[This article is the introduction to Rationality, Psychology and Capitalism: Defending Economic Theory From Behavioral Imperialism by former Mises Summer Fellow Arkadiusz Sieroń. The full book is available from Edward Elgar Publishing, and online from Elgar Online.]
Homo economicus is dead. Economics needs to develop more realistic psychological underpinnings and to become more mindful. This is at least what behavioral economists have declared after the successful emergence of its sub-discipline (e.g., Thaler 2000, 2015, 2016; Camerer 2008). But are they right?
The present volume aims to answer this question. It argues that such reports of Homo economicus’ death have been greatly exaggerated, as they stem from misunderstanding the nature and purpose of the concept. It is not a psychologically descriptive model of human behavior, but a key methodological device, a foundational principle of economics, which enables us to conduct scientific inquiry about economic phenomena. Indeed, the rationality principle explains the success of economics as a science, because without it economists would not, for example, be able to maintain that individuals react to incentives or, more generally, to understand people with (unobservable) values and beliefs different from their own. Adopting the rationality principle enables economists to preserve the principle of subjectivity of value while fulfilling the requirement of scientific objectivity.
Hence, the book adds to the literature about Homo economicus, rationality in economics, and the role of psychology in economics. The problem with the debate about rationality in economics is that its participants conflate different notions of rationality. In particular, behavioral economists1 oppose the concept of rationality (e.g., Jolls, Sunstein, and Thaler 1998; Mullainathan and Thaler 2000; Rabin 2002; Camerer and Loewenstein 2004; Ariely 2009; Thaler 2000, 2015, 2016), but they refer to rationality as a description of the behavior of individual agents, even though economists generally do not use rationality in this way. They refer either to empirical rationality, dealing with the aggregate effects of individuals’ actions within the markets, which most economists focus on in their empirical research and predictions, or to methodological rationality, which provides an indispensable framework for economics as an scientific inquiry. Thus, this monograph defends the value of traditional economic framework against psychological reductionism.
Another key message of my work is that economics should not be more grounded in psychology, as some researchers seem to believe (e.g., Jolls, Sunstein, and Thaler 1998; Mullainathan and Thaler 2000; Rabin 2002; Camerer and Loewenstein 2004; Ariely 2009; Thaler 2000, 2015, 2016). Psychology is an important field of scientific inquiry, but it is just one science among others, not the basis of all social sciences. The fact that the subject of economics seems to be similar to that of psychology does not mean that economics should adopt a similar research methodology. Economics is not empty without psychology and it is not a mere generalization of psychological tendencies in the context of economizing of scarce resources. Hence, economists should not suppose that, without understanding human nature and psychological motives behind actions, they would not be able to conduct proper research in economics.
In fact, using some of the psychological theories of the business cycle as an example, this book demonstrates that psychological explanations of economic phenomena suffer from several important problems.
The book also shows that psychological factors can be used not only to argue against the free market (because people allegedly suffer from biases which deviate them from full rationality), but also to assert that the anti-market sentiment held by people may be the result of envy and (illusory) perception of control related to the strong role of the government in the economy, or of a tribal bias – i.e., the fact that people could be evolutionary adapted to function in small groups rather than in today’s global economy (Hayek 1973, 1988).
Last but not least, the book also engages in the debate about the impact of capitalism on mental health and explores whether societies should take happiness into account when assessing economies. It argues that the fact that some negative psychological and social problems exist in modern capitalist economies does not mean that they are caused by capitalism or are inherent to this economic system. They can result from living within civilizations, hierarchical societies, and/or specific cultures that may not adequately respond to the challenges of human existence. When one analyzes complex systems, such as modern market-based societies, the monocausal explanations are rarely true. It is, of course, important that people can pursue happiness and feel it. However, happiness would be a very problematic social goal. This is because it is not clear what is it, how to achieve it, and how to measure it, if it can be defined, achieved, and measured at all. The aim of the economic system, if it has any aim, is to organize how people produce, exchange, and consume. Capitalism, or the free-market economy, is the impersonal self-ordering process that does not strive for any particular objective, such as happiness or the highest possiblep. xipace of GDP growth. It just allows people to reach their own economic goals. And economic growth is the result – the positive externality – of the activities of households and companies in free markets. If anything, this is probably the only thing one should expect from the economic system – the improvement of objective living standards. Even if people are not happier once their living standards have improved, their opportunities are greater (Hayek 1973; Mises 1998 [1949]).
