Similarly, even purely selfish workers have an incentive to Table 2. Explicit versus implicit punishment threats In the previously discussed extension of the employer—worker game employers cannot explicitly announce a punishment threat. However, in the presence of reciprocally fair employers the opportunity to punish ex post constitutes a kind of implicit threat.
The fact that the majority of subperforming workers expect to be punished confirms this. The advan- tage of the existence of an implicit threat like this is that it constrains the opportunistic inclinations of the selfish or insufficiently reciprocal types while it allows — at the same time — the maintenance of a friendly and trust- ful atmosphere. This is different in the presence of explicit ex ante threats. Such threats are likely to generate an atmosphere of hostility and distrust which in turn may destroy the willingness of reciprocally fair types to respond reciprocally.
By making a generous contract offer the employer implicitly tries to elicit the voluntary cooperation of workers who are, in principle, willing to respond reciprocally. It seems, therefore, that an explicit ex ante punishment threat psychologi- cally contradicts an appeal to behave reciprocally. Instead of opportunities for ex post punishments and rewards, employers have the opportunity to stipulate ex ante binding threats. Interestingly, in almost all contract offers experimental employers stipulate a positive fine and in the majority of cases the fine is maximal. In case employers have no opportunity to stipulate a fine there is a strong reciprocal relation between the generosity of the offer and the effort response that is similar to the relation in Fig.
In the presence of explicit ex ante threats, however, this reciprocal relation is almost absent. This is consistent with our conjecture that explicit ex ante threats may destroy reciprocity and shows that there may be a conflict between reciprocity-based incentives and explicit material incentives based on explicit threats. This leads to the striking conclusion that expli- cit performance incentives, when they take the form of binding ex ante threats, may be inferior in efficiency terms relative to incentives that try to elicit only voluntary cooperation.
Moreover, if the appeal to voluntary cooperation is combined with the opportunity to punish or reward per- formance ex post the efficiency advantage of reciprocity-based incentives becomes even greater. Cooperation and punishment opportunities The above experimental evidence indicates the widespread existence of reciprocal behaviour among anonymously interacting strangers in one- shot situations.
Roughly speaking, the fraction of subjects exhibiting some degree of reciprocal fairness is almost never below 40 and sometimes well above 60 percent. Or put differently: What are the interaction structures which enable the selfish types to induce the reciprocally fair types to behave noncooperatively and what are the structures that enable the reciprocally fair types to force or induce the selfish types to behave cooperatively? In view of the fact that reciprocally fair types are willing to punish unfair behaviour it seems likely that the presence or absence of punishment opportunities is crucial here.
To see why, consider the exam- ple of a simultaneously played one-shot PD, in which a purely selfish sub- ject is matched with a reciprocally fair subject. If the reciprocal subject knows that she faces a selfish subject, she will defect because she knows that the selfish subject will always defect. Assume further that the punishment is costly for the punisher, which ensures that a purely selfish subject will never punish. A cooperating reciprocally fair subject is, however, willing to punish a defecting subject because the defection is likely to be viewed as unfair.
Therefore, if the selfish subject anticipates that a defection will be punished, she has an incentive to cooperate. This suggests that in the presence of punishment opportunities reciprocally fair types can force the selfish types to cooperate, whereas in the absence of punishment opportunities the selfish types induce the reciprocal types to defect, too. FALK simultaneously how many tokens to keep for themselves and how many tokens to invest in a common project. For each token that is privately kept a subject earns exactly one token. Yet, for each token a subject invests into the project each of the four subjects earns 0.
This means that, irre- spective of how much the other three subjects contribute to the project, it is always better for a subject to keep all tokens privately. Therefore, if all subjects are purely selfish they will all keep all their tokens. Yet, if all fully defect, i. However, individually, everybody has an incentive not to invest at all. In the no-punishment condition the same group of subjects13 plays this game for ten periods where, at the end of each period, they are informed about the average contributions of the other three group members. In the punishment condition subjects also play the above game for ten periods.
The costs of punish- ment for the punisher are higher when more punishment points are assigned to the others. For each received punishment point the monetary income of the punished subject is reduced by ten percent. The experiment ensures that group members cannot trace the history of individual invest- ments or individual punishments of a particular subject in a group. It is, therefore impossible to gain an individual reputation for being non coop- erative or for being a punisher. It is important to notice that the ten-fold repetition of the generalised PD does not change the predictions relative to a pure one-shot experiment if it is common knowledge that all subjects are rational and selfish money max- imisers.
In fact, under this assumption, we should observe exactly the same investment behaviour in both the punishment and the no-punishment condition, namely, no investment at all in all periods. The no-investment prediction is most transparent for period ten. Since all subjects know that the experiment ends in period ten, their best private choice in the no-punishment condition is to invest nothing. In the punishment condition, their best choice at the punishment stage in period ten is to not punish at all, because punishment is costly.
Yet, since rational egoists anticipate that nobody will punish, the presence of the punishment stage does not change the behavioural incentives at the investment stage of period ten. Therefore, in the punishment condition as well nobody will invest in period ten. Since rational egoists will anticipate this outcome for period ten, they know that their actions in period nine do not affect the decisions in period ten.
This backward induction argument can be repeated so that full defection and no punishment is predicted to occur for all ten periods of the punishment treatment. The same backward induction logic also predicts, of course, defection in all periods of the no- punishment treatment. Moreover, punishment follows a clear pattern. The large majority of punishments are imposed by the cooperators on the defectors.
The punishment a subject receives is the higher the more their contri- bution falls short of the average contribution of the other three group members see Fig. Figure 2. Punishment of sub-average investments also prevails in period ten. What is the impact of this punishment pattern on investment behaviour? It turns out that contribution rates dramatically differ between the two conditions. Already in period one contribution rates are significantly higher in the punishment condition.
Then they quickly converge towards almost full cooperation in the punishment condition whereas in the absence of a punishment opportunity they steadily decrease to rather low 80 70 60 50 40 30 20 Average income 10 reduction 0 [0,2 [2,5 [5,8 [8,11 [11,14 [14,17] Negative deviation from the average contribution of the other group members Figure 2.
