# Economists: Are The Fudamental Assumptions of Economics Wrong? **URL:** \ **Category:** Great Debates\ **Created:** [May 15, 2005, 1:35pm UTC](https://boards.straightdope.com/t/economists-are-the-fudamental-assumptions-of-economics-wrong/303929 "2005-05-15T13:35:00Z")\ **Posts on this page:** 5\ **Page:** 2
**Author:** ![Maeglin](https://avatars.discourse-cdn.com/v4/letter/m/8baadc/32.png) [@Maeglin](https://boards.straightdope.com/u/Maeglin)\ **Post date:** [May 16, 2005, 9:05pm UTC](https://boards.straightdope.com/t/economists-are-the-fudamental-assumptions-of-economics-wrong/303929/21 "2005-05-16T21:05:38Z")
> [@Excalibre](#): > > 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. Then it should be a relatively trivial empirical exercise to demonstrate this. Such exercise has not yet occurred, and certainly not for lack of trying. > [@](#): > > 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. You would be hard pressed to find an economist who disagrees with you. Despite the fact that utility is not necessarily a good predictor of individual behavior, it tends to describe the _aggregation_ of human behavior extremely well. Problem solved. > [@](#): > > 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. It is not circular reasoning at all. Neoclassical economics is fundamentally uninterested in formulating theories of preference formation. What actually constitutes a person’s utility is not really important in the literature. For that, interested economists often turn to philosophy or psychology. Utility is a black box. What matters is not what constitutes utility for individuals but, for example, the properties of the function that maps preferences to utility. > [@](#): > > 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.) You won’t find these in a basic economics textbook, sure, but the blips that make real life so interesting are the meat and potatoes of formal economic literature. If anything, perfectly competitive markets with perfect information yield very low-tech analytics. It is hard to get this sort of thing published these days. ---
**Author:** ![Ludovic](https://avatars.discourse-cdn.com/v4/letter/l/7ab992/32.png) [@Ludovic](https://boards.straightdope.com/u/Ludovic)\ **Post date:** [May 16, 2005, 9:49pm UTC](https://boards.straightdope.com/t/economists-are-the-fudamental-assumptions-of-economics-wrong/303929/22 "2005-05-16T21:49:45Z")
> [@Excalibre](#): > > But no one is making an argument that a planned economy is better. That’s not at issue. Actually, from all the talk about the “controls” inherent in the plan, the Social Security “privatization” plan certainly looks to take away choice to make risks that go against “classical economics.” This lack of freedom of choice is bound to invite sub-optimal returns and insane fees. I think it would be better for the economy and people’s pockets in general if, instead of allowing, as an example, %50 of your SS nest egg to be invested in “controlled” investments, to allow %25 of it in pretty much any investment. It would provide more of a boost to the economy to let people invest in whatever they want rather than restrict it, which will only provide a boon to stock-brokers. I guess my thesis for this post is “People can always be irrational, but on average, it usually doesn’t provide a boost to the economy to legally thwart this due to the implementation costs of the restraint.” (OTOH there’s less costs involved with education or placing ethical codes to prevent fraud.) And certainly I would agree that irrationality is fair game for economic study. ---
**Author:** ![Digital\_Stimulus](https://avatars.discourse-cdn.com/v4/letter/d/aeb1de/32.png) [@Digital\_Stimulus](https://boards.straightdope.com/u/Digital_Stimulus)\ **Post date:** [May 17, 2005, 2:00am UTC](https://boards.straightdope.com/t/economists-are-the-fudamental-assumptions-of-economics-wrong/303929/23 "2005-05-17T02:00:01Z")
> [@JohnT](#): > > 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. I had thought that “rational” meant that besides acting according to subjective utility, _homo econimus_ also had complete knowledge, at least as a baseline to work from. Naturally, there are lots of extensions that attempt to take into account imperfect knowledge. Do I have that right? ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [May 17, 2005, 3:23am UTC](https://boards.straightdope.com/t/economists-are-the-fudamental-assumptions-of-economics-wrong/303929/24 "2005-05-17T03:23:00Z")
> [@Digital Stimulus](#): > > I had thought that “rational” meant that besides acting according to subjective utility, _homo econimus_ also had complete knowledge, at least as a baseline to work from. Naturally, there are lots of extensions that attempt to take into account imperfect knowledge. > > Do I have that right? A rational actor is a someone who will make choices that optimize an outcome based on that person’s own values and preferences. For individual action, you can bound that by saying, “Within the limits of the person’s knowledge” if you want. In other words, if I’m hungry and I’m presented a choice between a cake and a rock, I’ll take the cake. That’s a rational action. Now, if I’ve been convinced that rocks are especially tasty, I might choose the rock. That’s still ‘rational’ in the sense that I’ve acted in a rational manner given the information I have. Clearly, individuals do not always act rationally. But when you take the sum total of human actions, you find that humans do in fact behave rationally. This is a predictable, testable hypothesis. If there is a gold strike, you can bet that prospecting activity in the area will increase. If a finger is reported to have been found in a Wendy’s restaraunt, you can predict that Wendy’s revenues will fall temporarily. In fact, this last example is a good one, because that’s what actually happened, and as it turned out, there was no finger in the Chili. It was a hoax. But customers still behaved rationally based on the information they had. Taken in the aggregate, “irrational” behaviour would be something like the price of a commodity falling as demand for it increases. Doesn’t happen, unless supply outstrips demand. An ‘irrational’ behaviour would be people paying more for houses next to dumps, or property prices increasing in a neighborhood after a gang moves in. Things like that don’t happen. If something happens that seems to violate the rational action of humans, it almost invariably turns out that there were factors hidden to the outside observer that caused the behaviour. ---
**Author:** ![Maeglin](https://avatars.discourse-cdn.com/v4/letter/m/8baadc/32.png) [@Maeglin](https://boards.straightdope.com/u/Maeglin)\ **Post date:** [May 17, 2005, 3:44pm UTC](https://boards.straightdope.com/t/economists-are-the-fudamental-assumptions-of-economics-wrong/303929/25 "2005-05-17T15:44:19Z")
The rationality assumption is far thinner than most people here are thinking. It is also far less normative. When we use the word conventionally, it typically refers to _outcomes_. A “rational” person would do X because X yields an optimal outcome. This is not what rationality means in economics or in political science. There is nothing normative about rationality. Rationality does not connote intelligence, nor the ability to achieve certain outcomes. Put very simply, rationality means that people are goal directed and that their behavior is not entirely random. Economists like rationality because it has useful formal properties and often simplifies calculation. Some also like “bounded rationality,” which in some ways better approximates individual human behavior. This is very interesting stuff. Formally, an actor is _rational_ if his set of preferences is _complete_ and _transitive_. There are other assumptions that are sometimes made, like acyclicity, continuity, monotonicity, etc, depending on the nature of the problem. Take a brief look [here](http://www.absoluteastronomy.com/encyclopedia/p/pr/preference.htm). It is not a bad discussion of preferences. You don’t need to have much set theory to get the gist. It explains the rationality assumptions in a little more detail. As for rationality’s formal properties, well, there is a hell of a lot of literature out there about this stuff. [Previous page](https://boards.straightdope.com/t/economists-are-the-fudamental-assumptions-of-economics-wrong/303929.md?page=1)