Development as Human Well-being

  • Abbas Mirakhor
  • Hossein Askari


The new institutionalism in Western economic thought was developed within the neoclassical economic framework, although it incorporated the modification of a number of neoclassical assumptions, including those regarding information, transaction costs, and, most importantly, rationality. Douglass North argued for the notion of bounded rationality first proposed by Herbert Simon who had noted that a critical assumption of utility theory in neoclassical economics was based on the improbable— that a rational individual is capable of large, elaborate, and, often, instantaneous calculations before making decisions. This assumption is needed to justify a further assumption that individuals, asconsumers or as producers, behave in a manner so as to maximize satisfaction and profits, respectively. Simon argued instead that, in reality, individuals operate within a “zone” of rationality rather than full rationality because of constraints. Consequently, both the power and the scope of rationality are bounded. As a result, rational individuals do not aim to maximizes atisfaction, but to find a limited-scope-zone of operation within which the individual turns over part of the required immense calculation to habits, rules, social norms, and customs, namely, institutions. Thus the individual aims to “satisfy” rather than to maximize utility. The assumption of bounded rationality allows individual behavior to be influenced by cultural values, norms and rules of behavior.1


Gross Domestic Product Human Development Index Political Freedom Capita Gross Domestic Product Global Order 
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© Abbas Mirakhor and Hossein Askari 2010

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  • Abbas Mirakhor
  • Hossein Askari

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