The rational anthem

What makes people buy expensive freshly squeezed orange juice at Marks & Spencer? David Walker asks if the idea of rational choice - that people behave consistently selfishly - has passed its sell-by date. The electoral success of the Republicans last autumn put a skewer through the comforting idea that history - including the history of ideas - moves like a pendulum. The "me" decade was supposed to have given way to the caring, sharing 1990s; market individualism, the hinge of economics as a discipline, was going to be supplanted by the revival in the social sciences of communitarian and institutional approaches. So much for the accuracy of the clock-watchers.

Yet it is clear from their social, even collectivist, focus that Newt Gingrich and fellow Republicans are unconventional individualists. Market individualists are unlikely to put children in orphanages. When ideas about "virtue" and "shame" play big in the news magazines, clearly we are not going back to Reaganite laissez-faire.

Indeed, within the American intellectual world, individualism is under new attack. But interestingly the assault does not spring from what remains of the American Left. The Republican victory coincided with the publication of a book that took on the methodology of market individualism as it has played across a wide band of economic and social research and trashed it.

Pathologies of Rational Choice Theory by Donald Green and Ian Shapiro of Yale University has been making the birds fly. Ostensibly a critique of the failures of "rational choice" modelling in studies of voting and politics, the book seeks to subvert the pretensions of economists and other social scientists.

The charge is not that they have wrongly sought to be scientific in their methods but that they have got nowhere. Much social science is as arid as Death Valley in July because, Green and Shapiro say, it has overreached itself.

The distinguished Asia specialist Chalmers Johnston picked up the charge in an article in The National Interest saying that rational choice/market individualism is an over-generalisation of Anglo-American culture and of history warping attempts to understand Japan.

This is the decade - the book's success seems to say - when 1980s individualism gets its comeuppance, not from collectivists (their scattered distribution on both the right and left of politics sees to that) but from the little boy standing beside the procession: this emperor has no clothes.

Since social science in Britain is to all intents and purposes an intellectual colony of the United States, are the individualist 1980s finished here, too? The answer is no; indeed in political science rational choice is the coming thing. Yet in economics intellectual excitement is being generated away from the individualist mainstream at the margins where the behavioural bases of the subject are being scrutinised and (whisper it softly) some researchers are actually looking at how real people make economic decisions and finding rational choice is not it.

"Rational choice" assumes people are self-interested; they know what they want when they enter a market; they make consistent and logical connections between what they want and how they can get it . . . models of considerable elegance and some mathematical sophistication can be constructed.

The most obvious example comes from page one, chapter one of most economics textbooks. Where the curve describing the preferences of (utility-maximising, consistent and rational) sellers intersects with that relating to buyers an equilibrium price is set.

Applied to politics - where the approach is sometimes called "public choice" - you can build models of parties' behaviour, find equilibrium points for the functioning of coalition governments, redescribe political participation (this was the work of Anthony Downs in An Economic Theory of Democracy) as basically like buying and selling in a market, except the commerce is in votes.

In Britain, typically, the methodological debate is being conducted passionlessly and politely. In economics, it has taken the form of seeking to admit a limited dose of reality into the market models - a reality in which people are ignorant, inconsistent, occasionally altruistic and susceptible to all manner of "social" (that is, non-individualist) influences in their economic behaviour. What is it people actually do when they buy higher-priced freshly squeezed orange juice at Marks and Spencer Peter Taylor-Gooby of Kent University is coordinator of an Economic and Social Research Council programme that started last summer and is promoting work on the "cultural factors" and group influences that feed economic behaviour, looking at such things as the growth of ethical investment, and the way we think (or do not) about our finances in old age.

"The difference between this country and the States is that relatively few people here have been willing to take positions at either extreme, either finding some magic way of making rationality work or saying social science has come to an end.

"Most people are somewhere in the middle, trying to find ways of stitching together a notion of rationality that also includes things like respect for social values, or membership of social groups."

Robert Sugden at the University of East Anglia is a rationality revisionist who acknowledges his colleagues prefer "nice, simple, elegant, general theories . . . so don't like bringing in too many variables, diverse patterns of motivation."

