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

  • Samuel Bowles
  • Herbert Gintis

Recent developments in microeconomic theory have shown that the self-interested 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. But a handshake is not always 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. Abandoning the Victorian world of neoclassical theory will redirect economists to an older conception of their profession: what once was called political economy. By taking optimizing more seriously, post-Walrasian economics has inspired a revolution in economic thought fostering both new theoretical departures and alternative conceptions of the capitalist economy. We will offer our own interpretation of this literature, focusing on the widely recognized fact that the terms arising from exchange are not generally enforceable at zero cost to the exchanging parties. Where some aspect of the good or service supplied is both valuable to the buyer and costly to provide, the absence of third-party enforcement of claims gives rise to endogenous enforcement strategies. We refer to this relationship as a "contested exchange" because, unlike the transactions of Walrasian economics, the benefit the parties derive from the transaction depends on their own capacities to enforce competing claims.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.7.1.83
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 7 (1993)
Issue (Month): 1 (Winter)
Pages: 83-102

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Handle: RePEc:aea:jecper:v:7:y:1993:i:1:p:83-102
Note: DOI: 10.1257/jep.7.1.83
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  1. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March.
  2. Elster, Jon, 1989. "Social Norms and Economic Theory," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 99-117, Fall.
  3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  4. Sugden, Robert, 1989. "Spontaneous Order," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 85-97, Fall.
  5. Pranab Bardhan & John E. Roemer, 1992. "Market Socialism: A Case for Rejuvenation," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 101-116, Summer.
  6. Schor, Juliet B & Bowles, Samuel, 1987. "Employment Rents and the Incidence of Strikes," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 584-92, November.
  7. Lerner, Abba P, 1972. "The Economics and Politics of Consumer Sovereignty," American Economic Review, American Economic Association, vol. 62(2), pages 258-66, May.
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