26.3.1 On Pure and Perfect Rationality

Milton Friedman's statement must be traced back to its most fundamental ground, which is the assumption that individuals behave rationally. Behaving rationally means, for economists, that when making decisions, people evaluate thoroughly the situation, depending, for instance, on what they know about the product they want to buy. They are supposed to be able to rank without ambiguity their possible choices, and consequently to make the best choice. Such a description is ultimately grounded on the hypothesis that people are purely and perfectly rational. Being purely and perfectly rational amount to knowing everything about a product or about any economic situation and, as a consequence, being able to systematically make the best choice of any considered transaction, by ranking systematically the possible choices and automatically choosing the best – for example, the best quality and the lowest price.

The hypothesis of “pure and perfect” rationality amounts to assuming that people know everything about any situation, and that they consequently can do everything. In other words, the dream is that people be omnipotent due to being omniscient – the dream is that people are like God: omnipotence and omniscience being the two theological characteristics of the Judeo-Christian god. It is an assumption based on total transparency and consequently on the total control of humans over their situations. Such a dream of total transparency and control is of course a mere dream. It is not realistic. People are actually always embedded in situations they do not know perfectly, because things are actually always somewhat dark. In other words, people's rationality is not “pure and perfect,” to the contrary. It is bounded (March and Simon, 1993). And rationality being such bounded makes that organizations' rationality is also rooted on darkness and tacit skills and routines contrary to transparency, under control, and totally clear operations (Nelson and Winter, 1982).

Let us deepen the understanding of the issues related to the assumption of perfect and pure rationality.

Such an assumption is to be traced back to its very origin, which rests on the Renaissance humanism. Without arguing in detail, we may say that the European humanism consisted on a claim against “nature” as well as against the Judeo-Christian God. The core of the humanist intention may be described as the intention to take power over nature for the sake of humanity. Taking power over nature is to be done to the detriment of the Judeo-Christian God (Bibard, 2005). One of the most important consequences of humanism was that humans incorporated the dream as a reality. Among many, the mere efficiency of the modern sciences and technologies, which resulted from the humanist decision, to become, as the French philosopher Descartes (2005) states “masters and possessors of nature” was convincing enough to make people progressively develop on the belief that humans had reached the goal: the goal being that the whole world would be put under human control. Such a dream was radically criticized by some of the most famous philosophers of the twentieth century (see, e.g., Heidegger on technology, Heidegger, 1982). Nobody nowadays, indeed, thinks seriously that everything may be put under human control. The recent tsunamis – not only the Fukushima one, but some human tsunamis, such as the Arab spring, or precisely such as the subprime crisis one – show that humans do not control reality as they dream of. This is true theoretically. But observing humans and organizations in practice shows that people behave as if a total control of humans over their environment was possible, true, and the right way to operate reality. In other words, in practice, humans are quite naïve about their power on reality.

Before deepening the clarification of some huge consequences of such naïveté, it is necessary to remind ourselves a second origin of the economic notion of “pure and perfect rationality.” This rests on the birth of modern political science. Modern political science was created by some philosophers during the Renaissance period, but it was made particularly clear by the philosopher Thomas Hobbes. Hobbes was the first in defining humans not as “political animals” – for example, as collective beings – but as free, equal-to-each-other, and rational individuals (Hobbes, 1968). With Hobbes, the new anthropology was born, created against the ancient anthropology coming from the Aristotelian understanding of humans.

The specificity of Hobbes's understanding of reality is that it became a self-realizing prophecy. Hobbes defined humans as free, equal-to-each-other, and rational individuals in order to ground a solid understanding of politics, able to help the governments' sustainability. But because of the way his thought was understood by his heirs, and particularly by the liberal philosopher John Locke (see Locke, 1980), the understanding of humans as being (selfish) free, equal-to-each-other, and rational individuals became the taken-for-granted anthropology. This means that people unconsciously believe that they are actually and legitimately (selfish) free, equal-to-each-other, and rational individuals.

It is now time to come back to our previous statement.

People's rationality is not “pure and perfect,” but on the contrary, radically bounded. And people's rationality is bounded because of the organizations' and more generally life's routines. People need routines to do what they do in their daily lives. Otherwise, they cannot even live (Nelson and Winter, 1982; Polanyi, 2001). People's rationality being bounded means that people do not understand the whole as they should, in order to properly evaluate the consequences of their actions. People act and behave on the basis of their practices, which bound their understanding of reality. But they simultaneously as of now believe that they are endowed with “pure and perfect” rationality.

