Theory and Evidence
Chapter 9: Markets and Institutions
We are now in a position to compare the insights that emerged from our assessment of the theoretical literature undertaken in Chapters 2 and 3 with the conclusions derived from the empirical evidence on human behaviour, and the empirical and historical evidence on economic growth and institutional change. Based on this material in this chapter we arrive at some generalizations which are then used to develop an empirically grounded theory of the performance of an economic system. In Chapter 10 we shall consider what our findings suggest for the process of institutional change. First, at the behavioural level, the empirical evidence from cognitive psychology, genetics, and a vast literature on behavioural and experimental economics discussed in detail in Chapter 2, indicates that the neoclassical assumption that agents act in a rational self-interested manner is an unsafe hypothesis. Although self-interest is basic to human nature, this self-interest is by no means limited to the simple self-seeking maximization behaviour assumed by neoclassical economics. Self-interest in a broader biological, psychological and economic sense encompasses altruism, reciprocal altruism, opportunism and predation. Furthermore, since conflict of interest is a much more fundamental characteristic of observed human relations, this is more than likely to lead to a range of opportunistic and predatory types of behaviour, especially in circumstances where the economic system provides the opportunity or encouragement for such behaviour to exist. Since behaviour that goes beyond simple self-seeking wealth maximization is widespread and significant enough to affect decision-making by all agents, any model that tries...
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