IANAE, so I’d like to know current opinion. It seems to me, that whole study of the “Gloomy Science” rests upon some fundamentally flawed axioms:
(1) That MAN is a rational animal. I think this has been abundantly disproven-thing of the stupid things people do to use/misuse money.
(2) Humans seek to maximize their wealth (economic utility).This also seems wrong - people will do all kinds of things against their wealth maimization (including borrowing from a loanshark, or “renting” a TV set from one of those “Rent to own” scams places.
So, has anyone advanced an economic theory dealing with the “Real” world of human behaviour? Thorstein Veblen comes to mind, but he did most of his work almost a century ago-what say you, economists? 
It’s been… shit… 20 years since I studied this in school and I’m pretty sure I’m making a hash of it, but this is what I remember…
That’s not what that means. What is meant by “rational”, in the economic sense, is that people will do what is rational according to them to maximize their pleasure/utility/etc. It might not make a damn bit of sense to the rest of us, but that $1,000 shopping spree for purse accessories made all the rational sense in the world to the shopper.
“Wealth” can be defined as many things… wealth in money? wealth in friends? wealth in love?
Having a child does little to increase ones material wealth (quite the opposite, actually), but I’m a far richer man for having Sophia in my life, though she is an economic, i.e. wealth, drain.
Now I’ll bow out and let somebody with a bit more economic knowledge come and tell me where I screwed the pooch. 
Not everyone cares about maximizing wealth.
You’re also talking about “man” in the aggregate, not individual people. So, even if an individual acts irrationally or in a way that he doesn’t believe will benefit him, people in general still might.
Ralph124c,
Check out this link:
The book has several sections that talks about the major economic schools that have disagreements with neoclassical economics (most notably the Austrian and Keyesian schools). It does a pretty good job of “debunking” some of the underlying assumptions of neoclassical economics.
Also check out the following:
http://www2.sjsu.edu/faculty/watkins/prospect.htm
Amos Tversky’s work helped establish the field of behavioral economics and, as such, has implications for some of the underlying assumptions of neoclassicial economics. There’s a good book out there that captures some of the implications of this in the book Winner Take All Society.
Of course the assumptions underlying conventional economics aren’t completely accurate. Human beings can do dumb things. But what is the alternative? Should the government make financial decisions for people because the decisions they make for themselves are sometimes unwise? That may seem reasonable in principle, but in practice governments can very easily do an even worse job than people left to themselves. Individual circumstances vary, and individuals usually have a better idea of what they want than bureaucrats or politicians do. Moreover, bad government decisions can have much more serious consequences than the bad decisions people make about their own financial affairs.
Individuals go to loan sharks willingly, usually in full knowledge of the consequences, because they badly need money and no one else is willing to give it to them. The “victims” of those rent-to-own “scams” are often perfectly satisfied with the service they receive. Are you certain they would be better off if those options didn’t even exist?
Let’s substitute good for wealth.
I’m having a bit of trouble with this “the only alternative to orthodox economic theory is to adopt complete governmental control over economic matters” thing. The OP is just asking if there are economists attempting to formulate an economic theory based on realistic assumptions about human behaviour, rather than on assumptions that appear to be false. How did you get from there to thinking that he was advocating a planned economy?
I took four years of economics and I do not ever recall being taught that human beings are invariably rational and logical, or that they always take the correct route to maximizing utility.
That people deal with imperfect information and make mistakes is something that’s quite commonly dealt with in economics.
Man is a rational animal in the sense that he will do what he PERCEIVES to be in his best interests. That does not mean that he will perform a cost/benefit analysis on every decision. Take the laws of supply and demand. All things being equal, the more something costs, the fewer people are willing or able to buy it.
Humans seek to maximize UTILITY. For example, they will rent from a rent to own place because it offers immediate satisfaction, as opposed to actually saving up for something.
Game theory speaks to this somewhat. The classic example is the Prisoners Dilema. Now two rational prisoners would know that if they kept to the same story, they would recieve the greatest benefit. But not knowing what the other guy would do, it’s really in their interest to screw the other guy.
Maybe you could clarify exactly which economic theories you feel are wrong?
I’ll admit I may have been skipping a few steps there. I’ve heard arguments before that go like:
- Some people make bad decisions.
2a. This shows people aren’t perfectly rational like economics assumes.
3a. Hence classical economic theory is invalid.
4a. Hence the theoretical arguments for free markets don’t apply in the real world.
5a. Hence central planning might sometimes work better than free markets.
(all true, at least in a very strict sense, I think)
2b. People would be better off if they never made bad decisions.
3b. So obviously the government shouldn’t let them make bad decisions.
4b. Thus central economic planning that stops people from making bad decisions is a good thing.
I don’t mean to apply that the OP thinks any of this, but it annoys me me that some people don’t seem to realize that there are arguments in favor of letting people make financial decisions for themselves that don’t rely on the full apparatus of classical economic theory.
I mean, the Soviet Union failed, right? That alone proves that government intervention in the economy never works. [/sarcasm]
I actually think that the assumption that everyone tries to maximize their wealth is almost perfectly accurate. Even people who may to the layman appear to “ignore” the idea of maximizing wealth (for example people who care nothing about material posessions and instead stroll through the woods most days) are actually maximizing their wealth but their wealth is made up of what they value, and to them things that the market places a set dollar value on aren’t what they consider valuable.
Say you can choose to work an extra hour and make $20 or you can go spend time in the park. Whatever you choose you are maximizing your wealth because if you work the extra hour and make the $20 then whatever activity you were weighing that against was not worth more than $20, and if you choose not to work then the activity you engage in is worth more than $20 to you so you have maximized your wealth using that choice.
