious ex
ante (at least to me). (ii) means
that suicide rates will fall as income rises.
(iii) means that the effect of increases in income gets smaller the
larger income is to begin with. A
$10,000 raise is much more likely to prevent suicide if the person is earning
$50,000 to begin with than if the person is earning $150,000. This is quite plausible, but the point is
that it is not something most analysts would think about ex ante.
B. Auto Safety Regulation.
Peltzman
(1975) considers the likely effects of “legally mandated installation of
various safety devices
on automobiles.” The devices in question for the most part
were designed to reduce the damages caused by accidents rather than to reduce
the likelihood that accidents occur.
Peltzman notes that the auto safety literature estimates the impact of
safety mandates by assuming that (i) the mandates have no effect on the
probability that an accident will occur, and (ii) the mandates have no effect
on the voluntary demand for safety devices.
In effect, the regulations were implemented based on analysis that
assumed the same number and nature of accidents would occur, but that
automobiles would be better equipped to protect drivers and passengers from
injury and death. He notes that
“[t]echnological studies imply that annual highway deaths would be 20 percent
greater without legally mandated installation of various safety devices on
automobiles.” (p. 677)
Peltzman considers the behavior of a typical
driver and postulates quite reasonably that he or she is made worse off by
traffic accidents – or, equivalently, that he or she benefits from safety. Peltzman also assumes, however, that the
driver benefits from what he calls “driving intensity,” by which he means “more
speed, thrills, etc.” (p. 681). Other
things equal, the driver can obtain more driving intensity only by driving less
safely. Thus the driver faces a
trade-off between two goods, intensity and safety, in which more of one can be
obtained only by giving up some of the other.
This kind of trade-off is in standard fare for
rational choice theorists. In basic
consumer choice theory the consumer with a given income can obtain more of one
good only if he or she consumes less of some other good (or goods).
The
standard consumer choice problem also considers what happens when the
consumer’s income rises. Rational choice
theory predicts that, in the absence of very unusual circumstances, the
consumer will buy more of most goods when income rises. Put another way, it is typically not the case
that a consumer will allocate one hundred percent of an increase in income to
increased consumption of a single good.
Income increases tend to be “spread around” over several goods.
Peltzman
argues that the imposition of mandated safety devices in automobiles is rather
like an increase in income in the sense that the devices make it possible for
drivers to obtain both more safety and more intensity. Technological studies in effect assume that
drivers will respond by consuming only more safety, but rational choice theory
indicates that drivers can also respond by consuming more intensity (that is,
by driving less safely). The extent to
which drivers choose between more safety and more intensity is ultimately an
empirical question.
Suppose drivers choose to increase consumption of both
safety and intensity -- which is what economists have come to expect in these
kinds of situations. In this case, the
rational choice model implies that the number of total driving accidents
should rise because of increased driving intensity, while the average amount of
damage per accident – as reflected, say in the number of fatalities
among passengers – should decrease because of the safety improvements. This means that it is actually possible for total
traffic fatalities to rise as a result of the safety mandates! This would happen if the increase in the
number of accidents is sufficiently large relative to the decrease in average
damage per accident.
Once again we have an example of a rational choice
model yielding implications that are not obvious ex ante. The novel predictions here are that the
imposition of auto safety mandates (i) should increase the occurrence of
traffic accidents, and (ii) should decrease the relative frequency of accidents
involving passenger fatalities, and (iii) may increase or decrease the total
number of traffic fatalities.
After extensive empirical testing based on several
data sets, Peltzman concludes that “regulation appears not to have reduced
highway deaths.” (p. 714). There is indeed some evidence that the number
of deaths increased, but in most cases that evidence is not strong. In any case, there is no evidence that
the regulations decreased traffic fatalities.
Peltzman also finds that the safety mandates were followed by an
increase in the number of accidents involving pedestrians and by an increase in
the number of accidents involving only property damage with no injury to
vehicle occupants.
A
related paper by McCormick and Tollison (1984) considers the effect on arrest
rates of an increase in the number of police officers. Rational choice theory indicates that the
quality of law enforcement should not be judged by arrest rates alone. If the number of police officers increases
and as a result the probability of arrest for any given crime increases,
rational prospective criminals will see the expected cost of crime rise and
therefore undertake fewer criminal acts.
Total arrests reflect both the number of criminal acts (which should
fall) and the percentage of criminal acts for which an arrest is made (which
should rise). Total arrests rise only if
the latter effect is stronger than the former.
McCormick
and Tollison test their theory using data from the Atlantic Coast Conference in
men’s college basketball. In 1978, the
conference increased the number of officials from two to three. In this context, one may think of officials
as police officers and fouls called as arrests.
McCormick and Tollison find that this 50 percent increase in the number
of officials caused a 34 percent reduction in the number of fouls called
(p. 229).
When
my son Aaron (now almost 5 years old) was an infant, he attended the Baylor
Child Development Center during the day.
In the room where the teacher changed diapers, there was a pad on the
counter but no restraint of any kind (such as a belt or guard rail). When I asked the director about this, she
said that there was no restraint because she (the director) did not want to
give the teacher a false sense of security.
With a belt or rail, the teacher might be tempted to walk away for “just
a minute” to check on something in the room.
Whether restraints increase or decrease changing table accidents is an
empirical question, though Pelzman’s analysis suggests the director made the
right decision.
C.
Addiction
Stigler and Becker (1977) propose a rational choice theory
of addiction, a theory subsequently elaborated by Becker and Murphy
(1988). In this theory, “a person is
potentially addicted to [some good] c if an increase in his current
consumption of c increases his future consumption of c. (Becker and Murphy, 1988, p. 681) The key feature of these models is that a
consumer’s utility in any given period depends not just on consumption in that
period, but also on “consumption capital”.
Consumption capital is essentially the consumer’s ability to enjoy a
particular good, which depends on past consumption of the good and perhaps on
other factors.
If
past consumption enhances current enjoyment ability, the addition is said to be
beneficial. This might be the
case, for example, with listening to classical music. The more one listens to classical music, the
greater one’s capacity to appreciate it.
Stigler and Becker note that beneficial consumption capital might also
be positively influenced by education.
Highly educated people might have a greater capacity to enjoy things
like classical music, opera, and art.
If
past consumption reduces current enjoyment ability, the addition is said to be harmful. This is the case with substances such as
heroin and other substances normally considered to be addictive. The more heroin a person consumes in the
present, the less will be his or her future enjoyment (“high”) from any given
amount of heroin consumption in the future.
The
formal setup in Stigler and Becker (1977, p. 78) is relatively simple. First consider beneficial addiction – to,
say, classical music. Consumer utility (U)
depends positively on two goods, M (music appreciation) and Z
(other goods): U = U(M, Z). Music appreciation depends positively on the
time allocated to music listening (tm) and on music
consumption capital (Sm):
M = M(tm, Sm). Music consumption capital at date j, Smj,
depends positively on the time allocated to music consumption in the past, Mj-1,
Mj-2, …., and positively (perhaps) on the person’s level of
education at time j (denoted Ej): Smj = S(Mj-1, Mj-2,
… , Ej). The addition is
beneficial if Smj depends on positively on the
past values of M.
Alternatively,
for harmful addition we may replace M with H, where H denotes
the consumption of a good such as heroin.
In this case, consumption capital S depends negatively on past
values of H.