Fehr and S. In the final period of the punishment condition In the final period of the no-punishment condition almost nobody cooperates fully and 53 percent defect fully see Fig. The very high cooperation in the punishment condition represents an unambiguous rejection of the standard economic approach while it is con- sistent with the reciprocal fairness approach. Moreover, the big difference in cooperation rates across conditions indeed suggests that in the pres- ence of punishment opportunities the reciprocally fair types can force the selfish types to cooperate, while in the absence of such opportunities the selfish types induce the reciprocally fair types to defect, too.
Thus, inter- action structures that have theoretically identical implications, if there are only selfish types, generate fundamentally different behavioural patterns in the presence of reciprocally fair types. Reciprocal fairness as a limit to competition The importance of reciprocal fairness derives to a significant extent from the fact that it changes the incentives for the selfish types. This became transparent in the previous discussion of the simultaneous PD with pun- ishment opportunities where the reciprocally fair types constrained the cheating inclinations of the selfish types.
Since player B defects in response to defection and cooperates in response to cooperation, the selfish player A has an incentive to cooperate, too. We will show now that this incentive change has important consequences for the impact of competition on wage or price formation. We will, in par- ticular, show that, when there is an effort elicitation problem, experimen- tal employers are willing to pay voluntarily much higher wages compared to a situation where they do not face an effort elicitation problem.
To show this consider a simple variant of the employer—worker game mentioned above. After the effort choice no rewarding or punishing of workers is possible and there are also no fines. Each employer can only employ one worker so that there is an excess supply of 4 workers. Employers are, therefore, in a very strong position that allows them to pay rather low wages. Everything else was kept identical in the control condition. The important difference between the effort—choice condition and the control condition is that, in the former, workers can respond reciprocally to generous wage offers by choosing a high effort level while this is not possible in the control condition.
In the presence of reciprocally fair workers, employers face, therefore, very different wage setting incentives in the two conditions.
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The experimental data strongly support this hypothesis. The correla- tion between wages and effort is significantly positive and sufficiently steep to render a high wage policy profitable. This induces employers to pay considerably higher wages in the effort—choice condition see the first two columns of Table 2.
In the control condition many employers actively exploit the excess supply of workers by offering extremely low Table 2. FALK wages. In a further variation of the effort—choice condition we removed the excess supply of workers so that there were exactly as many employers as workers. Moreover, employers and workers were matched by the experimenter and employers could make a wage offer only to the matched worker.
Thus, this condition completely removes competition among the workers. By comparing the effort—choice condition with and without competition we can examine whether competition has a wage-decreasing effect. Contrary to what most economists probably — and perhaps even most social scientists — believe, it turns out that competition has no impact at all on wage formation in the effort—choice condition. As columns 1 and 3 in Table 2. Conclusions The empirical evidence shows that many people have inclinations to behave in a reciprocally fair manner. This deviation from purely self-interested behaviour constitutes a powerful constraint for potential cheaters that can generate almost universal cooperation in situations in which purely selfish behaviour would cause a complete breakdown of cooperation.
In sequential interactions reciprocal fairness constitutes also an important cooperation incentive for purely self-interested first movers. However, we also have uncovered interaction structures in which the selfish types induce the recip- rocally fair types to behave in a very noncooperative manner. In general, our experimental results show that the existence of reciprocally fair types greatly improves the prospects for cooperation and limits the impact of competition. The existence of reciprocally fair behaviour can, however, not be taken for granted because the willingness to cooperate voluntarily can be destroyed by explicit threats to punish cheating.
The empirical fact that many agreements contain an element of incompleteness is, however, undisputed. A prominent example is, of course, the labour contract. Hamilton Trivers ; R. Axelrod and W. Fudenberg and E. Maskin Rabin and A. Falk and U. Fischbacher Cameron and Fehr and Tougareva conducted experiments that show this. In Cameron subjects could earn the income of three months in a one-shot experiment that lasted 15 minutes. Berg, J. Dickhaut and K. McCabe and W. Fehr and A. Falk ; E. Fehr, G. Kirchsteiger and A. Riedl Falk and in E. Riedl between 20 and 30 percent of the subjects behaved in a completely selfish manner.
Subjects who are unconditionally altruistic are virtually non-existent in these studies. Fehr and K. Schmidt They show that in a generalised one-shot PD with a heterogeneous population of players, full defection by everybody can be the unique equilibrium in the PD without punishment while full cooperation can be an equilibrium in the PD with punishment. Due to space constraints and because the results are qualitatively similar we concentrate here on the results with a constant group composition.
However, for the final periods the no cooperation — no punishment prediction still holds. Falk References Axelrod, R. Cameron, L. Falk, A. Fehr, E. Fudenberg, D. Hamilton, W. Rabin, M. Trivers, R. A simple illustration of the importance of consumption as a way of belonging is that, throughout the world, refusal to consume that which is regarded as normal, or consumption of that which is abnormal, is a major marker of the outsider.
It is equally well recognized that people of different cultures consume different things, so much so that food consumption is often used as a standard marker of cultural identity, as is clothing and style of housing. The proposition that consumption is culturally patterned, and that it serves to mark identity, is integral to anthropological thought and plays an important role in allowing anthropologists to understand the processes by which cultural patterns are formed and reaffirmed. Sahlins uses American food preferences and tabus to illustrate his point.
Hence also a corresponding structure of agricultural production of feed grains, and in turn a specific articulation to world markets — all of which would change overnight if we ate dogs…. The tabu on horses and dogs thus renders unthinkable the consumption of a set of animals whose produc- tion is practically feasible and which are nutritionally not to be despised.
Sahlins , italics added The logic of meaningful order is the cultural logic that people inherit and modify, if slowly, but which is fundamental, in the anthropological view, to determination of consumption patterns. The choice of beef or pork at the meat counter may be based upon price and individual prefer- ence: dog is not in the realm of possibility — most Americans would gag at the very thought of eating dog — and would certainly shun, or worse, those who confessed to doing so.
