3 - Revealed Preference Theory, Rationality, and Neoclassical Economics: Science or Ideology
Corresponding Author(s) : Lansana Keita
Africa Development,
Vol. 37 No. 4 (2012): Africa Development: Special Issue on‘Africa and its Discontents:Politics, Economics and Culture’
Abstract
Revealed Preference Theory (Samuelson 1938) is an attempt to establish economic theory as a genuine empirical science by ridding it of non- empirical psychological concepts. Samuelson’s goal was to rid economic theory of the last vestiges of utility analysis. Samuelson structured his theory on a set of preference axioms that would explain the choices of economic agents. But revealed preference theory is rendered problematic because decision making is structured therein on preferences that conform to an implicit postulate of rationality. Matters are further compounded by the fact that despite theoretical support offered by theorists such as Varian, the empirical results demonstrate that agent decision making is often at variance with the formal axioms of revealed preference. The issue is not solved even when decision making is construed within the context of imperfect, that is, ‘bounded rationality’. I argue that neoclassical economic theory is best understood as a form of rule utilitarianism. In this regard, neoclassical economics is unavoidably value-laden and should be construed as an aspect of normative welfare economics. Thus efforts by theorists such as Vanberg to salvage the assumed scientific credentials of neoclassical economics by construing the postulate of rationality in evolutionary terms are seen as problematic. Neoclassical economic theory is to be viewed essentially then as an ideology that presents a particular theory of human behaviour. It is this theory that serves as the foundations of modern capitalism and its practise as neoliberal economics. This is the anthropological question then: is such an ideology socially optimal for humans as social animals in terms of efficiency and equity?
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- Afriat, Sydney, 1976, The Combinatorial Theory of Demand, London: Input- Output Publishing.
- Ariely, Dan, 2008, Predictably Irrational: The Hidden Forces that Shape our Decisions, New York: Free Press.
- Arrow, Kenneth, 1951, Social Choice and Individual Values, New Haven: Yale University Press.
- Becker, Gary, 1976, Economic Approaches to Human Behaviour, Chicago: University of Chicago Press.
- Bentham, Jeremy, 1879, Introduction to the Principles of Morals and Legislation, Oxford: Clarendon Press.
- Blaug, Mark, 1980, The Methodology of Economics, Cambridge: Cambridge University Press.
- Boland, Lawrence, 1981, ‘On the Futility of Criticizing the Neoclassical Maximization Hypothesis’, American Economic Review 71, 1031-1036.
- Bridgman, Percy, 1927, The Logic of Modern Physics, New York: Macmillan.
- Camerer, Colin, 1999, ‘Behavioral Economics: Reuniting Psychology’, Proceedings of the National Academy of Sciences of the U.S.A., 19, 10575-10577.
- Camerer, Colin, G. Lowenstein, and D. Prelec, 2005, ‘Neuroeconomics: How Neuroscience can Inform Economics’, Journal of Economic Literature, 43, 9-64.
- Coats, A.W. 1996, ‘Utilitarianism, Oxford Idealism and Cambridge Economics’, in Peter Groenewegen, ed., Economics and Ethics, London: Routledge.
- Dalton, George, ed., 1968, Primitive, Archaic and Modern Economics, New York: Anchor Books.
- Friedman, Milton, 1953, ‘The Methodology of Positive Economics’, in Milton Friedman, ed., Essays in Positive Economics, Chicago: University of Chicago Press.
- Green, Donald, and Shapiro, Ian, 1994, Pathologies of Rational Choice Theory, New Haven: Yale University Press.
- Groenewegen, Peter, ed., 1996, Economics and Ethics?London: Routledge. Grune, Till, 2004, ‘The Problems of Testing Preference Axioms with Revealed Preference Theory’, Analyse und Kritik, 382-397.
- Hausman, Daniel, and Mc Pherson, Michael, 1996, Economic Analysis and Moral Philosophy, Cambridge: Cambridge University Press.
- Holland, John. H., 1992 (a), Adaptation in Natural and Artificial Systems, Cambridge, MA: MIT Press.
- Houthakker, Hendrik, 1983, ‘Consumption Theory’, in Paul Samuelson and Modern Economic Theory, E. C. Brown and R. M. Solow, eds, New York: McGraw-Hill.
- Jevons, William, S., 1879, Theory of Political Economy, London: McMillan. Kahneman, Daniel and Tversky, Amos, 1979, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, 47, 313-327.