The
elaborated model of Becker and Murphy (1988) views addictive behavior as a
situation in which the consumption of a particular good begins to increase
rapidly. Their model has a number of
implications. Perhaps the most
interesting is their finding that the demand for addictive goods should be
quite sensitive to permanent changes in price (where the “price” of illegal
goods includes the expected costs associated with apprehension by authorities,
as well as any foregone earnings that may result from becoming addicted and,
say, unable to work), but not necessarily to temporary price changes. A second implication is that strong
addictions, if they are to end, must end suddenly (“cold turkey”). “Rational persons end stronger addictions
more rapidly than weaker ones.” (p.
692). Other implications are that
“addicts often go on binges” (p. 675), “present-oriented individuals are potentially
more addicted to harmful goods than future-oriented individuals” (p. 682), and
“temporary events can permanently ‘hook’ rational persons to addictive goods”
(p. 691).
Stigler
and Becker (1977) and Becker and Murphy (1988) do not perform empirical tests
of their models of rational addiction. Tests have been performed by other
authors, however. Because good
consumption data are not available for illegal substances, tests have focused
on tobacco and caffeine. Tests based on
tobacco consumption are reported by Becker, Grossman, and Murphy (1994), and
Keeler, et. al. (1993). A test based on
caffeine consumption is reported by Olekalns and Bardsley (1996). These tests are generally supportive of the
rational addiction theory.
Becker
and Murphy (1988) note that with a simple extension their model can explain
cycles of overeating and dieting. Their
basic analysis assumes there is only one kind of consumption capital. Suppose that with respect to food there are
instead two types of consumption capital, one of which is simply the
person’s weight (which might be called “health capital”) and the other of which
is “eating capital.” That is, eating can
be both harmful and beneficial in the senses defined above. As eating increases, health capital falls
(weight gain has detrimental effects on health) and eating capital rises (the
capacity to enjoy food is greater the more one eats). Under appropriate conditions, utility
maximization results in cycles of dieting and binging.
Rational
addiction theory has been applied to the analysis of religious behavior – see
Iannaccone (1984, 1990) and Durkin and Greeley (1991). Iannaccone (1998) summarizes this
approach. Utility depends on “religious
commodities” produced, the value of which depends on “religious human
capital.” The stock of religious human
capital depends on time and money devoted to religious activities in the
past. These models have the following
predictions, “nearly all of which receive strong empirical support”
(Iannaccone, 1998, p. 1481):
·
Individuals tend to move toward the denominations and beliefs
of their parents as they mature and start to make their own decisions about
religion;
·
People are more likely to switch denominations early in life;
·
People tend to marry within religions; if they do not, one
spouse is likely to adopt the religion of the other.
D. Racial Profiling
Law enforcement authorities in many jurisdictions have been
criticized in recent years for racial bias in their choice of cars to search
for illegal drugs and other contraband. The fact that police are more inclined to
stop and search cars driven by members of certain minority groups is well
established. Knowles, Persico, and Todd
(2001) develop a rational choice model that “suggests an empirical test for
distinguishing whether this disparity is due to racial prejudice or to the
police’s objective to maximize arrests.”
In their model, the typical police officer “maximizes the total number
of convictions minus a cost of searching cars.”
(p. 209) Motorists “consider the
probability of being searched in deciding whether to carry contraband.” (p. 209)
At least some motorists perceive a benefit to carrying contraband. If they do carry, their expected benefit is
positive if they are not searched and negative (that is, there is a positive
expected cost) if they are searched.
The model implies that if
police officers are not racially biased, the frequency of guilt among motorists
conditional on being searched will be independent of race. In their empirical analysis based on 1,590
searches on a stretch of Interstate 95 in Maryland between January 1995 and
January 1999, Knowles, Persico, and Todd find support for this
proposition. They interpret this result
as “the absence of racial prejudice against African Americans” (p. 212).
The
fact remains, however, that African Americans are searched more frequently than
whites. If this does not arise from
racial bias by police officers, then why does it occur? One possibility noted by the authors is that
“race may proxy for other variables that are unobservable by the policy officer
and are correlated with both race and crime.
Possible examples of such unobservables are the schooling level or the
earnings potential of the motorist.” (p.
212)
While one may quibble with some
elements of this study, for our present purposes the main point is that the
rational choice theory, at least potentially, yielded implications that allowed
the analyst to gain some insight (if not a final resolution) into the issue of
racial profiling.
E. Congressional Influence on Military
Assignments
Prior to the 1960s, economic theory tended to view
politicians and other government officials (bureaucrats) as disinterested
observers and regulators of economic activity.
A group of economics led by Nobel Laureate James Buchanan then developed
a branch of economics known as public choice theory, which views
government officials as self-interested maximizers. Goff and Tollison (1987) take a public choice
approach to gain some understanding of casualties in the Vietnam War. The typical soldier is assumed to prefer not
to be placed in risky combat situations, and this preference is shared by the
soldier’s family. A solider (or more
likely his family) might therefore try to gain a low-risk assignment by asking
for intervention in military decisions by his Senator or Representative. Senators and Representatives are assumed to
desire re-election, which implies a desire to please their constituencies. The ability of a Senator or Representative
to have this kind of influence, however, varies according to committee
assignments, ties to the military/industrial complex, etc.
Goff and Tollison assume that
political influence depends on seniority, with more seniority implying more
influence. Taken together, all these
assumptions have the straightforward implication that soldiers from states with
more senior (and hence more influential) Senators and Representatives should,
other things equal, have experienced fewer casualties in Vietnam than soldiers
from states with less senior (and therefore less influential) Senators and
Representatives. Their empirical
analysis (using data from January 1961 to September 1972) supports the
hypothesis:
In the House,
the Mississippi delegation had an average seniority of 27.7, while Hawaii had
an average seniority of 61.7. [A
seniority ranking of 1 indicates the member had the highest seniority in his or
her party.] In terms of lives, this
represents about 6 fewer war deaths for every 100,000 of population in Mississippi
relative to Hawaii. Ceteris paribus,
this difference in House seniority leads to a 55 percent higher casualty rate
for Hawaii than Mississippi. … In the
Senate, Arkansas had an average seniority of 6.2, and Maryland had an average
seniority of 45.4. Other things equal …,
this difference leads to an 86 percent higher casualty rate for Maryland than
for Arkansas. In terms of lives, this
translates into about 7 more war deaths for every 100,000 of population in
Maryland than in Arkansas. (pp. 319-20)
In this case, the value of
the rational choice approach is not so much in the fact that it yields
surprising answers to a well-established question, but that it suggests a
unique question to ask in the first place.
It is by no means obvious that someone not thinking about
self-interested Senators and Representatives would even think to ask the
question addressed by Goff and Tollison.
F. Ideology and
Intransigence
Roemer (1985) applies game theory to the analysis of
political revolutions. Specifically, he
presents a two-player game between “Lenin” and the “Tsar.” Lenin’s objective is to maximize the
probability of revolution, while the Tsar’s objective is to minimize that
probability. As in any game-theoretic
setting, when making decisions each player keeps in mind how the other player
might react. Lenin tries to create
revolution by lining up coalitions, where people are induced to join a
coalition with the promise of income redistribution. The Tsar tries to prevent revolution by
promising to punish anyone who participates in revolutionary activities
(assuming the revolution attempt is unsuccessful). Increased penalties reduce the number of
individuals who are likely to join the coalition but increase the revolutionary
fervor of those who do. An individual
will join a coalition attempting to overthrow the Tsar if the expected benefit
to him or her of doing so exceeds the expected cost. There is of course some uncertainty about the
outcome.
