Rethinking Rationality: The Critiques of Coase and Keynes on Economic Behavior

Economics has long been regarded as a science rooted in rational decision-making. This dominant view, often called rational choice theory, assumes that individuals make decisions based on a cost-benefit analysis, always striving to maximize their utility or profit. However, not all economists have embraced this model without question. Among the most prominent critics are Ronald Coase and John Maynard Keynes, two of the most influential economists of the twentieth century. Despite their many differences, from their approaches to economics to their political ideologies, both shared a skepticism about the rational choice theory that underpins much of mainstream economic thought. Their critiques were grounded in a belief that human behavior is more complex, unpredictable, and influenced by factors beyond simple calculation.

Ronald Coase: The Microeconomic Skeptic

Ronald Coase, a microeconomist known for his work on transaction costs and the nature of firms, was particularly critical of the assumptions that underlie traditional economic models. He argued that the rational choice theory often leads economists to create overly simplistic and unrealistic models of human behavior. Coase once remarked that when economists find themselves unable to explain real-world phenomena, they tend to invent imaginary worlds where their models hold true. In essence, Coase believed that economists were so invested in theoretical models of rationality that they neglected the messier, more nuanced reality of human decision-making.

One of Coase’s most notable critiques of the rational choice model was his argument that the assumption of rational behavior is "unnecessary and misleading." He questioned the idea that individuals are always engaged in maximizing anything, pointing out that even when humans do pursue goals, they often do so in a haphazard and inefficient manner. As Coase saw it, people rarely make decisions with the clear, calculated intent of maximizing their well-being or happiness. Instead, human behavior tends to be influenced by a variety of factors that do not always lend themselves to rational analysis.

This skepticism about the assumptions of rationality extended to Coase’s broader approach to economics. He rejected Milton Friedman’s influential principle that the validity of an economic theory should be judged solely by the accuracy of its predictions, not by the realism of its assumptions. Coase was deeply critical of the heavy reliance on empirical methods, particularly statistical approaches, that had come to dominate economics. He preferred more detailed case studies, which he felt were better suited to capturing the complexity of economic phenomena. While Coase did not dismiss the concept of rationality entirely, he was adamant that economists should not presume it as a universal feature of human behavior.

John Maynard Keynes: The Macroeconomic Critic

Like Coase, John Maynard Keynes also expressed skepticism about the rational choice model, although his critique was situated in the context of macroeconomics. Keynes, a liberal economist, was concerned with the behavior of entire economies rather than individual transactions. His greatest contribution to economic thought, The General Theory of Employment, Interest, and Money, offered a radical departure from classical economics by emphasizing the role of uncertainty and psychological factors in economic decision-making.

For Keynes, investment decisions—particularly in the face of uncertainty—could not be explained purely by rational calculations. He noted that businessmen often made investments under conditions where the future profitability of those investments was highly uncertain. In such a context, it seemed almost absurd to talk about "rational" investment behavior in the traditional sense. Instead, Keynes pointed to the role of what he called “animal spirits”—a term he used to describe the instinctive and often irrational drive for action that motivates entrepreneurs to invest and take risks. He acknowledged that during times of economic boom, people tended to be overly optimistic, while during periods of recession, fear and uncertainty could lead to pessimism and a reluctance to invest.

Keynes’s approach to understanding economic behavior was less concerned with creating a formal model of rational decision-making than with observing and analyzing the psychological and emotional forces that shape economic activity. He famously wrote that much of human decision-making is driven not by logical analysis but by whim, sentiment, and chance. In times of economic uncertainty, people are often motivated more by their "urge to action" than by a careful calculation of risks and rewards. This understanding of economic behavior was a significant departure from the rationalist view that had dominated classical economics.

Common Ground: A Shared Skepticism of Rationality

Though Keynes and Coase approached economics from different angles—Coase as a microeconomist and Keynes as a macroeconomist—they shared a deep skepticism about the rational choice model. Both economists believed that human behavior could not be reduced to a simple, predictable pattern of rational decisions. They rejected the notion that individuals always act with the sole aim of maximizing utility or profit. Instead, they took a more eclectic approach, acknowledging the complexities of human behavior and the role of psychological, emotional, and social factors in economic decision-making.

Neither Coase nor Keynes relied heavily on mathematical models or rigorous, predictive theories in the way that many modern economists do. Both were more interested in understanding the real-world behavior of individuals and firms, and they felt that the rational choice framework often failed to capture this complexity. They recognized that people do act in their self-interest, but they were wary of assuming that this self-interest could always be neatly modeled and quantified. In their view, human beings were too unpredictable and influenced by too many external factors to fit neatly into a rational decision-making framework.

A Return to Realism in Economics

The skepticism of Coase and Keynes toward the rational choice model was grounded in a desire for greater realism in economic theory. For them, it was more important to study how people actually behave rather than to create idealized models of behavior that ignored the complexities of the real world. Keynes’s work in particular anticipated the rise of behavioral economics, which has gained prominence in recent years by exploring how psychological biases, emotions, and social factors influence economic decisions. In this sense, both Coase and Keynes were ahead of their time, recognizing that economics could not be reduced to simple mathematical models and that human behavior could not be fully explained by rational choice theory.

Their work reminds us that economics is not just about numbers and models but about understanding the motivations, emotions, and uncertainties that drive real people to make the decisions they do. It also suggests that, rather than relying on unrealistic assumptions, economists should be open to a more interdisciplinary approach that incorporates insights from psychology, sociology, and other fields. In this way, the legacy of Coase and Keynes continues to challenge the assumptions of mainstream economics, encouraging a more nuanced and realistic understanding of how economies function.