Moral Limits of Rational Agent Theory

Neoclassical economics has its foundation in the conception of the rational agent. A rational agent is one with complete preferences, in that he knows what he feels about the relation of good A to good B; his preferences are transitive, if he prefers good A to B and B to C, he also prefers A to C; and he is subject to non-satiation, he will prefer 2 of good A to one of good A, if the cost is the same. This forms the consumer’s Weberian ideal type, meaning that while not all consumers may be rational agents, the rational agent is the prototypical consumer worthy of analysis. From this all economic models used to understand and interpret economic data are built.

Rational agent theory is considered by economists to be “value free” in that it makes no claim about the morality of individual economic actors, and prescribes no moral behaviour to them. It simply responds to their preferences and demands, with their morals being built into whatever preferences they have. On philosophical grounds there is much to question about this theory as a building block to our economic lives.

The value free claim of rational agent theory rests on pervasive myth of moral neutrality, something that has distorted social sciences built on a liberal philosophy. The idea that by removing one’s moral character from the equation one makes the model morally neutral, is in itself a moral imposition. This is most pervasive in the misinterpretation that pervades of Adam Smith’s “invisible hand”. While Smith himself referred to the means by which shared moral sentiments and local culture encourage economic behaviour that necessarily leads to the best outcomes, the moral sentiments and culture part is left out of modern reading. Instead, it is believed that by removing morals from the equation and submitting people to economic laws, the best outcome can be had for all. What this does is itself impose the economic laws, them being of a moral character as they lead to the best outcomes.

This makes intelligible claims such as “it’s not personal, it’s just business”.

Such an idea would have made no sense to thinkers of the School of Salamanca, early advocates of free trade that have been co-opted by certain thinkers as the forbearers to neoclassical economics. It is not possible to separate the business from the personal, for our economic lives are by definition the relationships individuals have with each other. By doing so, the personal itself is denigrated, and individuality is subsumed into the deterministic forces of economic laws.

Pope Emeritus Benedict XVI in his discussion on the morality of markets noted that it was the case that by these economic laws having the veneer of moral neutrality, they disadvantaged the moral businessman. The businessman who builds morality into his work can only survive given the conditions that moral character is valued, by reducing the economic transaction to the local and personal. As the economy grows and transactions with conglomerates remove the personal from the economic, morality must submit to the economy.

We can see it evident today that the local shops that protect diversity and personal character, the very type of shop the free market was meant to defend, are disappearing, being replaced by large multinational corporations that remove personhood in trade. The political means by which a local community can prevent something such as a Walmart from entering their area and upending the local economy have all but disappeared. Defenders of the market say that the conglomerate lowers costs and provides jobs, that it is therefore good for the local economy. That economic life is a means to other ends is not an aspect of the discussion. Economics has thus no longer become concerned with the aspects between individuals in an economy community, but the study of disembodied atomised individuals in a non-geographically bounded economy.

How is it then that such a myth of moral neutrality was allowed to penetrate the social sciences so deeply? One can trace this to a core belief of modern liberalism, that of a noumenal self, to use Kantian terminology. In John Rawls’ A Theory of Justice, he brings forth the thought experiment of the veil of ignorance, where it is imagined that you are ordering society without knowing your own talents, class, social standing, or preference. In such a case, what type of society would you ideally design. That this could even make sense as a thought experiment shows the pervasiveness of the atomic individual in modern philosophy. How it is even possible for the self to exist outside society is not a question addressed. That the self is formed through relationships and bonds, and evolves throughout time, is something entering the philosophical disciple more often nowadays, but is not a pervasive view in economics. Findings in neuroscience and cognitive science more generally, however, continually seem to refute the idea of a noumenal self.

This idea so ingrained in neoclassical economic thought allows economists to believe that individual preferences simply are, and an investigation into their formation is irrelevant. How society and the economy influence these preferences, create our concept of the self, and affect the relationships we have with other people is methodologically absent. This does not serve to protect the individual’s morality in the economic sphere. What it does is to make all preferences economic preferences. That a business survives on its profitability, not it social or moral character, and if its social and moral character are desirable, the business would have been profitable.

That is not to say all is hopeless within the economics discipline. Ronald Coase, the famed University of Chicago economist, developed his idea of transaction costs as an explanation for the existence of things, such as firms, that are not explained in traditional economic models. These costs affect the character of the economy in all sorts of ways, making the things the way they are, instead of the way that economists dream them to be. When it comes to morality in the market, certain transaction costs such as search and information costs, which affect how easy it is to find the good that you are looking for and acquire information about it, have great effect. The moral character of a certain business is not automatically apparent, meaning if the moral business wants to highlight its moral character it incurs costs upon itself to make that known. The moral consumer who wants to only make ethical transactions also incurs costs in finding out which businesses are of the moral standard they are concerned with, and actually verifying that standard.

