The New Microeconomics: A Psychological, Institutional, and Evolutionary Paradigm with Neoclassical Economics as a Special Case

• Date: 01 January 2019
• DOI: http://doi.org/10.1111/ajes.12260
• Author: Brendan Markey‐Towler
• Published date: 01 January 2019

The New Microeconomics: A Psychological,

Institutional, and Evolutionar y 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

becomes 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 Econom ics Has a Place in the New M icroeconomics

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 mod-

els of dynamic stochastic general equilibrium with a representative

agent suffer serious problems. However, the stumbling block of the

American Jour nal of Economics and Sociology, Vol. 78, No. 1 (Janua ry, 2019).

DOI: 10 .1111/ajes.122 60

© 2019 American Journa l of Economics and Sociology, Inc.

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

Architecture of the Mind: A Psychological 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, ad-

vised by Professors John Foster, Peter Earl and Michelle Baddeley. Email: brendan.

markeytowler@uqconnect.edu.au

96 The American Journal of Economics and Sociology

rethinking movement has been the lack of a compelling alternative

microeconomics that could replace the paradigmatic core of main-

stream economics. The problem is the same one faced by Janos Kornai

(1971) with his famous Anti-Equilibrium. Without a compelling alter-

native 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

that suggest there are a range of important psychosocial factors in

human behavior that neoclassical economics struggles to explain

fully. We seek to map a new pluralistic paradigm in microeconom-

ics 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, neo-

classical 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 2018a). This psychological approach to microeco-

nomic analysis may serve as a coherent foundation for an institution-

al-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 2008;

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 eco-

nomics 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 then consider some evidence on what this perspective struggles

97The New Microeconomics

to explain well. Since neoclassical economics offers a constrained per-

spective 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 spec-

trum of socioeconomic behavior that neoclassical economics struggles

to explain. The new theory is coherent and integrated, and it can be

formalized. It is also quite simple, which means that it is intellectually

competitive with neoclassical economics, which it seeks to subsume

and transcend (Harstad and Selten 2013; Rodrik 2015). We then show

how this might serve as the foundation of an institutional and evolu-

tionary perspective on socioeconomic systems. Before concluding, we

consider how this perspective may inform policy formation.

Neoclassical Econo mics as a Theor y of Incentives and Subs titution

We should be clear about what we mean here by “neoclassical eco-

nomics” 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 eco-

nomics historically in terms of what L akatos (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

(1871), 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 neoclassi-

cal 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