post-autistic economics review
Issue no. 35, 5 December 2005
article 4



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Criticizing Dow and Chick’s Dualism:
The case of the duals “rational – irrational” in the stock market

Gustavo Marqués    (University of Buenos Aires, Argentina)

© Copyright: Gustavo Marqués 2005





Sheila Dow and Victoria Chick object to the mode of argument based on “duals”. In particular, they reject the mainstream practice of reducing every situation in which decisions are taken to one of certainty or risk. Following Keynes, they, like all post-Keynesian economists, privilege those (more realistic) situations in which uncertainty prevails. As far as real economies are open systems, uncertainty is ubiquitous, and the dual “rational – irrational” is no longer applicable, and its relevance as analytical tool vanishes. But Dow and Chick do not stop here. They also want to criticize those who hold that no decision may be called rational under uncertainty, a view that, according to them, is just another form of dualism.


Against both kinds of dualistic thinking, they assert that under uncertainty human behaviour may still exhibit different degrees of rationality, a claim founded on the inductive logic developed by Keynes in his Treatise on Probability. Dow and Chick seem to think that Keynes’ early views are still alive in his The General Theory, and find in this continuity the means for moving beyond dualism.


In this article I argue, (1) that inductive logic is still unfounded and is absent in the General Theory; (2) Dow and Chick’s proposal for moving beyond dualism is not compatible with  Keynes’ own vision regarding investment decisions, which seems to be dualistic in Dow’s terms; and (3) that the attempt to bring into existence some form of rationality under uncertainty has heavy costs in terms of economic policy.



Two types of decisions


If an individual action performed in a certain situation S is to be labelled by one of the twin concepts that conform to the “dual” “rational – irrational”, there are at least two requirements:


a) There is a set of actions X, which is a subset of the many reactions Y that the subject could manifest in such circumstances. X only contains those actions which are a pertinent response to the problem posed by S. To split off X from Y a demarcation criterion is required.


b) As the actions that belong to X are pertinent, but not necessarily adequate, a second criterion is needed to identify those actions which are to be considered properly rational.


Clearly, any other response that individuals could perform that is not pertinent to S, can not be labelled as rational or irrational. They may be considered as non-rational, which also means that they are not irrational.


Many – but not all – situations in which people have to decide fit both requirements. Suppose first that an individual has to pick up a red ball from one of two boxes in one attempt. He knows that the first box contains 100 red balls and 10 white balls, and that the second one contains 10 red balls and 100 white balls. The set of actions X permits only two types of actions: pick up a ball from the first box or pick up a ball from the second one. In this situation, it is rational to choose the first box (and irrational to select the second one). But in the process of doing what is pertinent, the situation allows (and in some cases demands) one to perform some other actions, which could be called “collateral” actions. Some of them are necessary (for example to walk towards the box or introduce a hand into it), and others may be completely accidental (for example, to swallow or touch one’s hair before the choice is made). These collateral actions are not to be considered rational or irrational regarding S. In our terms, they should be considered non-rational.


In some other situations, however, it is not possible to identify unambiguously the adequate answer or the set of pertinent responses. If, as before, the subject has to pick up a red ball from one of two boxes, but knows nothing about their content, there is no way of applying the term “rational” to his preference of the first box and “irrational” to his preference of the second. And if a more complex situation is designed, in which he is informed that there are some hiding devices programmed to throw out to his hands a red ball in response to a certain conduct of his part (whose nature remains unknown to him), nothing he can do may be counted as rational (or irrational). Sitting down could be the right response. In such a situation every action should be considered non-rational.



What being dualistic and anti dualistic means


In Dow’s The Methodology of Macroeconomics, dualism is defined as  “the propensity to classify concepts, statements and events according to duals, as belonging to only one of two all-encompassing, mutually exclusive categories with fixed meanings: true or false, logical or illogical, positive or normative, fact or opinion, and so on” (Dow, 1998, p. 16)1.


According to Dow, dualists think by means of pairs of concepts (called “duals”) and their arguments are directed to defend one of its poles. Taking the dual “criteria of scientific demarcation – no criteria” Dow distinguished two forms of dualism. Traditional methodology is dualistic because it states some (universal) criterion for telling science from non science. But Constructivism is also dualistic because it rejects any criteria. Dow says that Constructivism is a dualistic reaction against the original dualistic position of orthodox methodology. There would be, it seems, dualistic positions and dualistic criticisms of them.


