The Methodenstreit between neoclassical and behavioural economics and its consequences Vladimir Avtonomov National Research University “Higher School of Economics”, Institute of World Economy and International Relations, Russian Academy of Sciences Moscow, Russia

The Idea of Two Canons, differing by the degree of abstraction John Neville Keynes The Scope and Method of Political Economy (Science and Art of Economics) Erik Reinert “How Rich Countries Got Rich…And Why Poor Countries Stay Poor”. Constable, London. 2007

The First canon more abstract deductivist based on metaphors and models borrowed from natural sciences (such as equilibrium, homo oeconomicus etc.) aiming at obtaining universal truths applicable to all the historical and geographical contexts. objective – to produce a scientific economic theory claims the autonomy from other social sciences

The Second canon less abstract based on everyday experience, plurality of human motivation aimed at specific local and temporal situations objective is to produce a useful economic theory not strictly separate from other social sciences

Composition of canons The First: physiocracy, classical and neoclassical economics Quesnay, Ricardo, Samuelson, Debreu The Second: mercantilist literature, historicism, American institutionalism, German Ordoliberalism etc. List, Schmoller, Commons, Keynes (but not neokeynesians), Eucken

The problems with canons The first canon – scientific (profound) but not realistic enough The second canon – realistic but not scientific enough(superficial)

General theory of Methodenstreits Methodenstreits: marginalism vs. historicism; neoclassical economics vs. behavioural economics etc. MS emerge when there is a breakthrough in one of the canons : a new technique of analysis is invented

General theory of Methodenstreits - 2 During a MS both canons tend to exaggerate their differences, but this helps to draw attention to important methodological problems. After a MS both canons try to approach these problems with their own or the opponents’ means.

MS «behavioural economics vs neoclassical synthesis» Stage 1 H. Simon’s Procedural rationality theory and Bounded rationality model as a challenge to assumptions of mainstream neoclassical microeconomics. G.Katona’s intervening (subjective) variables as an alternative to mainstream Keynesian macroeconomics.

Mainstream’s reaction If information costs are taken into account, Simon’s problem can be modeled as a maximizing one. Katona’s intervening variables can be approximated and endogenised with the help of objective variables

MS result The differences of positions was exaggerated, behavioural economics remained on the perifery. Simons’s Nobel prize (1978) as a recognition?

Annaeherungsstrategien on the side of behavioural economics 1 A model alternative to neoclassical rational choice model – prospect theory of Kahneman and Tversky. (1979)

Annaeherungsstrategien on the side of behavioural economics 2 Emergence of Neuroeconomics – new techniques of analysis – a possibility for a new MS.

Annaeherungsstrategien on the side of behavioural economics 3 Application to policy – new paternalism (ambivalent – recall the history of Keynesianism)

Annaeherungsstrategien on the side of neoclassical economics1 Using experimental methods new rules were designed that allowed people to behave more rationally (experimental economics) Vernon Smith

Annaeherungsstrategien on the side of neoclassical economics2 Attempts to model anomalies and other strange behaviours with own tools: economics of envy, economics of attention etc.

Annaeherungsstrategien on the side of neoclassical economics3 Not the rival’smethods but general vison was adopted – imperfections of information: Assymetry of information paradigm: Principal agent models, information economics.

This is the main way for economic science to become more realistic