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Steel, reason and human behaviour – Part Two

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This is the second in a short three-part series that looks at some of the bigger issues surrounding the problems facing Tata Steel, and will consider how reason, or rationality has played its part in the troubles of British steel.  Read the first instalment here.

Rationality is often considered a positive aspect in business. It is certainly valued over irrationality. In the bad old days where sexism was not considered abnormal, irrationally was often equated with emotion and the female gender. Women were emotional – and this led to them making irrational decisions. Men conversely, were objective and made decisions based on reason.

This hierarchical elevation of reason can be considered a factor in one of reason’s most famous iterations, “the rational man”. The rational man making sensible, objective decisions can be linked to “the economic man” who – both rational and self-interested – will always search for the most efficient way of making profit.

Adam Smith, the 18th century philosopher knew of the rational man when he wrote his classic book about economics, “The Wealth of Nations”. This is the ideology that first developed the concept of ‘the invisible hand’ which governs and regulates free market economics and is integral to capitalism. The role of the free market and its ‘invisible hand’ have a key part to play in our steel industry.  Hugely popular in Victorian Britain the free market, or laissez-faire economics, does not allow government interference in industry, but trusts in the invisible hand to decide which business – or which industry – will survive and which will not.

The Victorians’ enthusiasm for the market would not countenance nationalisation of industry and it wasn’t always successful. They had great passion (and invested enormous sums) for the development of the London Underground railway, but nobody ever made much money from it and ultimately, nationalisation was the only way forward.

Total war was another situation that required a closer grip by government, never more so that when in World War II, it took the control of British industry and infrastructure. The Labour government that followed the war took this control one step further through nationalisation.

However, in more recent years the inefficiencies of government control have led to the many privatisations and the invisible hand of the rational man again holds sway. The fundamental problem with all this is the assumption that people make rational decisions, that they will always pursue optimum ends to realise maximum utility. But consciously, we all know that when we are making economic decisions as individuals, even huge ones such as leaving a job, buying a car or even a house, emotion plays an enormous part.

While I’m not advocating the re-nationalisation of the steel industry (for the third time since the end of WWII), I am sounding a note of caution on the reliability of a system based on reason.

The third and final part of this mini-series will be published tomorrow.

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