Economists And Their Assumptions

The standard (or neo-classical) view of economics makes a lot of assumptions. The main ones are that people have rational preferences, they are self-interested, they are utility maximisers and they have access to all relevant information (including information about the future). The economy is assumed to be in equilibrium, markets are efficient and perfect competition reigns (of course this is a simplification). These assumptions come in for a lot of criticism but they are defended as necessary simplifications. However, the assumptions economists make have a huge effect on the world of economics and therefore world economies. Continue reading “Economists And Their Assumptions”

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Why Wages Don’t Fall During A Recession

I have finished reading a fascinating book by Truman Bewley called “Why Wages Don’t Fall During A Recession”. It’s an interesting book not only for its topic but also for the way in which the author conducted his research. Unlike most economists who conduct studies based on complicated mathematical models, Bewley did something unusual and interviewed business owners to understand more about how they run their business. Economists traditionally viewed the market as automatically self-adjusting so that wages and prices would easily change to the right level in response to market conditions. However, it has been found that wages are rigid and almost never decline so between 1992 and 1994 Bewley interviewed 336 people in the North East of the United States (the book was published in 1999). The studies were meant to be qualitative and as such are not random or representative. They provide a very interesting insight into the mind of business managers. Continue reading “Why Wages Don’t Fall During A Recession”

Challenging Economics – Coase Theorem

One of the fundamental problems with neo-classical economics is its lack of reality. In university students are taught theories that bare little similarity with the real world. I have learned a lot about economics and society during my time in university, unfortunately very little of that happened in the classroom. So I will run a series of posts where I challenge mainstream economics and debunk the unrealistic theories. Myself and my classmates are well able to explain abstract theories but can say little about the state of the economy or what to do about the recession.  First up is the Coase Theorem, a particularly ridiculous theory that only an economist could take seriously. Continue reading “Challenging Economics – Coase Theorem”

If We Were Rational . . .

Modern economics textbooks assume all people are rational. By this they mean we are logical and only do things that are in our interests. Yet once you close the textbook and enter the real world you find numerous exceptions to this rule. The world is full of people acting irrationally and doing things no textbook can explain. If we were rational then the world would be a unrecognisably different place.

If we were rational there would be no war. Continue reading “If We Were Rational . . .”

There Is (Almost) No Such Thing As Perfect Competition

Neo-classicalists argue that the market will naturally come to an equilibrium known as perfect competition. In this ideal utopia everything will be perfect. Consumers get the lowest price, workers get a fair wage and businesses earn only ‘normal’ profits. No one is ripped off or exploited because no such nasty things occur. There is no poverty, unemployment, inflation or recessions. There is no need for government to intervene or even exist. While it does describe agriculture, it is completely irrelevant to the rest of the economy. It is a conservative’s dream, more like Narnia than the real world. Despite being taught in all textbooks and described as the economy without government interference, it is instead a deeply flawed theory. It is based upon 5 unrealistic assumptions that do not reflect the actual economy. Continue reading “There Is (Almost) No Such Thing As Perfect Competition”