Some thoughts on a new micro-economic model and paradigm, through the integration of psychology into economics
The other day I was writing an article for Encefalus concerning economics and studying their relation to psychology. However, as I was writing it, I stumbled upon some problems, like what is the definition of economics. Obviously, modern economists might have different opinions among them, and I, as a psychologist, have a different view on the subject than them. So I started writing about the fundamendals of what I consider as economy and what a science of economy should be like. This was not in my intentions, but I believe it to be a quite interesting piece of article. If you read it please leave a comment. This article was not what I actually intented and it was written in a state of mental flow, but I believe that there are some thoughts in there that are worthy of some speculation. Write to tell me if you agree with me.
Lately, I have been thinking a lot about economics. Those of you who read this blog might have noticed that I have included various articles that concern this subject (How a single neurotransmitter can provide the basis for the explanation of all social phenomena, Lotteries, poverty AND credit cards this time along with the proper social and scientific analysis 
, Subliminal messaging, subliminal advertising and subliminal learning for a subliminal post , Lotteries, poverty and social implications , Neurons, politics and economics). The reason I am interested in economics. I am one of those psychotic psychologists that try to see the world as really big equation. Trying to explain the structure of society without taking economics into account is a huge mistake. I believe that in most cases, we have to reverse the relation between society and economics, considering the economy of a society the cause of most of its attributes and events.
In any case, economics have to be taken into account. However, there is always the question what we mean by economics. Many people might argue that economics come into existence only in a capitalistic setting, and should capitalism fall, all we know will collapse.
This statement could certainly be true for certain fields of economics, such as stock market analysis. However, economics go much deeper than that. In the following paragraphs I will explain my views on what economy is.
First of all, in my opinion, economy can be determined as following
Economy is the management of resources.
Resources can be determined as following
Resources are limited entities that have value.
Valuable resource 
Resources are limited entities and this is what gives rise to the need of management. After all, economy means, the management of one’s house (in ancient greek). Limitless entities, like oxygen for example, even if they are not trully limitless, cannot be considered resources from an economical perspective, since they don’t require management. Furthermore, not all resources are equal. Some resources, when present along with other ones, will be prefered, usually resources vital for living, such as food. So, we shall create a new term: resource marking
Resource marking is the procedure via which we categorize each resource into a certain grade of preference. The procedure via which we do that is called resource grade categorization. During that procedure we present two or more resources and observe the preference or we observe this procedure in the natural environment of the resource target.
And here we shall give a behavioristic definition of value (along with one more explanatory definition)
Value is a property that can be asigned to any real or virtual entity that appears to act as a stimulus, for at least for one person, for the commencement of actions that have as a target the acquisition of this entity. The people for which a resource has been proven to have a value are defined as resource target.
Random kitty image just because I find them cute
The definition of value might seem to be cyclical. We know that something has a value, and therefore acts as a stimulus, once we see that it acts as a stimulus. However, by giving this definition we have achieved two things:
1) Our definition of economy remains thus far a purely scientific one, since it is based on empirical facts, following the behavioral paradigm.
2)While the definition of value can be deemed as cyclical, it makes sure one thing. Once something appears to have the property of value, it is considered a resource. And resources are the basis of economy. However, resources don’t refer to one single object. Resources function like mathematical sets that can contain one ore more objects and they can fall one into the other, since a single object can be in more than one categories.
Therefore, what we achieve by this definition of value, is that we manage to find what entities can be considered as resources just by identifying one of them. Of course, in this procedure we must take into account that we must resort to inductive reasoning in order to succeed in our goal, which reduces the validity of this procedure. Inductive reasoning is a powerful tool, upon which all science is based, but unfortunately, many times it is proven wrong Now its time to name this whole procedure. We shall define it as value field identification
Value field identification is the procedure via which we find the set of entities (value field), through inductive reasoning, that can be considered as a resource, once a sole object of this category has be proven to have a value.
