economic theory: some criticisms and discussions

overlook social structure:

Economic action and social structure: The problem of embeddedness M Granovetter – American journal of sociology, 1985

The impact of social structure on economic outcomes M Granovetter – The Journal of economic perspectives, 2005

Market, culture, and authority: A comparative analysis of management and organization in the Far East GG Hamilton, NW Biggart – American journal of Sociology, 1988

a response: Capitalism and freedom M Friedman – 2009

not descriptive but normative 

Economics language and assumptions: How theories can become self-fulfilling F Ferraro, J Pfeffer, RI Sutton – Academy of Management Review, 2005

Constructing a market, performing theory: The historical sociology of a financial derivatives exchange D MacKenzie, Y Millo – American journal of sociology, 2003

Bad management theories are destroying good management practices S Ghoshal – Academy of Management learning & education, 2005

Why do bad management theories persist? A comment on Ghoshal J Pfeffer – Academy of Management Learning & Education, 2005


Marwell, G., & Ames, R. E. 1981. Economists free ride, does anyone else? Journal of Public Economics, 15: 295–310

Cadsby, C. B., & Maynes, E. 1998. Choosing between a socially efficient and free-riding equilibrium: Nurses versus economics and business students. Journal of Economic Behavior and Organization, 37: 183–192.


Carter, J. R., & Irons, M. D. 1991. Are economists different, and if so, why? Journal of Economic Perspectives, 5(2): 171–177.


Frank, R. H., Gilovich, T. D., & Regan, D. T. 1993. Does studying economics inhibit cooperation? Journal of Economic Perspectives, 7(2): 159–171.


Frank, B., & Schulze, G. G. 2000. Does economics make citizens corrupt? Journal of Economic Behavior and Organization, 43: 101–113.


Irrational behavior and economic theory GS Becker – Journal of political economy, 1962

Rational fools: A critique of the behavioral foundations of economic theory AK Sen – Philosophy & Public Affairs, 1977

Allocative efficiency of markets with zero-intelligence traders: Market as a partial substitute for individual rationality DK Gode, S Sunder – Journal of political economy, 1993



Information Equilibrium as an Economic Principle Jason Smith


Update 2017/09/06

After a long history of avoiding the morality factor, economists are beginning to include it in their work

Economists concern with economic efficiency not spiritual uplift; human choices and incentives, not human values. → They have indeed tended to leave aside questions of morality to philosophers and theologians.

→ In some cases that’s because they think, on ideological grounds, that it has no place in the discipline.
→ But even more thoughtful and less dogmatic economists have tended to shy away from the question on the grounds that moral values are tricky to pin down, much less quantify.

Economists’ research agendas can be moral stuff: market failures, welfare, government intervene, public goods, education, tax, inequality → but all based on theoretical models which generally have no place for morality

Bold attempts to put morality into theoretical economical modelling:

1] Oliver Hart: a new paper: the personal morality of shareholders → might affect the behaviour of the companies in which they invest → [whether maximise profits or sacrifice some profit for the sake of behaving in a socially responsible manner ]
← incentives in the system of stock-market – the psychology of shareholders and the pressures on managements

2] Jean Tirole: outlined  a theoretical framework to model behaviour: how certain popular “narratives” can inhibit people from doing normally right thing
“Economics is fundamentally a moral and philosophical science, embedded in the larger social sciences” → trying radical new approaches.

1] There are plenty of holes in these very simple models and the broad-brush assumptions about people’s decision-making processes
2] all in all, economics may generate particular value more in analysing the behaviour of broadly self-interested individuals in markets rather than trying to build models that factor in more complex human motivations
=> At least now some of them are trying to offer a better “normative” impact on society.

Adam Smith in The Theory of Moral Sentiments:
“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it,”


Update 2017/09/15

Too many models, too many many models

A case on an extension of prospect theory

“The point here is that the KR model was produced to offer an acceptable looking (to economists) way of determining the reference point, and then justified with some typically vague intuitive statements about its plausibility. All of this was done in place of a serious investigation into the mathematical properties of the model, its relationship to similar existing models, its implications for behaviour and a discussion of the conditions under which it would work and fail. “

And a case on life cycle model of consumption and savings → complex utility functions

“Economists may say ‘we use the models to explain one particular thing — like large scale gambling behaviour, or the macro consumption data, not to explain everything!’
Firstly, this could be better specified in classes and papers, as currently it is absent from both and therefore seems like an ad hoc response to this type of criticism. Secondly, the point of these complicated microfounded models are to show us how individual behaviour leads to macroeconomic behaviour. If the individual behaviour in the models is implausible then they are not advancing our understanding in that respect.”

“the impetus of theoretically-informed research is to understand or explain a particular class of observations. A model is formulated to do so, and once the researcher is confident that the model is plausibly related to the phenomena in question, they stop investigating its properties. Most models are left unexamined beyond the paper in which they are written, and even popular ones are rarely dissected at both the macro and micro levels to tease out their full implications. But this creates a tension whereby it is insisted that this type of model is necessary for understanding behaviour, yet the models’ implications for behaviour are not fully understood.”

“As for understanding individual behaviour, I think the use of utility functions in the face of risk/uncertainty is basically a dead end based on a mathematical error, and there are much simpler alternatives”



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