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Understanding the dynamics of rationality in contemporary legal and economic scholarship.


“Meaning is never fixed, it must be constantly won”- these words by Simone de Beauvoir occupies great relevance in the context of understanding the meaning of the term ‘Rationality’.

Rationality as a term is very broad and open-ended. The term is subject to constant change and academicians have varying thresholds to evaluate this term. For instance, Mary Gibson (1977) argues that rationality should be thought of as a human good and a social goal. She identifies two implications of this idea: one being that a “value-neutral” conception of rationality is inadequate; and the other, moral, social and political theories should treat rationality as a value to be promoted rather than as a property automatically attributed to all normal persons.  On the other hand, she also cites Harmon and Meyer and points out “the meaning of rationality” is widely disrupted as both an accurate and a normatively desirable characterization of human action. In June 2002, at a symposium to “Rationality, and Public Administration”, Tenbensal investigated on the possibilities of a “rich language of rationality”. His starting point was that rationality is a meta-value: there is general agreement about its desirability, but contest over its interpretation. Another school of thought dissects the link between rationality and reason. To add on the debate, John Broome (2005) says the idea that rationality being the faculty of reacting correctly to reasons is subject to a quick rebuttal unless all reasons are taken to be in mental states. If they are mental states, their property of being reasons must derive from the requirements of rationality, which require various sorts of coherence among mental states. But, then there can be reasons only because the requirements of rationality are normative. He further argues saying that there has been no progress made towards explaining the normativity of the requirements of rationality. However, he uses Ventriss (2003: 131) argues that rationality serves to act within society, in whatever form it takes, shaping our very view of reality. Further, Brian Epstein (2010: 1048) substantiates it arguing that rationality is a broader notion, indicating a kind of righteousness or faultlessness in forming a belief or choosing an action. He adds on saying that to reason well perhaps is one way of forming rational beliefs or guiding action, but not the only way; for instance, to be rational to form a belief based on one’s sense of perceptions, or based on the testimony of others, no reasoning involved.

It is therefore crucial to observe the liquidity of rationality, if I may call so. However, the scope of this paper is not to conduct an etymological analysis of rationality; but to expose the thin line of segregation between two main forms of rationality, namely, legal rationality and economic rationality.


As mentioned earlier, this paper aims to re-evaluate the distinction between economic rationality and legal rationality.

Economic Rationality

As Paul Diesing (1950: 12) mentions, “economic rationality consists of the deliberate allocation of scarce means to alternative ends in such a way that the ends are maximized. Even though this is a generally accepted definition, there seems to some ambiguity within it”. For example, the disagreements on this definition revolves around two grounds: firstly, whether economic rationality is primarily an explanation as to how men act or a standard of how they ought to act; secondly, whether the principle applies to all social action or to only one kind or one phase of action. There has been considerable debate on them and it the issues seem to have been somewhat resolved, he argues. He further reveals that the first disagreement stems from the utilitarian claim that the principle of utility is equally descriptive and normative. It continues with theories which treat it as primarily descriptive, and concludes with a theory that it is primarily normative. On the other hand, the second disagreement seems to have been settled by the elaboration of non-economic residual categories, like Pareto, for instance, which disapproved the utilitarian claim that all action is economic. However, a detailed evaluation on these disagreements is beyond the scope of this paper.

According to Alec Nove’s ‘The Politics of Economic Rationality’ (1958: 127, 128), it is interesting to note that some economists equate economic rationality to “consumer sovereignty”, which is a state of affairs that is believed to exist in Western countries; and he further uses the simplified definition of rationality “that the economic purposes of society, whatever these may be and whoever decides them, are achieved with maximum economic efficiency” or when maximum results are attained at minimum real cost. It is interesting to note his articulation that economic rationality is by no means the highest good to which human society can aspire, nor has its importance been appreciated in human history. He substantiates his position using the example as to how efficiency and growth were not regarded as of particular importance by the thinkers of medieval Christendom.

Many economists have pointed out the fallacy in equating rationality to economic rationality. John McMurtry (2011: 49) says “To be rational is to consistently self-maximize one’s private interests in money-value terms. And such is the meaning of “homo economicus”, “market rationality”, “rational choice”, and “rationality” as such. For example, public taxation outside private profits and consumer circuits is increasingly attacked as “taking money out of people’s pockets”, as was affirmed in Dodge v. Ford Motor Company (204 Michigan 459 (1919)). The Supreme Court set the precedent that where even Henry Ford could not deploy Ford profits to increase the employment and welfare of workers. However, as Jeanne L. Schroeder (2002: 875, 876) suggests that economic rationality, which is the identification of means to ends, is not only a denial of Kantian freedom, which is the identification of ends; but it is also the opposite of Kantian freedom. Economic rationality, accordingly, becomes in thrall or servitude to irrational ends, or what Kant calls “pathology”.

