You’re not rational and neither is anyone you know
In the Introduction, I gave a few quick examples of the many problems with “modern day” economics. These are only the tips of many icebergs, however. If you were ever suspicious of the field feeling like something just didn’t add-up or that the experts didn’t know what they were talking about, cheer-up. You may very well be onto something. Of course, you might be wrong, too. But, expertise about how the accepted models of economics work, doesn’t necessarily equate to expertise of how the world works.
Modern economics is usually built around something called the “Neoclassical model” developed throughout the 18th and 19th Centuries. This is a set of fundamental assumptions about the world and how it works. But, to understand how it came about, we need to go back further, when economics wasn’t its own field at all.
The core of Neoclassical economics has three assumptions:
- People are rational actors (they make decisions rationally).
- People optimize utility (functional and financial value) when making decisions (and companies do the same with profits).
- People make these decisions, independently, on the basis of “perfect” knowledge of their choices (meaning, they have all the needed, relevant information and they know how to apply it).
We can dispense with the first, right out-of-hand, based om our own personal experience, since it’s clear that irrationality exists. I speak more about this in the Business and Marketing chapters but there is clear evidence that people respond to and buy things for more than functional or financial gain. In these, I’ll describe how emotions aren’t actually “irrational” but that’s a quibble for our purposes here.
For the same reason, the second assumption is wrong, as well. We clearly buy products, services, and other experiences for more than their features and price. If we didn’t, there would be no brands, no premium companies, no seeking of joy or love or hope. Of course, we could cheat and just call all of these other qualitative things “functions,” too, but then everything could be said to be a function, including price. Then, the word would have abolutely no use. Besides, this isn’t how Neoclassical economists define it.
The third assumption is equally flawed. It might be true in the ideal but not in the real. Consider buying a plane ticket…