Raphale Chappe Hobbes and Spinoza Final Paper Fall 2010 [Note: all references to Spinozas Ethics are

e abbreviated as follows: IIp1, for example, refers to Part II, proposition 1 unless otherwise noted, all Spinoza citations are from the Ethics. The Theological-Political Treatise is abbreviated as TPT]

I.

Introduction

This paper attempts to explore the possible philosophical justification for the assumption of rationality on the part of economic agents, and for the treatment of human beings as utility-maximizers that is prevalent in the core of neoclassical economics. Specifically, the paper focuses on the characterization of individuals in Spinozas Ethics and Hobbes Leviathan with a view to assessing the extent to which they provide support for this framework. The paper is structured as follows. In Section II, we first briefly outline the concept of rationality in economics. In Section III, we show how both Hobbes and Spinoza provide support for the reference to personal self-interest in any theory of decision-making, with individuals essentially driven by self-preservation and a striving to increase ones power to act. In this context, we outline a definition of rationality as consistent with utility-maximizing behavior, but we also acknowledge the possibility of irrational and counter-productive behavior (with a greater focus on Spinozas theoretical apparatus). We explore three main sources of irrational behavior in Section IV. First, to the extent that rational decision-makers operate in a world where information is costly and difficult to acquire, we examine the implications of Spinozas concept of inadequate knowledge on our ability to act rationally. Second, we examine the problem of decisionmaking under uncertainty, and the mental limitations associated with our limited ability to distinguish between imagination and reason. And third, we explore the power of emotions and their effect on our decision-making, with a view to developing a better understanding of some psychological biases that distort our judgment (mainly, the mechanisms of association, imitation, and anticipation outlined by Spinoza). Finally, in Section V we provide some concluding thoughts on some insights provided by Hobbes and Spinoza, and how economists might think differently about rationality and irrationality.

II.

Rationality and Economics

One of the cornerstones of orthodox economics is the assumption of rationality on the part of economic agents. There are many facets to this assumption, but we will briefly outline the main established claims in so far as they are relevant to the foundations of economic analysis. The characterization of the homo economicus begins with Adam Smiths famous claim that self-interest is the main driver of capitalist society and mode of production (in a famous quote, Smith asserts that it is not from the generosity of butchers that we get our dinner, but rather from their own self-interest). In an attempt to

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implement this idea, and introduce formal mathematics into economics, Jevons (and others) imported Benthams theory of the utility-maximizing individual into the economic view of human psychology. Bentham proposed to consider pleasures and pains in quantitative terms. The pursuit of self-interest would then characterized as a calculation - the determination of what would procure the most pleasure overall. Utility functions were designed to measure the relative satisfaction derived from the consumption of various goods and services. This satisfaction is measured indirectly (since we cannot directly observe a purely internal psychological phenomenon) as each individual signals the magnitude of this satisfaction with his or her readiness to pay for the commodity itself. Further, under the marginalist approach, what really matters is the increment of utility derived when available quantities of commodities increase. This approach lends itself well to the use of calculus and derivatives. In the modern theory of economic rationality, people behave as though their aim were to maximize a utility function. This theory does not attempt to explain why people behave as they do. People do not choose one object a over another b because the utility of a exceeds the utility of b. Rather, it is because object a is chosen over object b that we can conclude that the utility of a exceeds the utility of b. The only requirement is that choice be consistent. If the persons choice behavior is consistent, we can construct a utility function associated with their observed behavior. Rationality has thus been reduced to an assumption of consistency in choice behavior (with the concept of revealed preference1). Microeconomic theory does not specify how preferences are formed, and what mechanisms in the mind might be involved in the process of utility maximization. It does not seek to explain behavior. Hence the neoclassical assumption of rationality is that individuals do not always get things right, but over time, on average, are precluded from making systematic errors, or at least inconsistent choices. Again, the exact process of how utility optimization might take place is not explored. Rationality is postulated. This leads to some interesting results both in finance and economics. Investors are expected to solve complicated equations to construct optimal portfolios and price assets, and form rational expectations of things like inflation and interest rates. Consumers are able to assess the desirability of consuming today as compared to some future point in time (by applying constant discount factors, etc.). With the standard expected utility theory, agents can also assess probabilities and maximize utility in a probabilistic, non-deterministic environment. The expected utility of a finance asset will be given by the sum of the payoffs weighed by their probability of occurrence. 2 Even the unpredictability of markets was interpreted as a sign of highly functioning efficient markets with rational agents, under the Efficient Market Theory.3

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This concept, first pioneered by Paul Samuelson is designed to ensure consistency in decision-making. The Weak Axiom of Revealed Preference provides that if a consumer chooses a over b, then it cannot be the case subsequently that b is chosen over a if both a and b are available. The Strong Axiom of Revealed Preference imposes transitivity: if a is chosen over b, and b is chosen over c, it cannot be the case that c is chosen over a. 2 See for example the von Neumann-Morgenstern (VNM) utility theory. 3 The Efficient Market Theory assumes that market prices incorporate all available information at any given moment (efficient markets). Thus prices are instantaneously (or quasi instantaneously) determined rationally in a manner that reflects current knowledge. Movements in stock prices are responding to a constant stream of new information, which is by definition unpredictable (if it were predictable, it would already have been reflected in todays price). This explains why stock prices follow a random walk.

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One should not overstate the predominance of this assumption. First, mainstream economics has allowed for alternative views on rationality, and debates over their relative merits for instance, with concepts such as bounded rationality (which embraces cognitive limitations), or "procedural rationality" (which refers to the rationality of procedures used to achieve certain goals). There are also dissenting views in the field. For starters, Keynes emphasized the importance of psychological behavior, dependent on hunches and animal theories, over optimal choice and expected utility. In The General Theory, he lists a variety of subjective psychological motives underlying consumer behavior, some leading to refrain from spending (precaution, foresight, calculation, improvement, independence, enterprise, pride and avarice), other leading to the propensity to consume (enjoyment, shortsightedness, generosity, miscalculation, ostentation and extravagance).4 These motives are hard to reconcile with the solid view of rational calculated decisions on the part of economic agents. How can there be consistency in choice if somewhat unpredictable psychological mechanisms drive behavior? More recently, there have been serious attempts to understand the role played by such psychological behavior in, for example, the formation of financial bubbles.5 And today, some leading economists do acknowledge that treating individuals as solely pursuing well-being ignores other reasons for behavior such as addictions, weakness of will and other dysfunctional features.6 There is much empirical evidence that psychological biases and seemingly irrational behavior is observed in processes of decision-making under risk and uncertainty. The whole field of behavioral economics is an attempt to reformulate utility functions to explain actual behavior, to the extent that standard expected utility theory is constantly violated.7 One example of this (amongst many) is prospect theory, developed by Kahneman and Tversky (1979). Prospect theory is an alternative to the standard approach of expected utility theory, designed to account for experimental result that show that people tend to perceive outcomes as gains and losses, rather than as final states of wealth (under standard expected utility theory, the same utility should be assigned to identical wealth, regardless of how it was reached), and that subjects display risk-averse behavior with respect to gains and risk-seeking behavior with respect to losses.8 Other anomalies identified empirically are that people often make decisions on the basis of subjective assessments of probabilities that differ from objective probabilities.9 There are two major explanations for these violations: first, the human brain is not well suited to probabilistic calculations (some results in probability theory make no intuitive sense), and second, a probabilistic framework is not applicable to

