Microeconomic theory has failed to reflect changes in the real world and the ferment in economics caused by the financial crisis of 2007/08 though there have been developments that reflect new thinking about consumer choice, the Association for Heterodox Economics (AHE) conference was told last week.
“Introductory text books give us a very limited idea of what is happening in the discipline,” senior lecturer in economics at University College London Ioana Negru said. “There have been very few changes in microeconomic theory as a result of financial crisis. The microeconomic profession is a bit more monolithic in outlook and teaching than macroeconomists. There seems to be more resistance towards anything that radically changes the theory.”
“The core propositions (in microeconomic theory) are scarcity, equilibrium, rationality, preferences and methodological individualism,” said University of East Anglia professor in the school of economics Robert Sugden. “Lots of things that were seen as mainstream micro have been thrown out. But a lot has remained to a surprising extent.”
Sugden said there is evidence that individuals don’t act on coherent preferences.
Research by University of Chicago economist Richard Thaler and Harvard Law School Professor Cass Sunstein shows consumers lack well-formed preferences in the sense of preferences that are firmly held and preexist the director’s own choices about how to order the relevant items.
“They say that, (i)n many cases, individuals make pretty bad decisions, decisions that they would not have made if they had paid full attention and possessed complete information, unlimited cognitive abilities and complete self-control,” Sugden said.
Instead, conventional economists suggest that people think like Albert Einstein, store as much memory as IBM and exercise the willpower of Mahatma Ghandi, Sugden said.
“Experimental evidence shows that revealed preferences are often context-dependent and empirical psychology explains why, Sugden said.
Sugden said that this perspective has been incorporated into mainstream microeconomics.