Roemer’s
results include the following:
… it is shown that various
“tyrannical” aspects of the Tsar’s strategy, and “progressive” aspects of
Lenin’s strategy need not flow from ideological precommitments, but are simply
good optimizing behavior, given their respective goals in this game. Thus apparently ideological positions of
Lenin and the Tsar are provided with microfoundations of a sort. (p. 85)
One may be tempted to
conclude from this that Roemer is saying that Lenin and the Tsar are in fact not
genuinely ideological and that their ideological posturing is therefore
insincere. Roemer addresses this idea as
follows:
If one
demonstrates that Lenin’s optimal strategy in recruiting coalitions to
revolutionary action is to propose a progressive redistribution of income, that
does not imply that actual revolutionary leaders do not have ideological
precommitments to progressive redistribution; it implies, rather, that a
would-be revolutionary leader who is precommitted against progressive
redistribution will necessary be limited to suboptimal strategies. The successful revolutionary leaders, the
ones we will tend to observe, are the ones whose ideology does not precommit
them against using the strategies that a disinterested optimizer would
use. Likewise, actual Tsars are surely
not non-ideological; what the analysis intends to show is that successful Tsars
will tend, statistically, to have an ideology which will permit them to do the
(non-ideologically) optimal thing. (p.
86)
This result may provide some insight,
for example, into the apparent intransigence of Ariel Sharon and Yasser Arafat
in the Spring 2002 conflict involving Palestine and Israel. Roemer’s analysis is not inconsistent with
the fact that each man may in fact be strongly ideological. It suggests, rather, that if they did not
have their particular ideological predispositions they would be unlikely to
occupy their current positions of leadership.
Mediation attempts that focus on asking each leader to “be reasonable”
would therefore seem to be doomed to failure.
Roemer’s
model also has the interesting implication that society can be separated into
three income groups, and “…members of the poorest class are surely in the
revolutionary coalition, members of the richest class are surely out of it, and
members of the middle class have an indeterminate revolutionary status.” (p. 102)
The Tsar threatens to impose identical and severe penalties on every
member of the poorest class, which “might be thought to add fuel to the
solidarity they feel with each other.”
(p. 105) Roemer interprets this
result as a possible explanation for class consciousness.
G. Megafauna Extinction
Approximately ten thousand years ago
a large number of large mammals (“megafauna,” including the camel, horse,
bison, mastadon, llama, and mammoth) in North America became extinct. This extinction has been attributed to
climate change [Guilday (1967)] and to “overkill” by Paleolithic hunters [Martin (1967)]. Smith (1975) develops a rational choice
model to examine the overkill hypothesis.
His model consists of a typical primitive person who gains utility from
consuming corn [c] or meat [m].
“Corn” might be the result of either gathering or agriculture. The person has a given amount of labor time (L)
that can be allocated either to agriculture (A) or hunting (H),
so L = A+H. The average
production of corn is determined by c = A, where A is the amount
of time devoted to agriculture and is a parameter describing farming
(or gathering) efficiency. The average
production of meat is determined by m = f(H, M/n), where H is
the amount of time devoted to hunting, is a parameter describing
hunting technology, M is the biomass of the hunted species (average weight per
animal times number of animals), and n is the number of individuals in
the population. There are also relations
explaining the change in biomass over time, which is (among other things)
determined by speed of growth, length of gestation period, length of maternal
care, and length of life of animals being hunted.
Among the many
implications of this model are the following:
·
(i) Larger animals are
more likely to become extinct (p. 739).
·
(ii) The greater the efficiency of hunting labor, the smaller
the equilibrium stock of animals (p. 740).
·
(iii) Changes in hunting efficiency can either increase or
decrease hunting effort and average equilibrium well-being. “Greater hunting efficiency could [either]
release labor for agricultural employment or so reduce the animal stock that
society is made poorer.” (p. 740)
Greater hunting efficiency can increase well-being in the short-run,
however, as appeared to be the case with the effect of the horse on Plains
Indians – “many of whom were uprooted from their agrarian activities but who
achieved greater affluence as bison hunters” (p. 740).
·
(iv) “… any increase in population will be offset by a
corresponding decrease in each individual’s hunting labor. This is a very strong empirical implication
of the model, for it asserts that (under our technological assumptions) once a
hunting society diversifies into agriculture (or gathering), the pressure of
increasing population on animal stocks disappears.” (p. 741)
The last two implications are perhaps
somewhat novel. Implication (iii) will
be familiar to economists as related to conventional “substitution” and
“income” effects, augmented by the fact that increased hunting can have a
negative long-run effect on biomass.
Implication (iv) suggests that extinction was much more likely when
hunters did not have non-hunting alternatives.
For example, “… if the environment was economically more favorable for
gathering in Africa than it was in North America, then the overkill hypothesis
is not inconsistent with the greater survival of megafauna in Africa.” (p. 750, fn. 9)
Smith
goes on to note that this “overkill” is an example of a well-known phenomenon
in economics: “Economists have long been
familiar with the proposition that unconstrained nonpriced access to any
common-property resource such as a fishing or hunting ground … leads to inefficient use of such
resources.” (p. 741). The solution is to restrict access in some
way. One method is the institution of
property rights, in which access is granted via ownership. Other methods include “social and legal
restrictions such as quotas, sharing rules, licensing, or prohibitions.” (p. 741)
Smith contents that this fact can explain “… the development of
conservationist ethics, and controls, in more recent primitive cultures.” (p. 727)
H. Shirking
Alchian
and Demsetz (1972) consider the problem of employee “shirking” – i.e., an
employee not putting his or her full effort into a job. Consider a firm and a worker. The firm is
assumed to maximize profits, an important element of which is to not
incur unnecessary or unproductive costs.
The worker is assumed to maximize utility, which depends positively on
the goods and services that can be produced with labor income and positively on
leisure. Given labor income, the worker
has an incentive to “shirk” his or her responsibilities – in effect increasing
leisure and thereby increasing utility.
The firm would naturally like the worker to put
forth his or her best effort and not shirk.
Depending on the nature of the job in question, it may be very easy
(cheap) or very difficult (expensive) for the firm to monitor accurately the
performance of the worker. That is, the
firm has incomplete information about worker performance. If production takes place in a team, for
example, it may be very difficult to isolate with certainty the contribution of
each individual member of the team. In
this case, individual team members will have more of an incentive to shirk,
because the expected cost of doing so will be low. Firms will monitor workers only up to the
point where it is cost-effective to do so.
There are some kinds of mild shirking that are simply too expensive for
firms to pursue. Even so, there is level
of compensation mandated by the labor market for any given set of observable
skills. Thus in equilibrium, jobs that
are hard to monitor will have some compensation in the form of “shirking
privileges” rather than wage payments.
Alchian and Demsetz derive the following
implications from their analysis:
·
Profit-sharing arrangements are more likely to occur in small
firms than in large firms.
·
Artistic and professional workers (e.g., lawyers, advertising
specialists, and doctors) will be monitored less closely than production
workers (e.g., workers loading trucks).
·
There will be greater shirking in non-profit, mutually-owned
enterprises than in corporations.
·
“Team production in artistic or professional intellectual
skills will more likely be by partnerships than other types of team production.
…. Also, partnerships are more likely to occur among relatives or long-standing
acquaintances, not necessarily because they share a common utility function,
but also because each knows better the other’s work characteristics and
tendencies to shirk.” (p. 790)
·
Workers are more likely to unionize when firm performance
with respect to workers is difficult to monitor.
Staten and
Umbeck (1982) apply the Alchian-Demsetz shirking theory to claims for
disability payments by air traffic controllers.
