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Another fiction in modern economics is the rational man that always maximizes utility.

by 21 8y ago

JumpCrisscross 8y ago
> Another fiction in modern economics is the rational man that always maximizes utility Nope, this is another fictional fiction. Homo economicus is a pedagogical tool and toy model. Utilitarian economics feature pretty much nowhere because defining a single utility function for real people is impossible. When modelling agents, it can be useful to start with a rationality assumption and then add complications. Or not. Depends on what you’re studying. The entire exercise of valuation, for example, asks “what would a rational person pay for this asset” and then looks to see if someone will sell it to you for less. The toy model is useful even if it doesn’t repreeent the present reality in the same way models of thermodynamic systems at equilibrium are useful.
- mpax 8y ago
  > Homo economicus is a pedagogical tool and toy model. Utilitarian economics feature pretty much nowhere because defining a single utility function for real people is impossible. Then what is the point? I mean, seriously, what is the point of teaching it? Why not simply use a different model that doesn't result in all kinds of awkward edge cases?
  - JumpCrisscross 8y ago
    Same reason we start with frictionless surfaces in physics. It’s simple to grasp and extends gracefully. I provided an example of valuation exercises as a practical application. Nobody thinks price = value. But by asking “what would a rational me pay for this bond” and then observing the price, we gain useful insight. If the word rational bothers you, replace it with equilibrium. As to why we don’t use other models, these models predict realty better than purely behavioural and other exotic models. They’re Newtonian mechanics to the economics discipline.
    - mpax 8y ago
      > If the word rational bothers you, replace it with equilibrium. The world is a complex adaptive system, how does micro or macro equilibrium fit that any better than homo economicus? If anything it sounds even worse to me... > They’re Newtonian mechanics to the economics discipline. To me this is really the crux of the issue... how is it desirable to model the world in terms of static mechanics, when it is clearly a dynamic system? For example, I find this on the Wikipedia page about Market Clearing: In economics, market clearing is the process by which, in an economic market, the supply of whatever is traded is equated to the demand, so that there is no leftover supply or demand. The new classical economics assumes that, in any given market, assuming that all buyers and sellers have access to information and that there is not "friction" impeding price changes, prices always adjust up or down to ensure market clearing. And then at the bottom there's this nugget: Most economists see the assumption of continuous market clearing as not very realistic. However, many see the assumption of flexible prices as useful in long-run analysis, since prices are not stuck forever: market-clearing models describe the equilibrium towards which the economy gravitates. Therefore, many macroeconomists feel that price flexibility is a good assumption for studying long-run issues, such as growth in real GDP. Other economists argue that price adjustment may take so much time that the process of equilibration may change the underlying conditions that determine long-run equilibrium. That is, there may be path dependence, as when a long depression changes the nature of the "full employment" period that follows. I mean, I have never seen an econ 101 lecture mention things like path dependence, which seems to be a very big deal indeed. That to me makes it seem this emphasis on being the equivalent of Newtonian mechanics is a bug and not a feature. I mean, I don't want to single anyone out here, but it seems to me this talk about "simplifying assumptions" and "toy models" is just some elaborate ex-post justification for keeping outdated (and hugely invested-in) models around.
      - chimeracoder 8y ago
        > The world is a complex adaptive system, how does micro or macro equilibrium fit that any better than homo economicus? If anything it sounds even worse to me... Chemistry is a field of complex and dynamic systems, yet we are still able to talk about equilibria there. Equilibrium doesn't mean nothing is changing - and in fact, it doesn't mean that the equilibrium corresponds to any actual observable state of the world. Due to aforementioned dynamism, observation effects, and other complications, it may not be possible to observe the true equilibrium state at all, but it's still a useful construct in our understanding of the chemical world. > I mean, I have never seen an econ 101 lecture mention things like path dependence I'm sorry to hear that you've never experienced a good introductory economics course. However, that experience (or lack thereof, as the case may be) doesn't serve as testimony against the field.

