I am therefore hoping to have an open and honest discussion concerning these assumptions and how they play out not only in the context of the discipline but how they are related to other disciplines(in my case specifically Psychology)and also how they influence and interact with the dominant societal discourse.

I am hoping this will be a thread that is not dependent on specialized knowledge and filled with Jargon. I hope that if we do use terms we can define them in a way that is undertandable to all.

[ 31 August 2004: Message edited by: audra trower williams ]

I take issue with all of these assumptions.

[ 30 August 2004: Message edited by: nonesuch ]

General
Economics is some unique form of behaviour that exists in a realm independent of other human social interactions.

1. Motivational Psychology
Human beings are primarily motivated by economic goals, endless accumulation of capital and goods is the end goal.

2. Cognitive Psychology
a)When making decisions people(agents)use a rational process that utilizes all necessary information.

b)people actually have access to necessary information.

3. Social Psychology
A)Individuals act as independent agents and are not impacted by social forces or rules.

B) dynamics of power and privillege do not influence economic interactions

1) they assumed that perfect competition exists everywhere(cough)

2) assume that demand will equal supply (provided that assumption 1 is correct, and it isn't)

3) assume that everyone in the marketplace has perfect information. (which they don't)

And politicians and their economic advisors then proceed to make up economic policies that:

(a) work best in the short term for re-election purposes

or

(b) work best for the wealthy and powerful interests that help get them elected and are usually not the same interests as working class people

[ 30 August 2004: Message edited by: Fidel ]

quote:

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1. Motivational Psychology
Human beings are primarily motivated by economic goals, endless accumulation of capital and goods is the end goal.
2. Cognitive Psychology
a)When making decisions people(agents)use a rational process that utilizes all necessary information.
b)people actually have access to necessary information.
3. Social Psychology
A)Individuals act as independent agents and are not impacted by social forces or rules.
B) dynamics of power and privillege do not influence economic interactions

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As I understand, these are assumptions that are applied generally, not specifically, and are not assumed to universally true. Indeed, plenty of economic literature surround rent-control, monopolies, subsidies, which clearly alter the choices of individuals. Moreover, Marketing itself is a clear example of how "social forces" can alter choices. Entire industries are built around marketing one product as "cool", even though substantially it doesn't differ from another product (endless examples). There is also a field of study which examines choice anomolies - such as buying a car - where sensible decisions are usually NOT made. But even though economic theories can't explain why people routinely pay too much for cars, car dealerships routinely employee the tactics to obtain just that.

In the end, the motivations of individuals must be self-determined. Economics tries to generalize, using data and trends and blah, but ultimately individuals determine value. I personally often choose to spend my Saturday's sleeping in and watching TV, even though I could go to work and make and extra $100 or whatever. For me, sleeping-in and watching TV on some Saturdays has a value greater than $100. But you won't find that value written in an Economic textbook.

In general, the psychological assumptions made by economics wrt choice-theory are generally correct. But there is also substantial money to be made off the anomolous choices: alternative brands for instance, or back to the automobile dealership.

but the key economists on the Right in the post-war make very clear that one key reason for favouring specialization and private ownership is precisely that people do NOT have complete information & knowledge, and can best judge a very small slice of life, their own

see esp. Hayek's influential 1947 essay The Problem of Knowledge (or some such), which was then hugely expanded by Thomas Sowell of Stanford in his Knowledge and Decisions, including many clever generalizations about how we "sort and label" things and people as ways of "economizing" on our limited ability to know about the world in our economic decisions -- from daily shopping to choosing a magazine to getting a car repaired.

Very insightful stuff, even if you reject the conclusions.

[ 30 August 2004: Message edited by: Geneva ]

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As I understand, these are assumptions that are applied generally, not specifically, and are not assumed to universally true. Indeed, plenty of economic literature surround rent-control, monopolies, subsidies, which clearly alter the choices of individuals. Moreover, Marketing itself is a clear example of how "social forces" can alter choices. Entire industries are built around marketing one product as "cool", even though substantially it doesn't differ from another product (endless examples). There is also a field of study which examines choice anomolies - such as buying a car - where sensible decisions are usually NOT made. But even though economic theories can't explain why people routinely pay too much for cars, car dealerships routinely employee the tactics to obtain just that.

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I confess I am not an expert but it is my understanding that homo ecomonicus is still the prevailing motivational model that informs much of economic theory.

As far as decision theory goes Cognitive psychology has demonstrated that the assumptions of rational decision making do not hold up, not in terms of "anomilies" but the way we make decisions on a regular basis rationality is often not the primary determinant of outcome.

Marketing was actually one of the social forces I don't believe is fully accounted for in economic theory.

How does marketing play out in the "law" of supply in demand do you ignore the fact that supply and demand are for the most part manufactured. If not what is the influence of marketing and what is the motivation of marketing

Okay, here are the types of assumptions economists make.

(1) Preferences
It is generally assumed that all other things being equal, people prefer more to less. In addition, it is generally assumed that the marginal gains associated with an extra unit of consumption or leisure are decreasing (this also has the effect of assuming that people are risk-averse).

