Assumptions: Rationality and Self-Interest

Depending on the definition we prefer, we may say that economists are interested in the allocation of resources, in the nature and causes of the wealth of nations, or perhaps something else. Regardless, all of those things depend on the actions and decisions of human beings. So, in order to get started, economists are going to have to make some assumptions about human beings, about how human beings act and how human beings decide how to act. We might turn to psychology for our assumptions -- after all, psychologists are the professionals in the study of the human mind -- but in practice, most economists have not done that. It may be that the theories of psychologists do not answer the questions economists need to ask, or that there are many competing psychological hypotheses, or that economists are stubborn fellows -- but, for whatever reason, economists have not as a rule based their assumptions on psychological views of the human mind. Rather, most economists have begun from an assumption few modern psychologists would endorse. The assumption is that human beings are highly rational and self-interested.

This assumption is especially characteristic of neoclassical economists. Some non-neoclassical economists do also accept it, but some do not.

Neoclassical economists usually assume, in other words, that human beings make the choices that give them the best possible advantage, given the circumstances they face. Circumstances include the prices of resources, goods and services, limited income, limited technology for transforming resources into goods and services, and taxes, regulations, and similar objective limitations on the choices they may make.

I should modify that a little right away. Strictly speaking, neoclassical economics does not assume that real, concrete human beings are rational and self-interested. Rather, most economists assume that economic systems work as if they consisted of rational, self-interested persons. After all, it is averages that count for these purposes. People are of all sorts; sneaky and altruistic, smart and dumb, but if the average is a person who is rational and self-interested, then the system will "act as if" people in general were rational and self-interested. At least, that is the basis of "neoclassical" economics: it is assumed that deviations from rational self-interest are random and will cancel out and so the system will act as if everyone were rational and self-interested. Accordingly, neoclassical economics studies an economic system consisting of rational, self-interested persons.

We should pause a little further over these assumptions before moving on. They are not particularly common-sense assumptions. We all know of examples of non-self-interested behavior -- of people who give to the church and to good causes and who sacrifice themselves in other ways -- and my common sense (at least) suggests to me that people are often irrational chumps.