Thursday, January 15, 2015

Rational behavior and perfect information

Zach Weinersmith, author of Saturday Morning Breakfast Cereal, continues to pump out the best web comic for academic economic jokes. Not just jokes about economics, but occasionally jokes defending economics as a discipline.

This recent strip lampoons educated folks who insist economics is flawed because it assumes human beings are rational. Here's the link.

My usual response to this line is that human beings are indeed rational, but only up to a point. No one insists that human beings are perfectly rational, but at the same time they are not completely irrational.

For example, say you had a store that sold two similar types of food at similar prices and customers bought them at about the same rate, say $1 hamburgers and $1 hot dogs. If suddenly you raised the price on one of the items to be 100 times that of the other, you would expect a shift in sales. Sales of the inflated item would fall, perhaps to zero.

If you want to hold the view that humans are not rational, then you would have to believe that purchases habits would not be affected in any way by that large price increase. There is a rich discussion about whether economics deserves to be called a science or not, but when someone denies economics has any credibility at all they are assuming that half of those customers would eat $100 hamburgers instead of $1 hot dogs.

On a similar note, opponents of markets and mainstream economics claim that markets only function where there is perfect information. That's obviously false, as the important concept of price signals only makes sense in markets with imperfect information, but what is the alternative to markets? Government action, and all governments operate with imperfect information.

Yet, many anti-market advocates assume that the government will have perfect information.

Weinersmith's comic is not focused on economics, but it does visit the subject often. See here, here, here, here, here and here for a taste. The first time I read this one I thought the joke was at the expense of economists, but Mike Munger got me to consider that philosophers were the ones being ridiculed, and this earlier parallel comic on engineers proved it.

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