What Kind of Psychology Does Economics Need?

What Kind of Psychology Does Economics Need?Author(s): C. Reinold NoyesSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 16, No. 2 (May, 1950), pp. 210-215Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/137982 .

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NOTES AND MEMORANDA

WHAT KIND OF PSYCHOLOGY DOES ECONOMICS NEED?

JN his interesting and able review of my Economic Man, in the May, 1949, number of this JOURNAL,' Professor Keirstead raises an important issue

which is fundamental in economic thinking. It concerns the particular requirements which a psychological system must meet if it is to constitute a sound basis for a "science of economics as a distinct discipline." This issue is not dealt with explicitly in my book; but it seems to be one that must be considered. What follows is an attempt to clarify it in order to lead others to wrestle with it.

Professor Keirstead's own specifications seem to be that man must be treated as "rational"-almost "an abstract calculating machine"-and as a free agent who "makes decisions." These specifications are derived from the following statements: "Economic man, in the classical abstraction, was a pure rationalist who weighed carefully something called utility and something called disutility . . ;2 "Basically, for Professor Hicks, as for Jevons and Marshall, economic decisions are made by an abstract calculating machine";3 "I find myself continuing to believe ... that, whatever the origin of the want, when it rises to consciousness, it is subject to a process which we call rational, when the human agent decides . . . and when he makes decisions . . ." ;4 "I doubt the possibility of a science of economics as a distinct discipline if this rational process is said not to exist."5 If I interpret him correctly, these requirements are set up in order that man's economic behaviour should be predictable, the general goal of all science. With this last requirement I should agree.

He regards the physiological-psychological system presented in Economic Mlan as failing to meet these specifications because it "abolishes the possibility of rational decision-taking";6 because it assumes "that man is passive with respect to choices . . ." ;' and because, in my book, the "rational process is said not to exist";8 in fact, because I "explicitly deny that the concept of rationality has any meaning...."9

The last two statements are due to a misunderstanding. What I do say is that the terms "rational" and "irrational" "have been little used [in my text] because I do not see their precise meaning in this context."'" That is something very different. My difficulty does not concern so much the definitions of the terms. Rather it arises from uncertainty as to what types of economic behaviour are to be called rational and what types not, and whether the latter are per se "irrational." The result is that I evade the question. Instead, I find a series of other terms which it seems possible to apply with precision in dealing with many types or characteristics of economic behaviour. When that is done, determination of the scope of the term rationality seems to become superfluous.

'B. S. Keirstead, "Economic Man in Relation to His Natural Environment" (Canadiacz Journal of Economics and Political Science, vol. XV, no. 2, May, 1949).

2Ibid., p. 232. 'Ibid., p. 235. 'Ibid. 7Ibid., p. 233. 4Ibid., p. 233. 'Ibid. 5Ibid. 9Ibid. "0Economic Man (New York, 1948), p. 1004.

210



Notes and Memoranda 211

In that evasion and substitution I find myself in very good company among contemporaries.

Let us consider a few examples. A large portion of man's economic behaviour is purely impulsive. He eats when and because he is hungry. Such behaviour is usually very useful, though occasionally it is harmful. But it certainly can be automatic, and it is characteristic of the whole animal world from man down to amoeba. If so, can behaviour be called rational merely because it is useful?

Through his sensory apparatus man learns to envisage the external world and to understand something of the way it works. Most of his behaviour then becomes adapted, though some remains unadapted. He does not usually try to walk through a brick wall; but even the "worm will turn" when he meets the foundation of that wall underground. Man learns to move along a line which is the shortest distance to his goal. But Max Planck"1 extends this characteristic even to the photons which constitute a ray of light; for they, too, "behave like intelligent beings: Out of all the possible curves they always select the one which will take them most quickly to their goal." This adapted behaviour can also become automatic. If such behaviour is general and frequently becomes automatic in the animal world, can it be called rational merely because it is adapted?

