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Showing posts with the label Adam Smith

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Polarizing Economic Debate and Shades of Grey

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  Any debate on economics tends to evoke extremes rather than any midway or realistic paths. There is a polarization between those who advocate free markets to the extreme and those who advocate total command and control economy. The former are usually identified with Adam Smith though Smith rarely talked about free markets at its fullest. The latter are usually associated with Karl Marx and communism though Marx was more a reaction to the diminishing returns of capitalism. The schools of thought that evolved over a century and half since Marx have generally associated with a degree of polarization among the two different streams. As the social media gathered momentum, the debate on economics and economic thinking often revolve around these extremes. At times it seems there is little meeting ground between the two. There is something normative as suggested by the proponents on either side of the divide and there is something realistic, something that exists on the ground which might be
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Self Interest, Collective Interest and Evolutionary Biology

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  Market economics is based on the foundations of Adam Smith theorising the ‘Invisible Hand’. To Smith, it was an individual’s pursuit of self-interest that lead unintentionally to collective interest and thus enhances social welfare. Of course, the term social welfare was an innovation that came decades later after Smith. Many economists have built their models and theories based on the Invisible Hand paradigm. There are no doubt many examples of the same. For instance a cab driver comes to pick up after travelling for 3-4 kilometres not because of his benevolence but because of his self-interest, his interest in earning daily bread, his interest in stepping to higher levels of income. A hotelier would keep the restaurant open even in times of pandemic not because he or she cares for the hunger of the people but for their own interest in earning and sustaining their daily bread. E-commerce delivery agents functioned in the pandemic partly because of their self-interest rather than an
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