- Elgar original reference
Edited by Richard Arena, Agnès Festré and Nathalie Lazaric
Chapter 9: The Cognitive Explanation of Economic Behavior: From Simon to Kahneman
Massimo Egidi 9.1 INTRODUCTION: ARE ‘RATIONAL AGENTS’ CONSCIOUSLY RATIONAL? The ‘marginalism’ debate emerged in the late 1930s after several studies – one by the Oxford Research Group (see Hall and Hitch, 1939) and another by R.A. Lester (1946) had argued that, empirically, it was not apparent that entrepreneurs followed the marginalist principles of profit maximization/cost minimization in running their firms. In particular, they found that many firms [were] conducting ‘full cost’ pricing rules and routines and [moreover] that predicted falls in employment as a result of higher wages were not evident. They consequently questioned the relevance of the profit-maximization assumption in Neoclassical theories of the firm. (History of Economic Thought website, http://www.newschool.edu/nssr/het/ essays/product/Maxim-2.htm#old) The debate elicited by the Oxford Research Group was related to a conceptual difficulty of marginalistic approach: the question if it is reasonable to believe that entrepreneurs, and more generally economic subjects, follow the profit-maximization principle in running their affairs, provided that maximization may require specific knowledge and high computational complexity. We shall briefly sketch this debate later, but it is useful to anticipate an essential point raised by Harrod (1939) in his defence of marginalism. He responded to the criticisms by claiming that profit maximization was not observed in many firms partly because the information necessary for such calculations was hard to obtain. But, he added, the ‘best’ decisions would nonetheless arise from a process of ‘natural selection’. In this way Harrod introduced an evolutionary justification of rationality, to overcome the conceptual difficulty of attributing to...
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