Economics: A Question
I’m studying economics for the first time this semester. I suppose I’m a little embarrassed that it’s taken me this long, but better late than never. Our text is specifically about micro-economics and public finance.
Reading the introductory material, I can’t help but notice (clearly, in print) something that I’ve suspected for a long time: economists think that people are robots. With the caveat that I’ve only read three chapters of this textbook, so far it seems to me that all of the economic theory (Pareto efficiency, welfare economics, etc) depends rather strongly on people being good little rational choice-making utility maximizers.
Thing is, I don’t feel like a mechanically rational utility maximizer, and I don’t think anyone else really is, either. Can someone who’s studied more of this than I have point me to some readings in one of the following two categories?
- An economist making reassuring noises that, yes, these things are only models, and as a result they’re only abstractions and approximations, and only a very shallow thinkier would take all of this perfectly literally.
- A serious thinker making a critique of rational choice and utility maximization as the underpinnings of (micro-)economics.
Thanks, smart people of the Internet!
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Certainly the first couple of chapters of Von Neumann and Morgenstern should be required reading on the topic. (I don’t have my copy on hand, to say exactly how many chapters — but it’s in the very beginning of the book.) They have a few words to say about the ‘normative’ vs. ‘descriptive’ takes on utility, if I remember correctly.
This Keynes quote, from DeLong, is also probably relevant.
Also, a description of prices as they arise in an arbitrage-free system might be somewhat tangential. For instance.
But I am not an economist either, so: grain of salt.
Nobel prize winner & non-economist Daniel Kahneman has had a huge impact in showing the limits of showing assuming rational, profit-maximizing behavior (and not just because of limited information). Dont’ know if these kinds of things get mentioned in Econ 101 classes covering classical economics.
Along with people acting “irrationally” and messing up an economist’s models, sometimes even markets act “irrationally” and mess up investors’ models. Amazon.com: When Genius Failed: The Rise and Fall of Long-Term Capital Management is the only book I’ve read about it. It’s about how hedge funds have these super brains modeling out market behavior and not being able to react when things start to go wrong.
von neumann and morgenstern focus on what i would imagine is the more specialized subject of decision theory. i was also going to mention the normative (also known as prescriptive) vs descriptive thingee. the subject does get more advanced than maximizing expected utility and there are plenty of models that try to account for more real word behaviors (i actually wrote my thesis on decision theoretic models that allowed for violations of transitivity). the fact of the matter is that it’s more fun to construct normative mathematically-based models that make some basic assumptions that inevitably won’t always be true. there’s no way you can construct a set of rules to model the behaviors of irrational agents, and without those assumptions, it’s basically an observational science, right? imagine if you were an economist, which would you rather do? contruct a sim-universe or gather data?
I thought of this thread when I read this New Yorker piece by Elizabeth Kolbert on the systematic irrationality that behavioral economics is uncovering, and the implications.