Home Economics Generalized Microeconomics
This publication summarizes the results of more than ten years of theoretical research in the field of microeconomics at the Faculty of Social Sciences at Charles University in Prague. The objective of this research was to generalize microeconomics so as to enable modelling of economic rationality even in fields that standard microeconomics more or less avoids. These fields are not insignificant. For example, roughly half the financial transactions in a modern economy (including donor activities) involve redistribution. The profit maximization assumption makes it impossible to gain a microeconomic modelling insight into centrally planned economies and above all into the non-profit sectors of market economies. The same can be said for externalities (both positive and negative).
In our view, abandoning the homo economicus paradigm — in the sense of replacing it with a different paradigm with a different (alternative) agent criterion function that conflicts with profit maximization — is an impassable route and one that bypasses the treasure trove of knowledge of standard economics.
We have opted for a different path: we try to broaden the scope of microeconomics in order to capture the activity of non-profit institutions while treating standard profit/utility maximization as a special case. In other words, instead of abandoning the homo economicus paradigm, we generalize it. This generalization complements rather than challenges standard microeconomics. Where the homo economicus modelling approach can reasonably be applied, we do not feel the need to abandon it. We venture beyond the boundaries of this standard microeconomic paradigm primarily where non-profit institutions operate and where, simultaneously, economic activity can be both rational and irrational.
For us, the generalizing criterion is "Darwinian” maximization of the probability of survival. This criterion is not necessarily considered explicitly by individual agents in their everyday decision-making, but if they do not respect it they will not survive in the long run.
The decision-optimization principle contained in the homo economicus paradigm conceals an assumed preference for a situation lying on the very boundary of the set of feasible solutions. Unless a homo economicus agent [a model producer or a model consumer) can estimate how the parameters of his decision-making problem are going to evolve, he will opt for a situation lying on the boundary of his production or consumption possibilities.
This is perhaps one of the most contentious aspects of neoclassical microeconomics, since producers, for example, will in reality tend to have a legitimate distrust of, or even aversion to, extreme situations located at the limits of technological or financial feasibility and will therefore prefer production situations that lie inside the set of feasible solutions. Being at the boundary is risky, as even a small change in the parameters of a decision-making problem can generate technological inconsistency.
An even stronger preference for a solution that is an internal point of the set of feasible solutions can be assumed in the case of legal constraints. Balancing on the boundary of legal admissibility usually entails a lot of extra non-productive effort and costs. This applies most of all to small firms, which cannot afford expensive lawyers.
The decision-taker also has to ensure that his behaviour is understood by others and does not disrespect established practices. Here again, maximization of profit (personal gain) in accordance with the homo economicus model behaviour leads inevitably to situations lying on the boundary of social and moral admissibility, situations where cooperation collapses, social relations become chaotic, and conflicts and disputes break out with such frequency that resolving them can hardly be described as efficient expenditure of human energy and other scarce resources.
In our view, the standard homo economicus economic paradigm does not offer enough scope to cover all the ways in which economic agents behave. In line with Sen, we cannot accept the economic behaviour described by the homo economicus paradigm as a requirement for rationality of economic agents.
Efforts to cover a wider context than the purely liberal neoclassical paradigm are not new, of course. In the next section we mention (briefly and without aiming to be comprehensive) some of the trends in economic theory in this sense.