1 - Reality (and Not Simply Abstract Rationality) as the Starting Point of Economic Theory

Summary

The chapter discusses Pasinetti’s arguments for a theory which is ‘firmly placed on an objective foundational framework’ rather than on the fictional reality of the ‘purely imaginary world of rationally behaving individuals’. This approach – Pasinetti argues – was typical of the ‘Cambridge Keynesians’, which following a path traced by Marshall, placed at centre of the analysis not abstract entities, but flesh-and-blood economic agents acting in various specific markets. The vision of economic behaviour guided by customs and habits, setting limits to the crude maximisation through marginal analysis, was shared by Kahn and Keynes, who accepted it in its modified form, namely, not as exact calculation but as the outcome of a trial and error method. Although they did not endorse Sraffa’s rejection of its validity for price determination and income distribution, they shared the common objective of placing reality at the centre of their analysis, rather than abstract rationality, as the principle guiding behaviour. In other words, what characterises the approach is a vision of individuals less stereotyped than mere maximising machines. This means that in the Cambridge approach there is room for rationality in depicting political and economic decisions, as long as we interpret it as constrained by limited knowledge and uncertainty.