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Keynes (1964), p108. See for examples Minksys financial instability hypothesis, an attempt to explain the erratic behavior of financial markets and the amplitude of price swings in boom and bust cycles. 6 See Bowles (2004) p100. 7 See for example the work of Kahneman and Tversky. 8 Peoples different sensibility to losses and gains are illustrated with the following experiments. Given 1,000 to begin with, people will take the certainty of a 500 gain over the uncertainty of a bet with a 500 expected value (win 1,000 with 0.5 probability). This is a display of risk aversion when it comes to gains. Given 2,000 to begin with, people will choose the uncertainty of a bet with a 500 expected loss (lose 1,000 with 0.5 probability) over the certainty of a 500 loss. This is a display of risk seeking behavior with respect to losses. These experimental results are clearly inconsistent with expected utility theory in that the choice problems are identical in terms of final states - certainty of getting 1,500 vs. a bet of either winning 1000 (with 0.5 probability) or 2000 (with 0.5 probability) yet subjects choose differently. See Kahneman and Tversky (1979). 9 Examples of subjective assessments of probabilities include the fact that people tend to place a premium on probability jumps from probable outcomes to certain outcomes (this is known as the certainty effect), or that people tend to place disproportionate importance on small probabilities.

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complex economic systems because human actions, which escape the realm of numerical probability, determine future states of the world. Choices faced by economic agents do not necessarily lead to specific and known outcomes, and if those outcomes can be identified, their probability cannot necessarily be quantified. This will give rise, potentially, to inconsistent (irrational) behavior.10 The challenge then becomes how to approach the concepts of rationality and selfinterest in this uncertain world. These are clearly issues that economists have struggled with and will continue to struggle with. While Keynes fully embraced the notion that much of human and consumer behavior is based on spontaneous urges, subjective motives and animal spirits rather than rational calculated decisions, the Chicago school has challenged Keynesian economics on the ground that it has ignored the full implications of people forming expectations as rationally as they could. Today, it is impossible to ignore that the rationality of human behavior is the starting point of mainstream economics.

III.

Rationality, Utility and the Striving For Self-Preservation

a. The Pursuit of Self-Interest Both Spinoza and Hobbes speak of the desire to preserve our lives are the fundamental motor of human existence, and characterize individuals as essentially motivated by selfinterest. For Spinoza, one of our fundamental desires is a striving for self-preservation (the conatus): Each thing, in so far as it is in itself, endeavors to persevere in its being. (IIIp6). Each thing seeks to preserve itself, but only to the extent it is in itself only to the extent it is allowed to follow its own essence. What Spinoza introduces here is the possibility of self-destructive behavior if a thing is not allowed to follow its own essence, if there is, for instance, intervention of external causes (we will explore this idea further). This endeavor to persevere in being also translates into a drive to increase our power to think and act: our minds strive to increase our power of acting (IIIp12), and given Spinozas parallelism, a similar drive would apply to the human body. Our desires and sense of joy and sadness are, for Spinoza, directly connected to the conatus. Desire is defined as conscious appetite, i.e. the conscious effort to persevere in being.11 The passage to a greater power of acting / perfection is experienced as joy, while the passage to a lower power of acting / perfection is experienced as sadness.12 Hence we strive not only to persevere in being, but also to increase our power to act (we will also refer to this power as the potentia). But what is our power to act? For Spinoza, acting is the ability to be the complete cause of an effect, while being acted on is

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Keynes stated his principal disagreement with rational utility calculation in this context: The orthodox theory assumes that we have a knowledge of the future of a kind quite different from that which we actually possess. This false rationalization follows the lines of the Benthamite calculus. The hypothesis of a calculable future leads to a wrong interpretation of the principles of behavior. Keynes (1972), p122. 11 Note to IIIp9, and Part III, definitions of the emotions, def 23. 12 Note to IIIp11 and Part III, definitions of the emotions, def 23. In these definitions, Spinoza refers to joy and sorrow as the passage to a greater or less degree of perfection, rather than the passage to a greater or lesser power to act. However, they are essentially the same thing, given that for Spinoza perfection is the accomplishment of a thing as finished. In the Preface to Part IV of the Ethics, he writes that when I say that an individual passes from a less to a greater perfection and vice versa, [!] we conceive that his power of action, in so far as it is understood by his own nature, is increased or diminished.

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being a partial cause of some effect (IIIdef2). While the drive for self-preservation is relatively intuitive, at first glance the drive to increase the power of ones body and mind is less so. Why do we seek to increase our ability to be the complete cause of effects, and to free ourselves from external causes? After exploring the concept of adequate knowledge, we will show that we can understand the striving for potentia as our striving to be free (see below). Another puzzle here is understanding how our striving to increase our power to act is derived from the conatus (Spinoza relies on the conatus (IIIp6) in his demonstration of IIIp12). Why we would seek to increase our power to act as a consequence of our endeavor to persevere in being is not intuitively obvious. Della Rocca (2008) suggests that the increase of power gives us the tools to be able to meet future threats to our well-being that we do not necessarily know about. Since we do not know exactly what those threats could be, we seek to increase our overall power to meet whatever threats may come up.13 Hence, in essence individual decision making is characterized by reference to personal self-interest, since all human drive, desire and sense of joy is directed at our drive for self-preservation and increase of potentia. This view coexists very nicely with the economic characterization of individuals as utility maximizers. In this framework, our desire for object a over object b would indicate that a is more instrumental in furthering our goal of self-preservation and increase of potentia. In economic terms, a is revealed preferred to b, and we can conclude that the utility of a exceeds the utility of b. Further, Spinoza justifies the pursuit of self-interest and the increase of potentia as an ethical choice (which achieves much more than the purely descriptive economic analysis of decision-making). The fundamental measure of value for individuals (what determines good or bad) can really be thought of in terms of usefulness to increase our power. If objects or people are instrumental to increasing potentia, they are desirable, and it is because they are desirable that we judge them good. Spinoza offers a radical reversal of causation between what we desire, and what is good. We do not desire something because we judge it to be good; rather, we judge it to be good because we desire it: we neither strive for, wish, seek, nor desire anything because we think it to be good, but, on the contrary we adjudge a thing to be good because we strive for, wish, seek, or desire it. (note to IIIp9). Anything that increases our bodys power is good: good and useful are essentially the same thing (IVdef1). We should not be surprised to see Spinoza also associate good with joy (in the note to IIIp39, he writes by good here I understand every kind of joy, and whatever leads to it), since joy is the increase to a greater potentia. This perspective leads to some interesting results. First, nothing is inherently good or bad: some things can be useful (and good) for some individuals, but not for others (interestingly, we find the same intuitions with neoclassical economists, where utility itself is not an objective property of an object but a subjective assessment which varies from one individual to the next14). And second, our emotions of joy and sorrow are direct expressions of our awareness of what is useful to us (IVp8). Utility becomes the main driver of happiness.

