Abstraction in economics: incorporating the time dimension.

1. Introduction

The timeless homo economicus abstraction remains dominant in economics, despite a range of criticisms of its use over the years since Veblen (1898) launched his well-known attack. Many institutionalists, post-Keynesians, neo-Austrians and social economists have insisted that economic analysis must be conducted in an explicit historical context, where the difficulties which economic decision-makers face, because of time irreversibility, structural change and fundamental uncertainty, are taken into account, as well as noneconomic influences on economic behaviour. Understandably, there has been a reluctance to construct a competing abstraction with formal properties which are comparable to those of the homo economicus construct. It is argued in this paper that the development of an alternative behavioural abstraction constitutes an important goal, both in terms of clarifying the limitations of homo economicus and providing an analytical basis on which investigations of economic behaviour in historical time can be built.

Habits of thought in mainsteam economics centre on a common set of abstract principles, aiding communication and pedagogic endeavours within its boundaries. There is little doubt that some of the principles contained within the neo-classical paradigm constitute useful insights in specific circumstances, as was stressed by Alfred Marshall a century ago. Also, there are general principles offered which enhance the capabilities of a student to understand economic behavior: the concept of opportunity cost being an outstanding example. Abstraction is unavoidable, what really matters is whether it provides an adequate characterisation of the of economic processes unfolding in history. Following Caldwell (1982), Duhem-Quine and many other coherent objectors to positivism, we need no longer see abstraction as only mathematical formalism in the service of hypothesis testing. A pluralistic, or non-dualistic, methodological approach, as advocated by Dow (1990), can embrace abstraction along with other dimensions of scientific enquiry Abstraction can be mathematical in character, if that is what is necessary to answer particular questions. Lawson (1989), from a "critical realist" perspective, explains how stylised abstractions can be used as part of a methodology which deals, explicitly, with economic processes in open systems and historical time.

In Section 2 a brief discussion of the homo economicus abstraction and its critiques will be presented. No attempt will be made to review the rather large literature on this subject. Readers are encouraged to read Foster (1987) and Etzioni (1988) for such reviews, from the perspective of an applied economist and an applied sociologist respectively. Hodgson (1988) offers the most comprehensive review, beginning with the critique of Veblen (1898). The objective here is to enquire, not into the realism of homo economicus, but rather into the role of this abstract construct in economics and in the wider socio-political context. In Section 3, related questions of the role of ethics and non-materialist approaches to the analysis of economic behaviour are discussed. Section 4 focuses on neo-Austrian subjectivism and its relationship to the economic philosophy of John Maynard Keynes. In Section 5, the abstract differences between neo-Austrians and post-Keynesians are identified. Section 6 begins the quest for a new characterisation with an introduction to the "self-organisation" approach to behaviour. Section 7 presents the beginnings of an abstraction of economic behaviour which can capture the essence of evolutionary economic change in open economic systems. In Section 8 the paper concludes with a final defence of abstract characterisations of economic behaviour.

2. Homo Economicus: a durable abstraction

Over the past quarter of a century there has been a constant flow of criticism of the individualistic, utility-maximising, information-rich, equilibrium characterisation of the economic agent. This criticism has come from within and outside the economics discipline. Radical economists have challenged individualism itself, offering, instead, homo sociologicus and arguing that collectively organised interest groups are the relevant behavioural units. Less radical economists have argued merely that utility functions of individuals display interdependence and show that this is sufficient to generate quite different predictions as to how economic agents will behave. However, others have attacked the utility notion itself, arguing that it is a static and tautological basis for analysis at any level of behavioural aggregation. Some have preferred to challenge the information-richness presumption, arguing that information shortages generate satisficing, habitual and rule bound behaviour. Much of the discussion of homo economicus involves a simultaneous evaluation of the Walrasian market equilibrium construct which is also found to be timeless and implausible as a basis for understanding economic co-ordination in history.

