EconAir

  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...

Adam Smith - Our Founding Father INTRODUCTION   This essay on Adam Smith and his famous example of a pin factory also serves as an introduction to some of the themes in the over 100 essays in this blog.   Adam Smith wrote the  Wealth of Nations  during the beginning of the Industrial Revolution. It was published in 1776. The dynamics of the Industrial Revolution continue to be a disruptive force; because of AI, it might be even more disruptive in the future.   ADAM SMITH’S PIN FACTORY   Adam Smith’s description of a pin factory is on the first page of  The Wealth of Nations .  (Chapter 1 – “Of the Division of Labour”)  Drawings of pin factories of this period show workers using hand tools. Smith says the process can be broken down into 18 distinct steps, including packaging the pins. Smith mentions that pin factory workers were poorly paid, despite their high productivity.    Adam Smith says he visited a pin factory empl...