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Study General How can economists assume that people are rational actors?
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How can economists assume that people are rational actors?
How can Economists assume that people will act rationally in their own interests in a market when I, like many other people, am sitting right here eating a large quantity of artery clogging 'food'? Is it rational of me to act despite my best interest and knowingly submit myself to a mere habit of laziness and apathy toward my own health? Furthermore could it be suggested that economics is a science based on completely abject and unfounded theory?

Postscript (March 15, 2011 at 3:13 PM):
I am glad my simple question spawned so much afterthought and tangents :)
By rights economics should be a discipline in crisis. Self regarding nonsense about the "dismal science" (and a Nobel they collectively bought for themselves) can't disguise the fact economists (with a few noble exceptions who prove the rule, and who were treated as pariahs for failing to jump on the bandwagon) have been repeatedly unable to predict even catastrophic market failures, ones that seemed "obvious" in retrospect, e.g. the Asian currency crisis, the dot com bubble, and the mortgage derivatives holocaust. Turns out economists are no less immune to mass hysteria than the population at large, indeed their real social function is to rationalize economic hysteria by prettifying it with some simple statistical analysis and a few graphs.

Social scientists will try to apologize for the rational actor hypothesis by appealing to the value of the "simplifying assumption", that is one that gives a model a pleasing "elegance" (i.e. simplicity) while retaining enough validity to tell us something about the real world. You have touched on the very problem of the social sciences: when you come down to it, what they all have in common is that they are devoted to studying some aspect of human behavior. Regrettably, human behavior isn't reducible to some relatively straightforward and immutable set of "natural laws" like those that govern inanimate objects. For me personally this isn't a problem (then again I did major in history, the last real bastion of qualitative as opposed to quantitative analysis in academia!), but for many social scientists it is -and let us speak plainly here- an embarrassment. Rather than embracing the difference, the dominant trend in the social sciences has been to try superficially emulate the natural sciences by adopting what I call the fetishism of numeracy. Blaise Pascal (no mean mathematician, he!) predicted it all three centuries ago: "If we can only define our terms; if we can only find the basic unit; if we can spot the right 'indicators'; we can then measure and reason flawlessly, and we shall have created one more science!".

The rational actor hypothesis in economics is even more pernicious than that however. Too much indoctrination in orthodox ("free market") economic theory creates ethical incompetents who believe that any interference in the operation of the free market -for example, laws intended to protect the interests of society's most vulnerable members- are intellectually unacceptable. I always tell people who can't shut up about how great the almighty "free market" is that (a) we've already tried unadulterated "free market" economics and (b) if they want to know how that experiment turned out they should read a Charles Dickens novel!

Anyway a while ago Ad Busters published a label they encouraged readers to cut out and affix to Harvard economist Gregory Mankiw’s bestselling textbook Principles of Economics (Mankiw was the first head of George W. Bush's Council of Economic Advisors). I think it's very à propos:






For those who might have trouble reading it the label says:
"WARNING! This economics textbook is for entertainment purposes only. The persons and events depicted in this work are fictitious [they're "rational actors" in a "free market"!] Any resemblance to real life is both purely coincidental and highly unlikely. Application of theories contained herein carries risk of mounting climate change, expanding wage disparity and general widespread misery. Some [Some!] cases of species extinction have been reported". 
I am sure (I have heard of) dissident economists who gave dire warning of the crash, whose opinions were marginalised and ridiculed by vested interests in the ever expanding bubble theory.  Everyone who believed they were benefiting from bubble like prices were quite happy to go along with the fantasy. 
 
The free market has not failed.  It has been corrupted by the control exercised by oligarchs and big business over the law-making process in most of the world's economies.  Our markets are not free at all.  They are almost as controlled as the markets of the Soviet Union were, just the controllers (government) are controlled in turn by the supply side of the market (corporate interests).
 
What we need is empowered markets (ie empowered consumers) not more regulation, most of which is carefully crafted to benefit the large corporations and the oligarchs of the world while paying lip service to social justice.
 
I again draw your attention to the Libertarian principles of allowing any sort of behaviour provided it does no harm to others and empowering all citizens equally so they can stand up to powerful interests when such interests do harm.

In response to John barri
John you're evading the central issues. First, a "free market" tends naturally toward oligopoly. The US for example adopted anti trust legislation in response to the overwhelming concentration of market power represented by companies like Standard Oil, anti trust legislation did not create the problem. In a free market wealth and power accrue to those at the top of the pyramid at the expense of everyone else. Free markets move toward ever greater inequality over time, not the other way around! As I said before, just read Dickens, it's all there.

Second, if you really think about it a principle like everything is permitted "so long as it does no harm to others" is so vague as to be useless in adjudicating disputes. If you want to put a satellite dish on your roof, for example, and your neighbor opposes satellite dishes (as many homeowners associations do) because they think they are eyesores that lower property values, does your neighbor's perception of harm trump your right to do as you see fit with your property?

I'm also not understanding where you get the idea that libertarianism empowers all citizens equally. Since people are inherently unequal, the only way a society can move toward greater equality is if the state intervenes to reduce that inequality through measures like progressive taxation and equality of access to education. Libertarianism actually maximizes inequality by allowing those with more money, more education, better connections, etc. to fully exploit those advantages at the expense of their fellow citizens. What has caused the corruption of the free market isn't excessive regulation but the opposite - insufficient regulation that enabled all manner of unethical and criminal behavior. Since you yourself agree that activity that is harmful to others should not be permitted, how can you oppose reasonable regulation intended to prevent exactly that kind of activity?
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