Microeconomics: Behavior, Institutions, and Evolution / Edition 1 available in Paperback, eBook
Microeconomics: Behavior, Institutions, and Evolution / Edition 1
- ISBN-10:
- 0691126380
- ISBN-13:
- 9780691126388
- Pub. Date:
- 02/05/2006
- Publisher:
- Princeton University Press
- ISBN-10:
- 0691126380
- ISBN-13:
- 9780691126388
- Pub. Date:
- 02/05/2006
- Publisher:
- Princeton University Press
Microeconomics: Behavior, Institutions, and Evolution / Edition 1
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Overview
Each chapter is introduced by empirical puzzles or historical episodes illuminated by the modeling that follows, and the book closes with sets of problems to be solved by readers seeking to improve their mathematical modeling skills. Complementing standard mathematical analysis are agent-based computer simulations of complex evolving systems that are available online so that readers can experiment with the models. Bowles concludes with the time-honored challenge of "getting the rules right," providing an evaluation of markets, states, and communities as contrasting and yet sometimes synergistic structures of governance. Must reading for students and scholars not only in economics but across the behavioral sciences, this engagingly written and compelling exposition of the new microeconomics moves the field beyond the conventional models of prices and markets toward a more accurate and policy-relevant portrayal of human social behavior.
Product Details
| ISBN-13: | 9780691126388 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 02/05/2006 |
| Series: | The Roundtable Series in Behavioral Economics |
| Edition description: | New Edition |
| Pages: | 608 |
| Product dimensions: | 6.00(w) x 9.25(h) x (d) |
About the Author
Read an Excerpt
Microeconomics
Behavior, Institutions, and EvolutionBy Samuel Bowles
Princeton University Press
Princeton University PressAll right reserved.
ISBN: 0-691-12638-0
Prologue
ECONOMICS AND THE WEALTH OF NATIONS AND PEOPLE[Economics is the study of] human behavior as a relationship between given ends and scarce means. -Lionel Robbins, An Essay on the Nature and Significance of Economics(1935) An economic transaction is a solved political problem Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain. -Abba Lerner, "The Economics and Politics of Consumer Sovereignty" (1972)
TO ITS FOUNDERS, the subject of political economy was the wealth of nations and people.
In the fourteenth century, Ibn Battuta, one of the leading geographers and explorers of his age, traveled widely in Asia, Africa, the Middle East, Russia, and Spain. In 1347, he visited the land we now call Bangladesh. "This is a country ... abounding in rice," he wrote. He described traveling along its waterways, passing "between villages and orchards, just as if we were going through a bazaar." Six centuries later, a third of the people of Bangladesh are undernourished and the country is among the world's poorest.
At the time of Ibn Battuta's visit to Bangladesh, Europe was reeling under the impact of the bubonic plague, which took the lives of a quarter or more in many cities. Manualworkers in London, probably among the better off anywhere on the continent, consumed fewer than 2000 calories per day. The shortage of labor following the plague somewhat boosted real wages through the middle of the next century, but over the next four centuries, real wages of laborers did not rise in any European city for which records exist; in most, wages fell by substantial amounts-in Northern Italy to half their earlier level. Over the past two centuries, however, real wages rose dramatically, first in England, where they increased ten-fold, and somewhat later but by even greater amounts in other European cities.
What accounts for these dramatic reversals of fortune? The most plausible answer, very briefly, runs as follows. The emergence and diffusion of a novel set of institutions that came to be called capitalism brought about a vast expansion in the productivity of human labor. This led to higher wages when workers' bargaining power was eventually augmented by the expansion of workers' political rights and by the drying up of the pool of new recruits from agriculture, household production, and other parts of the economy that were not organized according to these new institutions. This happened in Europe and not in Bangladesh.
What did happen in Bangladesh, as in much of the Mughal Empire and what became British India, was a growing entrenchment of the power and property rights of powerful landlords. Their influence was already substantial before the British, but during the Bengal Presidency it was greatly strengthened by the Permanent Settlement of 1793. This act of the colonial rulers conferred de facto governmental powers on the landlords by giving them the right to collect taxes (and to keep a substantial fraction for themselves). The fact that British taxation and land tenure policy was not uniform throughout the Raj provides a natural experiment to test the importance of these institutions for subsequent patterns of backwardness or development. Banerjee and Iyer (2002) compared the post-Independence economic performance and social indicators of districts of modern-day India in which landlords had been empowered by the colonial land tenure and taxation systems with other districts in which the landlords had been bypassed in favor of the village community or direct taxation of the individual cultivator. They found that the landlord-controlled districts had significantly lower rates of agricultural productivity growth stemming from lower rates of investment and lesser use of modern inputs. The landlord-controlled districts also lagged significantly in educational and health improvements. These findings suggest a remarkable persistence of the effects of an institutional innovation that occurred a century or more earlier.
