Modern Neoclassical Economics Research Articles

Leveraging Behavioral Economics to Decision Architecture

Modern economic theory has been dominated by neoclassical economics since the 1970s. Like any theory, neoclassical economics also has a series of assumptions underpinning it. These assumptions have been criticized and challenged on various grounds in the past several decades. The most serious assumption is the assumption of rational economic agents who aim to maximize their utility by analyzing the costs and benefits of every decision. The presence of “homo economicus” is very rare in our society. In fact, it is practically and psychologically impossible to be rational even most of the times. Empirical and experimental research heavily corroborates this fact. Despite such massive evidence, nearly all economic models and public policies use this distorting assumption in analysis and research. The result has been catastrophic, as can be seen in the Global Financial Crisis of 2008, the Dot-Com bust and numerous financial market crashes before that. Furthermore, the theory of rationality also reduces the effectiveness of government policies in achieving their objectives. Behavioral economics has emerged to address these fallacies of modern neoclassical economics and complement it to improve economic theory, methodologies and forecasting. Behavioral economics has mainly two branchesmacro theory which aims to design macro-economic models incorporating behavioral concepts and micro theory which explains the various biases that individuals, groups and institutions exhibit in economic and even social decision-making. This research is focused on micro-behavioral economic theory. While a colossal magnitude of research has been done in identifying, testing and explaining the plethora of behavioral biases, there is a dearth of research on systematically reducing these biases. This research aims to fill this gap by conducting research on private and public sector employees of 30 to 40 years age and testing for a significant difference in level of biases revealed between the two groups of employees. The research found that there is a significant level of difference in the rational decision-making behavior of the two groups of employees. It also discusses the applications of the findings and the further scope for research.

Economics in Search of a Moral Philosophy

The purpose of this essay is to review the state of economics as a discipline in light of how and to what extent ethical considerations and the precepts of moral philosophy affect the theory and application of economics. In its pursuit for purely ‘objective’ analyses and, thereby, attain the status of a science, modern neo-classical economics is constrained by self-imposed limitations in making value judgments about justice and fairness in a market economy. Adam Smith’s idea of “invisible hand” of the market driven by self-interested behaviour has sometimes been interpreted, wrongly, as a kind of market fundamentalism that ignores many failures and brutalities of the modern-day capitalism. While many ethical elements do go into economic policy analyses, these are still constrained by the discipline’s neglect of non-market activities and its tendency to undervalue the aspects of well-being which cannot be easily measured in monetary terms. This essay argues that economists may do better by improving their understanding of the complexity of human behaviour and the functioning of market institutions by embracing new ideas developed in other disciplines, such as neuroscience, experimental psychology and political sociology; they also need to allow more scope for ethical judgments in their choice of topics for inquiry, in their methodological approaches and in drawing policy conclusions. Without losing the analytical rigour, which is the hallmark of the discipline, economics needs to be broader in order to be better.

The resilience of modern neoclassical economics -a case study in the light of Ludwik Fleck's 'harmony of deception'

In this paper, Ludwick Fleck’s philosophy and sociology of science will be briefly outlined in order to establish a ‘theory of the resilience of scientific misapprehension’. This theory will be use in order to gain insights into the modes of operation of defence and resilience of modern neoclassical economics in the face of recent harsh critique by singling out a case of extreme deviation of theoretical prediction from empirical evidence: minimum wages’ impact on employment.

