On The Rationality Assumption In Neoclassical Economics

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Axioms are the unquestioned building blocks of any particular system of knowledge.

One singular example of an axiomatic scheme is Euclidean Geometry, a compilation of all geometry in 3rd century B.C.E by Greek mathematician Euclid, which defines the fundamental properties of forms and the relationships between them. Another is Newtonian Mechanics. The world, as we know it, works by applying Euclid and Newton in typically what are two-body arrangements.

In neoclassical economics since Alfred Marshall’s derivation of the demand curve – after the classicism of Adam Smith’s extraction of the homo economicus from the preceding study of human nature by English political economists such as David Hume – and the concept of equilibrium price and quantity at the intersection of the downward sloping demand curve and the upward sloping supply curve – the construction of the system of economic knowledge as we know it is founded on defining the economic man as a rational utility maximizing agent in behavior.

For the purpose of this exposition, therefore, I define “rationality” as being exhaustively logical within an axiomatic epistemological scheme and “utility” as deriving, synonymously, satisfaction by being rational.

Assuming that people are rational at all times per the above definition of rationality, and further assuming that by being so they maximize their utility, can they be incorrect? As a corollary of this query, if they are incorrect, are they then, by implication, irrational?

The passage of time being what it is, if we examine the process of thinking to arrive at conclusions after an exhaustively logical evaluation of observation of economic behavior with the all available tools of neoclassical economics, and after constructing the as yet unavailable tools but constrained by the axioms, is being incorrect significantly probable assuming we have all the information there is as an input to thought?

I contend that perfect information at time T = T(n), “perfect” being the assumption of the universal information set without consideration of relevance to the problem at hand, for example, “what should the Federal Funds Rate (FFR) be after the next Federal Open Market Committee (FOMC) Meeting?” can lead to incorrect conclusions despite “rational” analysis and synthesis  – within the axiomatic bounds of economic science.

People adapt and expect and adapt in self-reinforcing continuous feedback loops but may do so incorrectly though not irrationally because we do not know what we do not know. Being incorrect is not being irrational. Expectations, rational, can be wrong, but not necessarily irrational.

Reason is the pitfall of intuition, as counterintuitive as it may seem, for without intuition there is no axiom, no hermeneutic without the heuristic, and sometimes delayed and deliberately unsatiated gratification can maximize utility as in enhancing the probability of continued survival by mitigating consumption though not its quality.


About Chandrashekar (Chandra) Tamirisa

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