Recently there has been a small surge in the economics literature addressing the role of trust in the economy. Experiments have shown that trust is extremely important for understanding economic processes. Trust does not fit very well with the traditional concept of "homo economicus": Rational behavior is not trusting. The building and confirmation of trust usually requires sacrifices of resources, contradicting the utility and profit maximizing hypotheses of the homo economicus.
The Scientific American recently posted an article that looks at the evidence for trusting behavior from behavioral economics, in particular trust experiments and brain scan evidence from neuro-economic experiments.
I want to add my own two cents worth to this. First, trust building is directly related to the functioning of socio-economic networks. The better the functioning of these networks and the denser these networks, the better the development and building of trust. This in turn forms the foundation for a better functioning economy. (A neglected aspect in traditional neo-classical economics.)
On the other hand, network building is firmly founded on the presence of trust and behavioral norms of trusting behavior. The higher the level of trust in the society, the better one is able to build and maintain social networks.
This two-way street between trust building and network building lies at the foundation of my research on networks. It now seems that more and more evidence confirms the justification of these and similar theories of network formation. Here I also refer to the recent work of Markus Mobius and his co-authors.
2007-06-07
Economics and markets
I will use this blog to post random thoughts about economics and economic theory. In my postings I intend to promote a relational perspective on the economy.
I do not think that economics is a very mature science and has a very difficult subject of study. Economists in general, on the other hand, have strong beliefs that they know a lot about the functioning of the economy and point to the relatively recent successes of the market paradigm in our globalizing world economy. As a consequence in the teaching of economics we promote a view of a unified economic theory based on the market as the main allocation mechanism. But what is exactly a market?
In economic theory a market is a very restricted and precisely defined mechanism based on the assignment of a unique market price to a single commodity that reflects its true "value". This does not fit very well with reality. In practice, the notion of a "market" refers to a wide variety of economic concepts such as one's clients, a broad geographical area, a place where demand and supply meet in the broadest terms, and of course a farmers' market.
Economists pretend to understand this wide variety of mechanisms and networks with the single instrument of the theoretical market concept. This seems very pretentious. We should be more humble and accept that our science is still very immature. We should also allow the development and discussion of multiple theories and models for similar phenomena to take place in our journals. At the moment these journals are strictly closed for any contribution that deviates too much from the accepted paradigm. This stifles the development of the economics science.
The EconNet web site and this blog try to promote alternative views of economic phenomena that go beyond the traditional paradigm of neo-classical market theory.
I do not think that economics is a very mature science and has a very difficult subject of study. Economists in general, on the other hand, have strong beliefs that they know a lot about the functioning of the economy and point to the relatively recent successes of the market paradigm in our globalizing world economy. As a consequence in the teaching of economics we promote a view of a unified economic theory based on the market as the main allocation mechanism. But what is exactly a market?
In economic theory a market is a very restricted and precisely defined mechanism based on the assignment of a unique market price to a single commodity that reflects its true "value". This does not fit very well with reality. In practice, the notion of a "market" refers to a wide variety of economic concepts such as one's clients, a broad geographical area, a place where demand and supply meet in the broadest terms, and of course a farmers' market.
Economists pretend to understand this wide variety of mechanisms and networks with the single instrument of the theoretical market concept. This seems very pretentious. We should be more humble and accept that our science is still very immature. We should also allow the development and discussion of multiple theories and models for similar phenomena to take place in our journals. At the moment these journals are strictly closed for any contribution that deviates too much from the accepted paradigm. This stifles the development of the economics science.
The EconNet web site and this blog try to promote alternative views of economic phenomena that go beyond the traditional paradigm of neo-classical market theory.
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