Going back to the two types of situations described in the previous section, it is easy, at first, to link them with relevant economic situations2. Risky contexts fit very well the kind of circumstances described in the first case. The second case, on the contrary, corresponds to those situations called deep uncertainty by post-Keynesian economists. Mainstream economists models all decisions as instances of the first case, while post-Keynesians focus on those situations in which uncertainty is pervasive and see elections as instances of the second case. If I am right, both, mainstream economics (that focus on certainty and risk) and post-Keynesian economics (that privilege uncertainty) are dualistic in Dow’s terms (which are also Chick’s). And to be consistent, they should reject the economic relevance of both scenarios. Dow and Chick, however, do not agree with my interpretation. They would say, instead, that what is dualistic is my own interpretation of uncertainty as being like the second case, and would vindicate a non dualistic view of uncertainty, that, in their view, conforms the kernel of post-Keynesian thought. The problem, then, is what does to have a non dualistic view of uncertainty mean?


To clarify her proposal Dow brings in the Hegelian triad. The Thesis asserts that all choices qualify as rational or irrational. As we saw, this claim presupposes that two different criteria are available (one to separate the class of pertinent responses from the rest, and another to discriminate inside the pertinent set). The Anti-thesis posits that no behaviour is rational or irrational. As far as there is no criteria whatsoever for separating behaviour in different sets, all conduct should be labelled as non-rational. If the original dualistic position is the Thesis and its dualistic rejection the Anti-thesis, to be anti-dualistic is to go beyond both views. This is the Synthesis, according to which each behavior considered can not be called completely rational or irrational. There are, rather, different degrees of rationality which allow us to order decisions along a scale3. Possibly, what Dow has in mind is the inductive logic that Keynes tried to develop in his Treatise on Probability.



From the Treatise on Probability to The General Theory


To highlight how Dow misrepresents the possibility of deciding rationally under uncertainty, it is convenient to distinguish  two periods in the development of Keynes’ thought. In some of his early writings, he opposed Hume’s view according to which all knowledge was demonstrative knowledge: i.e., knowledge conformed by arguments whose premises logically implied the conclusion. Keynes has a wider vision that allows knowledge to be acquired also by means of inductive arguments4. To Hume, inductive argument faces an insolvable difficulty: induction is not valid in principle. Keynes, however, thought that the problem of induction was merely contingent. “Hume showed –he sustained- not that inductive methods … were false, but that their validity had never been established” (quoted in Meeks, 2003, p. 27). Starting from his critique of Hume, Keynes tried to develop a theory of partial entailment between sentences able to commensurate different non demonstrative arguments according to the support given to their conclusions by the premises. Had he been successful, his logic would have provided a way to distinguish different grades of reasonableness among arguments considered invalid by formal logic5. The problem is that he failed to do so.


In The General Theory, Keynes introduced the distinction between situations of certainty or risk and situations of uncertainty. This difference is absent in his Treatise on Probability. But, if one thinks that there is continuity in Keynes thinking, a link between both works can be established: under the first type of context agents would be able to argue conclusively, but under uncertainty they could only reason in a non demonstrative way. And given the link between uncertainty and  non demonstrative arguments, a successful inductive logic would clear the way for talking of a rank of actions and decisions ordered by their degree of reasonableness. I believe that Dow´s position gains plausibility as a result of her support of both, the continuity thesis and inductive logic6. However, I think both thesis are unfounded.


In fact, in the time elapsed between the Treatise on Probability and The General Theory, Keynes was convinced that probability judgements are subjective, and that there is no way to construct an objective inductive logic (I mean, an inter-subjectively accepted logic of partial implication between sentences). This scepticism forced him to recognize that under uncertainty, where all arguments are of a non demonstrative type, actions can not only be considered rational or irrational, but it is not even possible to order them according to degrees of rationality. Under uncertainty, all behaviour is of a non-rational type. The significance of this point for Dow and Chick’s claim concerning dualism makes it advisable to elaborate it a little more.



The dualistic reaction of Keynes to mainstream economics


A quick reading of Chapter 11 of The General Theory might suggest that Keynes allows some kind of rational behaviour under uncertainty: in the stock market there are rational people who can calculate the marginal efficiency of different investment projects in the long run, and decide the most profitable way to allocate their capital. But there are also people who do not perform this calculation and invest their time trying to guess the changes in conventional judgement about the valuation of the assets. The former knows the fundamentals; the latter do not have this knowledge. This is the difference between enterprise and speculation. From a social point of view, at least, only the first attitude is rational.


However, what distinguished his analysis from the one performed by mainstream economists is that Keynes does not provide any procedure to select the best behaviour. The “calculus” alluded to is simply a deliberative process, like the one undertaken by a politician. In fact, each decision is as legitimate as any other and there is no way of recognizing in advance which actions are rational and which irrational, or which decisions are more rational than others. Those who – like Dow and Chick – claim the existence of degrees of rationality cannot make this idea operative if uncertainty prevails.