Anyways, most things you learn in economics are designed with the idea that all other external factors or a controlled type of external factors are either kept unchanged or at a given rate of change. And there is also the key assumptions that may not always be true.
But economics “works” because the assumptions we make are right most of the time, or at least they are “right enough” for the theory to correlate enough to the real world for it to be of value.
I find it disturbing that the “most knowledgeable people on the web” always seem like they know jack-shit about economics.
Economics does not predict the future or guarantee that only good things will happen (Adam Smiths “invisible hand” not withstanding) or that everyone will have all of his or her wants needs met. It’s called the “dismal science” for a reason. It is basically a series of models and theories that explain WHY economies work the way they do and how they can be influenced. It’s like physics. Physics explains how gravity works. We don’t know everything about gravity. Knowing physics on’t prevent a falling rock from crushing your head. It does tell us that a thrown rock off a cliff will head in one direction - down.
There is more to economics than “free markets” or “perfectly competitive markets” which, outside of commodities markets, rarely occurs in the real world because companies try to dferentiate their products as much as possible. Classical economic theory also addresses monopolies, oligopolies, and monopolistic competition.
So, while crackpot websites are facinating, I would submit that if you want to disprove any of the currently accepted economic theories, you should come up with something more compelling than “people make bad choices”.
Economics is, in fact, about choices. Given a finite number of resources, there are a finite number of ways to use them. The problem is that people AREN’T rational. If you place all resources in control of a central authority, the people expect that authority to meet ALL their needs and wants. What makes markets so appealing to those knowledgeable in economics is that the market forces you to choose. Yes you can have that big car, but you will pay a lot more in gas and might not be able to afford dinner out each week. You are now forced to choose what is more important to you. Neat, huh?
I’m assuming that this is somehow directed my way for the links provided in my previous post. Can you clarify what you mean by “crackpot websites?” Or am I reading too much in your response?
Sorry but I generally have to question the guy who thinks that everyone else is wrong and he is right.
The site to the book looked like an interesting read though.
And my question stands - what particular aspect of economic theory do people feel they do not agree with?
msmith537,
I’m assuming you are referring to the Debunking Economics website I provided. I don’t quite get why you think he comes across as being right and everybody else is wrong. If you go to that site and scroll down until you find the link for History of Economic Thought, the PowerPoint presentations contained within details outlying the various schools of thought.
Keep in mind that some of his arguments (those that critique neoclassical economics, for example) are based on those that have been done previously by other economists. If you somehow find his critiques problematic, then you have to address the substance of his critiques directly.
The general point I initially wanted to rely to the OP is that there is a body of work out there that doesn’t necessarily agree with all the elements of neoclassical economics. There’s the Austrian school and the Keynesians who don’t share all the assumptions of neoclassical economics (not to mention the Marxists, but lets not get into that).
Keen’s book I am somewhat famailiar with in that I have read it and have found some of his arguments compelling. It doesn’t mean I necessarily agree with everything he’s written. And many of his arguments have been made by other, more prominent economists.
And with economic theories, don’t they usually say, “All other things being equal, this will happen under these circumstances…” The thing is, all other things are rarely equal.
Well I only skimmed through the sight, but it definitely had a “here’s some information that those fat-cats in Washington won’t tell you” vibe about it.
In any event, as you pointed out, there are many competing theories on economics. I STILL think the OP needs to narrow it down to a particular area of discussion instead of implying that the fundamentals are wrong. What fundamentals? That people tend to buy more of something as the price goes down? Or more complex theories on markets and managed economies?
I agree with you completely. I also like your point earlier that economics is about choices. Regardless of the type of society or economic system that exists (where it be a huneter/gather or modern industrialized society to a command or market based economy), a fundamental fact of human existence is that we are faced with having to make choices. What kind of choices we make depends on the circumstances we find ourselves in (along with our own personal preferences, among other things).
One thing that I would point out - and one that I wish more people would be aware of - is the fact that the notion of a “free market” has a host of underlying assumptions that are often abstracted away from the larger arena within which it resides (the wider society). Now, I understand why the abstraction takes place (one wants to isolate phenomena limited to the market itself) and why economists often do so.
But non-economists often fail to understand that above is simply an abstraction. In other words, they fail to understand that a free market wouldn’t exist if it weren’t for other elements being present in a given society. Such as the establishment of (and respect for) property rights; respect for (and enforcement of) contracts; a court system that recognizes property rights and enforces contracts; a market system that allows for the (relatively) easy entrance and exit of the market by the parties involved; and other elements as well (institutions that perpetuate these rules, standardized currency, a certain level of transparancy, a certain limit on the level of corruption, a certain level of trust built up by the players in the market, and so on).
But no one is making an argument that a planned economy is better. That’s not at issue. The question is whether economics is an accurate model, and whether some of the extensions of the model really describe real phenomena.
Personally, I’ve actually thought about this issue quite a bit. And I think economics is something of an axiomatic system, like mathematics, and that its basic axioms are simply flawed. Which makes me think the entire idea of it is probably deeply flawed (though the fact that economics is used to make decisions may give economic models utility simply by virtue of the fact that they are made relevant by decisionmakers.)
I think the entire idea of utility, at least as it’s applied to individual people, is problematic. I personally cannot place an economic value on a lot of things, and thus analyzing them in terms of utility seems impossible. You can argue from economics to claim that I must, by definition, be purchasing things that bring utility to me, but I think this represents a sort of circular reasoning. I don’t think the very concept of it applies to people’s economic choices.
I also tend to think a lot of economic models that presume certain things for simplicity - competitive markets, perfect information, and so on - are often used in situations that don’t even approximate those ideals (which of course never exist in their textbook form.)