It could thus be inferred that the existence of economic rationality continues to be very self-centric. As Paul Diesing (1950: 14) has argued that “the real problem is to discover a kind of rationality different from economic rationality; and if there is no other kind, all non-economic behavior is completely irrational and scientifically unknowable”. In this context, it becomes very important to discuss and comprehend the principle of legal rationality, and as to how it takes a substantial departure between the general theory of rationality, which is often mistakenly mixed with economic rationality.

In other words, under economic rationality, there is a scope to make a ‘rational choice’. According to the Rational Choice Theory, rational choice is defined as the process of determining what options are available and subsequently choosing the most preferred one according to some consistent criterion, argues Jonathen Levin and Paul Milgrom (2004). This could also be referred to as ‘utility-maximization approach’ to choice with several characteristics: firstly, if forms a major part of government and policy making; secondly, many of the qualitative predictions concerning the ways in which choices change as people’s environments change, etc. tend to be confirmed in empirical studies; thirdly, this approach has been used not only to make individual-centric or household choice; but also to make choices about education, marriage, child-bearing, migration, investment, crime, business decisions, etc; and finally, “this approach provides a compact theory that makes empirical predictions from a relatively sparse model of the choice problem- i.e. just a description of the chooser’s objectives and constraints”, argues Jonathen Levin and Paul Milgrom (2004: 2).

Legal Rationality

As per Joyce S. Sterling and Wilbert E. Moore (1987: 67) Max Weber was the first modern social theorist to develop a comprehensive approach to sociology of law through an analysis of the “internal” forms of legal thought, rather than the actual context of the law, and of the efficacy of law in assuring order and predictability, or “calculability” in social behavior. His specific emphasis on rationality of the legal system emerged from his broad examination of law, which emphasized on four central themes: coercion, legitimacy, normativeness, and rationality. Trubek (1972: 725) argues that for Weber rationality of the legal system is the degree to which the system is “capable of formulating, promulgating and applying universal rules”.  In other words, as Wrong (1970: 26) puts it, “rationality” means the use of “explicit, abstract, intellectually calculable rules and procedures [instead of] … sentiment, tradition, and rule of thumb”. Further, Kronman (1983: 73-75) identifies the four distinct ways in which Weber has used the term “formal legal rationality”: 1) “governed by rules or principles”; 2) the “systematic” nature of the legal order; 3) the method of legal analysis is focused on “the logical interpretation of meaning”; and 4) techniques of dispute resolution reflecting “control by the intellect”.

“Legal Rationalism is the theory that judges resolve legal disputes through legal rules, applied to facts”, argues Daniel Z. Epstein (2014: 8). According to him, legal rules, similar to rules of reason, are capable of filtering out the legally relevant from the legally irrelevant in order to decipher clear and distinct legal ideas that become articulated as objective, fair legal conclusions that determine the outcome of a dispute. The legal community considers legal rationalism to be the guidebook of how lawyers and judges understand the rule of law to function.  However, as Daniel Z. Epstein (2014: 9-10) points out American Legal Realists challenged the idea that judges were constrained by legal rules. They adjudicated their position by looking at the hard cases that were politically or socially contentious. They were right in saying that in the case of hard cases, the application of legal rules does not clearly lead to an objective outcome; rather, the rules appear to be in conflict. He substantiates his argument by using the example of regulatory measures where government and an individual or company may be involved in a dispute about an agency’s regulation. Here, the judge might look at several relevant legal materials, including legislation, other court precedents, and legal holdings pertaining to the dispute at issue. But, it may so happen that these legal materials may ultimately lead to two different conflicting rules: a) one rule saying that the judge should defer to the agency’s expertise if the agency’s interpretation of the statute was “reasonable”, and b) that the judge should overturn the agency interpretation if such an interpretation was “arbitrary and capricious”.  Moreover, he affirms that these cases fall under the category of “hard cases” because they cannot be resolved simply by the rules; but they require the judges to exercise discretion and judgement that may involve extra-legal considerations. Such considerations would require judgement of the kind that an individual human judge will have to make.

Insanity as a tool for understanding legal rationality

The most suitable example to understand whether an individual’s action is legal rational is through the judicial interpretation of ‘insanity’. Courts have constantly made clear distinction between medical insanity and legal insanity. It is ironic that even if a person is mentally insane, but his actions fulfil the threshold of a legally sane person, he is treated equally as a normal individual. John F.W Megher (1923: 46-49) gives a detailed overview on this distinction between legal insanity and medical insanity. He says that the “law has held that “mental disease” is an indeterminate and vague term- including conditions varying from mild indisposition to delirious, confused states”.  Further, he also pinpoints that the form of insanity is a question of mental pathology and is not of particular interest to law; nor are the causes of responsibility. Moreover, law is concerned in the consequences (conduct) resulting from insanity.

