A Tale of Two Rationalities: Decision-Making Between Cold War Formalism and Chicago Realism

1 Introduction

For many scholars Rational Choice Theory (RCT) has been identified with the University of Chicago School of Economics. Even though some of the major developments of the theory are connected with economists and social scientists working on other institutions, in different academic traditions and political environments and with clearly diverse research agendas from those of the Chicago School of the “golden era”,^[1] there is considerable confusion – if not clear ignorance – of the fact that there are at least two distinct and separate traditions in RCT: an axiomatic tradition and an empirical tradition.

The axiomatic tradition of RCT was born during the 1940s at Princeton University^[2] and grew up during the Cold War in places like Carnegie Mellon, Stanford and the RAND Corporation.^[3] It is highly mathematized, concentrated in game theory, and identified with “decision theory” and top-down government planning. The Princeton school of RCT was generously funded by the U.S. Government (especially military agencies during World War II and the early Cold War) and was interdisciplinary in nature (drawing economists, psychologists, mathematicians, statisticians, political scientists, and of course game theorists into its orbit).

By contrast, the new political economy developed at the University of Chicago (and later at Virginia, UCLA and George Mason University) as “the economic approach to non-market behavior”. Its approach was empirical, with an emphasis on price theory, and it was politically liberal in the classical sense, i.e. favoring individual freedom and free markets. The Chicago School’s work was funded by small private pro-free market foundations and outsider businessmen,^[4] and almost all its leading figures were economists.

The ways each school was funded and institutionalized were instrumental in shaping their character: Funding affected their research agenda, their methodological emphases, relationships with other sciences (especially psychology), and the uses of their research.

Amazingly enough, genuine dialogue or collaboration between the two schools was minimal and at times openly antagonistic. It is not a coincidence that much of the major critique of “rational choice” in later decades emerged from scholars associated with the first (axiomatic) group, although these critiques were often framed as attacks on the Chicago school version of RCT – essentially attacking a straw man. Richard Posner illustrates this (Posner 2002: 2) observing that.

Economics, without abandoning its commitment to the rational model of human behavior, has abandoned the model of hyperrational, emotionless, unsocial, supremely egoistic, omniscient, utterly selfish, nonstrategic man (or woman), operating in conditions of costless information acquisition and processing, that cognitive psychologists rightly deride as unrealistic, and, more important, that is deficient in explanatory and predictive power with regard to a number of the phenomena in which economists and economically minded lawyers are interested.

In other words, many critics railing against “Chicago-style” rational choice were targeting assumptions (of hyper-rational, acontextual agents) that Chicago economists themselves had long rejected or never embraced.

The following sections trace these two traditions of RCT, highlighting their distinct origins, philosophical and political orientations, and how their interactions (or lack thereof) have shaped the landscape of social science. Along the way, we will see how post-war funding imperatives and ideological currents (from the Cold War to the rise of “neoliberalism”) channeled RCT into divergent paths.

2 The Missing Chicago School: Cold War Rational Choice Theory and its Misinterpretations

For almost three decades a number of monographs have been published exploring the relationship between social scientists and cold war politics.^[5] Some of these books are of a low quality, shallow, written by authors without scientific integrity, with a minimal understanding of theories and concepts, usually defending conspiracy theories.^[6] However, even the monographs written by scholars who are polemical and very critical of RCT share the same characteristic: they do not include the Chicago School in their story. They describe RCT as a product of government planning and targeted funding in major academic and research institutions from the early 1940s to the end of Cold War. RCT is described as a weapon used by the U.S. government during the cold war (but also before and after) and at the same time a theory identified with neoliberalism. This is very odd. Since neoliberalism is usually identified with Chicago economics, how come Chicago is absent?^[7]

The most important work in the field are two monographs of historian of science, S.M. Amadae (2003; 2016). Amadae narrates the story of the birth and development of RCT as an “intellectual bulwark of capitalist democracy”. According to Amadae (2003), RCT grew out of the RAND Corporation’s efforts to develop a science of military and policy decision making. In her story the leading figures in the first generation of rational choice theorists are the political scientist William Riker and economists (and later Nobel laureates) Kenneth Arrow and James Buchanan. RCT had three functions to serve.

1. to generate a science of military strategy to aid leaders in making superior decisions,

2. to “transfer” the science to the domestic front by helping the American government design a “decision technology” for social control in order to supersede the limits of classical liberal democracy, especially majoritarianism and institutional safeguards for the protection of individual rights,

3. to secure the “philosophical basis of free world institutions”, to defeat “idealist, collectivist, and authoritarian social theories” (Amadae 2003: 12–13).^[8]

It is more than remarkable that in her 400-page monograph on the history of RCT Amadae doesn’t even mention^[9] the Chicago School of Economics. Apparently Amadae believes that the intellectual developments in Chicago during this period are not part of the history of RCT. There is no discussion (not even a reference) to Milton Friedman or Gary Becker. It is not a coincidence. Amadae’s thesis is that axiomatic decision making (or axiomatic RCT) is not a refinement of marginalist economics but an innovative approach to decision making quite far from the premises and objectives of Chicago economics (Amadae 2003: 240–248). It is a science of control, not a science of choice.

