The New Microeconomics: a Psychological, Institutional, And

Article Type: Original Article The New Microeconomics

A Psychological, Institutional, and Evolutionary Paradigm with Neoclassical Economics as a Special Case

By Brendan Markey-Towler*

Abstract: Microeconomics requires a new grounding or formulation that can account for a broader range of socioeconomic behavior than neoclassical economics does. The core of the neoclassical economics research program—the theory of rational choice—has offered insights into the determination of socioeconomic behavior. But other elements need to be integrated into a coherent microeconomic perspective. We introduce such a perspective in which neoclassical economics is treated as a special case. This advances our understanding of the determinants of behavior in a coherent and integrated manner. This perspective may form the foundation of an evolutionary and institutional perspective on socioeconomic systems. This has practical value in designing strategy and policy.

Introduction: Neoclassical Economics Has a Place in the New Microeconomics

In the decade following the global financial crisis of 2007, there have been myriad calls for rethinking economics, reforming the research program and corresponding curriculum to account more adequately for the nature of the economy. It is now generally accepted even in the mainstream economics profession that macroeconomic models of dynamic stochastic general equilibrium with a representative agent suffer serious problems. However, the

* Researcher, School of Economics, University of Queensland, Australia. Author of An Architecture of the

Mind: A PsychologicalAuthor Manuscript Foundation for the Science of Everyday Life (2018). PhD from the University of Queensland, Australia with a thesis entitled Foundations for Economic Analysis: The Architecture of Socioeconomic Complexity, advised by Professors John Foster, Peter Earl and Michelle Baddeley. Email: [email protected] This is the author manuscript accepted for publication and has undergone full peer review but has not been through the copyediting, typesetting, pagination and proofreading process, which may lead to differences between this version and the Version of Record. Please cite this article as doi: 10.1111/ajes.12260

stumbling block of the rethinking movement has been the lack of a compelling alternative microeconomics which could replace the paradigmatic core of mainstream economics. The problem is the same one faced by Janos Kornai (1971) with his famous Anti-Equilibrium. Without a compelling alternative microeconomics, Frank Hahn (1973) was able to simply dismiss the rethinking movement of the day on practical grounds: what else could we teach undergraduates and place at the core of our research program?

We seek to outline such an alternative paradigm here. We are guided by discoveries in behavioral economics and decision science which suggest there are a range of important psycho-social factors in human behavior that neoclassical economics struggles to explain fully. We seek to map a new pluralistic paradigm in microeconomics in which various modes of analysis—psychological, sociological, institutional, and evolutionary—are brought together within a new framework (Fullbrook 2007; Rodrik 2015). In the new paradigm, neoclassical economics will not be swept away entirely. It will constitute a special case.

The basis for the new paradigm will be a psychological approach to microeconomic analysis (Earl 1983 1984, 1986a, 1986b, 1990, 2017; Drakopoulos 1994; Drakopoulos and Karayiannis 2004; formalized in Markey-Towler 2018). This psychological approach to microeconomic analysis may serve as a coherent foundation for an institutional-evolutionary perspective on socioeconomic systems. It is consistent with institutional economics (Hodgson 1998, 2004, 2010; Hodgson and Knudsen 2010; Ostrom 2000; Ostrom and Basurto 2011). There is an even stronger connection with the original “Veblenian” form of institutional economics, as well as evolutionary economics (Metcalfe 1998, 2008; Dopfer, Foster, and Potts 2004; Dopfer and Potts 2007; Witt 2008). This new paradigm integrates a broad range of behavior that neoclassical economics has not been able to explain adequately. This has significant practical benefits in designing strategy and policy.

We proceed as follows. First we will consider neoclassical economics as a paradigm and examine its core message. We argue this provides a useful perspective on such behavior as can be understood to emerge from substitution between rival incentive structures. We will Author Manuscript then consider some evidence on what this perspective can or cannot explain well. Since neoclassical economics offers a constrained perspective on behavior that fails to explain adequately some types of behavior, it needs to be placed within a broader context. We introduce a psychological perspective that might address the significant spectrum of

socioeconomic behavior that neoclassical economics struggles to explain. The new theory is coherent, integrated and can be formalized. It is also quite simple, which means that it is intellectually competitive with neoclassical economics (Harstad and Selten 2013; Rodrik 2015), which it seeks to subsume and transcend. We then show how this might serve as the foundation of an institutional and evolutionary perspective on socioeconomic systems. Before concluding, we consider how this perspective may inform strategies of policy formation.

Neoclassical Economics As a Theory of Incentives and Substitution

We should be clear about what we mean here by “neoclassical economics” at the outset. Our definition is not quite as specific as that of Tony Lawson (2013), who defines it as any reductionist approach to studying socioeconomic systems. We instead define neoclassical economics historically in terms of what Lakatos (1968-1969) classified as a research paradigm—a set of ideas that are organized around a set of core arguments put forward in a series of canonical texts.

We define the neoclassical research paradigm specifically as work heavily influenced by the mathematical appendix of Alfred Marshall’s great textbook Principles of Economics (1890). We also include works heavily influenced by Robbins (1932), Hicks (1939), Arrow and Debreu (1954), Koopmans (1957), Debreu (1959), and Friedman (1962). Together they systematized and extended Marshall’s analysis of partial equilibrium and fused it with analyses by Edgeworth (1881), Jevons (1971), and the general equilibrium approach of Leon Walras (1899). The neoclassical research paradigm therefore also includes the corpus of game theory organized around the contributions of Nash (1950a, 1950b, 1951) and Harsanyi (1961, 1977), who extended the neoclassical perspective to account for strategic interactions (of a sort). In the modern era we would define neoclassical economics as that body of work most heavily influenced by the core canon provided by Kreps (1988), Mas-Collel et al. (1995), Rubenstein (2006) and Jehle and Reny (2011), which draw together all these historical texts into a coherent statement of the research paradigm they developed.

Author Manuscript The Core of Neoclassical Economics: Rational Choice Theory

The works that constitute neoclassical economics have a common core that is oriented around the theory of rational choice. The neoclassical perspective supposes that individuals seek to

choose, out of all feasible alternatives, the course of action associated with the maximum utility. This concept of rational choice is not the same as “reasoned choice,” as there is no real ratio decidendi guiding an individual. An individual is “rational” for a neoclassical economist in a manner quite different from what is “rational” in a normative moral philosophy (Elster 2009). One is rational if one acts to maximize one’s utility in one’s choice of behavior.

By applying some convenient mathematical assumptions, we arrive at the famous marginal-benefit–marginal-cost rule. An individual is rational and maximizes utility if they select the course of action that exhausts marginal net benefits and equates marginal benefits with marginal costs. A special case of this rule emerged toward the end of the 20th century from the application of Lagrangian and Kuhn-Kahn-Tucker optimization methods in an exchange economy. Accordingly, an individual is rational and maximizes utility if they select that course of action for which the marginal rate of substitution between two goods is equal to the ratio of their prices.

Utility-maximization is “taken back” to preference-maximization and even revealed preference in choice functions where observed behavior is rationalized by the construction of a preference relation, and it is “taken forward” to the analysis of markets and games. But, in all cases, the notion that individuals act as utility-maximizers is the core organizing principle of neoclassical economics as a research program. The equilibrium approach is, somewhat, anterior to this, and serves mostly as a mathematically convenient method for ordering the interactions of rational agents in a socioeconomic setting. This is one reason Hahn (1973) was able to set aside Kornai’s (1971) otherwise devastating critique of neoclassical economics. The true core of the neoclassical paradigm is not its commitment to equilibrium. Indeed, neoclassical economists are aware of the limitations of the equilibrium approach to the extent that at various points there have been bursts of attention paid to out-of-equilibrium dynamics in neoclassical models (Uzawa 1960; Drazen 1980; Ito 1980; Henin and Michel 1982; Bala and Majumdar 1992; Cheng and Wellman 1998). The true core of the neoclassical paradigm is its behavioral theory. Author Manuscript

Neoclassical economics has a place within a new microeconomics because something like the behavior it describes does exist, and within reason the dynamics at play in theory are reflected in practice. Of course, we are never going to find a person literally finding the point

exactly where marginal utility equals marginal cost, even the most stalwart neoclassical economist will admit this is unrealistic. What the theory of rational choice as neoclassical economics defines it actually does is tell us to seek an explanation for behavior in terms of incentives. If we know the incentive structure associated with choices and the relative costs and benefits for an individual facing those choices, we can predict the person will try to achieve the highest net benefit. If the incentive structure changes or if the relevant costs and benefits change, the behavior will also change. As the costs of one action increase and the benefits of another increase, the individual is encouraged to change from the one to the other. If we want to explain behavioral patterns, this theory suggests we should look to the rival sets of incentives (the costs and benefits) attached to feasible behaviors and how they might be changing.

When Neoclassical Economics “Works”

It is difficult to deny that neoclassical economics offers some insights. By applying rational choice theory we arrive immediately at a compelling explanation for the tendency of demand to decrease and for supply to increase as prices increase, and for substitution to occur between products in markets. That was arguably the initial aim of neoclassical economics, and it was certainly the objective of Marshall (1890) and Friedman (1962). But a broader range of behavior can be, at least in part, made sense of using this perspective.

The exploits of Levitt and Dubner (2005, 2009) of Freakonomics fame (or infamy), show that incentives (relative costs and benefits) help us partially to explain everything from sumo wrestling to abortions to global warming. Paul Frijters and Gigi Foster (2013) also offer new perspectives on the formation of groups and the bonds of love, using the idea that people act in response to incentives and change their behavior when incentives change. All this, of course, is an extension of Gary Becker’s (1993) research program seeking to explain as much as possible about life in terms of the costs and benefits faced by an individual in their choices about how to behave.