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Della Rocca (2008), p172. We also find the same intuition with classical economists. For Marx, for example, use-values are created as soon as a persons needs are satisfied: He who satisfies his own need with the product of his own labour admittedly creates use-values! (Marx, Capital Vol. I Ch.I.1 p131) and The use value of individual commodities depends on the particular needs which each satisfies. (Marx Capital Vol. III Ch. 36 p745). However, in order to be exchangeable, commodities must produce social use-values, i.e. use-values for others (Marx, Capital Vol. I Ch.I.1 p131).

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For Hobbes, the essential human drive is a fundamental drive called the Endeavor, which consists in internal physical motions in the body (small beginnings of Motion, within the body of Man15) that lead to actions (walking, speaking, striking, and other visible actions16). Desire is essentially an endeavor towards something, while aversion is an endeavor away from something. In his Philosophical Rudiments, Hobbes identifies a universal law, or tendency (rather than a right) of men to seek self preservation: For every man is desirous of what is good for him, and shuns what is evil, but chiefly the chiefest of natural evils, which is death; and this he doth by a certain impulsion of nature, no less than that whereby a stone moves downward.17 In Leviathan, Hobbes speaks of mans right to seek self-preservation: each man has a right of nature to use his own power for the preservation of his own nature.18 It appears that this right exists because the drive for self-preservation is in accordance with the laws of nature (we find a very similar idea in Spinozas Theological-Political Treatise, where Spinoza writes that it follows that each individual thing has the sovereign right to do everything that it can do, or the right of each things extends so far as its determined power extends).19 Further, Hobbes also describes mankind as driven by a perpetuall and restless desire of Power after power.20 For this purpose, the power of a man is defined as his present means to obtain some future apparent Good.21 So while Spinoza speaks of a power to act, Hobbes speaks of a power to obtain a future good. For Hobbes, we judge something to be good because it is the object of our desires, while we judge something to be evil because it is the object of our aversion: But whatsoever is the object of any mans Appetite or Desire; that is it, which he for his part calleth Good; And the object of his Hate, and Aversion, Evill.22 Hence nothing is intrinsically good or evil: For these words of Good, Evill, and Contemptible, are ever used with relation to the person that useth them: There being nothing simply and absolutely so; nor any common Rule of Good and Evill, to be taken from the nature of the objects themselves.23 Although Hobbes does not explicitly equate good with useful, this view is very similar to Spinozas in that good is defined in relation to specific individuals, as object of their endeavor. What we have established thus far is that there are many similarities between Hobbes theory of the endeavor and Spinozas conatus, and that both provide support for the view of homo economicus as a self-interested utility maximizer.24 Both characterize human beings as governed by a universal law, a fundamental drive to preserve their own existence and increase ones own capabilities and power to act. But does the fact that we are driven by a desire for self-preservation automatically generate a desire for the means to increase our own individual utilities and guarantee that individuals act to maximize utilities? And practically speaking, how do human beings know where and how to direct their efforts to maximize this utility? Here we will see that both Hobbes and

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Hobbes, Leviathan Ch. 6 p119 Id. 17 Hobbes, Philosophical Rudiments, Ch. 1, sec 7 p8 18 Hobbes, Leviathan Ch. 14 p189 19 Spinoza, TPT, Ch. 16 p195 20 Hobbes, Leviathan Ch. 11 p160 21 Hobbes, Leviathan Ch. 10 p150 22 Hobbes, Leviathan Ch. 6 p120 23 Id. 24 It is also worth mentioning that conatus translates in English as endeavor. One major difference between the two, however, lies in how these concepts fit in the authors overall theoretical framework. Hobbes general hypothesis is to explain everything in terms of material bodies and motion, so that the endeavor is physical in nature, while Spinozas conatus can be conceived both as a purely mental or purely physical phenomena under Spinozas theory of parallelism.

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Spinoza consider many situations where human beings pursue outcomes that are not in their best interest. In fact, both are very sensitive to the destructive powers of passions, emotions, and impulses. Spinoza very specifically acknowledges that while all human beings have a natural right to behave and exist as they are determined to by nature, driven by the conatus, all men are not naturally determined to behave according to the rules and laws of reason.25 In fact, as we will discuss later, Spinoza does not particularly trusts that reason is widespread. In Hobbes case, we can conceive of the entire framework in Leviathan and the desirability of a social contract to be motivated by the desire to avoid the excesses of Civil War. Hence, we are interested to explore the possibility of power-decreasing (utility-decreasing) behavior in their philosophical framework, with the purpose of developing a better understanding of rationality and irrationality.

b. The Possibility of Self-Destructive Behavior One logical consequence of the conatus is that each person desires that which he considers to be good, and avoids that which he considers to be evil (IVp9, emphasis mine). In the note to this proposition, Spinoza does acknowledge that we might occasionally act against our own self-interest, but this will be due to external forces rather than our own essence. For example, a man might kill himself because it is the command of a tyrant, or because he wishes to avoid a greater evil, but not because his own nature compels him to. In this example, it appears that a person is forced to neglect their own self-interest by external circumstances. We could say that self-destructive behavior is not a real choice in that it is not freely determined but directly caused by some external object. Here, I would like to introduce the possibility of another situation where we might find someone acting against his or her own self-interest. Going back to IVp9, it is interesting to note that Spinozas formulation allows for the interpretation that the mere belief that something is a means to satisfaction generates desire. People desire that which they consider to be good for them. There is thus the possibility that people might be, simply put, mistaken in the desirability of a particular outcome. This point is explicitly made in the Theological-Political Treatise: That is, of two things every single person will choose the one which he himself judges to be the greater good, and of two bad things he will choose that which he deems to be less bad. I say expressly what appears to him the greater or lesser good when he makes this choice, since the real situation is not necessarily as he judges it to be.26 We see here Spinoza reasoning in terms of a utility-maximizing outcome (seeking the greater good and the lesser bad), but acknowledging the possibility of errors in judgment. Spinoza argues that we endeavor to think of things that increase our bodys power (IIIp12), and that we seek to bring into existence those things that we imagine will produce joy (IIIp28). But there is the possibility that we might erroneously believe that something is useful to us and desire something that actually could reduce our potentia. In the demonstration to IIIp2, Spinoza writes that when we are agitated by conflicting

