The Rationality Assumption

Welcome to my brief series on the economic analysis of law (EAL). I am trying to explain what I see as the strengths and weaknesses of this school of thought.

In the last entry, I suggested that EAL was built around four propositions. The first of those propositions was "People are rational". In this post I want to examine what rationality means for the purposes of EAL.


Rationality and the Practical-Reasoning-Syllogism
"Rationality" is one of those terms that is used with reckless abandon. How many conversations have you had where either you or someone else has been accused of "irrationality"? It often seems like "rationality" is used as a rhetorical bludgeon: something with which to batter one's intellectual opponents.

If rationality is to be a useful concept in EAL it needs to avoid this rhetorical vapidity. We need to take a more systematic, bottom-up approach to reasoning and decision-making. This way we can be clear about what the rationality assumption entails. As we shall see, it does not entail a great deal.

Let's begin then with the practical-reasoning-syllogism. Many people will be familiar with syllogisms. They  are the most common form of logical argument. They consist of two premises (major and minor) and a conclusion. The conclusion is supposed to follow automatically (or without further assumption) from the premises. The most oft-repeated -- and frankly boring -- syllogism in history is the following:

P1. All men are mortal. (Major Premise)
P2. Socrates is a man. (Minor Premise)
C1. Socrates is mortal

A practical-reasoning-syllogism takes the form of the Socrates-Mortality argument, with the sole difference being that the conclusion is a decision-to-act.

In a practical-reasoning-syllogism, desires (or preferences) form the major premises, and beliefs form the minor premises. The decision-to-act is what follows from the conjunction of the desires and beliefs. premises. As follows:

P1. I want ice-cream
P2. The ice-cream man will give me ice-cream in return for money.
C1. I should give the ice-cream man some money.

So far so good. Where does rationality enter the picture? As with all logical arguments, we can challenge two aspects of the practical-reasoning-syllogism: (i) the truthfulness/acceptability of the premises; and (ii) the validity of the conclusion. In other words, we can check to see whether the beliefs and desires are true or acceptable (to see why I am using the term "acceptable" see here) and whether the decision-to-act really follows from them.

Now in everyday conversation, rationality/irrationality is often used to describe beliefs and desires. For example, I may call your belief that the Lord of the Rings is a historical document "irrational"; or I may say similarly unkind things about your desire to be an elf.

This type of rationality-talk is categorically not what is implied by the rationality assumption of EAL. Let me repeat that for dramatic effect: this type of rationality-talk is categorically not what is implied by the rationality assumption of EAL.

EAL does not care about the rationality of beliefs and desires; it only cares about the validity of someone's decisions-to-act. Actually, it cares about one more thing: if you have many preferences (and who doesn't?) then they should be transitive. That is to say: they should form a coherent logical hierarchy. So, if A is preferred to B and B is preferred to C, A should definitely be preferred to C.

That's it. That's all the rationality assumption entails. Given that it doesn't assess beliefs and desires it would seem to be a fairly modest assumption, right?



The Irrationality Hypothesis
Most people have a hard time with the rationality assumption. They look at the world around them and say "Fie! There be no rationality here".

Most of their worries can be dismissed if we drop the questioning of beliefs and desires. But not all of their worries can be dismissed in this fashion.

I know this was something that bothered me when I first came across EAL. At the time, I had been reading-up quite a bit on cognitive, behavioural and social psychology and the relevant experimental literature seemed to demonstrate all manner of quirks and biases in the way people think, reason and act.

There has been a veritable cottage industry of popular books explaining and outlining these peculiarities and irrationalities in recent years (this article provides a decent overview). However, it has become clear to me -- as some of the books linked to above will testify -- that these peculiarities can be incorporated into a suitably sophisticated analysis of rationality.

To say that is not to say that EAL has always been suitably sophisticated in its approach (see here for a discussion). Indeed, in the early days its proponents always assumed a type of hyper- or super-rationality. This was in keeping with classical economic theory. Nonetheless, it is the fact that these assumptions are not essential to EAL that persuades me of its continued relevance.

The Generality of Law
If there is a problem in using the rationality assumption in the analysis law, it will stem from the generality of legal provisions. Laws are not typically aimed at particular people and particular circumstances: they are supposed to be of general application.

This is problematic because in order to be of general application, a legal system needs to assume a certain homogeneity in the beliefs and desires of its subjects. Take an obvious example: the reasonable-person test in the criminal law. If we are trying to determine whether a person can avail of the defence of self-defence, we need to determine whether their actions were reasonable, all things considered. This means we compare their behaviour to that of a fictional reasonable person, a person who's beliefs and desires are within the bounds of acceptability.*

Does this type assessment of beliefs and desires pose a problem for the rationality assumption? Not necessarily. It strikes me that this assessment is a normative one, not something that affects the analytical potential of EAL. We can still use EAL, and make allowances for all sorts of crazy beliefs and desires and yet still grant that there are certain normative limitations on which beliefs and desires are acceptable in a legal system. That is simply an additional consideration.

