The nanolevel of economic hierarchy

In the XXth century theoretical science underwent some sort of “humanist switch”- it focused attention on the range of issues related to an individual. In pliilosophy it developed into appearance of existential schools and pliilosophy of life, in public conscience - in renunciation of scientism and teclmocratism Economic science wasn’t left aside.

ft is enough to give one example of how a personal aspect is important for economics. In Keynesianism it was supposed that individuals are susceptible to monetary illusion, monetarism described economic agents’ behaviour via adaptive expectations, neoclassics - via rational expectations. Realizing importance of studying subjects as basis of macroeconomics, G. Akerlof paid attention to the fact tliat neoclassical synthesis disregards issues connected with an individual [34, p. 40]. Another Nobel laureate, E. Phelps insisted on getting an individual back into economic models,, e.g. tlirough taking into account their expectations [34, p. 46].

In modern economic science the issue of an individual is moving to the forefront, and it is possible to say tliat a new field of study lias appeared along with traditional micro- and macroeconomic theories -nanoeconomics.

The term “nanoeconomics” was first introduced by K. Arrow1 as “theoretical description eco- nomic behaviour of an irrational agent” [27, p. 83]. The nanolevel was defined by G.B. Kleiner as “behaviour of individual participants of processes of production, distribution and consumption” [14, p. 104; 15, p. 45], by E. Popov and M. Vlasov - as a field of economic theory studying beliaviour of individual participants of economic processes” [27, p. 83]. A.G. Khudokormov prefers to use a term “micromicroeconomics” and defines its gist as cognition of inscape of a firm, household and the state and establish linkage between appearance of the new field and neo-institutionalism [34s p. 20-21].

ft was neo-institutionalism that ceased considering a firm or household as a black box, as it used to be in neoclassical microeconomics. R. Coase and his successors look inside a firm, analyse it as a tool of reducing transaction costs. G. Becker studies household, issues of conclusion of marriage, choice of a partner, number of cliildren, etc. Finally. J. Buhanan looks inside the state apparatus using the same tools of neoclassical economics.

ft is obvious tliat all economic decisions on price making, production output, investment, consumption, economy are taken not even by a household or a firm but by an individual. The more surprising it is tliat nanoeconomics as a subject of independent study lias appeared relatively recently. However, before consider- not a household or a firm but an individual to be an ultimate subject of decision-making [7, p. 379].

^ Shults DM„ 2014

ing the current state of nanoeconomics, it should be noted that scholars of the XIXth century pay close attention to an individual component of economics.

For example, J.-B. Say considered an entrepreneur as an individual who is ready to take a risk and manufacture a product [1, p. 193]. V. Pareto noted that successful entrepreneurs (“elite”) posses energy and will aimed at achieving goals even using criminal methods [26, p. 99]. W. Sombart contrasts different types of entrepreneurs’ behaviour: “commercial spirit” as such and “burgher spirit”. The first type is characterised by such features as conquering, organising and trading, which are typical not only of manufacturers and merchants but also of bandits and pirates. A. Marshall [20] accentuated managing functions of an entrepreneur: combining of labour and capital, planning and production control etc.

Finally, J. Schumpeter emphasizes a fundamental role of an innovative person. The innovative person has such qualities as unrestrained accumulation of property, strong will to victory and labour, intuition, which is necessary under risk and uncertainty. Narrowmindedness is compensated by immersing deeply in the problem [1, p. 197-198]. Furher, in his works F. Knight [23] analyzes an entrepreneur who takes a risk and makes a profit. An entrepreneur is used to making decisions under uncertainty, believe in his rightness and is ready to prove his case at the risk of losing his capital.

As a general property of all early theories of entrepreneurship V.S. Avtonomov names “dynamic view of economic processes, rejection of an abstract idea of absolutely balanced equilibrium economics with complete and available information” [1, p. 199].

Moving on from the theory of an entrepreneur to the consumer theory and the issue of rationality, first of all it is necessary to mention F. Fetter, who can be named a forerunner of modern behavioural economics and one of the first critics of marginalism. As early as in 1915, he insisted that subjective cost determination is not a result of rational decision-making but an impulsive act of choice based on unconscious preference. So choice is largely driven by influence of external and internal random factors, instinct and habit [1, p. 190].

According to M. Weber’s sociological theory, an individual’s behaviour is mainly explained by instincts, however not biological, but cultural and social ones: instincts of workmanship, idle curiosity, parental bent, inclination towards acquisitiveness and egoism, as well as an instinct of a habit. In Germany H. Miin-sterberg was also engaged in experimental studies of such issues as monotony and organization of labour, fairness of remuneration of labour and advertising efficiency [29, p. 11].