While transaction costs pervade all aspects of the modern economic life, in pre-Capitalist societies, morality and social norms served to lower them. In Ancient Athens, the social capital of a vendor was seen as a way to understand their trustworthiness, and thereby not have to be as weary when entering into a contract. Moral rules and social norms effectively enforced allowed for successful economic life. While the imperative that economic life submits to the moral life is not as pervasive today as it was in Athens then, attempts at social capital are still made. Corporate Social Responsibility programs are used often by large companies to build a brand while giving back to communities, but the efficacy of these programs is much harder to identity.

The economic system, however, does not see a need currently to submit the economic to moral concerns. Morality can be used as a marketing gimmick rather than a fundamental management philosophy, which is indistinguishable to the customer. This poses no problem for a purely consequentialist reading of economic life, and economists have no way to distinguish between them. This has disastrous social implications.

One can take the example of secularism in political life to see how this atomised and individualistic philosophy affects economic life. Whereas secular liberal society was meant to be one in which no religion could take control over the institutions of the State, thereby protecting freedom of religion, it has increasingly become a philosophy that strives to grant freedom from religion. Religious practices are increasingly seen as unfit in the public square, and something to be relegated to private life. Religion, however, is not a private phenomena, but a community one. It shapes the very worldview with which one interacts with others, their moral character, their choices, and their actions. By restricting religion to the private domain, instead of allowing all religions to have their place in public, all religion lose their public voice. Religious views lack the character worthy to be heard in democratic debate, and the religious person becomes split between a private and public self.

In economic life, this agnosticism to morality becomes a compulsion to amorality. By removing the moral from an economic transaction, an individual is effectively split between his private moral self, and his economic amoral self. The amorality in economic life, however, becomes the foundation of his relationships with others and society. When all one’s interactions are governed by an amoral character, this makes the private moral self effectively inactive. By removing the private from economic life, one replaces the moral structures of a society.

Markets are a tool to better society, and it is hard to deny the free market system has contributed to the greatest growth in prosperity in human history. Markets effectively allocate resources, encourage innovation, and, over time, lead to abundance for all. Markets, however, are not society. The economic is not the ends of one’s life, and material abundance ought not be the only goal of a society. By reducing society to markets, you reduce individuals to the purely economic, which neglects the proper purposes of man.

To properly place markets within a moral framework in which they serve as a means by which man can achieve his final cause is imperative in a functioning society. Economics is not an objective science that simply studies individual behaviour, but a moral science that studies how individuals ought to behave.

The distinction that inaugurated the adoption of rational agent theory, that of a difference between positive and normative economics, is a fallacious one. The principle of underdetermination, that any given set of data is commensurate with an infinite number of incommensurable hypothesis, is well known in the philosophy of science, but lost on many economists. Normative assumptions pervade all positive economics, because one cannot have an interpretation of economic data without the prior assumption of what is the purpose of the economy.

This question, the purpose of the economy, is something I like to call economic theology, and is implicit in all economic schools. Some are extremely blatant, with Marxist economic theology verging on religious dogmatism. Others are clearer only through deeper investigation, such as the Keynesian fascination with full employment, revealing a theology that states the purpose of the economy is to provide jobs. This finds support in the fact that the vast majority of economists who fear technological unemployment have identified as Keynesian, whereas many heterodox economists find it a non-sequitur.

The prevailing economic theologies, however, find the ultimate purpose in something material and economic, which ignores the more human concerns of life. Reducing individuals to rational agents may be useful from some technical analytics, but is socially disastrous when it becomes the foundation of an economic philosophy. Understanding of man, his relation to self and society, and the proper purpose of economic activity is essential to integrate into economic thought. Economics must regain its interdisciplinary nature in order to fully address the social problems currently being faced.

In my view, the Pope Emeritus put it best: “A morality that believes itself able to dispense with the technical knowledge of economic laws is not morality but moralism. As such it is the antithesis of morality. A scientific approach that believes itself capable of managing without an ethos misunderstands the reality of man. Therefore it is not scientific. Today we need a maximum of specialised economic understanding, but also a maximum of ethos so that specialised economic understanding may enter the service of the right goals. Only in this way will its knowledge be both politically practicable and socially tolerable.”

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