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ON LINE opinion
- Australia's e-journal of social and political debate
Rationalism and rationality in economics.
By John Quiggin
Posted Monday, November 15, 1999
Although used much earlier by sociologists and social historians, the term ‘economic rationalism’ first
entered the Australian lexicon in the 1970s (Schneider 1998). When the Whitlam government came to
power, related formations such as ‘economically rational’ were used to describe the arguments of the
group in the Labor Party, including Whitlam himself, who sought reductions in protective tariffs and
agricultural price support schemes. By implication, opposing claims were regarded economically
irrational. A little later, the term ‘economic rationalists’ was used by writers such as Watson (1979) to
describe the supporters of free trade within the Labor government. This was a first step on the path by
which the term radically changed its meaning.
Whatever the origin of the term, it has evolved a great deal since the 1970s. ‘Economic rationalism’ then
referred to policy formulation on the basis of reasoned analysis, as opposed to tradition, emotion and
self-interest. With the exception of support for free trade, there was no presumption in favour of
particular policy positions. The views of the first generation of economic rationalists were generally in
the economic mainstream of the period — Keynesian in macro terms and supportive of the ‘mixed
economy’ in micro terms.
During the period of the Fraser and Hawke governments, both the intellectual character and the
theoretical and policy content of economic rationalism changed. The critical and sceptical thinking that
characterised the first phase of economic rationalism was gradually replaced by a dogmatic, indeed,
quasi-religious, faith in market forces and the private sector. More and more, economic analysis was
based on deductions from supposedly self-evident truths, which were effectively immune from any form
of empirical testing. Many of the beliefs that are now central to ‘economic rationalism’ would have been
regarded as irrational prejudices by the first generation of economic rationalists.
By the 1980s, economic rationalists had largely adopted the microeconomic views of the Chicago
school, rejecting ideas of market failure in favour of the belief that the simple neoclassical model of
perfect competition was a good description of the economy, or would be in the absence of undesirable
government intervention. A variety of arguments were used to show that most market failures were
unimportant or self-correcting. At the same time, the public choice theory of politics was used to
introduce the idea of ‘government failure’. It was argued that, because of the systematic distortion of the
policy process by interest groups, the costs of government intervention were greater than the costs of the
market imperfections that government policies were supposed to remedy.
The evolution of economic rationalist attitudes towards the public sector followed a similar path.
Mainstream economics provides a range of arguments for and against government intervention in
particular cases. Consistently arguing against government intervention, economic rationalists came to
rely on the view, naturally popular in the business sector, that private enterprise is inherently superior to
government action. This view was reinforced in the 1980s by the perceived success of the ‘Thatcher
revolution’ in the United Kingdom, and by the apparent dynamism of private sector entrepreneurs like
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Bond and Skase.
Nevertheless, the ambiguity surrounding the term ‘economic rationalism’ persisted. A survey of
academic economists (Anderson and Harris 1996) revealed general agreement concerning the set of
policies that constituted the program of ‘economic rationalism’. However, while those who identified
themselves as opponents of economic rationalism agreed that economic rationalism involved strict
opposition to government intervention and a belief in the inherent superiority of private enterprise, there
was disagreement among those who regarded themselves as economic rationalists. Some ‘hard-line
hawks’ agreed with the view that economic rationalism implied support for laissez-faire, but others
adhered to the older definition, claiming that economic rationalism was nothing more than the
application of mainstream economics to policy issues.
These ambiguities were exploited by some defenders of economic rationalism, such as James, Jones and
Norton (1993), when their policy program came under attack during the 1989-90 recession. When
responding to critics such as Pusey (1991), Toohey (1994) and Langmore and Quiggin (1994), they
claimed that economic rationalism merely means policy formulation based on rational economic
analysis, which, presumably, no-one could disagree with. The rest of the time, they assumed that
economic rationalism implies support for radical free-market reform.
