Rational Choice Theory Methodological Individualism General approach to many paradoxical paradigms of theoretical perspectives Argument about app structure of theories Any complete explanation should include as one of its components some analysis of individuals thought and action o Individuals better be somewhere in the explanation o Macro Micro thought Micro actions Macro outcome If from Macro to Macro then something is missing Ex Deviance law change to harsher leads to crime rate decrease Cognitive theory that perceives humans as thinking beings o Individuals have goals and their actions are a means to achieve their goals means end theory A set of micro assumptions that model the macro outcomes Types of Models Maximizing and Satisficng Maximizing Utility o Begins with choice set that specifies certain actions that could be made Ex buying a car there are 100 s of choice sets ie The feasible options Go through the costs and benefits for each option and choose the one with greatest net benefit Impossible to go through all the calculations because our calculating capacities are limited and it s not realistic o Argument that its not realistic to predit peoples outcomes because we don t know what goes on in their head o Utility goals What people want If you don t specify what people want then the model becomes un testable o Difficult to collect data about what people want Often not truthful don t really know o Use assumptions that are fungible adaptable If you can t prove a theory wrong then you can t test the theory Specifying preferences Bounded rationality and Satisficing Ex Satisficing o Simon argued that people need to find shortcuts to decision making to simplify process Going through the list and finding something that s good enough and making the decision based on that Its satisfactory and suffices for a decision but doesn t mean it s the best Smith Wealth of Nations Self Interested action 1776 to explain why some countries are rich poor Individuals that are always looking out for themselves likely to produce society with negative consequences Counterintuitive In certain conditions self interest produces some positive social benefits o Ex Baker to make best bread lowest cost in order to maximize profit for his bakery o Scope condition competitive market with more than one baker and free market no rules governing what to use and how to use it Self interested action of the baker will result in him producing the best bread he can produce at the lowest possible price and if he doesn t then the other baker down the road will get all the customers and he will not survive Key is creating and maintaining markets that are free and competitive if not then you will remain poor Self Regulation Argues that free competitive markes are self regulating self equilibrating o Do not need third party state federal intervention to work at maximum efficiency o The free choices of self interested individuals will result in maximum profitability o Ex in country x there is terrible chicken plague resulting in fewer eggs in market Supply and demand says price of eggs increases Self interested people now begin importing chickens and supply of eggs increase o Price goes down again to normal price People will change their diet state intervenes No one will have motivation to produce more eggs thus preventing self equilibrating Laissez faire State shouldn t intervene people will do what they have to to survive Division of Labor Within the factory Technological other advances are produced by free competitive markets o Size of market local to global will determine the extent of division of labor Increased pressure on manufacturers to find more efficient ways to make things Everyone is rational and self interested in order to get a leg up on their competitors Consequence Increase within the production units firms laborers Ex production of chairs could be more efficient if we divide the production process into assembly lines o Increase specialization and efficiency o Same tools and number of hours yield more chairs CHEAPER Theory of comparative advantage o Ex England sheep grazing vs Portugal winery s o Different countries because of their natural endowments can more efficiently produce certain products because of natural resources Both locally procuring what they need saving on transportation o However both countries are better off if they specialize and trade Cost of production will decrease overthrowing the cost of transportation o Trade is positive sum meaning both England and Portugal benefit from specialization Increasing wealth of nations State intervention Against state intervention but necessary for certain things o Fundamental role relative to economy Free competitive markets cannot exist be efficient without the role of the state Role of the state o Social Security Protect property rights and private property No one will build factory etc if they know that they are not protected and legal environment is untrustworthy they will never build a factory If trade regulations are not stable there is no internal security and no one will want to produce anything o Civil and criminal law State will step in and settle the dispute ensuring fairness o Protection from external threat Some sort of army to protect from other nations taking over your factory o Social Adequate infrastructure education airports To reduce cost of transportation and increase trade