- Kahneman, Daniel and Thaler, Richard, 2006, ‘Anomalies: Utility Maximization and Experienced Utility’, Journal of Economic Perspectives.1, 221-234.
- Keynes, J.M., 1936, The General Theory of Employment, Interest, and Money, London: Macmillan.
- Kuhn, Thomas, 1962, The Structure of Scientific Revolutions, Chicago: University of Chicago Press.
- Machlup, Fritz, 1966, ‘Professor Samuelson on Theory and Realism’, in Joseph Stiglitz, ed., The Collected Scientific Works of P.A. Samuelson, Vol. I. Cambridge: M.I.T. Press.
- Mattei, Aurelio, 2000, ‘Full Scale Real of Consumer Behaviour Using Experimental Data’, Journal of Economic Behaviour and Organization 43, 487-497.
- Menger, Carl, 1871, Principles of Economics, New York: New York University Press, 1976 (English trans,).
- Mises, Ludwig von, 1949, Human Action, New Haven: Yale University Press. Polanyi, Karl, 2001, The Great Transformation, Boston: Beacon Press.
- Polanyi, Karl, 1968, ‘Our Obsolete Market Economy’, in Primitive, Archaic and Modern Economies. George Dalton, ed., New York: Anchor Books.
- Popper, Karl, 1968, The Logic of Scientific Discovery, New York: Basic Books. Popper, Karl, 1972, Objective Knowledge, Oxford: Oxford University Press. Rosenberg, Alexander, 1976, Microeconomics Laws, Pittsburgh: The University of Pittsburgh Press.
- Rosenberg, Alexander, 1992, Mathematical Politics or Science of Diminishing Returns,Chicago: University of Chicago Press.
- Rubenstein, Ariel, 1998, Modeling Bounded Rationality, Cambridge: MIT Press. Samuelson, Paul, 1938 (a), ‘A Note on the Pure Theory of Consumer’s Behaviour’, Economica 5, 61-71.
- Samuelson, Paul, 1938 (b), ‘A Note on the Pure Theory of Consumer’s Behaviour: An Addendum’, Economica 5, 353-54.
- Samuelson, Paul, 1947, Foundations of Economic Analysis, Cambridge: Harvard University Press.
- Samuelson, Paul, 1948, ‘Consumption Theory in Terms of Revealed Preference’, Economica 15, 243-53.
- Samuelson, Paul, 1950, ‘The Problem of Integrability in Utility Theory’, Economica 17, 355-85.
- Samuelson, Paul, 1972, ‘Maximum Principles in Analytical Economics’, American Economic Review, 62, 249-62.
- Sanfey, A.G., J.K. Rilling, J.A. Aronson, L.E. Nystrom, and J.D. Cohen, 2003, ‘The Neural Basis of Economic Decision Making in the Ultimate Game’, Science, 300,1755-1758.
- Sen, Amartya, 1987, On Ethics and Economics, New York: Basil Blackwell.
- Sent, Esther-Mirjam, 2004, ‘The Legacy of Herbert Simon in Game Theory’, Journal of Economic Behavior and Organization. 53, 303-317.
- Simon, Herbert, 1955, ‘A Behavioral Model of Rational Choice’, Quarterly Journal of Economics.
- Simon, Herbert, 1959, ‘Theories of Decision Making in Economics and Behavioral Science’, American Economic Review 49, 253-283.
- Simon, Herbert, 1982, Models of Bounded Rationality, Vol. 2, Cambridge, MA: MIT Press.
- Simon, Herbert, 1986, ‘Rationality in Psychology and Economics’, The Journal of Business, 59, 4, 209-224.
- Sippel, Reinhard, 1997, ‘An Experiment in the Pure Theory of Consumer’s Behaviour’, The Economic Journal 107, 1431-44.
- Stiglitz, Joseph, 1966, ed., The Collected Scientific Papers of Paul A. Samuelson,Vol. 1, Cambridge, MIT Press.
- Thaler, Richard, 1992, The Winner’s Curse: Paradoxes and Anomalies of Economic Life, New York: Free Press.
- Varian, Hal, 2006, ‘Revealed Preference’, in Michael Szenberg et al,eds, Samuelsonian Economics and the 21st Century (pre-publication draft).
- Vanberg, Viktor, 2004, ’The Rationality Postulate in Economics: Its Ambiguity, Deficiency and its Evolutionary Alternative’, Journal of Economic Methodology 11, 1, 1-29.