Rational choiceAuthor Manuscript theory also offers a valuable perspective on some of the dynamics determining strategic interaction. Thomas Schelling (1960) offers an analysis of how conflict and cooperation may depend, at least in part, on the relative costs and benefits of the various strategies under consideration created by the system of interactions. During the Cold War,

that helped make sense of the terrifying world of nuclear strategy that caused Sonja Amadae (2003, 2016) to provide an interesting meditation on whether rational choice theory is valuable in terms of human wellbeing. Regardless of its shortcomings in this regard, rational choice theory is certainly valuable in the analysis that led to the development of the New Institutional Economics. Oliver Williamson’s (1975, 1979, 1985, 2002) analysis of strategic interaction in business organizations reveals the deeper incentives underlying the puzzling formation of command and control hierarchies in otherwise free markets identified by Coase (1937,1984). Elinor Ostrom (1990) shows how the management of a common good can emerge spontaneously from the natural incentive to cooperate in the long run for evolutionary survival (Axelrod 1984; Axelrod and Hamilton 1981). Indeed, the discipline of biology as a whole benefited greatly from the idea that one might study the evolution of genes as if they caused organisms to have traits which maximized the chances of the gene’s survival (Dawkins 1976; Smith 1982)—quite a strong incentive.

Similar to this analysis, rational choice theory has offered a valuable perspective on the behavior of individuals in positions of power. Public Choice Theory, as presented by Buchanan (2003) and Downs (1957), supposes that people in a political environment respond to costs and benefits in the same manner as other people. If the incentives create a net benefit in pursuing a particular course of action, people in the public sphere will follow it. This offers a new perspective on how a commitment to follow specific rules of interaction can lead to the spontaneous emergence of cooperative governance rather than coercive government (Leeson 2014; Munger and Munger 2015). But it also explains why the behavior of politicians often does not align with their ideology, why public works do not always maximize the public welfare, and why corruption is a predictable product of a political system (Tullock 1996; Murray and Frijters 2016).

Interesting insights can thus be obtained when we suppose that people are maximizing benefits relative to costs and acting in response to changing incentives. These core elements of neoclassical economic theory ought to be incorporated in any new microeconomic paradigm. But the evidence suggests that there is far more to behavior than response to Author Manuscript incentives alone, and neoclassical economics will be but one part of a new microeconomic paradigm, a constrained special case.

The Evidence: Neoclassical Economics Is Not All There Is

There is evidence to suggest that neoclassical economics does explain some types of socioeconomic behavior fairly well, and so it offers one useful perspective. The evidence also suggests, however, that incentives are but one factor that determines socioeconomic behavior. Other factors need to be accounted for. Neoclassical theories offer a quite constrained perspective on human behavior.

Data on Demand and Supply

Foster (2017, 2018) provides evidence that confirm the validity of neoclassical theories that predict a decrease of consumption when prices increase. But Foster included a caveat: the validity of those theories is contingent on historical context. This caveat is far more crucial than Machlup (1946) allowed for in making his argument that neoclassical economics can explain behavior “at the margin.” Foster’s evidence helps to explain why the famous Taylor and Houthakker (2010: Chs. 6,12) studies lend only weak support to the predictions of neoclassical economic theory. They find that demand curves are not especially responsive to prices, contrary to what neoclassical economics would predict. Only when the historical context is accounted for do neoclassical dynamics become apparent at the margin.

An understanding of the context in which socioeconomic behavior is occurring is therefore a necessary condition for understanding behavior “at the margin.” Without understanding the broader socioeconomic environment, we cannot reveal the effect changing incentives are having on behavior at the margin. Incidentally, Milton Friedman (1962) admits as much in implicitly asserting the ceteris paribus clause consistently in his analysis of the response of socioeconomic behavior to prices. Friedman knew, as Marshall did, that one cannot understand socioeconomic behavior and the response to incentives without understanding the broader context in which they exist (Foster 1993; Rafaelli 2003; Metcalfe 2007; Hart 2013). Neoclassical theories explain a constrained set of the factors determining socioeconomic behavior. Author Manuscript

Indeed, much of time-series econometric modelling of economic data would seem to support this notion. Econometric models of data informed by neoclassical theory seem to perform far better when they are specified in Vector Autoregressive form (VAR) and

especially Vector Error Correction form (VECM). These models became increasingly popular in the late 20th and early 21st centuries (Qin 2010). They have the effect of holding the socioeconomic environment more or less constant by revealing the factors that govern the deviation of consumption, investment, and prices from one period to the next (Johansen 1991). VAR and VECM have been widely adopted because they fit the data better than more traditional models (Sims 1980). This suggests that historical context is an important influence on socioeconomic data, which can be understood better once it is “cancelled out” by holding it constant. When we apply neoclassical theories, we discover that they only predict well under constrained conditions—when the effects of a vast array of other variables are held constant.

Policy Experiments: Privatization and “Shock Therapy”

Evidence that neoclassical economics struggles to explain behavior fully can be found also in policy. We are accustomed to the failures of macroeconomics, even outside of the Global Financial Crisis (Quiggin 2010). As Conlisk (2010: 689) memorably put it, these probably are likely to arise when “we model Robinson Crusoe, and pretend he’s a $7 trillion economy.” But our concern here is the microeconomic level, where neoclassical economics is not wrong per se, but the advice it offers it appears incomplete and only reveals a part of the dynamics at play in the economy. This most clearly comes forth in the problem of privatization (Quiggin 2010).

The “shock therapy” administered to former states of the Soviet Union had mixed results, and particularly in the area of privatization. A simple policy of abolishing state control and legalizing free-market interaction replaced Gorbachev’s somewhat half-hearted reforms of glastnost and perestroika in 1991, after they had nonetheless made the position of the Communist Party in the USSR untenable, causing it to be abolished. The Russian economy seemed to improve its output overall, but within a few years most major corporations remained unchallenged and were still run by and remunerating the same people, but now in a private capacity rather than a state-owned capacity. The result appears to have been an increase inAuthor Manuscript the degree to which the economy was criminalized, the state became subject to corruption, and there was even an increase in the mortality rate due to the laying off of many former employees of those corporations (Intriligator 1994; Shelley 1995; Stuckler, King and McKee 2009). Applying the theory of incentives directly, there was

reason to expect a significant increase in the entry of new business into existing markets once it became legal, and for pre-existing monopolies to be seriously challenged, even allowing for regular market failures, but without accounting for political incentives (Boettke and Anderson 1993). Even without the actual entrance of those competitors there ought to have been an efficiency gain from potential competition (Shleifer 1998). We ought not to have seen ongoing mass unemployment if vast reserves of labor were suddenly made available to new business ventures. The post-Soviet experience suggests that barriers to market entry went well beyond mere “frictions” that distorted incentive structures. Those barriers were endemic and insurmountable—something difficult to explain fully with a theory of incentives.

Australia had a similar experience with liberalization in the 1980s, following a period of significant dirigisme. The results were mixed, though far less mixed than in the Soviet Union. Abbott and Cohen (2014) corroborate some observations made by King and Pitchford (1998) that significant efficiency gains were made in certain sectors of the Australian economy as a result of privatization. Yet in other areas, the gains did not stem solely from the withdrawal of government intervention. King (1994/1995) predicted that gains to efficiency would be brought about by privatization, but only if competition actually eventuated. Again, if we had applied a straightforward incentive-based analysis, we might have thought that the simple privatization of the industry alone—opening the market to competitors—would have provided sufficient incentive for new businesses to enter the market and challenge the profits of existing monopolies. In Australia this seemed to have been more possible than in the Soviet Union, though not entirely so, and despite some gains many sectors of the Australian economy remain heavily monopolized and inefficient. What emerges here is the implication that there are barriers to entry beyond the mere “friction” of distorted incentives, and they confound the predictions of neoclassical economics about policy.

From this particular example, we see that if we hold to a strictly neoclassical perspective, we do not necessarily provide the "wrong" advice so much as provide Author Manuscript "incomplete" advice, perhaps even dangerously incomplete advice. Something appears to be missing from the neoclassical perspective of economic behavior at the microeconomic level as to seriously affect the outcomes of policy advice based on it, at least with respect to

privatization policy. This suggests that significant, non-transient factors in the socioeconomic environment of individuals beyond incentives have a significant effect on behavior.

Experiments and Behavioral Economics

Another weight of evidence has gradually mounted against the use of neoclassical thought as the sole theory of the determinants of socioeconomic behavior. The evidence derives from experiments that have given rise to behavioral economics. From the early 1980s, Richard Thaler began to document the “anomalies” in experiments in which people deviated from the behaviors associated with the best incentives (Thaler 2015; Thaler and Sunstein 2008). For his work, he of course ultimately won the Nobel Prize. Daniel Kahneman and Amos Tversky were also instrumental in bringing the methods of empirical psychology to bear on the predictions of economic theory, and discovered tens of ways in which people in practice deviated from the predictions of neoclassical economic theory. People do not conform to the prediction that they will maximize net benefits from their actions, especially when they have to account for uncertainties about what costs and benefits might arise. They are subject to a range of “biases and heuristics” (Tversky and Kahneman 1974, 1981; Kahneman 2003, 2011). These deviations are so consistent that one could say that individuals are “predictably irrational” in certain settings (Ariely 2008). Judith Mehta (2013) has challenged the characterization of deviations from the predictions of rational choice theory as pathological “biases,” but the deviations still augur against the sole use of neoclassical economics in modeling socioeconomic behavior. Indeed, it became untenable to suppose that most behavior could be rationalized thus, for one would leave unexplained significant and persistent deviations of behavior from predictions.

Thus, behavioral economics rose to a position of prominence within the mainstream of the economics profession. Behavioral economists now coexist in (relative) harmony with straightforward rational choice theorists within the major academic posts of the discipline in the second decade of the 21st century. But all was not completely well, and the new mecca of the economist has not yet been reached. For behavioral economics had not yet obtained the Author Manuscript status of a research paradigm in its own right, sufficient to subsume the neoclassical economics within it as a special case of a coherent and integrated theory of socioeconomic behavior.