The effects of institutions on economic performance is further affirmed by a dramatic turn in land tenure in the Indian state of West Bengal. Following its election in 1977, the Left Front government of the state implemented a reform under which sharecroppers who registered with the Department of Land Revenue were guaranteed permanent and inheritable tenure in the plots they cultivated as long as they paid the landlord a quarter of the crop. Prior to the reform, the modal landlord's crop share had been one half, and landlord's had routinely used the threat of eviction to enhance their bargaining power with the sharecroppers. The cultivators' increased crop-share significantly increased the incentives to work the land productively. The security of tenure had two possibly offsetting effects: it enhanced the cultivators' incentive to invest in the land, while restricting the ability of the landlord to elicit high levels of output by threat of eviction. A further indirect effect may have also been at work. The increased economic security of the sharecroppers led to their more active participation in local politics; partly as a result, the local councils-the panchayats-became more effective advocates of the interests of the less well-off in the acquisition of agricultural inputs, credit, and schooling.
The effects of the reform have been estimated from a comparison of agricultural productivity between West Bengal and neighboring Bangladesh (a similar region in which no such reforms were implemented) and by exploiting the fact that the implementation of the reform (measured by the fraction of sharecroppers registering for its benefits) varied considerably within West Bengal. The resulting estimates are imprecise, and it remains difficult to determine which causal mechanisms were at work, but the effects of the reform appear to have been very substantial: rice yields per hectare on sharecropped land were increased by about fifty percent. Having lagged behind most Indian states prior to the reform, agricultural productivity growth in West Bengal has been among the most rapid since the reform.
The enduring importance of institutions is likewise suggested by the work of Sokoloff and Engerman (2000) concerning an analogous New World reversal of fortune. They estimate that in 1700 Mexico's per capita income was about that of the British colonies that were to become the United States, while Cuba and Barbados were at least half again richer. At the close of the eighteenth century Cuba had slightly higher per capita incomes than the United States, and Haiti was probably the richest society in the world. At the opening of the twenty-first century, however, the per capita income of Mexico was less than a third of the United States', and Haiti's was lower yet. In a series of papers, Sokoloff and Engerman provide the following explanation. In the parts of the New World in which sugar and other plantation crops could be grown (Cuba and Haiti) or in which minerals and indigenous labor were abundant (Mexico), economic elites relied on bonded labor or slaves, and consolidated their power and material privileges by means of highly exclusive institutions. These restricted access by the less well-off to schooling, public lands, patent protection, entrepreneurial opportunities, and political participation. As a result, over the ensuing centuries, even after the demise of slavery and other forms of coerced labor, opportunities for saving, innovation, and investment were monopolized by the well-to-do. Literacy remained low, and land holding highly concentrated. As the source of wealth shifted from natural resource extraction of manufacturing and services, these highly unequal economies stagnated while the far more inclusive economies of the United States and Canada grew rapidly. The ways their less exclusive institutions contributed to the success of these North American economies remains somewhat unclear, but a plausible hypothesis is that broader access to land, entrepreneurial opportunities, and human capital stimulated growth.
The source of the institutional divergence among the colonies of the New World appears to be their initial factor endowments, more than the distinct cultures or colonial policies of the European states that conquered them. British Belize and Guyana went the way of Spanish Honduras and Colombia; Barbados and Jamaica went the way of Cuba and Haiti. The Puritans who settled Providence Island off the coast of Nicaragua forsook their political ideals and became slave owners. Slaves on the island outnumbered the Puritans when it was overrun by the Spanish in 1641. According to its leading historian, "[T]he puritan settlement ... with its economy fueled by privateering and slavery looked much like any other West Indian colony" (Kupperman 1993, p. 2). At the time of its demise, Providence Island was attracting migrants from the more famous Puritan colony far to the north; two boatloads of hapless Pilgrims arrived from Massachusetts just after the Spanish takeover.
A final example is provided by the precipitous collapse of Communist Party rule in the Soviet Union and its Eastern European allies around 1990 and the transition of the new states to market-based economies. Figure P.1, presenting the levels of gross domestic product (GDP) per capita relative to the year 1990 for fourteen of these nations, reveals dramatic differences in their trajectories. After a decade of transition, Poland's per capita income stood at 40 percent above the initial level, while Russia's had declined by a third and Moldavia's had fallen to less than 40 percent of the initial level. Over the same period China's per capita income more than doubled (not shown). Among these fourteen economies, only Poland out-performed the (unweighted) average of the OECD economies.