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Spinoza, TPT, Ch. 13 p196 Spinoza, TPT, Preface, p198

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emotions we see that which is better and follow that which is worse. In the Preface to the Theological-Political Treatise, Spinoza specifically acknowledges that people are generally ready to believe anything, because when the mind is in a state of doubt, the slightest impulse can easily steer it in any direction, and all the more readily when it is hovering between home and fear.27 He also makes the point that these situations of doubt and fear will lead people to seek advice from just about anyone, with the added problem that people have no self-knowledge.28 In a later passage of the TheologicalPolitical Treatise, which is worth citing in its entirety: Now if human beings were so constituted by nature that they desired nothing but what true reason points them to, society would surely need no laws; men would only need to learn true moral doctrine, in order to do what is truly useful of their own accord with upright and free mind. But they are not so constituted, far from it. All men do indeed seek their own interest, but it is not from the dictate of sound reason; for the most part, they pursue things and judge them to be in their interest merely because they are carried away by the sensual desire and by their passions (which have no regard for the future and for other things).29 In this passage, it is very clear that human beings can be led astray by their passions, and that reason and rationality play a critical role in correcting assessing what is in ones best interest and what increases ones potentia. Rationality can be thought of as the capacity to know what is really useful for ones body. A rational person does not seek outcomes that clash with his or her utility. In his demonstration to IVp59, Spinoza writes that to act according to reason is nothing but to do those things which follow from the necessity of our nature considered in itself alone. Those things that follow from our nature alone are precisely the conatus and the drive to increase our potentia. This is also consistent with IVp65, where Spinoza writes that: According to the guidance of reason, of two things which are good, we shall follow the greater good, and of two evils, we shall follow the less. Here, since good and useful are essentially the same thing, the guidance of reason allows us to choose a utility maximizing outcome. Going back to Spinozas example of a man committing suicide because of external circumstances, we could say that such self-destructive behavior is not irrational. The man did not incorrectly assess what was in his self-interest, but rather was coerced by external forces to reduce his power to act. However, conceivably, there are other situations when we incorrectly believe that we are acting to preserve our interest when we are not. This creates the possibility of irrational behavior in the sense that we are not able to correctly assess what is in our best interest, and are pursuing outcomes that actually decrease our potentia. The question then becomes why we would or would not have the capacity to know what is really useful for our body. In order to answer this question, we must understand how beliefs are formulated. Hence, we must spend some time to properly explore Spinozas theory of how the human mind represents the world, so that we may begin to understand how beliefs may come into existence.

c. Knowledge and the Formulation of Beliefs

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Spinoza, TPT, Preface, p3 Id. 29 Spinoza, TPT, Ch. 5 p72

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For Spinoza, there is a perfect correspondence between physical events and mental events (theory of parallelism), with mind and body essentially the same thing conceived under different attributes (thought and extension), and following similar (though separate) causal sequences (IIp7). Hence, it cannot be said that decisions of the mind determine our actions (of our bodies). Mental and physical events happen simultaneously, they are the same thing. The object of the mind is the body (IIp13), and everything that happens in our bodies is perceived by the mind (IIp12). Our ideas are thus essentially representations of physical events. Further, it is only through idea of modifications of our body that the human mind perceives itself (IIp23). There Spinozas intuition seems to be that ones mind is aware of ones own body in a very unique way (we have a very unique awareness of our own body that we simply do not have with respect to other bodies). Hence the human mind represents all things via the representation of ones own body. It is the starting point of our representations and beliefs. The external world is revealed to us only through our senses (external things in themselves remain unattainable). We perceive external bodies through the changes that they cause in our own bodies, their effects on our bodies (IIp17). Further, our perceptions reflect the nature of our own bodies as well as that of external ones: the idea of these changes involves the nature of both our body and the external body (IIp16). While the intellect consists of ideas (conceptions) actively formed by the mind (IIdef3), imagination is connected to perceptions formed passively, and consists of mental representations of external bodies when they impact our bodies and our senses, which allows us to form images of things as if they were present (IIp17). Imagination, here, is the formation of images, which Spinoza defines as ideas which represent to us external bodies as if they were present (note to IIp17). Hence, we have the ability of representing things to ourselves even when they are not present. We can project ourselves into the future, for instance (this ability is essential to understanding the problem of decision-making under uncertainty, which we will address below). Although Spinoza does not seem to have a specific theory of consciousness, this framework (and specifically the fact that everything that happens in our bodies is perceived by the mind) does not rule out the possibility of subconscious ideas and perceptions. Clearly, there are things that happen in our bodies that we are not consciously aware of. Yet they would have some form of mental representation, since everything in our bodies is perceived by our mind. These representations should then escape conscious thought. In general, however, we are conscious of our desires and intentions, but, and this is a critical point for Spinoza, we are unaware of the causes that determine them: It will be sufficient if I here take as an axiom that which no one ought to dispute, mainly, that man is ignorant of the causes of things, and that he has a desire, of which he is conscious, to seek that which is profitable to him. From this it follows that he thinks himself free because he is conscious of his wishes and appetite, whilst at the same time he is ignorant of the causes by which he is led to wish and desire, not dreaming what they are. (Ethics, Appendix to Part I) Spinozas point in this passage seems to be that we consciously seek that which we think is useful to us, but are unaware of how those desires are formed. This view does seem to provide some support for the purely descriptive theory according to which homo economicus behaves as though he were aiming to maximize a utility function. If people are ignorant of the causes that determine them to desire some particular outcome, it is difficult to describe how preferences are formed as a rational choice. It is more