As would be expected of a research program that originated in cataloguing the deviations from rationality, theoretical behavioral economics mostly modified the assumptions of rational choice theory to account for those deviations (Rabin 1998). Sometimes one would even account for several such deviations at a time. The benefit of these “portable extensions of existing models,” as Matthew Rabin (2013a; 2013b) characterized them, is that they can explain deviations from standard models while keeping those models as a special case that can be derived by a restriction of parameters. Much as Newtonian physics can be considered a special case of Einsteinian physics, so too is rational choice theory extracted from behavioral economics by setting various parameters to one or zero. Rational choice theory is preserved as a core that behavioral economics extends to explain various deviations from it.

This creates a difficulty however, for the proliferation of “portable extensions of existing models” leaves behavioral economics with no integrated and coherent theory in which rational choice theory might be preserved while also explaining the various phenomena observed by behavioral economists in an integrated and coherent manner. The admirable textbooks by Baddeley (2012) and Cartwright (2011), which provide the best entry point for the literature, tabulate deviations from the predictions of rational choice theory and the modifications that account for them. Behavioral economics is complex, relatively disconnected, large, and nonintegrated. It is, therefore, not a perspective on socioeconomic behavior that is intellectually competitive with neoclassical economics because it is not applicable in a systemic manner, nor is it particularly pedagogical (Harstad and Selten 2013).

A further difficulty is that the more deviations one wishes to account for at a time— seeking to integrate behavioral economics into a more integrated whole—the more complex the model of utility becomes, exponentially so. The best example of this is Kahneman and Tversky’s (1979) Prospect Theory, which introduced four variations into standard utility models (reference-dependence, loss aversion, decision-weighting transforms of subjective probabilities and convexity-concavity about the zero-prospect) to produce a utility function much like that proposed by Markowitz (1952). In an excellent review of the literature Author Manuscript stemming from this paper, Barbaris (2013) noted that the uptake of the model has been somewhat constrained by just how unwieldy it is to work with—containing shifting functional forms and nesting transforms of kernel functions which satisfy particular properties. Immediately upon introducing loss aversion, for instance, it becomes extremely

involved in applying differential calculus to assess marginal benefits and costs due to the discontinuity of functional form about the zero prospect.

Instead of being to neoclassical economics as Einsteinian physics was to Newtonian, behavioral economics gives more the appearance of being as Ptolemaic astronomy was to the terracentric model of the universe. As Adam Smith argued in his History of Astronomy (contained in his 1795 Essays on Philosophical Subjects), the ever-growing list of epicycles modifying the orbit of the planets about the earth to align the predictions of theory with observation made Ptolemaic astronomy exponentially more complex, difficult to use and difficult to teach. It was intellectually uncompetitive with the basic terracentric model it modified, and was even less competitive when a simple change of axiomatics by Copernicus to a heliocentric model suddenly condensed the observed orbits of the planets into a coherent and integrated and simple theory.

Further modifications of rational choice theory are not what is needed. It is a perfectly consistent and integrated theory on its own, and modifications to it have the tendency of breaking that consistency. What is required for a new economics is a change of axiomatic foundations. They will need to incorporate in a coherent and integrated way the broad range of socioeconomic behavior that deviates from neoclassical economic predictions.

Psychological Economics As a New Microeconomics

If we need a new microeconomics that is coherent and integrates explanations of more than a constrained portion of socioeconomic behavior, then we need a new coherent and integrative theory of socioeconomic behavior. We will now propose one such theory. It originates in a psychological perspective on economic behavior provided by Peter Earl (1983, 1984, 1986a, 1986b, 1990, 2017), Stavros Drakopoulos (1994), and Drakopoulos and Karayiannis (2004). It is simple, coherent and compelling, which means that it is intellectually competitive with the neoclassical economics it seeks to subsume and move beyond (Harstad and Selten 2013; Rodrik 2015). We will first outline this microeconomic perspective and then demonstrate Author Manuscript how it may serve as a foundation for institutional and evolutionary perspectives on socioeconomic systems (Hodgson 1998, 2004, 2010; Hodgson and Knudsen 2010; Ostrom 2000; Ostrom and Basurto 2011; Metcalfe 1998, 2008; Dopfer, Foster, and Potts 2004;

Dofper and Potts 2008; Witt 2008). We then will consider some practical matters of how this theory might yield practical benefits for the formation of strategy and policy.

An Architecture of the Mind and the Psychological Process

The fundamental postulate of our perspective on socioeconomic behavior is that the mind, much like the brain, is a network structure within and upon which psychological processes operate. An early form of this concept was advanced by Friedrich Hayek (1952), who drew heavily on neuroscience to formulate his perspective on the human mind, as well as Kenneth Boulding (1962) in his remarkable book on human perception. It is also consistent with the personal construct psychology of George Kelly (1963) and his student Denniss Hinkle (1965), which advances the notion that our mental processes are constrained by the manner in which we construct reality. Peter Earl (1983, 1984, 1986a, 1986b) in particular drew heavily on their work.

The nodes in this mental network constitute conceptual representations of objects and events in the world—goods, services, money, people, needs, wants, actions, people, and higher order abstract attributes and descriptions of them. The connections in this mental network constitute the relations the individual construes between these objects and events in the world, what Dewey (1910) called the “unseen relations” between them, what Kelly (1963) called their “construing” of the course of future event, or what Hume (1777) and Kant (1781) called the “associations” or “connexion” they establish among them, respectively. The mental network as a whole is the person’s “schema” for interpreting the world and how to act in it (Piaget 1923). Polanyi (1958) called it “personal knowledge.” We might say, following Granovetter (1985) and, perhaps, Bourdieu (1972), that this network reflects a person’s understanding of their particular embeddedness within the social and physical world (their “habitus,” if you will), their relationships and attitudes to others. The psychological process operates within and upon this network structure.

The psychological process operating within and upon networks. Before all but the Author Manuscript reflexive orders of human behavior may arise, the information in the world, both external and internal, must be mapped to percepts of the objects and events contained in their environment within the mind by perception. By perception antecedent information in the world is correlated with anterior representations in the mind (Brunswik 1934) and the world is

interfaced with our personal knowledge of it, as Merleau-Ponty (1945, 1948) and Polanyi (1958) might have put it. In the process of analysis, these percepts of objects and events in the environment are connected together based on the individual’s prior understanding of their relation as expressed in their personal knowledge of the world. This process can be demonstrated to be a process of reasoning in the sense of constructing ratio decidendi (Elster 2009) or forming expectations of the future course of events (Kelly 1963; Shackle 1969). It can also be a process of computation, applying the various steps in algorithms such as the ones that cognitive psychologists theorize (von Neumann 1958; Simon 1967; 1968, 1976, 1978a, 1978b; Newell 1990, Gigerenzer and Goldstein 1999; and Pinker 1999). It is a process that may proceed subconsciously and with such speed that we are not even aware of large parts of it until some “feeling” is presented to the conscious mind (Freud 1917, 1930; Jung 1968). The process of analysis is the process whereby our personality, encoded in the totality of our manner of interpreting the world and acting in it, manifests in our conscious and subconscious thinking and informs our behavior (Kelly 1963; Goldberg 1993; Jung 1921).

The mental network in which this portion of the psychological process operates is in a constant state of evolution due to the pressure of developmental and societal effects. As individuals go through life, their experimentation in the social world presents them with new connections that, incorporated into their minds, allow them to establish the bounds of socially acceptable behavior (Piaget 1923). Their experimentation presents them with new connections that increase their knowledge of the relations between the objects and events in their world (Dewey 1910). These are subject to laws that govern the likelihood they will be incorporated into the mind—increasing, for instance, if connections are actually perceived, and decreasing if the connections contradict the mindset of the individual (Festinger 1957). The network structure of the mind decays toward nothing the longer it goes unused in the process of making sense of the environment (Hayek 1952; Edelman 1978).

Our personal knowledge, applied to understanding our environment, expresses knowledge of how and why to act in the world and thereby guides our decision-making (Loasby 2002). This knowledge contains motivational complexes, be they Freudian drives, Author Manuscript Jungian archetypes, Maslowian hierarchies of wants and needs, or visceral emotions that endow this knowledge with urgency, with “feeling,” and thus with a sort of aesthetic content that we could consistently use to define preferences (Freud 1917, 1930; Jung 1964, 1968; Maslow 1943; Simon 1967; Le Doux 1996; Panksepp 998; Elster 1998; Sapolsky 2017). A

useful theory of decision, thus behavior is that people choose to engage in that behavior which is associated with the most preferable implications or behavioral predicates out of all feasible behavior. Perhaps this choice is trivial if preferences are decided in a qualitative manner by a subconscious cognitive rule in personal knowledge so that the individual is acting out the behavior of the rule more than they are acting out of a complex process of reasoning.

The kernel truth of neoclassical economics—that we do what we think is best for us— is captured in this analysis, but the theory developed on this truth is revealed to be a special case of a far broader perspective on socioeconomic behavior (for we do what we think is best for us). Neoclassical economics is placed within a context, and within that context it has an effect on behavior at the margin, but can only be understood at that margin as operating within a broader context. Once we understand the environment in which behavior takes place, and the mental networks that guide the process of thought and have been shaped by a process of social development operating on an evolutionary basis that have been applied, then we can understand the role of changing incentives at the margin. Not before.

