Marrying Behavioural Economics and Growth Theory

Abstract

Adam Smith wrote two major books in his lifetime. One of them, the well-known Wealth of Nations (1776) propelled him to be the father of economic theory; whereas the other one, the Theory of Moral Sentiments (1759) did not bring him so much fame. If it had, he might have become the father of psychology as well. Classical economists often moonlighted as early psychologists. Yet, as the use of mathematics gradually became a standard feature of mainstream economics, the profession began to shy away from psychology as it lacked the tools as well as the rules to describe complex human behaviour. However, both mathematical tools and socio-psychological theory have improved a great deal over time, enabling us to build much richer economic frameworks. And indeed over the last couple of decades, we have witnessed a growing number of attempts to bring the two disciplines together once again. The subfield became known as behavioural economics. The objective of this paper is to find out whether behavioural economics could help us gain useful insights into the Nature and Causes of the Wealth of Nations. The paper consists of two parts. The first part discusses whether we could, and should, build deductive and formalised growth models which incorporate 'irrational' features of human nature. In the second part we attempt to build one such model by including a perception of fairness. Our main conclusion is that although various difficulties arise, it would be beneficial for growth theory if the modern versions of Adam Smiths two professions integrated each other's findings.This is the first draft of the paper.