Rational Inefficiency: A Discourse on John Richard Hicks, Joe Staten Bain and Harvey Leibenstein

Abstract

Rationality and efficiency are often considered two sides of a same coin. Often we argue that in the absence of market failures, rationality always generates efficiency. The present paper, however, goes against this current of wisdom. It argues that rationality reflects the state of mind that determines the course of decision-making for an individual. Efficiency, on the other hand, conventionally reflects the financial results of an economic activity. But the human mind always desires more than what those financial outcomes provide. Therefore, rationality should not be identical to efficiency. This is the concept of ‘rational inefficiency’, or equivalently, ‘irrational efficiency’, which is theme of this article. It discusses in this context three important hypotheses, as developed in the literature on efficiency. Those are (a) the Quiet Life Hypothesis, (b) the Structure-Conduct-Performance Hypothesis, and (c) the x-efficiency Hypothesis.