- Varoufakis, Yanis, 1996, ‘O Tempora, O Mores! Economics as the Ethos of Our Times’, in Peter Groenewegen (ed.). London: Routledge.
- von Neumann, John, and O. Morgenstern, 1944, Theory of Games and Economic Behavior, Princeton: Princeton University Press.
- Walras, Leon, 1874, Elements of Pure Economics, William Jaffe (trans.), Homewood, Ill.: Irwin, 1954 (1874).
- White, Michael, 1996, ‘Comment: No Matter of Regret: The Cambridge Critique(s) of Jevons’s “Hedonics”’, in Economics and Ethics, Peter Groenwegen (ed.), London: Routledge.
- Wong, Stanley, 1973, ‘The F-Twist and the Methodology of Paul Samuelson’, American Economic Review 63, 312-25.
- Wong, Stanley, 1978, The Foundations of Paul Samuelson’s Revealed Preference Theory, Boston: Routledge and Kegan Paul.
References
Afriat, Sydney, 1976, The Combinatorial Theory of Demand, London: Input- Output Publishing.
Ariely, Dan, 2008, Predictably Irrational: The Hidden Forces that Shape our Decisions, New York: Free Press.
Arrow, Kenneth, 1951, Social Choice and Individual Values, New Haven: Yale University Press.
Becker, Gary, 1976, Economic Approaches to Human Behaviour, Chicago: University of Chicago Press.
Bentham, Jeremy, 1879, Introduction to the Principles of Morals and Legislation, Oxford: Clarendon Press.
Blaug, Mark, 1980, The Methodology of Economics, Cambridge: Cambridge University Press.
Boland, Lawrence, 1981, ‘On the Futility of Criticizing the Neoclassical Maximization Hypothesis’, American Economic Review 71, 1031-1036.
Bridgman, Percy, 1927, The Logic of Modern Physics, New York: Macmillan.
Camerer, Colin, 1999, ‘Behavioral Economics: Reuniting Psychology’, Proceedings of the National Academy of Sciences of the U.S.A., 19, 10575-10577.
Camerer, Colin, G. Lowenstein, and D. Prelec, 2005, ‘Neuroeconomics: How Neuroscience can Inform Economics’, Journal of Economic Literature, 43, 9-64.
Coats, A.W. 1996, ‘Utilitarianism, Oxford Idealism and Cambridge Economics’, in Peter Groenewegen, ed., Economics and Ethics, London: Routledge.
Dalton, George, ed., 1968, Primitive, Archaic and Modern Economics, New York: Anchor Books.
Friedman, Milton, 1953, ‘The Methodology of Positive Economics’, in Milton Friedman, ed., Essays in Positive Economics, Chicago: University of Chicago Press.
Green, Donald, and Shapiro, Ian, 1994, Pathologies of Rational Choice Theory, New Haven: Yale University Press.
Groenewegen, Peter, ed., 1996, Economics and Ethics?London: Routledge. Grune, Till, 2004, ‘The Problems of Testing Preference Axioms with Revealed Preference Theory’, Analyse und Kritik, 382-397.
Hausman, Daniel, and Mc Pherson, Michael, 1996, Economic Analysis and Moral Philosophy, Cambridge: Cambridge University Press.
Holland, John. H., 1992 (a), Adaptation in Natural and Artificial Systems, Cambridge, MA: MIT Press.
Houthakker, Hendrik, 1983, ‘Consumption Theory’, in Paul Samuelson and Modern Economic Theory, E. C. Brown and R. M. Solow, eds, New York: McGraw-Hill.
Jevons, William, S., 1879, Theory of Political Economy, London: McMillan. Kahneman, Daniel and Tversky, Amos, 1979, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, 47, 313-327.
Kahneman, Daniel and Thaler, Richard, 2006, ‘Anomalies: Utility Maximization and Experienced Utility’, Journal of Economic Perspectives.1, 221-234.
Keynes, J.M., 1936, The General Theory of Employment, Interest, and Money, London: Macmillan.
Kuhn, Thomas, 1962, The Structure of Scientific Revolutions, Chicago: University of Chicago Press.
Machlup, Fritz, 1966, ‘Professor Samuelson on Theory and Realism’, in Joseph Stiglitz, ed., The Collected Scientific Works of P.A. Samuelson, Vol. I. Cambridge: M.I.T. Press.
Mattei, Aurelio, 2000, ‘Full Scale Real of Consumer Behaviour Using Experimental Data’, Journal of Economic Behaviour and Organization 43, 487-497.