Mitchell, who used it to very different purpose. Samuelson, like Leibenstein, needed to dismiss social determination of consumption patterns and the importance of advertising in order to retain the rational consumer of neoclassical theory. This was made easier for Samuelson by the strongly ethnocentric approach that allowed him to avoid any mention of the possibility that some people might prefer a diet of wheat flour, cabbage, lima beans, and kidneys to steak and potatoes.
The question that I want to pose is this: why and how have economists remained so apart from other social scientists in continuing to treat a portion of consump- tion — the portion defined as non-functional or backward — as relatively triv- ial and thereby to downplay the social roles of consumption? However, as a good economist he does not appear to have been seriously tempted by the thought that most if not all consumption is so patterned. It is probably true to say that economists who have been tempted have often rejected this view because it would undermine the welfare conclu- sions derived from consumer sovereignty.
MAYHEW would be sacrificed if the anthropological view of consumption were accepted; it is harder to understand how economists have suppressed the evidence in favor of this view. Thorstein Veblen did see consumption as socially patterned. In The Theory of the Leisure Class he argued that consumption was based on emulation and the desire to impress others.
However, the point is the same. The desirability of goods consumed is socially determined and cannot be said to be inherent in the goods them- selves. Since Veblen wrote, the growth of advertising and marketing, as well as the arguments of such as Duesenberry , Hamilton , Galbraith and others have provided further evidence of a truth that has nevertheless been steadfastly ignored in the core of mainstream eco- nomic theory, just as Samuelson did in his text.
In the remainder of this essay I consider two arguments that might seem to support the main- stream economic view. Both arguments are to be taken seriously, but both should be rejected, as I shall argue. Theory and evidence One possible argument in favor of the standard view of neoclassical economists is that consumption theorists, such as Veblen and the anthro- pologists, have confused the long-term and fundamental functionality of consumption patterns with the faddishness and non-functionality allowed by modern affluence.
Thus it can be argued that Veblen, with his emphasis on waste and leisure among the newly rich of late nineteenth- century America, was dealing with marginal consumption and not with the more fundamental consumption patterns of the great majority. The adequacy of the emic explanations offered by Douglas are of no importance here.
From this arose the taboo against their consumption. Israelite society chose the economically rational pattern of consumption and placed religious taboos on the tempt- ing but costly, and therefore irrational, consumption of pork. Inherited patterns of consumption continue to reflect those realities. No absolute answer can be given. The historical record tells us only that eating of pork was tabooed and that the Israeli culture survived. Orthodox Jews do not eat pork, whatever the price relative to beef.
Why was pork considered so attractive that it had to be tabooed when ecological condi- tions changed? Although it is a mistake to think that modern hunters and gatherers are good models of our long-ago ancestors DeGregori ; Lee we can learn some things from them about people who have a very primitive technology. We learn that cultural patterning even among the most geographically and technologically confined people is apparent. Under normal non-starvation conditions choices are made among possible foodstuffs, choices that are not dictated simply by technology or geography.
Richard B. Lee did a survey of food consumed in the early s by the! Kung Bushmen of the Kalahari Desert and concluded that 90 percent of the vegetable diet by weight came from only twenty-three of the eighty-five edible species of plants available. There were local species of animals known and named by the Bushmen, with fifty-four classified as edible, but only seventeen species were regularly hunted Whatever the truth may be, or may have been when Lee did his survey in the early s, the fact remains that cul- tural patterning of consumption was apparent even among these people. What is even more interesting for our purposes is that among the!
Kung Bushmen, as among other hunters and gatherers, seasonal and cyclical drought results in travel over a larger area in order to maintain existing patterns of consumption. For the greater part of the year, food is locally abundant and easily collected. It is only during the end of dry season in September and October, when desirable foods have been eaten out in the immediate vicinity of the waterholes that the people have to plan longer hikes of 10—15 miles and carry their own water…. The important point is that food is a constant, but dis- tance required to reach food is a variable….
Kung maintain the preferred diet even though other foodstuffs are more easily available. This second argument posits that, until very recently, say in the past century or so, roles in production and other social markers rather than consumption served to define social status and belonging. For example, in sixteenth-century Elizabethan England, consumption was used to pro- vide theatrical proof of importance and legitimacy.
By the twentieth century, consumption had become a pri- mary way of indicating group allegiance and identity. What is important is that McCracken sees conspicuous consumption, playing a social marking role, as something new in human history. So too do a number of other writers who, somewhat ironically, have criticized Veblen as well as neoclassical economists for failing to rec- ognize the complex social meaning that consumption has come to have. He did not appreciate, and could not have done so late in the nineteenth and very early in the twentieth century, the full range of cultural meaning carried by consumer goods today.
It is even possible through visible and highly conspicuous consumption to reveal oneself to be scornful of modern conspicuous consumption. Clearly, groups to which one signals belonging by consumption are no longer defined or confined by locality or kinship. MAYHEW with a group of strangers by choices of clothing, food, music, presence or absence of tattoos, and so on and on. While the current complexity of consumption and of group identity is much greater than in the past, it is not the case that those wedded to neo- classical analysis of consumption should take comfort in knowing that they are only slightly behind the times and were once correct.
Even before advertising became widespread, and even before some con- sumers had time and money to spend on socially complex modern consumption, consumers consumed what they did primarily because of the groups of which they were part. Whether we use modern ethno- graphic records as an imperfect mirror to reflect patterns among our tech- nologically primitive ancestors, or make use of written historical records, it is apparent that clothing, food consumption, housing styles, art styles, pottery patterns and the like varied culturally rather than individually.
Groups were more tightly defined by geographic place and by kinship than they are today when choice of exotic food, new music, fashion in clothing, and other translocal and even transnational patterns have become more important. Nevertheless, the human process of eating, adorn- ing, and protecting in a patterned manner remains constant. In short, the evidence is overwhelming that all consumption has been conspicuous as far back as we can trace it and that takes us back to the central question of the paper. How have economists continued to deny this? Samuelson made a tentative approach but backed off by finding evi- dence that consumers were becoming more professional and thus more like the advertising-immune individual utility maximizing choosers of neoclassical theory.
