Rationality and Knavery

Abstract

James Buchanan, Frank Hahn, and Alexander Rosenberg have argued that economic theories may be of normative value even if they are predictively weak: the assumptions that individuals are rational, intelligent, well-informed and self-interested are appropriate in the context of institutional design regardless of whether they are true. As Hume wrote, "In contriving any system of government, ...every man ought to be supposed a knave, and to have no other end, in all his actions, than private interest." I argue that this view is mistaken and that theories of choice cannot provide guidance concerning institutional design unless they provide correct predictions concerning how people will behave.