Posted by: Dirk | December 17, 2013

Neuroscientific foundations of microeconomics?

The book ‘Self comes to Mind’ by Antonio Damasio offers an interesting take on some of the questions that modern (micro)economics does not answer, or even more, declines to ask. The questions of who we are and how we are, perhaps even how many, are microeconomic questions. Today’s microeconomics had been built on the idea of rational choice, which itself is based on a book named ‘The Economic Approach to Human Behavior’ by Gary Becker. Here is an extract from page 5:

I content that the economic approach is uniquely powerful because it can integrate a wide range of human behavior. [..] Everyone recognizes that the economic approach assumes maximizing behavior more explicitly and extensively than other approaches do, be it the utility or the wealth function of the household, firm, union, or government bureau that is maximized. [..] Since economists generally have had little to contribute, especially in recent times, to the understanding of how preferences are formed, preferences are assumed not to change substantially over time, nor to be very different between wealthy and poor persons, or even between persons in different societies and cultures.

The book by Damasio is an attack on this kind of thinking, even though he does not seem to be aware of it. Of course, microeconomics like it is taught today is not general knowledge even inside the wider science community where even half of the social sciences seems to disagree with the idea of rationality as put forward by Becker. Let me give you some brief snippets of Damasio in order to highlight the differences. We start with the question of whether we as human beings are objective (p. 13 [all page numbers refer to the Vintage edition]):

In brief, our only direct view of the mind depends on a part of that very mind, a self process that we have good reason to believe cannot provide a comprehensive and reliable account of what is going on.

This connects to ideas of reflexivity in social processes and reminds me of the theory of reflexivity put forward by George Soros (and which I discuss at some length here). We are trying to understand reality and by this create a part of reality, which influences reality. Social matters are thus more complicated than just assuming utility functions that are a. given, b. not subject to change and c. independent from the utility functions of others.

What follows in Damasio’s book is the idea of the self as the manager of life, which thus leads him to ‘the mechanics of life management’ (p. 41). On the next page one of the core ideas of the book is developed:

Life requires that the body maintain a collection of parameter ranges at all costs for literally dozens of components in its dynamic interior. All the management operations to which I alluded earlier – procuring energy sources, incorporating and transforming energy products, and so forth – aim at maintaining the body’s chemical parameters of a body’s interior (its internal milieu) within the magic range compatible with life. The magic range is known as homeostatic, and the process of achieving this balances state is called homeostatis.

This idea is something which I have seen in economics already. Here is Axel Leijonhufvud 2009 at

It is the case, however, that all other known complex dynamical systems, whether human-made or occurring in nature, are known to have the property that their homeostatic capabilities are bounded. It is extremely unlikely that the economy would be different in this regard.

Leijonhufvud is talking about the macroeconomy, not the microeconomy. Let us return to the book by Damasio nevertheless. On page 46, under the heading of ‘Biological Value’, Damasio writes:

As I see it, the most essential possession of any living being, at any time, is the balanced range of body chemistries compatible with healthy life. It applies equally to an amoeba and to a human being. All else flows from it. Its significance cannot be overemphasized. [..] We all have an idea, or perhaps several ideas, of what the word value means, but what about biological value? [..]

Damasio discusses scarce items and price tags next, and how these items would help us achieve our balances range of body chemistries. In that part, he is not too far away from modern microeconomics after Becker. In chapter 5 then there is a break:

In the quest to understand human behavior, many have tried to overlook emotion, but to no avail. Behavior and mind, conscious and not, and the brain that generates them, refuse to yield their secrets unless emotion (and the many phenomena that hide under its name) is factored in and given due.

On page 114, Damasio describes fear as ‘nothing but a false alarm induced by a culture gone awry’. So, there is some path dependency and the utility function, while given, is not leading to good results in all cases. This opens up some space for the discussion of whether utility preferences should be taken as a black box that should not be opened, as much of modern microeconomics does.

So much for now, I will continue this post another day.


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