There is a strong incentive for controllers to claim disability: “On average, disabled controllers with at
least one dependent qualify for tax-free disability compensation that actually
exceeds their normal take home pay.” Controllers normally qualify for
disability on the basis of “emotional and nervous disorders resulting from the
demands of their occupation.”
Unfortunately, “.. the types of disabilities controllers have been
acknowledged to suffer as a product of their job are the very ones posing the
greatest measurement difficulties for the compensation systems.” (All quotes in this paragraph are taken from
page 1025.)
In 1972
Congress authorized funding for a “Second Career Training Program” in which air
traffic controllers who had been removed from active duty (either because of
medical inability to perform job tasks adequately or to protect the employee’s
mental or physical health) could receive free training for another career. “The cause of the problem was not
required to be job related. If such a
controller had been employed for at least five years, the Federal Aviation
Administration (FAA) would pay for an approved training program of the
controller’s choice and maintain him at his base rate pay for up to two
calendar years from his date of dismissal.”
(p. 1027).
In 1974
Congress passed a law that made it easier for traffic controllers to
demonstrate disability by allowing the testimony at disability hearings of
physicians selected by the controller himself or herself. Previously only the testimony of a Federal
Aviation Administration (FAA) flight surgeon, or occasionally a private
physician designated by the FAA, was allowed.
“The change allowed employees greater freedom in physician shopping to
find a doctor sympathetic to a claim, or to find one who might be sympathetic
for a price.” (P. 1026)
Staten and
Umbeck note that “by lowering the expected cost of claiming a disability, we
would predict that [the laws described in the above paragraph] …would each
lead to an increase in disability claims filed, some genuine and some not. We would also expect each to be followed by a
more than proportional increase in psychological and emotional claims [as
opposed to claims based on easily demonstrable physical conditions], some
genuine and some not. (p. 1028)
The laws did
in fact have the predicted effects on total disability claims and on the
proportion based on emotional and psychological causes. This result raises the question of whether,
or the extent to which, the new claims were fraudulent rather than
genuine. The rational choice approach
used by Staten and Umbeck allows them to address this question. By established procedures, a controller can
prove a disability claims only by reference to “specific stressful incidents on
the job.” These incidents must involve
“separation violations” – situations in which the controller allows two or more
aircraft to move in closer proximity than regulations allow. There are two types of separation violations,
“system errors” and “near mid-air collisions” [NMACs] with the latter
considerably more serious than the former.
Staten and Umbeck argue that “[t]here
are several reasons why we would expect changes in controller incentives to
file [disability] compensation claims to affect reported system errors and not
NMACs” (p. 1030) The system was set up in such a way that
there was no benefit to a controller (in terms of the probability of his or her
disability claim being approved) of an NMAC as opposed to a system error. The authors “… assume that controllers place
some value greater than zero on human lives.
If the gains from having high-risk separation violations [that is,
NMACs] are zero, then controllers would be willing to allocate resources to
avoid them.” (p. 1031) To the extent that the increase in disability
claims after the 1972 and 1974 claims was fraudulent, claims based on system
errors should have increased in frequency relative to claims based on
NMACs. Empirical tests based on FAA data
confirm that this was in fact the case.
The value of the rational choice approach in this context is that it
allowed the researchers to deduce observable implications of fraudulent
behavior.
I. Predicting
Consumption Behavior
Economists have long considered
expectations about the future to be potentially important for behavior. The problem is that expectations are not
directly observable. Prior to the 1970s, most macroeconomic models (models that
attempt to explain economy-wide phenomena such as inflation and unemployment)
assumed that expectations are adaptive – that is, expectations change
only in response to observed changes in the variable under consideration. If expectations are adaptive, for example,
people will begin to expect more inflation in the future only if they see more
inflation in the present.
The 1970s
witnessed a revolution in the way economists think about expectations – the
so-called “rational expectations” revolution. First proposed by Muth (1961), rational
expectations embodies the idea that within the context of a model, the
expectations held by agents in the model are the expectations implied by the
model itself. Although this would
appear circular, it is in fact possible
to solve such models and (with certain auxiliary assumptions) obtain unique
equilibria.
Hall (1978) applies the rational
expectations hypothesis to a theory of consumption behavior first advanced by
Friedman (1957). This so-called
“permanent income” hypothesis says that consumption spending in a particular
period (a particular year, say) depends not just on after-tax income in that
same year, but also on expectations about future income. People who expect future income to be high
are likely to consume more out of current income.
Friedman notes that this hypothesis
has an interesting implication about the relationship between consumption and
income: Consumption should be much less
sensitive to income among occupations in which income tends to be volatile
(e.g., farming and sales) than in those occupations in which income tends to be
stable (e.g., teachers and bureaucrats).
The reason is that when income is stable, an increase in current income
tends also to signal an increase in future income. An increase in farm or sales income this
year, however, says very little about what income will be next year. Friedman looks at consumption behavior across
occupations and finds that this implication is supported by the data.
Hall (1978) finds that combining the
rational expectations hypothesis with the permanent income hypothesis has a
striking implication: given current
consumption, no other variable (including current income, interest rates, stock
prices, measures of consumer confidence, etc.)
should be of any use in predicting future consumption. This was a very novel implication, but it did
receive considerable support in Hall’s statistical tests. Hall’s empirical results were later
questioned by Flavin (1981), however.
J.
Other Papers
The
above discussion only touches the surface of the scope of rational choice
theory. In this section I will mention
very briefly several other interesting uses of the rational choice approach.
Marschak (1965) considers how
rational choice theory can provide insights into the development of
language. Rubinstein (1998) and Glazer
and Rubinstein (2001) provide a rational choice explanation of rules used in
debating. The rules of debate are
“treated as tools designed to enable the best elicitation of information, given
the constraints on the length of the debate and the interests of the
debaters.” [Rubinstein (1998), p.
23]
Yamaguchi and
Ferguson (1995) use rational choice theory to explain the stopping and spacing
of childbirths. Dickert-Conlin and
Chandra (1999) consider the effects of taxes on the timing of births. The strength of the financial incentive for a
birth to occur in December rather than January depends on certain features of
the tax code. They find that “…
increasing the tax benefit of having a child by $500 raises the probability of
having the child in the last week of December by 26.9 percent.” (p. 161)
Mason and Fett (1996) use rational choice theory
to analyze whether civil wars end in negotiated settlement or military
victory. Peltzman (1973) shows that “… a
subsidy in kind, such as below-cost education provided by state universities,
replaces more private consumption of the subsidized good than an equivalent
money subsidy, such as a scholarship. Indeed,
a subsidy-in-kind may reduce total consumption.” (p. 1, italics in original) Ehrlich and Chuma (1987) consider a rational
choice theory of longevity. They note
that their analysis “… establishes not merely the finiteness of life as a
consequence of optimizing behavior, but the existence of a well-defined demand
function for longevity as well.” (p.
250) Friedman (1987) develops a rational
choice model to explain why “[h]ouses in cold climates are kept warmer in
winter than those in warm climates, despite the greater cost of heating in colder
climates.” (p. 1089)
This list could continue indefinitely. I hope this extended discussion of examples
has given the reader at least some flavor of how the rational choice approach
works and the breadth of issues to which it has been applied. The following section considers very briefly
(and incompletely) critiques of the rational choice approach and some of the
issues raised by those critiques.
6. Issues
in Rational Choice Theory
This section considers briefly several issues in
rational choice theory. Subsection A
considers the definition of rationality. Subsection B is a general overview of the
many critiques of rational choice theory.
