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In an earlier message, I noted that Marshall saw a problem with  
assuming "perfect knowledge". For the record, here is what he  
said:   
 
"The process of substitution [i.e. maximization], of which we have  
been discussing the tendencies, is one form of competition; and it  
may be well to insist again that we do not assume that competition  
is perfect. Perfect competition requires a perfect knowledge of the  
state of the market; and though no great departure from the actual  
facts of life is involved in assuming this knowledge on the part of  
dealers when we are considering the course of business in  
Lombard Street, the Stock Exchange, or in a wholesale Produce  
Market; it would be an altogether unreasonable assumption to  
make when we are examining the causes that govern the supply of  
labour in any of the lower grades of industry. For if a man had  
sufficient ability to know everything about the market for his labour,  
he would have too much to remain long in a low grade. The older  
economists, in constant contact as they were with he actual facts  
of business life, must have known this well enough; but partly for  
brevity and simplicity, partly because the term "free competition"  
had become almost a catchword, partly because they had not  
sufficiently classified and conditioned their doctrines, they often  
seemed to imply that they did assume this perfect knowledge. It is  
therefore specially important to insist that we do not assume the  
members of any industrial group to be endowed with more ability  
and forethought, or to be governed by motives other than those  
which are in fact normal to, and would be attributed by every well- 
informed person to, the members of that group; account being  
taken of the general conditions of time and place. There may be a  
good deal of wayward and impulsive actions, sordid and noble  
motives may mingle their threads together; but there is a constant  
tendency for each man to select such occupations for himself and  
his children as seem to him on the whole the most advantageous  
of those which are within the range of his resources, and of the  
efforts which he is able and willing to make in order to reach them." 
 
Marshall's Principles of Economics, Book VI, Chapter II, Section 8:  
(pp48-9, 8th edition):   
 
 
So, historians of economic thought, who got neoclassical  
economics going in the wrong direction by ignoring Marshall's  
cautioning? From what Ross tells us, it was not Knight although he  
seemed to be aware of the issue.   
 
We have known since Hobbes that while it is ok to use logically  
valid arguments that include assumptions for which the truth status  
is unknown, it is not ok to include known false assumptions since  
modus ponnens would be invalid. In our context, whenever we  
obtain conclusions (or explanations) by using a model (or theory)  
that includes known false assumptions, the truth status of those  
conclusions (or explanations) is unknown: The classic "garbage in,  
garbage out" syndrome.   
 
As an aside, I find it strangely interesting that many people willing  
to assume perfect knowledge for what Marshall called "brevity and  
simplicity". Econometrics model builders have for some time  
willingly accepted false assumptions since they are not interested  
in supporting true conclusions (in the non-stochastic sense)  
usually because they want to keep the mathematics simple  
enough to be "tractable". But, while any assumption of perfect  
knowledge may provide "brevity", it certainly does not provide  
"simplicity". Acquiring "perfect knowledge" is surely a very  
complicated process (if even possible). If it is not possible (or  
economic, as Stigler argued) then why would we assume it?  
"Funny" is an understatement.   
 
Lawrence A. Boland 
Simon Fraser University 
 
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