(2) Technology
Firms use labour, capital and other inputs to generate output, subject to technological constraints. It is generally assumed that the marginal productivity of inputs is decreasing, and that the firm either faces diminishing or constant returns to scale. Increasing returns to scale are used in contexts where it seems appropriate.

(3) Informational assumptions
We specify who knows what. The most common assumption is the perfect information assumption, but all we really need to assume in order to get the standard intro micro story to work is that agents know all relevant information: households know their income, their tastes, and can observe prices, while firms know their technology and can also observe prices.

(4) Market structure
The standard assumption is that there are lots of buyers and sellers, so that no-one has the power to move prices on their own. There are also models of monopoly/duopoly/oligopoly (one/two/few sellers), as well as of monopsony (a single buyer).

(5) Behavioural assumptions
Households maximise utility subject to budget constraints (that is, their income and the prices they face). Firm maximise profits subject to the constraints imposed by technology.

In Stiglitz' Keynesian view, the same approach for paying down debt in the States was not only premature at that time, it also doesn't change the model for third world countries trying to kick-start their economies during recession. IOW's, borrow heavily, spend liberally and tax those who can afford it most. At this time, almost all American States are experiencing budget deficits. Governor Jeb Bush of Florida is typical of state politicians who say that everything is on the table to deal with these deficits ... except raising taxes on the wealthy, the ones who can afford it most. And what else are they doing to deal with a stalled economy? Reducing state and local government spending which, according to Stiglitz, is the wrong thing to do and will take even more money out of the economy and exacerbate an already bad situation. It's as if conservative politicians down there are trying to prolong the recession. And which group of people are best suited to weather a storm and even profit from a recession with long term bonds called in sooner than full term and inflation come a cropper ?.

Since 2000 began, the percentages of American's defaulting on home mortgages has increased by 45%, but politicians know that to cite increased home ownership overall is more politically expedient. Of course home ownership should be up from the roaring 90's and every year before that. The economy would have to be all the way in reverse for that not to happen. The Yanks now have their first net job loss economy since Herbert Hoover in the early 1930's.

And in Canada, we experienced the boom and bust as well during that time, but I believe that the Bank of Canada held back on raising interest rates this time around as opposed to the disasterous 1980's.

[ 30 August 2004: Message edited by: Fidel ]

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It is generally assumed that all other things being equal, people prefer more to less.

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Firms use labour, capital and other inputs to generate output, subject to technological constraints.

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The most common assumption is the perfect information assumption, but all we really need to assume in order to get the standard intro micro story to work is that agents know all relevant information: households know their income, their tastes, and can observe prices

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If households know their income, why do so many people wind up with debt problems, including personal bankruptcy? Either they don't know their incomes or they ignore them (either has the same effect).
In terms of observing prices (ostensibly for comparing them), there are so many different products, brands, styles, and package sizes that comparison is difficult, often to the point of being for practical purposes impossible.

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Households maximise utility subject to budget constraints (that is, their income and the prices they face). Firm maximise profits subject to the constraints imposed by technology.

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As I mentioned in another thread, none of these assumptions is considered to be sacrosanct, and there are any number of contexts in which it has been convincingly shown that the standard assumptions yield unacceptably erroneous conclusions. OTOH, there are lots of other cases where the standard model provides useful insights.

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(5) Behavioural assumptions

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I can answer that one: the overall properties of complex systems. At some level, there are properties and requirements on systems that supercede the acquired social characteristics of people.

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I'm not entirely sure I get that or at the least I'm not entirely sure I belief it. Surely if the social behaviour that makes up these complex changes you would expect a change in the system.

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2. There are (or at least, there might be) properties of complex systems that cause them to tend towards some kind of "lowest-energy" state. In other words, the behaviours may be affected by the general properties of complex systems themselves. It may not be just one way. So if you can claim that given certain physical characteristics of an environment, all systems containing complex interactions in that environment will tend towards particular states, then it matters less what the social constructs in those systems really are. What is under contention are the limits of defining the characteristics of the environment, like whether you can make simplifying assumptions about the behaviour of human beings.

Economists take people's base preferences (tastes, desires) as a given. (This is called consumer sovereignty.) Economists, unlike pyschologists, do not wonder why people have the preferences they do.

Economists believe people use their preferences to make choices that provide the perceived best net benefit. A good example is the choice to get up in the morning. I often stay in bed too late; it's my choice given my preferences. (This is called rational behaviour.)

Last point:

Economists simplify by generally excluding envy (the benefit one gets from seeing others in difficulty) and compassion (the benefit one gets from seeing others at ease).

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That is, economists examine the individual alone making choices. From this, they derive conclusions about group behaviour - but always with a clear view of the individual.

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However, like I said, I accuse economists of a particular sin: assuming that they have a general, proven mechanism of extrapolating from the individual behavioural assumptions to generalizations about the complex systems in question.

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And I don't know about NRK, but this is precisely what I find dubious about economics. No one has as yet a mathematically justified way to derive conclusions about group behaviour from individual behaviour, or there wouldn't be so much research these days into things like "Swarm Intelligence."

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Secondly, I don't know about "Swarm Intelligence" but I think you might mean "Herd Behaviour".