Ten years later, another very interesting story of cold war rationality collectively written by six scholars from different disciplines (Erickson et al. 2013), reaches a similar conclusion about RCT. According to the authors, RCT was developed by game theorists and social psychologists in almost everywhere, except Chicago.^[10] Oskar Morgenstern, Thomas Schelling, Herbert Simon, Herman Kahn and Anatol Rapoport are the protagonists in this story of a creation of a science of decision making which is formalistic, algorithmic and mechanically rule-bound, and is heavily funded by the U.S. Defense department. Economists are only a part of this story since RCT is an interdisciplinary endeavor by experts in mathematics, logic, game theory, systems analysis, computer science, operations research, Bayesian probability, nuclear strategy and experimental social psychology.^[11] The outcome of this was a theory (RCT) where “[rationality] could be captured by a finite, well-defined set of rules to be applied unambiguously” (Erickson et al. 2013: 29). According to the authors, even old-behavioral scientists, like Herbert Simon, reinforced this approach by adopting the framework and working in it. The same happened with Amos Tversky and Daniel Kahneman. They are essentially part of the same tradition in social science research.^[12]

Chicago school is again notoriously absent. There is not even a reference.^[13] This is again not a coincidence. For the authors, RCT’s objective was to replace human judgment with formalistic rationality, stripped of subjective perception, reasoning and emotion. How can this be accommodated with the empirical, subjective emphasis on real choices of the Chicago School? The following excerpt by Richard Posner, discussing the case where contracting parties in actual markets agree on something which an economist finds inefficient, is illustrative (Posner 2003: 96–97):

Now consider what to do about cases in which the parties’ intentions, as gleaned from the language of the contract or perhaps even from testimony, are at variance with the court’s notion of what would be the efficient term to interpolate into the contract? If the law is to take its cues from economics, should efficiency or intentions govern? Oddly, the latter. The people who make a transaction – thus putting their money where their mouths are – ordinarily are more trustworthy judges of their self-interest than a judge […] who has neither a personal stake in nor first-hand acquaintance with the venture on which the parties embarked when they signed the contract. So even if the goal of contract law is to promote efficiency rather than to enforce promises as such […] enforcing the parties’ agreement insofar as it can be ascertained may be a more efficient method of attaining this goal than rejecting the agreement when it appears to be inefficient.

One of the reasons of the Chicago isolation from RCT research and government funding was that the University of Chicago was tolerant to communist scholars and students and protective of academic freedom even in the early period of Cold War, when red scare was mainstream. Herbert Simon had difficulties to be accepted by the cold war RCT circles because he was a graduate of Chicago: “By 1948, Communists and supposed Communists were being discovered under every rug […] Any graduate of the University of Chicago, with its reputation of tolerance for campus radicals, was guaranteed a full field investigation before he could obtain security clearance.” (Simon 1991: 118). In the early sixties the Chicago School was identified with the anti-(Vietnam)war libertarian movement, the abolition of the draft (an idea supported publicly by Milton Friedman himself) and pro-market ideas (Doherty 2007: 297–307, 454–463). These ideas ensured that the Chicago school would remain an outsider in major Department of Defense programs in social sciences and decision theory.

Bordering the absurd is the connection Abella does in his book on RAND Corporation. Abella narrates (somewhat superficially) the story of RAND’s involvement in Cold War with many references to RCT. Again, there is no reference to Chicago, with one exception at the conclusion of his book when he feels obligated to attack Milton Friedman out of the blue. After decrying “RAND’s rational choice” as denying “cooperation, self-sacrifice and abnegation,”, giving birth “to a world shaped by decisions made in the dark, outside the realm of public debate – justified by false objectivity […] and biased scientific bases that denigrate collective responsibility” and discarding “previous social commitments of companies to employees, government, and community” he adds the following footnote to give an example: “Among other things, that is why we have a volunteer army – a concept espoused and driven by laissez-faire economist Milton Friedman, a firm believer in the trade-offs of rational choice theory” (Abella 2008: 308–309).

There is no doubt that there is no connection between the two traditions. Axiomatic rational choice theory was a product of scholars and institutions totally separated from the Chicago School of Economics. This was not only separation, it was a clear-cut exclusion.^[14] Nevertheless, it’s difficult to understand not only the reasons that this separation was not observed earlier by experts but most importantly the reasons why Chicago was identified with the more extreme formalistic versions of RCT. Versions that were totally alien to Chicago^[15] as we are now going to see.

3 The Cold War Axiomatic Tradition (Princeton and RAND)

The axiomatic tradition of RCT took shape in the 1940s and 1950s in an environment heavily influenced by World War II and the Cold War. It was epitomized by the work of John von Neumann and Oskar Morgenstern, whose landmark Theory of Games and Economic Behavior (1944) laid down mathematical axioms for rational decision-making and strategic interaction. Game theory itself first emerged from discussions of the mathematics and psychology of games like chess in interwar Europe, and by the late 1930s von Neumann had developed it into “an ambitious theory of social organization.” This approach was subsequently shaped by its use in combat analysis during WWII and the Cold War (Leonard 2010). In the postwar period, this tradition found institutional homes at places such as the Princeton psychology department, the Cowles Commission (at the University of Chicago, though Cowles was quite independent of Chicago’s economics culture), the RAND Corporation in Santa Monica, and later think tanks and universities like Carnegie Mellon and Stanford. It was characterized by an abstract, formal approach to rational choice, treating it as a set of logical axioms and optimization problems.