Another type of economic behaviour is deliberate, or the result of deliberation which takes place in consciousness. In this process various considerations or reasons, pro and con, are permitted to compete and may result in a decision. Many of these considerations are, or are loaded with, impulses and are, to that extent, automatic. This is particularly true when the competition is among "present wants," all of which are impulsive. Furthermore, observers testify that animals often deliberate.'2 In spite of these facts, is the process to be called rational?

When deliberation or its resulting behaviour is conducted in cold blood (that is, free from the influence of overpowering impulses) and as a process of judicious calculation or weighing, it might be regarded as rational."3 However, even here the insufficiency of the term appears. Carefully planned behaviour may turn out to be successful or unsuccessful. If it succeeds, is it thereby rational? A gambler playing a system at the roulette wheel may win. If it fails, is it thereby non-rational? But "the best laid schemes ... gang aft a-gley. " Calculated estimates may turn out to be correct or incorrect. Are the former rational and the latter not? F. R. Macaulay in the introduction to his book on Bond Yields seems to me to identify rationality in the forecast with correct- ness after the fact.'4

Max Planck'5 expresses the view that "the laws of human reasoning coin-

"Scientific Autobiography (New York, 1949), p. 178. 12In fact, one cannot draw a line with respect to any mental process. As Max Planck puts

it, "Along the entire ladder of evolution, from the lowest order of life up to Man, there is no point at which one can establish a discontinuity in the nature of mental processes" (ibid., p. 64).

"In Economic Man, p. 658, I say that the operation of "future wants" is essentially "what is called rational"; that is, "dictated by 'rational' considerations."

'4F. R. Macaulay, Bond Yields, Interest Rates and Stock Prices (New York, 1938). 5Scientific Autobiography, p. 13.



212 The Canadian Journal of Economics and Political Science

cide with the laws governing the sequences of impressions we receive from the world about us."'16 In other words, human logic is derived from experience of the external world. Both plans that are unsuccessful due to external circum- stances, or calculations of external fact that turn out to be incorrect, must fail because they do not conform to the logic of the external world. On Planck's theorem one might argue then that both were illogical. If so, were they rational? All this examination makes us wonder to exactly what behavriour, in preparation (thinking) or in process, we do apply, or ought to apply, the term rational.

At this point, it becomes necessary to introduce the second specification we have attributed to Professor Keirstead and to consider both specifications together. In this cold-blooded type of deliberation is man to be regarded as a free agent who "makes decisions," or is he to be regarded as "an abstract calculating machine."'7 He cannot be both. For a calculating machine is automatic and in no respect a free agent. This dilemma is real, not verbal. If the decision is automatic, shall it be called rational? It is certainly not that of a free agent. This dilemma leads, in turn, to a second one. If the decision in this type of deliberation is automatic, it is predictable if one knows the considerations at play. It will therefore serve as the basis for a science. If the decision is not automatic, it cannot be predicted and therefore cannot serve as the basis for a science involving prediction.

William James, approaching the subject from an introspective viewpoint, finds five types of decision, all of which may occur as a result of cold-blooded deliberation.'8 Of these, four are automatic, so that, as he expressed it in an earlier work, the decision is "a simple resultant of the victory which was a foregone conclusion decided by the intrinsic strength of the conflicting ideas alone." Only in the fifth type, when the decision involves the sense of effort, is it not automatic, in that sense. But he thinks decisions only involve effort when moral or prudential considerations can, by means of the effort of willing, overcome powerful impulses.

In the first place, are effortful decisions of this fifth type per se rational? Tucked away in a corner of a recent number of the Journal of Political Economy"9 is a remark by Professor T. N. Carver, formerly of Harvard and now of Santa Monica, which, I think, deserves to be passed down to posterity and which is certainly apposite in this connexion. Speaking of the influence of the doctrine of Nirvana on Gandhi, he says, "Here is the greatest contrast between Eastern and Western ideas of happiness. From both points of view unsatisfied desires are sources of discomfort and also of human conflict. Emancipation from craving is, therefore, held in the East to be the way of blessedness. But there are two ways to kill desire. One is to root it out; the

l6Macaulay makes the same point (Bond Yields, p. 10). l7At best that analogy may be far-fetched. For, in spite of the new science of cybernelics,

the great British neurophysiologist, Sir Charles Sherrington, thinks that, "between the calculating machine and the human brain there is no basic similarity (see New York Times, Dec. 4, 1949). Of course, Professor Norbert Wiener (Cybernetics, New York, 1948) wotuld dispute that statement.

