Humans as Rational Actors

Now that we have discussed the underpinnings of general Economics, it would be best to cover the ideas which underpin Austrian Economics specifically, so that we may see how it may differ from other schools and know the basis from which Austrians make economic judgments. Primary among these differences is its approach to human action and how the actions of individuals are determined by the information and economic preferences of those individuals.

In this study, Austrians work from one assumption first and foremost. This is that humans are rational actors,  meaning that they make choices which are rational in relation to their preferences and the information they possess. This means that any person, in any situation where they are faced with a series of choices, will make the choice which suits them best. To put this in terms of our previous post, the choice made is the one with the lowest perceived opportunity cost of action, and as such provides the most utility to the individual making the choice at the time.

There are two points which must be made in order to clarify this point: The first is that people, at all times, in all states of mind, are making rational choices. Regardless of mental or emotional state, a person's choices will always suit their current preferences and provide them the most utility. When a person is angry at someone else and decides to punch him in the face, that represents a rational choice based on his current preferences because, to him, the opportunity cost of not acting on his anger then and there was higher than the cost of further potential violence against him.No action an individual makes is excluded from this principle of rationality, and to suggest such would inherently work against the basis of our premise.

The second point is to remember that when we say rational, we do not mean that all people will make the same choice when faced with the same information. Essentially, "rational" does not mean "agrees with you". To put an example in: Suppose two people each find $100 on the sidewalk. They live in a busy city, and could both use the money, whereas trying to find the person who dropped it would be very hard if not impossible. Now, in this situation, we might think that the rational thing to do would be to keep the money, and go on his way. We may also think that the rational thing would be to at least try to find out who dropped it, since that is a lot of money to just lose. And both would be correct; if one of the people decides to ask nearby people if they dropped the money, and the other decides to fold it back up, put it in his pocket, and walk away, both of them have behaved rationally.

How can this be? Because rationality is not a value judgment of a person's decisions, merely an observation of the process they used to reach that decision. When we say an action is rational we mean that the person making the action took the information available, then considered and weighed it against their preferences to reach the best choice. Oftentimes, claims against the Austrian School's perceptions of rationality are due to confusion on this point; they assume that rational choices are the same for everyone, rather than different from one person to the next based on preference.

Note: I intend to be posting 3 times a week, on Mon/Wed/Fri. That way I can balance this blog with other activities while still being thorough in my posts.