It is impossible not to note innovativeness of J. Keynes, whose macroeconomic theory is saturated with psychological aspects: a psychological law in the theory of consumption, realistic description of an investor’s behaviour while choosing a project to finance, constant use of concepts of uncertainty and expectations, description of subjects’ irrational behaviour through the category “money illusion” etc.

It is possible to name three fields of modern economic theory that actively develop nanoeconomic issues. They are behavioural economics, neoinstitutionalism and ethical economics.fined by R. Kapeljushnikov as a “revolution” [13, p. 71] and “the most interesting and remarkable event in economic science development over the past decades” [13, p. 66], appeared in 1970s. It is H. Simon, the Nobel laureate of 1977, who can be considered as its author. The term “behavioural economics” was introduced by psychologist and economist G. Katona, who investigated behaviour, including irrational behaviour, of consumers and entrepreneurs, as well as their expectations [29, p. 1112]. The Nobel Prize was also won by such behavioural economics theorists as R. Selten (1994), D. Kahne-man (a psychologist) and V. Smith (2002).

Behavioural economics can be reduced to critics of the neoclassical postulate on rationality basing on the experimental method.

Basing on laboratory experiments, R. Selten showed that while decision making an individual can be guided by habit, imagination and logical reasoning [34, p, 34]. D. Kahneman and A. Tversky, who applied cognitive psychology to economics, conducted a lot of experiments that demonstrated inadequacy of the classic model of absolute rationality [34, p. 37]. Finally, V. Smith examined basic postulates of economic theory under laboratory conditions and discovered that they only hold tme under “the simplest and most primitive variants of the market configuration” [34, p. 35].

Among the empirical results not corresponding to classical theory, modern authors name the following: dependence on the reference point, unacceptance of losses, social preferences, a switch of preferences, framing, hyperbolic discounting, a sunk cost effect, an anchoring effect, decision bracketing, mental accounting, a context effect, availability bias etc. [6, p. 54-56; 8-10; 33, p. 61]. According to some estimates, the number of such types of irrational behaviour approaches to 50 [13, p. 75].

Departures from the postulate on rational behaviour were found not only in the processes of consumption. Nobel laureates R. Shiller, who had predicted the US stock market crash in 2000, G. and Akerlof, find examples of instinctive (“spiritusanimalis” can be translated as “animal instinct”) behaviour and its consequences: money illusion, job search, processes of saving and investing, cyclicity and financial crises, national minorities poverty etc. [2]. A lot of conducted experiments made economists come to the conclusion that “departures of the actual behaviour from the normative model are too numerous to be ignored, too regular to reject them as occasional ones and too fundamental to try to add them to the normative system by weakening its initial premises [13, p. 73]2.

It is important to note that not only the postulate on rational behaviour, but also connected with it statement on complete knowledge was subjected to criticism. In our opinion, its wittiest and deepest criticism is represented in works by a Nobel laureate K. Arrow [35-36]. For example, he paid attention to the idea tliat according to the theory of oligopoly a firm has to know not only the price, but also the demand curve. But a demand curve is estimated via teclmiques of econometrics (which didn’t exist in 1838 when A. Cournot worked on liis famous model). As a result, neoclassic assumes tliat agents beliave as scientists3. To support this idea, it is possible to add D. Colander’s argument: rational economic agents should liave unified understanding of real economic laws, whereas even among economists there is not any unity of views ontliis issue [18, p. 16-17].

There is a more profound observation: if when making decisions every agent assumes rationality of others, as a result “rationality of all the agents lias to be coimnon knowledge [36, p. 253]”, For liierarcliical analysis of economy it means tliat “...rationality and knowledge of rationality are social, not only individual phenomena” [36, p. 254]. Finally, the complete knowledge hypothesis requires infinite amount of information on not only existing, but also future markets, and even on markets of goods that don’t exist yet.

It can also be noted that K. Arrow establishes linkage between the neoclassical hypothesis about rational behaviour and the premise of homogeneity: “... the hypothesis about rationality as such is very weak. Tiying to make it more useful a researcher is tempted to introduce some strong assmnptions. In particular, the assumption of homogeneity seems to me to be the most dangerous” [36, p. 251]. This assumption contradicts the data on human capital, savings etc. The assertion tliat the premise of homogeneity rules out the possibility of trade is not an indisputable conclusion but the strongest one. As K. Arrow insists, trade is only possible in case of limited knowledge and information, in case of nonidentical individuals.

