Thursday, September 26, 2013

Beginnings of a Comprehensive Economic Theory: The Building Blocks of the Economy

What is the fundamental unit of the economy? Orthodox economic theory, in addition to many heterodox economic theories, accept the premise of classical and neo-classical economics in this aspect: the rational individual is the fundamental unit of the economy. But is it?

If it is, then there is no fundamental units of the economy. Why is that? Because people aren't rational, as a whole, especially not in any economic sense, which often includes pursuing their personal self-interest. People are influenced too much by morals, lack of information, friendship, hate, identity, and social prestige. People will cater to the whims of others rather than their self-interest, and often do so in irrational ways, such as praying for a hurt child instead of taking that child to the hospital or assassinating a famous musician to keep him "pure".

However, there are more problems with this concept of the rational individual being the fundamental building block of the economy. I mean, an individual who goes out into the wild and hunts for food in unclaimed territory is not a part of the economy. What is different about that person from a participant in the economy? Interactions with others.

Does that mean we should refine the fundamental of the economy to irrational individuals who interacts with others? No. No one interacts with others all the time, and it's only when they are interacting with others that they are participating in the economy. The fundamental unit of the economy should be the interactions with others themselves.

In my next post on building a comprehensive economic theory, I'll discuss what are the most important interactions with others and how to classify these interactions, especially the important ones.

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