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Rational Action and Economic Theory: A Reply to I.

Author(s): Gary S. Becker
Source: The Journal of Political Economy, Vol. 71, No. 1 (Feb., 1963), pp. 82-83
Published by: The University of Chicago Press
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Accessed: 14/08/2009 15:15

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Journal of Political Economy.
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IN A recentarticleI arguedthat manyim- tional; rather, any position if attained could

portant results of current economic the- be maintained indefinitely.
ory do not really depend on rational individ- These conclusions, if proven, would have
ual behavior;' in particular,market demand advanced our understanding of the role of
curves would be negatively inclined not only rational behavior in market processes. In
when households maximize utility but also fact, however, Kirzner offersno proof what-
when they choose impulsively or follow hab- soever and argues that irrational markets
it. I also argued that instead of depending must be unstable simplybecausethelanguage
on rationality, these results depend on a gen- used in proving that rational markets are
eral principle related to opportunity sets stable is inapplicable to such markets.3This
that includes both rational and irrational is like saying that irrationalhouseholdsmust
behavior. Professor Kirzner in his comment have positively inclined demand curves
in the August issue apparently accepts what simply because the concept of diminishing
I claim to have demonstrated,2but he vigor- marginal utility (or marginal rate of substi-
ously denies that my analysis could be ap- tution) is inapplicable to them. The truth of
plied to the stability of competitive markets. the matter is that a single market might well
He presents a lengthy demonstration along be stable even if all participants were irra-
traditional lines that the equilibrium posi- tional. Since Kirzner'sprincipal argument is
tion in a single competitive market would be that a single market would not be stable if
stable if both suppliers and demanderswere price-setters were irrational, my discussion
rational. He readily concedes-a bit too of stability is limited to this case.
readily-that, since market demand curves Let us assume that suppliersuse irration-
were shown to be negatively inclined and al decision rules in setting prices, and that
supply curves positively inclined even when the demand curves for the outputs of any
behavior units were irrational, a single mar- group of suppliers are either negatively in-
ket would still be stable when suppliers (or clined or infinitely elastic. (I have already
demanders) alone were irrational. He as- shown that market demand curves tend to
serts, however, that the equilibrium would be negatively inclined even when demanders
not be stable if all participants were irra- 3 The flavor of his "proof" is well conveyed by the
1 "Irrational following sentences:
Behavior and Economic Theory,"
"Such a pattern of plan revision can be conceived
Journal of Political Economy, LXX (February,
of only for rational buyers. If buyers were afflicted
1962), 1-13. I might use this occasion to make some
with chronic inertia, they would presumably come to
typographical corrections that were not made earlier market each day with the same low bids as yester-
because the proofs were lost in the mail: p. 1 (n. 1,
day, and return home with the same disappoint-
1. 10), for 1931 read 1953; p. 5 (col. 1, 1. 19), for or
ments. If buyers made bids in a purely random man-
read of; p. 6 (col. 2, 11.23-24) insert although they
ner, there is again no assurance that 'the' market
would no longer be on before the budget line; p. 6
price would rise at all. Only by assuming that buyers
(n. 10), for much read must; p. 9 (col. 1, 1. 7), for non-
purposefully seek to achieve given goals, can we pre-
negative read positive; p. 11 (col. 2, par. 2, 1. 10),
dict that their thwarted market plans of yesterday
for Qe, Q. read QeQu;p. 11 (last par., 1. 3) read this
will lead to their systematically offering more attrac-
famous theorem; p. 13 (col. 2,1. 4), omit sometimes;
tive choices to sellers today.
p. 13 (col. 2, 11.10-12), omit or the positive slope of "It is abundantly clear that such revision of plans
market demand curves.
by sellers assumes their rationality. Sellers who make
Israel M. Kirzner, "Rational Action and Eco- selling offers according to the throw of a multisided
nomic Theory," Journal of Political Economy, LXX die, or merely out of habit, cannot be relied upon to
(August, 1962), 380-85. make any such systematic plan revisions" (p. 382).


are irrational.) If market price was above argues that if people were known to behave
the equilibriumprice, demanderscould buy rationally economists would have to place
whatever they wanted at the "going"price, considerableemphasis on the rationality as-
while some suppliers could not sell all they sumption. Although I can only agree whole-
wanted. Assume for simplicity that suppliers heartedly, I must emphasize that the major
either can sell all they want or nothing at all. point of my paper is to question the reliabil-
The latter group of firms could not sell any- ity of the evidence most frequently cited.
thing at still higher prices, but by assump- Some analysts have believed in the rational-
tion could sell if they charged lower prices. ity assumption because several important
This negatively inclined demand curve for market implications of rational behavior
their output would intersect their average were verified, and the language used in de-
cost curve in a region I have called the pro- riving these implications laid great stress on
duction opportunity set. Outputs and prices rationality. Others have believed that mar-
must be selected from within this set regard- kets respondirrationallybecause individuals
less of the decision rule used, and since all seemed (to them) to behave irrationally. I
prices there are below the market price, the have argued that none of this evidence is too
average price selected must also be below, relevant since individuals can behave irra-
even if irrational decision rules were used. tionally and yet markets can respondration-
Since sales of these firms are partly at the ally, the language used in deriving market
expense of the other suppliers, the demand implications simply being different from
curve and thus the production opportunity that used with rational behavior.
set available to the latter would shift to the On the other hand, I have certainly not
left. This in turn means that the average shown that all the market implications of
price available to them is lowered, and, rational behavior would be reproduced by
therefore, that a reduction in the price all or most irrational behavior. Surely mar-
chargedby them becomeslikely, even if they ket responses of rational units sometimes
too respond irrationally. The end result is a differ substantially from those of most irra-
reductionin the going price and a stabilizing tional units, and, as pointed out in my pa-
movement of average price back to the equi- per, this evidence "would be crucially im-
libriumlevel, even though price-setterswere portant in assessing the extent of individual
irrational. rationality" (p. 13). This evidence has not
I do not pretend to have demonstrated usually been sought and emphasizedappar-
that the equilibriumprice must be stable in ently because of a common belief that evi-
markets dominated by irrational partici- dence such as the negative slope of market
pants. A full study would requirea detailed demand curves is sufficient to demonstrate
analysis of many factors that have either individual rationality. Praxiologists and
been ignored or abruptly treated here. My others concerned with determining the ex-
aim is simply to indicate not only that tent of individual rationality might well de-
Kirznerofferedno proof that irrationalmar- vote more time in the future to formulating
kets are unstable5 but also that there are and conducting relevant tests.
powerful stabilizing forces even in such I His discussion of stability in rational markets is
markets. also far from rigorous and shows an insufficient ap-
In the last section of his comment Kirzner preciation of the difficulty in proving stability even
in "simple" cases. Some difficulties are analyzed in
4 By the "going" price is meant the central A. W. Phillips, "Employment, Inflation, and
tendency of perhaps different prices to different de- Growth," Economica, XXIX (February, 1962), 1-
manders. Since the issue was not raised by Kirzner I 16, and K. J. Arrow and L. Hurwicz, "Stability of
continue to refrain from discussing the dispersion of the Competitive Equilibrium, I," Econometrica,
prices in markets with irrational participants. XXVII (October 1958), 522-52.