Sunday, March 31, 2019

The Philosophy of Rationality in Economics

The ism of tenableness in EconomicsNikita KohliThe ship canal of cosmos gentleman race be bound tho infinite.-Larry NivenAn Introductionthither exists no one definition of tenableness, yet it forms the cornerstone of basal assumptions of cadence models of political economy.A sweeping glance of the surmise however, elucidates one fact. noeticity deals in human demeanour, it aims to under tie its motivations and predict succeeding(a) outcomes footd on choices. overriding with contradictions and limitations analogous to the innate complexity of human nature, this surmisal has been repeated altered and manifests itself in different ways with the progression of time.Objectives The primary objective of this regard is to qualitatively analyze frugal literature and draw conclusions pertaining to the concept of grounds and its relevance in the world today.Literature ReviewThis paper, as the patronage suggests, aims to examine the concept of modestness, its use both ph ilosophic every(prenominal)y in the lead of broad humanity as well as in its much specific application to economics and standard models of human conduct.In ready to gain an understanding of archeozoic texts exploring concepts of sensibleity, such as the grazes of Aristotle and, the reference relied on interpretative text file such as those of Fred Miller (1984). discordant original toys of authors gain been studied chronologically to enable a historic overview of the concept, flattually yielding to contemporary work, implications and applications to various phenomena. Notable repositories of cultivation such as the Palgrave Dictionary of Economics and minute essays on the ath allowic field of modestness (a collection edited by Bill Gerrard) pass on been accessed.The papers with their extensive reference lists gave the author insight into the vast literature focussed on this specific subject.Reviews and critiques, and studies in retrospect of concepts have been peruse d to help regulate an view from a nonher time into contemporary perspective.PART 1Rationality A historical AnalysisIf one devalues grounds, the world tends to fall obscure Lars Von TrierThe first mention of the concept of Rationality is seen in the work of Aristotle who invokes that the human being has a wise principle and the ability to ingest out noeticly formulated projects. (Miller, 1984).Homo Economicus or the Economic composition was a term that first appeared in the work of J.S Mill who describe man as solely as a being who desires to take in wealth, and who is capable of judging the comparative efficacy of means for obtaining that end. (Mill, 1844). This is the base of the most widespread assumption in economics that man strives to plainly maximize his avail and satisf exploit, and this trait, infixed to all men, is termed tenableness.Jevons, the forbearer of mathematical economics propounded a quantitative measure of the good function. In stressing on the concept of marginal utility, he put forth some basic tenets of the utility utilisation theory, namely that economic agents derive utility by consumption of goods, and that they are rational, calculating maximisers. In attempting to treat the economy as acalculusof pleasure and pain, Jevons (1871) set the foundations for a paradigm of Economics, which was late rooted in individualistic theories of motivation and decisions.Von Mises (1949), in his seminal work on human nature and decision make, asserted that human doing is necessarily always rational. His understanding of reasonableness, however, differed from that of his successors in the field of Economics. He believed that every human being acted in a way that furthered their egocentrism and was to achieve some end goal. When viewed in pure subjectivity, no action can be termed irrational as every human being acts out of some motivation, thus making the action rational.Concepts of Rationality A contemporary compendiumAll hu man behavior is plan and programmed through rationality. Michael FoucaultIn the early 1960s, mathematical economist John Muth (considered the spawn of the Rational Expectations Revolution in Economics) put forth a dead body of work that would leave on indelible mark on the rationality dis escape. For the first time, a significant difference in economic analysis was make, that between adaptive and rational conductations. Muths work and the theory of Rational Expectations was considered iconoclastic at the time as it pro comprise a shift in knowledge processing, analysis and decision making.Neo-classical economics, as propounded by Friedman, Keynes and others dealt with systems and analysis using historical data. This was termed adaptive. Adaptive neo-classical theory forms the basis for many constitution decisions, be in pump-priming investment or monetary contraction. Policy is created in keeping with past results and some common assumptions in economics plenty will demand mo re when the government invests in the economy etceteraIn contrast, Rational Expectations take into view the whole economy, in its real-time functionality, and uses imbibes on-line(prenominal) info in its analysis. It propounds that rational agents continuously update their information and take into account the whole system. As Muth (1961) asserts, the economy does not licentiousness information, and that expectations depend specifically on the structure of the entire system. In assenting to this fundamental tenet, this school of thought also verbalises that markets will always iron out prices will array to fluctuations in supply almost immediately.When this concept is extrapolated to espouse the macro economy, it is oftentimes stated that no government policy or exogenous shock can shake up the system. This is because of the existence of rational agents, who, using their knowledge of existing phenomenon, expect certain outcomes and adjust their course of action according ly. For instance, in a recessionary period, sellers will not let their prices fall. They behave in this manner because they are aware of the current scenario and preemptive bid government investment intervention to attenuate falling demand. Thus they expect their