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Rethinking the Rationality paradigm…

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Rationality is often assumed, yet far from perfect. The question remains, does rationality still have a place in modern economic thought? Hugh Oliver discusses.

This article first appeared in Short Supply 2016 – check out the full magazine via the Short Supply tab at the top of this page!

Falling Commodity Prices: Riding the Rollercoaster

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Mining has propped up the Australian economy for over a decade, but now the boom appears to be over. What can explain this dramatic fall?

This article first appeared in Short Supply 2015 – check out the full magazine via the Short Supply tab at the top of this page!

A Game of ‘Productivity’

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G.R.R. Martin’s fictional universe in A Game of Thrones evokes a number of economic phenomena found in many modern day economies. Specifically, the Seven Kingdoms (regions south of ‘The Wall’) is characterised by a dual economy, significant urban-rural wage differentials, widespread poverty and unemployment, underdeveloped infrastructure, low national savings, high debt, civil war and fiscal irresponsibility.

Collectively, these characteristics mirror many of the factors that constrain economic growth and productivity in contemporary developing economies.

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Markets and morality

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In recent years, the interrelationship between ‘free markets’ and morality has become increasingly apparent. Stories of corporate corruption, unethical animal testing and the exploitation of workers in third world countries arise frequently in the media.

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The rise of the sharing economy

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At the heart of economics lies the fundamental problem of scarcity. As Lionel Robbins reflected, economics is a science that studies ‘human behaviour as a relationship between ends and scarce means which have alternative uses.’ The recurring challenges faced by economists, consumers, businesses – in fact, everyone – is how to allocate finite resources amongst infinite needs and wants.

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Nuclear Deterrence and Profit Maximisation

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In October 1962, the world watched on anxiously as the US and the USSR became precariously poised on the verge of mutually assured destruction during a confrontation known as the Cuban Missile Crisis. This tense 13-day period is considered by many as the point during the Cold War in which the two superpowers came closest to full scale nuclear warfare.

So why didn’t they?

And how is this relevant to economics?

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The irrationality of the ‘rationality’ assumption

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Historically, the term ‘rationality’ has been ascribed various meanings within the sphere of economics.  Typically, rationality has been expressed in terms of the idea that consumers attempt to maximise utility by arriving at an optimal decision in light of a complete set of information relating to the market in which they operate.

That is, the rational person of neoclassical economics opts for the decision that is subjectively best for that person in terms of a given utility function.[1] Consequently, neoclassical reasoning relies heavily on artificial factual assumptions such as perfect information, rather than accepting the reality of limited information and cognitive capacity in making any given decision.[2]

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