Rational agents in free-market theory

[Nerburg]

So lots of people think that free-market theory depends entirely on, or mostly consisting of, rational agents but to my understanding it really doesn't depend on that and simply objecting isn't enough because I haven't been able to fully articulate what I mean. Could someone help me out here?

[Magnus]

Here is an excerpt from von Mises on the topic of the rationality of economic action.  He argues that since the value we place on our goals is entirely subjective, it makes no sense to call those goals (or "ends") either rational or irrational.

 

The only area where rationality matters is the degree to which one's means (i.e., actions) are well-calculated to achieve those goals, since some of actions are better at achieving one's goals than others.

 

A great deal of what Statists mean when they say "irrational consumer" is "people who don't share my values."

 

Or, they mean something like "imperfect information."  (As though the State has access to better information.)

 

Either way, it's entirely false to claim that free-market economics depends on an assumed "rational actor."  The entire field, assuming von Mises counts as a free-market economist, relies on the assumption that there is no such thing as rational action, as the critics mean it. They openly disclaim that such a thing can exist.

[Andrew79]

Ideally you'd need to define what's meant by "rational" first, as what's rational from one perspective might look crazy from another...

 

If people are rational then a free market will work fine. But if they aren't, if people tend to do things against their own self-interest, then you can't afford to not have a free market, because otherwise those irrational people would be trying to control the market, which can only lead to problems.

 

There are only people, there's no super-race immune to the usual foibles we all suffer.

 

To go further, if we make the impossible assumption that the people in charge of a market will be rational, then there's still a problem. Because what's rational for them, getting promotions, raises, etc. goes against what's rational for everyone else. For example, it might be rational for a planner to start a new department because the more people under him, the more money he can make, regardless of the validity of its existence. And once the department's been created it's almost impossible to get rid of, because it's rational for the people working there to do everything they can to keep their jobs (while not being rational for anyone in the market to spend much, if any, time and resources protesting it).

 

That was a bit of a ramble, hope it's clear.