All things being equal, rational market participants will act accordingly
One of the gaps that I noticed from the first day of Econ 101 was the concept of “all things being equal” that applies to every economic model to correctly map out an economic theory to precision. Here is the supply curve and here is the demand curve, the point they meet is the equilibrium, sets the ideal price for an efficient market. In a way, Keynesian theory states that all things being equal, recessions and depressions can be avoided only by increased deficit spending and ever increasing access to credit.
What I took away from day one was that this assumption totally ignores the limitations to any theory that assumes laboratory-like conditions to describe something as subjective and chaotic as human behavior. This is the same criticism that hard science lobs at the soft sciences as being impossible to test empirically. Almost like having an inferiority complex to the hard sciences and overcompensating the quantitative analysis at the expense of the qualitative analysis of human behavioral nuances, economics runs the risk of getting an incomplete conclusions, and at worst, ignoring contrary evidence.
Another gap that I came across almost immediately was the concept of the rational market participant, that is, an individual given a certain amount of information about a market, will only pay a price accordingly to the supply and demand in the market. It goes to the heart of the assumption that people act rationally. I remember having a hard time accepting this theory on its face on the basis that very few people I know of act rationally at all when it comes to personal finance. You only have to take a look at the consumerist society to see how irrational the decisions that all of us make when it comes to buying things. Also, some of even the most established and respected economists have a difficult time maintaining their own personal finances, despite the assumption that they of all people should be in the best position to act rationally in a market.
Again it goes to the oversimplification of human behavior to force an empirical theory with the goal of being able to test it. Rather than just admitting that some systems may be to complex to quantify with a high level of certainty, economics is pushed out as a hard science and backing to many social policies and initiatives. Experimenting with these theories might be ok on a smaller level, given the risks can be assessed, and the decisions can be made on those risks. But really is it worth spending trillions of future taxpayer dollars that we don’t have on betting a soft science theory? Especially when we don’t even have the money to begin with, and are instead mortgaging the financial future of our unborn children, grandchildren and great-grandchildren?
All things being equal, that sounds pretty crazy, at the very least very reckless and irresponsible.