Economic Assumptions
(Do they just make an ass out of you and me?)
Assumptions form the foundation of our perceptions and expectations. Basic economic assumptions influence our thinking about the constraints of what is possible in an economic system. These cognitive constraints about what is possible influence how perceive reality and the behavior of others, and therefore how we design systems, enact policies, and the extent to which we expect and even tolerate certain behaviors.
What examples can you think of where false assumptions led to unintended consequences? Our lives are rich with them, which explains the popular adage:
The following are the Five Economic Assumptions have guided economic thinking. As you read, consider: did the assumptions precede or follow the establishment of economic systems? Do these assumptions describe the nature of physical reality, or of a society formed within an economic reality?
- Scarcity. Society’s wants are unlimited, but all resources are limited.
- Trade offs. Due to scarcity, choices must be made. Every choice has a cost.
- Self-interest. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own self-interest.
- Costs and benefits. People act rationally by comparing the costs and benefits of every choice.
- Graphs and Models. Real-life situations can be explained and analyzed through simplified models and graphs.
Question:
Which assumptions do you agree or disagree with?
Question:
What are some implications of economic outcomes that might have been influenced or tolerated based upon these assumptions?
Question:
If you were to design a prototype economic system, how might you adapt, delete, or add to the assumptions above?Question:
Question:
Is it possible to avoid making assumptions?
Here are some questions that can help us to check our assumptions:
- What was the purpose of our design? What did we set out to achieve?
- What information did we have that formed our assumptions? Was it evidence-based? Do we have new or contradictory evidence? What might the implications be of contradictory evidence?
- Can we reduce risk by running more small-scale prototypes to test assumptions?
- How can we be held accountable for outcomes, and increase flexibility in both our thinking and our ability to respond and adapt?
Question:
What else would you add?
