Capable, but Fallible Actors; Orderly, yet Inefficient Systems

|Peter Boettke|
To my mind, one of the really serious problems with modern economic thought is to confuse the concept of rational action with 'correct action', and to conflate the orderly coordination of the market economy with the perfect dovetailing of plans that defines an equilibrium state of affairs.  Don't get me wrong --- the equilibrium propositions are important analytical devices in economic thought.  But the preoccupation with them can stifle progress in thought and cloud our understanding of the market economy and the costs of government.
Individuals are, as Mises taught, purposive; they are 'rational' actors.  But they are not perfect decision makers. They are, as William Jaffe characterized Menger's view of man, forever caught between alluring hopes and haunting fears.  We are not lightening calculators of pleasure and pain.  We are capable, but fallible decision makers.  Within the context of the market economy, we also find ourselves existing within a context where the feedback on our decisions is constant.  The price system incentivizes us, it provides us with signals, it reveals to us knowledge we previously were unaware of, and it steers us in ways to utilize our own knowledge so we may realize the gains from opportunities for mutually beneficial trade, and to realize the gains from the creativity of innovation.  The market economy never settles, and thus it never exhibits the first-best efficient state of affairs as defined in a model of general competitive equilibrium.  But ithe market system by constantly adjustment to changing conditions reveals an intricate and beautiful mosaic of social cooperation.
What does economic theory look like that understands this point?  Well, I would say that is ironically the mainline of economic thought from Adam Smith and David Hume, to Mises, Hayek, Buchanan.  But if this is the character of mainline economics, then how do we address the mainstream of economic science as personified in the Samuelsonian project, but also finding expression in the prestine world of Arrow-Hahn-Debreu, and the less than ideal world of Stiglitz, Sonnenschein, etc.  Those theories are about the system, but my point would also relate to the decision theory underlying those depictions.  The rational choice model of Becker-Stigler, as well as the behavioral model of Kahneman and Thaler.
As students of the market order and of modern economics, those who wished to pursue a "mainline" research program must not only study the history of political economy from Smith to Hayek, but must familiarize themselves in a disciplined and serious way with the "mainstream" from Samuelson to Stiglitz.  Mario Rizzo has been teaching a course at NYU on behavioral economics.  He addresses the idea of rationality in economics from a variety of perspectives.  I highly recommend following his syllabus and thinking through these issues to decide what sort of economist you want to be, and what sort of questions you want to explore in your research.