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The Rational Economist with irrational Models…

May 12, 2009

I remember once I asked one of my teachers, madam Apala Panda, regarding the use of pervasive models we study in economics most of which are based on imaginary world axioms and extended (beyond reasoning) assumptions of rationality of economic agents. It was then the beginning of my third year in economics honors and today whilst I pen this, it is almost the near end of the same year, with one examination paper remaining and due on 20th of May.

Economic models never fetched much of my interest mostly for their distance from reality and incompleteness they represented. When I asked my teacher the use of studying such incomplete models, she replied that these models were here for our understanding of basics of how economic mechanisms take place in society. However it had always been my contention since then and it is: most of macro economic mechanisms are not so complex in their complete sense that students would be required to learn them in years through the means of imaginary world scenarios.

Moreover these models over years have not been used solely for teaching economic fiction to students but it is conspicuous that they have been applied in the real world, they have been accepted as established economic theories and have brought overwhelming failure in regard to their application. For e.g. the case of rational expectations hypothesis; this exaggerated hypothesis which adds the notion of rationality to each economic agent and goes on predicting outcomes ensuing from this rationality has not only been present inside the classrooms but was one of the single most important reasons behind emergence of the present economic Crisis. The policy makers simply believed that individuals (economic agents of course comprise of individuals) are far too rational to let major price bubbles appear, let alone go out of control. One only needs an idiot to take such an assumption, or is there something severely different about the rationality of policy makers and economists?

Models of such vagueness can be found profoundly in the economic arena, both in literature and in practice. It is no doubt that these models can be completed and being directed in their completeness they can be put to successfully achieve well desired goals and objectives, but that is not the case often. Neo Classical and Classical literature in spite of its bizarre assumptions has been in the mainframe of economic practice since decades and has successfully made cases for elusion of government intervention in various ways.

In this theatre of rationally driven economics there is no reason behind carrying out errant and flawed concepts when there errors and flaws have been openly documented over years both in theory and in practice.

Rationality is not best explained by outcomes, but it is explained by intent. It is clear over years that unbridled classical capitalism has not been able to bring stable prosperity to the world, it has driven the world through bubbles, wars, crisis… But what if bringing stability and prosperity has not been one of its intent. As Prof. John Cozy argues in one of his articles,

But what if its intent has never been the promotion of the people’s prosperity? What, if any, result has it attained consistently? Well, it has consistently protected the wealth of the privileged; it has preserved the status quo. The wealthy privileged increase their wealth in good times and in bad. The system works for the privileged just as the market works for stock brokers who make money when prices are rising and when they are falling. If this is capitalism’s intent, and the evidence for it is overwhelming, understanding the Obama administration’s, and the developed world’s, response to the current economic downturn is easy. As the meager apparent wealth that the common people acquired during the better years now disappears, as they lose their jobs and homes, the wealthy institutions and the people who manage them and created the downturn are rewarded and prevented from failing by obligating the common people to someday repaying a growing colossal national debt incurred for the sake of those privileged. None of this makes sense unless capitalism’s intention is to preserve the status quo at the people’s expense.

This goes on explaining the rationality behind myriad irrational and unnecessary axioms of economics. Books are written, laurels are made, awards are given often to some of the most errant texts written. All this is facilitated primarily by a wealthy few in order to sustain their hegemony in the world.

Today we hear a lot about maintaining the strength of financial markets and maintaining the availability of cheap credit in order to reach higher levels of production and consumption. But it is so that businesses should be financed by investment and consumption by earning? What is the need to finance these by debt? One of the columnists at Global Research pens as under:

The answer is really very simple. The wealthy increase their wealth by lending and they do it without even having to use their own money by means of the Ponzi scheme known as fractional reserve banking. And when debtors cannot meet their obligations, their assets are acquired by the wealthy at fire sale prices who then become even wealthier. This is what capitalism does; it does it consistently and spectacularly. It really can have no other purpose. Credit is good only for creditors; debtors always lose.

I would just like to end with few important words from John Cozy:

What is there about this that economists cannot understand? Are they absolutely irrational or complicit? Each must answer for him/herself. But the economic system they advocate is nothing but an irrational tower of Babel that is based on principles derived from simplistic, imaginary situations and assumptions about rationality that are contradicted by hundreds of years of evidence, and is devoted to the worship of Mammon which benefits only the rich. Capitalism has been very successful; it has impeded the improvement of the human condition for two hundred years, and unless it is scrapped, it will continue to do so. No mere change in government can stop it.

It is complicated for a student today to understand these concepts. Specially in our age when even education is commercialized and what aspiring economics students aim for is degrees rather than pure knowledge amidst the realms their rational lives dominated by the motive of self centeredness. What the ongoing academia churns out is more and more economists walking the same deluded lines, sustaining the same unjust and corrupt system, gullible to believing that the self centered economic agents would contribute to the development of this world.

There are countless cases to justify the above points though i don’t think more are needed. What is needed is for people to realize the need for change and escape this virulent brainwashing and be heedful individuals.

2 Comments leave one →
  1. Somenath Sengupta permalink
    May 19, 2009 10:25 am

    I sent my comments on 18.05.09

  2. June 2, 2009 10:15 am

    Have you received my last mail?

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