The style of argument adopted by economic rationalists is well illustrated by Parkin (1999, p 5), who
says:
Achieving a redistribution of income and wealth by taxing incomes is inferior to taxing
expenditures while taxing capital income is the least efficient of all. Progressive taxes are
also highly inefficient. These are not statements of opinion. They are fact.
I assume that what Parkin means is that these propositions may be derived as logical deductions from an
economic model based on the assumption that individuals, with no inherited wealth and facing perfect
labour and capital markets, rationally optimise their lifetime work and consumption patterns. (Even with
these assumptions, I do not think Parkin's claim that the optimal tax schedule is linear rather than
progressive is justified.)
It is a matter of fact that the assumptions underlying the life-cycle model are not exactly satisfied in
reality. Contrary to Parkin's assertion, it is a matter of opinion whether the differences between reality
and the model are sufficient to invalidate the policy conclusions derived from the model. But the use of
dogmatic assertion, and the claim that anyone who holds contrary views is not a real economist, are
standard features of economic rationalist rhetoric.
Despite these rhetorical manoeuvres, ‘economic rationalism’ became a primarily pejorative term in the
1990s. In part, this change arose because economic rationalists, who now dominated the main economic
policy-making institutions, found it less necessary to justify their views in public debate, and therefore
less useful to identify themselves as members of a school of thought. The use of the term was therefore
more frequent among their opponents. The shift also reflected a substantive change in the policy debate
as it became evident that radical free-market reforms had failed to deliver the promised benefits. (The
jury is still out on whether any net benefits have been realised. On the whole the evidence suggests that
microeconomic reform has yielded modest benefits in Australia, but that the unconstrained dominance
of economic rationalism in New Zealand has led to consistently poor outcomes.)
In philosophical terms, the opposite of rationalism is not irrationalism but empiricism, that is, a
willingness to form beliefs on the basis of experience rather than from a priori deduction. Empirical
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evidence never yields the dogmatic certainty that accompanies logical deduction. I interpret the
economic experience of the last two centuries to show that an unregulated market economy is inherently
unstable and that a mixed economy, with an appropriate allocation of productive activity between the
public and private sectors yields outcomes superior to those generated by either of the polar alternatives
- laissez-faire capitalism and comprehensive socialism. Others, particularly those who focus on the
strong performance of the US economy the last decade, have drawn conclusions more favourable to the
market economy.
Empiricism is consistent with an approach to policy-making based on willingness to adjust the role of
the public sector in the light of new experience and of innovations in technology and policy design.
Such an approach is more rational than economic rationalism.
References
Anderson, M. and Harris, M. (1996), Economics through the looking glass: "Economic Rationalism" as
seen by public figures, IAESR Working Paper Series No. 6/96, Institute of Applied Economic and
Social Research, University of Melbourne.
James, C., Jones, C., and Norton, A. (1993), A Defence of Economic Rationalism, Allen and Unwin,
Sydney.
Langmore, John and Quiggin, John (1994), Work for All: Full Employment in the Nineties, Melbourne
University Press, Carlton, Victoria.
Parkin, M. (1999), ‘In defence of economic rationalism’, Queensland Economic Review 1999(2), 4-5.
Pusey, Michael (1991), Economic Rationalism in Canberra: A Nation--building State Changes its Mind,
Cambridge University Press, Cambridge.
Schneider, M. (1998), ‘'Economic rationalism', economic rationalists and economists’, Quadrant
October, 48-53.
Toohey, Brian (1994), Tumbling dice : the story of modern economic policy , William Heinemann
Australia, Port Melbourne
Watson, A. S. (1979), ‘Rural policies’, in Patience, A. and Head, B. e. (ed.), From Whitlam to Fraser:
reform and reaction in Australian politics, Oxford University Press, Melbourne, pp. 157-72.
This essay was published by the Office of Economic and Statistical Research in the Queensland
Economic Review 1999/3.
Professor John Quiggin is an Australian Research Council Professorial Fellow based at the University of
Queensland and the Australian National University.
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