Politically, many proponents of this axiomatic decision theory saw themselves as problem-solvers for liberal democracy, not necessarily as advocates of laissez-faire economics. Their work was often funded by military and government agencies with practical goals: winning wars, optimizing logistics, designing effective institutions, and “taming” the threats of the nuclear age (Erickson et al. 2013). In this sense, Cold War RCT was a technocratic project. It aimed to provide rational, scientific solutions to social and strategic problems, thereby “saving” the Free World through better decision-making rather than through ideological advocacy of free markets or individual rights. This stance sometimes made their position appear paradoxical: they championed democracy and capitalism in the abstract, but they were willing to use highly centralized, mathematical, and even top-down methods that looked more like planning. For example, many figures in this tradition were comfortable with extensive government intervention as long as it was guided by “rational” principles. In the context of the early Cold War, rational choice at Princeton/RAND often meant enhancing the decision-making capacity of the state (e.g. in military strategy or resource allocation) to compete with the Soviet Union’s centrally planned system (Amadae 2003).

One hallmark of this tradition was its interdisciplinary nature and insulation from traditional economics. Economists working in this mode interacted extensively with psychologists (e.g. in studying decision-making under risk), operations researchers, mathematicians, and political scientists. The problems they tackled (nuclear deterrence, arms races, voting systems, etc.) often lay outside the usual domain of market economics. Notably, the University of Chicago’s economics department was largely absent from these developments. Historical accounts by Amadae (2003) and by Erickson et al. (2013) emphasize that RCT’s early Cold War flowering happened in government-funded institutions like RAND and in Ivy League and West Coast settings – essentially almost everywhere, except Chicago. The protagonists of this story include not only von Neumann and Morgenstern but also figures like Thomas Schelling, Herbert Simon, Howard Raiffa, Kenneth Arrow, and Anatol Rapoport, who were pioneering game theory, decision theory, and related fields (Amadae 2016).

The intellectual ethos in this community was one of formal rigor and engineering-style problem solving. For instance, Herbert Simon’s work on bounded rationality arose as a critique of the unrealistically omniscient “Economic Man” assumed in early game theory – a concern shared by others in the RAND milieu. Yet, even as they introduced psychological realism, scholars like Simon still worked largely within a government-funded, technocratic framework (Simon 1957). The overarching objective was to develop tools for optimal decision-making that could be applied to military strategy, diplomacy, and social planning.

It is important to note that many members of this axiomatic tradition were not laissez-faire economists; indeed, some leaned left of center in their politics. An illustrative case is the Cowles Commission for Research in Economics, which resided at the University of Chicago from 1939 to 1955. The Cowles Commission’s economists (like Tjalling Koopmans, Jacob Marschak, and Kenneth Arrow) shared the Princeton/RAND group’s zeal for formal modeling and tended to favor Keynesian or even socialist economic policies. As Lanny Ebenstein (2007: 55) observes in his biography of Milton Friedman, “the Cowles Commission was, as a group, somewhere between Keynes and Lange politically, with a number [of its members] closer to Lange.”^[16] In other words, the mathematical economists in the Cowles orbit often viewed rational choice and optimization as tools for managing the economy, not arguments for unfettered markets. This left-of-center technocratic bent meshed well with the funding environment of the time: government agencies and private foundations were eager to support research that promised better control of economic and social processes.

Despite being housed at Chicago for a time, the Cowles Commission had a tense relationship with the Chicago economics department. When Milton Friedman joined the Chicago faculty in 1946, he and his colleagues in the department (like Frank Knight and later George Stigler) were wary of Cowles’s abstract approach. Over the late 1940s and early 1950s, as Friedman’s empirical, market-oriented group “jostled for institutional predominance” with the Cowles Commission, the differences became more pronounced (Ebenstein 2007: 55). There was significant personal and intellectual interaction (Friedman recalls attending Cowles seminars frequently and Cowles economists attended Chicago workshops (Ebenstein 2007: 56), but there was also a clash of views on methodology and ideology. Friedman noted that Cowles scholars had “very different views” of economics as a discipline and very different ideological leanings, compared to his own. He and others in Chicago saw Cowles’s approach as too formalistic and too accepting of government planning. This internal Chicago tension presaged the broader gulf between the axiomatic rationalists and the emerging empirical tradition.

A telling anecdote illustrating the divide between the Cold War axiomatic rationalists and free-market empiricists comes from the RAND Corporation. In 1963, Chicago economist Ronald Coase (then famous for his work on transaction costs) prepared a report for RAND on allocating radio frequencies. In line with Chicago’s market-oriented thinking, Coase^[17] proposed that broadcasting rights be allocated by market auctions rather than by bureaucratic FCC fiat (Van Horn and Klaes 2011). The reaction within RAND was extremely negative: the report was seen as undermining RAND’s institutional interests and was suppressed (it went unpublished until three decades later, when Coase won the Nobel Prize). The fact that a figure like Coase – who was external to the RAND decision-theory establishment – proposed a market solution that clashed with RAND’s more planning-oriented ethos, and that RAND’s response was to veto the idea, underscores how far apart the traditions were. As Van Horn and Klaes (2011: 305) noted, Coase’s Chicago-style position “undermined the interests of RAND,” whereas the conclusions of a RAND-affiliated axiomatic theorist like Arrow “furthered those interests”. In short, the Cold War RCT establishment at places like RAND was not receptive to Chicago’s free-market empiricism.

