Assumptions in Economics

Abstract

Any scientific discipline—any theory, formal or informal—rests on assumptions. These assumptions matter, and in the case of social sciences, they influence our vision of society and our policy recommendations. This chapter reviews and comments on assumptions most commonly made by economists—methodological individualism versus socially determined preferences, consequentialism, and utility comparisons—and discusses their attitudes toward the market and ethical choices. Economics combines positive and normative dimensions, seeking to describe behaviors while evaluating policies. Often adhering to utilitarian principles, economists emphasize preferences, including reconciling short- and long-term interests. They employ the “veil of ignorance" to assess policy fairness, acknowledging challenges in compensating policy losers. Consequentialism, central to economic analysis, evaluates actions based on outcomes. Economists also explore market failures—externalities, information asymmetries, and power dynamics—advocating for smart regulation to address ethical concerns while leveraging market incentives. Finally, methodological individualism underpins economic analysis, acknowledging social influences on preferences without attributing them entirely to social construction. Economists aim to balance theoretical assumptions with empirical data, ensuring robust, adaptable frameworks for understanding and improving societal outcomes.

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Reference

Jean Tirole, “Assumptions in Economics”, in Core Assumptions in Business Theory: A Wedge Between Performance and Progress, Subramanian Rangan (ed.), Oxford University Press, part I, chapter 2, 2025, pp. 59–70.