Critique of Basic Economic Theory
Assumptions Economic theory starts with a set of assumptions about behavior. The most basic is the assumption of rationality in the limited sense that individuals can calculate and compare the marginal costs and marginal benefits of decisions. They then pick that decision that maximizes net benefit. Economists and psychologists have attacked this assumption. Some have won Nobel Prizes in Economics. It is refuted by virtually everything that has been learned in cognitive psychology and neuroscience. Yet it remains the foundation of economic theory. This assumption is not even supported by one of economists’ favorite tool, game theory. One famous experiment, the “ultimatum game,” demonstrates that moral considerations can overcome maximizing income. This outcome seems to hold for many different social groups and many different cultures. Profit Maximization Maybe the most defensible assumption is profit maximization. While it is...