By the late 1950s and early 1960s, the axiomatic tradition had produced an impressive intellectual edifice – from game theory and expected utility theory in economics to applications in political science (e.g. Riker’s 1962 work on voting and coalition formation) and psychology (e.g. subjective expected utility in behavioral decision research). It largely defined what “rational choice theory” meant in a broad swath of the social sciences. Yet its very abstraction left it somewhat disconnected from the growing work of Chicago economists on real-world markets and social issues. Mirowski (2002: 202–207) observes that there was a “chasm” between Cold War RCT and Chicago: the Chicago School simply ignored many of the developments of von Neumann and the “cyborgs” (Mirowski’s term for the Cold War rationalists who blended humans and machines in systems analysis).^[18] Indeed, Mirowski^[19] tries very hard to connect Chicago to the Cold War rationality project by noting, for example, that Friedman and Stigler had wartime roles at the Statistical Research Group (SRG) at Columbia University, a group that was established in the spring of 1942 by Harold Hotelling. This was a group of Columbia economists helping the U.S. government war effort by dealing with the statistical problems of ordinance and warfare – it was dissolved right after the end of the war in 1945 (Wallis 1980). Milton Friedman and George Stigler worked there as young economists (before they got tenure at Chicago), essentially as research associates, not as senior scholars. But even Mirowski’s (2001: 203) own conclusions underscore how little substantive influence that had: “Although no profound engineering or theoretical breakthroughs on a par with the atomic bomb or radar occurred at the SRG, it was nevertheless the occasion for the consolidation of what later became known as the ‘Chicago school’ of economics in the postwar period.” In other words, the wartime experiences of individuals like Friedman did help solidify their Chicago approach, but the Chicago approach was fundamentally separate from – and a reaction against – the formalistic, engineering approach of Cold War RCT.^[20]

In revisiting Amadae’s thesis about these developments, it becomes clear that we agree with Amadae’s argument: axiomatic decision theory was not simply a refinement of pre-war marginalist economics, but rather “an innovative approach to decision making quite far from the premises and objectives of Chicago economics.” (Amadae 2003: 240–248). Our analysis concurs that these two schools of thought arose from different impulses and served different masters – one, the technocratic-managerial needs of the Cold War state, the other, the empirical and liberal traditions of market economics.

Before turning to the Chicago school, it is worth noting one more feature often associated with the Princeton/RAND tradition: the concept of “rational choice” as a value-neutral, scientific tool. Proponents prided themselves on being apolitical problem-solvers. In fact, the phrase “Cold War rationality” was not one they would have recognized; as Erickson et al. (2013: 2) point out, the very notion would have seemed bizarre to them because it implied their rationality was context-bound. They believed they were uncovering universal principles of reason. However Cold War rationality was indeed a distinct phenomenon – a historically specific form of rationality characterized by formal models, an ethos of control, and often a neglect of context and human factors. Its ideal type was formal and largely independent of culture or historical context, assuming that every problem could be encoded into a model of utility maximization or game-theoretic equilibrium (Erickson et al. 2013). This idealization, of course, eventually met with its own challenges (such as the advent of behavioral economics).

In summary, the first tradition of RCT was born in an era of existential threats and unprecedented government investment in science. It forged a vision of human rationality as something that could be formalized and harnessed to serve collective ends (like national security). It operated in prestigious academic and policy institutions (Princeton, RAND, etc.) with ample funding and intellectual firepower. But it also developed in relative isolation from, and often ignorance of, the parallel empirical tradition that was emerging in Chicago.

4 The Empirical Tradition of RCT (Chicago and the “Economic Approach”)

The Chicago School of Economics emerged in the late 1940s, after the end of the war, when three young economists returned to Chicago with tenure: Milton Friedman, George Stigler and Allen Wallis. All three were students of Frank Knight^[21] and classical liberals. Together with Aaron Director and Henry Simons, they formed the first generation of the Chicago School. For Friedman, economics was a science “to the extent that neoclassical price theory^[22] and empirical verification were combined” (Van Overtveldt 2007: 26). Friedman was from the very beginning very critical of the formalism of the axiomatic RCT. He, as early as in 1949, protests strongly against empty formalistic reasoning (Friedman 1949: 490):

Economic theory […] has two intermingled roles: to provide “systematic and organized methods of reasoning” about economic problems; to provide a body of substantive hypotheses, based on factual evidence, about the “manner of action of causes.” In both roles the test of the theory is its value in explaining facts, in predicting the consequences of changes in the economic environment. Abstractness, generality, mathematical elegance – these are all secondary, themselves to be judged by the test of application. The counting of equations and unknowns is a check on the completeness of reasoning, the beginning of analysis, not an end in itself. […] But our work belies our professions. Abstractness, generality, and mathematical elegance have in some measure become ends in themselves, criteria by which to judge economic theory.

This doesn’t mean that Friedman was not a positivist (Hands 2009). In his very influential methodological article (Friedman 1953: 4) he emphasizes that positive economics can be “an ‘objective’ science in precisely the same sense as any of the physical sciences.”^[23] Nevertheless, the ambition of Friedman was not to sponsor a new approach to economics and of course it was not to shape a distinctive RCT (see e.g. Friedman & Savage 1952). His objective was to protect the school from formalistic rationality^[24] without becoming antiquated and outdated.

