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Sir, Interestingly, Martin Wolf (“Make policy for real, not ideal, humans”) and John Kay (“Crowd-pleasing theories are no substitute for wise regulation ”) write in the same edition (December 17) about the unreality of the “Homo economicus” so relied on by economists as the model of human behaviour.
In reality, as Mr Wolf says, we are not “far-sighted, rational and self-interested” but rather “bundles of emotions”. Professor Kay attacks the “supposed wisdom of crowds” as justifying claims of market efficiency. This criticism goes to the micro half of economic theory.
The model for the macro half is not much better. A standard textbook (Baumol and Blinder) states that minimum waste “can be achieved extraordinarily well by letting markets operate more or less freely”. On that basis, economists assume full employment and an invisible hand that, with some few exceptions, “delivers the right goods and services to right people”. Is that the world we see today? Or do rampant unemployment, underemployment, low wages and poverty suggest we look for other models of human and market behaviour?
Baltimore, MD, US
Former Assistant Secretary of Labor in the Carter Administration; former Chief Economist, US Senate Budget Committee