The Relationship between Psychology and Economics: Insights from the History of Economic Thought

Drakopoulos, Stavros A. and Katselidis, Ioannis (2017): The Relationship between Psychology and Economics: Insights from the History of Economic Thought.

Abstract

Psychological ideas had always played a role on the formation of economic thought as can be seen in the works of many influential pre-classical and classical authors. Up to the beginning of the 20th century, there was almost no methodological objection regarding the incorporation of ideas from psychology into economic theories. After this period, a fundamental shift in mainstream economics took place which is also known as the Paretian turn. This conceptual change, initiated mainly by Vilfredo Pareto and completed with the emergence of the theories of choice in the first decades of the 20th century, attempted to expel all psychological notions from economic theory. However, in the last three decades, the increasing appeal of subjective well-being research and especially of the new behavioral economics, re-brought the topic onto the surface. In order to better comprehend and to contribute to the recent discussion concerning the relationship between the two disciplines, the study of relevant views found in history of economic thought is necessary. The paper starts with a brief sketch of the history of the relationship between economics and psychology, focusing also to the recent literature which points to a reconsideration of this relationship. After an examination of psychological ideas found in influential pre-marginalist writers, the paper discusses the arguments supporting the case for the interaction between the two fields. It also suggests that the work of Richard Jennings can be seen as the peak of the early interaction between economics and psychology. Finally, it considers the relevance of these arguments for the current debate concerning the relationship between economics and psychology.

• Item Type: MPRA Paper
• Language: English
• Keywords: History of Economic Thought, Economics and Psychology, Economic Methodology; Relation of Economics to other Disciplines
• Subjects: A - General Economics and Teaching > A1 - General Economics > A12 - Relation of Economics to Other Disciplines; B - History of Economic Thought, Methodology, and Heterodox Approaches > B0 - General > B00 - General; B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B40 - General

References

Angner, E. and Loewenstein, G. (2012), “Behavioral economics”, in U. Mäki (ed.) Philosophy of Economics, Amsterdam: Elsevier, pp. 641-690.

Antonides, G. (1996), Psychology in Economics and Business: An Introduction to Economic Psychology, Dordrecht/Boston/London: Kluwer Academic Publishers.

Arrow, K. and Debreu, G. (1954), “Existence of an equilibrium for a competitive economy”, Econometrica, 22: 265–290.

Arrow, K. and Hahn, F. (1971), General Competitive Analysis, San Francisco: Holden-Day.

Baddeley, M. (2013), Behavioural Economics and Finance, London and New York: Routledge.

Banfield, T. C. (1844/1848), The Organization of Industry, Explained in a Course of Lectures Delivered in the University of Cambridge in Easter Term, 1844, 2d ed. London: Longman, Brown, Green, & Longmans.

Bensusan-Butt, D. (1978), On Economic Man, Camberra: Australian National University Press.

Bentham, J. (1823), An Introduction to the Principles of Morals and Legislation, Oxford: Clarendon Press.

Bentham, J. (1882), Theory of Legislation, London: Trubner and Co.

Bruni, L. (2010), “Pareto’s legacy in modern economics. The case of psychology”, Revue européenne des sciences sociales (European Journal of Social Sciences), XLVIII-146: 93-111.

Bruni, L. and Guala, F. (2001), “Vilfredo Pareto and the epistemological foundations of choice theory”, History of Political Economy, 33: 21-49.

Bruni, L. and Sugden, R. (2007), “The road not taken: How psychology was removed from economics, and how it might be brought back”, The Economic Journal, 117: 146-173.

Cairnes, J. E. (1857/1869), The Character and Logical Method of Political Economy, London: Longman, Brown, Green, Longman, & Roberts.

Caldwell, B. (2013), “Of positivism and the history of economic thought”, Southern Economic Journal, 79: 753-767.

Camerer, C. and Loewenstein, G. (2004), “Behavioral Economics: Past, Present, Future”. In: Advances in behavioral economics. Roundtable series in behavioral economics. Princeton, N.J: Princeton University Press, pp. 1-61.

Camerer, C., Loewenstein, G. and Prelec, D. (2005), “Neuroeconomics: how neuroscience can inform economics”, Journal of Economic Literature, XLIII, March: 9-64.

Clark, A., Frijters, P., and Shields, M. (2008), “Relative income, happiness and utility: an explanation for the Easterlin paradox and other puzzles”, Journal of Economic Literature, 46: 95–124.