Economists believe that individuals use their preferences (tastes) to make decisions. Many decisions involve perceived costs (not staying in bed) and perceived benefits (earning money at work). In some cases, my perception might be wrong. Perhaps I don't trust it. So, I'll follow the pack, the herd or the swarm.

I once ordered a meal in a restaurant in Prague by asking for the most popular dish. I followed the herd. It was arguably a sensible way to choose; and I learned about Czech tastes.

[ 31 August 2004: Message edited by: August1991 ]

By "Swarm Intelligence," I mean a field of study in computer science and mathematics that deals with things as modeling the behaviour of bee hives and anthills and bird flocks given their respective environments and assumptions about individual behaviours of bees/hives/birds. So far, the study is only in its infancy, since there is no mathematical way to derive directly the structure of a complex system in a random initial environment even given a single simple deterministic participant.

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1. Motivational Psychology
Human beings are primarily motivated by economic goals, endless accumulation of capital and goods is the end goal.

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2. Cognitive Psychology
a)When making decisions people(agents)use a rational process that utilizes all necessary information.

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All necessary information? All available information.

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b)people actually have access to necessary information.

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3. Social Psychology
A)Individuals act as independent agents and are not impacted by social forces or rules.

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"Social forces or rules". Got me there. What do you mean?

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B) dynamics of power and privillege do not influence economic interactions

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Or do you mean with "power and privillege" that some people are motivated to seek it? Or signal that they may have it?

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Economists believe people use their preferences to make choices that provide the perceived best net benefit. A good example is the choice to get up in the morning. I often stay in bed too late; it's my choice given my preferences. (This is called rational behaviour

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And I don't know about NRK, but this is precisely what I find dubious about economics. No one has as yet a mathematically justified way to derive conclusions about group behaviour from individual behaviour, or there wouldn't be so much research these days into things like "Swarm Intelligence."

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I think I'm pretty much with you here. I would go further to say that it appears economists make erroneous assumptions about individual behaviours aggregate those behaviours and consider than collective behaviour. This is not the way I believe groups work.

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I am aware of that assumption but Cognitive theorists(most famously, Kahneman and Tversky but also Keith Stanovich at U of T) have demonstrated in numerous empirical studies that we do not make decsions in the fashion economists presume.

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Let me be more plain. The desire to eat ice cream on a cold winter day is perfectly rational. The choice to enter a dry cleaning shop to get the ice cream is irrational. "Lunatics" might choose this. Or foreigners who can't read shop signs.

IOW, economists are grappling with the problem of how individuals obtain and use information. But as a basic principle, is it not bad to assume that individuals seek to do good?

My lunatic reference is not flippant. Pyschologists seem understandably interested in deviant behaviour. Economists are inclined to ignore it, or assume it's another indication of "rational bevahiour" that is difficult to discern.

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When I was speaking of Social forces or social rules I was refering to shared or conflicting values, norms, culture ideals, organizational culture and myths and the way the impact on and interact with both individuals and groups. I'm not sure if this is part of what Mandos refers to as operating in complex systems. IF so I would agree the direction of influence or casality is not unidirectional.

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IME, theories of society that refer to the "masses" or broad groups are often wrong. I always read these ideas and think: "What would I do?"

You refer to myths, social forces, cultural ideals and I understand perfectly what you mean. (John Kenneth Galbraith referred to this as conventional wisdom.)

If tradition/social forces/conventional wisdom tells me to eat chicken yet I find the taste repulsive, what do I do?

Economic theory has much to say about this dilemma.

[ 31 August 2004: Message edited by: August1991 ]

[ 31 August 2004: Message edited by: August1991 ]

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My lunatic reference is not flippant. Pyschologists seem understandably interested in deviant behaviour. Economists are inclined to ignore it, or assume it's another indication of "rational bevahiour" that is difficult to discern.

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Not all Psychologists are interested in "deviants" psychology is the study of individuals thoughts, feelings, perception and behaviour. There are many sub-disciplines

Cognitive Psych. (or science as the computer crowd likes to call it) deals with the way individuals process, store and retrieve information (including decision making).

Perception naturally deals with the way we physiologically and psychologically percieve stimuli

Neuropsychology deals with the brain functions and activies and behavioural or cognitive correlates.

Social Pych. deals with indiduals interaction with others and groups.

there are other categories like organizational and environmental, and developmental but this should give you an idea.

So the main point is regardless of the assumptions econmists make cognitive science has demonstrated that when individuals make decision they use strategies that are not rational, they utilize short cuts and heuristics. The model proposed by economics is not feasible in terms of cognitive capacity and resources and also poorly reflects the interaction between cognitive, emotional and social components.

In terms of value or utility Leo Festinger's work on Cognitive Dissonance found amongst other things that we frequently assign value or utililty post hoc. If we have one or more choices that appear to be of equal value to us we will assign more value to the choice we make. In this sense subjective value is contingent upon the choice we make. We seek to convince ourselves that we made the right and rational choice. interestingly even when people make a choice that is less preferential than another in retrospect the subject will assign greater value to it.

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You refer to myths, social forces, cultural ideals and I understand perfectly what you mean. (John Kenneth Galbraith referred to this as conventional wisdom.)

