Conclusions and Implications

In order to place the behavioural approach to economics in context, it is helpful, it seems, to contrast it in methodological terms with the now standard neo-classical approach. The latter is founded on what Dow (1985) has called the ‘Cartesian/Euclidean’ mode of thought. That is, it is founded on a system of axiomatic logic. Key axioms which are either true by definition or ‘self-evident’ are adopted and by a process of deduction used to formulate precise predictions, which are then tested against the facts, so far as these can be ascertained. The key axiom is usually identified as the assumption that individuals behave ‘rationally’. As Arrow (1987) has pointed out, among classical economists the idea of rationality had the limited meaning of preferring more to less, and, although that might be interpreted as the maximisation of profits, it was not until the 1880s that the assumption of profit maximisation was explicitly formulated. Nor did the classicists advance a hypothesis of rationality on the part of consumers. Not until the marginalist revolution brought about by Jevons, Walras, Menger and others were rational consumers assumed to maximise utility, subject to a budget constraint.