Thus, this publication could be seen as a thorough defense of economics and market-based economies against behavioral imperialism and psychologism – i.e., the idea that psychology should play a greater role either in economic theory or in evaluating economic systems.2 It is partially a response to the growth in popularity of behavioral economics and resulting misconceptions that this sub-discipline has disproved the orthodox economics and the Homo economicus model. From this perspective, the book is a continuation of my article pointing out the problems with behavioral economics (Sieroń 2020).
I am not the first to write about the methodology of economics in the context of ‘rationality wars’ (Sturm 2012; Rich 2016) and complaints that economics is based on erroneous psychology or is not psychological enough. For example, Brennan (2007), Kirchgässner (2013), and Li (2020) are excellent articles about the rationality principle, while Hudík (2011) brilliantly contrasts psychology, which studies conscious human behavior, with economics, which examines undesigned results of social cooperation.
However, my work overall is not merely an article that focuses on a small part of the debate, but a more comprehensive study of the issues at the intersection of economics and psychology. In this book, I try to thoroughly analyze the different concepts of rationality in economics, and the relationships between psychology and economics, including the question as to whether economics should be more psychological, or whether economic systems should be assessed in terms of their impact on happiness or psychological well-being.
Having said that, the present volume is not a treatise that covers all the important issues related to rationality in economics. In particular, this is not a book about the concept of Homo economicus, its history, and problems related to its axiomatic and mathematical form. There are already excellent publications on this topic (e.g., Huerta de Soto 1998; Giocoli 2003). Nor is this book a comprehensive critique of behavioral economics (or even of the heuristics-and-biases research program or the libertarian paternalism). This is because I have already discussed some problems of behavioral economics (Sieroń 2020), and other scholars have done so in a better and more comprehensive way (e.g., Lopes 1991; Gul and Pesendorfer 2008; McKenzie 2010;p. xiiSaint-Paul 2011; Levine 2012; White 2013; Abdukadirov 2016; Gigerenzer 2018; Rizzo and Whitman 2020).
Behavioral economics has many strands. I had thought that, to provide an exhaustive assessment of it, I might have to write about each of the main effects or cognitive biases studied by behavioral economics, and such a book would have to be much longer. I decided that I would rather write a more general piece about the rationality and relationship between economics and psychology.
My work is primarily methodological in nature. The book should inspire readers interested in the methodology of economics, rationality in economics, Homo economicus, anti-market sentiment, the relationship between psychology and economics, and the discussion of the impact of capitalism on the people’s subjective well-being.
The book begins with a chapter on rationality in economics. Whether people behave rationally is one of the most intriguing subjects of controversy in the social sciences in general and economics in particular (Vanberg 2004; Smith 2008; Zouboulakis 2014). The aim of the first chapter is, thus, to contribute to this long-standing debate through detailed examination of different notions of rationality. I distinguish four types of rationality and argue that only two of them (methodological and empirical) are crucial for economics, while individual and metaphysical rationality belong to the realm of psychology and philosophy, respectively. I also claim that disagreement among researchers on rationality in economics stems from focusing on different kinds of rationality. In particular, behavioral economists question the rationality assumption in economics, but they conflate rationality as a description of individual behavior with rationality as a methodological device.