demand to rise in the near future.As Greg Egan would put it, It all adds up to normality.While implicit in the Rational Expectations theory is the existence of perfect knowledge, transmuting into rational decisions, there emerged a field of study which emphasized the shortcomings of knowledge and information acquisition.The term Bounded Rationality was introduced by Herbert Simon in his book Models of Man (1957). While in spirit adhering to the tone that human beings are rational, Simons theory observed a critical failing that of the assumption of complete information. In this structure, human behaviour is viewed not in terms of rational, utility maximising behaviour. Instead, it is seen as a serial of actions, often no t compatible with each other, decisions taken in situations of uncomplete information and based on limited reflection. This accounts for the limitations to both knowledge and cognitive capacity.Taking this idea further, simmering in the field of human behaviour vis a vis economic processes, is the belief that human beings can sometimes be Irrational. Carrying out specific studies in this area, economist Dan Ariely finds surprising results. In a given situation, a person may make a choice which will not benefit them in the future, may not help them immediately, and the decision is made in the light of these two eventualities. Ariely explains that this is because human behaviour is not always controlled by rational motives, it is highly zest set and furbish uped heavily by exogenous factors. In the early 1960s, Gary Becker put forth the like idea only that he believed even irrational agents can work smoothly as a single unit. Human irrationality, he states, was in fact rational .PART 2 NUANCES OF RATIONALITYAmartya Sen anchors a clear distinction in the approaches to Rationality in literature. He divides them into two broad categories Instrumental Rationality and all important(p) Rationality. Substantive rationality is when one acts out of objectively, independently defined self interest. This lends itself to the cosmopolitan Equilibrium theory, the starting point of individual behaviour is a predefined utility function, and choice arises from this within the constraints imposed. Instrumental rationality dons a more gracious approach wherein it allows for objectives that are not restricted to solely self-interest. This methodology acknowledges the mould of other factors on rationality. Sociologist gook Weber states a similar idea that of Wertrationalor value/belief-oriented rationality, wherein the motives for action are often driven by reasons intrinsic to a particular actor, such as specific emotions, societal or spiritual aspects.Daniel Kahneman and Amos Tversky have made important contributions to the understanding of rationality and reactions to choice. The chance theory attempts to describe decisions under suspense. It empirically proves that a decision making process is often not rational people are risk-averse when they stand to incur losses and risk-taking when they stand to gain. some other obstacle to rational thought is the problems posed by heuristics (Kahneman Tversky, 1974). Heuristics are mental short-cuts, which usually involve focal point on one part of a complex problem and often ignoring the larger, more complete set of information. This limited perception of the issue at hand is used to make a decision.In any airfield of study, the influence of external social factors cannot be denied, on a skin-deep level, this impact could manifest itself in the way of the Demonstration or Bandwagon effect. On deeper examination, we see that these exogenous factors often define an individuals wizard of Rationali ty, which leads us to realize that Rationality can never be totally objective or homogenously innate to all.Adopting a pragmatic approach to the limitations posed by imperfect knowledge, Herbert Simon proposes the term satisficing. He pointed out that human beings escape the cognitive resources tooptimize the relevant probabilities of outcomes are usually, thus the evaluation of all outcomes with adapted precision is rare, if not impracticable. A more realistic approach to rationality takes into account these limitations.An important application of the rationality principle in neo-classical economic theory is in the analyses of perfect competition. Competitive equilibrium is said to have been reached when each person maximizes their utility, given a certain set of assumptions (no externalities). This state of equilibrium will tend towards Pareto Optimality as it is assumed that the Pareto Optimal state is one where there is perfectly competitive equilibrium at a given set of pri ces and some initial distribution of resources. Every rational utility maximizer is in equilibrium, wherein no one can be made better off without hurting anothers well-being and current status. This basal assumption of rational behaviour establishes the relationship between the aforesaid(prenominal) concepts.PART 3 CONCLUSIONIn everything, one thing is unsufferable rationality NietshchzeThis paper has attempted to shed light upon the various dimensions of rationality, as depicted in economic phenomenon. Problems arise however, with the implicit assumption of rationality in models involving human behaviour in varied situations.Rationality implies countywide knowledge of the current economic system, which is then factored into the decision making process. In keeping with the Efficient Market Hypothesis, markets will always clear themselves and clear as people are able to adapt and adjust to fluctuations almost immediately, due to their information. It has also been argued that nat ural processes of elimination ensure that rationality perpetuates itself, where those who act rationally work optimally. This can be seen in nature, in the principle of survival of the fittest. Milton Friedman also draws this parallel to markets, where non-profit maximizing firms are driven to a wall so that only the rational, profit maximizing firms may survive. (Friedman, 1953).These applications and assumptions are rife with shortfalls. The first limitation is that of knowledge. science of this perfect knowledge to facilitate rationality