Another fiction in modern economics is the rational man that always maximizes utility.

by 21 8y ago

Another fiction in modern economics is the rational man that always maximizes utility.

> Another fiction in modern economics is the rational man that always maximizes utility Nope, this is another fictional fiction. Homo economicus is a pedagogical tool and toy model. Utilitarian economics feature pretty much nowhere because defining a single utility function for real people is impossible. When modelling agents, it can be useful to start with a rationality assumption and then add complications. Or not. Depends on what you’re studying. The entire exercise of valuation, for example, asks “what would a rational person pay for this asset” and then looks to see if someone will sell it to you for less. The toy model is useful even if it doesn’t repreeent the present reality in the same way models of thermodynamic systems at equilibrium are useful.

mpax 8y ago
> Homo economicus is a pedagogical tool and toy model. Utilitarian economics feature pretty much nowhere because defining a single utility function for real people is impossible. Then what is the point? I mean, seriously, what is the point of teaching it? Why not simply use a different model that doesn't result in all kinds of awkward edge cases?
- JumpCrisscross 8y ago
  Same reason we start with frictionless surfaces in physics. It’s simple to grasp and extends gracefully. I provided an example of valuation exercises as a practical application. Nobody thinks price = value. But by asking “what would a rational me pay for this bond” and then observing the price, we gain useful insight. If the word rational bothers you, replace it with equilibrium. As to why we don’t use other models, these models predict realty better than purely behavioural and other exotic models. They’re Newtonian mechanics to the economics discipline.
  - mpax 8y ago
    > If the word rational bothers you, replace it with equilibrium. The world is a complex adaptive system, how does micro or macro equilibrium fit that any better than homo economicus? If anything it sounds even worse to me... > They’re Newtonian mechanics to the economics discipline. To me this is really the crux of the issue... how is it desirable to model the world in terms of static mechanics, when it is clearly a dynamic system? For example, I find this on the Wikipedia page about Market Clearing: In economics, market clearing is the process by which, in an economic market, the supply of whatever is traded is equated to the demand, so that there is no leftover supply or demand. The new classical economics assumes that, in any given market, assuming that all buyers and sellers have access to information and that there is not "friction" impeding price changes, prices always adjust up or down to ensure market clearing. And then at the bottom there's this nugget: Most economists see the assumption of continuous market clearing as not very realistic. However, many see the assumption of flexible prices as useful in long-run analysis, since prices are not stuck forever: market-clearing models describe the equilibrium towards which the economy gravitates. Therefore, many macroeconomists feel that price flexibility is a good assumption for studying long-run issues, such as growth in real GDP. Other economists argue that price adjustment may take so much time that the process of equilibration may change the underlying conditions that determine long-run equilibrium. That is, there may be path dependence, as when a long depression changes the nature of the "full employment" period that follows. I mean, I have never seen an econ 101 lecture mention things like path dependence, which seems to be a very big deal indeed. That to me makes it seem this emphasis on being the equivalent of Newtonian mechanics is a bug and not a feature. I mean, I don't want to single anyone out here, but it seems to me this talk about "simplifying assumptions" and "toy models" is just some elaborate ex-post justification for keeping outdated (and hugely invested-in) models around.
    - chimeracoder 8y ago
      > The world is a complex adaptive system, how does micro or macro equilibrium fit that any better than homo economicus? If anything it sounds even worse to me... Chemistry is a field of complex and dynamic systems, yet we are still able to talk about equilibria there. Equilibrium doesn't mean nothing is changing - and in fact, it doesn't mean that the equilibrium corresponds to any actual observable state of the world. Due to aforementioned dynamism, observation effects, and other complications, it may not be possible to observe the true equilibrium state at all, but it's still a useful construct in our understanding of the chemical world. > I mean, I have never seen an econ 101 lecture mention things like path dependence I'm sorry to hear that you've never experienced a good introductory economics course. However, that experience (or lack thereof, as the case may be) doesn't serve as testimony against the field.