In Peoples v. McElvaine (125 N.Y. 596), it was held that a commission may be appointed to determine whether the accused is able to make a rational defense by intelligently conferring with counsel, to decide whether insanity existed at the time of the act or not. Interestingly, the legal presumption of insanity is the assumption the accused had not the mental capacity to form a criminal purpose, and to deliberate and premediate on an act, which malice, anger, hatred, revenge, or evil disposition might impel, or to know the nature and wrongfulness of the act. However, a suspect’s own testimony that he did not know that his act was wrong or criminal is not sufficient to establish insanity, as laid down in Perry v. State, 87 Ala. 30. A suspect’s statement that his mind became blank prior to the offence, when he calls the facts of the act, does not indicate that he was incapable of forming an intent to commit the offence, as held in People v. Osmond, 138 N.Y. 80, 33 N.E. 739).  Even a minute recollection of the details of the crime long after its occurrence is a strong evidence of sanity at the time of the commission of act. This position was affirmed in Pienovis case, 3 N.Y. City Hall Rec. 123).

The judicial position is clear on the fact that even if there is a history of insanity in the accused prior to the homicide, for instance, still a burden is on him to prove his insanity at the time of the murder. Hereditary insanity would not relieve, unless the accused himself shows insanity, as held in the Guiteau’s case, 10 Fed. 161).  The segregation between medical insanity and legal insanity remains same even in the Indian context. Section 84 of the Indian Penal Code, 1860, deals with insanity. It was drafted based on the Mc Naughten’s rules. As Knight B (1990) mentions in his ‘Medical Jurisprudence and Toxicology’, the rules states that for establishing a defense on the grounds of mental insanity, it must be clearly proved that at the time of committing the act (or making the omission), the accused was laboring under such a defect of reason from a mental ailment as not to know the nature and quality of his act, of even if he knew what he was doing, that he did not know that it was wrong. In other words, if a person is acting under effect of delusions, if those delusions are such that they impair his cognition, then he is not liable. For instance, in Karma Urang v. Emperor (114 Ind Cas 159) when Karma Urang killed his father under the delusion that he was ordered by Goddess Kali to do so, and proceeded to the court with cut head in his hands; it was held that he was under he was under delusion and was acquitted. On the other hand, Subramanyam B.V (1999) highlights a few instances when courts took diverse opinions on the issue.  In the case when an accused suffering from fever paroxysms killed his children because their crying disturbed him, he was convicted although medically he could be termed insane, but an accused (a young boy) was brought up by his grandfather and studied abroad. His parents did not care about him; even his grandfather’s death was not communicated to him. On his return to India, he committed various brutal offences at random. Further, during the pendency of his trial, he completed studies abroad and started his own business. It should be noted that his behavior was normal both before and after the offence; however, he was held insane while committing the offence and was acquitted. Finally, a person killed his four relatives and started running away; but later volunteered this information. There was no motive, no accomplice and no attempts to secrecy, yet he was convicted, as he was legally sane and knew the nature of his act as well as its consequences.

The abovementioned examples substantiate that legal rationality revolves around pre-determined standards unlike economic rationality. An economically rational individual has the freedom of choice to decide what gives him the maximum satisfaction at a particular point of time; and this freedom of choice is the fundamental element of rationality. However, I argue that legal rationality does not give an individual any freedom of choice over his actions, and it revolves around rules and standards. The following case-study proves this dichotomy.


A drastic change that has hit the Indian economy very recently is the Prime Minister Narendra Modi’s decision to ban 500 and 1000 currency notes. His argues that this initiative would help in putting a curb to the black money prevalent in the Indian economy. It is too early to predict the outcome of this initiative; however, this could be a perfect example to understand the principle of rationality from both an economic point of view as well as a legal point of view.

First, let’s evaluate the economic rationality behind the demonetization scheme.  According to PM Modi and confirmed by the Economic Times (2016) some of the reasons behind the scheme are: a) to tackle black money; b) to lower the cash circulation in the country which “is directly related to corruption in our country”; c) to eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in India; d) the move is estimated to scoop out more than rupees 5 lakh crore black money from the economy, according to Baba Ramdev, a staunch Modi supporter.  Even according to MD & CEO, ICICI Bank, Chandra Kochhar, “this move will definitely bring about a whole amount of transaction to no cash or low cash kind of transactions”. Further, Harish Salve believes “A parallel black economy will collapse”, while Narayana Murthy, the founder of Infosys, says that the dishonest would suffer and that “is the right thing”; quotes Economic Times (Ravi Prakash Kumar, 9th November, 2016).