The predictions of neoclassical theory—that people respond to incentives and pursue courses of action with the greatest net benefits—can be derived from this theory and generalized when a state of substitutability exists between two courses of action (Earl 1986b; Markey-Towler 2018). If certain technical conditions are met, then a change of prices or attributes may make two courses of action equally preferable, at which point an individual may be induced to change behavior by a further change of incentives (Ironmonger 1972; Lancaster 1966a, 1966b). But how do people behave if no state of substitutability exists between two courses of action? The perspective offered by Earl (1983, 1984, 1986a, 1986b, 1990, 2017), Drakopoulos (1994), and Drakopoulos and Karayiannis (2004) really advances our knowledge in this regard.

If no state of substitutability exists, the requirements created by simple cognitive rules in the psyche may establish cutoffs that restrict courses of action and render tradeoffs moot. Author Manuscript Heiner’s (1983, 1985) argument about the necessity of cognitive rules to deal with the competence-difficulty gap in a complex world therefore demonstrates the constraints of neoclassical theory. Behavior that results from non-substitutability in this way is ubiquitous. Further, some complementarity between various courses of action may result in resistance to

adopting some behavior which renders tradeoffs moot. A change in behavior might therefore require a change in technology in order for requirements and complementarities to be obtainable. But if we still find such breaks in the chain of substitution, then we require a more holistic view of psycho-social factors before we can understand how behavior changes fully.

Psycho-social factors determining behavior. Suppose no state of substitutability exists for some feasible socioeconomic behavior. We can readily identify the necessary conditions for a behavior to nonetheless be adopted by the individual. If the individual is to engage in it, this behavior must be associated with the most preferable implications/behavioral predicates out of all feasible behavior. We can “unpack” this into several necessary and sufficient conditions for behavior.

First, individuals must have some understanding of the behavior they are to engage in. If there are no connections to this behavior in their mental networks, they cannot understand how it relates to events in the world or appraise it. That knowledge must be developed or learned, which is most likely when it is communicated simply (with few connections) and noticeably (connects objects with a significant salience) and builds on existing ideas in the mind without contradicting existing mindsets or changing personalities at their core. Experimentation and play are powerful means by which such knowledge can be developed for this reason (Dewey 1910; Piaget 1923; Panksepp 1998). They immerse individuals in an environment they understand, and a simple new idea is presented to them that modifies their understanding a little. Similarly ideas expressed in narrative structures as stories are a similarly particularly potent way of communicating such knowledge and influencing behavior for this reason (Shiller 2017). Individuals are not atomistic entities in socioeconomic systems; they are, as Granovetter (1985) put it so well, “embedded” within a broader socioeconomic system where they are communicating with and observing the reaction of others to their experimentation and play. Not only is the information in our environment contingent on interactions with others, the very structure of our minds is shaped by our interaction in society. Author Manuscript

Second, the individual must have that knowledge called to mind in the relevant environment that is associated with the most preferable feelings of expectation or satisfaction out of all feasible courses of action. At least one of two requirements imposed by perception

must therefore be met (Vernon 1962). One possibility is for the information that corresponds to percepts of objects or events to be sufficiently salient to make a strong sensory impression in their own right. Alternatively, the information that correlates to percepts of antecedent objects or events which are sufficiently strongly connected to those objects or events must be sufficiently salient for them to be perceived. If the latter is the case, then the posterior percepts will call to mind the anterior, by the process Hayek (1952) and Luria (1973) called “categorization,” mirrored by the passage of electrical signals through neural networks. The information in the environment must therefore be framed in such a manner that calls to mind the objects and events that, connected together, become the most preferable feeling of anticipation or satisfaction. Thus procrastination or myopic behavior might occur not because of hyperbolic discounting of the future, but because costs were moved out of the salient present and into the future, which is removed from our senses (Rick and Loewenstein 2008). Similarly, if the past experience of an event (such as a capital loss on an investment) made it threatening, the mere presence of that event might trigger anticipations which cause “fight or flight” behavior due to the salience of the affective memories associated with it (Sapolsky 2017).

Connecting objects and events in the environment to form a feeling of anticipation or satisfaction may cause an individual to act in certain ways. The effect of the connection on preferences is captured by the idea of anchoring. The term “anchoring” here is used in a more fundamental sense than often accorded to it in behavioral economics (Earl 2015). Anchors are ubiquitous in the mind as axes of classification, without which, as Kelly (1963) and Hinkle (1965) taught, we cannot make sense of any object or event. Mental networks are rarely fully modular. They contain significant interconnectivity between concepts. So it is possible that inclusion of a particular anchor might change the overall interpretation of an event drastically and qualitatively in a “non-smooth” manner and thereby change behavior. The classic example of this in economics is the anchor of peer income or consumption. A comparison between oneself and one’s peers in terms of income or consumption can lead to radically different experience (anxiety) than the utility gained by buying goods and services. When a focus on relative income or consumption makes status comparisons an anchor, new Author Manuscript behaviors become common, such as “conspicuous consumption” or responses to “positional externalities” (Veblen 1899; Duesenberry 1949; Hirsch 1976; Easterlin 2001; Clark, Frijters, and Shields 2008; Frank 2011). But motivations could equally act as anchors of thought that affect the whole tenor of our attitudes and thus behavior as well, causing actions to be

dominated by emotions rather than long-term interest (Sapolsky 2017; Bauermeister and Tierney 2011; Baumeister, Braslavsky, Muraven, and Tice 1998; Mischel 2014; Metcalfe and Mischel 1999; Coleman 1996). They could be needs, which have the effect of breaking the chain of substitution and categorically ruling certain courses of action out of consideration if there is any possible alternative (Earl 1986a, 1986b; Blatt 1979; Ironmonger 1972; Maslow 1943).

So there is a relatively simple process we can use to understand why, outside of inducement and incentive, the individual acts in a certain way. It depends on social, environmental, and historical contexts. Either the knowledge that creates the feelings of anticipation or satisfaction arising from the individual’s analysis of the implications or behavioral predicates of behavior that support the engaging in it is innate, or it grows from the process of development, learning or socialization by play, experimentation, or the telling of stories (Pinker 2002; Dewey 1910; Piaget 1923; Panksepp 1998). That knowledge must be elicited by the framing of information in the environment such that the objects and events it relates together are either salient, or objects and events strongly connected to them in mental networks are salient. A sufficient number of positive non-inert anchors of thought with respect to that behavior (which qualitatively improve its preferability) must have been elicited, and any sufficiently negative, non-inert anchors (which qualitatively reduce its preferability) must have been suppressed. It can be shown that a combination of these dynamics underlies a significant array of phenomena identified in behavioral and experimental economics within one relatively simple model (Markey-Towler 2017, 2018a). But these dynamics also provide the foundations for an evolutionary and institutional systemic perspective on socioeconomic systems.

Psychological Economics As the Basis for an Institutional-Evolutionary Approach to Socioeconomic Systems

The socioeconomic system is a complex evolving network of interactions among individuals acting on the basisAuthor Manuscript of their psychology, social psychology, and socioeconomic environment (Potts 2000; Foster 2005; Earl and Wakeley 2010). The above theory of the psychological process operating within and upon networks to determine behavior provides a theory of behavior which may be nested within such a perspective on socioeconomic systems, and thus

serve as a foundation for an institutional and evolutionary perspective on socioeconomic systems. I have shown elsewhere how this perspective might be obtained (Markey-Towler forthcoming, forthcoming-a).

The micro-meso-macro perspective (Dopfer, Foster, and Potts 2004; Dopfer and Potts 2007) offers a coherent and integrated view of the properties of socioeconomic evolution which is organized around the concept of the meso-rule. A meso-rule is a rule, a production technology, or a procedure that originates in a system and is then diffused throughout it by a process of selection and retention. It eventually characterizes a “meso-population” of individuals who use it. Within this meso-population there is variation, selection, and retention of different ways to implement the rule. The meso-rule originally disrupts the structure of interaction between people and then becomes integrated within it. At the macroscopic level, however, the system gradually readjusts, as the meso-rule is selected and retained. This model reveals the importance of selection rates by which an anterior population of rules for behavior are reconciled to a posterior population (Witt 2008; Metcalfe 1998, 2008).

Potential meso-rules become cognitive rules guiding thinking about how and why to act in certain ways in the socioeconomic system in our new paradigm. We begin from a state of ignorance and uncertainty where little is known of the future of socioeconomic interaction. Potential meso-rules must first be created (which Schumpeter (1911, 1950) saw is the source of innovation) and then incorporated into the minds of individuals on both sides of any interactions that are supported by that meso-rule. Our theory suggests that rules for interaction expressed as simple ideas on the periphery of existing knowledge will likely become meso-rules coordinating socioeconomic interaction, especially if they do not contradict the mindset of individuals. Furthermore, the knowledge of how and why to provide goods or services on the one side of the interaction, and obtain them on the other, must be then elicited by the environment in which the individuals find themselves to organize socioeconomic interaction. That knowledge must be so anchored as to make following the meso-rule preferable to any other feasible course of action. At this point, incentives may have an effect at the margin. Such cognitive rules as meet these requirements will be selected and Author Manuscript retained as meso-rules for coordinating socioeconomic networks of interaction. They will cause it to evolve as they are selected, retained, and integrated into the broader set of rules that organize socioeconomic systems.

The micro-meso-macro perspective on the structure and evolution of socioeconomic systems is an institutional perspective “through the looking glass.” Institutional economics, particularly the original variant tracing its intellectual lineage to Veblen, is concerned with the rules by which socioeconomic behavior and therefore interaction is organized (Hodgson 1998, 2004, 2010; Hodgson and Knudsen 2010; Ostrom 2000; Ostrom and Basurto 2011). These rules are subject to origination and diffusion across society and to a process of variation, selection, and retention and therefore the evolutionary process of reconciling an anterior population of rules with a posterior set of institutions that serve to order socioeconomic interaction. The model we have introduced here provides a perspective on the manner in which selection pressures are differentially applied to these rules in order for them to become institutions.