On the basis of behavioural economics a new (“the newest” [33, p. 70]) theory of welfare (“new paternalism”) appeared. Whereas the traditional theory of govermnent regulation admits market failmes at the microlevel and rectifies their consequences at the macrolevel, new theoretical ideas suggest tliat the state should eliminate the very causes for market failmes at the microlevel by stimulating subjects to optimal be-haviom for their own sake. In other words, the state lias to rectify not only market failures, but also beliaviour failmes, e. g. introduce a “tax on sins” (alcohol, tobac- co, gambling etc.), restrict use of credit cards4, legislate on the “cooling” period (when it is possible to return donations or purchases from travelling agents), print information on winning probability on lottery tickets etc. [7, p. 3 70-3 76; 13, p. 84-88].

As is noted by A.G. Khudokormov, in economic theory the question of correlation between neoclassical mainstream and behavioural economics has not been settled so far. On the one liand, results of experiments can be included in the core of the traditional science. On the other hand, in this case it turns out that competitive equilibrium implying absolute knowledge and rationality is only a special case wliich doesn’t exist in reality and for wliich market only strives as for an unacliievable ideal [34, p. 38].

Basing on researches in behavioural economics it is possible to draw one more conclusion: economy can be considered from both perspective of levels even deeper than nanoeconomics and perspective of levels beyond the framework of traditional economic theory. Even at the nanolevel the role of psychology is quite big. Lower, there is a level of neural impulses in brain (nemoeconomics) [28, p. 49; 33, p. 63]. As is noted by V. Smith, the biggest %, part of the knowledge tliat we use and decision-making ability are subconscious by their natme” [26, p. 10], wliich makes it possible to analyse rationality at the nemolevel (neuroeconomics) and evolution of genes responsible for an individual’s beliaviour (psychogenomics).

It is nemopsychology that allows us to see the problem of rationality from the new perspective. It appears tliat behaviour wliich is irrational from the economic point of view in fact can turn out to be rather hedonic.

For example, neurobiologists discovered that when decision making different brain regions can be activated. For instance, when making a decision on whether to smoke or not, brain regions responsible for pleasme and for evaluation of probable consequences of smoking are active. Another example: consuming absolutely the same wine people consider more expensive wine to be tastier. Tliis example seems to be absurd and show that people behave irrationally. However, wliat is interesting is tliat brain tomography when being made wliile a person is drinking wine, shows that people get more pleasme when drinking expensive wine than when drinking the same wine with a lower price on the price tag. Although such behaviour doesn’t correspond to traditional understanding of rationality, following brain chemistry individuals themselves get the greatest satisfaction (at the level of brain nemons) when beliaving exactly tliis way and consequently strive for it.

Let us now proceed to the evolutionary theory, whose authors R. Nelson and S. Winter [24] came to the conclusion tliat innovators make discoveries and introduce inventions guided not by rational consideration but by habitual behaviour models. In other words,

* The Central Bank of the Russian Federation applies analogous measures to protect citizens from “imprortunate” offers of high interest credits (URL: (accessed: 02.04.2014)).

under insufficient information economic agents have to rely on social conventions and stereotypes (routines) as ways of transmission of knowledge. Moreover, most inventions are created in organisation tliat are not aimed at gaining profit (such as universities) and/or in govermnent-funded ones.

It is important to note the following. First, even exponents of evolutionary theory state that beliav-ioural “mistakes” are predictable because they develop [13, p. 74]. In terms of evolutionism, these patterns of behaviour could have been optimum at the previous stage of development, but in the present context they are not optimum and will be adjusted in the process of evolutionary adaptation of mankind. So evolutionary approach admits more dynamic (in comparison with behavioural economics) interpretation of rationality.

Second, for hierarchical analysis it is important to note that there are three levels of decisionmaking distinguished witliin the evolutionary approach: biological instincts, culture and conscious choice [32, p. 79]. These three levels, which are beyond the framework of pure economics, interact, compensate and supplement each other for the sake of a single aim - survival. Utility maximization, which goes on under different restrictions, can only be the aim of a lower level in comparison with the strategic aim - survival. Everything that increases probability of survival at any given stage of the progress of population (religion, morality, altruism and avidity, love and liatred, patriotism and vindictiveness and other phenomena) is admitted to be rational. So they are not individuals or even society but genetic1 and cultural routines tliat turn out to be a unit of evolution and subject of evolutionary approach analysis. Therefore it is genetics that appears to be foundation for nanoeconomics, not brain chemistry as in case of beliavioural economics.