While the success of China's gradual reforms has been the subject of extensive study, the differences among the countries undertaking a rapid transition are poorly understood. A possible explanation is that, starting from quite similar institutions, small differences in the content or timing of reform packages or chance events resulted in large and cumulative differences in performance, because some countries (e.g., Hungary and Poland) were able to capture the synergistic effects of institutional complementarities while others were not (Hoff and Stiglitz 2002). Other explanations stress the substantial institutional differences among the countries or their differing levels of trust or other social norms. What is not controversial is that divergences in performance of this magnitude, emerging in less than a decade, suggest both the importance of economic institutions and the pervasive influence of positive feedback effects, whereby both success and failure are cumulative.
I have deliberately chosen cases that dramatize the central role of institutions. Other comparisons would suggest different, or at least less clear-cut conclusions. Over the period 1950-1990, for example, countries with democratic and authoritarian regimes appear to have differed surprisingly little in their overall economic performance (controlling for other influences) with major differences appearing only in their demographic record, with slower population growth in democracies (Przeworski, Alvarez, Cheibub, and Limongi 2000). Nonetheless, the examples above-the divergence of living standards in Europe from many parts of the world, the reversal in New World fortunes, and the heterogeneous consequences of economic liberalization in the once-Communist nations-are of immense importance in their own right and, as subsequent examples show, are hardly atypical.
What can modern economics say about the wealth and poverty of nations and people? No less important, what can it do?
CONTRARY to its conservative reputation, economics has always been about changing the way the world works. The earliest economists-the Mercantilists and the Physiocrats-were advisors to the absolute rulers of early modern Europe; today's macroeconomic managers, economic development advisors, and architects of the transition from Communism to market-based societies, continue this tradition of real world engagement. Economists have never been strangers to policy making and constitution building. The hope that economics might assist in alleviating poverty and securing the conditions under which free people might flourish is at once its most inspiring calling and its greatest challenge.
Like many, I was drawn to economics by this hope. Having been a schoolboy in India and a secondary school teacher in Nigeria before turning to economics, I naturally came to the field expecting that it would address the enduring problem of global poverty and inequality. At age eleven I had noticed how very average I was among my classmates at the Delhi Public School-in sports, in school work, in just about everything. A question has haunted me since: how does it come about that Indians are so much poorer than Americans given that as people we are so similar in our capacities? And so I entered graduate school hoping that economics might explain, for example, why workers in the United States produce almost as much in a month as those in India produce in a year, and why the Indian population is correspondingly poor (Hall and Jones 1999). We now know that the conventional economic explanations fail: by any reasonable accounting, the differences in the capital-labor ratio and in the level of schooling of the U.S. and Indian workforces explain much less than half of the difference in productivity. It seems likely that much of the gap results from causes more difficult to measure and, until recently, less studied by economists: differences in historical experience, institutions, and conventional behaviors. These are the subject matter of this book.
Alfred Marshall's (1842-1924) Principles was the first great text in neoclassical economics. It opens with these lines:
Now at last we are setting ourselves seriously to inquire whether it is necessary that there should be any so called "lower classes" at all: that is whether there need be large numbers of people doomed from their birth to hard work in order to provide for others the requisites of a refined and cultured life, while they themselves are prevented by their poverty and toil from having any share or part in that life [T]he answer depends in a great measure upon facts and inferences, which are within the province of economics; and this is it which gives to economic studies their chief and their highest interest. (Marshall 1930:3-4)
Marshall wrote this in 1890. I suspect he would be disappointed by the progress economics made towards these lofty aims in the century that followed.
THE NEOCLASSICAL PARADIGM that Marshall helped found was ill-suited to the task he set. Its defining assumptions precluded analysis of many key aspects of economic progress and stagnation, among them the exercise of power, the influence of experience and economic conditions on people's preferences and beliefs, out-of-equilibrium dynamics, and the process of institutional persistence and change.
Drawing on the contributions of many-economists and others-this book presents a theory of how individual behaviors and economic institutions interact to produce aggregate outcomes, and how both individuals and institutions change over time. It is based on assumptions that are quite different from those that define the neoclassical paradigm. In what follows, I use the term Walrasian paradigm (for Leon Walras [1834-1910], another of the founders of neoclassical economics) in preference to the more open-ended term "neoclassical." By Walrasian I mean that approach to economics that assumes that individuals choose actions based on the far-sighted evaluation of their consequences based on preferences that are self-regarding and exogenously determined, that social interactions take the exclusive form of contractual exchanges, and that increasing returns to scale can be ignored in most applications. With some refinement, these assumptions account for the distinctive analytical successes and normative orientation of the Walrasian approach. The term paradigm refers to the core subject matter taught to students.
(Continues...)