18Principles of Psychology (New York, 1890, 1896), vol. II, pp. 532-4. 9Feb., 1949, review of Gandhi's Autobiography.




other is to satisfy it. One way to emancipate one's self from the craving for food is to keep one's mind on higher things; the other way is to eat." Which of these two ways is rational? The first way is undoubtedly the result of a decision of William James's fifth type. The second may be wholly the result of impulse.

In the second place, can even such cases be said to be the acts of a free agent? James pursues that question. He says that the effort of willing "certainly appears to us indeterminate, and as if, . .. we might make more or less, as we choose. If it be really indeterminate, our future acts are am- biguous or unpredestinate: in common parlance, our wills are free. If the amount of effort [of willing] be not indeterminate ... in such wise that whatever . . . fills our consciousness was from eternity bound to fill it then and there, and compel from us the exact effort . . . which we bestow upon it-then our wills are not free, and all our acts are preordained."20 And he concludes that, if decisions involving the effort of willing be indeterminate (that is, if there is free will), then, "Before their indeterminism science simply stops.""2

Now this brief analysis seems to me to show the inadequacy of the concept of rationality. The samples of substitute terms that we have cited here- useful, adapted, deliberate, successful or correctly estimated, and effortful- are members of a long series defining qualities or attributes which seem to appear at intervals and increase gradually on the way from the most impulsive, automatic, and effortless behaviour (for example, the knee-jerk) to the most deliberate, voluntary, and effortful behaviour (for example, studying Economic Man). They are specific terms. The trouble with the term rational is that it is not sufficiently specific. And, if we try to make it specific, it becomes too limited in its coverage and, worse still, may connote something that cannot be proved.

This analysis also brings out the inconsistency of supposing that man is both a free agent and a calculating machine. In that respect it ends up in the morass of the age-old dispute as to the freedom of the will. Viewed objectively, that is part and parcel of the current morass in which the physicists are wallowing. On one side is Ampere's principle of determinacy; on the other is Heisenberg's principle of indeterminacy or uncertainty. The question of free will versus predestination, or determinacy, or predictability, in human affairs is presented with Gallic wit by Anatole France in his L'!le des Pingouins. He attributes to the Lord the following speech: "In order not to impair human liberty, I will be ignorant of what I know, I will thicken upon my eyes the veils I have pierced, and in my blind clear-sightedness I will let myself be surprised by what I have foreseen." That would be one way of reconciling free will with determinacy. The whole problem, however, is what Max Planck calls a "phantom problem"; that is, neither principle can be proved or dis- proved. Therefore, it is unwise to make a science depend on the assumption of either one exclusively.

Purely upon the grounds of pragmatism I have suggested that human behaviour is more useful to the individual and to society when the individual

20Principles of Psychology, vol. II, p. 571. 21Ibid., p. 576.



214 The Canadian Journal of Economics anid Political Science

assumes that he has free will.22 This assumption cannot be justified scien- tifically; but when made, it seems to work wonders. I think, however, that the exercise by the individual of even such an assumption of his own free will is probably restricted not only by the limitations imposed by external and by human nature, but also to the particular type of decision which James says involves effort. In other words, I think that it is by no means characteristic of human behaviour in general, but that it is, on the contrary, to be imputed to some men fairly frequently and to others rather rarely. As William Howells says, there are plenty of men "whom it would be biological blasphemy to label Homo sapiens."23

At the best, this quasi-free-will type of behaviour occurs on much too limited a scale to serve as a foundation upon which to rest a system of economic psychology. And, in any case, when the individual acts on the theory that he has a free choice, his behaviour is precisely the kind that is intrinsically unpredictable. It can only be examined after the fact and reduced to some generality by statistical methods. In that respect it is like the classes of data which have led to the physicists' surrender of Ampere's principle, and their admission that the best that can be done is to determine only the average motions of particles or atoms, without attempting to predict the motion of any one.

