Role of Assumptions in Economics - Philosophical Concept | Alexandria
Role of Assumptions in Economics. The role of assumptions in economics is the foundational, often unseen, scaffolding upon which theoretical models and policy recommendations are constructed. More than mere simplifications, these assumptions shape our understanding of how economies function, influencing everything from predicting market behavior to justifying government intervention. Often mistakenly viewed as self-evident truths, they are, in reality, powerful choices that dictate the scope and conclusions of economic analysis.
The practice of making explicit assumptions in economic reasoning can be traced back to even before Adam Smith, though its formal codification emerged more gradually. While not using the terminology precisely as it exists today, elements can be seen in the arguments and models of the Physiocrats like François Quesnay in his Tableau Économique (1759). Quesnay simplified a complex economy into flows between sectors, implicitly making assumptions about human behavior for the sake of model tractability. These simplifications were radical for their time.
Over time, the understanding and use of assumptions has evolved. The marginalist revolution in the late 19th century, with figures like Jevons and Walras, witnessed a more rigorous deployment of assumptions about rationality and individual optimization. Later, the development of econometrics in the early 20th century brought with it statistical assumptions needed for inference and estimation. Critiques of neoclassical economics, particularly regarding its assumptions of perfect rationality and information, prompted the growth of behavioral economics and new institutional economics. Consider how the assumption about availability of perfect information can lead to vastly different conclusions about market efficiency than one where agents are assumed to make rational decisions on possibly flawed data.
Today, the role of assumptions remains a central debate in economics. While acknowledging their necessity for building models, economists grapple with the trade-off between simplicity and realism. Models built on elegant assumptions might offer analytical clarity while failing to capture real-world complexities. Conversely, more nuanced models, although potentially more accurate, can become unwieldy. This tension reminds us that economic models are not perfect reflections of reality but rather tools for understanding its multifaceted nature. What responsibility, then, falls on economists to transparently acknowledge the assumptions used to arrive at particular conclusions?