When a theorist in
economics first presents a model to others, the first thing he usually presents
or the first question usually asked by those who are attending his presentation
concerns the assumptions made when formulating the model. The rationale behind
that is straightforward: the assumptions one makes are the building blocks of
the model. If they are solid and make sense, then we can trust the outcome more
than if they are based on something cooked up in the researcher's mind.
A simple example
showing the importance of assumptions is the following:
Suppose that I want
to show that in an economy where only beef and cheese are produced, the
production of cheese is economically disastrous. Then, assuming a utility
function (a measure of how happy I am by consuming) of U=(Consumption of Beef -
Consumption of Cheese)^(1/γ) I could use some derivations to show that cheese
will not be good. Why? Because, as the reader may observe in the utility
function, cheese consumption lowers my potential happiness. Thus, the only way
for me to be "happier" is not to consume any cheese at all. By
imposing an unrealistic assumption (even if this might hold for a very small
percentage of the population) I can prove practically anything.
Obviously,
economists are smarter than this and thus try to avoid such issues. Even more
commonly, they just try to mask the lack of a coherent relation between the
world and what they assume by imposing more elaborate assumptions, such as the
ones Paul Pfleiderer shows in his deconstruction of some
peer-reviewed papers. A notable example is one where "the intermediary can
threaten not to contribute his specific collection skills and thereby capture a
rent from investors". This might sound a bit appealing: if I can threaten
to stop being the middle man and they cannot do it on their own, then I can get
people to pay me for doing it.
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