What Makes a Good Assumption?

My previous post on assumptions was not quite rigorous enough in its definition of assumptions, and attracted some skeptical feedback from the commenter named isomorphisms. Allow me to reiterate my point more clearly.

The distinction between hypotheses and assumptions was intuitively appealing, but of course all assumptions could be said to be hypotheses in a sense. However, I think most scientists would agree that a useful assumption has definitive characteristics, even if it’s difficult to pin down exactly what those are. I think they’d also agree that counter factual prepositions about the mechanics of a system are not useful assumptions. So what are?

At their heart, assumptions are intended to simplify analysis – this is an oft-used defence of economists. But the crucial way in which assumptions are able to do this is by eliminating a specific complication. Of course, this alone is not a sufficient condition. Assumptions also need to have a clear impact on the analysis, too, so we can be sure what happens when they are relaxed.

How many economic assumptions meet these two criteria?

Firms equating marginal cost to marginal revenue certainly doesn’t, as it’s a preposition about the nature of the firm, rather than an assumption that simplifies the nature of the problem – in fact, cost-plus pricing is far easier to calculate and also appears to be used far more widely used.

Perfect information can’t be said to eliminate a specific complication – it’s simplifying in a sense, but it potentially ‘simplifies’ the analysis to the point of undermining it, hence creating its own complications (you’d eliminate most real-world firms). Analysis is entirely possible without this assumption – ‘Schumpeterian’ economics uses imperfect information to its advantage.

Rational self maximisation, on the other hand, is a good example of an assumption that is defensible, as it allows us to simplify how people make decisions and has clear implications. Furthermore, it can easily be modified to include behavioural characteristics such as loss aversion (though economists seem unwilling to do this any time soon).

I stand by the idea that assumptions are an appropriate target for criticising economics, and feel this is a much more coherent and useful definition of what makes a good or bad assumption.

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  1. #1 by Arijit Banik on March 14, 2012 - 7:17 pm

    Your assertions are valid despite the criticisms. Mark Blaug (“The Methodology of Economics: Or How Economists Explain”) mentioned that “a theory is refuted only if the assumptions on which it is based are proven to be invalid, or if it is proven to be logically inconsistent” and, further to this, Himmelweit and Mohun (“The Anomalies of Capital” in Capital and Class) cleverly stated that “nothing can be deduced from assumptions which is not already entailed by those assumptions; hence theory becomes tautology, the deduction of conclusions from assumptions” which gives a sense of the ridiculously circular nature of neoclassical economics thinking.
    In addition, Ben FIne and Dimitris Milonakis, in their excellent book “From Political Economy to Economics” show Milton Friedman’s slight of hand in terms of economic “analysis” by his use of assumptions in that (Friedman’s) “Assumptions need bear no relation to reality; it can even be claimed that theory has greater purchase the more unrealistic its assumptions. Anyone that has read some of Friedman’s papers understand this. Instead, we are expected to swallow tripe such as “inflation is always and everywhere a monetary phenomenon” without referring to the constriciting assumptions he used in his rendering of positivist economics.

    • #2 by Unlearningecon on March 15, 2012 - 3:23 pm

      Thanks for your comment, some interesting looking books/papers in there. And yes I would argue that half of neoclassical economics is basically circular logic.

  2. #3 by n8chz on March 15, 2012 - 1:48 pm

    Let’s start by assuming a universe in which the only economic goods that exist are eggs and root beer. A vegan maximizes utility by spending all their income on root beer and none on eggs. For the non-vegan, it’s the other way around. Make it so the root beer is diet root beer, and the vegan doesn’t even get calories.

  3. #4 by Ciaran on March 16, 2012 - 2:44 pm

    Okay, putting everything else aside, imagine Robinson Crusoe is on an island, and he has six coconuts to barter….er, what were we talking about again?

    • #5 by Unlearningecon on March 16, 2012 - 4:08 pm

      IDK but the answer is it’s the government’s fault.

  4. #6 by Dave Marsay on March 16, 2012 - 10:09 pm

    Good issue. In economics, unlike logic, it is generally supposed that all the assumptions are – strictly speaking – false, but that the model created by the sum of the assumptions is adequate for some purpose. Thus I think the assumptions of neoclassical economics, for example, are probably adequate for some purpose, but (as you say) are inadequate for proving their own validity.

    In the 200s we seemed to forget this. On this issue, at least, Keynes seems indisputably correct.

    • #7 by Unlearningecon on March 16, 2012 - 11:44 pm

      Well neoclassical models certainly failed the empirical test in 2008. And also in 1929. And 1873. Etc.

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