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appropriate to think of rationality in terms of actual outcomes, and thus to focus on actual observable behavior, which is precisely what modern microeconomic theory has done, treating rationality as consistency in choice behavior. For Spinoza there are three kinds of knowledge (note 2 to IIp40). The first kind of knowledge is based on perceptions by the senses (knowledge from vague experience) and on signs (when we associate certain ideas to words). Spinoza refers to it as opinion or imagination. The second kind of knowledge is that derived from possessing adequate ideas of properties of things. Spinoza refers to it as reason, and further indicates that the foundations of rational thought are those things common to all things (Demonstration to IIp44), to the extent that people have adequate ideas of certain common properties of things (IIp38).30 The third kind of knowledge is the rather mysterious intuitive science. Knowledge of the second and third kind is necessarily true, and generates adequate ideas. On the other hand, the first type of knowledge is a source of error and of inadequate ideas, as it can be the cause of falsity (IIp41). Spinoza introduces here the possibility of error and inadequate ideas, linked to knowledge based on imagination and sensory experience. Further, he also establishes that knowledge of external bodies (IIp25), of our bodies (IIp24), and of our minds (IIp29) is inadequate. Why is it so? Could this inadequateness play a role in our inability to discern what is in our best interest? In the Note to IIp29, Spinoza seems to associate our inadequate knowledge of the human mind with the fact that ideas that are determined externally are perceived in the common order of Nature where chance coincidence rules. This gives rise to inadequate ideas. On the other hand, clear and distinct perceptions require that ideas be internally determined. Adequate ideas would thus require internal determination (the mind needs to be the complete cause of such ideas), while inadequate ideas are determined externally (the mind is not the complete cause of such ideas). But what does this mean exactly? Deleuze gives the following interpretation: an adequate idea is the knowledge of the true causes of things, rather than mere knowledge of their effects (Deleuze, 1978-198131). Indeed, Spinoza tells us that the knowledge of an effect depends upon the knowledge of its cause (Iax4). For example, consider what happens if I take arsenic and die of poisoning (this is Deleuzes example). If I can merely understand the effect of an external body (the arsenic) on mine (i.e. what happens to my body once I have taken arsenic), I only have inadequate knowledge. If on the other hand I can understand the relationship between arsenic and my own body (le rapport caractristique des deux corps) -- as I might, for instance, if I know the chemical structure of the two, I have adequate knowledge. If we consider that for Spinoza the complete cause of a thing can be thought of as the complete explanation of that thing (Della Rocca (2008), 118), Deleuzes interpretation can be reconciled with Spinozas focus on ideas being determined internally or externally. If my current mental state is that I understand the relationship between arsenic and my body, then I already understand that I will die if I take the poison. Hence if I do, the idea of the effect of the poison on my body is fully explained by my prior existing mental state. If, on the other hand, I do not currently understand this relationship, I do not understand arsenic can kill me, and I do absorb the poison, the idea I have of the effect of this poison on my body is new to me (this idea was not already contained in my mind), and as such is caused from outside my

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Spinoza gives examples of what these common properties might be in the Corollary to IIp38: All bodies, for example, involve the conception of one and the same attribute and may be absolutely in motion or absolutely at rest (lem2). We can only speculate what other common properties might give rise to adequate ideas. 31 Class on 24/01/1978 Laffect et lide

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mind (explained by an external source). Adequateness becomes a technical term Spinoza uses to designate existing ideas that can be fully explained and generated by my prior state of mind (or future ideas that can be explained by my existing state of mind. Keeping Iax4 in mind (knowledge of an effect depends upon the knowledge of its cause), adequate ideas give us true knowledge and the basis for rational thought. We can aspire to more adequate ideas only to the extent that we can free ourselves from external causes. Here it would appear that independence from external causes is desirable because it allows for a true understanding of causal relationship, which enables us to produce effects on our own. Spinoza would say that our minds become active (IIIp3). Although human absolute freedom does not exist to the extent the human mind is not self-caused (IIp48), there is human freedom to the extent adequate ideas increase our ability to exist from the necessity of our nature alone, free from external interference (Idef7). Here we can answer a question we asked earlier regarding our drive to increase potentia. The increase our power to act is desirable because it increases our ability to be the complete cause of an effect. This in turn allows us to be free. Our striving for potentia is, in essence, our striving to be free. IV. Explaining Irrational Behavior

We now address why we would not have the capacity to know what is really useful for our body what determines irrational behavior. We are interested to explore the philosophical framework in both Spinoza and Hobbes to explain irrationality. a. Inadequate Knowledge If we had all the information required to explain events that are relevant to us and that impact our well-being, we would be in a position to make well-informed decisions regarding our self-interest and the increase of our potentia. Here we would like to argue that our ability to be consistently rational is dependent our ability to develop adequate knowledge. In IVp26, Spinoza writes that reason is nothing other than our ability to understand. The first kind of knowledge (which does not require adequate ideas) gives us understanding, but it can also lead to error. Hence if we want to be consistently accurate in our judgment and understanding, we need adequate knowledge. There is the very real possibility that inadequate knowledge can lead us to act in a counter-productive way even if we are seeking to increase our potentia (and in that sense are acting rationally), because it can be the source of error. Given Spinozas framework, it seems that the human mind will rarely have unconfused and adequate ideas, to the extent that we do not often understand the true causes of things, and we rarely understand the causes that determine us. In the Note to IIp29, Spinoza writes that the mind has inadequate knowledge to the extent it contemplates many things at once. Our minds are constantly bombarded with information -- outside objects impact our own bodies, and outside ideas impact our own ideas.32 Hence, many of our ideas originate from outside of our own minds. Unless we are able to clearly distinguish between what is externally caused and what is not, our ideas are bound to be

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Under Spinozas theory of parallelism, mental and physical states follow their own independent causal chains.

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somewhat confused, and we will be limited to observing effects rather than causes. In the Appendix to Part IV of the Ethics, Spinoza writes that human power is very limited and is infinitely surpassed by the power of external causes. (IVappendix32). Further, the impact of outside causes brings some level of unpredictability to our decision-making to the extent that we may not be able to fully appreciate the consequences of some particular action. Our acquisition of adequate knowledge is thus desirable in that it reduces our vulnerability to external causes, but in practice is very difficult to obtain. With this perspective in mind, in theory homo economicus can consistently make decisions that truly maximize utility only to the extent that perfect information is assumed. However, this assumption cannot really be justified to the extent that rational decisionmakers operate in a world where information is costly, and where all relevant information might not even be practically available. For example, there is increasing evidence that time-series data in finance or economics might display elements of chaotic behavior. Chaotic systems are deterministic (so that we would expect predictable behavior at least on a theoretical level), but we find that such systems are so sensitive to initial conditions that any initial measurement error (even infinitely minor) produces in the long-run very large divergences between observed and predicted data (popularly known as the butterfly effect). Our ability to predict the evolution of such systems (Spinoza might say our ability to acquire adequate ideas of the system), and thus our explanatory power is severely limited. There is increasing evidence that chaotic dynamics are at play in much of our environment, from natural (weather, ecology, etc.), to physical (communications circuits) or economic systems (stock market data), which severely undermines our ability to form adequate ideas. In much simpler (non chaotic) systems, we might still find that information is costly to acquire, so that even though we could aim for adequate knowledge, we are limited by our time and budget. The concept of bounded rationality acknowledges the practical limitations of acquiring and processing information, and incorporates these constraints in the characterization of agents as seeking to reach a sufficient rather than optimal level of utility. If for example we are looking to hire someone for a job, we cannot choose the absolute best person (this would require that we screen all potential candidates in the world). But we may be perfectly content with a person who is good enough. We satisfice rather than optimize. This framework does not mean that rational choice has failed as a descriptive model of human behavior, but rather that while intending to be rational, decision makers might sometimes fail to make rational decisions.

b. Inability to Distinguish Between the Contingent and the Necessary Many choices we make involve some assessment of situations of uncertainty, for instance where there is more than one possible outcome. According to Spinoza, our ability to choose properly depends on our ability to distinguish between imagination and reason. Spinoza argues that uncertainty arises from the use of imagination over reason. The following example is given in IIp44. If a boy is used to seeing three different persons (Peter, Paul and Simeon) at different times in the day, he will associate each person with the particular moment in the day in which they are seen, especially if the sequence is often repeated (there is reference here to some sort of inductive process, drawing a generalized conclusion from specific empirical observations). If the order is reversed, however, the boy will be confused, and he will be unable to associate the presence of these different persons with specific present, past or future moments. He will imagine things as contingent. Reason is the ability to overcome this limitation and conceive