This impossibility is shown clearly in the next chapter of The General Theory, where Keynes frankly admits that investment decision are guided by animal spirits. There are no experts under uncertainty. The distinction between professionals and fools is just a rhetorical device in this context. All subjects are non-rational: actions are determined by the state of confidence, emotions and ideals. This shows that – beyond Keynes’ own equivocal expressions that may suggest the contrary – The General Theory is dualistic in the second of the senses described by Dow: it represents a dualistic reaction against mainstream dualism, which limits itself to model those situations in which “rational” and “irrational” may be applied to decisions without ambiguity.



The vague status of anti-dualism


Against this interpretation, Dow and Chick think that there is in The General Theory some room for rational decision making. They dismiss the obvious incompatibility among the two collections of Keynes’ writings referred above and argue that Keynes effected a methodological revolution at the level of his mode of thought. They believe that Keynes broke completely with the dualistic mode of reasoning, creating a “synthesis” that preserves, even under uncertainty, some form of rational behaviour. Beyond some differences between them regarding how to understand how the synthesis operates7, both authors agree on the need to restore the “excluded middle” by postulating a scale of rational reactions (the inductive logic tried by Keynes in Treatise on Probability).


As long as there is no adequate concept for representing the vague notion of “rational belief”, and there also is no clear and articulated inductive logic, the assertion of the possibility of rational behaviour under uncertainty is unsupported.  It is an appealing claim, but its meaning and contents are still lacking.  Consequently nothing is gained using labels such as “rational” or “irrational” or “more rational than” in reference to behaviour under uncertainty. In this context their application is beside the point. It is like predicating “polite” for natural numbers (even if there were grades of politeness, such a scale is of no use regarding natural numbers). To insist on applying the predicate “rational” to any behaviour in any context is a category mistake. As Arrow has said, rationality is not an entirely individual matter; it is context-dependent, and this means that there could be situations in which it is not defined8. I suggest that calling such contexts “uncertain” would avoid many linguistic discussions.



Political risks of  “vindicatory rationalism”


Some Keynesians proposed the imposition of a tax ad-valorem on financial transactions, which, allegedly, would reduce volatility in financial markets. This advice is based in those assertions of Keynes’ already examined. Particularly, in his distinction between investors and speculators. The tax, they have said, would discourage the participation of amateurs, thus increasing the rationality of decisions and giving more stability to transactions9.


Davidson (1998) discussed an empirical study about New York’s stock market written by Jones and Seguin, which contradicts the (allegedly) Keynesian thesis that greater transaction costs will reduce volatility improving the rationality of the decisions undertaken. The study shows the contrary: a reduction in transaction costs is associated with a decline in volatility. In his comment, Davidson rejected the interpretation of Keynes advanced by the “old and new Keynesians” as mistaken and sustained that Keynes’ position is indeed perfectly compatible with the empirical results showed by Jones and Seguin.


In Davidson´s terms, these “Keynesians” assume ergodicity, which means that, based on available information, agents would be able to form “right” expectations (rational beliefs) about the future profitability of their actual investment decisions. Experts or professional investors can achieve this result. However, there is a larger number of amateurs who do not perform this calculus and speculate through very short run transactions, generating instability. To go back to stability, these “Keynesians” propose the tax designed to reduce the number (and, consequently, the power) of irrational people10.


According to Davidson, the true Keynesian thesis states that under uncertainty the ergodic axiom is no longer valid, and nobody can use past experience to form right expectations about the future (and, consequently, nobody can pick up the rational or more reasonable decision beforehand). However, although there is no connection between participants’ rationality and stability of the stock market, there is indeed an important connection between the number and diversity of participants. What brings stability to investment market is the diversity of opinions, not the prevalence of rational decisions. As long as the number and diversity of agents are positively correlated, the recommended tax on transactions would have consequences exactly opposite to the ones pursued by those who advocate it. To achieve stability, what is needed is to augment the number of participants, not to reduce it. Incidentally, this makes it clear that the study performed by Jones and Seguin fails to provide empirical evidence against Keynes (on the contrary), but contradicts the mistaken interpretation of Keynes performed by old and new Keynesians.





