Explain what is meant by instrumental rationality and assess its relevance for economic
analysis. (1200)
Instrumental rationality is also known as the rationality of means or cognitive rationality
which involves applying appropriate reason to choose the best possible means to attain
one's ends. The individual is considered self-interested, not thinking of others when setting
their own preferences. These preferences could be for altruistic behaviour, for behaviour
harmful to oneself, or for immoral or even evil behaviour. This theory is not limited to a
singular moral code, it covers a broad range of preferences (Tomer,2008). Most economists
recognise this as the only form of rationality.
Instrumental rationality is highly recognised by neoclassical economics, which uses
simplifying assumptions to allow formal mathematical analysis which can be used to explain
or predict the choices and actions of rational individuals (Hodgson,1992). They believe that
any behaviour, even odd behaviour, fits into a general preference function.
In practice, this theory is good at predicting trends in the economy and predicting human
behaviour in a simplistic sense, however, it is difficult to see instrumental rationality reflected
in reality. Instrumental rationality is merely too restrictive and mechanical to reflect the true
patterns of human behaviour. The neoclassical model is too deterministic of behaviour and
their approach can elude a loss of free will. Modelling people like programs that can be
easily manipulated is very dehumanising. Austrians believe that we do have free will and
take a less mathematical approach to economic behaviour. Keynes for example, uses
fundamental uncertainty and humanism consistently in his theory. Human behaviour is not
black and white. There are many more things that determine human actions than just
preferences. Our choices depend on what we need as well as what we want which can be
very conflicting when making decisions. Our behaviour can also depend on our norms and
values, routines, habits, and procedures which are very unique for each of us. This relates to
the argument of the prevalence of habits.
Empirical evidence against the orthodox theory is too easily found. If any evidence is found
against their universal model, they would usually use the empirical evidence to call for a
reform of the original model, but in many cases, the evidence may be used to shift attitudes
to a more heterodox approach, as the orthodox approach is not always successful. For
instance, there is an issue with the fact that people may actually have knowledge of ends
and they might not be fixed, plus, not enough knowledge may be available about means in
the case of bounded rationality. By this, I mean that more often than not it may be rational to
sometimes change your mind. Hume considered a person’s ends, one’s motivating passions
to work outside the rule of reason, people do not always try to apply reason to assess the
appropriateness of their actions. Reason is only applied to choose the best means to
achieve these given ends (John Tomer, 2008). The fact that people supposedly have a
complete set of preferences is questionable. They do not consider the fact that there can be
gaps in preferences when a consumer has little interest or experience in a particular area.
Many of us simply do what we desire or want but such actions may not be in our best or real
interests, we may have a motive and some reasons for our actions, but unless there are
good reasons for doing so, it will not be what is best for us. Hence, it is difficult to find the
optimum choice, consumers cannot possibly be constantly responding and adapting to
external events, being self-reflective on their preferences with the assumption that people
are universally intelligent and mindful, which is not the true picture whatsoever.
Overall, instrumental rationality comes with a lot of issues and has been heavily criticised,
there is no general consensus that this theory is always relevant in economic theory. When
we are analysing a range of situations in industry, in trade and in markets, it does not give a
satisfactory account of all types of economic behaviour in my opinion.
