Vernon Smith’s "Ecological Rationality" and Efficiency
Mentor:Andrew Yuengert, Professor of Economics, Pepperdine University
In the twentieth century, F. A. Hayek analyzed and described the unintended order present in the free market, and compared this order with centrally planned markets. In Rationality in Economics: Constructivist and Ecological Forms, experimental economist Vernon Smith continues Hayek’s project by reporting on the order that emerges in his own laboratory experiments, even when all of the participants involved do not have perfect information. Smith makes the distinction between “constructivist rationality” and “ecological rationality”. Constructivist rationality is the conscious use of reason to evaluate and choose between multiple alternatives; it is the sort of rationality employed in economic models of behavior, and in government planning. Ecological rationality is the emergent order that arises without the conscious use of reason—for example, the undirected order of the market highlighted by Hayek. Smith argues that ecologically rational outcomes tend to be efficient more frequently than the outcomes of constructivist efforts do. He also believes that ecologically rational outcomes bring about the creation of efficient institutions.
For something to be efficient, it must be the case that no one can be made better off without making anyone worse off. To determine whether someone is better off, one must specify what “better off” means. In a constructivist framework, “better off” means “getting what you value most highly given your budget,” since to exercise constructivist rationality is to specify your objectives clearly and choose the best of the alternatives available to you. Since Smith asserts that ecologically rational market institutions are efficient, one task of my research will be to clarify what it means, if anything, for something to be efficient outside of a constructivist framework. More specifically, I want to figure out whether people can be considered better off without employing constructivist reason as a means of determining the value of different outcomes.