Rules for guiding thought and behavior are diffused across the population, selected at differential rates, and retained as institutions, the more they are incorporated into the minds of individuals. These institutions are communicated by development, learning, or socialization processes, all of which communicate ideas about how to behave in society, but simple argument and debate in the public sphere are also relevant processes. Our theory thus brings development psychology, sociology, and political science deeper into economics at the very core of the discipline in its model of socioeconomic behavior. Our theory explains which of these ideas will be incorporated into the mind at differential rates across the population and thus retained as institutions. Simple ideas that build on the periphery of existing knowledge without contradicting the individual’s mindset are more likely to be selected and retained as institutions and diffused successfully across society. As new rules for guiding thought and behavior are originated and diffused, socioeconomic structures in which they manifest will evolve as well. Successful rules are ones with properties that make them “fit” for selection and that contribute more to the structure of socioeconomic interactions.

The new microeconomics has primarily an individualist methodology (Hodgson 2007). However, we can now see that it is not so crude as to treat individuals as if they were isolated. Not only do others influence the environment upon which their psychology acts, Author Manuscript social interactions affect the very basis for their psychology by causing mental networks to evolve. The individual exists within a socioeconomic environment in relation to others, observing others, and interacting with others in an institutional environment and evolutionary system.

Practical Matters: Strategy and Policy

The new paradigm of psychological economics not only advances our understanding of socioeconomic systems from an institutional-evolutionary perspective. It also has significant practical value in improving the formulation and implementation of strategy and policy. It expands the means by which policy and strategy may be implemented, shows why traditional incentive-based methods may be limited, and proposes alternative or complementary methods. One such method has a readily applicable and simple algorithmic structure (Markey-Towler 2017, 2018a). We can see its practical value by applying it to some microeconomic policy problems.

Predicates of Privatization: Institutional and Technological Knowledge

Applying a psychological and institutional-evolutionary approach to the problem of privatization, we readily discover the truth of what Intriligator (1994) suggested with respect to the former Soviet Union: the success of shock therapy and especially privatization was predicated on a range of non-incentive factors. Without them, the predictions of incentives- based neoclassical economics would not hold. There was no state of substitutability between modes of behavior in a Communist system and in a free-market system. Specifically, there was little knowledge of how to enter into markets with new businesses to challenge monopolies. In order for competition to operate, ex-Soviet citizens needed time to develop the knowledge of how to make use of Western production technology and how to meet regulatory requirements. They also need a relatively stable regulatory system, but that was not forthcoming. Even more basically, they needed knowledge of how to operate within the new legal system, but it first had to be formulated. In other words, there was insufficient knowledge of the radically new institutions within the former Soviet bloc, and the institutional system was too unstable for states of substitutability to exist between prior modes of socioeconomic behavior and new modes for any sort of meaningful competition to develop. The newly freed market failed to emerge before state capture occurred. The Author Manuscript incentives-based neoclassical theory was not "wrong,” but it was rendered moot, for the necessary preconditions had not been established.

If we take the Australian experience of privatization, now we see reasons why it was, relatively positive, while still mixed. The Australian regulatory and legal environment was stable for the period of privatization. Reforms were extensively debated in public and systematically planned before being implemented. Nevertheless, while knowledge was available of the technologies that allowed new entrants to markets, knowledge of how to apply them effectively was insufficient to guarantee a state of substitutability between previous modes of behavior in a monopolistic market and a competitive market. It is no small matter to go into competition with a major ex-government telecommunications monopoly like Telstra. One must have vast resources before being able to meet the requirements imposed by customers for telecommunications services, let alone provide complementarities like landline, mobile and internet packages. Or take the Big Four banks that monopolize the financial market, including the ex-government Commonwealth Bank. Regulatory requirements alone make it prohibitive for new banks to enter the market, and the only real competition they have encountered has come from allowing other financial institutions to offer banking services. Notwithstanding the ability to develop the requisite institutional knowledge to compete with newly privatized monopolies, technological and logistical knowledge are also essential before the incentives-based neoclassical theory could be applied to predict an increase of efficiency from privatization.

Incentive-based neoclassical economic theory is not wrong so much as it is incomplete. That theory assumed a state of substitutability between behavior in a heavily nationalized economy and in a privatized economy that was open to competition. But it did not exist in reality because the institutional structure of society was too disrupted and unsettled for the requisite knowledge of how and why to behave in new ways to emerge. The failure to apply a psychological institutional-evolutionary economic perspective in both the Soviet and Australian experience left massive, inefficient institutions more or less unchallenged by competition.

Effective Climate Policy = Markets x Technology x Framing

Author Manuscript Policies to produce emissions of greenhouse gases provides another arena in which to compare competing theoretical perspectives. Incentives-based neoclassical theory provides a disarmingly simple suggestion to solve this problem. To align private incentives and a given policy, neoclassical theory proposes to tax emissions directly, or to put a price on emissions

to reveal the "true" incentive structure to individuals through market interaction. This is straightforward neoclassical economics. But rational choice theory about incentives is predicated on the theory of substitution, and there is no reason to assume that a state of substitution exists between existing technologies that create emissions and new technologies that do not.

In Australia, neoclassical economics was directly applied to the formulation of climate change policy. An incentives-based policy was adopted, in which a tax was introduced (later to become a floating price) on carbon emissions, to be compensated by transfers (Jotzo 2012). Standard incentives-based modelling by Meng, Siriwardana, and McNeill (2012) predicted that the change of incentives would cause a substitution away from emissions-intensive industries with a mild economic contraction accompanying it. The policy was repealed after a change of government and replaced with a “command and control” policy, but the results from its brief existence suggest that the policy did not have the predicted outcomes. Carbon emissions increased by several megatons, even while household electricity prices increased by at least 10 percent (Robson 2014). This does not even account for an earlier price rise likely brought about by an uncertain policy environment.

This is not especially difficult to understand with our psychological institutional- evolutionary perspective. Electricity is a necessity for most households and businesses, and they require a certain quanta of it regardless of prices (unless those prices become prohibitive). But there was no readily available substitute technology in Australia by which that electricity might be produced without incurring a substantial tax on emissions. The critical assumption of substitutability, on which neoclassical analysis in favor of the tax was based, was incorrect. The technologies exist by which emissions might be reduced (natural gas, solar, wind, water), but they were not adopted, in part due to regulated requirements of security, resilience and redundancy across the system, as well as simple, but massive infrastructure requirements imposed by engineering concerns. It may have been the case, were the tax implemented for longer, that such technologies might have emerged, though one might be rightly skeptical, since only a half-hearted attempt was made to stimulate and Author Manuscript encourage investment in a renewable energy sector.

Yet a further barrier to incentives-based policy existed which one would only notice by adopting a psychological institutional-evolutionary perspective. This is the problem of

framing. Without the environment having been framed in such a way that households and business could substitute between electricity suppliers, all neoclassical incentive-based considerations were moot. Changing electricity suppliers is no small matter in Australia. It only became possible in the decade before the carbon tax was introduced, and the bureaucratic entanglements alone were a nightmare. Furthermore, there were few means of comparing supply contracts (which can be complex even for persons with knowledge of the market). That might have constrained perception of the possibility of changing suppliers. The Australian government made no effort to frame the environment of households and businesses in a way that they could perceive the possibility of substitution to a low-emissions supplier. Without that possibility, all theories about substitution from high to low emissions technologies were entirely moot.

Once again, the incentives-based neoclassical theory of how one might respond to climate change was not wrong but rather incomplete. The assumption of substitutability upon which it was predicated was not met in reality due to regulatory and engineering requirements, and very little consideration was given to framing choices so that consumers could consider alternative electricity supply technologies. The results of not considering a psychological institutional-evolutionary perspective on the socioeconomic system were that many families, especially poorer ones, faced higher electricity prices, and very little was achieved by way of emissions reduction.

Good Strategy = Product x Narratives x Framing x Pricing

Let us now set aside policy and consider the problem of business strategy from the perspective of psychological institutional-evolutionary economics. The central problem of business strategy is the problem of how to grow and maintain the custom of a business venture. This is, incidentally, the central question of the two great seminal texts of evolutionary economics by Nelson and Winter (1982) and Metcalfe (1998). So it may be unsurprising that the psychological institutional-evolutionary perspective we have developed adds much to the microeconomic principles underlying the formulation and implementation Author Manuscript of business strategy beyond incentive-based theory while still maintaining a coherent, integrated and systematic perspective.

We can summarize the perspective our theory offers us of good strategy as “product x narratives x framing x pricing.” If any one of these dimensions is neglected, a business strategy will not succeed. Once each is established, the strategy grows stronger as each of these dimensions grow stronger and complement each other.

The first requirement for a strategy that will allow a business to grow and maintain custom is an engineering one: a company must maintain a product that meets evolving consumer requirements and that provides adequate complementarities with other products in the market. As Earl (1986a, 1986b) might have put it, a good strategy involves the manufacture of a product that “fits” with a consumer’s lifestyle. This is all important. Gans’ (2016) study of disruption shows that strategies fail not because they do not “get the incentives right” for consumers, or even because they fail to frame it or narrate it, but because consumer lifestyles evolve as new products are introduced so that a product has to be redesigned in order to meet new requirements and provide new complementarities.

A company must, however, also heed the studies of Granovetter (1973, 1985), who argues that economic action is embedded within a socioeconomic system, not merely an economic system. Unless knowledge of how to obtain its product can be spread through social networks, all other considerations are moot since the potential customer does not even imagine being a customer. Hence the second requirement of a strategy that will allow a business to grow and maintain custom is marketing: the company must be able to craft a persuasive narrative about how and why to buy its product. It is not enough for companies to be full of engineers, they must also be full of “creatives” and even “socialites” who can imagine how products might be used and how to spread knowledge of them through key locations in the social structure. This depends on their ability to construct simple, attention- grabbing stories, building on existing ideas without contradicting mindsets or the core of personalities. A company looking to develop good strategy needs good storytellers who are aware of the structure of society and means of communication.

