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On the Limits of Rational Choice Theory

Geoffrey M Hodgson

Abstract

The value of rational choice theory for the social sciences has long been contested. It is argued here that, in the debate over its role, it is necessary to distinguish between claims that people maximise manifest payoffs, and claims that people maximise their utility. The former version has been falsified. The latter is unfalsifiable, because utility cannot be observed. In principle, utility maximisation can be adapted to fit any form of behaviour, including the behaviour of non-human organisms. Allegedly ‘inconsistent’ behaviour is also impossible to establish without qualification. This utility-maximising version of rational choice theory has the character of a universal ‘explanation’ that can be made to ‘fit’ any set of events. This is a sign of weakness rather than strength. In its excessive quest for generality, utility-maximising rational choice theory fails to focus on the historically and geographically specific features of socio-economic systems. As long as such theory is confined to ahistorical generalities, then it will remain highly limited in dealing with the real world. Instead we have to consider the real social and psychological determinants of human behaviour.

Published on 17 Jul 2012 in Economic Thought Vol 1, No 1, 2012