Friedman’s best doctoral student, Gary Becker was the one who created a new approach to economics. He was the one who successfully expanded the domain of economics to a science studying choice in a variety of “markets” (from politics to crime, mating, fertility and marriage; Becker 1976; 1993). The fact that this new approach to human behavior, with the help of microeconomics, is still identified with an RCT developed in the cold war academic/military complex, is remarkable but also puzzling. It is mostly the result of a failure to distinguish the two RCT traditions, compounded by polemical oversimplifications. One of the best historians of the development of the concept of rationality in RCT theory, Nicholas Giocoli makes the record straight (2003: 112, emphasis by the author):

Becker’s way out was grounded upon the traditional notion of rationality as reasoned pursuit of one’s own interest. Yet, the latter was broadened to encompass not only self-interest, but, more generally, any notion of welfare as individuals conceived of it, so behavior was assumed to be driven by a much richer set of values and preferences – namely, “selfish, altruistic, loyal, spiteful, or masochistic” ones (Becker 1993, 386). To behave economically simply meant choosing according to one’s own preferences the best option in the perceived opportunity set. Differing from the early marginalists therefore, rationality became a method of analysis, rather than a specific hypothesis concerning human motivations.

Giocoli (2003: 115) is one of the few scholars who emphasize the essence of Chicago’s hostility to “cold-war RCT” (without naming it). Chicago school reacted to “the creation of a purely logical theory, a deductive exercise with little if no empirical significance.” For Chicago “the criterion of robustness being the possibility of undertaking a rigorous empirical validation of theoretical statements.”^[25] Nobody described the difference of the two traditions better than Friedman (1953: 282–283) when he accused the formalistic highly-mathematized approach for giving too much emphasis on the formal structure of the theory and considering as unnecessary to test the validity of this theoretical structure except for conformity with the canons of formal logic. “The theory provides formal models of imaginary worlds, not generalizations about the real world.” (Friedman 1953: 283).

The hostile attitude towards almost everything that axiomatic RCT represents led, as we have seen, to conflict with Cowles Commission. The struggle for the nature of the economics science that took place in the department after the arrival of Friedman to the final ousting of the Cowles Commission is very well documented (Mirowski 2001; Van Overtveldt 2007: 36–39, Düppe & Weintraub 2014: 465–466, Ebenstein 2015: 92: 107, for more details and further references). Karl Brunner was a young economist when he arrived in Chicago and became a witness of the struggle between the “increasingly mathematical flavor”^[26] of the Cowles commission and the infant Chicago school which “emphatically advanced the relevance of economic analysis as an important means of understanding the world, in a manner that I had never encountered before” (Brunner in Van Overtveldt 2007: 38).

The Chicago tradition of rational choice theory took root in a very different soil: the environment of the University of Chicago’s economics department in the 1940s and 1950s, spreading later to affiliated outposts such as the University of Virginia (where James M. Buchanan launched the Public Choice school) and University of California, Los Angeles (UCLA), and eventually George Mason University. For Friedman and his Chicago colleagues, economics was above all an empirical social science – “a discipline to the extent that neoclassical price theory and empirical verification were combined.” They valued simplicity and real-world relevance in theory. Friedman, in particular, was from the beginning a trenchant critic of the formalism that characterized the axiomatic school. This critique, voiced in his review of utility analysis and later famously in “The Methodology of Positive Economics” (Friedman 1953), captures Chicago’s hostility to the hyper-mathematical approach: models should ultimately be judged by their empirical predictions, not by their internal logical consistency alone. The Chicago criterion of a good theory was its robustness and testability in empirical studies – “the possibility of undertaking a rigorous empirical validation of theoretical statements.”

It’s important to underscore that, despite Friedman’s emphasis on positive economics, the Chicago economists were not value-neutral in their orientation. They were unabashedly supportive of free markets and skeptical of government intervention – though they arrived at these positions through their analysis rather than taking them as axioms. As Ross Emmett (2022) notes, the Chicago School’s analytical framework did not inherently require a normative commitment to individual freedom, but in practice many Chicago economists did share such libertarian or classical liberal values. In Friedman’s case, his policy advocacy (e.g. for flexible exchange rates, against conscription, for school choice) sprang from his analysis of what policies would maximize freedom and efficiency.

Aaron Director, for example, was instrumental in bringing The Road to Serfdom to American audiences by convincing the University of Chicago Press to publish F.A. Hayek’s famous 1944 book. Director also founded the field of Law and Economics at Chicago, which explicitly applied economic reasoning (rational choice) to legal and political institutions in a way that often buttressed libertarian conclusions. This points to a key aspect of the Chicago tradition: they extended rational choice analysis beyond the market, but always with an eye to demonstrating the power of voluntary exchange and the limitations of government. Becker’s work exemplified this “economic imperialism.” With this broad conception, he boldly applied price theory to crime, family, education, and other traditionally non-economic spheres (Becker 1968; 1976). Becker’s work essentially said: people respond to incentives and make trade-offs in all areas of life, not just in shopping or firms’ production decisions. This was a radically empirical claim – one that invited testing and data (indeed, much of Becker’s work is backed by or spurred empirical studies).

The Chicago tradition’s funding and institutional context also set it apart. Unlike the Princeton/RAND scholars who enjoyed lavish government or big foundation grants, the Chicago economists in the 1950s had relatively meager outside funding. They occasionally received support from private foundations with ideological agendas (for instance, the Volker Fund or Rockefeller grants for specific projects). But the scale was much smaller, and there was no government “social science” largesse flowing to Friedman, Becker, or Buchanan in their formative years. This scarcity of funding may have had an upside: Chicago scholars were not beholden to defense agencies or to the priorities of Cold War planners. As a result, their research agenda was self-determined and often contrarian. They focused on issues that mainstream academia (and certainly the RAND crowd) wasn’t looking at – such as the economics of racial discrimination (Becker 1957), the economics of fertility (Becker 1960), or the logic of collective action in democracy (Buchanan and Gordon 1962). These topics were pursued with minimal resources; the Chicago school’s support was too low to shape a particular research agenda from above. Thus, the Chicago tradition evolved somewhat underground relative to the high-profile Cold War RCT projects.

