A Brain-Focused Neoclassical Microeconomics

Abstract

“Brain-focused neoclassical economics” uses neoclassical analytical methods to predict a range of human decision and behavioral flaws documented by behavioral economists and psychologists. It helps explain (and predicts), through deductive methodological means, many presumed “irrationalities,” such as inconsistencies in choices. It also explains laboratory subjects’ failures to appropriately discount future costs and benefits, to ignore sunk costs, and to consider opportunity costs. It also provides an analytical foundation for Adam Smith’s presumption that people have a propensity to specialize and trade: specialization and trade free up the brain’s limited resources for other uses, increasing the potential rationality of decision-making. Overall, under a brain-focused methodology, many presumed “irrationalities” are not the welfare destroying decision errors in need of corrections that they have been made out to be. Rather, they can be reconstrued as welfare enhancing. Moreover, movements toward, say, freer trade can have efficiency and welfare benefits beyond those neoclassical economists have always considered: specialization and freer trade can improve the allocation of external resources, as conventionally argued, but they can also improve the allocation of internal neuronal resources, leading to more rational decisions in the allocation of external resources. Under strict neoclassical economics, instruction founded on perfect rationality is an economic waste. Under a brain-focused foundation for economics, the discipline has the potential for improving decision-making and, as a consequence, economic welfare, in much the same way that property rights, prices, and markets can.