After stating foundations of behavioural economics, it is necessary to dwell on some results obtained witliin neo-institutionalism and important for liierarcliical analysis of economy.

In liis theoretical schemes G. Becker proceeds from the premise tliat “...various personal cliaracteris-tics of some individuals influence utility functions of others” [4, p. 232]. ft explains phenomena of altruism and charity wliich contradict principles of rationality at first sight. For liierarcliical analysis of economy the most important conclusion from Becker’s theory is a “rotten kid theorem”: “if one of a family members takes care of others intensively enough to perform the function of the head of the family, all other members will be guided by the same motives as tliis member, thus maximising the family capabilities” [4, p. 252]. As a result models of single individuals boil down to the model of only one participant - the head of the family.

In our opinion, tliis theorem has some parallels with social ideologies that consider interests of the whole society as interests of only one of its classes. For methodology of economic science tliis theorem is important in terms of the representative agent approach. If it is really possible to sufficiently describe some set of agents, aggregated economic sectors and economy on the whole tlirough only one agent, it validates the representative agent principle.

On the other liand, Becker’s theorem states possibility of modelling a family not tlirough a typical family member but tlirough the head of the family, to whose interests interests of all other members boil down. So it is reasonable to simulate macroeconomics not tlirough a representative firm or a household, wliich pursue their own objectives, but tlirough the state and some altruistic economic sectors wliich are aimed at maximising social welfare.

ft is interesting to note tliat “dependence on the context” is not an example of the irrational behav-iom for Becker, as it is for Kalmeman. According to Becker, an individual’s demand depends on the demand of other consumers [4, p. 273] and “depends positively on the aggregate demand level” [4, p. 274]:

D^lp.D) (1)

with ^c\ C ■■ ^) denoting the demand of the /-th consumer and D denoting the market demand.

For liierarcliical analysis the equation (1) is notable since it describes interaction between an individual ^G’i and market D. Ascending links are represented by aggregating operator of smmnation, descending links - by reverse influence of the market demand on individual demand. Thus, the Nobel laureate uses a model close to liierarcliical analysis in order to defend the concept of rational behaviom.

Arguing against behavioural economics, the economist identifies “social types of activity of wliich collaborative, partly public consumption of products and services is typical” [4, p. 273] and points out that such approach was corroborated by scholars conducting researches into segregation, customs, gambling, choice of place of abode etc. Thus, Becker introduces a concept of “status” into economic science, wliich means not just social position but certain resomce providing access to other benefits, e. g. to quality education and healthcare [34, p. 24-25].

Becker insists that principle of rationality is sufficient to explain all the examples given by behav-iomal economics without recomse to ad hoc hypothesis about stupidity, sliifts in value system etc. [4, p. 32].

For liierarcliical analysis it is important not only to state existence of the nanoeconomic level of liierarchy but also to analyse relations between the level of an individual and micro- and macrolevels. So it is necessary to mention researches of V.M. Sokolinsky and Ju. Olsevich [25-26], who analyse psychological aspects of perception of value of money, consumption and savings, state economic policy, sliadow economy, labour market and labour relations, economic equilibrium and growth etc. Besides, the authors identify nanoeconomic tools of the state policy: influence on subjects’ consciousness and subconsciousness, achievement of social equilibrium, building of an advantageous image of the state etc.

• V .V. Mikheev’s research is not less interesting for hierarchical analysis of nanoeconomics [21]. The scholar establishes links between the nanolevel and level of the world economy, revealing an individual’s need for international security. Thus, the author not only connects extreme levels of economic hierarchy but also broadens Maslow’s well-known hierarchy of needs.

Apart from appearance of the nanolevel of economic theory it is possible to name some tendencies characteristic of science of the XXth century on the whole. Earlier appeal to morality was prerogative of religion. However, modern scientists tend to particular humanistic orientation, attention to an individual (“new discovery of a man in sciences” [16, p. 15]) and protection of an individual against unregulated capitalism (“globalization with a human face” [34, p. 344]).

It is possible to give different examples of this new trend. For instance, the fact of bestowing the Nobel Prize in Economics on A. Sen, who considers not cost or material wealth but “plethoric, free, full of long-lasting physical and mental health” life to be the aim of human activity, including economic activity [34, p. 298]. The Indian economist states that success of capitalism is based not on egocentrism but on a complex value system.