Subsection C considers how rational choice theory is used to make
recommendations to government policymakers.
Subsection D provides a brief overview of some Christian perspectives on
rational choice theory.
A. Definition of
Rationality
What does it mean to say that a choice is
“rational?” In rational choice theory it
means only that an agent’s choices reflect the most preferred feasible
alternative implied by preferences that are complete and transitive (that is,
choices reflect utility maximization.)
This is a quite narrow definition of rationality.
More
generally, a “rational” choice must by definition be a choice based (somehow)
on reason. Reason has been
defined as “the faculty or process of drawing logical inferences.”
Logical inferences relate premises to conclusions. In this context one might ask two kinds of
questions. First, does a stated
conclusion follow from a given set of premises?
Second, one might ask judgmental questions about premises – that is, are
premises justified or well-defended? The
second kind of question inevitably involves an appeal to another set of
premises, so any exercise in logic must rest ultimately on one or more
undefended premises.
As applied to
rational choice theory, the first kind of question involves whether a given
choice is consistent with utility maximization -- given whatever preferences
happen to be. The second kind of
question involves judgments about the nature of assumptions about
preferences.
With respect
to the first kind of question, a choice is irrational if it is not consistent
with utility maximization. Perhaps
somewhat surprisingly, there are several generic instances of this kind of
irrationality that are not especially dependent on the specification of
preferences. The easiest illustration of
this kind of irrationality is when someone makes a choice based on what
economists call a sunk cost.
Frank (1990, pp. 53-4) provides an example:
Cornell
University has two sets of faculty tennis courts, one outdoor and the other
indoor. Membership in the outdoor
facility is available for a fixed fee per season. There is no additional charge based on actual
court use. The indoor facility, by
contrast, has not only a seasonal fee, but also a $12 per hour charge for court
time. The higher charges of the indoor
facility reflect the additional costs of heat, electricity, and building
maintenance. The indoor facility opens
in early October, a time when the Ithaca weather can be anything from bright
sunshine and mild temperatures to blowing sleet and snow. The outdoor courts remain open, weather
permitting, until early November. During
good weather, almost everyone prefers to plan on the outdoor courts, which are
nestled in one of Ithaca’s scenic gorges.
Demand on the indoor facility is intense,
and people who want to play regularly must commit themselves to buy a specific
hour each week. Having done so, they
must pay for the hour whether they use it or not.
Here is the problem: You are committed to an indoor court at
3:00pm on Saturday, October 20, the only hour you are free to play that
day. It is a warm, sunny afternoon. Where should you play, indoors or out?
I find that surprisingly many of my
noneconomist partners balk when I say that playing on the outdoor courts is the
only sensible thing to do. “But we’ve
already paid for the indoor court,” they invariably complain. I ask, “if both courts cost the same, which
would you choose?” They immediately
respond “outdoors.” I then explain that
both courts do cost the same – because our fee for the hour is going to be $12
no matter which place we play – indeed, no matter whether we play at all. The $12 is a sunk cost, and should have no
effect on our decision. The alternative,
however, is to waste an opportunity to play outdoors, which we all agree is
something even more valuable. True
enough, it is bad to be wasteful, but something is going to be wasted,
no matter which place we play.
Eventually, most people come around to the
notion that it is more sensible to abandon the indoor court, even though paid
for, and play outdoors on sunny fall days.
The rational choice model says unequivocally that is what we should do.
…
Frank identifies several other
generic examples of behavior that is irrational in the sense that it does not
reflect utility maximization, many of which are based on experiments discussed
by Tversky and Kahneman (1981). These
examples include situations in which people seem to (i) value gains differently
from foregone losses (and losses differently from foregone gains) and (ii)
confuse out-of-pocket costs and costs associated with foregone alternatives
(so-called “opportunity costs).
The
other possible kind of irrational choice would be a choice that is consistent
with the maximization of utility based on preferences that are somehow
irrational. That is, the choice
(analogous to the conclusion of a logical argument) does indeed follow from
maximization of utility given preferences (analogous to the premises), but the
preferences (premises) themselves are somehow flawed. To make this kind of argument, one must
appeal ultimately to another logically prior set of premises (we might
call them meta-premises). To
return to an example quoted near the beginning of this paper, suppose a person
drinks a gallon of crankcase oil because he really likes crankcase
oil. In this case his choice follows
rationally from his preferences, but we might have some questions about the
nature of his preferences. If we have
one or more meta-premises in mind (e.g., humans are made in the image of God
and one’s body is the temple of the Holy Spirit), we might be able to
characterize his preferences as irrational in the sense that they are
inconsistent with those meta-premises. A
choice that follows logically from irrational preferences must (in the absence
of a fortuitous coincidence) be an irrational choice.
Frank
(1990, p. 54) addressees this issue as follows:
The standard economic
model of rational choice assumes that consumers maximize well-defined utility
functions. When questions arise about
what goes into these functions (that is, questions about what people really care
about), most economists quickly defer to psychologists, sociologists, and
philosophers. As a practical matter,
however, economists seldom consult outside sources for guidance on how to
portray people’s tastes. Rather, they
are content to assume that the consumer’s overriding objective is the
consumption of goods, services, and leisure – in short, the pursuit of material
self-interest. Economists also
assume that the consumers act efficiently in the pursuit of their
objectives. [Emphasis added.]
Frank goes on to show that “[o]nce we
modify the traditional utility function by introducing sympathy, anger, or
concerns about relative position, we modify the conclusions of traditional
models in fundamental ways. There is
nothing mystical about the emotions that drive these behaviors. On the contrary, they are an obvious part of
most people’s psychological makeup.” (p.
65)
Sugden
(1991) surveys the intersection of economics and philosophy with emphasis on
the meaning of rationality.
Specifically, he compares and contrasts “instrumental (or Humean)
rationality” and “Kantian rationality.” Instrumental rationality would seem to
view preferences as beyond justification:
Hume provides the most
famous statement of the instrumental view of rationality. ‘Reason alone’, he says, ‘can never be a
motive to any action of the will’, and “reason is, and ought only to be a slave
of the passions.’ … The ultimate motive for any act must be some
kind of pure feeling or ‘passion.’ Since
all we can say about a state of feeling is that exists within us, there is
nothing in such a state on which reason can get a grip. The qualification ‘ultimate’ is important
here. Hume recognizes that some of our
desires may be formed as a result of rational reflection, but insists that any
such reflection must take some desires as given. Actions can be motivated only by desires, and
no desire can be brought into existence by reason alone. (p. 753)
An action can therefore be
“irrational” only if it is not consistent with unexplained passions and
desires. Preferences are undefended
premises. This is squarely consistent
the “first kind of question” I describe above.
Sugden also notes that
“from a philosophical point of view, Kant’s conception of rationality is the
most prominent alternative to the instrumental one.” (p. 755).
In this case, reason would appear to have some role in the determination
of preferences:
To ask whether an action
is rational, we must not (as in the instrumental approach” ask how it connects
with the psychologically given desires and beliefs of the actor; we must
instead examine the coherence of the principles which – from the viewpoint of
the actor, conceiving himself as autonomous – determined the action. (pp. 755-6)
I assume that “coherence” means the
absence of contradictions. In
particular, preferences must be consistent with “categorical imperatives”,
which are “principle[s] which the chooser can will to be … universal law[s] for
all rational agents.” (p. 755) Sugden characterizes the implications of a
categorical imperative as “do X, regardless of your wants.” (p. 755)
Kant’s perspective has the following rather striking implication:
Thus for Kant, reason
alone can be a motive for action of the will.