This procedure comes along with another procedure for which apply the same rules of inductive reasoning. That is the procedure of resource target identification
Resource target identification is the procedure via which we find the set of people, through inductive reasoning, that for which the aformentioned entity is considered to have a value and therefore is treated as a resource.
So, let’s give an example of this procedure along with a possible mistake. One observes that a little girl is all the time with a teddy-bear. Once she loses it, she starts to look for it. Our observator believes that the teddy-bear has value, and it is a resource. He believes that the category of this resource is every teddy-bear that exists. However, this could be wrong because the following are (or might be) true:
1)Not only the teddy-bear, but other animal dolls have value as well. So the category is animal dolls, and not teddy bears.
2)The teddy-bear can have a varied resource target. Teddy-bears don’t have a value for everyone, but usually only for children. Also, this teddy-bear might have a special value for this girl, that can’t be compared with other dolls.
So, there can be two possible mistakes that we can make.
1)Value field identification error, when we enlarge or shrink the category of a resource.
2)Resource target error, when we enlarge, shrink or miss the category of people for which the resource has value.
Some resources can have varied value fields
In the example above we should identify two value fields: the teddy-bear, and the animal dolls, as well as two resource targets, the little girl and children. The little girl is a subset of children, like the teddy-bear is a subset of the animal dolls set.
So far, we have defined the following terms which are the backbone of our theory: Economy, resource, value, resource target. We have also identified the following two procedures: value field identification and resource target identification, which are accompanied by two errors: Value field identification error, Resource target error.
So, what all this has to do with psychology? Psychology connects with this theory in the following ways. First of all, our theory above shall be named: Basic Behavioristic Economy Paradigm. This paradigm is based on empirical facts and can be considered objective. However, it is limited. Cognitive psychology rose as a reaction to the limitations of behaviorism that tried to explain things, by not taking into account internal procedures. This gave rise to a neuropsychological and cognitive revolution. Our theory must take the same road. However, it is a dangerous road, since once we exit the behavioristic paradigm, we lose a certain amount of objectivity. Yet, this objectivity can be regained once we manage to establish once again objective methods of observation. These come with the introduction of neuropsychology.
Read Montague in the article How a single neurotransmitter can provide the basis for the explanation of all social phenomena is an example of how simple neuronal procedures can give rise to an objective cognitive and economic science.
Dr. Read Montague
So, let’s get back to our subject. The new theory will be called Cognitive Economy Paradigm. Our goal is to reach the final state theory of Cognitive Behavioristic Economy Paradigm.
Now, we must "plug" Cognitive Psychology into the following "slots" of our theory
1) Value field identification
2) Resource target identification
3) Resource marking
4) Resource grade categorization
Once we integrate cognitive psychological research into our theory, we have to take it to the next level to reach the Cognitive Behaviorist Economy Paradigm. In the previous procedure we made a made the necessary leap from behavioristic to cognitive. Now we will merge these two. This will happen through the integration of neuropsychology and the modelling of cognitive procedures based on neural correlates of economics behaviors. Here come what we said before about Read Montague and the article How a single neurotransmitter can provide the basis for the explanation of all social phenomena.
So, in this article, we established a new micro-economic model, based on a new paradigm based on cognitive science. We have actually done the following.
1)Establish the basic notions of our theory: Economy, resource, value, resource target, value field identification, resource target identification, value field identification error and resource target error
2)Establish the states through which our theory must pass: Basic Behavioristic Economy Paradigm – >Cognitive Economy Paradigm-> Cognitive Behavioristic Economy Paradigm
3)Establish the methods we must use: Behavioristic observation -> Cognitive Psychology -> Neuropsychology based on neural corellates of economic behavior – > Modelling
So that was it! I hope that you find it useful. Encefalus is not only a blog, but also some kind of an external hard drive of my brain where I can store my thoughts, and this article is actually a storage for some thoughts that came by. Feel free to express your opinion. Before we close I’d like to mention Professor Michael J. Radzicki, Ph.D. who is a professor of economics. I stumbled upon his site as I was searching for images for this article. There, he mentions some of his observations and interests that I found extremely intriguing, since they are in many ways in complete accordance with my views. He is talking about non-linear dynamics and the integration of psychology into economy. I will try to delve deeper into the subject witht he promise of future articles. For now, here are the points that Professor Michael J. Radzicki, Ph.D. mentions in his site. I encourage you to visit it, since he has many more interesting things.