Another example is substitution of the concept of economic growth for the concept of sustainable socioeconomic development. Finally, conspicuous is the fact that the list of factors of production including land and physical capital was supplemented with an entrepreneur’s talent and human capital assets connected with such spheres as education, health, quality of life, security [31, p. 34]. So both aim and tools of economic science and policy have changed - now they are for the sake of an individual and through an individual’s development [34, p. 312].

We have listed only a few examples of anthropologic, humanist switch in economics. Our research doesn’t aim at considering propositions and results of ethical economics1. We will only state some points important for hierarchical analysis.

In our opinion, the most interesting and comprehensive results (among recent research), which lie far beyond the framework of economic theory, were obtained within M. S. Zagulin’s “economic theory of an individual”. Its subject is “an individual as a subject of management” [11, p. 7], its content is studying laws of people’s economic behaviour. Zagulin notes that an individual’s fundamental characteristic is the ability to be a worker, an owner and a consumer all in one. These roles are analysed by the author from various aspects (at various “levels of knowledge” [11, p. 15]): ideological, political, legal, socio-psychological etc. As an optimal, a personality type “ideal manager” is defined, which possesses the following qualities: as a worker -realism, ability to defend his/her rights, self- organisation, business activity; as an owner - spirituality, efficiency, business morality; as a consumer - humanism, social partnership, legislative initiative etc. [11, p. 118].

Taking all the aforesaid into consideration, it is possible to represent the following schematic view of economy in terms of ethical economics: an individual is the origin and the ultimate aim of social development; however, society can limit individuals’ activity as well as form their moral compass with the help of morality.

At the same time pure economic theory is a tool of analysing only rational activity while ethical economics is aimed at “investigating exactly formation of preferences and development of perception of value qualities and possibilities of use” [17, p. 154]. So as a positive science ethical economics applies methods of ethics in economics and as a normative theory it is a theory of ethical rules and guidelines. In the latter meaning ethics turns out to be close to politics as they both provide rational economic activity at the individual and public levels [16, p. 8].

Rational (“economical”) principle is formal, indifferent - that is purpose-rationality (according to M. Weber [16, p. 73]). It can be applied when the aim is very clear (profit or utility maximisation or costs minimisation). This principle is opposed by axiological rationality, which is guided by the values given from without (e.g. by tradition or authority) and create the aims of activity itself.

At the same time ethics and economics are “in interconnection, which is close and fundamentally harmonious, however not completely free from tension” [30, p. 291]. Ethical economics doesn’t deny or substitute economic theory and its scientific conclusions on market functioning: “a morality that believes itself able to dispense with the technical knowledge of economic laws is not morality but moralism” (cardinal J. Ratzinger, pope Benedict XVI) [30, p. 299].

In this respect economic and ethical rationality correlate hierarchically. Ethical rationality is at a higher level and determines economic rationality, in accordance with which individuals act. However, an economic criterion underlies ethical rationality in that choice of the most efficient ethical norm is always made basing on economic considerations.

Here it is useful to note that ethical economics found its application in practice of German ordoliberalism. O. Schlecht identified 10 principles of the “economics of order” [30, p. 284-299], which can be briefly stated the following way: market is the most efficient economic model (thesis 1), but it is reasonable only if it is competitive (4); at the same time it cannot reject morality (2) as it cannot resolve all important social issues (3) and needs “social equilibration” as a condition for social progress (5). Market as a mechanism of regulating microrelations should be supported by the state macro policy (6), infrastmcture investments (7), protection of nature (8), democracy and free state (910). M. Albert contrasts this German-Japanese model with an Anglo-Saxon one [3, p. 23].

In conclusion we would like to introduce some integrating observations. In modern economic theory a new nanoeconomic subject of research is being elaborated. Different scientific schools are engaged in developing this field, and they present essential difference in methodological approaches and theoretical results:

• -    behavioural economics denies the idea of economic agents rationality; evolutionism is based on bounded rationality; neo-institutionalism and ethical economics preserve the concept of rationality in theory developing criteria for rationality of higher orders (metarationality).

• -    evolutionism rejects neoclassical economics and suggests a new paradigm; behavioural economics criticises the axiom of rationality, but it is still not clear what changes into the theory it entails; neoinstitutionalism broadens and deepens neoclassical theory maintaining its core (in Lakatos’ understanding); ethical economics develops the neoclassical model as its own special case, which is of interest to scientists but not to practitioners.

• -    neo-institutionalism is a sort of economic imperialism that tries to extend the methods of economic analysis on issues of other fields such as sociology. Behavioural economics is a sort of expansion of psychology into economics; evolutionary theory is expansion of biology into economics; ethical economics is expansion of ethics into economics.