Coats, A. W. (1976), “Economics and psychology: the death and resurrection of a research program”, in S. Latsis (ed.), Method and Appraisal in Economics, Cambridge: Cambridge University Press, pp. 43-64.

Condillac, E. B. (1776/2008), Commerce and Government Considered in Their Mutual Relationship, Indianapolis: Liberty Fund.

Davis, J. B. (2003), The Theory of the Individual in Economics: Identity and Value, London: Routledge.

Dickinson, Z. C. (1922), Economic Motives: A Study in the Psychological Foundations of Economic Theory, with some Reference to other Social Sciences, Cambridge, Mass.: Harvard University Press.

Drakopoulos, S. A. (1991), Values and Economic Theory, Aldersot, UK: Gower.

Drakopoulos, S. A. (1997), “Origins and development of the trend towards value-free economics”, Journal of the History of Economic Thought, 19: 286-300.

Drakopoulos, S.A. (2012), “The history of attitudes towards interdependent preferences”, Journal of the History of Economic Thought, 34: 541-557.

Drakopoulos, S.A. (2016), Comparisons in Economic Thought: Economic interdependency reconsidered, London: Routledge.

Düppe, T. (2011), “How economic methodology became a separate science”, Journal of Economic Methodology, 18(2): 163-176.

Earl, P. (1990), “Economics and psychology: A survey”, The Economic Journal, 100: 718-55.

Earl, P. (2005), “Economics and Psychology in the twenty-first century”, Cambridge Journal of Economics, 29: 909-926.

Earl, P. (2016), “The Evolution of Behavioural Economics” in Roger Frantz (ed.) Handbook of Behavioural Economics, London: Routledge, pp.5-17.

Edgeworth, F. Y. (1877), New and Old Methods of Ethics or “Physical Ethics” and “Methods of Ethics”. Oxford: James Parker and Co. Also in Newman (ed.) (2003).

Edgeworth, F. Y. (1881), Mathematical Psychics: An Essay of the Application of Mathematics to Moral Sciences, London: Kegan Paul.

Fehr, E. and Schmidt, K. (1999), “A theory of fairness, competition and cooperation”, Quarterly Journal of Economics, 114: 817–868.

Fisher, I. (1892/1965), Mathematical Investigations in the Theory of Value and Prices, New Haven: Yale University Press.

Frantz, R. (2009), (ed.), Renaissance in Behavioral Economics: Essays in Honour of Harvey Leibenstein, London: Routledge.

Frey, B. (2008), Happiness: A Revolution in Economics, Cambridge, MA: The MIT Press.

Frey, B. and Benz, M. (2004), “From Imperialism to Inspiration: A Survey of Economics and Psychology”, in Davis, John, Marciano, A. and Runde, J. (Eds.). The Elgar Companion to Economics and Philosophy, pp. 61-83.

Friedman, M. (1953), “The methodology of positive economics”, in Essays in Positive Economics. Chicago: University of Chicago Press, pp. 3–43.

Georgescu-Roegen, N. (1983), Hermann Heinrich Gossen: His Life and Work in Historical Perspective. In: (Gossen, 1854/1983).

Gossen, H. H. (1854/1983), The Laws of Human Relations and the Rules of Human Action Derived Therefrom, Cambridge, Mass.: MIT Press.

Hands, Wade (2010), “Economics, Psychology, and the History of Consumer Choice Theory”, Cambridge Journal of Economics, 34 (4): 633-648.

Hergenhahn, B. R. (2009), An Introduction to the History of Psychology, Sixth edition, Wadsworth Cengage Learning.

Hobbes, T. (1651/1962), Leviathan, New York: Macmillan.

Hume, D. (1748/1957), An Enquiry Concerning the Human Understanding (L. A. Selby-Bigge, Ed.), Oxford: Clarendon Press.

Jaffe, W. (1976), “Menger, Jevons and Walras De-homogenized”, Economic Inquiry, 4: 511-524.

Jennings, R. (1855), Natural Elements of Political Economy, London: Longman, Brown, Green and Longmans.

Jevons, W. S. (1871), The Theory of Political Economy, London: Macmillan.

Kahneman, D. and Tversky, A. (1979), “Prospect theory: an analysis of decision under risk”, Econometrica, 47: 263–291.

Kahneman, D., Slovic, P. and Tversky, A. (1982), Judgment under Uncertainty: heuristics and biases, New York: Cambridge University Press.

