ssrn-id996670 - Economic Theory: Structural Abstraction or...

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Electronic copy available at: http://ssrn.com/abstract=996670 Economic Theory: Structural Abstraction or Behavioral Reduction? Shyam Sunder In physics, optimization is an organizing principle for natural phenomena. Entropy tends toward its maximum and marbles roll toward minimum potential energy, all without intent or purpose. Injection of this principle into economics initially followed the physicists’ organizing perspective and helped develop the powerful insights of the abstract equilibrium the - ory. However, humans and their institutions being the unit of analysis, economists could not long resist the temptation to give optimization a behavioral spin. Photons may travel along paths that minimize their travel time without intention or purpose; but economists were all too human to think in a similar vein of the people buying ice cream or cars. Once opti - mization was posited as a behavioral principle of individual human beings, it was easy for cognitive sciences to show that it lacked descriptive valid - ity. Individual behavior is more complex and less predictable. The aggre - gate characterizations of Walrasian abstraction could not be derived start - ing from such complex micro-level behavior. If psychology and equilibrium theory were to be reduced into a single science, something had to give. Given the cognitive limitations humans share with all organisms, validity and relevance of the conclusions of equilibrium theory became suspect. The marriage of economics and computers led to a serendipitous discov - ery: there is no internal contradiction in suboptimal behavior of individuals History of Political Economy 38 (annual suppl.) DOI 10.1215/00182702-2005-028 Copyright 2006 by Duke University Press I am grateful for the comments from participants at the 2005 HOPE conference and the edi- tors of this volume.
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Electronic copy available at: http://ssrn.com/abstract=996670 Structural Abstraction or Behavioral Reduction? 323 yielding aggregate-level outcomes derivable from assuming individual optimization. Individual behavior and aggregate outcomes are related but distinct phenomena. Science does not require integration of adjacent disciplines into a single logical structure. As the early-twentieth-century unity of science movement discovered, if we insist on reducing all sci - ences to a single integrated structure, we may have no science at all. In Herbert Simon’s (1996, 16) words: “This skyhook-skyscraper construc - tion of science from the roof down to the yet unconstructed foundations was possible because the behavior of the system at each level depended on only a very approximate, simpliFed, abstracted characterization of the system at the level next beneath. This is lucky; else the safety of bridges and airplanes might depend on the correctness of the ‘Eightfold Way’ of looking at elementary particles.” This is the story of how we found that economists can have their cake while psychologists eat it too. Willingness to abandon the reductionist
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ssrn-id996670 - Economic Theory: Structural Abstraction or...

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