In the 1940s, economics started getting highly mathematical. It was basically because economists weren't smart enough to write down models of real behavior that they started writing down models of highly rational behavior - and they kind of forgot about humans.
Interpretation
Richard Thaler critiques the shift in economics towards overly mathematical models that neglect human behavior.
In this quote, Richard Thaler reflects on the evolution of economics in the 1940s, pointing out that the increasing mathematical complexity in economic models led to a disconnection from real human behavior. Thaler argues that economists, faced with the challenge of accurately representing the intricacies of human actions, opted for simplified rational models instead, resulting in a neglect of the essential factors that drive genuine human decisions.
In practice
During a lecture on the evolution of economic theory, one might use this quote to highlight the importance of human behavior in economic models.
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My thesis topic was 'The value of a human life.' I asked people a question: 'Suppose you had some risk, a one in a thousand risk of dying - how much would you pay to eliminate it?'
The market is incredibly inefficient and capable on rare occasions of being utterly dysfunctional. And people have a really hard time getting their brain around that fact. They want to believe that it's approximately efficient almost all the time, and it simply isn't true.
So that the record of history is absolutely crystal clear that there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free-enterprise system.
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When you have a tax system in which most of the exemptions and the lowest rates benefit the richest, all in the name of job creation, all that happens is that the rich get richer.
The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available,with a view to mitigating the predominance of speculation in the United States.
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