From: Matt Jensen (mattj@newsblip.com)
Date: Mon May 14 2001 - 16:42:12 PDT
On Fri, 11 May 2001, John Hall wrote:
> As for axioms [in Economics],
> there really is only one 'people behave rationally'.
That one's a Dusey, a deeply-central and deeply-flawed axiom that has only
recently started to be seriously questioned in behavioral terms.[1]
But rational behavior is only one of many axioms of Economics. Below I've
listed some others, each of which, I think, is an independent assumption.
--- 1. Most goods and services desired by people are made from limited resources (land, energy, time, natural resources).2. People's desires for such goods and services are essentially unlimited.
3. The "satisfaction" of an actor (a person, company, or society) can be maximized by finding an "optimal" allocation of its limited resources to production or acquisition of such goods and services.
4. For a company, satisfaction is defined by its return on investment, either short-term or long-term.
5. Actors behave rationally. Specifically:
a. They are aware of what their objectives are.
b. They have the cognitive skills and mental models to make optimal choices.
c. They choose to use those skills (choose to act based on reason, rather than emotion or impulse).
6. Behavior of individual actors can be abstracted away by looking at average behavior. (Call it the Axiom of Hari Seldon.)
7. Nearly everything (quality of life, "value" of leisure time) can be quantified, after some preference research.
8. Accurate, up-to-date information (about price, supply, demand, product quality, workshop conditions, adherence to privacy policy etc.) is easily available to all who want it.
9. The behavior of actors is the same, whether economists are studying them or not.
10. Economists are no more biased by their funding sources than are other scientists.
--- Some of these axioms are more widely true than others, but they all have failings. Economists have developed rationales to explain some of this, but what they end up with is what in the software world we would call "spaghetti code".
My main beef with Economics as a field is that its explanatory power is on the level of Psychology (of the 1940s), but it likes to act like it has the power of Physics. (Has Psychology finagled a Nobel Prize category for itself?)
Then you call their bluff, examine their definitions, and they backpedal. "Woah, we're not claiming to cover that!" But then the next day, they go back to the Excluded Middle Fallacy created by the handwaving definitions in #3 and #7, and they're back in congressional hearings, advising on public policy. Maybe with the addition of a new fudge factor.
Psychologists did the same thing, particularly in the middle of the 20th Century. Eventually people learned to take them with a grain of salt, and psychologists (researchers, at least) learned not to claim so much.
-Matt Jensen http://mattjensen.com http://NewsBlip.com Seattle
--- [1] NYTimes, Feb 11, 2001, "Exuberance Is Rational", on Richard Thaler, etc.
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