Leibenstein acknowledged that Veblen had a point, but made it relevant only to a relatively trivial part of consumption. How has this orthodoxy retained its power? An emic explanation There are a number of ways of answering this question. The one that I will pursue in the remainder of this paper is an emic explanation; an explana- tion that makes sense not because of correspondence with reality as des- cribed by non-economists and some heterodox economists but because it is consistent with classical, neoclassical, and Marxian patterns of thought.
At first blush the truth of this idea seems so obvious as to make a challenge ludicrous. How could populations that eke out a living with primitive agri- cultural equipment build the cities, the laboratories, the transportation net- works of complex modern societies? There are clearly caloric levels too low for human survival and reproduction, and there are temperatures below which humans cannot sur- vive without protective clothing and shelter, but, as the anthropologists have told us, in all societies the acceptable range of actual items consumed is socially determined.
It follows that subsistence needs, except insofar as they are defined extraculturally by scientists in terms of caloric and basic nutri- tional needs, can only be defined in a relative sense. Pearson put it this way: If the concept of surplus is to be employed … at all, it must be in a relative or constructive sense. In brief: A given quantity of goods or services would be surplus only if the society in some manner set these quantities aside and declared them to be available for a specific purpose. Into this category might then fall such things as food set aside for ceremonial feasts or in anticipation of future dearth, war chests, budgetary surpluses, or savings for whatever purpose….
It is true that such surpluses may be made to appear along with a windfall increase of material means, or a more per- manent rise in productive capacity; but they may also be created with no change whatever in the quantity of subsistence means by re-allocating goods or services from one use to another. The Biblical story of the grain storage by Joseph in Egypt is one illus- tration of the latter. More important than the natural conditions associated with the creation of relative surpluses is thus an atti- tude towards resources, and the institutional means of counting out, setting aside, and making available p.
MAYHEW bring any given item or element in under this head it is not necessary that it should be recognized as waste in this sense by the person incurring the expenditure. Surpluses, necessities, and consumption that show the consumer capable of wasteful expenditure are all socially defined; they can be given mean- ing only within the context of a particular culture. However, modern western economic thought has been founded on the idea of absolute surplus.
The Physiocrats found the source of the surplus in agriculture; Smith and the classical economists found it in the ability of labor to produce more than required to sustain the laborers. It did not totally disappear; the idea that there is indeed an absolute surplus makes periodic appearances in a variety of areas of economic analysis. As Pearson observed, the idea of a social surplus as the explanation of differential rates of economic devel- opment has been commonplace in the literature of economic develop- ment.
Surplus in the form of capital accumulation is fundamental both to neoclassical and to Marxian explanations of growth see Mokyr , for a review and critique of the neoclassical, and Perelman , for a recent example of the Marxian. A concomitant idea is that there is a level of subsistence that is naturally defined and this idea has led to efforts to develop a theoretically derived definition of basic needs Hodgson Adams goes on to point out that, in macroeconomic and growth theory,4 A represents income or output, B consumption, and C becomes savings or investment; in mercantile thought which still influences international trade accounting , exports are A, imports are B, and C becomes the movements of specie — or, in modern terms, the balance of payments.
The operant equa- tion converts the A term to infinite wants, the B term to finite pro- ductive capacity, and the C term, once again to infinity…. Thus from the very beginning does training in the wonderful logic of economics begin with a special case of The Subtractive Principle. Something minus something else yields a residual of great mean- ing — and something that deflects attention from the major terms from which it is derived.
MAYHEW abstract putative condition of scarcity rather than towards the sub- stance of the economy: How do individual and social wants arise and of what do they consist? Are they reasonable or can they be deflated? Is some level of production, B, enough to satisfy when wants, A, are limited? What are the direct and indirect costs — espe- cially environmental burdens — of different levels of B?
My argument in this paper is that allegiance to this fundamental Subtractive Principle allowed Leibenstein, and continues to allow econo- mists who may never have read Leibenstein, to ignore the strong evidence that all of consumption is indeed conspicuous. Conclusion All consumption is visible and made visible to mark the consumers as members of their group, to mark the status of each, and to inform out- siders that each is a member, not an outsider.
Thus is all consumption con- spicuous. Of course, people enjoy many traits inherent in the goods and services that they consume: the taste, sound, feel, smell, and use of goods are important. But non-functional and functional demands are all func- tional in establishing group identity; all demand is intersubjective. Whatever the truth may be, or may have been when Lee did his survey in the early s, the fact remains that cultural patterning of consump- tion was apparent even among these people. Thus, had the idea of subsistence and surplus crept into Keynesian economics.
References Adams, J. Duesenberry, J. Galbraith, J. Hamilton, D. Harris, M. Lee, R. Leibenstein, H. Mokyr, J. Perelman, M.
2. Six central methodological problems
Pearson, H. Arensberg, and Harry W. Ramstad, Y. Sahlins, M. Samuelson, P. Veblen, T. This idea dates back at least to Milton Friedman in economics, and more importantly, draws on powerful, well- known examples in physics. Nothing could be more intuitively implausi- ble than quantum mechanics, yet its predictions have been confirmed in great detail.
The same is true of neoclassical economics — except for the part about the predictions. What if implausible assumptions lead only to implausible conclusions and empty predictions? When grand theories are built up from a model of economic actors as uncoordinated, unchanging, asocial individuals, the flaws in the foundation show up as cracks in the super- structure. For this reason, there is a connection between two seemingly separate areas of economic theory, namely the simple stories of consumer decision-making and the intricate theoretical conclusions of general equi- librium analysis.
Simple problems in the former lead directly to complex problems in the latter. Consider one of the classic individuals described in economic theory. All students of economics are familiar with the textbook model of the con- sumer. She is an individual with a unique and methodical approach to shopping. She may not literally draw budget lines and indifference curves to study their tangencies though a casual reading of an introductory text might create that impression. But she does have well-defined, insatiable desires, and she certainly knows how to make marginal adjustments in her purchasing plans to reach the absolute maximum of attainable bliss.
