When that pioneering economist David Hume wrote about the problem of induction, he talked about the possibility that the sun would not rise one morning. There is no way we can know ‘for sure’ that it will rise. (In contrast, we know for sure that 1+1=2.) Just because the theories we have suggest it will rise each morning, and those theories have been right so far, does nothing to ensure they will continue to be right.
The problem with this example is that it is very difficult to imagine the sun not rising every morning. Bertrand Russell had perhaps a better example. The chicken that is fed by the farmer each morning may well have a theory that it will always be fed each morning - it becomes a ‘law’. And it works every day, until the day the chicken is instead slaughtered.
When I used to lecture about economic methodology, I liked to say that this chicken was not an economist. Now you might say that no chicken is an economist, but suppose that chickens were as intelligent as the farmer who keeps them, so they could be an economist. Economics is at a disadvantage compared to the physical sciences because we cannot do so many types of experiments (although we are doing more and more), but we have another source of evidence: introspection. So if Bertrand Russell’s chicken had been an economist, they would not simply have observed that every morning the farmer brought them food, and therefore concluded that this must happen forever. Instead they would have asked a crucial additional question: why is the farmer doing this? What is in it for him? If I was the farmer, why would I do this? And of course trying to answer that question might have led them to the unfortunate truth.
I thought of this when reading through the fascinating comments on my post on rational expectations, and posts others had written in response. You can see why the habit of introspection would make economists predisposed to assume rationality generally, and rational expectations in particular. (I think it also helps explain economists’ aversion to paternalism.) It only works to use your own thought processes as a guide to how people in general might behave, if you think other people are essentially like yourself. So if your own thoughts lead you to postulate some theory about how the economy behaves, then others similar to yourself might be able to do something like the same thing.
But of course this line of reasoning could also be misleading. An economist who introspects does so with the help of the economic theory they already have, so their introspection is not representative. A psychologist or behavioural economist might come to very different conclusions from introspection - what biases do I bring to this problem, they may ask. Economists may also be fooled into thinking their introspection is representative, because they are surrounded by other economists. So this conjecture about introspection does little to show that assuming agents have rational expectations is right (or wrong), but it may be one reason why most economists find the concept of rational expectations so attractive.
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