Menger, Carl, 1871, Principles of Economics, New York: New York University Press, 1976 (English trans,).
Mises, Ludwig von, 1949, Human Action, New Haven: Yale University Press. Polanyi, Karl, 2001, The Great Transformation, Boston: Beacon Press.
Polanyi, Karl, 1968, ‘Our Obsolete Market Economy’, in Primitive, Archaic and Modern Economies. George Dalton, ed., New York: Anchor Books.
Popper, Karl, 1968, The Logic of Scientific Discovery, New York: Basic Books. Popper, Karl, 1972, Objective Knowledge, Oxford: Oxford University Press. Rosenberg, Alexander, 1976, Microeconomics Laws, Pittsburgh: The University of Pittsburgh Press.
Rosenberg, Alexander, 1992, Mathematical Politics or Science of Diminishing Returns,Chicago: University of Chicago Press.
Rubenstein, Ariel, 1998, Modeling Bounded Rationality, Cambridge: MIT Press. Samuelson, Paul, 1938 (a), ‘A Note on the Pure Theory of Consumer’s Behaviour’, Economica 5, 61-71.
Samuelson, Paul, 1938 (b), ‘A Note on the Pure Theory of Consumer’s Behaviour: An Addendum’, Economica 5, 353-54.
Samuelson, Paul, 1947, Foundations of Economic Analysis, Cambridge: Harvard University Press.
Samuelson, Paul, 1948, ‘Consumption Theory in Terms of Revealed Preference’, Economica 15, 243-53.
Samuelson, Paul, 1950, ‘The Problem of Integrability in Utility Theory’, Economica 17, 355-85.
Samuelson, Paul, 1972, ‘Maximum Principles in Analytical Economics’, American Economic Review, 62, 249-62.
Sanfey, A.G., J.K. Rilling, J.A. Aronson, L.E. Nystrom, and J.D. Cohen, 2003, ‘The Neural Basis of Economic Decision Making in the Ultimate Game’, Science, 300,1755-1758.
Sen, Amartya, 1987, On Ethics and Economics, New York: Basil Blackwell.
Sent, Esther-Mirjam, 2004, ‘The Legacy of Herbert Simon in Game Theory’, Journal of Economic Behavior and Organization. 53, 303-317.
Simon, Herbert, 1955, ‘A Behavioral Model of Rational Choice’, Quarterly Journal of Economics.
Simon, Herbert, 1959, ‘Theories of Decision Making in Economics and Behavioral Science’, American Economic Review 49, 253-283.
Simon, Herbert, 1982, Models of Bounded Rationality, Vol. 2, Cambridge, MA: MIT Press.
Simon, Herbert, 1986, ‘Rationality in Psychology and Economics’, The Journal of Business, 59, 4, 209-224.
Sippel, Reinhard, 1997, ‘An Experiment in the Pure Theory of Consumer’s Behaviour’, The Economic Journal 107, 1431-44.
Stiglitz, Joseph, 1966, ed., The Collected Scientific Papers of Paul A. Samuelson,Vol. 1, Cambridge, MIT Press.
Thaler, Richard, 1992, The Winner’s Curse: Paradoxes and Anomalies of Economic Life, New York: Free Press.
Varian, Hal, 2006, ‘Revealed Preference’, in Michael Szenberg et al,eds, Samuelsonian Economics and the 21st Century (pre-publication draft).
Vanberg, Viktor, 2004, ’The Rationality Postulate in Economics: Its Ambiguity, Deficiency and its Evolutionary Alternative’, Journal of Economic Methodology 11, 1, 1-29.
Varoufakis, Yanis, 1996, ‘O Tempora, O Mores! Economics as the Ethos of Our Times’, in Peter Groenewegen (ed.). London: Routledge.
von Neumann, John, and O. Morgenstern, 1944, Theory of Games and Economic Behavior, Princeton: Princeton University Press.
Walras, Leon, 1874, Elements of Pure Economics, William Jaffe (trans.), Homewood, Ill.: Irwin, 1954 (1874).
White, Michael, 1996, ‘Comment: No Matter of Regret: The Cambridge Critique(s) of Jevons’s “Hedonics”’, in Economics and Ethics, Peter Groenwegen (ed.), London: Routledge.
Wong, Stanley, 1973, ‘The F-Twist and the Methodology of Paul Samuelson’, American Economic Review 63, 312-25.
Wong, Stanley, 1978, The Foundations of Paul Samuelson’s Revealed Preference Theory, Boston: Routledge and Kegan Paul.