But reality obtrudes. "My sense is the world has become more difficult for economic forecasting - for example, with the globalisation of markets. But saying the world is much more complicated is not the same thing as saying it is any more or less rational than it was before."

There is, to date, no such thing as post-modern economics. British economists are unwilling to abandon assumptions about rationality in people's behaviour but some want to study and augment them.

Ken Binmore of University College London has been pushing a variant of rational choice theory - gaming - by studying how people behave confronted with such classical problems as the prisoner's dilemma: two prisoners are separately told that they will be released if they inform on their colleague. Chicago economics - the fountainhead of rationalist individualism - says people will always seek to "optimise", or be as selfish as they can. In other words, the outcome of such games can be predicted exactly.

Binmore says the experimental evidence differs. What it shows is that people adjust their behaviour as they learn, but learning can take a long time. That does not invalidate rationality assumptions - they provide base lines. He gets cross, he says, with holists who simply say, everything is complicated and leave it there.

And yet the experimental work being done by Graham Looms at the University of York feels subversive of much of the superstructure of conventional economics. If people, studied in laboratory conditions, do not maximise their utility, are not consistent in their preferences, are not logical, then one by one the axioms of economic theory fall away. Professional amour propre has so far forbidden most economists from pushing far down that road.

In Britain political science devotees of rational choice feel they are something of an intellectual elite, in contrast perhaps to the stolid ranks of psephologists and writers about Cabinet government and policy-making networks. Rational choice - often called public choice in political science - offers rigour.

The London School of Economics is a centre; Patrick Dunleavy and Christopher Hood run a study group that meets at the flat of the government department's senior professor, Brian Barry.

In his study of bureaucracy Dunleavy has applied the central assumption of rational choice - people behave consistently selfishly - to upset the conclusion of American rational choicers. The work of Gordon Tullock and James Buchanan (a Nobel prize winner) was firmly on the political right: all bureaucrats maximise their empires.

Dunleavy has been arguing - during a period of upheaval in British government - that on the contrary bureaucrats seek to "shape" their empires and may actually welcome budget cuts and contracting out as long as a small central core is protected.

His use of rational choice parallels that of Ian Budge at the University of Essex. Political parties are his individuals, and he applies to them the (American) tenet that they are in the - consistently selfish - game of maximising votes and power. He adds that in the real world parties also have ideological baggage and beliefs. If power was all that interested parties, we would see them jumping around picking up appealing policies here. (No jokes about Tony Blair, please.) Budge's recent work - based on analysis of the recent political history of 20 countries - shows the way parties change their spots is a more elaborate process, in which ideology and previous election results meld.

But is that methodological promiscuity another way of saying there is no single, and singularly rigorous way, of describing people and politics; that political science can never have mathematical rigour - indeed may be mislabelled as a "science" ?

In the United States it is said new PhDs with training in rational choice routinely receive multiple job offers from leading universities. But that speaks to the yearning within American higher education for the signs and symbols of "science" and (so Green and Shapiro argue in their book) the subsitution of empty formalism for real advances in explaining worldly behaviour.

The need for satisfying explanation grows, says Peter Taylor-Gooby. "It matters to get a theory of how people make choices right now because a) people are confronted with crucial choices in everyday life as the state shrinks and markets become more important and b) people have higher disposable incomes and so have more choices open to them."

Roger Backhouse of Birmingham University, reviews editor of The Economic Journal, says British economists are more pragmatic than Americans; for them rational models are not all or nothing. There is growing interest, he says, in refining assumptions of rational behaviour in the light of people's lack of information. In many markets information is asymmetrically distributed: employers and employees know different things about wage rates.

Some of his colleagues want, as it were, to get back behind Ricardo, the early 19th-century father of market economics who assumed people in markets will always seek to maximise in their pursuit of consistent and pre-set preferences.

In real world markets consumers take their view of the value of the commodity from the market price, they do not know what this thing is worth to them, and may allow themselves to be influenced by television advertisements featuring neighbours falling in love thanks to sharing a jar of instant coffee.

What kind of rational choice is that ?

Pathologies of Rational Choice Theory: A Critique of Applications in Political Science, by Donald P Green and Ian Shapiro, is published by Yale UP.

David Walker is the BBC urban affairs correspondent.