This is indeed the true root of the liberal understanding of reality. Liberal and neoliberal economists (Smith, Hayek, Friedman, and others) argue that the problems of economic life are not due to people's selfishness and individualistic behavior but to the institutional interferences with and into the markets. Should states and, generally speaking, institutions make room for individual initiatives and interactions, markets would by themselves operate the best. The famous Adam Smith's invisible hand would operate as a perfect regulation of the economic life.

Ironically enough, this understanding of reality is quite imperfect. It presupposes that a theoretical norm is (already) indeed real, which is not true. The problem is that such an understanding becomes the norm. In other words, the liberal understanding of reality became the normative or conventional taken-for-granted understanding of reality. And at the end of the day, people who do not think and question theoretically the world take for granted what they are told, without examining and taking any distance with what they are told.

What are they sometimes told? They are told that they are rational and that making profit ort increasing their profit suffices for them to comply with their social responsibility. “Be selfish, you will thus support society.” Why should people doubt such a statement, particularly when it is written by such an important scholar as the Nobel Prize winner Milton Friedman? Here is the real problem of the Milton Friedman's statement: mixing reality and norms, and making public on the basis of this confusion a statement that people would just make theirs without further questions. Such a statement plays a real role in society and would certainly deserve more prudence for a scholar such as Friedman (see Strauss, 1952).

The consequences of such an understanding of reality, and of stating that a norm is indeed “already” real – the normative understanding of humans as “already” free, equal, and rational individuals – is the introduction of a hidden, invisible, and deeply deleterious complexity in reality. Because people behave as if they were purely and perfectly rational, free, and equal to each other, when this is absolutely not the case, they barely increase the spontaneous complexity of reality. People unconsciously believe that they are rational and that they have their environment under control – but they fight on this very basis against each other to impose their understandings of reality, which are actually bounded. Here we are with the deleterious naïveté we previously alluded to. This naïveté about themselves makes that people actually ignore a huge amount of aspects of reality, and that they do not know that they do not know about this naïveté. Indeed, ignorance is quite often, if not always, self-ignorance.

The way we put the issue may sound exaggerated. It is not. The High Reliability Organizations sociological studies (with scholars such as Karl Weick, Kathleen Sutcliffe, Charles Perrow) show that one of the main origins of catastrophes and organizational problems is that people do not know that they do not know many aspects of their environment including themselves. In other words, should people know about their structural ignorance, about themselves, and about their environment, they would be much more ready to learn and behave in an efficient way to help organizations and networks, if not society, to do their jobs the right way (see, e.g., the thorough analysis of the Bhopal case by Karl Weick for instance; Weick 1988, 2010). Because daily organizational life separates people, embedding them in bounded routines and skills, without being aware of it, people tend structurally to ignore their continuously changing environment and need to continuously relearn about it. But contrary to what they should know, due to the “control culture” we described above, they most often unconsciously believe that they know everything they should know and continue to behave out of date.

This happens when difficulties if not crises like the subprime one start looming ahead. It suffices to make even more clear that people do not want to imagine that they ignore their environment, because such an ignorance would endanger their capacities to comply with their partners' expectations – including the shareholders' – to make see how crises are prepared by the short-term and long-term tension described above. Accepting uncertainty, ignorance as a matter of fact, and continuously learning or being prepared to learn on such a basis would mean behaving on the basis of a structurally innovative, creative, and flexible attitude, which would favor real learning processes, through unlearning (skills, routines, know-how) and relearning.

Being short-term-oriented amounts to repeating already known procedures, operations, skills, and routines, on the basis of a radical compliance with others' expectations, and becoming more and more blind to oneself and the environment. Global crises or “tsunamis” are rooted on aggregated very local and apparently insignificant behaviors and attitudes.

Shareholders' expectations concerning the corporations' profitability are not automatically rooted on selfish and ill-intentioned behavior – far from it. But they certainly are the most often naïve. Should shareholders understand clearly their own best interest, they would support companies that do not systematically maximize their profit on the unique basis of the short term.

To finish this brief presentation of the reasons why there is a tension between financial markets and corporations, let us present some solutions to the contradictory dynamics between the short- and the medium- if not the long-term attitudes.