Karayiannis, A. D. (2001), “Behavioural Assumptions in Nassau Senior's Economics”, Contributions to Political Economy, 20: 17-29.

Lewin, S. (1996), “Economics and psychology: lessons for our own day from the early Twentieth Century”, Journal of Economic Literature, Vol. XXXIV: 1293-1323.

Lloyd, W. F. (1833/1834), A Lecture on the Notion of Value as Distinguished Not Only from Utility, but also from Value in Exchange, London: Roake and Varty, 31, Strand; Oxford: J.H. Parker; Cambridge: J. and J.J. Deighton.

Locke, J. (1706/1974), An Essay Concerning Human Understanding, A. D. Woozley (Ed.). New York: New American Library.

Longfield, M. (1833), Lectures on Political Economy, Dublin: William Curry, Jun. and Company.

Loomes, G. and Sugden, R. (1982), “Regret theory: An alternative theory of rational choice under uncertainty”, Economic Journal, 92(4): 805–824.

McLure M. (2010), “Pareto, Pigou and Third-party Consumption: Divergent approaches to welfare theory with implications for the study of public finance”, European Journal of the History of Economic Thought, 17: 635-57.

Mill, J. (1829/1869), Analysis of the Phenomena of the Human Mind, London: Longmans Green Reader and Dyer.

Mirowski, P. (1989), More heat than light: Economics as Social Physics, Physics as Nature’s Economics. Cambridge, UK: Cambridge University Press.

Muramatsu, R. (2009), “The death and resurrection of ‘economics with psychology’: remarks from a methodological standpoint”, Revista de Economia Politica, 29 (1): 62-81.

Nagatsu, M. (2015), “History of Behavioral Economics”, International Encyclopedia of the Social & Behavioral Sciences, Second Edition, Elsevier, pp. 443–449

Newman, P. (1987), Edgeworth, Francis Ysidro. In J. Eatwell, M. Milgate and P. Newman (eds), The New Palgrave: A Dictionary of Economics, vol. II. London: MacMillan, pp. 84 – 98.

Pareto, V. (1896), Corso di Economia Politica [Cours d’Économie Politique]. Torino: Unione Tipographico-Editrice Torinese.

Pareto, V. (1907/1971), Manual of Political Economy, (transl. by A. Schwier), London: MacMillan.

Quinn, M. (2016), “Jeremy Bentham, ‘The Psychology of Economic Man’, and Behavioural Economics”, Œconomia, 6-1: 3–32.

Rabin, M. (1998), “Psychology and economics”, Journal of Economic Literature, 36: 11–46.

Rabin, M. (2002), “A perspective on psychology and economics”, European Economic Review, 46: 657–685.

Savage, L. (1954), The Foundations of Statistics, New York: John Wiley and Sons.

Seligman, B. (1969), “The impact of positivism on economic thought”, History of Political Economy, 1: 256-78.

Senior, N. W. (1836), An Outline of the Science of Political Economy, London, Clowes and Sons.

Sent, E-M. (2004), “Behavioral economics: how psychology made its (limited) way back into economics”, History of Political Economy, 36: 735-760.

Smith, A. (1759/1976), The Theory of Moral Sentiments, edited by Raphael, D. D. and Macfie, A. L., Oxford: Oxford University Press.

Von Neumann, J., and Morgenstern, O. (1944/1953), Theory of Games and Economic Behaviour, Princeton: Princeton University Press.

Walras, L. (1874/1965), Elements of Pure Economics, transl. by W. Jaffe, London: Allen and Unwin.

Wärneryd, K-E. (1994), “Psychology + Economics = Economic Psychology?” In Essays on Economic Psychology, Editors Hermann Brandstätter, Werner Güth, Springer Verlag, Berlin, pp.31-52.

Whately, R. (1832/1968), Introductory Lectures on Political Economy, New York, A. M. Kelley.

White, M. V. (1992), “Diamonds are forever (?): Nassau Senior and Utility Theory”, The Manchester School, Vol LX, No. 1: 64-78.

White, M. V. (1994), ‘‘The Moment of Richard Jennings: The Production of Jevons’s Marginalist Economic Agent.’’ In Philip Mirowski, ed., Natural Images in Economic Thought: ‘‘Markets Read in Tooth and Claw.’’ Cambridge: Cambridge University Press, pp. 197–230.