This does not mean that the demonetization scheme is perfectly suitable in India. Steve. H. Hanke, an applied economist at John Hopkins University in Baltimore and a global authority on currency policy says that: “Basically, you’ve created chaos … India is a cash economy. It’s not like Europe or the US where everyone is running around with a credit card… That’s not the world of India…. It doesn’t look like this thing was thought through at all”; quotes The New York Times (Associated Press, 18th November, 2016). Additionally, Rajiv Biswas, Asia-Pacific chief economist at HIS Global Insight notes that this scheme would have a direct and negative effect on retail sales and industrial output in the subsequent weeks. A research report from the HSBC predicted that imports of consumer goods would fall, but added that it could offset by a spike in demand for gold, as unsettled Indians look for ways to store their wealth, mentions The New York Times (Associated Press, 18th November 2016). Furthermore, it is interesting to learn that Raghuram Rajan, the former head of the RBI (Reserve Bank of India) warned in 2014 that demonetization programs could easily stumble; and that “It’s not easy to flush out black money”. He also added that “my sense is that the clever find ways” to get around currency overhauls; and he also suggested better monitoring of financial transactions, such as using government ID cards to track major purchases, and improved tax enforcement, notes The New York Times (Associated Press, 18th November 2016).

Tim Worstall (2016) in his ‘Effects of Demonetization On India’s GDP- Difficult To Calculate, We Don’t Even Know The Sign’ (19th November, 2016) has noted that “Ambit Capital, a respected Mumbai-based equity research firm, has officially estimated that the demonetization-driven cash crunch will result in GDP growth crashing to 0.5% in the second half of the financial year 2016-2017.  … Further, Ambit Capital estimates that during the October to December quarter that we are currently living in, the GDP growth may contract, thus showing negative growth…”  He argues that microeconomic effects seem to be beneficial, for instance, there have been concern about terror fighting through forged notes. But, he also points out that the macroeconomic effects are unpredictable at this points “[f]or economies are complex things with moving parts”.

On a careful reading of the observations given by the various economic visionaries, I believe that the economic rationality of the demonetization scheme falls in a mixed bag. This is because there are very strong opinions from both sides, and the rationality of the scheme depends on who is arguing and there is no framework to which this could be tested. I would like to appreciate the long term agenda behind the scheme, i.e. to wipe out black money, however, the scheme has its own flaws, as pointed out earlier. Therefore, this scheme is rational at the irrational. I would like to emphasize on the broader aim of this scheme and emphasize on its rational side; and therefore, I would like to call it a ‘rational scheme with an irrational speck’.  The scheme has the economically rational welfare agenda, but economically irrational modus operandi.

Economic rationality/irrationality is just one aspect of the demonetization scheme in India, however, we ought to conduct a thorough evaluation on its legal rationality as well.

I argue that the demonetization scheme has resulted in blatant human rights violation. Unfortunately, the common man has to bear its consequences. According to an interview conducted by the First post (T.S Sudhir, 12th November, 2016), some of the responses by the citizens made it evident that the implementation of the scheme caused severe inconvenience to the public. The question posed was “Do you support Prime Minster Narendra Modi’s surgical strike to demonetize 500 and 1000-rupee currency notes?”. One response was that “Yes. But banks should have been better prepared. All it has meat is worry and a lot of trouble”. The analyses of the study proved that the public was happy with the scheme, but greatly disappointed with its operation. As First Post (T.S Sudhir, 12th November, 2016) puts it, “not that surgical strikes, Rohit Vemula, beef ban, Kashmir, Pakistan, etc., had not polarized India. But the demonetization has taken a new level. You are simply not patriotic enough even if you complain about having to stand in an ATM queue for two hours and more. Or sweat it out at a bank branch to withdraw Rs. 4000, waiting up to four to six hours in some cases. Especially, when bank employees, the new soldiers- are overstretching themselves.” Even though the scheme is being praised, the sarcasm on the inconvenience caused not only to the common man, but also to the bank employees are evident here.

Furthermore, the First Post (2016) also reveal that less than 32 percent of Indians have access to banks and post offices, as per the official records of the Finance ministry’s banking division. According to RBI data, there is just one bank for 9,500 Indians across the nation. And this is the fundamental cause of panic for the citizens. According to Hindustan Times report, one-third of the 1.38 lakh bank branches are concentrated in 60 cities; and 253 of the 677 districts in India have less than 100 bank branches. Additionally, reports from Jammu & Kashmir, the north-east have not reached many banks in adequate numbers.

