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"The Origin of Wealth"

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Greebo

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I'm currently reading 'The Origin of Wealth', by Eric B something (sorry, its a long last name) - which is discussing the failings of classical economic theory.

It discusses how Traditional Economists have used theories that make assumptions about human behavior that are completely ungrounded in reality (such as, "Humans use perfect rationality, know all the variables, and make perfect decisions every time"). It then goes on to discuss new, evolving theories about economy and how the economy is very possibly a complex, evolutionary system that, like the weather, can't be predicted perfectly because human beings are not "Perfectly rational" - which means they make best guesses based on available information, not perfect guesses with complete and total information about their decision before making it.

The early sections of the book are particularly interesting, because they describe meetings between economists and physicists in the 50'. The economists, who had been operating on Ivory Tower theories that had no base in reality, felt the scientists "just didn't get it", while the scientists kept insisting to the economists that it didn't matter of their theories usually worked, because if they weren't grounded in reality, they were wrong.

I think this is a book anyone with an interest in economic matters should read - and any objectivist will appreciate for the pure irony. :P

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Does he indicate what classical theories depend about an assumption of perfect rationality?

I'm a little confused by the question. Are you asking which classical theories assume perfect rationality, or what constitutes perfect rationality in the assumptions?

The term Traditional Economics in the book means: "the set of concepts and theories articulated in undergraduate and intermediate gradualte-level textbooks" and "also includes the concepts and theories that peer-reviewed surveys claim, or assume, that the field generally agrees on."

The author examines multiple models of "traditional economics" and lumps them under the label "Neoclassical economics".

The book goes into great detail of the history of Economic Theory going back to Adam Smith. The names and concepts referenced in the early section of the book dealing with the evolution of classical economic theory is too long to list here.

The assumptions it discusses in traditional economics include:

- Tendency towards equilibrium in the market

- The market as a closed system

- market agents (ie, us) having perfect and total information and always making the most rational decisions, instantly

and so forth.

It's really quite a compelling read.

Edited by Greebo
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I am guessing "no". I bet he assumes all classical theories do.

That would be a bad bet on your part.

As of right now I'm only about 1/3 of the way through. I don't know where he's going with it yet in the latter half - I gather from reading about the book that he moves into advocacy for change later in.

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Are you asking which classical theories assume perfect rationality, or what constitutes perfect rationality in the assumptions?
Yes, because many classical economists don't assume rationality, but frame their theories in the form: if we assume rationality then...

Economists used to be the butt of jokes because of this rationalistic-sounding formulation. "Q: How does an economist open a can? Ans: he'd assume he has a can-opener." However, this is not always rationalistic. It is often a simplification that is similar to a physics professor saying: "if we assume this surface is exactly at x degrees, and if we assume that there is no friction, and if we assume the mass of this block is exactly y grams, ... then we know it will slide down this incline in z seconds.

Secondly, classical economics does not really assume the values driving people's choices are always rational in an ethical/philosophic sense. There is definitely an assumption that people value wealth and money. However, it does not follow -- for instance -- that a person will always prefer a cheaper "no-brand" good to an expensive branded one if it can be scientifically proven that they are actually identical, with simply a different brand name.

I'm not saying that classical economics never made bad assumptions that led to wrong theories. I'm just wondering what exactly this author is referring to. Not just the bad assumptions, but the actual impact in terms of theory. What important theories taught as classical economics are invalid because of the poor assumptions? [Not saying there aren't any, just curious which ones.]

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Yes, because many classical economists don't assume rationality, but frame their theories in the form: if we assume rationality then...

Economists used to be the butt of jokes because of this rationalistic-sounding formulation. "Q: How does an economist open a can? Ans: he'd assume he has a can-opener." However, this is not always rationalistic. It is often a simplification that is similar to a physics professor saying: "if we assume this surface is exactly at x degrees, and if we assume that there is no friction, and if we assume the mass of this block is exactly y grams, ... then we know it will slide down this incline in z seconds.

The economist joke I heard goes as follows:

If you laid out all the economists that ever were in a straight line (head to foot) you could not reach a conclusion.

Which raises a genuine question. If the economists know so much, why aren't more of them millionaires or billionaires?

ruveyn

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There are in my view, a couple of totally different problems that arise in mainstream analysis of classical economics.

The first are the classical economists that assume that all people ARE rational, instead of saying "if all people acted rationally, then.....". This often leads to wrong conclusions from classical economists when discussing current economic issues, as in reality, people arent all that rational. The errors they make, especially the libertarian ones, is that because X amount of bought product A for the price B, it means that it is rational for these X amount of people to buy product A for that price. It doesnt matter if product A is a herbal pill to make your penis bigger, all that matters is that there was X demand for it, and that the demand had to be rational.

The second type of error is the more typical one, that comes from socialists, that just claim that because all people arent rational, classical economics are bullshit, and therefore capitalism is bullshit, as all people arent rational. However, the logical step would be to urge people to rationality, but instead these socialists and othere similar people urge people to denounce classical economics as a whole.

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I don't know about "perfect knowledge" and "perfect rationality."

It seems to me that knowledge has a cost, and part of rationality is judging when the additional cost of knowledge is no longer justified by the potential gain. Therefore, it is the amount of knowledge, not the knowledge itself, that tends towards the "perfect."

Rationality is likewise not perfect, and only tends towards the perfect, with "perfect" meaning: most efficient/productive/beneficial use of resources. Capitalism tends towards the most efficient actions ("perfect" rationality) by creating a market-based value for every productive endeavor, and transitioning capital (through the mechanism of profit) from less efficient endeavors to more efficient endeavors.

Generalizing these natural tendencies as "perfect rationality" and "perfect knowledge" is an error and leads to false conclusions.

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