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The assumption in economics though is that these forces are either neutral or willingly shared by all or most people. What ignores is that one narrative, worldview or ideology is dominates due to the narrators social, economic or political position. Rupert Murdoch's worldview has a lot more influence and sway than mine because of access of resources. Neither his view or mine is value neutral. This brings in the difficulty of power dynamics Economics makes the assumption again that agents are equal in terms of their influence or impact this is clearly not true as the example above suggests.

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I have no objection to you referring to whatever social interaction. My concern is that any understanding of society must start from the individual.

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Yet economics starts looking at aggregate behaviour and then makes inferences concerning the individual.

I also do not think it is valid to think you can examine the individual in isolation. Even in the physical sciences constructs are defined both by properties that distinquish them from other objects and by the interactions they have with other objects. Chemicals are differentiated by amongst other things, atomic weight, but also by the way they bond with other chemicals. In physics the same is true particles are identified by distinquishing features and on how they interact with other particles. Why should this be different with people if anything we should pay more attention to properties of interaction. We are biologically , anthropolically social creatures, we are born into a social context and defined by our relationships.Hunman beings can never exist outside a social sphere even if you become a hermit you are still influenced by previous relationships and have been shaped and influenced by previous relationships. You can't say you are studying individuals if you ignore this reality.

Overall I am making the argument that the Economist understanding of human psychology and behaviour is poor, even though their work is dependent on an accurate understanding of individuals. It seems that economists either reject or ignore research from other social science disciplines because it challenge the assumptions they make in their formulations.

[ 31 August 2004: Message edited by: N.R.KISSED ]

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Overall I am making the argument that the Economist understanding of human psychology and behaviour is poor, even though their work is dependent on an accurate understanding of individuals.

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Not all Psychologists are interested in "deviants" psychology is the study of individuals thoughts, feelings, perception and behaviour. There are many sub-disciplines

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cognitive science has demonstrated that when individuals make decision they use strategies that are not rational, they utilize short cuts and heuristics.

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In terms of value or utility Leo Festinger's work on Cognitive Dissonance found amongst other things that we frequently assign value or utililty post hoc.

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Rupert Murdoch's worldview has a lot more influence and sway than mine because of access of resources. Neither his view or mine is value neutral. This brings in the difficulty of power dynamics Economics makes the assumption again that agents are equal in terms of their influence or impact this is clearly not true as the example above suggests.

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But if you mean that Murdoch, through his media empire, can influence the public agenda and individuals' opinions, then economists would be wary. Preferences are strongly rooted. People don't change them easily. Our discussion seems evidence of that. But we can discuss this further, if you want.

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I also do not think it is valid to think you can examine the individual in isolation. Even in the physical sciences constructs are defined both by properties that distinquish them from other objects and by the interactions they have with other objects. Chemicals are differentiated by amongst other things, atomic weight, but also by the way they bond with other chemicals. In physics the same is true particles are identified by distinquishing features and on how they interact with other particles. Why should this be different with people if anything we should pay more attention to properties of interaction. We are biologically , anthropolically social creatures, we are born into a social context and defined by our relationships.Hunman beings can never exist outside a social sphere even if you become a hermit you are still influenced by previous relationships and have been shaped and influenced by previous relationships. You can't say you are studying individuals if you ignore this reality.

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Yet economics starts looking at aggregate behaviour and then makes inferences concerning the individual.

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Overall I am making the argument that the Economist understanding of human psychology and behaviour is poor, even though their work is dependent on an accurate understanding of individuals. It seems that economists either reject or ignore research from other social science disciplines because it challenge the assumptions they make in their formulations.

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My biggest beef with economics is the popularly applied assumption that competition, and competitiveness, are constant. Generally, firms prefer monopolies, when they can get them.

I actually think there is a large potential for understanding human behaviour in economics. I just wish that it didn't have the sheen of received wisdom. Entire ideologies are based on the flawed assumptions of economic theory, and most people don't have the training or experience to question those basic assumptions.

Incidentally, those assumptions tend to presume equal competition, while policies based on them tend to support vested, powerful and monopolistic interests.

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I'd just like everyone to know that August1991 is not a sock-puppet of mine

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Oliver Cromwell outlines quite well the general pantheon of economics in academia (see, I give credit where it's due. fair is fair, right).

But others also point out that many standard assumptions made in many economic schools of thought are based on a capitalistic bias, and therefore not conducive with an accurate view of human development.

It seems to me that in practice, economics of every variety boil down to three main areas (and Olly can clarify or chastise me on this):

1) The Empiric. This is the facts, the gathering and correlation of information on current practices, measurements, trends and developments, as well as those from history.

2) Values. These are where the assumptions and interpretation, as well as ideology, come into play. The idea is to take the information you gather and correlate, compare it to the value judgments and draw some conclusions as to what works best, in relation to what ideology or values you consider. Obviously, some economic schools do this better than others (the Fraser Institute comes to mind when thinking of less-than-honest research and outright lies).

3) Forecasting. Economists usually try to use the result of 1 and 2 to try to predict, or at least give some kind of foresight, into what will or won't likely happen in the future, as a result of what's going on today. Obviously, that's not easy to do.