Categorical imperatives are imperatives that would be recognized by any
agent possessing the faculty of reason.
Thus they are not merely independent of the particular desires of any
particular agent; they are independent of any facts, however general, about
human psychology or human society. The
autonomous agent imposes his own laws; but if each agent arrives at these laws
by the use of reason, all will arrive at the same laws. (p. 756)
Thus
we begin to get a sense of how muddled discussions about “rational choice” can
become. If we are not careful with our
definitions, it is quite possible for a particular choice to be simultaneously
rational and irrational! It is
rational in the first sense if it follows from utility maximization, but
irrational in the second sense if the maximization is based on preferences that
are “irrational” in some way.
B. Critiques of
Rational Choice Theory
Rational
choice theory has long been the dominant paradigm in Economics, though even in
Economics it has been subject to vigorous criticism. The name used in Economics for the rational
choice approach is the neoclassical paradigm, so for the remainder of
this paper I will use the terms “rational choice theory” and “neoclassical
economics” interchangeably. Prychitko
(1998) provides a useful survey of alternatives to the neoclassical
paradigm. Alternative schools of thought
discussed in the Prychitko volume include Austrian, Post-Keynesian,
Institutional, and Radical (Marxist).
Another important alternative to the neoclassical paradigm is the
Behavioral approach, which is described by Mullainathan and Thaler (2000).
Criticisms of
the rational choice approach may have a practical, an empirical,
or a theoretical basis. Practical
criticism says that rational choice theorists are not asking the right kinds of
questions. One kind of empirical
criticism (which might be denoted empirical failure) says that a theory
does not account adequately for observed phenomena. Another empirical criticism (empirical
ignorance) is that the developer of a theory does not even attempt
to test it empirically. Leontief (1971)
applies all of these kinds of criticism to economic practice, though most
economists would argue that there are many instances of empirical success in
the economics literature (when a theory does in fact account adequately for
observed phenomena). Green and Shapiro
(1994) apply both kinds of empirical criticism vigorously to rational choice
models in political science.
In general, theoretical
criticisms can come in two forms – regarding either the nature of a model’s
assumptions or whether the conclusions stated by the theorist actually follow
from the assumptions. Criticism of the
latter kind is rare in rational choice theory, primarily because of the
reliance of the theory on mathematical techniques. When a theory is couched in terms of
mathematics, it is usually quite straightforward to determine whether the
conclusions follow from the assumptions.
If they do not, a theory is not likely to be published. Theoretical criticisms are therefore normally
levied against the assumptions of the rational choice approach.
The natural reaction of many economists to criticisms
about assumptions is to quote a famous paper by Friedman (1953, pp. 14-15):
... This widely held view [that one can
evaluate a theory by the conformity of its assumptions to reality] is
fundamentally wrong and productive of much mischief....
In so far as a theory can be said to have
“assumptions” at all, and in so far as their “realism” can be judged
independently of the validity of predictions, the relation between the
significance of a theory and the “realism” of its assumptions is almost the
opposite of that suggested by the view under criticism. Truly important and significant hypotheses
will be found to have wildly inaccurate descriptive representations of reality,
and, in general, the more significant the theory, the more unrealistic the
assumptions (in this sense). The reason
is simple. A hypothesis is important if
it “explains” much by little, that is, if it abstracts the common and crucial
elements from the mass of complex and detailed circumstances surrounding the
phenomena to be explained and permits valid predictions on the basis of them
alone. To be important, therefore, a
hypothesis must be descriptively false in its assumptions; it takes account of,
and accounts for, none of the many other attendant circumstances, since its
very success shows them to be irrelevant for the phenomena to be explained.
To put this point less paradoxically, the
relevant question to ask about the “assumptions” of a theory is not whether
they are descriptively “realistic,” for they never are, but whether they are
sufficiently good approximations for the purpose in hand. And this question can be answered only be
seeing whether the theory works, which means whether it yields sufficiently
accurate predictions. The two supposedly
independent tests thus reduce to one test.
Friedman therefore
maintains that the only valid criticisms of a theory are empirical
criticisms. Samuelson (1963) responds to
this idea with the following example:
... what I and
other readers believe is his [Friedman’s] new twist – which from now on I shall
call the “F-twist” ... is the following:
A theory is vindicable if (some of) its consequences are empirically
valid to a useful degree of approximation; the (empirical) unrealism of the
theory “itself,” or of its “assumptions,” is quite irrelevant to its validity
and worth. ...
... the nonpositivistic Milton
Friedman has a strong effective demand which a valid F-twist brand of
positivism could supply. The motivation
for the F-twist, critics say, is to help the case for (1) the perfectly
competitive laissez faire model of economics, which has been under continuous
attack from outside the profession for a century and from within since the
monopolistic competition revolution of thirty years past; and (2), but of
lesser moment, the “maximization of profit” hypothesis, that mixture of truism,
truth, and untruth.
If Dr. Friedman tells us this was
not so; if his psychoanalyst assures us his testimony in this case is not
vitiated by subconscious motivations; even if Maxwell’s Demon and a Jury in
Heaven concur – still it would seem a fair use of the F-Twist itself to
say: “Our theory about the origin and
purpose of the F-twist may be ‘unrealistic’ (a euphemism for ‘empirically dead
wrong’), but what of that. The
consequence of our theory agrees with the fact that Chicagoans use the
methodology to explain away objections to their assertions. (pp. 232-33)
Samuelson here is
exploiting the well-known problems with self-referential statements – see
Hofstadter (1979). Samuelson concludes
his discussion as follows:
Experience suggests that nature
displays a mysterious simplicity if only we can discern it. This is a bonus and need not have been
so. And unrealistic, abstract models
often prove useful in the hunt for these regularities. (Sometimes they prove misleading to a whole
generation of searchers.)
This
psychological usefulness should not be confused with empirical validity. Black coffee may be useful to physicists,
mathematicians, economists, and artists.
But coffee is coffee. Such
abstract models are like scaffolding used to build a structure; the structure
must stand by itself. If the abstract
models contain empirical falsities, we must jettison the models, not gloss over
their inadequacies.
The empirical harm done by the
F-Twist is this. In practice it leads to
Humpty-Dumptiness. Lewis Carroll had
Humpty-Dumpty use words any way he wanted to.
I have in mind something different:
Humpty-Dumpty uses the F-Twist to say, “What I choose to call and
admissible amout of unrealism and empirical validity is the tolerable amount of
unrealism.”
The fact that nothing is perfect
accurate should not be an excuse to relax our standards of scrutiny of the
empirical validity that the propositions of economics do or do not possess. (p.
236)
Hausman (1989) points out that the Friedman
methodology says nothing meaningful about how theories are formed and nothing
about how theories are revised. Where do the assumptions that make up a
theory come from in the first place? One
might argue that economists use the rational choice assumption because it is
successful empirically, but that cannot always have been the case. It is possible that in the past a number of
different approaches were tried randomly rather than because of any
conformation of their assumptions with reality, and that the rational choice
approach has come to dominate its competitors (in Economics, at least) because
it has been more successful empirically.
I am not sufficiently familiar with the history of economic thought to
dismiss this contention, though it is not especially plausible to me that
someone sitting down to develop the first theory of (say) international trade
would choose assumptions at random with no thought as to their empirical
validity.
Even so, let us grant that scholars who currently
employ the rational choice approach do so only because of its past
empirical successes. What happens when a
theory fails empirically? In these
cases, the economist’s first instinct is to check his or her empirical
technique. Are there problems with the
data? Have statistical methods been applied
properly? If that approach is
unsuccessful, and if the economist is unwilling to jettison the entire project,
it becomes necessary to change one or more of the model’s assumptions.
