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Understanding the rationality principle in economics as a functional a priori principle

  • S.I. : First Principles in Science
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Abstract

Since the early days of economics, the rationality principle has been a core element of economic theorizing. It is part of almost any theoretical framework that economists use to generate knowledge. Despite its central role, the principle’s epistemic status and function continue to be debated between empiricists and rationalists, and a clear winner is yet to emerge. One point of contention is that we cannot explain the principle’s special status in light of clear evidence against its empirical validity and the continuous conceptual changes it undergoes. In this paper, I argue that we should think of the rationality principle as a functional a priori principle along the lines of a pragmatic theory of constitutive elements recently put forward by David Stump. Such an approach would explain the principle’s persistence and changing status. More generally, the pragmatic theory of constitutive elements in science offers a viable alternative to rationalism and empiricism that allows for approaching the debate about the status and function of the rationality principle in economics. It provides a new framework and starting point to think about the usefulness of a central first principle in economics in a constructive way.

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Notes

  1. See e.g., Diemer and Guillemin (2011) for Newton’s influence on Adam Smith.

  2. The term “behavioral” is used here in the sense of behavioral economics. As such, the meaning of the term is not to be confused with the term used in behaviorism. In behavioral economics, behavioral principles are principles that are grounded in actual psychological findings about human behavior and can thus go beyond the purely behavioral level, which is distinct from the school of behaviorism in psychology.

  3. Because the understanding of fundamental principles in Stump (2015, p. 3) differs profoundly from Kant’s understanding of them as a priori knowledge, Stump introduces the term “constitutive elements of science” to capture the idea of a priori knowledge.

  4. Popper (1985, p. 359) has provoked an extensive discussion about the status and role of the rationality principle in social scientific explanations, defining the behavior the principle describes as acting appropriately in a given situation. This discussion is left out here because it approaches the issue from a different angle. The discussion is mainly concerned with the question how the principle’s role can be made sense of in the context of Popper’s account of social scientific explanation, which is called ‘situational analysis’.

  5. Note that there is a lot of variation even in how economists and philosophers have formulated the general version of the rationality principle. Besides ‘reasonableness’, others have states requirements such as ‘appropriateness’ (Popper 1985).

  6. As it is often required to satisfy the axioms of subjective expected utility, this approach is related to the second interpretation above. Also, how to interpret ‘utility’ is a matter of debate. One camp interprets utility as a psychological quantity. Another camp interprets utility as a theoretical construct that is useful for representing an agent’s preferences (for an elaboration, see Thoma 2019, section 3.1).

  7. For a critical discussion of whether consistency is best secured by the expected utility axioms, see e.g., Anand (1993).

  8. The universal law of gravitation is another example of such a fundamental principle (see e.g., Friedman 2001). Note, however, that the status of such principles is a matter of discussion, which is what is at issue here. For instance, Friedman (2008) argues that Newton’s law of gravitation is an empirical law.

  9. Economists speak less often about the ‘laws’ of demand and supply nowadays. However, it is still common to refer to demand and supply in terms of laws (see e.g., Mas-Colell et al. 1995, p. 28 ff.).

  10. The debate about the status of the rationality principle in economics is extensive and not all positions can be discussed here in detail. For an overview, see Caldwell (1994), especially Chapter 7. For an alternative position, defending conventionalism in economics more generally, see Boland (1970).

  11. Machlup used the term “verifiable” and not “testable” in this context. However, this terminology could lead to confusion, as he had a very specific understanding of “verifiability”, which he defined as “a procedure designed to find out whether a set of data of observation about a class of phenomena is obtainable and can be reconciled with a particular set of hypothetical generalizations about this class of phenomena” (Machlup 1978, p. 2).

  12. The debate between Machlup and Hutchinson has already been researched in the literature on economic methodology. For accounts of the debate, see Caldwell (1994) and Hands (2001).

  13. There are multiple arguments against von Mises’s extreme rationalism that cannot be discussed here. For a critical discussion, see Scheall (2017).

  14. Note that this argument assumes a subjective interpretation of the rationality principle, namely, that an agent behaves reasonably from their own point of view. An objective interpretation, namely, that the agent behaves reasonably from some objective point of view, is a rather uncommon interpretation in economics; see Hands (1991, p. 112) for a discussion on why the rationality principle is not falsifiable on both interpretations.

  15. Besides the complexity in causation of economic phenomena, the historical contingency of economic structures is a second reason frequently given for why there are no social scientific laws in general (see Kincaid 1990; McIntyre 1994).

  16. Stump ultimately commits himself to empiricism in that those conventions are ultimately empirical. He gets rid of the term ‘a priori’ because he takes the link to the traditional discussion about a priori knowledge to be misleading. He argues that all knowledge is ultimately derived from sensation (Stump 2015, p. 2). But by upholding a distinction between the constitutive elements of a theory and the rest, it is important that we see that this empiricism only holds ‘ultimately’.

  17. The distinction between the two meanings of a priori as the necessary and the constitutive and the relativized constitutive elements of science goes back to Reichenbach (Stump 2015, p. 3).

  18. Note that we cannot clearly separate those practices in a principled way and make some claims about the status and function of the rationality principle and/or other constitutive elements in the context of one practice. This is because there is also great variation within a particular practice. Modelling is only one example. There are various kinds of models in economics that are used for distinct purposes. The function of specific elements in those models varies, depending on the kind of model and the purpose it is used for.

  19. This shift began with the Marginalist Revolution in the 1870s and extended to the so-called “Paretian turn” and the Ordinal Revolution at the beginning of the twentieth century (Bruni/Sugden 2007, p. 146). While this conceptual change was a gradual one, it probably became most visible in Lionel Robbins’s explicit attempt to define economics around the 1930 s in terms of choice under conditions of scarcity (Robbins 1935 [1932], p. 16) and not anymore in terms of its emphasis on markets or the origins of wealth.

  20. This equally holds for the case of the consumer, where utility is maximal.

  21. Obviously, there are various axiomatic formulations of the rationality principle that differ with respect to, for example, its system of axioms, etc. (see e.g., Anand et al. 2009).

  22. There are various books on the different variants of axiomatic choice theories in economics and philosophy. For comprehensive expositions, see Anand et al. (2009), Gäfgen (1974), and Gilboa (2010).

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Acknowledgements

I am grateful to Charles Djordjevic, D. Wade Hands, Alexander Linsbichler, David Stump, Stefan Riegelnik, Philippe Verreault-Julien, and three anonymous referees for comments. I also thank Paul Dudenhefer for editing the manuscript. The project was financially supported by the Alexander von Humboldt-Foundation.

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    Catherine Herfeld

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Herfeld, C. Understanding the rationality principle in economics as a functional a priori principle. Synthese 198 (Suppl 14), 3329–3358 (2021). https://doi.org/10.1007/s11229-020-02730-z

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