Arborman raises a good point about the assumption that competition is constant; when under capitalism, the goal of most businesses of any measurable size is monopoly. This is true. Competition is merely a process of elimination. This is why I keep pointing out that capitalist economics form the basis for every modern dictatorship or oligarchy. They go hand in hand.

However, I don't think it's wrong to assume competition, in one form or another is pretty much constant. Even with monopolistic corporate structures and highly regulated markets (like Stalinist regimes), competition exists within those structures.

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Originally posted by Oliver Cromwell:

(1) Preferences
It is generally assumed that all other things being equal, people prefer more to less. In addition, it is generally assumed that the marginal gains associated with an extra unit of consumption or leisure are decreasing (this also has the effect of assuming that people are risk-averse).

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So if this economic model based on consumption is supposed to creat wide spread economic security and growth, then why was growth more pronounced in the years leading up to 1980 than after that as N. America, Britain and Chile started down the road toward deregulation and scaling back social spending ?. Why are those nations subscribing to the Washington consensus struggling moreso than developing countries doing better by comparison and not diving head first into liberal democratization of their economies - China, Singapore, India etc ?. Thailand adhered to the reforms toward a proposed liberal democracy the most, and yet they've faired about the worst, according to commentators.

Why did Canada pick up fewer Olympic medals than tiny Cuba, operating on a shoe string budget ?. ha ha

[ 31 August 2004: Message edited by: Fidel ]

Academic economics covers a wide range of eventualities and market circumstances, and has as much (but no more) pretense to scientific legitimacy as the rest of the social sciences.

Unfortunately, most people stop at econ 101, the course taught by the evangelical sessional instructor, usually a recent PhD, that explains everything in nice little graphs. They get those basics, and go out into the world. First to third year economics tends to function more as indoctrination than education, much like the so-called 'hard sciences.' The difference is, physics is not (as) political, while economics is highly politicized.

High level economic theory and analysis is fine, but nobody outside the field reads it. Policy practitioners and pundits just refer to economic theory as received wisdom, and a way to justify exploitation and resource extraction, with massive human consequences.

Through that lens, new economic analyses and theories are either seen as 'radical' (not supporting the corporate libertarian agenda) or otherwise marginalized. People ignore or downplay information that contradicts their closely held assumptions, and in the case of economics and the right, they will outright vilify and suppress countervailing opinions.

Fraser Institute is the first example that comes to mind.

[ 31 August 2004: Message edited by: arborman ]

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My biggest beef with economics is the popularly applied assumption that competition, and competitiveness, are constant. Generally, firms prefer monopolies, when they can get them.

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To economists, two people competing for the same prize (that is, two runners in a race seeking a gold medal) is wasteful. (All that effort exerted simply to decide a winner.) Indeed, economists refer to this kind of competition as "rent seeking".

Price competition, on the other hand, is different. When two people compete on price, a third party benefits. In addition, the price becomes a useful signal.

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I'd like to know more about the links between game theory (co-operative behaviour etc.) and economic theory.

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Consider the example of a happy marriage. It is a long term contract that involves many trades (give and take) but net benefits for both partners.

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I actually think there is a large potential for understanding human behaviour in economics. I just wish that it didn't have the sheen of received wisdom. Entire ideologies are based on the flawed assumptions of economic theory, and most people don't have the training or experience to question those basic assumptions.

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Incidentally, those assumptions tend to presume equal competition, while policies based on them tend to support vested, powerful and monopolistic interests.

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Economics is fine, but I just wish it wasn't so damned presumptious, and would operate on par with all the other social sciences - political science, sociology etc.

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[ 31 August 2004: Message edited by: August1991 ]

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Mmm. In that case: TP, you should know that my self-interest involves the pursuit of knowledge.

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More generally though, TP's comment implies that all economics is normative. IOW, there is always an angle. On the contrary, economics is also positive and purely analytical. Even lawyers sometimes give objective opinions.

I know economics has theory. I know that on some level it can be very clinical. I know that the field of study, like psychology and a good many other fields of study, would like to wear the mantle of science without enduring it's rigors.

Just colour me bitter. Every time the CAW negotiates a contract with a 3% raise over three years some economist rails on about how inflationary that is.

But the same economists always go on holiday when energy prices go up due to gouging. Somehow in the maleable mathematics of economics, rich people raising prices through monopolies and price fixing doesn't cause inflation, but the crumbs that fall off the table to workers raise the specter of the great satan inflation.

The Economist is good, though.

[ 31 August 2004: Message edited by: Oliver Cromwell ]

Labor Notes (USA)

Canadian Centre for Policy Alternatives (CAN)

Independent Monthly Review (USA)

Left Business Observer (USA)

Canadian Dimension (CAN)

[ 31 August 2004: Message edited by: N.Beltov ]

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Price competition, on the other hand, is different. When two people compete on price, a third party benefits.

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How often do you hear "I researched all the products and picked the best one based on my needs and price"?

I think most people (myself included) don't have the information needed to properly assess the choices of most of what they buy (i.e. most of what they buy is outside of their area of primary expertise). They have to rely on advice of friends or sales people or advertising as the basis of their decision.