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things as they are in themselves, that is necessary and not contingent i.e. without this uncertainty. In short, we must be able to properly process the information that reaches our senses. Here I would like to suggest that uncertainty caused by the inability to distinguish the necessary from the contingent is one source of confusion in the decision-making process that might lead to irrational counter-productive behavior. Spinoza indicates that reason is the ability to explain things without relationship to time (Corollary to IIp44): it is the nature of reason to perceive things under a certain form of eternity. One interpretation of this statement could be two-fold. First, rational individuals should be able to properly incorporate future events in the decision-making process. We can see illustrations of this in economics with the concept of the time-value of money (discount rates and interest rates allow for the pricing of different financial benefits occurring at different points in time the entire field of finance is built on this assumption). This would also seem to require that we understand causality between seemingly unconnected events. If we understand true causality, we can envision a full sequence of related events, regardless of their timing. This understanding would seem to require adequate knowledge. Second, rational individuals should be able to overcome empirical uncertainty. We should not allow ourselves to be fooled by appearances, the randomness of data, seemingly conflicting information, etc. This seems to require that we embrace a scientific approach (although in this context the term itself is not used by Spinoza) to uncover the true nature of things, and discover patterns of regularity in nature hiding behind seemingly random data. Here, Hobbes definition of the scientific knowledge jumps to mind: science is defined as the knowledge of consequences.33 It is unclear to me how Spinoza would address the issue of true uncertainty in the world (such as that arising in quantum physics for example), or in modern terms, the concept of risk (different future outcomes are possible, and we can think of their occurrence in probabilistic terms). We can only speculate (since we have no evidence that Spinoza knew of Pascals work on probability theory) that the fields of probability and statistic would have appealed to his desire to perceive things in as necessary, and not contingent. In a sense, probability and statistics allow us to overcome uncertainty in the world. The relevance of this in economic theory would relate to the ideas that rational agents can assess probabilities and maximize utility in a probabilistic environment. We do not know the future, but we can still seek to maximize utility and make rational decisions (it still makes sense to buy fire insurance, even if in the end, our house is not destroyed by fire, and it still might be irrational to play the lottery given the odds and the negative expected value of the bet, even if we do win). It seems that Spinozas description of the role played by the contingent directly contributes to the formation of inadequate ideas. Clearly, if we are misled by empirical data and do not understand the true relationship between different events (if for example we are confused by the presence of Peter Paul and Simeon), we cannot form adequate ideas. Our ideas of the world are inadequate in that they cannot be explained by our prior state of our mind. Hence there is an element of surprise and unpredictability to the word. This unpredictability may lead us to choose outcomes that do not increase our potentia, again because we do not fully understand the consequences of our actions and the context we are in.

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Hobbes, Leviathan Ch. 9 p147

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c. Emotions and Psychological Biases In his Preface to Part IV of the Ethics, Spinoza writes that a man who is under the control of his emotions is not his own master, but is mastered by fortune, in whose power he is, so that he is often forced to follow the worse, although he sees the better before him. In the Theological-Political Treatise, he writes that everyone is guided by their own pleasure, and the mind is very often so preoccupied with greed, glory, jealousy, anger, etc. that there is no room for reason.34 Here the link between emotions and counter-productive behavior is very clear. Spinoza calls bondage the impotence of man to govern or restrain his emotions. At the end of Part III of the Ethics, Spinoza gives us a general definition of the affects (emotions): Emotion which is called animi pathema is a confused idea by which the mind affirms of its body, or any part of it, a greater or less power of existence than before; and this increase of power being given, the mind itself is determined to one particular thought rather than to another.35 Thus affects are in essence ideas, i.e. representations of the body. More specifically, they are representations of the bodys current power to act. Finally, passions and emotions are inadequate ideas. The justification for this, given by Spinoza a few sentences later, is that we have shown that the mind suffers only in so far as it has inadequate or confused ideas. It would appear that for Spinoza all emotions entail some level of suffering.36 If emotions are inadequate ideas, we would expect that they may interfere with ones ability to fully appreciate the consequences of ones actions, and that this may lead to irrational behavior. Indeed, we find that Spinoza gives specific examples of this, and more generally, provides a framework that allows us to think about emotional decision-making. Further, Spinoza writes that emotions make us changeable and inconstant (IVp33) because emotions cannot be explained by our nature alone, but instead are determined by external causes. Hence the same person might be affected differently by the same object. Hobbes makes a similar observation in Leviathan: And because the constitution of a mans Body, is in continuall mutation; it is impossible that all the same things should alwayes cause in him the same Appetites, and Aversion.37 This would seem to undermine the assumption of rationality as consistency in decision-making prevalent in neoclassical economics. Hobbes also has a theory of passions in Chapter 6 of Leviathan. Passions are the interior beginnings of voluntary motions. Recall that Endeavor is any internal physical motion in the body, so that it would thus appear that passions lie at the beginning of any Endeavor. In this framework, passions essentially motivate all actions. Only certain excessive passions produce irrational behavior. Generally, chapter 8 of Leviathan discusses some defects of the mind, stupidity or slowness of motion, which are caused by mens passions. Hobbes refers to strong passions as a cause of Madnesse and as producing strange and unusual behavior.38 Rage and fury are Madnesse caused by excessive love, pride, and desire for revenge. One example of irrational behavior produced by Madnesse is melancholy, which subjects a man to causeless fears, such as superstition. These excessive passions are dangerous because they can lead to irrationality on a large scale and social unrest, as Hobbes beautifully describes: Yet when many of them [men] conspire together, the Rage of the whole multitude is

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Spinoza, TPT, p.199. Spinoza, Ethics, Part III, Definitions of the Emotions, General definition of the emotions 36 Here I am not entirely clear as to why this is the case. 37 Hobbes, Leviathan Ch. 6 p120 38 Hobbes, Leviathan Ch. 8 p140

