Tag: assumptions

Economics Explained for 6th Graders

I ran across this somewhat longish article at NakedCapitalism.com. Even if you are not a 6th grader you will find this interesting. In part, Andrew Dittmer, who in fact has taught 6th graders, our author,  points out that modern economics is based on certain assumptions that render  much of the application of advanced mathematics in economics false, misleading, yet amazingly resistant to criticism by non-economists exactly because of the use of obscurantist fog of mathematics.

One of these assumptions is that players in a market have “perfect information” – this is summed up in action by Wikipedia as “Perfect information would practically mean that all consumers know all things, about all products, at all times (including knowing the probabilistic outcome of all future events) , and therefore always make the best decision regarding purchases.”  There has been plenty of criticism of this concept even by economists, yet this concept is still embedded. Another assumption is that people will be rational and strive to achieve well-being. Again borrowing from Wikipedia, “well-being as defined by the utility function is optimized given perceived opportunities. That is, the individual seeks to attain very specific and predetermined goals to the greatest extent with the least possible cost. Note that this kind of “rationality” does not say that the individual’s actual goals are “rational” in some larger ethical, social, or human sense, only that he tries to attain them at minimal cost.”

Dittmer devotes most of his attention to Samuelson’s assumption “ergodicity”. As near as I can make it out this asserts that no matter what happens in the world, everything will reach a point at which things stop changing. This is the equilibrium point.  Kind of amazing. I will let you delve into Dittmer’s discussion. He is aiming at 6th graders so I only had to read through his article three times to get the gist. Maybe you will be quicker about it. Just keep in mind that these underlying assumptions are contributing to our current malaise. They have become the armamentarium of Wall St. and government bureaucrats.

Economics Debunked: Chapter Two for Sixth Graders