Wednesday, May 25, 2011

Rational self interested actors.

Our free market enthusiasts on the right of the political spectrum generally have some attachment to the theories of Milton Friedmann. Given the set of premises that Friedmann has, his theories actually make a lot of sense. Unfortunately, one of the premises is that all the individuals in a economy are perfect, rational, self aware, self interested actors who will do what is most beneficial to themselves at any given point in time. This, is patently untrue. And unfortunately, it's why I don't have a lot of time for anyone who is adamant that markets know best and should be unregulated, it's an idea that is based on a faulty premise. I'm quite willing to admit that the theory is elegant but an elegant theory means nothing if it is not based in reality.
In general, the only two groupings of economists that I'm aware of are the Miltonian ones and the Keynsian ones. The Keynsian ones, to me are a little more rational but are still basing their models on some pretty general (though not necessarily wrong) assumptions. It's interesting to see a third grouping in this article mentioning economists working on something called behavioural economics, a system of economics that is attempting to take into account the silly, non-rational things that people do, folding economics with psychology. It's a big ask and they've set themselves a huge task, but you have to start somewhere. And at least they're starting with a set of premises based in reality. There's hope for economics yet.

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