Severe inconvenience is caused to people availing medical facilities. Due to lack of disposable money at hand and that private hospitals and chemists are not accepting old notes or extending their credit facilities; their trauma is beyond bounds. As First Post (2016) says “The Rs. 4000 limit that has been imposed on withdrawals from bank mean it is a hand-to-mouth existence for many who are already in trouble”. Also, Abul Siddhique, who brought his mother along for treatment from Bangladesh to Kolkata says that he came to India because of the high quality of medication and treatment as compared to Bangladesh; even though it’s more expensive. He is terribly disappointed that most of the hospitals are not accepting high value currency; quotes India West (2016).

Foreign tourists are also severely affected with the scheme. Most of them who have withdrawn money after landing in India, an alien land, are desperately waiting to secure legal currency rather than fulfil the purpose of their visit, i.e. sight- seeing, enjoying the cuisine, etc. Robert Rudovick, a German tourist, says: “I had exchanged 200 U.S dollars last week and got most of the money in Rs. 1,000 and Rs. 500 notes. Now we are reduced to the status of going almost without any money in a foreign country. We have just a few Rs. 100 and Rs. 50 valid notes”, cites India West (PTI, 17th November, 2016).

Perhaps, the most unexpected result of the demonetization scheme is the number of ailments and deaths it has caused since its implementation.  In Bundelkhand, after 17-hour long workdays for over a week, 45-year old Varsha, a cashier at a Bank of Baroda had collapsed while handing out cash to a customer. Further, 30-year old Satish Soni, the manager at the Central Bank of India’s Talebhat branch in Bundelkhand “has been able to manage only 4-5 hours of sleep during the early days of implementation of the scheme”; notes Alok Pandey and Rohit Bhan (‘Amid Cash Crunch, Sleepless Bank Employees Fulfil Government’s Promises’, 20th November, 2016).  Senior citizens are already vulnerable to ailments suffer the most consequences of the ban. For example, a 70-year old man standing in a queue outside a branch in Maharashtra’s Nanded district died, reports First Post (FP Staff, 16th November, 2016). Additionally, as per PTI reports (2016) a 73-year-old man died of heart attack at Mulund; similarly, a 69-year-old man who was standing in a queue in Limbdi town of Surendranagar district in Gujarat, died as a result of heart attack.

People committing suicide as a result of shock and panic subsequent to the announcement of the demonetization scheme is also large. “Yesterday, my mother and father had a fight after she heard about the government decision. She was heartbroken and later she hanged herself to the ceiling fan”, Srinivas said to India Today (Kritika Banerjee, 10th November, 2016). Further, a class 12 student of Jaypee Vidyapeeth, Sumit, was found hanging from the ceiling at his house, on learning that his mother did not have smaller currency notes to give him.

The abovementioned facts are simply a curtain raiser to the much gross amount of human rights violations that has occurred post since the scheme has been announced. For instance, in Uttar Pradesh (Mahua Mafi village), an 8-year old died after her father was unable to pay for the petrol while rushing her to a hospital; i.e. since the man was carrying a Rs. 1000 note, the petrol pump attendant refused to take it. In Delhi, a woman who went to the bank asking for Rs. 1000 for her daughter’s wedding was turned away; as the withdrawal limit was Rs. 4000, notes India Today (2016).

Therefore, I argue that that the demonetization scheme is the least legally rational scheme that is being implemented in India. The human rights violations that occur on a daily basis as a result of this implementation is devastating. When the motive behind the scheme is appreciable, and economically rational to an extent, a blind eye cannot be made to its legal irrationality. The demonetization scheme per se is legally rational while its implementation makes it completely irrational. A scheme which causes such a trauma to the ordinary citizens cannot be justified, however good the long-term objective may be.


The aim of this paper was to expose the unique standing of legal rationality within the rationality discourse. As I conclude this paper, I strongly believe that I was able to achieve my aim in proving that there is no choice available for an individual/institution while deciding upon legal rationality because it is always a conduction of the judicial mind on pre-set standards. On the other hand, the fulcrum of economic rationality is the presence of ‘choice’ in it, and what choice results in maximum satisfaction. Legal rationality is always objective in nature, while economic rationality continues to remain subjective. The results of these might be positive or negative, but these two different schools of rationality always work on these two unique paradigms. Hence, legal rationality should always be segregated from economic rationality and considered as a novation within the study of Rationality.

List of references.

The author, Sreelakshmi Kurup, is a student of the Jindal Global Law School.

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