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visible enough. For what argument of Madnesse can there be greater, than to clamour, strike, and throw stones at our best friends? Yet this is somewhat less than such a multitude will do. For they will clamour, fight against, and destroy those, by whom all their lifetime before, they have been protected, and secured from injury.39 In this passage, the rage of the mob leads people to counter-productive behavior: the destruction of friends and allies who have their best interest at heart. For a more complete description of various psychological mechanisms governing emotions and passions, we turn to Spinoza. First, Spinoza describes the general mechanism of the association of mental states that occur together. In IIp18, Spinoza writes: If the human mind has at any time been simultaneously affected by two or more bodies, whenever the mind afterwards imagines one of them, it will also remember the other. In his Note to IIp18, Spinoza displays a remarkable (in that it is quite ahead of its time) understanding of the subjective nature of the organization of memory (how information is stored and recalled in our minds): memory is a certain concatenation of ideas, involving the nature of things which are outside the human body a concatenation which corresponds in the mind to the order and concatenation of the modification of the human body. Memory is thus essentially ideas of modification of our bodies (since all external things affect us through our senses), connected together in the same sequence as the occurrence of the modifications they represent. These connections are thus personal in nature, dependent on ones prior life experiences. Hence our recollections and mental associations are also highly subjective. Spinoza writes that in this manner each person will turn from one thought to another according to the manner in which the habit of each has arranged the images of things in the body (note to IIp18). Here Spinoza shows a prescient understanding of the concepts of stream of consciousness and free association! He also establishes a similar result with respect to emotions in IIIp14 (this is hardly surprising since emotions are also ideas): if the mind has been simultaneously affected by two emotions, whenever it is affected by one, it will also be affected by the other. Let us imagine that we are a professional tennis player who just started wearing a new shirt, and that we win a tournament. We might associate wearing the shirt with being successful in the game. This might, in turn, lead us to believe that the shirt is responsible for the games outcome. We might insist that we must continue wearing the shirt.40 This is, in essence, irrational (economists would say that the marginal utility of the shirt has increased, even though our probability of winning the game is affected by our skill level only, not our clothing). Spinoza specifically alludes to the possibility of loving or desiring certain things accidently (in IIIp15). If two things affect us at the same time, we might confuse the effect of one for the other. Hence we might erroneously think one thing to be responsible for our increase in power, when in fact this increase is attributable to some other thing (as is the case with our tennis shirt example). The logical consequence is that this belief will lead us to desire something when it is not necessarily useful to us. In the Appendix to Part IV, Spinoza writes that superstition seems to affirm that what brings sorrow is good, and, on the contrary, that what brings joy is evil. (IVappendix31). Further, in the same proposition (IIIp15) Spinoza also considers the possibility of loving or hating out of sympathy or antipathy, when some objects affects us with joy or

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Hobbes, Leviathan Ch. 8 p140-141 There are many examples of these kinds of superstitious practices. Bjorn Borg allegedly started growing a beard during tournaments because he was unshaved when he won his first Wimbledon final.

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sorrow because are somewhat like objects which usually affect us with those emotions. Although Spinoza does not explicitly derive this result from IIp18 (and IIIp14), this would seem to follow from the principle of the association of ideas (and emotions). If for example our best friend in high school smoked a certain brand of cigarettes, we might associate our friend with the brand. If we then meet someone else who smokes the same cigarettes, we might be reminded of our friend, and we might experience joy (remember that joy is the experience of passing to a greater power of acting). To go back to Spinozas claim that some objects might cause us joy if they are alike objects which usually affect us with joy, our friend and this new person are alike in that they smoke the same brand of cigarette. Spinoza defines love as joy accompanied with the idea of an external cause and hate as sorrow with the accompanying idea of an external cause (corollary to IIIp13). Identifying this new person as the source of our joy, we will love that person this establishes Spinozas result that we might love out of sympathy. However, we immediately note that the connection between our friend and this new person is a rather weak one. After all, smoking the same brand of cigarette as our dear friend does not guarantee we will get along. Hence, we have evidence of some level of psychological bias. We immediately are well disposed towards a person even though that person might turn out to be our worse enemy. Hence, we love someone who might in fact decrease our power of acting irrational behavior on our part. Of course, we might quickly adjust our disposition when we realize this fact (when, for example, the person does something to hurt us). Nonetheless, even so the power of association momentarily distorts our ability to act rationally. Another example of a psychological bias is our tendency to imitate the emotions of others who are like us. If we imagine anyone who is similar to us to be affected by an emotion, we are also affected by a similar emotion (IIIp27). Spinozas explanation is that our ability to imagine another persons emotion involves a modification of our body similar to that other persons. Spinoza specifically notes that our ability to imitate emotions applies to desire (the imitation is then called emulation, which Spinoza subsequently defines as the desire which is begotten in us of a thing because we imagine that other persons have the same desire41). In short, we desire what other people (similar to us) desire. We want what other people have (this idea will, centuries later, be formally explored by Ren Girard with his theory of mimetic desire42). It is possible that what other people desire will increase our own potentia (since they are similar to us), but this is not guaranteed. People might want or need to increase their potentia at our expense. Hence, we again have the possibility of a psychological bias, leading to irrational decisions. The imitation of the affects also explains envy and ambition (note to IIIp32). If we imagine someone to enjoy a thing that only he can possess, we do all we can to prevent him from possessing it (IIIp32). We do this because we imitate this persons desire, and because we imagine that he is interfering with fulfillment of our desire. Yet again, there is no guarantee that the object of desire will increase our potentia, so we find here yet another example of counterproductive irrational behavior (we are wasting energy trying to prevent this person from possessing something, instead of focusing on the increase of our own power of action). At the end of

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Part III, Definitions of the Emotions, def. 33 An interesting thing to note, here, is that Spinozas intuition that we imitate people who are similar to us is very relevant indeed. Ren Girards theory of mimetic desire, as developed in his book Mensonge Romantique et Vrit Romanesque is that mimetic desire is unlikely to apply to situations where the person we would envy belongs to a very distant social circle (kings, celebrities, etc.). This is because we are unlikely to consider this person as a rival. Mimetic desire is more likely to apply to someone who is close to us friend, work colleague, neighbor.

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Part III of the Ethics, Spinoza defines many other emotions: contempt, self-satisfaction, anger, vengeance, cruelty, consternation, drunkenness, avarice, lust, etc. We do not have space in this paper to explore them all, and so have limited ourselves to emulation and the general mechanisms of association and imitation, but we would find countless examples of decision-making that reduces our power to act. One final example of a psychological bias is that Spinoza explains how we can anticipate future affects. If we represent future pain or pleasure, we experience present pain or pleasure (IVp9). This present pain or pleasure is less strong than its future counterpart; for instance, the pain of anticipation is less strong than the anticipated pain itself. Further, the degree of pain (or pleasure) caused by anticipation is a function of how far off in the future the anticipated pain (or pleasure) is (IVp10). There is thus a distortion produced by the temporal differences between two anticipated affects. This can lead us to act to our detriment and reduce our power to act because we attach too much importance to affects that are near to us in time. For instance, the desire generated by the determination that a future object is good or bad for us can be extinguished or restrained by the desire of things which in the present are sweet (IVp16). In the same way, the presence of some level of uncertainty somewhat inhibits our desire, as compared with things that are certain (or present) (IVp17). These intuitions are very interesting in that they are corroborated by modern behavioral economics. Many choices we make involve some assessment of a future outcome, and a decision as to whether to incur a present benefit at the cost of a future loss (or vice versa). Our ability to choose what is in our best interest depends on our ability to properly assess the payoffs, which involves some assessment of timing differences and risk. The concept of a financial investment, for example, requires that we sacrifice something now (the cost of purchasing a financial instrument) for a future benefit (a future cash flow).43 These timing differences might be accompanied with some level of uncertainty, because a future payoff is inherently uncertain.44 In this context, one example of an irrational action generated by emotions that is specifically addressed by Spinoza in his theory of anticipated pain and pleasure is that we might desire things because they give us immediate pleasure in spite of the fact that they can turn out to be harmful to us, or we might neglect to pursue something which may be slightly disadvantageous in the short-run but very advantageous in the long-run. As discussed in Section II, there is much empirical evidence that psychological biases and seemingly irrational behavior is observed in processes of decision-making under risk and uncertainty. We find that in valuing uncertain outcomes, people tend to place a premium on probability jumps from probable outcomes to certain outcomes45 (this is known as the certainty effect) illustrating Spinozas intuition that the presence of some level of uncertainty somewhat inhibits our desire. For example, experiments might show that reducing the probability of a loss from 20% to 10% is less valuable than reducing the probability of that loss from 10% to 0%. We also find that in valuing future outcomes,