The second chapter deals with the question as to whether economics abstracts too much from psychology, and whether psychology should play a more important role in economics. The claims that economics should be more grounded in (proper) psychology are not new (Lewin 1996; Bondo and Presskorn-Thygesen 2022), but they came back in full force with the development of behavioral economics (e.g., Jolls, Sunstein, and Thaler 1998; Mullainathan and Thaler 2000; Rabin 2002; Camerer and Loewenstein 2004; Ariely 2009; Thaler 2000, 2015, 2016). I argue in this chapter that, although both seem to study human behavior, economics and psychology are distinct domains of social science with different research questions and perspectives, and that they should remain separate fields and respect each other’s methodology. While psychology investigate the content of people’s actions, economics studies only the formal implications of the fact that people act. Thanks to its formal nature, economics can formulate general theories – i.e., it is more about general equilibrium than situational factors that are interesting for psychology. As economics abstracts from psychological factors, it can explain human actions regardlessp. xiiiof the people’s motivation. Thus, by making economics more psychological, one would reduce the generality of its theories. Economics is also more interested in studying the (undesigned) effects of human actions rather than their motives, and on aggregate outcomes rather than individual behavior. Hence, economics should not become more psychological, as this would deprive it of its unique character, and could weaken its explanatory power. However, that does not mean psychology has nothing to offer to economics – in this chapter, I point out a few legitimate areas where psychology could enrich economics.
While the second chapter is rather general in its scope, the third chapter is more specific and examines in detail a particular application of psychology in economics, namely the psychological theories of business cycle (e.g., Shiller 2015; Akerlof and Shiller 2009). I point out a number of problems faced by such theories. In particular, I argue that they violate the proper methodology of economics; ignore important economic factors; appeal to psychological phenomena but do not adequately explain their genesis, their course, and why they should result in business cycles; assume a causal relationship from mental states to objective market reality, introducing changes in mental states as diabolus ex machina; do not adequately explain all features of business cycles; ignore the concept of the invisible hand and systemic (ecological) rationality; constitute ex post narratives about particular business cycles rather than general theories that allow for predictions; assume a dubious view of human nature. These issues seriously undermine the validity of the psychological theories of business cycle. Hence, based on a specific example of the use of psychology in economics, this chapter shows serious difficulties in making economics more psychological, strengthening the argument of the second chapter.
The fourth chapter analyzes claims that capitalism negatively affects the psychological well-being of people (e.g., Prins et al. 2015; Sell and Williams 2019; Eisenberg-Guyot and Prins 2022) and that GDP should be replaced or supplemented by some happiness index (Scitovsky 1976; Oswald 1997; Diener 2000; Jansen et al. 2004; Easterlin 2005; Layard 2005; Lee and Goh 2023; Agrawal et al. 2025). I argue that attempts to link some mental health outcomes to capitalism seems to be a gross over-simplification that does not take into account several crucial causal elements. The idea that happiness is an important factor for people is hardly controversial. However, I demonstrate that making happiness a social goal or a criterion for evaluating the economic system does not stand up to scrutiny.
The fifth and penultimate chapter is about the psychology of anti-market sentiment. It argues that the negative attitude towards the market-based economy held by many people, despite the enormous benefits of this economic system, can stem from three psychological factors. First, people can have tribal instincts (e.g., solidarity, in-group altruism, inter-group aggressiveness) that have enabled their small groups to function and survive in the past, but theyp. xivhave come to apply them inappropriately to the extended order of cooperation through markets (Hayek 1973, 1988). Second, according to many people, one of the biggest problems of market-based economies is (excessive) income and wealth inequality. But should not poverty be a more important social issue? It seems that egalitarianism can be motivated by envy (Hayek 1960; Nozick 1974; Schoeck 1987; Buchanan and Hartley 2000). Third, the idea of spontaneous order is not only intellectually but also emotionally challenging – it requires faith in impersonal market forces, while people could be evolutionarily adapted to live in hierarchical groups in which someone is ‘in charge’ (Hayek 1973, 1988). Thus, having the government in charge can offer a (false) sense of security and control. This chapter is the most speculative, but it shows that the concept of biases can be used not only to argue against the free market and for government interventions (since people allegedly suffer from biases, which lead them away from full rationality), but also to argue that anti-market sentiment can be a form of a bias itself.
The book concludes, in Chapter 6, by summarizing my analysis, offering theoretical and policy implications, and suggesting directions for further research on the intersection of psychology and economics.
- 1
Behavioral economics have different strands (e.g., Ross 2014, ch. 4). When writing about behavioral economics in this book, I will refer primarily to the “heuristics and biases” program, adopted by such researchers as Kahneman, Tversky, or Thaler (e.g., Kahneman and Tversky 2000).
- 2
On behavioral imperialism, see also the conclusions of Chapter 2.