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In the short term, perhaps. I think that the benefits of competition have been grossly oversold and the costs almost univerally ignored. Taken to its logical conclusion, competition seems to arrive at one of three end points:
1) Collusion where everyone sells at the same price -> think gas prices
2) Monopoly after the strongest competitor drives out the rest -> a lot of sectors seem well down this road - think media
3) Product branding or differentiation to the point where competition no longer exists -> the actual competition between pepsi and coke is limited because people internalize their brand choices

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Your second example, monopoly and media, is evidence of competition (or what economists call rent-seeking). The prize is extra profits obtained by dominating the market. Different firms compete for this prize.

Your third example is really interesting to economists. They view it this way: How much more can Pepsi charge for a bottle based on Pepsi's advertising to differentiate Pepsi? You do the math! And think of No Names, or the Atkins Diet. And where does Pepsi get the water it uses to make it drinks? (Perrier makes a big deal about that.)

Competition and price competition are not the same things. En passant, en français, comme dans les langues latines et même slaves en générale, la concurrence désigne ce qu'on appele la compétition par les prix. None of your examples imply pure price competition, or what should be called perfect co-operation.

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WRT to the assumption of perfect information:
I find this assumption particularly ludicrous. Ask people why they bought what they did and listen to the answers
"We were in the mall and we really liked it".
"I loved the color".
"I bought it on a whim".
How often do you hear "I researched all the products and picked the best one based on my needs and price"?

I think most people (myself included) don't have the information needed to properly assess the choices of most of what they buy (i.e. most of what they buy is outside of their area of primary expertise). They have to rely on advice of friends or sales people or advertising as the basis of their decision.

And without proper information, treating individuals as rational actors is wishful thinking.

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How much time do people devote to thinking about a house or car purchase? Much more, I suspect, than the time considering a purchase of a box of cereal. Would you spend 40 minutes hesitating over a $10 ear-ring purchase? Yes, if your 11 year-old daughter was involved. But then, price isn't the issue.

But here's an idea:

Prices are signals of what you must (unfortunately) give up to get what (maybe) you want. Think of other signals.

Some posters to this forum use English well and some make grammatical erors. What does that signal? Well, if a woman has a big rock, what does that signal? So, what does advertising signal?

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I'm not a sock puppet, but I do have a sick cat.

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I have tenure at a publicly-funded university. My salary doesn't depend on what I say, and I can't be fired.

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[ 02 September 2004: Message edited by: August1991 ]

[ 02 September 2004: Message edited by: August1991 ]

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To get back on topic, one of the assumptions I've noticed about economics is that the environment will always be there for us to exploit.

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And the American's believe they are providing a market solution for safe streets to walk on in their country. It's just that gulag state is much more expensive, as well as being oppressive, than if they actually invested in social democracy.

Free markets in energy are also a lesson in old world colonialism and collusion. Observe the ENRONg scandal in the States and skyrocketing hydro-electric power prices in every case where privatisation has been tried around the world.
And having oil in your back yard seems to be cause enough to provoke an invasion by old world colonialists preaching capitalism. The Yanks have trampled the Iraqi's rights to their free market in life and liberty.

This economic model, really, is based on appalling greed and corporate collusion and nothing more. We fought two world wars, a counter-revolutionary war and one cold war to protect trans-national corporate rights to profiteer in any part of the world they desire.

[ 02 September 2004: Message edited by: Fidel ]

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Originally posted by Mandos:
I can answer that one: the overall properties of complex systems. At some level, there are properties and requirements on systems that supercede the acquired social characteristics of people...

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That is exactly the it. I work with chaotic systems, and we often sit around drinking tea debunking financial models. You may find Mandelbrot's recent book "The Mis(Behaviour) of Markets" interesting.

Anyways I think this all accumulates in what I see as the underlining bad assumption of economics: foundationalism.

Everyone's been harking on perfect information and its a perfect example. The basic presupposition is that our world is some sort of casual nexus that funnels itself into a price scrolling across the stock ticker. Therefore we don't have to analyze individual social action.

However a brief persual through history will tell you that economics is a feedback system. The market influences society as much as society influences the market. And so we're left instead with a system of coherentism.

Economic models work well in the short term because rules do determine behaviour. However, they fail to account for behavour changing the rule. Induction/deduction can only take you so far and you know your on that path because its littered with chicken-egg paradoxes.

Someone else mentioned game theory. The classical debate is of course between modeling the market as a zero or non-zero sum game. Monopolies require zero-sum conditions, and so unless everything we value is zero-sum, than we will never diverge upon a monopoly. Capital and power are generally zero sum, while social relations generally are not non-zero sum.

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Originally posted by August1991:
But if you mean that Murdoch, through his media empire, can influence the public agenda and individuals' opinions, then economists would be wary. Preferences are strongly rooted. People don't change them easily. Our discussion seems evidence of that. But we can discuss this further, if you want.

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Sorry, I realize this is jumping up the thread quite a bit, but I just wanted to address this quickly:

August, in saying that you are contradicting your own statement about neglecting the element of time...

Consider how remarkable this discussion alone is...both technologically and intellectually could it have happened ten years ago? Five?

