capitalism

Economics, Experimental 137
as some critics of what has been called the Chicago School’s
“economic imperialism” have contended. It simply allows
new and different insights into a particular set of social
questions and permits conceiving of problems in terms of
people attempting to maximize certain values. The economic
approach of which Becker writes seeks not to dislodge
the more traditional modes of analysis, but to
supplement them. This approach, possibly more than anything
else, is the defining characteristic of the modern
Chicago School: its emphasis on price theory and its unrelenting
application to problems of public policy. For all
practical purposes, this approach was initiated by Friedman
and extended and refined by Becker.
Libertarians are indebted to the proponents of the
Chicago School for bringing to bear their analysis of economic
phenomena on misguided political policies and for
energizing political forces around the world in support of
the free market.
See also Becker, Gary S.; Buchanan, James M.; Classical
Economics; Coase, Ronald H.; Economics, Austrian School of;
Friedman, Milton
Further Readings
RH
Becker, Gary S. The Economic Approach to Human Behavior.
Chicago: University of Chicago Press, 1976.
Ebenstein, Lanny. Milton Friedman: A Biography. New York:
Palgrave Macmillan, 2007.
History of Economic Thought Website. Available at http://cepa
.newschool.edu/het/schools/chicago.htm.
Miller, H. Laurence, Jr. “On the ‘Chicago School of Economics.’” The
Journal of Political Economy 70 no. 1 (February 1962): 64–69.
Overtveldt, Johan van. The Chicago School: How the University of
Chicago Assembled the Thinkers Who Revolutionized Economics
and Business. Chicago: Agate, 2007.
ECONOMICS, EXPERIMENTAL
Experimental economics applies laboratory methods of
inquiry to the study of motivated human behavior in social
contexts governed by explicit or implicit rules. Explicit
rules may be defined by experimental control and information,
or the rules may be shaped by market institutions in
which cash-motivated people buy or sell abstract rights to
consume or produce commodities and services within some
particular technological context. Implicit rules refer to the
norms, traditions, and habits that people bring to the laboratory
as part of their cultural and biological evolutionary
heritage; they are not normally controlled by the experimenter.
By devising and running markets and other
exchange systems in the laboratory, and through the use of
actual people, experimental economics helps us better
understand why markets and social exchange systems work
the way they do.
Generally, we can think of experimental outcomes as the
consequence of behavior governed by individual choice,
driven by the economic environment, and mediated by the
language and rules that govern interactions supplied by the
institution. The economic environment consists of preferences,
knowledge, skills, and resource constraints. Abstractly,
institutions map the messages (e.g., bids, asks, acceptances,
words, and actions) that give rise to our outcomes.
Under the operation of these rules or norms, people
choose messages consistent with their economic environment.
A well-established finding in experimental economics
is that institutions matter because the rules matter, and
the rules matter because incentives matter. However, the
incentives to which people respond are sometimes not those
one would expect based on the canons of economic theory.
It turns out that people are often better, and sometimes
worse, at achieving gains for themselves and others than is
predicted by standard forms of rational analysis. These contradictions
provide important clues to the implicit rules that
people may follow and can motivate new theoretical
hypotheses that can then be examined in the laboratory.
The design of experiments is motivated by two quite
distinct concepts of a rational order. Rejecting or denying
either of these should not lead one to assume that the
actor’s decision was irrational. Thus, if people in certain
contexts choose outcomes yielding the smaller of two
rewards, we ask why, rather than conclude that this choice
is irrational. The first concept of a rational order derives
from today’s standard socioeconomic science model and
dates back to the 17th century. This model is a product of
what Hayek has called constructivist rationalism, which,
in its modern form, stems from Descartes, who argued
that all worthwhile social institutions were and should be
created by conscious deductive processes of human reason.
Cartesian rationalism provisionally requires agents to
possess complete information—indeed, far more than
could ever be given to one mind. In economics, the resulting
analytical exercises, while yielding insightful theorems,
are designed to aid and sharpen thinking in the form
of “if–then” parables.
Yet these exercises may not approximate the level of
ignorance that has given shape to real institutions. Our theories
and thought processes about social systems involve the
conscious and deliberate use of reason. Therefore, it is necessary
to constantly remind ourselves that human activity is
diffused and dominated by unconscious, autonomic, and
neuropsychological systems that enable people to function
effectively without always calling on the brain’s scarcest
resource: attention and reasoning circuitry. This property is
an important one of the brain. These considerations lead to