Rationality of Self and Others in an Economic System

Abstract

Standard economic doctrine makes assumptions of rationality that have very strong implications for the complexity of individ- uals’ decision processes. The most complete assumptions of competitive general equilibrium theory require that all future and contingent prices exist and be known. In fact, of course, not all these markets exist. The incompleteness of markets has several side consequences for rationality. For one thing, each decision maker has to have a model that predicts the future spot prices. This is an informational burden of an entirely different magnitude than simply optimizing at known prices. It involves all the complexity of rational analysis of data and contradicts the muchpraised informational economy of the price system. It is also the case that equilibria become much less well defined. Similar problems occur with imperfect competition.