Research
My research is primarily aimed at combining Post Keynesian economics and institutional economics with cognitive psychology and computational methods to create a more powerful form of heterodox economics. Heterodox economists object to many of the tenets of orthodox economics and base their analyses on (many of) the following propositions:
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The cutting edge of economics lies at the interface of economics, cognitive psychology, and computational methods such as system dynamics computer simulation modeling, agent-based computer simulation modeling, neural networks, and genetic algorithms.
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Economic systems are path dependent historical processes that evolve over historical, rather than logical, time.
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Economic systems are fundamentally uncertain (non-ergodic) and, as such, economic agents must make their crucial (non-routine) decisions on the basis of expectations and via the use of bounded rational coping mechanisms.
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Economic, social, and political institutions play a significant role in shaping economic events.
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The distribution of income and the role of economic power must be taken into account when studying economic systems and crafting economic policies.
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Real capital is non-malleable, embodies historical decisions, and is conceptually distinct from financial capital.
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Income effects are more dominant than substitution effects in creating and solving economic problems.
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The most important economic principle is that of “circular and cumulative causation.”
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It is important to think of economic problems in terms of patterns of behavior over time instead of as events happening at a particular point in time.
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Economic problems must be examined holistically via a systems approach.
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When approaching an economic problem it is important to identify who supplies and who demands, as well as how the important stocks, flows (information and material), feedback loops, and limiting factors in the system influence the suppliers and demanders.
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The real world is non-linear. Non-linear relationships usually describe what happens when a system approaches its limiting factors.
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Economic systems grow exponentially, not linearly, and the difference is very important.
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Economic systems naturally resist policy interventions and typically get better before worse or worse before better.
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Economic systems often behave counter-intuitively.
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Macroeconomic behavior emerges from the microstructure of the economy.
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Money is non-neutral in real economic systems and its role must be taken into account when studying modern economic systems and crafting economic policies.
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Say’s law does not hold in advanced market economies and thus economic instability and involuntary unemployment are "normal" characteristics of such systems.
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A sovereign nation with a sovereign fiat currency should pursue principles of functional (as opposed to "sound") finance to maintain full employment (i.e., to preserve Say’s Law) and price stability.
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Taxes give value to sovereign fiat currencies and reduce spending by the private sector (aggregate demand), they do not finance government spending at the national level.
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Central banks control short-term interest rates, not the money supply. The money supply is endogenously determined by the economic behavior of firms and households. Central bank policies are by necessity reactive, not proactive.
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Government sales of bonds to the non-bank private sector reduce spending (aggregate demand). Government sales of bonds to the private banking sector are undertaken to maintain the overnight inter-bank lending rate. Bond sales by a sovereign nation with a sovereign fiat currency do not finance its budget deficit.
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The national debt of a sovereign nation with a sovereign fiat currency should actually be considered the "national interest rate maintenance account."
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Inflation is primarily caused by a conflict between management and labor over income shares, and not by excessive demand or "too many dollars chasing too few goods." As such, cooling down the economy (and thus causing unemployment and severe economic hardship) to reduce inflation is poor economic policy (although it can be effective).
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Inflation is always and everywhere a psychological phenomenon
January 16th, 2009 at 2:13 am
this helped
January 16th, 2009 at 10:15 am
Well, I am happy it helped, even though I don’t know in what it helped