is expensive, consumes resources, and in many flakes proves impossible to obtain. To assume that perfect knowledge is a prerequisite for rational behaviour limits its scope.While looking at markets and macro-structures, one can see rational expectations as the underlying force in stock markets. These markets are extremely sensitive to minor fluctuations and react almost instantaneously to restore equilibrium. The same cannot be said of the eco nomy. It is impossible to expect policy to change, or its impact to be as versatile as is seen in the stock markets. The case of the rupee depreciation illustrates this point, wherein the stock markets adjust to the disturbance, but the economy is left(p) flagging.Chamberlin points out, that for Perfectly Competitive equilibrium to exist, there at first must(prenominal) exist a certain measure of disequilibrium. He states that not merely pure, but perfect competition is requisite for the rationality hypotheses can have their full power. The existence of the initial disequilibrium, in conditions of complete rationality, proves to be contradictory.Another limitation of the rationality assumption is that it makes for models that are normative, rather positive. Formally and explicitly, these return frameworks to understand how agents should act in order to maximize their self interest. This fails in its predictive capacity, to see how one will behave in the future.Were all mad here Cheshire Cat, Alice in WonderlandRationality is assumed to be highly centered on the individual. But as Kenneth Arrow 1986) points out, rationality gathers not only its force, but very meaning from the social background in which it is embedded. It obliges only under ideal conditions, the nature of which is not seen in the world today.Adam Smith in the Theory of Moral Sentiments attributes actions to not only self-interest, but more humane factors like love, benevolence and friendship feeling.A science taking into account human behaviour must closely study its major drivers. Exposure to various social factors and facts of life influences the way people think. Defining rationality becomes problematic, what is rational to one may be deemed irrational to another. For instance, faith, religious belief, personal opinions and ideology are not universal in their impact and acceptance.Rationality then becomes extremely context of useual one persons rationality is bound to not hold in another persons situation. Rationality can also be temporal, due to the lack of accurate information about the future what holds true today or in the immediate foreseeable future, may not hold in the long-run.The limits and bounds to rational thinking are not clear and universal, theyre morphed and moulded and coloured by personal experiences and biases.A crucial distinction needs to be made about what pleasing of behaviour is rational and what is not, and what models of behaviour may be useful in predicting actual behaviour. Taking into account various individualities poses a great challenge, but to attribute motivation and action to perfect rationality, especially in the context of subjective human behaviour, is problematic. Anomalies will be patent to the process of adequate human nature and motives into an objective framework.The author concludes that an assumption about human beings, especially one as pervasive as assumed rationality, is dangerous. At the same time, accountin g for individual drivers is nearly impossible. Policy, and core economic theory must be able to account for, at the very least(prenominal) acknowledge, these discrepancies. This is the only way to create frameworks which may work with greater precision.REFERENCESArrow, K. J. (1986). Rationality of self and others in an economic system. ledger of Business, S385-S399.Friedman, M. (1953). The methodology of positive economics.The Philosophy of economics an anthology,2, 180-213.Heap, H.S (1993) Post Modernity and New Conceptions of Rationality in Economics. In The Economics of Rationality. (pp. 48-60). RoutledgeJevons, W. S. (1871).The Theory of Political economic system. Macmillan and Company.Kahneman, D. (1994). New challenges to the rationality assumption.Journal of institutional and Theoretical Economics (JITE)/Zeitschrift fr die gesamte Staatswissenschaft, 18-36.Kahneman, D. (2003). Maps of bounded rationality Psychology for behavioral economics.The American economic review,93(5 ), 1449-1475.List, J. A. (2004). Neoclassical theory versus probability theory Evidence from the marketplace.Econometrica,72(2), 615-625.Mill, J. S., Backhouse, R. E. (1997).On the Definition of Political Economy and of the order of Investigation Proper to it Essays on Some Unsettled Questions of Political Economy (1844) On the Logic of the Moral Sciences A System of Logic (1856)(Vol. 1). Routledge.Miller, F. D. (1984). Aristotle on Rationality in Action. The Review of Metaphysics, 499-520.sMuth, J. F. (1961). Rational expectations and the theory of price movements.Econometrica Journal of the Econometric Society, 315-335.Sen, A. (2000). Reason before identity.Romanes Lecture.Sen, A. K. (1977). Rational fools A critique of the behavioral foundations of economic theory.Philosophy Public Affairs,6(4), 317-344.Stewart, S. A. (2005). Can behavioral economics ransom us from ourselves?.University of Chicago magazine, 97(3).Swidler, A. (1973). The concept of rationality in the work of Max Weber.Sociological Inquiry, 43(1), 35-42.Tetlock, P. E., Mellers, B. A. (2002). The great rationality debate.Psychological Science, 13(1), 94-99.Tversky, A., Kahneman, D. (1974). Judgment under uncertainty Heuristics and biases.science,185(4157), 1124-1131.Tversky, A., Kahneman, D. (1986). Rational choice and the framing of decisions. Journal of business, S251-S278.Von Mises, L., Greaves, B. B. (1949). Human action (pp. 59-62). emancipation Fund.WebliographyFuture Prospects. (2013, Aug, 5). retrieved kinfolk 1 2013, from The Economist Web Site http//www.economist.com/blogs/freeexchange/2013/08/prospect-theory-and-economicsRethinking Thinking. (1999, Dec, 16). retrieved September 1 2013, from The Economist Web Site http//www.economist.com/node/268946

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