Silver Dialogues Essay
For most of my career, being an economic theorist has involved building models of economic phenonomena using two fundamental ideas, rational choice and equilibrium, as building blocks.
The assumption of rational choice in a model of human behavior is not as restrictive as it sounds. It simply requires that each decision maker have consistent preferences over all possible alternatives and that he choose the most preferred alternative from the feasible set. Consistency does not rule out preference for status or power; nor does it rule out feelings of envy and altruism. Consistency is an empty box and we can fill it as we wish. Equilibrium, by contrast, is a more restrictive concept. One definition of equilibrium, due to Nash, plays a central role in the theory of games. It assumes that each player chooses a strategy that maximizes his payoff taking as given the strategies of his opponents. In other words, each player chooses a best response to the strategies of the other players. Read More...