The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy

The strength of the neoclassical paradigm, generations of students have been told, lies in its hardheaded grounding in a general model of self-interested action. But recent developments in microeconomic theory have shown that the selfinterested behavior underlying neoclassical theory is artificially truncated: it depicts a charmingly Victorian but utopian world in which conflicts abound but a handshake is a handshake. Studies of principal-agent analysis, the economics of information, radical political economy, mechanism design and transactions cost economics have all focused on the difficulties involved in policing and enforcing the actual process of market exchange.1 Abandoning the Victorian world of neoclassical theory will redirect economists to an older conception of their profession: what once was called political economy. Adam Smith and Karl Marx alike knew that a handshake was not always a handshake. The broad compass of their political economy embraced not only the analysis of simple acts of exchange, but issues of strategic action, changes in tastes, norms, and sentiments, collusion among agents, and reciprocity and altruism as well. Extending the rich insights of the older conception of political economy using the formal modelling techniques of the new is one of the more fruitful challenges facing economic theorists today. The formal codification of Smith’s “invisible hand” in the economics of Leon Walras, and later in the general equilibrium models associated with Kenneth Arrow ∗Samuel Bowles and Herbert Gintis are Professors of Economics, University of Massachusetts, Amherst, MA. They would like to thank the editors of this Journal for helpful and perceptive comments in the preparation of the paper. 1See, for instance, Akerlof (1984), Bowles and Gintis (1990), Rebitzer (forthcoming), Stiglitz (1987), and Williamson (1985).