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Many non-financial decisions also involve this kind of trade-off. Should we over-indulge in a current meal at the cost of indigestion later? Should we accept a current sacrifice (practice scales on a music instrument) for a future benefit (play the instrument)? 44 As it turns out, even a risk-free investment in finance, such as a U.S. Treasury obligation, includes a risk component. Although highly unlikely, it is not theoretically impossible that the U.S. government default on its bond (as the current economic environment shows the Chinese government recently hinted at this possibility!). 45 Kahneman and Tversky (1979).

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people discount events in the near future differently than events in the far future.46 For example, many people will prefer $10 today to $15 next year, but will prefer $15 in three years to $10 in two years. This type of behavior is inconsistent with models of rational choice, and is usually characterized as impulsive behavior by economists.

V.

Conclusion

Hobbes and Spinoza provide support for the characterization of homo economicus as seeking to maximize utility. Utility can be interpreted as the ability to increase our power to act and persevere in being. Rationality can be thought of as the capacity to know what is really useful for ones body, and act accordingly. If I believe something to be useful to me, this belief will generate a desire (since desire is the conscious effort to persevere in being). The increase of individual power and utility results in actual pleasure and happiness. Yet our ability to choose what is in our best interest (and thus act rationally) depends on our ability to correctly assess this usefulness. Spinoza gives use plausible accounts of different possibilities of irrational decision-making. First, our understanding of the world is limited by the information we can obtain, which limits our ability to form adequate ideas. This means we may not be able to fully appreciate the consequences of some particular action, which introduces an element of unpredictability to our decision-making, and vulnerability to outside causes. Second, for Spinoza reason is the ability conceive things as they are in themselves, i.e. without uncertainty. This would seem to require that we be able to overcome empirical uncertainty and embrace a scientific approach to fully understand causal relationships, and not be fooled by appearances. Even if we operate in a world with perfect information, we must still make sense of that information and develop adequate knowledge. We can aspire to more adequate ideas only to the extent that we can free ourselves from external causes. In this process, we become more free, so that for Spinoza there is an interesting association of rationality, knowledge, freedom they are all connected. Here, Spinoza allows us to conceive utility as something quite active (as opposed to mere passive enjoyment). This active quality, I believe, is an interesting perspective for economists. Finally, our ability to act rationally is limited by the influence of emotions and passions in our decision-making. We find in Spinoza a thorough account of a variety of psychological biases that might distort our ability to assess and desire useful outcomes. As we initially outlined, there are attempts to explore irrational behavior in economic thinking. For instance, behavioral economics has been working to analyze actual behavior that disproves traditional utility functions. Yet for economists the rationality of human behavior always seems to be conceived as a starting point, with irrational behavior a departure from the rational model, which needs to be explained and accounted for. Behavioral economics, for instance, has attempted to reformulate utility

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See for example Ainslie (1975). Specifically, hyperbolic discounting evidences time-inconsistent evaluations whereby the rate of discount between time t and t+1 will be lower than the rate of discount between t+1 and t+2.

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functions to incorporate irrational behavior.47 The reformulation of a utility function allows economists to explain behavior in terms of systematic decision procedures, internalized in the model. This, in turn, preserves consistency in behavior, and eliminates (incorporates) departures from the rational model. For Spinoza, on the other hand, irrationality is really the starting point of the human condition. Men are agitated by emotions, which make them changeable and inconstant, so that consistency in decisionmaking cannot be the norm. If so, economists need to reconsider the assumption of stability of preferences. The entire Part V of the Ethics is devoted to the path to reason (and to the third kind of knowledge), as well as asserting the power of the mind over emotions. There is a spiritual quality to this process, which, as described by Spinoza, is very difficult, but can nevertheless be found.48 Hence, if we take Spinoza seriously, rationality is not something that can be assumed as a general rule if we are to describe actual behavior, but instead is a desirable guide to human behavior. This distinction between the descriptive and the normative is important for economists to keep in mind.

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One example of this (amongst many) is prospect theory, developed by Kahneman and Tversky (1979). Prospect theory formulates an evaluation model whereby a value function v assigns to outcome x a value v(x) which reflects the subjective valuation of the outcome defined relative to a benchmark (typically the current asset or wealth position) rather than to final wealth positions or payoff outcomes. The model also replaces probabilities with decision weights !(p), which reflect the impact of p on the decision process rather than the objective probability. The overall utility of a prospect becomes: U ( x1, p1;...; x n , pn ) = " ( p1 )v ( x1 ) + ... + " ( pn )v ( x n ) . 48 Note to Vp42.
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Primary Sources: The edition of the Ethics is that published by Hafner Press, 1974 The edition of the Theological-Political Treatise is that published by Cambridge University Press, 2007 The edition of Leviathan is that published by Penguin Classics, 1985 The citation from Philosophical Rudiments is taken from the introduction of Leviathan. References: Ainslie (1975), Specious reward: A behavioral theory of impulsiveness and impulsive control. Psychological Bulletin, 82, 463-496. Bowles (2004), Microeconomics: Behavior, Institutions, and Evolution, Princeton University Press. Della Rocca (2008), Spinoza, Routlledge New York Deleuze (1978-1981), Les Cours de Gilles Deleuze, Intgralit Cours Vincennes (transcript from classes), available at webdeleuze.com Kahneman and Tversky (1979), Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263292. Keynes (1964),The General Theory of Employment, Interest and Money, Harcourt, Inc. Keynes (1972), The General Theory and After Part II: Defence and Development, Collected Writings, Palgrave-Macmillan. Marx K. (1990), Capital, Volume I, London: Penguin Classics Marx K. (2007), Capital, Volume III, New York: Cosimo, Inc.

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