Rationality in Economics

Rationality is one of the defining concepts of economics. Standard economic theory routinely assumes that people behave rationally. Consumption decisions are taken to be made by utility maximising economic agents, and production decisions by profit maximising firms. Economists have also eagerly applied the rationality assumption to situations outside the traditional realm of economics. The economic analysis of crime and marriage are just two examples.

Throughout the history of economic thought debates have raged about the nature of rational behaviour. A case in point is the debate about rationality in situations of risk and uncertainty, set in motion by Maurice Allais’s experiments and the discovery of the Allais paradox. Game theory has been a fertile ground for the exploration of different puzzles and anomalies concerning rational behaviour. The prisoners’ dilemma, for instance, highlights the tension between individual and collective rationality.

A more radical departure can be seen in the development of new branches of economics, such as behavioural finance and behavioural macroeconomics. Scholars in these fields openly question the assumption that people behave rationally, and adopt behavioural assumptions which are perceived as more realistic. Recent work on ‘irrational exuberance’ (Robert J. Shiller) and ‘predictably irrational’ behaviour (Dan Ariely) illustrates this type of research. Going further back in history, John Maynard Keynes’s use of the phrase ‘animal spirits’ points in the same direction.

Clearly, there is a role for historians of economic thought to illuminate the central but changing place of the concept of rationality in the history of economics. Since the debates on rationality are far from over and continue to influence the way economics and related disciplines evolve today, the topic is of interest to more than just historians of thought. The theme of the 2017 conference therefore confirms ESHET’s belief that the study of the history of economic thought should in no way be disconnected from current issues in economics and beyond, and could in fact help provide historical perspectives on standard views about the subject.