Beyond these necessities for good strategy, without which any further strategy is Author Manuscript irrelevant, a business needs a strategy in which knowledge of how and why to buy its product is actually elicited by the environment in which the business exists. This requires first that the environment be framed such that information corresponding to the product is placed prominently in the environment where it will have a significant impression on the sensory

organs. But further, information corresponding to positive non-inert anchors with respect to thinking about that product (its attributes, peer consumption, emotions) is placed prominently in the environment where it will have a significant impression on the sensory organs. This is again a problem of marketing and (literal) advertising.

At this point, a state of substitutability might exist between current behavior and buying the product, so incentives also become important. It is essential for the customer to be able to afford the product, so the benefits of buying it need to exceed its price. A good strategy must therefore have a marketing element that ensures the requisite knowledge of how and why to buy the product is called to mind in the business environment, but it must also have an economic component that provides a sufficient incentive for the customer to buy the product.

We can see that in the realm of strategy, as in the realm of policy, neoclassical economics is not wrong, but it is incomplete. The cost of applying it by itself could be a significant waste of capital. Instead we have offered a coherent and integrated approach to the formulation of strategy based on a psychological and institutional-evolutionary perspective on socioeconomic systems. A company needs to have a strong pricing strategy that provides adequate incentive to buy its products, but it also requires strong product development, placement, and promotion strategies acting in concert.

A Warning for All Aspiring Social Engineers

Our perspective also offers a more philosophical perspective with respect to policy and augurs pretty strongly against attempts at large-scale engineering of the economic system. The reason for this is that the new paradigm in microeconomics affirms the argument of Friedrich Hayek (1989) about the non-calculability of socioeconomic systems: they are vastly more complex than our attempts to engineer them. In fact, our argument augurs something like the truth of Samuel's (1993) nihilistic argument about predicting the path taken by socioeconomic systems. Author Manuscript

Schemas for interpreting the world and how to act in it are complex, intricate, and individuated enough to make difficult the successful, consistent prediction of any person’s actions. The problem is exponentially more complex for a small group, for not only must we

understand individual schemas but also how they interact. This is even before we have allowed for those schemas to evolve with the introduction of new meso-rules and institutions, quite possibly indeterminately! The problem of prediction quickly becomes intractable if we scale beyond the unit of a group unless we begin to employ statistical mechanics or chaos theory or complexity methods which are liable to diverge seriously from the data. The effects of any strategy and policy oriented at systemic socioeconomic change (if it is possible even to implement it) must therefore be almost entirely unpredictable. Thus, we are likely to observe the emergence of unintended consequences to any strategy or policy that seeks to engineer society outright, compared to a strategy or policy that aims at a smaller sphere of influence.

The evidence for such a hypothesis is staggering. Some three million deaths from starvation are directly attributable to Stalin’s diversion of resources aimed at industrializing the Soviet Union, coupled with his collectivization policies (Snyder 2010). Mao’s similar attempts to industrialize China, coupled with his collectivization policies, are estimated to have led to some 45 million deaths from starvation (Dikotter 2010). Stiglitz (2002) has argued that ongoing underdevelopment in Africa and Latin America can be attributed to the International Monetary Fund’s imposition of the Washington Consensus. Others would suggest this is to be expected when social engineering on a global scale is imposed across an entire economy by weak and corrupt governments at the behest of international agencies far removed from the socioeconomic systems they are regulating (MacKenzie 2004).

A policymaker or strategist does well in such complex systems to aim to induce change at a level below that of socioeconomic systems as a whole. In particular, socioeconomic systems are complex systems which tend to be “nearly decomposable,” as Herbert Simon (1962) put it memorably. Where a strategist or policymaker can establish that the effects between a particular group of individuals are first-order relative to the effects on those individuals from the socioeconomic system at large, we can be relatively certain of the effects of any strategy or policy. As Popper (1945) put it, the social sciences are far too indeterminate and the subject matter they deal with are too complex to provide a basis to engineer society outright, which invites potentially catastrophic consequences. What is Author Manuscript required is more "piecemeal social engineering," a more community-based approach to solving problems than a system-wide approach lest the pretence of knowledge of the system invite potentially catastrophic unintended consequences.

Conclusion: The New Microeconomics

A new microeconomics must arise to explain new data on behavior. When that is achieved, neoclassical perspectives on economics will not be swept away entirely. Instead, it will be retained as a special case in an expanded microeconomic analysis of socioeconomic behavior that accounts for human psychology and its interaction with social systems. Neoclassical economics has given us insight into the theory of incentives. But the evidence suggests that there is far more to behavior than incentives alone. While behavioral economics has hitherto made some progress in explaining this behavior by extending and modifying rational choice theory, a more coherent and integrated perspective on the pscyhosocial influences on socioeconomic behavior is required. We have sought to map such a paradigm in microeconomics. It is pluralistic insofar as different modes of analysis are brought together within a framework for economic analysis (Fullbrook 2007; Rodrik 2015).

As the basis for a new microeconomic paradigm, we propose a psychological approach to economics based on the work of Peter Earl and Stavros Drakopoulos. This perspective approaches the mind as a network structure within and upon which the psychological process operates. This perspective allows us to approach the psychosocial influences on behavior in a coherent and integrated manner. The theory of incentives is a special case where a state of substitutability exists, once we have established a particular context of psycho-social factors. If a state of substitutability does not exist—and such cases are ubiquitous—then we must understand behavior as the outcome of innate, developed, or evolved knowledge of how and why to act in particular ways in an environment structured to call to mind that knowledge. This understanding of socioeconomic behavior may serve as a foundation for an evolutionary-institutional perspective on the function of socioeconomic systems as a whole, which are organized by a particular set of institutions or meso-rules that originate and diffuse by a process of variation, selection, and retention.

The value of this new microeconomic paradigm is both intellectual and practical. It retains neoclassical insights into socioeconomic behavior while incorporating insights into Author Manuscript phenomena that neoclassical economics has struggled to explain. It does so in a coherent and integrated manner that can be formalized. It is therefore intellectually competitive with the neoclassical economics it seeks to subsume and transcend. This is of practical value for the formulation and implementation of strategy and policy. There is a huge amount of work that

remains in extending the insights we might obtain within this paradigm, formalizing its propositions, filling out the more abstract elements of its contents, and relating them better to the data. But it is to be hoped that it moves us one step beyond neoclassical economics as the sole microeconomic paradigm to a better understanding of the behavioral foundations of our socioeconomic systems.

References

Abbott, Malcom, and Bruce Cohen. (2014). “A Survey of the Privatization of Government- Owned Enterprises in Australia since the 1980s.” Australian Economic Review 47(4): 432-454. Amadae, Sonja M. (2003). Rationalizing Capitalist Democracy. Chicago : University of Chicago Press. ______. (2013). Prisoners of Reason. Cambridge: Cambridge University Press. Ariely, Dan. (2008). Predictably Irrational. New York: HarperPerennial. Axelrod, Robert. (1984). The Evolution of Cooperation. New York: Basic Books. Axelrod, Robert, and William D. Hamilton. (1981). “The Evolution of Cooperation.” Science 211: 1390–96. Baddeley, Michelle. (2012). Behavioral Economics and Finance. London: Routledge. Bala, Venkatesh, and Mukul Majumdar. (1992). “Chaotic tatonnement.” Economic Theory 2(4): 437-445. Barberis, Nicholas C. (2013). “Thirty Years of Prospect Theory in Economics: A Review and Assessment.” Journal of Economic Perspectives 27(1): 173-196. Bauermeister, Roy F., and John Tierney. (2011). Willpower. London: Penguin. Baumeister, Roy F., Ellen Braslavsky, Mark Muraven, and Dianne M. Tice. (1998). “Ego Depletion: Is the Active Self a Limited Resource.” Journal of Personality and Social Psychology 74(5): 1252–1265. Becker, Gary S. (1993). “Nobel Lecture: The Economic Way of Looking at Behavior.” Journal of Political Economy 103(3): 385-409. Blatt, John M. (1979). “The Utility of Being Hanged on the Gallows.” Journal of Post Author Manuscript Keynesian Economics 2(2): 231-239. Boettke, Peter J., and Gary M. Anderson. (1993). “Perestroika and Public Choice: The Economics of Autocratic Succession in a Rent-Seeking Society.” Public Choice 75(2): 101-118.

Boulding, Kenneth. (1961). The Image. Ann Arbor: University of Michigan Press. Bourdieu, Pierre. (1972). Outline of a Theory of Practice. Cambridge: Cambridge University Press. Buchanan, James M. (2003). Public Choice: The Origins and Development of a Research Program. Fairfax, VA: Center for the Study of Public Choice. Brunswik, Egon. (1943). “Organismic Achievement and Environmental Probability.” Psychological Review 50(3): 255-272. Carwright, Edward. (2011). Behavioral Economics. London: Routledge. Coase, Ronald. (1937). “The Nature of the Firm.” Economica (New Series) 4(6): 386–405. ______. (1984). “The New Institutional Economics.” Journal of Institutional and Theoretical Economics 140: 229–231. Conlisk, John. (1996). “Why Bounded Rationality?” Journal of Economic Literature 34(2): 669-700. Cheng, John Q., and Michael P. Wellman. (1998). “The WALRAS Algorithm: A Convergent Distributed Implementation of General Equlibrium Outcomes.” Computational Economics 12(1): 1-24l. Clark, Andrew E., Paul Frijters, and Michael A. Shields. (2008). “Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox.” Journal of Economic Literature 46(1): 95-144. Dawkins, Richard. (1976). The Selfish Gene. Oxford: Oxford University Press. Debreu, Gerard. (1959). Theory of Value. New Haven, CT: Yale University Press. Dikotter, Frank. (2010). Mao’s Great Famine. London: Bloomsbury. Dopfer, Kurt, John Foster, and Jason Potts. (2004). “Micro-meso-macro.” Journal of Evolutionary Economics 14(3): 263–279. Dopfer, Kurt, and Jason Potts. (2007). The General Theory of Economic Evolution. London: Routledge. Downs, Anthony. (1957). An Economic Theory of Democracy. New York: Harper. Drakopoulos, Stavros. (1995). “Hierarchical Choice in Economics.” Journal of Economic Surveys 8(2): 133-153. Drakopoulos, Stavros, and Anastassios Karayiannis. (2004). “The Historical Development of Author Manuscript Hierarchical Behavior in Economic Thought.” Journal of the History of Economic Thought 26(3): 363-378. Drazen, Allan. (1980). “Recent Developments in Macroeconomic Disequilibrium Theory.” Econometrica 48(2): 83-306.