Geography and academic culture reinforced this separateness. Chicago’s economics department was (figuratively and literally) far from the Ivy League and Washington, D.C. power centers. Van Overtveldt (2007) described Chicago’s two-fold isolation: not only was it in the Midwest, away from the East Coast establishment, but within the university the Chicago economists stood apart from the Cowles Commission during its Chicago tenure. This “outsider” status nurtured a strong esprit de corps and a willingness to defy academic fads. Chicago economists relished taking on Keynesianism in macroeconomics, for example, or attacking the over-formalization of economic theory. They saw themselves as keepers of an older tradition of political economy that emphasized real-world institutions (prices, property rights, incentives) and human limitations.

One consequence of these differences was that each tradition tended to talk past the other. By the 1960s, to someone in the Cowles/RAND orbit, “rational choice theory” conjured up the image of logical axioms, Nash equilibria, linear programming, and the like – tools that could just as easily plan an economy as explain how it worked. To someone at Chicago, however, “rational choice” meant something more down-to-earth: individuals pursuing their own goals, responding to incentives, and doing the best they can in markets. When critics of RCT emerged, they often failed to distinguish these meanings. For example, in the 1970s and 1980s, sociologists and political scientists attacked “economic imperialism” and the assumption of self-interested rational actors, but frequently their target was a caricature – the “hyper-rational,” asocial being that Posner later said economists had already abandoned. In fact, the most forceful early critiques of RCT came from within the axiomatic camp itself (e.g. the work of psychologists like Tversky and Kahneman, or economists like Herbert Simon and later Amartya Sen). But these were often misinterpreted by outsiders as if they invalidated Chicago-style economics, when Chicago economists had never relied on the extreme assumptions being critiqued.

A case in point is the accusation (by some philosophers or social theorists) that RCT cannot account for altruism or “irrational” motivations. Chicago’s response was essentially already in Becker’s formulation: expand the utility function to include any values the actor holds – a move that preserves the rational-choice approach by making it flexible in content. This was a subtle but important shift: it allowed the Chicago school to claim that their version of RCT was not a narrow dogma (people are selfish calculators) but a general approach (people have consistent preferences and respond to constraints) (Foka-Kavalieraki and Hatzis 2011).

One of the most significant products of the Chicago empirical tradition, which in time grew into its own school, was public choice theory – essentially the application of economic reasoning to politics. James Buchanan (a Chicago PhD student of Frank Knight) and Gordon Tullock (a Chicago law graduate, similarly influenced by Chicago ideas) argued that “individuals in their capacity as political actors could be analyzed in the same way, and on the basis of the same assumptions, as individuals in their capacity as market actors.” (Zowlinski and Tomasi 2023: 169). This was a direct extension of the Chicago philosophy to the realm of voting, bureaucracy, and constitutional rules. Public choice, or the Virginia School, insisted that politicians and bureaucrats are not perfectly benevolent planners (as some Cold War rationalists assumed in their models of social welfare optimization) but are self-interested individuals subject to incentives. In Buchanan’s famous words, politicians are ordinary human beings” with the same foibles and motivations as anyone else.

This idea was radical at the time (1950s–60s) because it challenged the prevailing technocratic faith in wise government planning – a faith that, as we saw, was prevalent in the axiomatic tradition. Here we see again the ideological undercurrent: Chicago/Virginia empiricism often had the effect of bolstering arguments for limited government. Buchanan and Tullock’s seminal book The Calculus of Consent (1962) essentially argued that constitutional rules are needed to constrain government because majority voting can lead to outcomes that harm minorities or the economy. Decades later, historians like Nancy MacLean would controversially claim that this was part of a “stealth plan” to protect capitalism from democracy. Indeed, MacLean’s interpretation (2017) casts Buchanan’s work as a deliberate political project funded by right-wing businessmen to “train a line of new thinkers” who could resist an “increasing role of government” in society. While MacLean’s conclusions are contested, it is true that the Chicago/Virginia tradition was comfortable engaging in ideological battles in a way the Princeton/RAND crowd generally was not. Buchanan’s venture at UVA (and later at GMU) explicitly linked rational choice economics with defending certain political values (like economic liberty and constitutionalism).

In short, the empirical rational choice school merged with a libertarian political economy, producing cross-disciplinary fields like law and economics, public choice, and new institutional economics. It is worth noting that by the 1970s, many of Chicago’s ideas had permeated mainstream economics (e.g. the importance of micro foundations, the use of rational choice in political science via Gary Becker’s and others’ work, etc.). Ironically, as Chicago’s approach became more influential, it also became less distinguishable from the rest of the profession. The Chicago School’s success meant that its once-heterodox methods were now widespread in economics, blurring the lines between “Chicago” and the rest.

But at the same time, the axiomatic tradition had also deeply infiltrated economics, particularly through the rise of game theory as a standard tool in industrial organization, finance, and even macroeconomics. In some sense, the two traditions coexisted within economics departments by the end of the century, with people often unaware of the historical tensions. Gary Becker’s own career reflected this fusion: he was entirely of the Chicago empirical tradition in spirit, yet he readily used formal models when needed and even co-authored with axiomatic game theorists (e.g. his work on bargaining with Kevin Murphy).