Okay, that's it for now. In the next post I will look at proposition 2 of 4: "the interactive 'games' that rational actors play, can lead to all sorts of problems".

What is the Economic Analysis of Law?

This is part of my series on the Economic Analysis of Law (EAL). I am trying to explain why I went from being an EAL-sceptic to a modest supporter.  In this post, I want to give the general gist of EAL.

EAL is obviously an attempt to use the tools of economic analysis in the legal arena. In my introductory post, I mentioned that EAL has descriptive, analytical, and normative dimensions. Let me elaborate on each of these:

• Descriptive EAL: tries to show how economic principles and ideas (such as the idea of "efficiency") are already embedded in legal decision-making. This take on EAL is most readily apparent in some of Richard Posner's early work. I think it is best categorised as a brand of legal formalism. This is a topic which will probably only be of interest to a handful of legal philosophers. Nonetheless, I will give it an airing in an appendix to this series.
• Analytical EAL: this is the core dimension of EAL ("analysis" is right there in title). It is the use of the assumptions, methods and techniques of economics to sharpen and deepen our understanding of legal disputes, disagreements and dissensions.
• Normative EAL: this is the most contentious aspect of EAL, and what switches most people off. You see EAL, which rose to prominence in the 1960s and 70s, was touted, in the main, by those associated with the Chicago School of Economics. As such, EAL took on the normative excrescences of this school -- i.e. pro-free market. I'll explain roughly what this entails later.

It is the analytical and normative dimensions that I think are the most important aspects of EAL. You can think of these as the two main "chunks" of the theory. As it happens I think that the analytical chunk can survive the cutting-loose of the normative chunk. And this fact is what persuaded me to reverse my position on EAL. Not that I am particularly opposed to free market principles. There's a time and a place...

Four Key Propositions

Although EAL consists of two main chunks, four key propositions can be adduced from these chunks. These four propositions form a very inexact and informal argument. Still, I will use them to structure the remainder of this series.

The propositions are:

1. People are rational.
2. The interactive "games" played by rational people can lead to all sorts of problems.
3. Law can be used to solve these problems.
4. But we can go too far in proposing legal solutions; sometimes, the market can find the most efficient solution.

As you can see, these four propositions marry the analytical and normative dimensions of EAL. Roughly: propositions 1 and 2 cover the analytical dimension, while propositions 3 and 4 cover the normative.

That's it for now. In the next post I will tease out the complexities of the first proposition: are people really rational and what on earth could this mean?

Musings on the Economic Analysis of the Law (Introduction)

If there can be a division between one's internet persona and one's real self (a question to which I must return), then my real self spends several hours a week tutoring in the philosophy of law. One of the topics that I cover is the economic analysis of law (EAL).

EAL is a brand of legal theory with descriptive, prescriptive and analytical dimensions. It rose to prominence in the 1960s and 1970s in American law schools, being particularly associated with the work of Richard Posner.

When I studied EAL as an undergraduate at an Irish university, I had a general dislike for it. I thought the assumptions which undergirded the theory were dubious, and the normative dimensions to it were odious. This was reinforced by the general antipathy I found among my lecturers.

I have spent the past three years looking at behavioural science and the law. This has led to me reversing many of my earlier conclusions about EAL. Many not all.

I have now come to the conclusion that EAL is actually a powerful analytical tool, one which is underappreciated in my neck of the woods (it is hugely popular in the U.S.).

I want to spend some posts outlining my current position on EAL. I appreciate that this may seem a thoroughly uninteresting thing to do to. But I think the topic is interesting and it offers a gentle introduction to later series in which I examine behavioural science, game theory and normative systems -- the three topics with which I spend most of my time.

Here's an index for the series:

1. What is Economic Analysis of Law? Four Key Points

2. The Rationality Assumption

3. The Poisoned Chalice: An Illustration of Interactive Games

4. The Soldiers' Dilemma: The Problem of the Stable Equilibrium

5. Leviathan: Lifting Us Out of the State of War

6. The Law Has Gone Too Far: The Problem of Social Cost

7. The Market is Failing: The Problem of Normative Economics

8. Appendix: Descriptive EAL and Legal Formalism


NOTE: This series is based largely on notes compiled for my philosophy of law tutorials - I will try to make the disjointed bullet points as smooth as possible.