Duesenberry, James. (1949). Income, Saving and the Theory of Consumer Behavior. Cambridge, MA: Harvard University Press. Earl, Peter. (1983). The Economic Imagination. Brighton: Harvester Wheatsheaf. ______. (1984). The Corporate Imagination. Brighton: Wheatsheaf. ______. (1986a). Lifestyle Economics. Brighton: Harvester Wheatsheaf ______. (1986b). “A Behavioral Analysis of Demand Elasticities.” Journal of Economic Studies 13(3): 20-37. ______. (1990). “Economics and Psychology: A Survey.” Economic Journal 100: 718-55 ______. (2015). “Anchoring in Economics: On Frey and Gallus in the Aggregation of Behavioral Anomalies.” Economics 9: 1-25. ______. (2017). “Lifestyle Changes and the Lifestyle Selection Process.” Journal of Bioeconomics 19(1): 97–114. Earl, Peter, and Tim Wakely. (2010). “Alternative Perspectives on Connections in Economic Systems.” Journal of Evolutionary Economics 20(2): 163-183. Easterlin, Richard. (2001). “Income and Happiness: Toward a Unified Theory.” Economic Journal 111: 465-484. Edelman, Gerald. (1978). Neural Darwinism. New York: Basic Books. Edgeworth, Francis Y. (1881). Mathematical Psychics. London: C.K. Paul. Elster, Jon. (1998). “Emotions and Economic Theory.” Journal of Economic Literature 36(1): 47-74. ______. (2009). Reason and Rationality. Princeton: Princeton University Press. Festinger, Leon. (1957). A Theory of Cognitive Dissonance. Stanford: Stanford University Press. Foster, John. (1993). “Economics and the Self-Organisation Approach: Alfred Marshall Revisited?” Economic Journal 103(419): 975-991. ______. (2005). “From Simplistic to Complex Systems in Economics.” Cambridge Journal of Economics 29(6): 873-892. ______. (2017). “Prior Commitment and Uncertainty in Complex Economic Systems: Reinstating History in the Core of Economic Analysis.” Scottish Journal of Political Economy 64(4): 392-418. Author Manuscript ______. (2018). “The Consumption Function: A New Perspective.” MPRA Paper No.84383. Frank, Robert. (2011). The Darwin Economy. Princeton, NJ: Princeton University Press. Freud, Sigmund. (1917). A General Introduction to Psychoanalysis. Hertfordshire: Wordsworth Editions.

______. (1930). Civilization and its Discontents. London: Penguin. Friedman, Milton. (1962). Price Theory. Chicago: Aldine. Frijters, Paul, and Gigi Foster. (2013). An Economic Theory of Greed, Love, Groups and Networks. Cambridge, UK: Cambridge University Press. Gans, Joshua. (2016). The Disruption Dilemma. Cambridge, MA: MIT Press. Goldberg, Lewis R. (1993). “The Structure of Phenotypic Personality Traits.” American Psychologist 48(1): 26-34. Goleman, Daniel. (1996). Emotional Intelligence. London: Bloomsbury. Gigerenzer, Gerd, and Daniel G. Goldstein. (1996). “Reasoning the Fast and Frugal Way: Models of Bounded Rationality.” Psychological Review 103(4): 650-669. Granovetter, Mark. (1973). “The Strength of Weak Ties.” American Journal of Sociology 78(6): 1360-1380. ______. (1985). “Economic Action and Social Structure: The Problem of Embeddedness.” American Journal of Sociology 91(3): 481-510. Hahn, Frank. (1973). “The Winter of our Discontent.” Economica 40(159): 322-330. Harsanyi, John. (1961). “Bargaining in Ignorance of the Opponent’s Utility Function.” Journal of Conflict Resolution 6(1): 29-38. ______. (1977). Rational Behavior and Bargaining Equilibrium in Games and Social Situations. Cambridge, UK: Cambridge University Press. Harstad, Ronald M., and Reinhard Selten. (2013). “Bounded-Rationality Models: Tasks to Become Intellectually Competitive.” Journal of Economic Literature 51(2): 496-511. Hart, Neil. (2013). Alfred Marshall and Modern Economics. London: Palgrave MacMillan. Hayek, Friedrich. (1952). The Sensory Order. Chicago: University of Chicago Press. ______. (1989). “The Pretense of Knowledge.” American Economic Review 79(6): 3-7. Henin, Pierre-Yves, and Philippe Michel. (1982). “Harrodian and Neoclassical Paths in a Constrained Growth Model.” Economics Letters 10(3-4): 237-242. Hodgson, Geoffrey. (1998). “The Approach of Institutional Economics.” Journal of Economic Literature 36(1): 166–192. ______. (2004). The Evolution Of Institutional Economics. London: Routledge. ______. (2007). “Meanings of Methodological Individualism.” Journal of Economic Author Manuscript Methodology 14(2): 211-226. ______. (2010). “Choice, Habit and Evolution.” Journal of Evolutionary Economics 20: 1– 18.

Hodgson, Geoffrey, and Thorbjorn Knudsen. (2010). Darwin’s Conjecture. Chicago: University of Chicago Press. Hicks, John. (1939). Value and Capital. Oxford: Oxford University Press. Hinkle, Dennis. (1965). The Change of Personal Constructs from the Viewpoint of a Theory of Construct Implications. Doctoral Thesis, Ohio State University. Hirsch, Fred. (1976). Social Limits to Growth. London: Taylor and Francis. Hume, David. (1777). An Enquiry Concerning Human Understanding, 2nd ed. Cambridge, UK: Hackett Publishing Company. Intriligator, Michael D. (1994). “Privatisation in Russia Has Led to Criminalisation.” Australian Economic Review 27(2): 4-14. Ironmonger, Duncan S. (1972). New Commodities and Consumer Behavior. Cambridge, UK: Cambridge University Press. Ito, Takatoshi. (1980). “Disequilibrium Growth Theory.” Journal of Economic Theory 23(3): 380-409. Jehle, Geoffrey A., and Philip J. Reny. (2011). Advanced Microeconomic Theory. London: Prentice Hall/Financial Times. Jevons, William S. (1871). The Theory of Political Economy. London: MacMillan. Johansen, Soren. (1991). “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models.” Econometrica 59(1): 1551-1580. Jotzo, Frank. (2012). “Australia’s Carbon Price.” Nature Climate Change 2: 475-476. Jung, Carl G. (1921). Psychological Types. London: Routledge. ______, ed. (1964). Man and His Symbols. London: Aldus Books. ______. (1968). Analytical Psychology. London: Routledge. Kahneman, Daniel. (2003). “Maps of Bounded Rationality: Psychology for Behavioral Economics.” American Economic Review 93(5): 1449-1457. ______. (2011). Thinking Fast and Slow. London: Penguin. Kahneman, Daniel, and Amos Tversky. (1979). “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica 47(2): 263-292. Kant, Immanuel. (1781). Critique of Pure Reason. London: Penguin Kelly, George A. (1963). A Theory of Personality. New York: Norton. Author Manuscript King, Stephen, and Rohan Pitchford. (1998). “Privatisation in Australia: Understanding the Incentives in Public and Private Firms.” Australian Economic Review 31(4): 313-328. King, Stephen. (1994/1995). “Competition: The Missing Link in Australia’s Privatisation Program.” Policy 10(4): 12-16.

Koopmans, Tjalling. (1957). Three Essays on the State of Economic Science. New York: McGraw-Hill. Kornai, Janos. (1971). Anti-Equilibrium. Amsterdam: North-Holland. Kreps, David. (1988). Notes on the Theory of Choice. New York: Avalon Publishing. Lakatos, Imre. (1968-1969). “Criticism and the Methodology of Scientific Research Programmes.” Proceedings of the Aristotelian Society (New Series) 69: 149-186. Lancaster, Kelvin. (1966a). “Change and Innovation in the Technology of Consumption.” American Economic Review 56(1/2): 14-23. ______. (1966b). “A New Approach to Consumer Theory.” Journal of Political Economy 74(2): 132-157. Lawson, Tony. (2013). “What Is This ‘School’ Called Neoclassical Economics?” Cambridge Journal of Economics 37(5): 947-983. Le Doux, Joseph. (1996). The Emotional Brain. London: Orion. Leeson, Peter. (2014). Anarchy Unbound. Cambridge, UK: Cambridge University Press. Levitt, Steven, and Stephen J. Dubner. (2005). Freakonomics. New York: William Morrow. ______. (2009). SuperFreakonomics. New York: William Morrow. Loasby, Brian. (2002). Knowledge, Institutions and Evolution in Economics. London: Routledge. Luria, Aleksandr. (1973). The Working Brain. New York: Basic Books. Machlup, Fritz. (1946). “Marginal Analysis and Empirical Research.” American Economic Review, 36(4): 519-554. MacKenzie, Douglas W. (2004). “Joseph E. Stiglitz, Globalization and Its Discontents.” Public Choice 120(1-2): 236-241. Markey-Towler, Brendan. (2017). “How to Win Customers and Influence People: Ameliorating the Barriers to Inducing Behavioral Change.” Journal of Behavioral Economics for Policy (Special Issue: Behavioral Policy and its Stakeholders) 1: 27- 32. Markey-Towler, Brendan. (2018). An Architecture of the Mind. London: Routledge. ______. (2018a). “Salience, Chains and Anchoring: Reducing Complexity and Enhancing the Practicality of Behavioral Economics.” Journal of Behavioral Economics for Author Manuscript Policy 2(1): 83-90. ______. (forthcoming). “The Competition and Evolution of Ideas in the Public Sphere: A New Foundation for Institutional Theory.” Journal of Institutional Economics.