Is Competition Necessarily Efficient? An Answer through the History of Neoclassical Theory

The paper challenges the idea that neoclassical economics has demonstrated competition’s efficiency. It does so by retracing the history of Pareto’s criterion (in general equilibrium and in modern neoclassical economics), showing that it is only after a few shifts and transformations that it became an “efficiency” criterion while it was never called that in Pareto’s work. Widespread belief that competition is efficient is rather the result of ideology than of rigorous neoclassical demonstration. JEL Classification: B13, B21, P16

Behavioural Economics: A Virginia Political Economy Perspective

AbstractBehavioural economics offers a critique of modern neoclassical economics by providing empirical evidence that the model of rational choice does not accurately describe human decision‐making processes. The existence of cognitive biases, what we might term ‘agent failure’, becomes reason to doubt the efficacy of unhampered markets, and is seen by some as a sufficient condition for government intervention. This article offers a critique of this argument from an Austrian and public choice theory comparative institutions perspective. Agent failure arguments are analogous to market failure arguments of the mid‐twentieth century and the same kinds of responses made against the latter are applied to the former. Behavioural economics arguments for intervention ignore the cognitive biases of political actors, neglect the comparative perspective that results from such biases, and do not examine the ways in which markets are superior to politics in providing the information and incentives actors need to become aware of their errors and correct them. The existence of imperfectly rational agents, like the existence of imperfect markets, is therefore not a sufficient condition for government intervention into the market.

Capital as power and the corporatisation of education

ABSTRACTBuilding on the definition of critical education residing in the crossroads of cultural politics and political economy, this theoretical article offers an inquiry into the intersection between critical education research and the central ritual of contemporary capitalism – capitalisation. This article outlines four current approaches in education research literature to the corporatisation of education. This article argues that the approaches must rely implicitly on one of the two major theories of capitalism: modern neoclassical economics or Marxist political economy, even when the approaches are built on cultural and sociological arguments. Without an explicit engagement with the concept of capital and capitalisation, the approaches risk appearing theoretically weak and reliant on moral assumptions. In this sense, critical education literature would be strengthened by engagement with international political economy (IPE) literature. This article proposes to redress this lacuna in the literature by mobilising Jonathan Nitzan’s and Shimson Bichler’s theory of capital as power to better understand the corporatisation of education.

MR. PIKETTY AND THE "NEOCLASSICS": A SUGGESTED INTERPRETATION

This essay is an attempt to build a bridge between Thomas Piketty's arguments in Capital in the Twenty-First Century and modern neoclassical economics. This is done by deconstructing the variables and mathematical expressions used by Piketty to define specific economic phenomenon, examining the historical periods that Piketty has focused on in Capital, and using the results from the previous analyses to critique Piketty's arguments in Capital in the Twenty-First Century within a modern neoclassical economics framework.

The Economy of Esteem: An Essay on Civil and Political Society

The Economy of Esteem: An Essay on Civil and Political Society. By Geoffrey Brennan and Philip Pettit. New York: Oxford University Press, 2004. 339p. 29.95 paper.Much of social science has been devoted to the analysis of different mechanisms for social steering. The most well-known are the “invisible hand” market and the “iron hand” state. In many studies, these systems of coordination have been put forward as the only two that are available, and we have seen endless amounts of energy going into the pros and cons for each in different areas. In this book, two renowned scholars, one an economist (Geoffrey Brennan) and the other a political philosopher (Philip Pettit), put forward a third mechanism that they argue has largely been neglected, namely, esteem. The central idea is that while people are motivated by material benefits and by the incentives given by laws and regulations, they are also motivated by the opinions other people hold of them. In addition to material rewards, we also want other people we care about to think well of us. The authors argue that this esteem mechanism has largely been overlooked in modern neoclassical economics but that it was a major part of earlier economics, not least in Adam Smith's “A Theory of Moral Sentiments,” which was published in 1759, 13 years before “The Wealth of Nations.”

