The New Yorker has just produced this profile of Paul Krugman.
In it we read the following passage.
It isnt that freshwater types believe that actual people are perfectly rationalthey just believe that making that assumption enables a more rigorous economics than is possible without it. After all, while there is only one way to be perfectly rational, there are an infinite number of ways to be irrational, and how do you choose? It all begins to look awfully arbitrary.
Hurrah! An non-lazy portrayal!
The article continues to talk about macro, but in relation to micro the problems associated with the assumption of rationality are evidently huge, but critiques have often irritated me because they imply that neoclassicism adopted the concept either through sinister ideological motives or willful stupidity. It probably feels good to imply this, but it doesn’t help us produce something better unless we understand why the flawed tool we want to use was adopted in the first place. We haven’t been using internal combustions engines through willful stupidity, it’s just they were the best/least worst option around for most of the last century. We’ll stop once there’s something better.
Granted there has been a process of discursive collapse where the RET kiddies don’t understand the tools they’re using, but we won’t get anywhere unless we address the reasons behind why their academic fathers (gendered language intended economics is regrettably a sausage fest) created them.
Behavioral Economics does do this by giving systematic shape to the relevant irrationalities, despite constantly being portrayed as disproving the homo economicus straw man. Perhaps agent based modeling can do the same.
I’m just glad there’s been an honest appraisal in the public sphere as to why a weak idea like assumed rationality has been prevalent.
I can’t buy the analogy with the petrol engine.
The problem with economic rationality as commonly used in orthodox economic analyses is not that it’s a straw man. It’s an initial hypothesis adopted because – as Krugman says – without it economic decisions are very messy and hard to analyse. But it provides cover for a lot of other assumptions which are rarely examined (eg that people are individual utility-maximisers), and it carries it’s own definition of rationality which rarely checks back against what people actually want or do. It was seen as an unrealistic assumption early on, but carried on when it was realized that the alternatives are not mathematically treatable (this was stated explicitly in the 40s). In short, the appearance of rigour won out over the messy reality.
It’s not so much outmoded as radically incomplete, and the key issue is that the profession – and the economics-using public – are reluctant to recognise the limitations this imposes. Worse, the growing realisation that this incompleteness renders hollow many arguments has not led, on the whole, to opening the field, but to hostility to studies which could endanger economics’ status (eg the marginalisation of other schools, and the disbandment of economic history departments).