Donut World and the Duopoly Archipelago: Social Learning and the Evolution of Competition

Abstract

The traditional approach to economics has been to assume that agents are rational and use all of the information they have in an optimal manner. However, as we have seen in the previous chapter, there are many arguments against this. At best, it is a modelling simplification, an ‘as if’ assumption made to make the process of understanding the economy and economic behaviour easier. There are rationality fundamentalists around, who believe optimising rationality is an essential part of human nature. I think that this is largely a credo with little or no justification, an act of faith by economists who want to have a single principle with which to understand economic phenomena. There are reasons why I reject the fundamentalists view. First, most economic decisions are made in the context of groups of people: the family/household, the firm, the union, the bank and so on. Even if individuals are ‘rational’, that does not imply that the decisions of groups will be ‘as if’ made by a single rational individual. Second, in practice individuals do not appear to act in ways consistent with rationality all the time:1 they may learn to be rational, particularly in repeated situations where there is a lot to be gained or lost. But then again, some people end up making the same mistakes over and over again.