Blanqui Lecture - In the Sign of the Axiomatic Method: Mathematics as the Role Model for Neoclassical Economics

Born out of the conscious effort to imitate mechanical physics, neoclassical economics ended up in the mid 20th century embracing a purely mathematical notion of rigor as embodied by the axiomatic method. This lecture tries to explain how this could happen, or, why and when the economists' role model became the mathematician rather than the physicist. According to the standard interpretation, the triumph of axiomatics in modern neoclassical economics can be explained in terms of the discipline's increasing awareness of its lack of good experimental and observational data, and thus of its intrinsic inability to fully abide by the paradigm of mechanics. Yet this story fails to properly account for the transformation that the word rigor itself underwent first and foremost in mathematics as well as for the existence of a specific motivation behind the economists' decision to pursue the axiomatic route. While the full argument is developed in Giocoli 2003, these pages offer a taste of a (partially) alternative story which begins with the so-called formalist revolution in mathematics, then crosses the economists' almost innate urge to bring their discipline to the highest possible level of generality and conceptual integrity, and ends with the advent and consolidation of that very core set of methods, tools and ideas that constitute the contemporary image of economics.

Keynes as a Marshallian

The article considers in detail those aspects of J. M. Keynes’ theory, which conform to A. Marshall’s approach. The author regards Marshall’s and Keynes’ tradition as distinct from modern neoclassical economics; advantages and disadvantages of both currents of economic thought are analyzed.

Man as Machine: The Plight of 20th Century Economics

We argue that in the 20th century economic theory took a path that purged human actors from economic analysis. We describe this evolution as the result of four competing visions in economics: the analytic narrative approach pursued by the classical economists, New Institutional Economics, and Austrian economics, the approach of the old institutional economics, the approach of modern neoclassical economics, and an approach that blended neoclassical economics with a particular form of game theory, which we call formalistic historicism. We contend that only the first of these visions is consistent with acting man as the center of economic analysis. Movement back to human-centered economics requires a return to this vision.

Scarce or Abundant? The Economics of Natural Resource Availability

Most natural resources that are used in production are non‐renewable. When they become depleted they are lost for future use. Does it follow that the limited availability of natural resources will at some time in the future constrain economic growth as many environmentalists believe? While classical economists have shared the belief in limits to growth, the distinctive feature of modern neoclassical economics is its optimism about the availability of natural resources. This survey suggests that resource optimism can be summarised in four propositions. First, a rise in the price of a resource leads to a substitution of this resource with another more abundant resource and to a substitution of products that are intensive in this resource. Second, a rise in the price of a resource leads to increased recycling of the resource and to the exploration and extraction of lower quality ores. Third, man‐made capital can substitute for natural resources. Fourth, technical progress increases the efficiency of resource use and makes extraction of lower quality ores economical. In a critical analysis of these four propositions it is shown that while the conjecture that natural resources will never constrain future economic growth is logically conceivable, we do not and indeed cannot know whether it will be possible in practice to overcome any resource constraint. JEL Classification: Q20, Q30, Q40

The Austrian Search for Realistic Foundations

Self‐designated Austrian economists have two different views of modern neoclassical economics. Some, such as F. A. Hayek, take issue with certain aspects of neoclassical economics without disputing its fundamentals. Others, most notably Ludwig von Mises and Murray Rothbard, explicitly reject the foundations of neoclassical consumer and welfare theory and construct a systematic alternative. This paper analyzes the most distinctive features of the Mises‐Rothbard alternative to the neoclassical paradigm; it also considers related positions defended by Israel Kirzner. I argue that their effort to rebuild economics on nonneoclassical foundations fails and that their critique of neoclassical foundations is wrong or strongly overstated.

The analytical foundations of evolutionary economics: From biological analogy to economic self-organization