A great part of economic behaviour is not deliberate and is automatic. Even deliberate behaviour may also be automatic as far as decision is concerned, and therefore will not involve the exercise even of the assumption of free will. However, departing from James, I hold that behaviour may become effortful even after an automatic decision. For instance, the decision to go to work in the morning may be automatic, though the work thereafter is certainly effortful. At any rate, since these two classes of behaviour are automatic, in whole or in part, they are to that extent predictable and determinate and therefore furnish an excellent field for a future science of economics. Probably most physicists, physiologists, psychologists, and philosophers would agree that automatic behaviour is predictable wThile free-will behaviour would not be. Then which is rational?

That raises one further question which requires to be cleared up. I have the impression that Professor Keirstead applies these labels, predictable and unpredictable, in precisely the reverse way. Perhaps this is because he thinks automatic (impulsive) behaviour is hit-or-miss while "rational" (deliberate) behaviour is sure-fire. That is an ancient preconception. But be it noted that what it does is to beg the question: for it relieves the term "rational" of any of its other meanings or connotations which would conflict, and makes it synonymous with the term "predictable." Hence the irrational becomes the unpredictable. I find a good example of this usage, and a good illustration of where it leads to, in Professor Wiener's recent book.24 He says, "In a world ruled by a succession of miracles performed by an irrational God subject to sudden whims, we should be forced to await each new catastrophe in a state

22Economic Man, App. III F. 23Mankind So Far (New York, 1945). 24Cybernetics, pp. 62-3.




of perplexed passiveness. We have a picture of such a world in a croquet game in Alice in Wonderland; where the mallets are flamingos; the balls, hedgehogs, which quietly unroll and go about their own business; the hoops, playing-card soldiers, likewise subject to motor initiative of their own; and the rules are the decrees of the testy unpredictable Queen of Hearts." The acts of such an imaginary God, the decrees of such a rules-maker and the behaviour of such pieces for the imaginary game would be unpredictable and "whimsical" precisely because they resulted from the exercise of free-will and were, therefore, in no sense automatic-because the "actors" were, in fact, miscast for their roles of "laws of nature," in the first case, and inert objects and established rules, in the second case. Is man then "rational" because his "character" fits him for such roles? If so, we have completed the vicious circle, and man's behaviour is predictable because it resembles the behaviour of inert objects.

The psychological system economists have inherited from our intellectual ancestors was chiefly developed, on the side, from Jeremy Bentham, through the Mills to Jevons, say. It was not scientific; it was not founded on obser- -vation; it assumed rationality and free will; its other features were deduced from a principle, the pain-pleasure hypothesis, and from utilitarian philosophy. Is it not time to recognize that it has long been discarded by other disciplines dealing with man, and that it is now beginning to be replaced by a new physiological-psychological system derived directly from observation and experiment? We can participate in and contribute to that progress; but we cannot prevent it, nor long ignore it. And no one needs it more than we do. As the dean of British economists, Sir Alexander Gray, is reported to have said recently, "If any one were to ask me what are the psychological assumptions of modern economics, I should be constrained to give a dusty answer.... But of one thing I am certain: a structure of economic theory that is not based on sound psychology is a house without a foundation."25

C. REINOLD NOYES New York City.

251n his presidential address on "Economics: Yesterday and Tomorrow?" before Section F of the British Association at the 112th Annual Meeting. See Economic Journal, vol. LIX, Dec., 1949, p. 515.

RETURNS TO SCALE AND SUBSTITUTION'

I

IT is the object of this paper to show how the phenomenon of increasing returns to scale2 may be viewed as either a direct relationship between

output and scale, or as an indirect relationship brought about by substitution of factors of production, depending upon the broadness or narrowness of the definition of factor of production employed.

'The author is greatly indebted to Dr. Fritz Machlup for his careful reading of the manu- script and for his valuable criticisms and suggestions.

2Though we shall be concerned throughout with increasing returns to scale, our analysis will be equally applicable to the phenomena of constant and decreasing returns to scale (if the latter is conceded to exist).



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What Kind of Psychology Does Economics Need?