Economic Rationalism

… a core concept in Socioeconomic and Political Context and Atlas105

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Concept description

Collins Dictionary defines economic rationalism as “an economic policy based on the supposed efficiency of market forces, characterized by minimal government intervention, tax cuts, privatization, and deregulation of labour markets.”

Writing in Oxford Reference, Michael Pusey elaborates:

“‘Economic rationalism’ is an Australian label for what is known elsewhere as supply‐side economics, neo‐liberalism, laissez‐faire, structural adjustment, ‘free’ market policies or, more simply, ‘economic reform’. In Australia, economic rationalism began in the early 1980s with the floating of the Australian dollar and the deregulation of Australian capital markets. It became a mantra some four years later in May of 1986 when the Federal Treasurer, Paul Keating, warned that without vigorous economic restructuring Australia would become a ‘banana republic’. Specific elements of the economic rationalist policy bundle variously include deregulation, free trade and tariff reductions, Privatisation, labour market reform, microeconomic reform—for example, of the waterfront – Public sector reform, user pays, cutting government spending, competition policy, tax reform (the Goods and Services Tax), Welfare reform and, most recently, the creeping privatisation of Medicare and of the universities. All of these policies share the same aim of expanding the role of the market in society. In its practical application at the organisational level economic rationalism is often called ‘Managerialism’ whereas, at the macro or international level, it is sometimes equated with Globalisation.

“As a public policy position and in its strongest form economic rationalism may be more formally defined as the doctrine that markets and money provide the only reliable means of setting values on anything – or, alternatively, that economies, markets, and money can always, at least in principle, deliver better outcomes than states, bureaucracies and the law. These are the normal assumptions of contemporary neoclassical economics and of its offshoots in public choice theory. Accordingly, in the political spectrum, economic rationalism is generally associated with ‘New Right’ neo‐conservatism and with mainstream US and British public policy in the post‐Keynesian period from the mid‐1970s to the present – the political and economic dispensations of Thatcher in Britain and Reagan in the USA (see Keynesianism). These positions all contain, with varying degrees of intensity, critical evaluations of the role of the state in society. In this respect the Anglophone model of neo‐liberal economic rationalism may usefully be contrasted with other models of contemporary capitalism, most saliently with Dutch and German Corporatism and with the Nordic or Scandinavian models.

“Economic rationalism takes its criteria of reason and rationality from modern economics. The individual is assumed to be an egoistic, self‐interested, homo economicus for whom rational action means the maximisation of utilities, wealth, and advantage. This implicitly behaviourist psychology has its roots in classical Utilitarianism and assumes that all significant motivations reduce to the maximisation of pleasure and the minimisation of pain. Accordingly, economic rationalists equate rationality with the self‐interested, ‘strategic’, ‘instrumental’, or ‘rational‐purposive’ action of individuals. From this perspective other actors are normally defined as competitors for scarce resources. For these same reasons economic rationalists place little faith in cooperative action and still less in any form of collective action. Accordingly, they typically view trade union activity and attempts by governments to moderate the free play of labour and financial markets as ‘distortions’.

“As utilitarian welfare economics and then neoclassical economics have come under fire in recent times, economic rationalists and like‐minded public policy specialists have found other philosophical defences for their neo‐conservative and anti‐collectivist orientations. These have come in the main from the neo‐libertarian and rights‐based liberalism of Buchanan, Hayek, Rawls, and Nozick that all set an overriding priority on the right of the individual to freedom of choice. Such theories explicitly treat virtue, merit, and social needs as morally arbitrary constructs that may not be used to legitimate redistributive Welfare state policies, or any actions of governments, that could trespass on individual freedom of exchange in the marketplace. This has negative consequences for notions of Citizenship, participative Democracy, Community, and Social justice.