In this paper, it is argued that the espousal of biological analogies by evolutionary economists cannot reveal the most important features of evolutionary change in economic processes. Analogies are used to best effect in the preliminary stages of research and in their normal linguistic role as illustrative devices in argumentation. An economic process may sometimes appear to operate ‘like’ a biological one; however, it is inappropriate to then model such a process ‘as if’ it is essentially biological due to its timeless qualities. Because of this timelessness, the model cannot address history except through the contrived use of Newtonian comparative statics, with the force of competition acting as the equilibrating mechanism. In contrast, the self-organization approach to system behaviour is founded upon an observable historical process, captured in the entropy law. It deals with non-equilibrium structural change, as found in historical experience, not timeless Newtonian comparative statics, workable only in contrived laboratory experiments. The advantage of the self-organization approach is that it encompasses time irreversibility, structural change and fundamental uncertainty in an analytical framework which can be used in empirical settings. The economic self-organization approach offers an analytical framework which can embrace a range of other positions. It can deal with Austrian considerations concerning the variety of subjective knowledge, aspiration and uncertainty and it can give spontaneous order an explicit process meaning. A wide range of institutionalist insights can be translated into propositions concerning self-organization. Marshallian neo-classical approximations concerning the short period operation of the price mechanism in certain market conditions can be dealt with. What we cannot incorporate is the post-Marshallian general equilibrium analysis which has become so popular in modern neoclassical economics. Neither can we embrace new Keynesian propositions concerning asymmetric information or incomplete markets. Thus, economic self-organization provides a modern context for the revitalization of older traditions in economics and political economy that stress the fact that nonlinear structural change is an ongoing feature of economic systems.

Georgescu-Roegen's defense of classical thermodynamics revisited

Nicholas Georgescu-Roegen's criticisms, added to those of physicists and philosophers, result in a definitive refutation of Boltzmann's claim that his H-theorem derives the Second Law of Thermodynamics solely from Newtonian Mechanics. Some authors using Boltzmann's Statistical Mechanics go so far as to claim that perpetual motion machines are feasible in principle; this is also incorrect. Modern approaches by Ilya Prigogine and by the “Astrophysical School” to build thermodynamics on a basis that avoids Georgescu-Roegen's objections are surveyed. These conclusions have both epistemological and technological importance for economics; this paper emphasizes the former. The epistemological argument is: (1) The entropy law is an evolutionary law. (2) Modern neoclassical economics is arithmomorphic. (3) Arithmomorphic laws cannot capture evolutionary changes. (4) Hence neoclassical economics cannot incorporate the entropy law's implications for the economic process. (5) If one can show that modern physicists use evolutionary laws despite their non-arithmomorphic nature, then maybe (6) economists will become accepting of evolutionary laws. (7) This would be good because the entropy law, which is evolutionary (point 1), has important implications for economics. This paper primarily treats the most unfamiliar point for non-physicists, point 5.

Four Dogmas of Environmental Economics

Four dogmas have shaped modern neoclassical economics. The first proposes that markets may fail to allocate resources efficiently, that is, to those willing to pay the most for them. The second asserts that choices, particularly within markets, reveal preferences. The third is the assumption that people always make the choices they expect will benefit them or enhance their welfare. The fourth dogma holds that perfectly competitive markets will allocate resources to their most beneficial uses. This is the doctrine of the invisible hand. I argue that these dogmas of applied welfare economics should be abandoned. One consequence of doing so will be an increased interest in the institutional context of production. A second will be a turn toward empiricism.

Four Dogmas of Environmental Economics

Four dogmas have shaped modern neoclassical economics. The first proposes that markets may fail to allocate resources efficiently, that is, to those willing to pay the most for them. The second asserts that choices, particularly within markets, reveal preferences. The third is the assumption that people always make the choices they expect will benefit them or enhance their welfare. The fourth dogma holds that perfectly competitive markets will allocate resources to their most beneficial uses. This is the doctrine of the invisible hand. I argue that these dogmas of applied welfare economics should be abandoned. One consequence of doing so will be an increased interest in the institutional context of production. A second will be a turn toward empiricism.

Business cycles and complex non-linear dynamics

The modern neoclassical economics takes two approaches to economic fluctuations and business cycles: the endogenous approach and the exogenous approach. While the exogenous approach views fluctuations and cycles as a result of random shocks, the endogenous approach attributes them to the fundamental structure of an economy resulting in complex non-linear dynamics. This study explains these approaches by constructing a simple framework that provides a unified view for the approaches.