On the scale of human history ideas can change very quickly...in a way I think its analogous with Gould and Eldredge's evolutionary theory of Punctuated Equilibrium, which supposed that specification occurred in quick bursts (and in unpredictable trajectories) followed by long periods of relative equilibrium.

Where the analogy collapses is instructive: within the context of biological evolution, the base mechanisms of change are random mutation and Darwinian selection.

Within human culture a special form of randomness exists. There is randomness in the appearance of influential individuals...you can't predict a Lincoln, nor a Bush. But the ideologies of their 'Big Man' successes leave a historical residue.

Instead of Darwinian, you have Lamarkian evolution, an earlier theory discounted for biological evo, but useful here because it proposed that those mutations which *arose within* the parent generation were passed on to the next - the framework for cultural evolution.

Charles Berber wrote in People Before Progress - and I would agree - that we are living through a Constitutional Moment, a period of a few short years in which a phase-shift occurs in the course of human society. A punctuation of change...

Economics may perhaps be able construct predictive models during periods of stability, but they can't predict a changing future.

phew...long. sorry.

Just one more point: since we seem to have two (2!) economists in this discussion, a question if you please:

Posted this in another thread, but I just read Cobb et al's Intro to Genuine Price Indicator which was suggested in 1995 as an alternative to economists using the GDP. It seemed to me (econo-ignorami) to be a cogent argument...

What would your take be on it? I see the media and politicos still gushing over GDP, but I realize that what they say and what professionals *do* may be very different things. Have mainstream economists adopted any of their ideas? Why? Why not?

Cheers,

[ 03 September 2004: Message edited by: britchestoobig ]

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Originally posted by britchestoobig:

Economics may perhaps be able construct predictive models during periods of stability, but they can't predict a changing future.

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Well, it certainly isn't easy. But economists are well aware of the fact that the rules of thumb developed in one environment will not necessarily be used in a new one. (For those of you keeping score, this point is yet another of Robert Lucas Jr's contributions to economics; it's known as the Lucas Critique)

Indeed, this is why much of economics has become so complicated in the past few decades. It's not enough to identify and estimate the rules of thumb; you have to try to identify and estimate the features of the economy that are less likely to vary over time, such as tastes and technology. How these manifest themselves will depend on the environment in which agents operate.

About GDP. There's a reason why introductory textbooks make it a point to describe at length the pitfalls in assuming that GDP is the same thing as economic welfare. But our experience has been that it is generally the case that the correlation between growth in GDP and improvements in economic welfare is positive. When Argentina's GDP dropped by 10% a few years ago, that was a pretty good signal about just how badly things had deteriorated.

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Originally posted by August1991:
It sounds like you have a strong aversion to risk. Is that conducive to good research, or thinking outside the box?

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Originally posted by Oliver Cromwell:
That doesn't sound right. The whole point about gains from trade is that it's not a zero-sum game: both the seller and the buyer are better off making the trade.

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Although, again, this is a situation where quite commonly politics messes in the economic pond, destabilizing the assumptions. Typically in international trade, political and military muscle is used to enforce terms of trade such that the weaker side is *not* better off, but has little choice but to continue. In the classic first world/third world case, this is reinforced by installing a local group into power which is better off from the trade, even if the country they're in is generally worse off. To put it a different way, local rules get rejigged such that a lot of local costs become externalities for this group. I believe such groups are often referred to as a "comprador class", although I have no idea what that means.

This phenomenon is sufficiently widespread that the effective operation of international trade works out very differently from how the both-parties-benefitting assumption would suggest.

This is one reason why the "free trade" era beginning in the eighties has been an unmitigated disaster for the third world. Relative to the not-so-free trade period from the forties or fifties through the seventies, growth crashed, poverty and hunger increased, inequality swelled. GDP growth did continue, but it tended to be much reduced, and the fruits concentrated among a very small group while the living standards of the majority actually deteriorated. The World Bank itself has released reports reaching this conclusion.

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I believe such groups are often referred to as a "comprador class", although I have no idea what that means.

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Typically in international trade, political and military muscle is used to enforce terms of trade such that the weaker side is *not* better off, but has little choice but to continue.

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Originally posted by N.R.KISSED:
Just curious I'm wondering if Oliver or August have any problems with assumptions made by economists and what they might be.

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I pretty much go on a case-by-case basis. These are all meant to be simplifying assumptions; no-one believes that they're literally true in all contexts. When we're focussing attention on a certain point, it's natural to simplify all the other aspects as much as possible. We want to avoid dealing with complexities that just cloud issues without offering any additional insights.

For example, it is standard practice in models of economic growth to assume that people don't value leisure. That's not necessary, but we've found that adding leisure makes the model more complex without adding anything to the fundamental conclusion, which is that economic growth is powered by technical progress. But if you were trying to model labour supply, that would be a ludicrous assumption to make.

A lot of what research economists do is to try to identify cases where variations in the simplifying hypotheses make a significant difference. An argument like 'The market for maple syrup doesn't satisfy the perfect-information assumption, because my brother-in-law makes maple syrup, and he doesn't know the Swahili term for antidisestablishmentarianism!' would be met with . But an argument based on informational asymetry - such as 'My brother-in-law routinely gets drunk and pisses in the buckets of sap, but since there's no way the distributors can track him down, he never gets caught.' would be taken seriously.

