On Sept 7, Robert Schultz wrote:

"The real power of rational choice theory in my experience has never been in
predicting/explaining INDIVIDUAL (emphasis in original) behavior (now that's
tough psychology), but in predicting/explaining how GROUPS (emphasis in
original) perform in the aggregate"

In neoclassical economics, rational choice theory is PRECISELY to explain the
behavior of INDIVIDUALS and not aggregated results of decisions made by
individuals. Furthermore, neoclassical economists don't explicitly extend
arguments from the individual to the aggregate. Microeconomics is about
explaining the behavior of the individual decisionmakers in the society. It
rests on reductionist utility analysis, indifference analysis or revealed
preference. We cannot aggregates because individuals have preferences which
emerge from subjective (and unexaminable) utility functions that are NON-
COMPARABLE. In economics to reason from the individual to the group is to commit
the sin of the "fallacy of composition". This is not to say that real live
economists don't commit this sin "upon occasion" - I was almost thrown out of my
Master's level Micro class when I ask an "innocent" question to the effect of
"isn't this argument about the evils of minimum wage laws committing the fallacy
of composition?". [n.b. An increase in minimum wage creates an incentive for
each firm to marginally reduce its employment of labor (the micro effect); but
raising the wage increases many other workers income thereby stimulating
aggragate demand and creating jobs (a macro effect). That is why we have
increased minimum wage 23 times and it has always been accompanied by an
_increase_ in employment. See Card and Kruegers recent book Princeton Press.
Also see the Wall St. Journal's rabid response].

But when NCE's argue from the individual to the aggregate (except rational
expectations macroeconomists and even then it rest on very questionable
assumptions about the stochastic distribution of individual responses) they
don't do so explicitly, they simply "assume". General Equilibrium analysis. The
explicit theoretical effort to extend Microanalysis (rational choice) to
aggragate analysis has been subject to fatal critique--often acknowledged by the
best neoclassical practitioners of this arcane, formalist approach. This
critique is presented in B. Ingrae and G. Israel, _The Invisible Hand_, MIT
Press, 1990.

The current status of microeconomics is that partial equilibrium analysis,
Walrasian (Arrow-Debreu) general equilibrium analysis and game theory (all of
which are inconsistant with one another and contain different definitions of
rationality) are all presented to economics graduate students as if they were a
coherent and consistent body of theory. The typical economic practitioner is
usually unaware of epistemological or methodological debate within the
discipline unless they specialize in such matters or engage in interdisciplinary
work (both are rarities among mainstream economists). Consequently economic
analysis will not reflect this anytime soon. But serious scholars in more
epistemologically and methodologically aware areas of inquiry would be well
advised to consult the critical literature on these matters before following
economists down this path.

Bernie Lanciaux
Associate Professor of Economics
Hobart and William Smith Colleges
lanciaux[atx]hws.edu

and William Waller
Professor of Economics
Hobart and William Smith Colleges
waller[atx]hws.edu