Morality, maximization, and economic behavior.

• Author: Isaac, Alan G.

1. Introduction: Morality and Economic Behavior

   Morality influences economic behavior. It has been invoked to explain worker solidarity, statesmanship, voting patterns, cooperative behavior, bargaining outcomes, the production of public goods and externalities, worker performance, and the degree of competition in labor markets [1; 10; 14; 19; 21; 26]. So economists ought to consider the economic consequences of prevailing moral norms. In some areas such considerations will be distinctly secondary (e.g., the study of arbitrage pricing relationships). But in many areas that economists traditionally consider to be in their purview - including the study of labor markets, organizational design, income distribution, long run growth, and the provision of public goods - economic models can be improved by the accommodation of moral behavior.(1)

   However, the ability of the neoclassical paradigm of rational economic behavior to accommodate moral behavior remains controversial. Prima facie, moral motivations can generate behavior that is not profit maximizing or utility maximizing. A primary goal of this paper is to clarify the relationship between moral motivations and the neoclassical paradigm. I trace some of the controversy in this arena to incorrect or misleading formulations of key issues, as in the debates over the necessity of multiple utility representations. Nevertheless, the neoclassical paradigm encounters two major challenges in accommodating moral behavior: actual inconsistencies in behavior due to a lack of coherence in the goals or the rules that govern behavior, and apparent inconsistencies due to the interpretational inadequacies of the neoclassical paradigm.(2) A second goal of this paper is therefore to explore the nature of these challenges and describe some responses to them.

2. Rationality, Rules, and the Neoclassical Paradigm

   Moral commitments are often embodied in behavioral rules, such as "keep promises" or "respect property rights." Some writers claim that the neoclassical paradigm of rational choice cannot accommodate rule-governed behavior in general and morality-governed behavior in particular. Of course, rule-governed behavior is not necessarily an empirical problem for the neoclassical paradigm, even if we eliminate rules such as "be rational" or "optimize." For example, an optimal consumption plan - eminently compatible with the neoclassical paradigm - might be embodied in a rule tying expenditure patterns to the current economic environment. A critique based on the prevalence of rule-governed behavior therefore must specify a domain of application. This section offers a specification that provides qualified support for the critique.

   Define 'rules of conduct' to be (tacit or explicit) behavioral guidelines that one might readily imagine replacing with (possibly inferior or superior) alternatives. I refer to actions selected (tacitly or explicitly) for their accord with rules of conduct as 'rule-governed.' The adherence to rules may or may not be rigid; the value of adherence to rules may be lexically prior to other values or may be entirely derivative.(3) I will call an action 'strongly rule-governed' when it is influenced by a rule of conduct independently of aspects of the choice situation that might justify or vitiate a particular application of the rule.(4) Alternatively, rule-governed actions might consistently manifest an integrated preference for rule adherence (e.g., to rules embodying social or moral norms); I call such actions 'weakly rule-governed.'(5)

   Let 'behavior' denote the observed manifestation of action. Weakly rule-governed behavior may respond to the full particularities of a choice situation, while by definition strongly rule-governed behavior does not. Many of the economic rules actually followed by individuals appear to be strongly rule-governed. For example, consumers often establish fairly rigid budget categories to constrain their spending, and many firms set prices according to markup rules. Such behavior poses obvious explanatory challenges for the neoclassical paradigm.

   Let 'the rules critique' denote arguments that the neoclassical paradigm of economic rationality is incompatible with rule adherence.(6) The rules critique is quite plausible when applied to strongly rule-governed behavior. The critique fails, however, when applied to weakly rule-governed behavior. In addition, the critique may fail empirically if "irrational," strongly rule-governed behavior satisfies the abstract consistency requirements that constitute the neoclassical paradigm's most fundamental characterization of rational choice.

   The neoclassical paradigm has emphasized that the efficient pursuit of stable, well-defined, context-independent goals should generate certain consistencies among choices as the feasible actions change. This consistency has been characterized as "internal" insofar as it refers only to feasible sets and choices, not to "external" criteria such as underlying goals or motivations [25]. For example, consumption choices deriving from maximization of a stable utility function must satisfy the generalized axiom of revealed preference, which refers explicitly only to feasible sets (budget sets) and choices (consumption bundles). It is well known that choice behavior satisfying internal consistency of choice can be given a maximizing interpretation.

   Internal consistency of choice does not imply rationality in any broad sense: many types of patterned behavior, such as rigid or habitual behavior, may produce internal consistency of choice.(7) This insufficiency is seldom seen as a defect of the neoclassical paradigm, however. For example, the revealed preference literature originally aspired to discard even the "vestigial" mental categories of utility and preference [15; 18; 22]. While such behaviorist aspirations were foredoomed (see section III), the fundamental prediction of the neoclassical paradigm of rational choice remains this behavioral consistency.(8)

   Given the emphasis on behavioral consistency, logic alone does not imply that strongly rule-governed behavior is problematic for empirical applications of the neoclassical paradigm. If observations of stable, consistent behavior result, then we can generate a maximizing interpretive framework ex post. Our framework will sacrifice understanding and descriptive accuracy, but - as these goals are secondary for most neoclassical economists - an argument for radical change in the neoclassical paradigm must include evidence of foregone predictive power or policy control.

   However, we can extend the rules critique by focusing on the interpretive framework that undergirds the neoclassical paradigm. Even consistent strongly rule-governed behavior creates two problems for this interpretive framework. First, despite the paradigm's behaviorist tendencies, the open acknowledgment that behavior is not actually motivated by utility maximization and profit maximization generates internal tension.(9) Second, such rules are likely to generate behavior inconsistent with this interpretive framework. For example, it is difficult to reconcile markup pricing rules with profit maximizing behavior, and moral rules remain problematic for interpretations of human action as rationally self-interested.

   In contrast to the initial critique, the modified rules critique does apply to weakly rule-governed behavior. Behavior may deviate from the consistency predicted by the neoclassical paradigm due to interpretive failures on the part of the observer. That is, the source of inconsistency may be the observer rather than the actor. As a result, even rules that select efficient means to stable goals can present empirical challenges to the neoclassical paradigm. This is the basis of an argument that economists must attend to moral motivation, which I present in the next section.

   Given an individual's rules of conduct, we have seen that weakly rule-governed behavior admits a formal reconciliation of rule-governed behavior with the core neoclassical notions of rationality, whereas strongly rule-governed behavior creates a difficulty for these notions. Less obviously, we found that both weakly and strongly rule-governed behavior can be problematic for the neoclassical interpretive framework. In sum, while there is no logically necessary conflict between rule-governed behavior and rational choice modeling - given the restricted criteria of rationality informing the neoclassical paradigm - reconciliation of actual rule-governed behavior with rational choice modeling appears problematic. Since moral commitment is often embodied in behavioral rules, these arguments identify one potential conflict between morality and rationality. Setting aside concerns about the fundamental conflicts inherent in strongly rule-governed behavior, we find that morality can still create problems for the interpretive framework of neo-classical economics. For example, neglect of the value of rule adherence can cause predictive failures. Problems with the notion of internal consistency of choice rule out a behaviorist response to this difficulty: economists wishing to accommodate moral behavior must grapple with actual moral motivations.

3. Motivation and Economic Models

   The neoclassical paradigm involves more than abstract maximization: it also involves particular specifications of the maximanda. A crucial ingredient of the neoclassical paradigm is its restriction of admissible interpretations. For example, the theory of the firm assumes a profit maximization objective. Similarly, the theory of the consumer effectively assumes utility maximization, with many restrictions on what provides utility.(10) The present section argues that the maximization hypothesis derives its empirical content from these...