Indeed, she is continually making such adjustments whenever the market provides her with new information. Her resemblance to actual consumers is more tenuous. Now consider the theoretical structure built on the behavior of indi- viduals like her. General equilibrium theory, the complete model of individuals interacting through a system of markets, represents the cap- stone of the conventional economic edifice. In the standard image, the existence and Pareto optimality of an equilibrium point are the ultimate mathematical expression of the metaphor of the invisible hand.
However, theorists have known for some time that the equilibrium of a general equilibrium model is not necessarily either unique or stable. There may be multiple sets of prices, and associated allocations of resources, that are all equilibrium points. Moreover, an equilibrium may be unstable, meaning that small market fluctuations can lead farther away from the equilibrium rather than back toward it. There is no economically plausible dynamic process that always leads toward an equilibrium point. A closer look will reveal the connection between the two distinct, prob- lematical theories of consumer behavior and general equilibrium.
After presenting the two separate sets of problems, and then discussing their connection, I will turn to more realistic analyses of consumer behavior, and conclude with the implications of these analyses for an overall frame- work that might replace general equilibrium. Theorizing the consumer A wave of new interdisciplinary research on consumption has swept through most of the social sciences — except for economics Miller Yet, despite the central role that consumers play in economic theory, eco- nomics has been almost unaffected by new ideas about consumption of any variety Goodwin et al.
Those desires are not affected by social interactions, culture, eco- nomic institutions, or the consumption choices or well-being of others. Only prices, incomes, and personal tastes affect consumption — and since tastes are exogenous to neoclassical economics, there is little point in talk- ing about anything but prices and incomes. ACKERMAN More precisely, there are three fundamental assumptions of the neoclassical theory of consumption; these assumptions may be called aso- cial individualism, insatiability, and commodity-based utility Ackerman : 1 Asocial individualism.
Consumer desires and preferences are exoge- nous; they are not affected by social or economic institutions, interac- tions with others, or observation of the behavior of others. In the language of this volume, the existence or at least the economic signif- icance of intersubjectivity is denied by assumption. It is human nature to have a multiplicity of insatiable material desires. Consumer preferences consist of well- informed desires for specific goods and services available on the market.
The only economically meaningful forms of individual satis- faction result from more consumption or less work, a related point that will not be addressed here. The first two assumptions are at times explicit; frequently, however, all three are implicit in the basic formulation of the theory. The second assumption, insatiability, implicitly enters simple versions of the theory in the familiar sketch of a nested series of indifference curves, rising to higher and higher levels of utility as the quantity of commodities increases. In more formal, mathematical versions of the theory, insatiabil- ity is explicitly assumed see, for example, Mas-Colell et al.
- Diffraction effects in semiclassical scattering!
- An encyclopedia of philosophy articles written by professional philosophers.;
- Mead, George Herbert | Internet Encyclopedia of Philosophy.
- Person | King’s People | King’s College London.
- Intersubjectivity in Economics: Agents and Structures - Google книги.
It is easy to reject all three assumptions as descriptions of real con- sumer behavior. First, consumers are not asocial individualists. Social influences such as advertising and peer group pressure clearly affect our consumption choices. From cars to clothes to computers, we buy many things, in part, because others are buying them, or because others will observe our purchases of them.
Intersubjectivity is the norm, not the exception.
Second, consumer desires are satiable. That is to say, it is possible to have enough of many things. People typically stop eating before the refrigerator is empty. Some people even start to save money or make gifts to charities or relatives, rather than spending it all, as their incomes rise. Many consumers do not know exactly what they want to buy. Often people want things that are not marketed commodities.
This is why advertising does not merely offer technical information about products and prices, but claims that par- ticular brand names can deliver adventure, romance, athletic prowess, and other non-material feelings and experiences. In short, common knowledge about consumer behavior is repeatedly at odds with the traditional model assumed in economic theory. This alone does not necessarily refute the theory; for some, it may even add to the eso- teric allure of the discipline. However, a theory with unrealistic assump- tions depends heavily on the validity and usefulness of its results.
Where are the successful, non-trivial predictions that derive from the economic theory of the consumer? The theory of consumer behavior is not typically used to make direct predictions, at least beyond the obvious responses to price and income changes. Rather, it is a foundation for much more elaborate theories. In particular, it is the basis for general equilibrium theory — and the basis, as well, for the mathematical difficulties which have undermined the prom- ise of general equilibrium. Beyond stability1 General equilibrium theory was one of the great theoretical advances of mid-twentieth-century economics.
The theory asks whether there is always a set of prices at which supply equals demand for every commodity an equilibrium point , and explores the characteristics of such points. In the s Kenneth Arrow and Gerard Debreu proved that, under standard assumptions defining an idealized competitive market economy, any mar- ket equilibrium is a Pareto optimum. Moreover, under slightly more restric- tive assumptions, an equilibrium point is guaranteed to exist, and any Pareto optimum is a market equilibrium for some set of initial conditions.
There is a longstanding debate about the interpretation of the Arrow— Debreu results, in light of the obvious lack of realism of some of their assumptions.
For example, non-convexities, such as increasing returns to scale in production, are common in reality. If they are allowed into the theory then the existence of an equilibrium is no longer certain, and a Pareto optimum need not be a market equilibrium. Yet, despite awareness of this and other qualifications, economists fre- quently talk as if deductions from general equilibrium theory are appli- cable to reality.
For example, it is often suggested that any efficient allocation of resources — for instance, one based on a preferred distribu- tion of income — could be achieved by market competition, after an appro- priate lump-sum redistribution of initial endowments. Even if the conditions assumed in the proofs applied in real life which they clearly do not , meaningful application of the Arrow—Debreu theorems would require dynamic sta- bility.
Consider the process of redistributing initial resources and then letting the market achieve a new equilibrium. Implicitly, this image assumes that the desired new equilibrium is both unique and stable. If the equilibrium is not unique, one of the possible equilibrium points might be more socially desirable than another, and the market might converge toward the wrong one. If the equilibrium is unstable, the mar- ket might never reach it, or might not stay there when shaken by small, random events.
