Wednesday, January 21, 2009

Real tragedy of modern economics is too much false assumptions

Courtesy-The Business Line

T. C. A. Srinivasa-Raghavan writes in the Business Line but quite interesting in questioning the basics of economics which is often said as 'dismal science' nothing more on it in a rational way at least in the modern times. Note the following thought which has gone through years at least in his mind.

“As mentioned last week the purpose of this column is to suggest that economists no longer quite know what they are doing as a result of which economics has lost its way. This is proposed to be done with the help of examples from the research in economics.

Assumptions are central to any discipline of structured thought. Newspapers, for example, assume that readers are only interested in reading news but not reading per se. Psychologists assume that everyone is nuts unless proven otherwise. Historians assume that the historical material they use is true. And so on.

Economics differs in one very important respect. It makes more assumptions than any other discipline. One of these is (or used to be) that people and societies act rationally, where rationality consists mostly of consistency.

But after more than a century of using this assumption as a bedrock of their theories economists have now begun to abandon it in order to justify the discipline’s inability to come up with explanations that stand the test of time.

They are not saying that people don’t behave rationally but only that there can be no standard yardstick by which to judge an action as rational.

Thus, even though suicide bombing is regarded as completely irrational behaviour, to the bomber himself it appears to be the most rational thing to do.

I might add that whether or not that is the case, suicide bombers certainly take care of one of the most used definitions of rationality in economics, attributed to John Muth of Chicago University, an economist of great standing.

His definition was simple: people don’t make the same mistake twice. With suicide bombers, of course, we never get the chance to find out if this is true.

The question that needs asking but which no one is asking is: by diluting the rationality requirement, has the subject gained or lost? Having thought about it a lot during the last two decades, I would say that one way or another, it has not made any difference.

Therein lies the real tragedy of modern economics”.

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