The concepts of dualism and anti-dualism proposed by Dow, and adopted by Chick, are confusing and too broad to be useful. They do not make any distinction between what in the language of the old logic are called contrary and contradictory, so they conflate “rational – irrational” with “rational – non rational”, which, as we have showed, are vitally different. The anti-dualism they promote assumes that every pair of duals has a higher concept (the Synthesis) that denies each member of the pair but, at the same time, conserves and supersedes both of them. This philosophical decree is assumed to be valid for any context, and, in the particular case of  the dual “rational – irrational”,  it impelled them to look for some form of rationality even under uncertainty. This vision, although inspired by the early work of Keynes, is not present in The General Theory and is asserted by Dow and Chick without the support of a clear and articulated inductive logic. This is potentially dangerous because it may lead to wrong economic policies.






1. Dow sees duals everywhere: “deduction-induction”, “conceptual knowledge – observation”, “analytic – synthetic” (Dow, 1998, pp. 24, 26 y 27), “certainty-ignorance”, “rationality-irrationality” (Chick and Dow, 2000, on line).


2. To avoid unnecessary complications I will not consider here the case of certainty.


3. “While Cartesian/Euclidean thought represents the choice of focusing exclusively on certain (at least in principle) knowledge, Babylonean thought represents the choice of building up rational grounds for beliefs in propositions, even if most of the underlying knowledge is held with uncertainty. This indeed is how Keynes … understands how knowledge is in general built up as a basis for action; most propositions are believed to be known, subject to uncertainty of various degrees which are unquantifiable” (Dow, 1998, p. 18). The various degrees by which the premises of an argument support the conclusion are not only unquantifiable, but in most cases (and certainly in those economic decisions that really matter) are not even comparable.


4. “He rejected the dominant view, which came from Hume, that only logically demonstrable arguments can claim validity, to assert the claim of probabilistic knowledge as the basis for rational action” (Chick, “Keynes, John Maynard (1st Baron)”, on line).


5. “In the Treatise on Probability, Keynes …. sought a logic which would provide reasoned grounds for belief in propositions, as a basis for action where certain or complete knowledge is only a special case and is normally not available” (Chick and Dow, 2000).


6. It is Chick’s position too. “Keynes argues (that) there are many circumstances amenable to systematic analysis even in these conditions (uncertainty). We need not be paralysed by inaction or resort to irrational behaviour. Clues exist which may guide rational action in some (but not all) cases, and repeated experience from these clues, while not definitive, add to what Keynes called the ‘degree of rational belief’ in the connection between an action and outcome which the agent expects”. On this basis she could say that “he accepted fundamental uncertainty but found a way to avoid the subjectivism, irrationalism or nihilism which for others logically follows” (Chick, “Keynes, John Maynard (1st Baron)”, on line).


7. According to Chick, the dualist opposes reason to intuition (or emotion), but the anti-dualist brings together both kinds of mental states. She understand that Keynes describes the rational aspects of investment decisions in Chapter 11 of The General Theory and its irrational aspects (animal spirits and states of confidence) in Chapter 12. The synthesis would consist in endowing agents with both types of dispositions: cold calculation and hot decisions. She regrets that "the theory of investment … has often been interpreted dualistically. A dualist sees the emphasis on animal spirits in Chapter 12 as invalidating the discussion of rational calculation in Chapter 11. But it is perfectly possible to imagine that someone carries out the calculations and, being still very uncertain, opts to go ahead with the project anyway" (Chick, 2002). What does it mean to say that someone can calculate the marginal efficiency of a unit of capital under consideration and, at the same time, assert that he is very uncertain?


8. “I want to stress that rationality is not a property of the individual alone, although it is usually presented that way. Rather, it gathers not only its force but also its very meaning from the social context in which it is embedded. It is most plausible under very ideal conditions. When these conditions cease to hold, the rationality assumptions become strained and possibly even self-contradictory” (Arrow, 1987, p.201).


9. “Stiglitz …. claims that a small transactions tax has a strong deterrent effect primarily on short-term speculators. The tax will not be a deterrent to long term asset holders who are rational market participants and who base their trading on fundamentals . . . and are willing to wait a long time to realize a return. Rational market participants therefore do not change their already optimal behaviour if a transaction tax is imposed” (Davidson, 1998, on line).


10. “Since short run speculation trading is attributed primarily to the action of fools (noise traders), they interfere with the efficient capital allocation function of financial markets. The tax, by making it more costly for fools (as well as for all other mortals) to engage in short-run financial market activity therefore improves the efficiency of financial markets” (Davidson, 1998, on line).





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Gustavo Marqués, “
Criticizing Dow and Chick’s Dualism: The case of the duals “rational – irrational” in the stock market”, post-autistic economics review, issue no. 35, 5 December 2005, article 4, pp.32 -39,