“Not surprisingly we find that this view contains its own criteria for institutional design and reform. Here there is a preference for what are called, after Adam Smith, ‘invisible hand’ mechanisms – in other words, for a coordination of individual actions that is achieved through markets, prices, and incentives and which, accordingly, places minimum reliance on civic virtue, negotiation, organisation, and trust. At the global level, and through the agency of mainly US‐dominated international economic organisations such as the World Bank, the World Trade Organization (WTO), the International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD), and the international credit rating agencies, economic rationalists have opposed attempts by national governments to intervene in the operation of markets to protect labour, to impose tariffs, to fix price floors and ceilings, to moderate the distribution of income, or otherwise to interfere with the ‘free’ play of market forces. The underlying standard for good institutional design requires that economies, markets, and prices should, as far as possible, be removed from the political domain and allowed to function autonomously and as a self‐adjusting system. In Australia these policies have been driven by economic rationalist economists in central agencies of the federal bureaucracy; New Right, big business–funded ‘Think tanks’ – the Centre for Independent Studies and the Sydney Institute, among others; peak Business associations, most notably the Business Council of Australia; big accounting houses; financial journalists; and leading academics in faculties of business, commerce, and economics.

“Economic rationalists have an inbuilt preference for smaller government and a bias against the public sector and public administration generally. They tend to assume that efficiency is best served by moving as many functions as possible from the public sector to the business or private sector. Strategies for bringing this about normally begin with a process of ‘corporatisation’ that seeks to restructure public, welfare, and social service organisations along private sector lines as business corporations. This involves the internal monetisation of allocations as well as structural innovations such as the separation of funders from providers together with many other accounting practices, all designed to force compliance with markets and prices in the external money economy. This leads, as far as electoral tolerances will allow, to the privatisation, sale, and transfer of public utilities and social service organisations to the private sector. The scale of these reforms has made Australia a world leader in the privatisation of public assets. Since government is seen as a restriction on the efficiency of markets, a priority is set on the deregulation of private sector businesses. By the same token the preference for less government brings on pressures to reduce taxes, cut public spending, and reduce welfare and transfer payments. Similarly, in the name of efficiency, economic rationalists press for a transfer of the remaining burden of Taxation away from business corporations to wage and salary earners and consumers.

“Two quite separate families of arguments are brought against economic rationalism. One comes mainly from within economics itself. Here the accusation is that economic rationalism fails in its own terms, and that it is in any case intellectually misconceived ‘bad’ economics. International comparisons of economic performance in the ‘developed’ member nations of the OECD have largely disproved the claims of economic rationalists that strong and generously funded public sectors are inimical to economic growth and productive investment. The evidence points in the contrary direction and shows that the smaller, corporatist, social democratic economies of western Europe with ‘interventionist’ governments, redistributive social policies, large public sectors, and strong trade unions have, for the most part, performed better than the USA, Great Britain, Australia, and New Zealand.

“The second principal criticism of economic rationalist policies is that they fly in the face of evidence concerning the factors that make for ‘quality of life’ and, still more fundamentally, that they are socially corrosive, inimical to the dignity of work and to personal identity, harmful to good governance and to the environment, and detrimental to the cohesion and reproduction of society. These criticisms are supported by longitudinal and comparative studies of quality of life showing that most people in developed Western nations value health, family relationships, friendship, tension‐free leisure, and social peace ahead of personal wealth, income, and consumption. There is little real evidence for the core economic rationalist assumption that selfishness, competitiveness, or aggressive individualism are natural, admired, or even broadly accepted.

“In the wake of nearly a quarter of a century of economic reform there is now broad agreement that corporations have been the principal beneficiaries of economic reforms and that economic rationalism is associated with an upward redistribution of national income from the poor and those in the middle to the rich, and with a fall in real lifetime incomes for most wage and salary earners. Social science survey studies including the Pusey ‘Middle Australia’ studies show that economic rationalism is blamed for increasing workplace and family stress, for the rising incidence of poverty and inequality, and that it is associated with a majority view that big business has too much power in Australia.”

Atlas topic, subject, and course

The Study of the Socioeconomic Context for Politics and Policy (core topic) in Socioeconomic and Political Context and Atlas105.


Collins Dictionary, economic rationalism, at, accessed 12 December 2018.

Michael Pusey, Economic rationalism, Oxford Reference, at, accessed 12 December 2018.

Page created by: Ian Clark, last modified on 12 December 2018.

Image: YouTube, Economic rationalism, at, accessed 12 December 2018.