Frontiers of Research in Economc Theory. - Review - book review

Organization Studies, Nov, 2000 by Lex Hoogduin

Lex Hoogduin [*]

D.P. Jacobs, E. Kalai and M.I. Kamien (eds.): Frontiers of Research in Economc Theory. The Nancy L. Schwartz Memorial Lectures, 1983-1987 (Econometric Society Monographs 29)

1998, Cambridge: Cambridge University Press. 274 pages.

This book contains the annual lectures in memory of Nancy L. Schwartz delivered between 1983 and 1997 at the J.L. Kellog Graduate School of Management of Northwestern University. Only Kenneth Arrow's lecture of 1992 on 'Information and Returns to Scale' could not be reproduced. Morton Kamien (one of the editors) provided an introduction to Nancy Schwartz's contributions to economic theory.

Well-known economists such as Robert Aumann, Robert Lucas, Gary Becker, Roy Radner, and others, delivered the fourteen lectures, printed here as separate chapters. Being lectures, the language is not too technical, although one often needs some mathematical background to fully understand the arguments. Nonetheless, the book is very readable. A wide variety of topics are presented in the lectures. The authors present theoretical, experimental and empirical analyses of topics such as decision making under uncertainty and under full and bounded rationality, the influence of economic incentives and habits, and the effects of learning and evolution on dynamic choice. Perfect competition, economic development, social insurance and mobility, and negotiation and economic survival are other major economic subjects analyzed with a view to advancing our understanding of economic behaviour.

It is beyond the scope of this review to discuss all the individual chapters of the book. The different lectures can well be read separately. They are interesting in themselves, because of the topics they deal with and the often elegant way in which this is done. However, they also belong together and it makes sense to publish them in one book and read them together. Publishing them in one volume is not only an appropriate tribute to Nancy Schwartz, but there is also added value from the perspective of the substance contained.

To my mind, there is a common theme running through this book. The title -- Frontiers of Research in Economic Theory -- captures it, to a certain extent. It is true that most of the lectures deal with topics at the borders of our knowledge. However, this is not the full story as this does not summarize more precisely what is also at stake at a more abstract level in many of the lectures. To get a better feeling of the common thread of this book, one should add that, in many cases, the issues dealt with are fundamental to economic research. The boundaries of the 'standard' economic approach are examined in many areas and in several ways. Without mentioning this too explicitly, the book is thus also about the methodology of economics. The 'standard' approach in economics could be loosely defined in the following way. The world is inhabited by economic agents, who maximize a well-behaved utility function (consumers) or their profits (producers). Consumers are able to rank their preferences, and producers to base their production decisions on (expected) demand and cost. Uncertainty can be described by quantitative probability density functions. Economic agents are fully rational. They make consistent decisions, do not make logical mistakes, have an unlimited capacity to process information, do not forget anything and do not do anything which goes against their own interest. Economic subjects have a lot of knowledge and learning is a conscious, highly rational process. History and culture do not really matter. The economic agent is not driven by emotions, but by rational calculations. Economic knowledge is universal and independent of time and space. The individual economic agent is the focus of analysis, even if the economist is dealing with the economy as a whole (macroeconomics). In the latter case, the representative agent assumption is often made.

In principle, economics is capable of dealing with many issues. If a decision problem involves scarce resources, it can be analyzed using the economics apparatus. Economics is the logic of choice. In practice, however, economics deals with many issues, but many topics that could be dealt with by economists are often left to other sciences, such as law, sociology, history and psychology.

Economic analysis has a highly deductive and mathematical character. Empirical analysis is conducted with the help of statistical techniques, such as regression analysis. Often, experiments are not seen as a fruitful way of acquiring knowledge. Economists do not work much in laboratories and economic theories are not very easily refuted in empirical analysis. This is because of the complex character of the economic process. It is very difficult to control for changes in factors other than those that are the subject of the empirical examination. It is also connected with the fact that the core assumptions, such as those relating to rational behaviour, are not directly tested and are difficult to reject in statistical analysis. Some would even go as far as claiming that the most basic assumptions are irrefutable.