----------------- HES POSTING ----------------- 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 ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]