The meaning of rationality

I have left to the last what some regard as the most characteristic feature of neoclassical economics, namely, its insistence on methodological individualism: the attempt to derive all economic behavior from the action of individuals seeking to maximize their utility, subject to the constraints of technology and endowments. This is the so-called rationality postulate, which figures as a minor premise in every neoclassical argument. The economist's measure of “rationality” does not correspond to the layman's understanding of the term. In common parlance, rationality means acting with good reasons and with as much information as possible or, in somewhat more formal terms, consistently applying adequate means to achieve well-specified ends. For the economist, however, rationality means choosing in accordance with a preference ordering that is complete and transitive, subject to perfect and costlessly acquired information; where there is uncertainty about future outcomes, rationality means maximizing expected utility, that is, the utility of an outcome multiplied by the probability of its occurrence.

The economist's meaning of rationality is a relatively recent invention dating from the 1930s but descending from the marginal revolution of the 1870s. To the classical economists, rationality (a term they never used) meant preferring more to less, choosing the highest rate of return, minimizing unit costs and, above all, pursuing one's self-interest without explicit regard to the welfare of others.