Suspect from the Start

The Journal of Economic Literature, perhaps the most prestigious of economic journals, published an article on the rational-consumer part of neoclassical theory in 2002. According to the authors, economist Paul Samuelson proposed the neoclassical theory of extreme rationality concerning future costs and savings in 1937, and people quickly accepted his idea because of its convenience and simplicity and in spite of Samuelson’s reservations about its accuracy. In other words, economists began using the theory without testing it.

The article goes on to explain that once economists began checking the theory, the “empirical research led to the proposal of numerous alternative theoretical models,” none of which agree with the neoclassical theory of extreme rationality. The article reports on dozens of papers, with dozens of empirical results, most of which contradict the neoclassical theory. People, it seems, may not always be entirely rational, even about money.