26.4.1 An Organizational Theory Perspective

The high-reliability organization trend makes clear that organizations that confront crises in contexts of complexity and uncertainty (at least, the unexpected) should favor the following:

1. – There should be awareness related to a lucid understanding that ignorance constantly looms ahead in organizations – knowing that people ignore a huge amount of data related to their own job, due to many interactions with others is to be understood as a competence: the capacity to learn continuously about what people are doing on the basis of their daily professional lives.
2. – Related to such a capacity, the capacity to doubt information, is consequently to question situations when they look abnormal. Such a capacity demands that people keep some distance from the daily tasks and operations. A while should be previewed on a regular basis to question the taken-for-granted activity.
3. – An example of this capacity to doubt consists in debriefing activities, whatever happens, good or bad. Making clear in teams why an operation went the right way or failed is deeply instructive for the future operations, and makes people used to take a step back from what they spontaneously consider as evident. Let us make clear that questioning and doubting are an aspect of people's daily work. Organizational life is much more ambivalent: because organizations need routines and taken-for-granted individual and collective skills. The method can consequently never consist in a unilateral choice for doubt or for taken-for-granted competences. Rather, it consists in balancing the dynamics between routines and distance, say between the short term and the long term. Managing organizations requires a kind of wisdom (Weick, 2001);
4. – Last but not least, organizations should favor that people speak their minds. Too often, due to short-term constraints and demands, the managerial culture provokes silence because people are scared of sanctions. The more people may feel able to trust their bosses and talk to them when doubting a process or an operation, and even when committing errors, the best it is for the organizational internal as well as external communication. When errors are made, it is crucial that people feel able to talk about – for example, that they will not be systematically sanctioned. In that case, they will feel to be able to tell the truth, and look for ways to prevent the same error in the future. Otherwise, they will keep silent and try to hide problems. In the first case, the organization has a chance to become genuinely a learning one. In the latter, it will sooner or later have problems if not break.

The above recommendations (Weick and Sutcliffe, 2007) concern the management of the unexpected. As a consequence, they concern par excellence the management of financial markets. Financial markets are not organizations, they are rather networks. Networks are much less vulnerable to constitutive ignorance as organizations are. But bounded rationality not only concerns people within organizations. It concerns everybody. And one may state that what happened, for instance, to the famous French trader Jérôme Kerviel “playing” with data on his computer screen may happen to anybody too much embedded in her/his job.

Anyway, another perspective should be of some help for people to get used to keeeping some distance with their jobs and short-term objectives and projects – including maximizing their profits. This second perspective depends on an understanding of some political philosophy issues.

26.4.2 A Political Philosophy Perspective

When tracing back the origin of Milton Friedman's statement on business social responsibility, we alluded to the theoretical revolution made by Thomas Hobbes. According to him, political philosophy was grounded on an Aristotelian understanding of politics, which takes for granted that political life is spontaneous to humans. As stated above, for Aristotle, humans are but “political animals” (Aristotle, 1995). Human lives are grounded on collective life, which starts with the family life. The radical difference between the ancient (e.g., Aristotelian) understanding of politics and the modern one (e.g., the Hobbes one) rests in considering or not considering humans as spontaneous “political” or living in collective structures.

By inaugurating the new anthropology, which will become the economic one, or by defining humans as free, equal to each other, and rational individuals, Hobbes makes room to the radical possibility of considering each human as equal to all the others. In other words, he potentially makes possible the abolition of slavery, the gender studies, and so on. This is the indomitably positive aspect of the modern understanding of politics. But on the other hand, this understanding potentially reduces humans to selfish and indifferent to the common good individuals, which is the dark side of modernity.

Taking distance with the short term amounts to taking distance with one's own interests, toward a consideration of the common good as well. A medium- and long-term attitude amounts to favoring open-mindedness and the capacity to balance one's own interests with the collective ones. In other words, a unilateral short-term attitude is structurally selfish, whereas a medium- or long-term one is collective and common-good-orientated. None of these perspectives is able to bring a solution by itself to the tension between the short term and long term, or between financial markets and corporations. Both are necessary. But a balance between short-term and long-term perspectives is necessary. In managerial terms, this means that neither the stakeholders theory nor the shareholders theory is true. They are true together.

Understanding how such knowledge may be of some help practically demands understanding a bit more on how the ancient political philosophy and the modern political science complete each other on the very basis of their initial difference if not contradiction. We discuss this issue in our book Sexuality and Globalization, An Introduction to a Phenomenology of Sexuality (Bibard, 2014).