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Originally posted by Oliver Cromwell:

For example, it is standard practice in models of economic growth to assume that people don't value leisure. That's not necessary, but we've found that adding leisure makes the model more complex without adding anything to the fundamental conclusion, which is that economic growth is powered by technical progress. But if you were trying to model labour supply, that would be a ludicrous assumption to make.

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And so the American's are the most productive worker's in the world for several reasons. Widget markets are largest in the States and production runs tend to be longer. More workers are willing to work more overtime without pay in non-unionized environments. American's probably have a larger percentage of dangerous and toxic work environments than any other labour force.

If it wasn't for unpaid overtime and longer production runs, French and German workers would be most productive. German workers are paid about 50% more on average than their American counterparts and have much higher rates of unionized work force in Europe and Scandinavia. At least, this is the way I understand it.

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Originally posted by Oliver Cromwell:

I pretty much go on a case-by-case basis. These are all meant to be simplifying assumptions; no-one believes that they're literally true in all contexts.

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Just curious I'm wondering if Oliver or August have any problems with assumptions made by economists and what they might be.

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As to assumptions about firms, I'm comfortable with the basic assumption of (discounted) profit maximization. I'm also comfortable with the idea that managers don't explicitly maximize profits. (But I think economists model badly the internal affairs of firms, strategic market behaviour and State/firm relations.)

As to assumptions about individual behaviour (consumer theory), I have always thought that ignoring compassion (mother and child) and envy (keeping up with the Joneses) was simplistic. (To include them makes the math horrendous). I know that people are not always consistent in their preference orderings. (I prefer coffee to tea and then tea to coffee.) I know that people are very inaccurate in assessing risk. (People buy car rental insurance but not house insurance.)

It has been estimated that Americans on average feel that their life is worth about $10 million. To an economist, this means that an average American would pay $100,000 to avoid a 1 chance in 100 of being killed (100 X 100,000 = 10 million). Incidentally, lawyers, not only economists, would go along with that idea. It's called the Learned Hand decision.

In general, the market punishes the irrational behaviour of managers more quickly than friends and family punish our own foolishness. But perhaps I'm wrong.

Lastly, I am deeply uncomfortable with efforts in macroeconomic to model, for example, consumption functions. Macroeconomics is more art and less science. We're waiting for another Keynes or Lucas with some genuine insight.

I hope this post is not too technical, or otherwise incoherent.

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As Bolivian's have asked, who can own the rain ?

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I work with chaotic systems, and we often sit around drinking tea debunking financial models. You may find Mandelbrot's recent book "The Mis(Behaviour) of Markets" interesting.

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Consider how remarkable this discussion alone is...both technologically and intellectually could it have happened ten years ago? Five?

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More generally, how do people learn? How do they change their mind? I don't know. But they do, in their own way.

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phew...long. sorry.

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Posted this in another thread, but I just read Cobb et al's Intro to Genuine Price Indicator which was suggested in 1995 as an alternative to economists using the GDP. It seemed to me (econo-ignorami) to be a cogent argument...

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PS. I strongly like the idea of including housework in the GDP. Too often, women do this work and official statistics ignore it. "Domestic Product", heavens.

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In fact, what's conducive to good research and thinking outside the box is that he is in a situation such that he can do these things *without* risk. That's the point.

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Typically in international trade, political and military muscle is used to enforce terms of trade such that the weaker side is *not* better off, but has little choice but to continue.

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In the classic first world/third world case, this is reinforced by installing a local group into power which is better off from the trade, even if the country they're in is generally worse off.

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These are all meant to be simplifying assumptions; no-one believes that they're literally true in all contexts.

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Three men are stuck on a deserted island: an athlete, an engineer and an economist. They have lots of food, but it's all in cans, and they have nothing to open them with.

The athlete says, 'You know, I think I'm strong enough to bash these cans open with a rock. Most of it will be ruined, but it's better than starving to death.

The engineer says, 'No, that's too wasteful. I'm pretty sure we can rig up a system of levers to pry the cans open. We should be able to recover at least three-quarters of the food.'

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Originally posted by Oliver Cromwell:
I agree Fidel. Dairy cows are not threatened with extinction because they are "owned". Someone cares for them. But no one owns the rain, yet the rain provides benefit to all. So, how to care for it?

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Bechtel and Suez have never caused more rain to fall or paid for much exploration of fresh water sources. They have been very good at profiting from its scarcity, however. A subsid of ENRONg planned to create a world cartel of fresh water distribution companies. Imagine the opportunities.

And what about the grass, Oliver?. Throughout history, it was landless peasants without access to grass to sustain themselves that was a problem while millions of acres of arrable land went unused by the owners and their cows. They needed to enforce exclusive property rights with force against the poor. How natural was that ?.

John Locke's "natural" property rights bore striking resemblance to another Englishman's before him. The difference was that Gerard Winstanley's case for natural property rights argued for the common good, and similar with Lockean philosophy, the land belongs to God and country.

[ 06 September 2004: Message edited by: Fidel ]