Economist's Assumptions Mistaken for Reality (again)

Alex Tabarrok is telling his students that requiring apartments to have hot water is not useful to the tenants. How on hearth could he possibly have come up with such an idea? The answer, not surprisingly, is economic theory and the oversimplified assumptions upon which it builds. As Daniel Davies writes at Crooked Timber: about "The correct way to argue with Milton Friedman...
if you give away the starting assumptions - Friedman's reasoning will almost always carry you away to the conclusion he wants to reach"
The assumptions of economic theory states that people satisfy their own static preferences, with no respect whatsoever to other people, except for the volumes and prices they are offering and bidding you for goods and services. No big mystery why its result most often tells you that people are best off when left to themselves. In the real world, we all know that people are actually interacting through other means than buying and selling. We look at each other and try to act and live similar to each other, at least like those we identify as belonging to our group. And this has an impact also on our economic behavior, which is far from being individual and independent. Why are young people from certain groups less likely to acquire higher education? In some countries, their parents economic resources may provide answers. But here in the Welfare-state, tuition is free, and Government subsidies funding for students living-costs. So, why are young people from certain groups less likely to acquire higher education? What are these groups? They consist of people with on average lower education. We want to stick to our group, we are not "economic man". If parents and friends don't expect you to study, that will have an impact on your choice. More precisely, it will diminish your chance to chose education and the higher lifetime income that is associated with it. The whole economy loses from negative peer pressure. And apartments without hot water just serve too well as theatrical properties to manifest low-income lifestyle that is easily is passed on to future generations.

Paternalistic - yes! But if its so right to wage war against cancer, drugs (a war that somehow excludes alcohol...), terrorism; why not poverty?

Update: Tabarrok continues the discussion here.

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