How does the economist decide which assumption(s)
to change? In practice, economists
surely make this decision at least some of the time by thinking about realism. That is, they try to identify which
assumption(s) are unrealistic and change them accordingly. Of course they will only keep the new
assumptions if those assumptions have verified empirical implications, but in
my view it is clearly wrong to say that realism has no role at all in decisions
about which changes in assumptions to try first.
One can also imagine a situation in which two
theories account for the same phenomena equally well. How is one to choose the preferred
theory? One approach would be to broaden
the range of phenomena under consideration until one theory dominates the other
empirically. I think it is fair to say,
however, that economists do not always take this approach. Instead, they sometimes choose the theory
with the most plausible assumptions.
Sargent (1976) seems to advocate both approaches.
The bottom line of this discussion is that a
strict interpretation of the Friedman argument is not beyond question. That is, there are circumstances under which
it might not be completely unreasonable to question the assumptions of a
model. I therefore proceed below to
discuss briefly some of the ways the assumptions of the rational choice model
have been questioned in the economics literature.
I do believe, however, that a less strict
interpretation of Friedman’s argument is helpful. If one has a theory that generates
predictions that are “sufficiently accurate,” one should not discard the theory
simply because its assumptions are not literally true to the last detail. Theory is abstraction in the same sense that
a road map is an abstraction. A road map
of the State of Texas that was literally true would be the size of the State of
Texas, which would not be of much use.
Different maps (say of a city, state, or country) embody different
assumptions about what to ignore, and the appropriateness of those assumptions
depends on the context. A street map of
Dallas is not of much use to someone driving from Texas to California.
Much of the criticism of rational choice theory would
seem to be that the assumptions of the theory are not literally and completely
true. No model can pass such a test, as
all theories abstract from reality in some way. Determining the validity of a
model (or even a methodology) would therefore seem to involve a subtle
examination of both plausibility of assumptions and conformity
with real-world data. There is no single
magic bullet.
I concluded above that most criticisms of rational
choice theory are criticisms of assumptions rather than contentions that
implications do not follow from assumptions.
It is useful to place these criticisms of assumptions in two
categories. The first is criticisms of
the foundational assumptions of rational choice. The second is criticisms of the auxiliary
assumptions that are an inevitable part of any rational choice model.
The most basic assumption of rational choice
theory is that the primary unit of analysis is the individual
decision-maker. This formulation has
been criticized by those (including Marxists) who believe that groups (e.g.,
social classes) are fundamental. This issue of
“methodological individualism” shows up in many contexts in the social
sciences. Its use in Economics is
discussed thoughtfully by Arrow (1994).
Even if the individual is the fundamental
unit of analysis, problems remain. The
psychologist Amos Tversky, in a number of studies done in collaboration with
various other scholars, has shown that individual choice behavior often does
not conform to the fundamental premises of rational choice theory. Some of these results are described in
Tversky and Kahenman (1981, 1986).
Preferences are not always transitive, for example. The basic assumptions of expected utility
maximization under conditions of uncertainty are especially problematic. The “Austrian” school of economic thought is
also very critical of the how uncertainty is treated in the rational choice
approach. [See O’Driscoll, Rizzo, and
Garrison (1979).]
Another important assumption of rational choice
theory is the idea that preferences are primitive and stable. The Institutional school of economic
thought is highly critical of this assumption, arguing instead that preferences
are changed by factors such as advertising.
Galbraith (1984) is a best-selling example of this line of thinking,
which argues that one must understand institutions before one can understand
preferences. The New Institutional
Economics, however, views institutions as ultimately reflective of the
decisions made by economically rational individuals. An example from this literature is North
(1982).
Related to those the Institutional school are the
purveyors of Radical Political Economy.
These scholars view power relations and associated political questions
as primary, with economic issues following from power relationships. Bowles (1974, p. 131), for example, contends
that “...the inequalities and antidemocratic hierarchies which dominate our
everyday lives are rooted in the capitalist system itself, not in preferences,
technology, or ill-conceived state action.”
In contrast, many rational choice theorists would view political
questions and power relations as being driven by economic concerns.
Finally, a number of economists – most notably
Herbert Simon -- have questioned whether individuals have complete information
about choice alternatives and/or are able to make the extensive computations
called for by conventional rational choice assumptions. Simon (1987, p. 5) uses the term “bounded
rationality” to “designate rational choice that takes into account the
cognitive limitations of the decision-maker – limitations of both knowledge and
computational capacity.” Theorists who
rely on conventional rational choice models are by and large content to view
those models in an “as if” sense. That
is, the agents in question behave “as if” they are maximizing utility subject
to constraints. Whether the agents
actually make the calculations envisioned by the theory is irrelevant. As Friedman (1957, p. 21) notes:
Consider the
problem of predicting the shots made by an expert billiard player. It seems not at all unreasonable that
excellent predictions would be yielded by the hypothesis that the billiard
player made his shots as if he knew the complicated mathematical
formulas that would give the optimum directions of travel, could estimate
accurately by eye the angles, etc. describing the locations of the balls, could
make lightning calculations from the formulas, and could then make the balls
travel in the direction indicated by the formulas. Our confidence in this hypothesis is not
based on the belief that billiard players, even expert ones, can or do go
through the process described; it derives rather from the belief that, unless
in some way or other they were capable of reaching essentially the same result,
they would not in fact be expert billiard players. [Emphasis in original.]
The school of thought
known as behavioral economics is devoted instead to “... the ways in which the
actual decision-making process influences the decisions that are reached.” [Simon (1987, p. 5)] One response to this line of criticism is to
cite Stigler (1961) – and the voluminous literature spawned thereby -- who
develops a rational choice model in which agents choose to collect and use the
optimal amount of information by comparing benefits and costs.
Criticisms of the auxiliary assumptions
of rational choice theory are also widespread.
Rational choice models in economics often assume perfectly competitive
markets and complete information, which seems to many observers to be
drastically at odds with the situation in the real world. Arrow (1987) contends that the assumption of
rationality has by itself no observable implications whatsoever. Instead,
Rationality in
application is not merely a property of the individual. Its useful and powerful implications derive
from the conjunction of individual rationality and the other basic concepts of
neoclassical theory – equilibrium, competition, and completeness of markets.
... When these assumptions fail, the
very concept of rationality becomes threatened, because perceptions of others
and, in particular, of their rationality becomes part of one’s own
rationality. Even if there is a
consistent meaning, it will involve computational and informational demands
totally at variance with the traditional economic theorist’s view of the
decentralized economy. (pp. 26-7)
An important subset of this basic criticism is
that without very strong auxiliary assumptions many economic models have
multiple equilibria. If a model has multiple
equilibria, it does not have specific observable predictions and therefore is
not subject to verification. Multiple
equilibria tend to arise quite frequently in game theory models, where somewhat
arbitrary assumptions must be made about how agents anticipate the actions of
other agents. This problem has spawned a
large sub-literature in game theory on “equilibrium refinement” – which
essentially looks for ways to narrow down the range of admissible equilibria so
that the models do have observable implications. Van Huyck, Battalio, and Biel (1991) report
the results of experiments showing that in certain kinds of games with multiple
equilibria, agents will nevertheless coordinate on a specific equilibrium in
predictable ways.
Another important situation in which multiple
equilibria tend to occur in economics is when agents exhibit altruism. If people care about each other in a model,
that model is much less likely to have specific observable predictions than a
model in which all agents are selfish egoists.
