Book Review – Predictably Rational

Rational Choice Theory is dead. Long live rationality in economics.

I wish I wrote this book.

Predictably Rational is an attempt by a self-described neoclassical economist to grapple with the challenges presented by behavioral economics. It is a resounding success. McKenzie contrasts the meanings of rationality, from Smith to Marshall, from Buchanan to Friedman to Becker, and critically examines as to which “rationality” behavioral economics research has anything to do with. The author determines that very few of the eminent economists who had something to say on rationality believed it actually has descriptive relevance of the real world. Notably, Becker and Stigler believed it does. In that sense, behavioral economics has destroyed the idea that people actually maximize ex post utility in some meaningful way.

However, McKenzie also discusses how unimportant behavioral economics is regarding the conclusions of other economists. For example, McKenzie defends Milton Friedman’s use of rationality since it was only meant to be used as a simplifying device. I don’t ultimately agree with Friedman myself, but Friedman deserves to be dehomogenized from Becker’s and Stigler’s uses of rationality in economics. McKenzie also defends James Buchanan, who uses the ultra rational economic man not as an accurate description of reality, but as an idealization of the destructive, selfish force in humanity which our political institutions should protect us from (with constitutional amendments, in the case of Buchanan). Showing that, in a laboratory setting, people off the street don’t perfectly maximize profits obviously has no bearing on these usages of “rationality,” though frequently those who cite the behavioralist literature act as if they do.

In the context of discussing evolutionary theory and neuroeconomics (which he does so extensively, in a manner I have not seen at all elsewhere), McKenzie also posits a new way of defining human rationality: rational rationality. What it means is that our rationality is a product of our evolution. Just like anything else, whether it is our ability to run, see a broad color spectrum, or avoid sleeping, we face tradeoffs when we marginally increase the degree to which our biology allows us to make rational decisions. How rational we are today was determined “rationally” by the invisible forces of evolution. This is brilliant and recasts virtually every aspect of the debate in behavioral economics.

This is a sprawling work, and there is one other somewhat original point made. McKenzie suggests that the discovery of the issues raised by behavioral economics demonstrates that neoclassicals should feel free to begin teaching economics as a prescriptive science in addition to a descriptive one. If we jettison the beliefs of Becker and Stigler, we can make people better off by teaching them that sunk costs don’t matter and that they should set marginal cost equal to marginal benefit. There is much to gain in teaching “rationality” since it will make the economy more competitive and more efficient for everyone.

Quibbles:

-I would have liked to see more discussion of Herbert Simon and bounded rationality. The book touches on him several times but never really gets into it.

-I was already aware of nearly every behavioral study McKenzie mentioned (perhaps every one) and I’ve only studied behavioral economics informally. This concerns me because the best arguments for anything are usually too complicated for public consumption. Since this seems like a book made for consumption by academics (currently with a price of $50 for a soft cover, 300 pg book), I would want to see McKenzie take on whatever those arguments are.

-Way too large of a portion of the book was spent on history of thought, especially Adam Smith. Because of this, we don’t really see McKenzie’s own arguments until 140 pages into the book. This “history of thought,” some of which is barely relevant, goes from page 35 to page 111 in a book which concludes at 281.

-On the other hand, the history of thought was extremely specific to certain strands of economics. The mainstream people in the book, Friedman, Becker, and Stigler, are all Chicago guys. Where are all the Samuelsonians? If we are going to be talking about a book on economic rationality that goes heavy into history of thought, shouldn’t we talk about revealed preference?

Still, those are quibbles.