In the s theorists including Debreu reached quite strong, and almost entirely negative, conclusions about both the uniqueness and the stability of general equilibrium. There is no hope of proving uniqueness in general, since examples can be constructed of economies with multiple equilibria. At best, there is a persuasive argument that the number of equilibrium points is virtually always finite. There are certain restrictions on the nature of aggregate demand that ensure uniqueness of equilib- rium, but no compelling case has been made for the economic realism of these restrictions.
This means that for some initial conditions, there are multiple possible outcomes of market competition, i. For stability the results are, if anything, even worse. There are exam- ples of three-person, three-commodity economies with permanently unstable price dynamics Scarf , showing that there is no hope of proving the stability of general equilibrium in all cases. Cycles of any length, chaotic price changes, or anything else you can describe, will arise in a general equilibrium model for some set of con- sumer preferences and initial endowments.
Not only does general equi- librium fail to be reliably stable; its dynamics can be as bad as you want them to be. In a sweeping generalization of the SMD theorem, Kirman and Koch proved that the full range of instability can result — i. This means, among other things, that the addi- tion of one more commodity could be sufficient to destabilize a formerly stable general equilibrium model. More broadly, this means that dynamic results that are proved for small models need not apply to bigger ones — a finding that should be troubling to users of applied general equilibrium models with small numbers of composite commodities and sectors.
Might instability be a result of the unrealistic method of price adjust- ment assumed in general equilibrium theory? Again, the answer is no. This is not realistic, but it is mathematically tractable: it makes price movements for each com- modity depend only on information about that commodity. There is an iterative mathematical procedure that always leads to a market equilibrium, starting from any set of initial con- ditions Smale However, there is no economic justification for this procedure, and it requires overwhelming amounts of information about the effects of prices of some goods on the demand for other goods.
In fact, any price adjustment process that always converges to an equilibrium has essentially infinite information requirements Saari Interpretations of the fall The failure of general equilibrium theory, as revealed in the SMD theorem and related research, is little known and even less widely understood. The key results are typically presented at a staggeringly difficult level of mathematics. However, the persistence of instability under many changes in assumptions, as discussed in the previous section, suggests that basic features of the underlying model are involved, rather than esoteric twists of mathematical analysis.
At its root, the instability demonstrated in the SMD theorem can be traced back to the unrealistic and underspecified neoclassical model of consumer behavior. Kirman , pp. Saari , pp. Both are basic causes of the instability of general equilibrium. Instability arises in part because aggregate demand is not as well- behaved as individual demand.
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Unfortunately, though, the aggregation problem is intrinsic and inescapable. There is no representa- tive individual whose demand function generates the instability found in the SMD theorem Kirman Groups of people can display patterns and structures of behavior that are not present in the behavior of the indi- vidual members; this is an idea with obvious importance throughout the social sciences.
For contemporary economics, this shows that the pursuit of microfoun- dations for macroeconomics is futile. The microeconomic model of behavior contributes to instability because it says too little about what individuals want or do. From a math- ematical standpoint, as Saari suggests, there are too many dimensions of possible variation, too many degrees of freedom, to allow results at a use- ful level of specificity. The consumer is free to roam over the vast expanse of available commodities, subject only to a budget constraint and the thinnest possible conception of rationality: anything you can afford is acceptable, so long as you avoid blatant inconsistency in your preferences.
Physics, a science which mathematical economists often seek to emu- late, is actually more modest in its modeling efforts, and imposes much more definite structure on its analyses Ackerman All physical par- ticles are subject to the same forces, and all react to those forces in a predictable manner. For such similar and well-behaved objects, the aggre- gation problem can sometimes not always be solved: useful statements can often be made about the aggregate behavior of a cloud of particles in physics, unlike a crowd of consumers in economics.
If consumers were modeled as having predictable responses to social forces, it might be possible to describe their aggregate behavior in more interesting detail. Instead, the assumption of asocial individualism in neo- classical economics guarantees that the aggregation problem is insur- mountable. Physics also develops mathematical models involving many dimen- sions — but here economic theory goes even farther.
Some of the latest work in theoretical physics analyzes elementary particles as moving in a ten- dimensional space, which leads to mathematical models of great subtlety and complexity. Economic theory effectively treats consumers as particles moving in a space with one dimension per commodity — in other words, a space with thousands, if not millions, of dimensions. As Saari observes in the passage quoted above, this extremely high-dimensional model allows all manner of mathematical pathology, such as the SMD theorem.
If nothing imaginable is excluded by mathematical analysis which is what the SMD theorem says , then the model has no economically significant content. In this case, the problematical assumption is commodity-based utility. This seemingly innocu- ous assumption means that representation of the utility or preference function requires a mathematical space with one dimension per commod- ity.
The SMD problem suggests that this framework itself is unproductive. Useful mathematical analysis of consumer behavior requires a more com- pact and manageable structure. In particular, it requires a low-dimen- sional representation, which cannot be defined in terms of individual commodities. Blasts from the past: Broader views of consumers So far we have seen that flaws in the standard model of consumer behavior lead to critical problems in general equilibrium theory. A better model of consumption, therefore, is an essential step toward better economic theory in general.
Fortunately, there is a long history of broader analysis of con- sumer behavior. The essential components of a more adequate theory of consumption can be found in the economics literature in decades past — often in works that have since drifted into obscurity. The discussion can again be organized in terms of alternatives to the three basic assumptions of asocial individualism, insatiability, and commodity-based utility.
First, no consumer is an island. The powerful social influences on con- sumption, from the pursuit of status to the impact of advertising, were the subject of eloquent, well-known analyses by Thorstein Veblen at the open- ing of the twentieth century, and John Kenneth Galbraith at mid-century. Provocative mathematical models of social interactions in consumption were proposed by James Duesenberry and Harvey Leibenstein In the s Robert Pollak made heroic attempts to develop formal models of social interactions in consumption Pollak ; ; ; , but had little impact on other economists.