______. (forthcoming a). “A Formal Psychological Theory for Evolutionary Economics.” Journal of Evolutionary Economics. Markowitz, Harry. (1952). “The Utility of Wealth.” Journal of Political Economy 60(2): 151- 158. Marshall, Alfred. (1890). Principles of Economics, 4th ed. London: Macmillan. Mas-Collel, Andreu, Michael D. Whinston, and Jerry R. Green. (1995). Microeconomic Theory. Oxford: Oxford University Press. Maslow, Abraham. (1943). “A Theory of Human Motivation.” Psychological Review 50(4): 370-396. Mehta, Judith. (2013). “The Discourse of Bounded Rationality in Academic And Policy Arenas: Pathologising the Errant Consumer.” Cambridge Journal of Economics 37: 1243-1261. Meng, Sam, Mahinda Siriwardana, and Judith McNeill. (2013). “The Environmental and Economic Impact of the Carbon Tax in Australia.” Environmental and Resource Economics 54(3): 313-332. Merleau-Ponty, Maurice. (1945). The Phenomenology of Perception. London: Routledge. ______. (1948). The World of Perception. London: Routledge. Metcalfe, Stanley. (1998). Evolutionary Economics and Creative Destruction. London: Routledge. ______. (2007). “Alfred Marshall’s Mecca: Reconciling the Theories of Value and Development.” Economic Record 83(s1): S1-S22. ______. (2008). “Accounting for Economic Evolution: Fitness and the Population Method.” Journal of Bioeconomics 10(1): 23-49. Metcalfe, Janet, and Walter M. Mischel. (1999). “A Hot/Cool-System Analysis of Delay of Gratification: Dynamics of Willpower.” Psychological Review 106(1): 3-19. Mischel, Walter M. (2014). The Marshmallow Test. London: Penguin. Munger, Michael, and Kevin Munger. (2015). Choosing in Groups. Cambridge, UK: Cambridge University Press. Murray, Cameron, and Paul Frijters. (2017). Game of Mates. Brisbane: Cameron Murray. Nash, John. (1950a). “The Bargaining Problem.” Econometrica 18(2): 155-162. Author Manuscript ______. (1950b). “Equilibrium Points in N-Person Games.” Proceedings of the National Academy of Sciences 36(1): 48-49. ______. (1951). “Non-Cooperative Games.” Annals of Mathematics 54(2): 286-295.

Nelson, Richard, and Sidney Winter. (1982). An Evolutionary Theory of Economic Change. Cambridge, MA: Harvard University Press. Newell, Alan. (1990). Unified Theories of Cognition. Cambridge, MA: Harvard University Press. Ostrom, Elinor. (1990). Governing the Commons. Cambridge, UK: Cambridge University Press. ______. (2000). “Collective Action and the Evolution of Social Norms.” Journal of Economic Perspectives 14(3): 137–158. Ostrom, Elinor, and Xavier Basurto. (2011). “Crafting Analytical Tools to Study Institutional Change.” Journal of Institutional Economics 7(3): 317–343. Panksepp, Jaak. (1998). Affective Neuroscience. Oxford: Oxford University Press. Piaget, Jean. (1923). The Language and Thought of the Child. London: Routledge. Pinker, Steven. (1999). How the Mind Works. London: Penguin. ______. (2002). The Blank Slate. London: Penguin. Polanyi, Michael. (1958). Personal Knowledge. Chicago: University of Chicago Press. Popper, Karl. (1945). The Open Society. London: Routledge. Potts, Jason. (2000). The New Evolutionary Microeconomics. Cheltenham: Edward Elgar. Qin, Duo. (2010). “Rise of VAR Modelling Approach.” Journal of Economic Surveys 25(1): 156-174. Quiggin, John. (2010). Zombie Economics. Princeton, NJ: Princeton University Press. Rabin, Matthew. (1998). “Psychology and Economics.” Journal of Economic Literature 36(1): 11-46. ______. (2013a). “An Approach to Incorporating Psychology into Economics.” American Economic Review 103(3): 617-622. ______. (2013b). “Incorporating Limited Rationality into Economics.” Journal of Economic Literature 51(2): 528-543. Rafaelli, Tiziano. (2003). Marshall’s Evolutionary Economics. London: Routledge. Rick, Scott, and George Loewenstein. (2008). “Intangibility in Intertemporal Choice.” Philosophical Transactions of the Royal Society B 363: 3813-3824. Robbins, Lionel. (1932). An Essay on the Nature and Significance of Economic Science. Author Manuscript London: MacMillan. Robson, Alex. (2014). “Australia’s Carbon Tax: An Economic Evaluation.” Economic Affairs 34(1): 35-45.

Rubenstein, Ariel. (2006). Lecture Notes in Microeconomic Theory. Princeton: Princeton University Press. Samuels, Warren J. (1993). “In (Limited But Affirmative) Defense of Nihilism.” Review of Political Economy 5(2): 236-244. Sapolsky, Robert M. (2017). Behave. London: Penguin. Schelling, Thomas. (1960). The Strategy of Conflict. Cambridge, MA: Harvard University Press. ______. (1966). Arms and Influence. New Haven, CT: Yale University Press. Schumpeter, Joseph. (1911). Theory of Economic Development. Piscataway, NJ: Transaction Publishers. ______. (1950). Capitalism, Socialism and Democracy. New York: HarperPerennial. Shackle, George L.S. (1969). Decision, Order and Time. Cambridge, UK: Cambridge University Press. Shelley, Louise I. (1995). “Privatization and Crime: The Post-Soviet Experience.” Journal of Contemporary Criminal Justice 11(4): 244-256. Shiller, Robert. (2017). “Narrative Economics.” American Economic Review 107(4): 967- 1004. Shleifer, Andrei. (1998). “State versus Private Ownership.” Journal of Economic Perspectives 12(4): 133-150. Simon, Herbert A. (1956). “Rational Choice and the Structure of the Environment.” Psychological Review 63(2): 129-138. ______. (1962). “The Architecture of Complexity.” Proceedings of the American Philosophical Society 106(6): 467-482. ______. (1967). “Motivation and Emotional Controls of Cognition.” Psychological Review 74(1): 29-39. ______. (1968). Sciences of the Artificial. Cambridge, MA: MIT Press. ______. (1976). “From Substantive to Procedural Rationality.” In Method and Appraisal in Economics. Ed. Spiros Latsis, pp.129-148. Cambridge, UK: Cambridge University Press. ______. (1978a). “On How to Decide What to Do.” Bell Journal of Economics 9(2): 494-507. Author Manuscript ______. (1978b). “Rationality as a Process and Product of Thought.” American Economic Review 68(2): 1-16. Sims, Christopher A. (1980). “Macroeconomics and Reality.” Econometrica 48(1): 1-48. Smith, Adam. (1795). Essays on Philosophical Subjects. Oxford: Oxford University Press.

Smith, John M. (1982). Evolution and the Theory of Games. Cambridge, UK: Cambridge University Press. Snyder, Timothy. (2010). Bloodlands, New York: Vintage. Stiglitz, Joseph. (2002). Globalization and its Discontents. New York: Norton. Stuckler, David, Lawrence King, and Martin McKee. (2009). “Mass Privatization and the Post-Communist Mortality Crisis: A Cross-National Analysis.” Lancet 373(9661): 399-407. Taylor, Lester D., and Hendrik S. Houthakker. (2010). Consumer Demand in the United States. New York: Springer. Thaler, Richard. (2015). Misbehaving. London: Penguin. Thaler, Richard, and Cass Sunstein. (2008). Nudge. London: Penguin. Tullock, Gordon. (1996). “Corruption Theory and Practice.” Contemporary Economic Policy 14(3): 6-13. Tversky, Amos, and Daniel Kahneman. (1974). “Judgment under Uncertainty: Heuristics and Biases.” Science 185(4157): 1124-1131. ______. (1981). “The Framing Of Decisions and the Psychology of Choice.” Science 211(4481): 453-358. Uzawa, Hirofumi. (1960). “Walras’ Tatonnement in the Theory of Exchange.” Review of Economic Studies 27(3): 182-194. Veblen, Thorstein. (1899). The Theory of the Leisure Class. Oxford: Oxford University Press. Vernon, Magdalen D. (1962). The Psychology of Perception. London: Pelican. von Neumann, John . (1958). The Computer and the Brain. New Haven, CT: Yale University Press. Walras, Leon. (1899). Elements of Pure Economics. London: Allen and Unwin. Williamson, Oliver. (1975). Markets and Hierarchies. New York: Free Press. ______. (1979). “Transaction-Cost Economics: The Governance of Contract Relations.” Journal of Law and Economics 22(2): 233–261. ______. (1985). The Economic Institutions of Capitalism. New York: Free Press. ______. (2002). “The Theory of the Firm as Governance Structure: From Choice to Contract.” Journal of Economic Perspectives 16(3): 171–195. Author Manuscript Witt, Ulrich. (2008). “What is Specific about Evolutionary Economics?” Journal of Evolutionary Economics 18(5): 547-575.