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Table of Contents
Preface ix
Prologue: Economics and the Wealth of Nations and People 1
Part I: Coordination and Conflict: Generic Social Interactions 21
Chapter One: Social Interactions and Institutional Design 23
Chapter Two: Spontaneous Order: The Self-organization of Economic Life 56
Chapter Three: Preferences and Behavior 93
Chapter Four: Coordination Failures and Institutional Responses 127
Chapter Five: Dividing the Gains to Cooperation: Bargaining and Rent Seeking 167
Part II : Competition and Cooperation: The Institutions of Capitalism 203
Chapter Six: Utopian Capitalism: Decentralized Coordination 205
Chapter Seven: Exchange: Contracts, Norms, and Power 233
Chapter Eight: Employment, Unemployment, and Wages 267
Chapter Nine: Credit Markets, Wealth Constraints, and Allocative Inefficiency 299
Chapter Ten: The Institutions of a Capitalist Economy 331
Part III: Change: The Coevolution of Institutions and Preferences 363
Chapter Eleven: Institutional and Individual Evolution 365
Chapter Twelve: Chance, Collective Action, and Institutional Innovation 402
Chapter Thirteen: The Coevolution of Institutions and Preferences 437
Part IV: Conclusion 471
Chapter Fourteen: Economic Governance: Markets, States, and Communities 473
Problem Sets 502
Additional Readings 529
Works Cited 537
Index 571
What People are Saying About This
Homo economicus is dead, but whose Homo behavioralis will replace him? For those who care, this sustained and honest attempt to explore the implications for economic theory of one of the leading candidates is essential reading.
— Ken Binmore, University College London
This is one of the most engaging books of its kind that has been written, intellectually challenging and a pleasure to read. It presents an innovative and unconventional perspective on microeconomics and, as such, is a book that many will want to teach from—I will.
— Kaushik Basu, Cornell University
Bowles does a masterful job of expanding the boundaries of received microeconomic theory by drawing upon cutting edge ideas from behavioral and experimental economics, evolutionary game theory, and the new institutional economics. I don't know of anyone who has woven such a wide range of literature into an equally coherent vision of post-Walrasian microeconomic theory.
— Gregory Dow, Simon Fraser University
The standard neoclassical competitive model of economic behavior has been significantly extended in the last fifty years by emphasis on interaction among small groups (game theory), on extended models of human motivation based in part on human evolution, and on divergent information bases of participants. A rich but scattered literature has now received a brilliant synthesis and development in Samuel Bowles's new book. Microeconomics will be an indispensable part of future teaching in microeconomics at the graduate or advanced undergraduate levels, as well as an excellent source of information for the practicing economist.
Sam Bowles reminds the student from the first page to the last that microeconomic theory is an attempt to understand economic institutions in order to inspire us to improve the world. This book may be a turning point in bringing economics back to its real political economic roots.
— Ariel Rubinstein, Tel Aviv University and Princeton University
An important and highly original book that shows how an evolutionary version of microeconomics can be brought to bear on central questions of economic growth and organization.
— Peyton Young, Johns Hopkins University
"Sam Bowles reminds the student from the first page to the last that microeconomic theory is an attempt to understand economic institutions in order to inspire us to improve the world. This book may be a turning point in bringing economics back to its real political economic roots."—Ariel Rubinstein, Tel Aviv University and Princeton University"The standard neoclassical competitive model of economic behavior has been significantly extended in the last fifty years by emphasis on interaction among small groups (game theory), on extended models of human motivation based in part on human evolution, and on divergent information bases of participants. A rich but scattered literature has now received a brilliant synthesis and development in Samuel Bowles's new book. Microeconomics will be an indispensable part of future teaching in microeconomics at the graduate or advanced undergraduate levels, as well as an excellent source of information for the practicing economist."—Kenneth J. Arrow"Homo economicus is dead, but whose Homo behavioralis will replace him? For those who care, this sustained and honest attempt to explore the implications for economic theory of one of the leading candidates is essential reading."—Ken Binmore, University College London"An important and highly original book that shows how an evolutionary version of microeconomics can be brought to bear on central questions of economic growth and organization."—Peyton Young, Johns Hopkins University"This is one of the most engaging books of its kind that has been written, intellectually challenging and a pleasure to read. It presents an innovative and unconventional perspective on microeconomics and, as such, is a book that many will want to teach from—I will."—Kaushik Basu, Cornell University"Bowles does a masterful job of expanding the boundaries of received microeconomic theory by drawing upon cutting edge ideas from behavioral and experimental economics, evolutionary game theory, and the new institutional economics. I don't know of anyone who has woven such a wide range of literature into an equally coherent vision of post-Walrasian microeconomic theory."—Gregory Dow, Simon Fraser University