C. Policy
Prescriptions
Perhaps the most important criticism of rational
choice theory involves not the theory per se but how it is used. In a sense these criticisms are not relevant
to our discussion, which focuses on the rational choice approach per se. Even so, it may be useful to review some of
them briefly.
Economists tend to base judgments about the
relative desirability of different outcomes on how individuals fare (in terms
of utility) in each outcome. In
addressing these kinds of questions economists usually assume that agents’
preferences are self-centered and based on the consumption of material goods
and services. Hausman and McPherson
(1997, p. 2) note, however, that “[t]he view that well-being is the
satisfaction of preference has little to recommend itself as a philosophical
theory of human well-being.” It seems
clear that people sometimes make bad choices, and economics in practice does
little to allow for this fact.
Economists often arrive at policy recommendations
that are at odds with prevailing opinion (and some might say with common
sense). Many economists advocate the
legalization of narcotics such as heroin – for a good example, see Miron and
Zwiebel (1995). Lawrence Summers, former
Treasury Secretary and now President of Harvard University, once considered
advocating the export of high-pollution industries to poor countries on the
grounds of economic efficiency [Hausman and McPherson (1996, pp. 9-10)]. These arguments may be valid based on the
assumptions economists employ, but to the non-economist it sometimes seems
clear that the arguments are overlooking something important.
Most economists compare economic outcomes
according to the criterion of Pareto optimality. (The branch of economics with this kind of
work is known as welfare economics.)
An outcome is said to be “Pareto optimal” if no one agent can be made
better off (higher utility) without making at least one agent worse off (lower
utility). This criterion is viewed
favorably by economists because it does not require the comparison of
utilities. Economists generally do not
feel qualified to say that person A should benefit at the expense of person B,
and with the Pareto criterion they don’t have to make statements of that
kind. What they can say with the
criterion is that a situation in which someone can be made better off without
hurting anyone else is not a good situation.
Economists oppose monopolies and price controls for this reason.
A problem with the Pareto criterion is that it
does not allow very useful discussions of distributional issues. An outcome with one rich person and everyone
else on the verge of starvation can be Pareto optimal. In fact, many outcomes can be Pareto optimal,
and economists can usually provide little insight about how to choose between
them. Thus rational choice theory as it
is conventionally used does not seem to be a great deal of help with respect to
issues of justice and fairness.
D. Christian
Perspectives
The interface between economics and religious
faith runs two directions. The first
direction runs from economics to religion.
In this work scholars use economic concepts to analyze religious
behavior. The paper by Azzi and
Ehrenberg (1975) discussed above is a good example of this approach. A comprehensive overview is provided by
Iannaccone (1998).
Tiemstra (1994) provides a recent overview
of writings on the second perspective, which considers Christian perspectives
on Economics. He outlines two critiques,
the “ethical critique” and the “methodological critique.” The ethical critique focuses on how
economics is used for policy prescriptions (as discussed in the previous
section). He makes the following points:
·
“[t]he desires of individuals are infected with the
sinfulness that we all inherit as part of our nature, and hence are an
inadequate ethical foundation for economic policy.” (p. 232)
·
“Welfare economics overemphasizes allocation questions and
underemphasizes distribution questions. (p. 232)
·
“The neoclassical account of self-interested, gain-seeking
individuals is incapable of describing the behavior of Christians who are
trying to live according to the stewardship principle. Furthermore, since all humans are created in
the image of God, and hence are by their very nature religious and moral
beings, the neoclassical model fails to capture an essential dimension of human
behavior.” (p. 232)
·
“By teaching people the utilitarian ideology of neoclassical
economics, economists encourage the very kind of self-interested, greedy
behavior that is inconsistent with the demands of the Christian life ...” (pp.
232-3)
The methodological critique says that
“[n]eoclassical economists are incorrect when they claim that “positive” ...
economics is value-free, and that therefore values only enter into “normative”
(i.e., prescriptive) economics. Value
judgments are inevitably involved in deciding which questions to study, which
data are relevant, which theory to select of the infinite number that are
consistent with the data, and which method to use to validate the theory.” (p. 236)
Tiemstra notes that the most common
response to these critiques by Christian writers is to advocate a Christian
form of Institutionalism. He notes,
however, that “[t]he Christian writers who have adopted [the Institutionalist
approach] for their own work have generally not offered an elaborate
justification for choosing it.” (p.
240) He also notes, interestingly, that
most work in this area has been done by Calvinists and Catholics, with only a
few contributions from mainline Protestants.
To this point, then, there have not been
many attempts to incorporate Christian insights into rational choice
theory. One notable effort is by
Yuengert (2001), who extends the rational addiction model of Becker and Murphy
(1998) to allow for “passion.”
Interestingly, his analysis provides “... a normative rationale, absent
from rational addiction models, for policies that limit access to addictive
goods.” (p. 1) Other work, though not obviously motivated
by Christian concerns, may provide guidance for Christian scholars thinking
about these issues. Akerlof and Kranton
(2002), for example, describe their model as follows:
This paper
considers how identity, a person's sense of self, affects economic outcomes. We
incorporate the psychology and sociology of identity into an economic model of
behavior. In the utility function we propose, identity is associated with
different social categories and howpeople in these categories should behave. We
then construct a simple game-theoretic model showing how identity can affect
individual interactions. The paper adapts these models to gender discrimination
in the workplace, the economics of poverty and social exclusion, and the
household division of labor. In each case, the inclusion of identity
substantively changes conclusions of previous economic analysis.
It might be possible to
explore within this framework whether a particular kind of identity, a
Christian identity, has any unique observable implications.
7. Concluding
Remarks
In this paper I have tried to give the reader a
sense of how rational choice theory works and of its methodological
foundations. The theory is making
substantial inroads into a number of social science disciplines. There are two possible explanations for this
fact. First, the theory is useful in
that it generates novel predictions and provides useful insights. Second, everyone using the theory is a
misguided reductionist driven by perverse ideological motivations. Though there is probably a bit of truth in both
explanations, I think the former is probably closer to the truth than the
latter.
Rational choice theory is subject to a number of
criticisms, but that is to be expected.
We are not likely to attain complete knowledge about anything,
especially social phenomena – any time soon.
Refer to the quotes from Churchill and Sen shown on the first page of
this paper. To paraphrase Churchill,
rational choice theory may well be the worst social science methodology ever
invented except for all the others. I believe
this means we should be open to the insights provided by rational choice theory
without embracing the approach with religious fervor. The approach can be useful, or it can be
misleading. So can all other approaches.
I close with three sets of questions I would like
for us to consider in our deliberations during the seminar:
(1)
Does the basic rational choice approach in which preferences
are assumed to depend only on material self-interest actually encourage people
to make choices primarily because of material self-interest? If so, how?
If the rational choice approach is amended to allow for non-selfish
preferences, will the typical person in society gradually become less selfish?
(2)
Why is it that the application of rational choice methods in
certain areas is troubling to some people? Why do some people resent being represented
as utility-maximizing machines with respect to certain aspects of our behavior
– in particular, those aspects of behavior that provide the most meaning in our
lives – faith, hope and love? Are there
limits to the legitimate scope of rational choice inquiry? That is, should we rule out a priori
the application of rational choice methods to some questions? Do sacred things lose their meaning if we
come to view them through a rational choice lens?
(3)
Should the use of rational choice methods by a Christian
scholar differ in an important way from how they are used in the mainstream
literature? If so, how? Why?
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