Economic Theories Letitia Lew

Paul Samuelson once told a joke about a physicist, a chemist and an economist who were stranded on an island with only a can of soup. The physicist suggested smashing it open with a rock, the chemist wanted to heat it with a fire, and the economist just said, "Let's assume we have a can-opener..."

The joke speaks to one of the main criticisms of economists: They're supposed to be out of touch with reality, making numerous, simplifying assumptions to qualify their models. This criticism fascinates me, for it challenges the very basis of economic theory.

In real life, after all, humans are not homo economicus and ceteris is not paribus. Thus, these assumptions appear to render economic models useless in practice.

Yet I feel that assumptions may be clarifying tools for economists, in the same way Occam used his Razor to cut out complexities and hypotheticals in arguments. Economists make assumptions because they do not, and cannot, take into account all possible factors. Some are irrelevant, some they do not know how to handle, and others are excluded because "the benefits of a more complete theory outweigh the costs of including them." (Coase) As Milton Friedman stated, "The more significant the...