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I just read a Times article discussing the rational theory in economics.I found it mentioned an interesting point that I want to share in this blog.

“The Myth Of the Rational Market” Time, June 22, 2008, pg.44-46

I, as other Hong Kong high school students who studied economics, was educated to believe that as long as people act rationally, our society will progress, and the accumulated wealth will increase and finally the standard of living will rise as a result. Human beings are assumed to be rational. Irrational people will suffer from losses caused by their irrational decision and will be kicked out of the race (shut down business). This “System of Rationality” is exactly one of the selling points of Market economy. A Free Market is an excellent place to provideĀ  an environment for the “System of Rationality” to work. That’s makes marketplace a pillar of capitalism and centuries of prosperity.

The top scholars and experts like Fisher, Friedman believe in the rational theory. We taught our future elites in colleges and high school the very same theory till today. CEOs and other high executives in companies are suppose to be chosen for being the most rational people in the company. Yet the recent financial disaster disprove the theory. What happened?

The problem is the word ‘rational’. Being rational means that one must analyze an event 100% logically and mathematically, without being influenced by emotions. If all businessmen made their decisions without being affected by their personal grudge, gut feelings or emotions, then they can be considered as rational. But is it possible for a human to be perfectly rational as a robot or computer did? Human are fundamentally made up of emotions and rationality. It was always a balance between the 2 sides. Our strength in rationality confirmed our superiority against the other species. Yet are our rationality strong enough to make sure we won’t be affected by emotions and made bad decisions? We can control the rational part of the nature, but how about the random part, like luck, fate and destiny? Not only it is impossible for us to be totally rational, even we do, we still have to subject ourselves to the judgment of the nature.

Will this major crack in the fundemental pillar of economic rationality forever changed our opinion in value and vaildity of the discipline of Economics?

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Two interesting quotes from our dearest Gov. Arnold Schwarzanegger.

“I came in here to fix what is broken in California”

“Even though we fixed a lot of different things, one of the things we couldn’t fix is the broken budget system.”

I put this up on Facebook, but in case you haven’t seen it, here you go.

I’m not making fun of Arnold – OK, maybe I am – but we know California is in a pretty difficult situation, with a $15b deficit on hand and signs of further deterioration. The recent argument is rather ordinary. The government proposes a series of programs and position elimination, including $3 to $5b on education expenditure, $1b on medical care and cutting off at least 500 jobs. That’s why people say if this bill passes, Californian kids are going to be “dumb and sick,” as they will receive a worse education and less comprehensive medical attention. On the other hand, students in college are organizing rallies to Sacramento to fight the budget cut. A quick question to the student: while we fight for our benefits, should we also consider giving a constructive proposal for the government to raise their funds to cover its negative bottom line? If the state is seriously in red, it must seek ways to squeeze some dollars from all areas. I mean, all programs hate cuts, but some cuts are inevitable. Cuts in education definitely will make California lose its comparative advantage to other states, as it is famous for its mature education (UC/CSU) system. Both sides should try to enter the others’ shoes and develop from a common ground, rather than students shouting out of the government agency and the officials inside are doing all the same.

Here is a list of the Golden State proposal on the May 19 ballot.

1. Spending limit and tax hike

2. New education payment plan

3. Borrow from the state lottery (interesting…. maybe that would work)

4. Redirect children’s services funding

5. Redirect mental-health funding

6. Ban pay raises for state officials

Among the six, only item #6 is favored (48% support) by voters, according to a non-partisan survey – and we all know why.