Even in the mainstream, imperfect competition, asymmetric and incomplete information have come to be accepted as a better approximation to reality. However, weakening the strength of competition has led to a shift in theorising towards strategic behaviour, rather than an abandonment of homo economicus. The deterministic accounts of homo economicus operating smoothly in clearing sets of auction markets has given way to a complex tangle of situation-specific game theoretic models where there is little hope of isolating general abstract principles which can link micro-behaviour to macro-outcomes. It has become obvious that the homo economicus abstraction depends critically on a strong economic co-ordination hypothesis to sustain its analytical usefulness.

Critics who have replaced the clearing auction market assumption with imperfect competition have had their criticism turned against them by those, such as Milton Friedman, who have argued that the very delineation of economics from other social sciences centres on the vision of homo economicus operating in competitive market contexts and that such abstractions should be measured by their usefulness rather than their realism (see Friedman, 1953). This position hardened into the "new Classical" position in the 1980s which holds that "rational" models must be realistic, not because of empirical support but because of the force of logic (see Hoover, 1988). Thus, despite the many objections to the homo economicus abstraction that have been expressed, there has been a general expansion of its use, particularly in the development of the "micro-foundations" of macroeconomics.

For those interested in economic methodology and the history of economic thought, this situation can be puzzling. Why should orthodox economists retreat into an abstraction that renders them less able to understand real world phenomena or to prescribe specific cures for particular problems? A possible explanation is that an abstraction is favoured when it conforms to a central socio-political belief system. Methodological individualism and market clearing analysis fit very well into the underlying capitalist version of post-enlightenment materialist beliefs. As with religious beliefs, it is an advantage to remain in the abstract and to engage in tautological exercises to interpret the meaning of events. Furthermore, mathematicians, like all skilled illusionists, are free to use their sleight of hand to play tricks with our perception and preconceptions. When economic theorists are viewed as more akin to clever illusionists, rather than scientists, we can begin to understand why there is so much resistance to the infusion of entirely reasonable cultural, sociological and psychological modifications to homo economicus.

Non-economist critiques of homo economicus tend to be approached from the perspective of the discipline in question. Recognising the high ground held by economics in the materialist belief system, such critics rarely try to replace the economistic paradigm but rather an appeal is made for more interdisciplinary economic analysis. This is rarely successful in ideologically sensitive areas such as macroeconomics. For example, the admission of too much sociology in this influential area runs the risk of leading to analysis which is perceived as too close in spirit to Marxism, the other main strand of the post-enlightenment materialist beliefs. Only in extremely specific areas in microeconomic analysis are non-economic influences allowed to enter explicitly. Psychological influence in consumer economics is an example, but, even there, considerable resistance is encountered (see Earl, 1983).

The desire to share the high ground with economists has, instead, often led to the adoption of the homo economicus abstraction in other social science disciplines by aspirants keen to apply prestigious mathematical approaches to methodological individualism. Thus, this timeless economic idealisation has become increasingly influential in other social sciences, as well as in the biological sciences (see Foster, 1994a). However, it has been in its prescriptive, rather than its scientific, role that it has had most impact in the socio-political system. Social scientists have recognised this for a long time. For example, Ishboldin (1958), writing in the 1930s, argued that the very survival of capitalism in the face of totalitarian threat depended on the promulgation of such a libertarian economic myth. In the 1960s, Marcuse (1964) also recognised the ideological importance of the economic myth but came to radically different conclusions as to its ability to liberate individual believers. Like Fromm (1956) in social psychology, he saw materialism as an over-successful post-enlightenment system of beliefs, fired by both capitalist and Marxist ideology

Each of such writers saw economics directly in terms of culture, ethics or values. Prescriptions for the problems brought on us by homo economicus are usually seen as soluble in terms of altering belief systems. Often religious values are prescribed: Schumacher (1977) offered enlightened Christianity, Pirsig (1974) appealed to Zen Buddhism, Fromm (1978) enthused about humanism, to cite …