Among economists engaged in social criticism, such as Fred Hirsch or Robert Frank , the interactive nature of consump- tion is taken as a starting point. Turning to the second assumption, the view of human nature as an ensemble of insatiable desires for private consumption is as standard as it is silly. Many great economists of the past have known better. Adam Smith emphasized the importance of motivations such as self-respect.
Alfred Marshall believed that it was possible to make a distinction between higher and lower desires; the resulting hierarchy of more and less urgent wants is one basis for the declining marginal utility of consumption. Dissent from the neoclassical caricature of human nature was also shared by John Maynard Keynes. Tibor Scitovsky offered an extensive examination of human nature and its implications for economic behavior Scitovsky An exploration of research in psychology provided him with a much richer and more specific theory of human wants than is normally seen in economics.
And which satisfactions are necessarily obtained through purchases in the marketplace? Other authors have raised alternative perspectives on human nature, questioning the notion of insatiable desire. The third assumption, commodity-based utility, is routinely questioned in other social sciences. The value of commodities and the satisfaction they produce cannot be traced directly to their physical characteristics.
Goods may have ritual, social, or emotional meanings that transcend their original utilitarian purpose — an idea that has occurred to advertisers as well as anthropologists. Economists have also considered alternatives to the assumption of com- modity-based utility, in what was, for a time, a prominent theoretical innovation.
Almost simultaneously, Kelvin Lancaster a, b , Richard Muth and Gary Becker proposed similar rethinkings of the theory of consumer behavior. Rather than knowing in advance exactly how much they will enjoy each potential purchase, the new approach held that consumers want experiences, satisfactions, or characteristics of goods that result from purchases — e.
Lancaster assumed that consumer demand for characteristics resembles the conventional picture of demand for goods — consumers know exactly which characteristics they want, and they always want more. The rela- tionship of characteristics to goods is strictly linear and determined by technology: twice as much of a good always produces twice as much of each of its characteristics. In contrast, Muth and Becker dropped the assumption of a linear relationship between goods and characteristics, and used the language of a household production process: the household combines purchased inputs groceries, cooking utensils, fuels and house- hold labor to produce desired outputs meals.
This involves delineating the core structures of a capitalist economy relevant to the social provisioning process and locating within them the organizations, institutions, and agency that direct, engage in, or facilitate the economic events that result in social provisioning. And the economic events of specific interest are those that affect the production, pricing, demand, and distribution of goods and services. The structures help shape and govern economic events while the organizations and social institutions that are located in the structures house the causal mechanisms in which agency is embedded.
What these structures are will in part determine the kind of heterodox microeconomic theory that is developed. The core structures include the input-output schema of circular production which is incompatible with the neoclassical concept of relative scarcity , income flows relative to goods and services for social provisioning, and the flow of funds that ensure that monetary production and monetary social provisioning are taking place; the core organizations, social institutions, and core agencies relevant to the social provisioning process and embedded in the structures include the business enterprise, market organizations such as cartels, family, government, and the social individual that makes decisions and choices in a non-neoclassical optimizing manner.
Indicative readings for the section include:. The representing of the structures, organizations, institutions, and agencies to create an integrative picture of the foundations of heterodox microeconomic theory can be assisted by mathematics and economic models.
Their uses are, however, restricted since the tenets of realism, critical realism, and the method of grounded theory prescribe that the type of mathematics used and economic models constructed are derived from as opposed to being imposed upon via analogy or metaphor the empirically grounded theories being developed.
Consequently, the economic model reflects the narrative of the theory from which it is derived. To translate a grounded theory into an economic model, its structures and causal mechanisms which embody accurate measurements and observations have to be converted, as far as possible, into mathematical language where each mathematical entity and concept is in principle unambiguously empirically grounded, meaning in part they also have to be measurable and observable. As a result, the mathematical form of the model is determined and constrained by the empirically grounded structures and causal mechanisms, and hence is isomorphic with the theory and its empirical data.
This relationship between mathematics and empirically grounded theory is similar to the late 19 th century view in which mathematical rigor was established by basing the mathematics on physical reasoning resulting in physical models. However, the difference here is that rigor results when the mathematical model is based on social reasoning represented by empirically grounded theory. In this manner, mathematical model-based analysis remains subjugated to the study of economic activity.
Thus, while mathematics helps illuminate aspects of the grounded theory and making clear what might be obscure, it does not add anything new to the theory, that is, it does not by itself produce new scientific knowledge. As suggested above, the structure of the economy is pictured in terms of an input-output matrix; hence the mathematics of input-output models is what students studying heterodox microeconomic theory need to know. A secondary benefit of input-output models is that they permit the exploration of various theoretical themes in classical political economy, Marxism, and the capital controversies as they relate to heterodox microeconomics.
Useful introductions to input-output models and their mathematics are L. Kurz and N. Because of the grounded theory approach to theory creation, the core of heterodox microeconomics consists of a series of substantive theories that are empirically grounded and are part of an overall formal microeconomic theory. However, since the empirical groundness of the substantive theories is uneven and far from complete, development of the overall theory is still incomplete.
The requirement that all theories must be empirically grounded means that, in a discipline which traditionally does not empirically ground theories, this process is quite slow. The core can be divided into four components: three substantive areas—the business enterprise, the market and the business enterprise, and market governance; and a formal area which deals with the three substantive areas together.
With the structures, causal mechanisms, and substantive theories in place, the final step is to develop a holistic heterodox microeconomic theory and with it the microfoundations of heterodox macroeconomics. Thus, in the formal area a disaggregated price-output model of a monetary economy will be developed and then utilized to delineate the impact of the micro—that is prices, profit mark ups, finance, and investment—on the overall level of economic activity.
The business enterprise is conceived as a non-static, historically changing going concern, that is, as an entity that has an indefinite life span and which undertakes production, employment, pricing and investment activities in this context. It is also an organization that is structured and contains causal mechanisms that direct its activities.
