| Abstract: |
This paper contrasts the modern use of the assumption that rationality guides
individual economic behaviour, as reflected in simple models of utility and
profit maximization, to literature between 1890 and 1930 which sharply
challenged the use of such an assumption, as well as to later literature in
economic psychology from Herbert Simon onwards which sees economic (and other)
cognitive processes in different ways. Some of the earlier literature proposed
objective and operational notions of rationality based on the availability of
information, ability to reason (cognitive skills), and even morality. Learning
played a major role in individuals achieving what was referred to as complete
rationality. I draw on these ideas, and suggest that developing models in
which economic agents have degrees (or levels) of economic cognition which are
endogenously determined could both change the perceptions economists have on
policy matters and incorporate findings from recent economic psychology
literature. This would remove the issue of whether economic agents are
dichotomously rational or irrational, and instead introduce continuous metrics
of cognition into economic thinking. Such an approach also poses the two
policy issues of whether raising levels of economic cognition should be an
objective of policy and whether policy interventions motivated by departures
from full economic cognition should be analyzed. |