5 Neoliberalism and the Two Traditions

In discussions of 20th-century economics, the term “neoliberalism” often arises to describe the free-market revival associated with figures like Friedman, Hayek, and Buchanan. The Chicago School, due to its policy influence and market orientation, is regularly identified as a chief example of neoliberal economics (or “market fundamentalism” to its critics).^[27] However, as a concept, neoliberalism is notoriously nebulous. Scholars have pointed out that the term has been used so broadly that it risks becoming a “trivial and nonsensical” catch-all. In the context of rational choice theory, labeling the Chicago tradition “neoliberal” can obscure more than it clarifies. We acknowledge that the Chicago School and its offshoots were part of a larger pro-market intellectual movement. Critics frequently use it as a shorthand for everything from monetarist economics to public choice theory to globalization, without distinguishing among them. As a result, serious historical analysis must be precise: Chicago economists did advocate free markets and influenced policy, yet their methods and immediate objectives (building an empirical science of human behavior) differed from the European Hayekians or the technocratic globalizers also lumped under “neoliberalism.”

Nevertheless, the use of the concept is a strong indication that this is not a concept but a “straw man”. It has all the characteristics: (a) nobody describes herself as neoliberal, (b) it is a term coined by adversaries of various theories collectively stamped as “neoliberal”, (c) there is no shared meaning between the different users, even when their political views are identical, (d) the concept is employed in ways that are contradictory, (d) the range of targets is so broad that it becomes trivial and nonsensical. According to Venugopal (2015) neoliberalism as a concept “has proliferated well beyond its conceptual crib in political economy and has as a result become stretched to the point where widespread concerns have been raised about its viability and relevance”.

One wonders why the employment of the term is so popular, not only in superficial political discourse but also in scholarly work. According to Venugopal (2015):

In effect, neoliberalism serves as a rhetorical tool and moral device for critical social scientists outside of economics to conceive of academic economics and a range of economic phenomena that are otherwise beyond their cognitive horizons and which they cannot otherwise grasp or evaluate. It has as a result ended up, as Bob Jessop describes, ‘more as a socially constructed term of struggle (Kampfbegriff) that frames criticism and resistance than as a rigorously defined concept that can guide research.’

In this paper, we have used the term sparingly. When applied, it is to situate Chicago’s intellectual lineage in the broader post-1940s revival of market-oriented thought. Notably, works like Raghuram Rajan and Luigi Zingales’s Saving Capitalism from the Capitalists (2003) and Zingales’s Capitalism for the People (2012) show that even in the 21st century, economists influenced by the Chicago tradition continue to champion free markets while grappling with new challenges (e.g. crony capitalism). These works underscore that Chicago’s core message – confidence in competitive markets – persisted, but with refinements: e.g. acknowledging the need to prevent incumbents from undermining competition (which is actually in line with true liberal principles, not a deviation from them). Thus, it would be a mistake to say that “Chicago strayed from its free-market roots” in recent times; rather, Chicago-influenced scholars have applied free-market reasoning to new problems, remaining within the broad tent of neoliberalism understood as pro-market ideology.

In sum, we have clarified our usage of the term neoliberalism in relation to RCT. We treat it as a historical context (the rise of global market advocacy after WWII) rather than as a precise analytical category. Chicago’s empirical RCT tradition was a key strand of neoliberal thinking, but it was not identical to all currents of neoliberalism. Conversely, the axiomatic tradition did not fit neatly into any ideological box – its practitioners ranged from libertarians to socialists – which is one reason we avoid conflating Cold War decision theory with neoliberalism.

6 Conclusions

The exploration of Rational Choice Theory across these two traditions reveals a nuanced and complex landscape that departs from any simplistic narrative linking RCT exclusively to one school of thought. Historically, accounts by scholars like Amadae and Erickson et al. have shown that RCT’s formative roots lay to a great extent in government-funded projects (e.g. the RAND Corporation and related Cold War institutions) that shaped it into a tool for military strategy, social engineering, and the ideological struggle against totalitarianism. This axiomatic RCT, driven by game theory and systems analysis, was markedly different from the empirical, market-focused approach of the Chicago School. Chicago’s economics department, noted for its fierce defense of academic freedom and tolerance of diverse viewpoints (Milton Friedman famously allowed and debated Marxist and Keynesian colleagues), was largely absent from – and sometimes dismissive of – the Cold War “rational choice” enterprise. That absence was not an oversight but a reflection of fundamentally different approaches and philosophies.

The Princeton/RAND tradition viewed rational choice as something that could be designed and imposed from above (for instance, optimal strategies or social welfare criteria), often with collective objectives in mind. The Chicago tradition, conversely, viewed rational choice as emerging from below, from the independent decisions of individuals responding to incentives in markets and social settings. Funding sources and institutional affiliations reinforced this split: the axiomatic camp thrived on military and big foundation patronage, aligning its research with Cold War priorities, whereas the Chicago camp, with sporadic private funding, pursued a more maverick trajectory, aligning with classical liberal ideas and often challenging government orthodoxies.

By clearly delineating these two traditions, we strengthen the argument that “rational choice theory” was never a monolith. It followed two parallel tracks through much of the postwar era, occasionally intersecting but more often engaging in mutual ignorance or miscommunication. This understanding brings greater conceptual precision: for example, when someone critiques “rational choice” for being unrealistic or ideologically biased, one must ask – which rational choice? The formal axiomatic models of Cold War game theorists, or the contextual economic approach of the Chicago School? As we have shown, many criticisms historically aimed at RCT (e.g. that it assumes hyper-rationality or self-interest to the exclusion of other motives) were already internalized and addressed differently by the two schools. Chicago economists expanded preferences and insisted on empirical testing, whereas Cold War rationalists sometimes adjusted their models (as in the development of bounded rationality) but often kept a formalistic structure. Recognizing the dual lineage of RCT helps avoid conflating the target of such critiques.