It is within these structures and causal mechanisms which change over time that these resources are utilized in various activities in a changing economic environment. The business enterprise comprises of three structures: legal and organizational structure, decision-making structure, and production and cost structure. The causal mechanisms, on the other hand, concern pricing, prices, investment, wages, employment, and production and reflect the motivation of the management of the enterprise involved in making the decisions. From the structures and causal mechanism a series of empirically grounded theories on pricing and prices, on investment, and on wages, employment, and production are delineated; and these theories integrated together constitute the theory of the business enterprise.
The business enterprise decisions concerning production and investment determine its demand for industrial goods while those same decisions and the decisions about pricing are based on views about the demand for the goods produced by the enterprise. A central feature to these double-edge decisions is the structure of market demand; and central to market demand is concept of market. The concept of market is an empirically grounded in terms of standard industrial classification and followed by its delineation as a social structure that has a legal component, a set of institutional practices and rules of exchange, and involves issues of market control.
Turning to the structure of market demand, the analysis focuses on the demand-for-goods decisions by households, enterprises, and non-market organizations, especially with regard to price. Indicative readings for this section include:. All enterprises have some market power, that is, the ability to inflict unacceptable consequences upon competitors.
Thus, any propensity towards price wars and other factors such as business cycles or secular changes in demand generating fluctuating prices among competitors inhibits the enterprise as a going concern. This section develops a theory of market governance to explain why and how business enterprises utilize social, economic, and political processes to co-operatively establish institutions and organizations that regulate horizontal market transactions among themselves.
The particular forms of market governance embodied in the theory include social networks, bilateral agreements, trade associations, cartels, price leadership, and government regulation. Thus, a disaggregated price-output model of a monetary economy is developed based on the foregoing theories of the business enterprise and market governance and the arguments of about the structure of market demand and the non-relationship between market price and sales.
It is then utilized to delineate the impact of the micro—that is prices, profit mark ups, finance, and investment—on the overall level of economic activity. In particular, the disaggregated price model resembles a Sraffian price model based on normal output or capacity utilization; while the disaggregated quantity model is derived from a Leontief quantity model.
The connection between the two via the profit mark-up qua prices and enterprise investment decisions and government expenditures or effective demand is examined, especially with regard to issues of prices and the going concern and co-ordination of economic activity, aggregate economic activity, and disaggregated effective demand.
Finally, the impact of micro pricing, investment, production and employment decisions on distribution and social welfare under capitalisms is examined. In contrast to the commonly held view, this article shows that there is a heterodox microeconomics that is teachable to students. Clearly it is not as well developed as mainstream microeconomics, but then in the s or even in the s neoclassical microeconomic theory was not well developed and yet it was taught.
Teaching an incomplete theory is not a problem if the professor believes that the central components of what is being taught are empirically and theoretically sound and help provide a better understanding of the phenomena under examination. The early neoclassical economists held this position and then spent two, three, five and more generations developing and extending their theory. What is presented above as heterodox microeconomics and its theoretical core is, like neoclassical microeconomics in the s, quite incomplete—but it is not non-existent! Further developments are needed and in fact demanded; and it is not improbable that over the next couple of generations of heterodox economists it could be greatly transformed.
All that is needed is for heterodox economics to overcome one major obstacle: the propensity of most heterodox economists to dismiss and ignore heterodox microeconomics and to direct their graduate students to pursue research agendas that do not engage with heterodox microeconomic theory.
But whether this is possible is an open question! Earl, P. Microeconomics for Business and Marketing. Eichner, A. The Macrodynamics of Advanced Market Economies. Sharpe, Inc. Keen, S. New York City: St. Kregel, J. London: Macmillan. Kurz, H. Lavoie, M. Foundations of Post-Keynesian Economic Analysis. Lee, F. Pasinetti, L. Lectures on the Theory of Production. New York: Columbia University Press. Robinson, J. An Introduction to Modern Economics.
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Teaching Heterodox Microeconomics Frederic S. Introduction to Heterodox Microeconomic Theory At the undergraduate level, most students enter their introductory microeconomic or macroeconomic course with little or no knowledge of economics, economic theory, or awareness that there are different ways of doing economic theory.
History of Heterodox Economics Since the student has taken prerequisite courses in the intellectual history of heterodox economics, the history of heterodox economics in this section deals with the social, organizational, and political history of heterodox economics in the 20 th century.
Indicative readings associated with the topics covered in this section include: Bortis, H. Dugger, W. Edited by C. Armonk: M. Post Keynesian Price Theory. Fullbrook, E. London: Routledge. Ferber, M. Chicago: The Chicago University Press. Applied Economics and the Critical Realist Critique. Finch, J. Locke, K. Grounded Theory in Management Research.
Lawson, T. Denzin, N. Strategies of Qualitative Inquiry. Structural Organization of Economic Activity The aim of the final section of the Introduction is to present to the student a theoretical picture of a capitalist economy that will serve as the foundation for developing an empirically grounded microeconomic theory of the social provisioning process as well as an empirically grounded model of the economy. Indicative readings for the section include: Okubo, S. Economy, Bortis, H. Rochon and S. Cheltenham: Edward Elgar. Davis, J.
Potts, J. Intersubjectivity in Economics: Agents and Structures. Mathematics and Modeling: A Digression The representing of the structures, organizations, institutions, and agencies to create an integrative picture of the foundations of heterodox microeconomic theory can be assisted by mathematics and economic models. Information, Opprtunism and Economic Coordination. Downward, P.
Bewley, T. Cambridge: Harvard University Press. Champlin, D. The Institutionalist Tradition in Labor Economics. The Market and the Business Enterprise The business enterprise decisions concerning production and investment determine its demand for industrial goods while those same decisions and the decisions about pricing are based on views about the demand for the goods produced by the enterprise. Indicative readings for this section include: Nightingale, J.
Granovetter, M. Fligstein, N. Robinson, R. Indicative readings for this section include: Richardson, G. Campbell, J. Governance of the American Economy. The Transformation of Corporate Control. Colombo, M. Mizruchi, M. Cambridge: Cambridge University Press. Indicative readings for this section include: Lee, F.
Related Intersubjectivity in Economics: Agents and Structures (Economics As Socialtheory, 18)
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