We have also enhanced the historical framing of these traditions. The Cold War context is indispensable for understanding why the axiomatic approach flourished when and where it did. It was part of what one historian calls the “strange career of Cold War rationality” – a chapter in intellectual history where reason was marshaled as a weapon of war and governance. On the other hand, the Chicago tradition can only be fully grasped against the backdrop of American so-called “neoliberalism” – the revival of free-market thinking in the mid-20th century as a counter to both New Deal and Soviet communism. Chicago’s RCT was a pillar of that revival, providing analytical rigor to the case for markets (e.g. demonstrating that even non-market behavior could be explained by market principles). Works like Angus Burgin’s The Great Persuasion and Daniel Stedman Jones’s Masters of the Universe detail how thinkers from Hayek to Friedman rebuilt a free-market network after WWII. However, while Aaron Director’s efforts to spread Hayek’s ideas in the U.S. and the Mont Pelerin Society connections, Chicago’s methodology was distinct. However, one can be a Chicago-school economist without a strong libertarian commitment, because the method doesn’t logically require it.

Finally, we acknowledge that the story of RCT does not end with these two traditions. In the last few decades, a “third” strand of research has come to prominence, one that might be seen as both a critique and an outgrowth of the earlier traditions. Behavioral economics and experimental economics, along with evolutionary game theory, have introduced systematic irrationalities and social preferences into what was once a purely rational choice framework (Friedman controversy). Interestingly, some of this “third wave” can be viewed as vindicating certain Chicago-style insights while demolishing others. For example, Vernon Smith’s work in experimental markets showed that even when individuals do not have full information or complete rationality, a competitive market can still aggregate information and yield efficient outcomes – an empirical confirmation of Hayek’s famous insight that competition induces people to act as if they were rational in order to survive.

Hayek (2023 [1973]: 75–76) had argued that “it is not rationality which is required to make competition work, but competition which will produce rational behavior,” and the success of markets in lab experiments supports this. In the decades after the Cold War, scholars inspired by Austrian economics and behavioral research have proposed a possible third tradition of RCT (Rizzo and Whitman 2020). This perspective – foreshadowed by Hayek and later advanced by economists like Vernon Smith – argues that market competition will produce rational behavior even if many individuals are not fully rational. Experimental evidence by Vernon Smith (2008) shows markets reaching efficient outcomes as if participants were perfectly rational, due to learning and adaptation (an “ecological” rationality) (Foka-Kavalieraki 2025). This line of thought, along with a revival of interest in Adam Smith’s Theory of Moral Sentiments (which emphasizes morality and norms in decision-making), lies outside the scope of this paper. Its emergence, however, underscores that RCT has continued evolving beyond the two mid-century traditions.

At the same time, the behavioral revolution (Kahneman, Tversky, Thaler, etc.) has catalogued departures from the classical rational model – from prospect theory’s loss aversion to hyperbolic discounting – forcing a reconciliation of RCT with psychological realism. Floris Heukelom’s (2014) notes that this movement represents a “fundamental reorientation” of economics toward empirical validation of behavioral assumptions, which interestingly echoes the Chicago ethos of testability while rejecting partly the Chicago assumption of consistently rational behavior.

In effect, behavioral economists took up Chicago’s call for empirical relevance but often ended up aligning with some of the long-standing criticisms the axiomatic tradition had faced (e.g. that humans don’t fit the rational calculator model). Meanwhile, the political realm of RCT has also evolved. Public choice theory has been joined or challenged by other frameworks (like behavioral public choice, which looks at the biases of voters and officials, or Ostrom’s Bloomington School focusing on institutional analysis beyond simple market/government dichotomies). And on the far libertarian edge, there are indeed those who push rational choice to an extreme anti-statist vision. Yet, one could also trace their intellectual lineage to Cold War rationalism’s confidence in designing new systems from scratch. Thus, the legacy of the two traditions of RCT continues to unfold in complex ways.

In closing, rational choice theory should be understood not as a single doctrine but as a terrain of intellectual inquiry shaped by at least two major traditions. Appreciating this fact allows us to better interpret both the historical development of social science in the 20th century and the continuing debates over the role of rational choice in explaining (or guiding) human behavior. We have aimed to strengthen this understanding by integrating diverse sources and perspectives – from Cold War intellectual history and the rise of neoliberal thought to the internal methodological debates within economics – thereby providing a richer, more precise account of the two traditions of rational choice theory. Perhaps equally important, recognizing these distinctions encourages a more nuanced dialogue between critics and advocates of RCT. Rather than talking past one another, scholars can pinpoint whether a critique is addressing unrealistic axioms (more relevant to the Princeton tradition) or ignoring empirical success (the forte of the Chicago tradition). In an era when interdisciplinary research is reviving interest in “rational choice” under new guises (like computational modeling, neuroeconomics, or institutional analysis), the history mapped here serves as a reminder and a guide. It reminds us that rational choice theory has worn different faces – technocratic and libertarian, deductive and inductive – and it guides us to synthesize insights from each while avoiding their respective pitfalls. By clearly delineating and now revising the record of these two traditions, we hope to have contributed to a clearer and more comprehensive narrative of what Rational Choice Theory has been and where it might yet go.