Microeconomics: Behavior, Institutions, and Evolution

Citation

Bowles, S. (2004). Microeconomics: Behavior, Institutions, and Evolution. Princeton University Press.

Chapter Summary

The book runs to roughly 580 pages in four parts and fourteen chapters, preceded by a prologue and followed by thirty pages of problem sets, additional readings and references. Each chapter opens with an empirical puzzle or historical episode that the models in the chapter are meant to illuminate. The publisher adds that agent-based simulations are available online so that readers can experiment with the models.

Prologue: Economics and the Wealth of Nations and People

Returns to the classical economists' concern with the wealth and poverty of nations and people, and sets out the approach: a microeconomics in which institutions shape individual behaviour and institutions are in turn shaped by individual actions, technological change and chance.

Part I, Coordination and Conflict: Chapters 1–2: Social Interactions and Institutional Design; Spontaneous Order: The Self-organization of Economic Life

Chapter 1 introduces social interactions through simple games, among them a prisoner's-dilemma-style "tragedy of the fishers" and an assurance game, and with them the concepts of Nash equilibrium and Pareto efficiency. Chapter 2 asks how order can emerge without design, using replicator dynamics and evolutionarily stable states, with examples such as residential segregation and the evolution of property rights.

Chapters 3–4: Preferences and Behavior; Coordination Failures and Institutional Responses

Chapter 3 compares the standard route from preferences to behaviour, the maximisation of expected utility, with evidence that preferences depend on the situation and that self-interest does not always prevail, and discusses prospect theory, inequality aversion and reciprocity. Chapter 4 models coordination failures such as team production and builds a taxonomy of coordination problems and of the ways institutions respond to them.

Chapter 5: Dividing the Gains to Cooperation: Bargaining and Rent Seeking

Treats bargaining over the gains from cooperation, including the Nash bargaining solution and alternating-offers models, together with rent seeking and bargaining breakdowns.

Part II, Competition and Cooperation: The Institutions of Capitalism: Chapters 6–7: Utopian Capitalism: Decentralized Coordination; Exchange: Contracts, Norms, and Power

Chapter 6 treats the fundamental welfare theorem and the Coase theorem as idealised limiting cases rather than descriptions of real economies. Chapter 7 starts from the observation that contracts are typically incomplete and explores norms, repeated interaction, reputation and asymmetric information.

Chapters 8–10: Employment, Unemployment, and Wages; Credit Markets, Wealth Constraints, and Allocative Inefficiency; The Institutions of a Capitalist Economy

Chapter 8 builds a model of the employment relationship in a firm and extends it to general equilibrium with unemployment. Chapter 9 models credit markets and shows that wealth affects contract forms and allocative efficiency. Chapter 10 considers why control rights in firms usually belong to suppliers of capital and what this implies for the exercise of power.

Part III, Change: The Coevolution of Institutions and Preferences: Chapters 11–13: Institutional and Individual Evolution; Chance, Collective Action, and Institutional Innovation; The Coevolution of Institutions and Preferences

Chapter 11 uses replicator models with within-group and between-group selection to study competing patterns of behaviour in early human groups and the shift to agriculture. Chapter 12 applies stochastic evolutionary game theory to institutional change and collective action. Chapter 13 develops a multi-agent simulation of the joint evolution of institutions and preferences.

Part IV, Conclusion: Chapter 14: Economic Governance: Markets, States, and Communities

Closes with the question of "getting the rules right", evaluating markets, states and communities as alternative and sometimes complementary structures of governance.

Key Concepts

Part I (Chapters 1–5)

• Coordination and conflict: social interactions in which individual best choices produce outcomes that are worse for everyone.
• Replicator dynamics: a model of how behaviours spread in a population according to their success.
• Social preferences: motives such as reciprocity and inequality aversion that depart from pure self-interest.
• Bargaining and rent seeking: struggles over the division of the gains from cooperation.

Part II (Chapters 6–10)

• Incomplete contracts: the idea that contracts cannot specify every contingency, so outcomes depend on norms and power.
• Wealth constraints: the effect of wealth on who can borrow, own and control, and so on the form of contracts.
• Residual control rights: the right to decide whatever is not specified by contract, which the book connects to power.

Parts III–IV (Chapters 11–14)

• Coevolution of institutions and preferences: the joint, mutually reinforcing development of economic institutions and individual dispositions.
• Stochastic evolutionary game theory: evolutionary models with random deviations that allow a population to move between equilibria.
• Economic governance: the balance among markets, states and communities.

Critical Analysis

Strengths

• A different organising idea. Rather than prices and isolated markets, the book is organised around social interactions, institutions and their evolution, and uses game theory, contract theory, experimental evidence and dynamic models as its tools. Danny Yee's review says Bowles takes behavioural and experimental results as foundations, not add-ons.
• Models with their limits stated. In Yee's account the models are presented with careful attention to their assumptions and limitations, and the author is wary of treating the Walrasian benchmark as a description of real economies.
• Light mathematics, brisk exposition. The review notes that only simple calculus is needed and that the mathematics is presented succinctly.
• Problems that make one think. Yee describes the thirty pages of problems as multi-part scenarios designed to test understanding of core ideas rather than simple applications, and the publisher adds online simulations for experimenting with the models.
• Link between theory and history. Each chapter begins with an empirical puzzle or historical episode.

Limitations

• Pace and prerequisites. The same review observes that ideas arrive at a brisk pace and a high level of abstraction, and that the book assumes some previous exposure to formal microeconomic thinking; familiarity with game theory or evolutionary models would also help.
• Not a conventional first course. The book is intended by the author for graduate-level microeconomics courses and departs from the standard curriculum, so it works best next to a conventional text rather than instead of one.
• Unsettled material. Bowles describes the field as one in flux in which little is settled, and some chapters, such as those on bargaining, say that better models are still needed.

Where It Fits in the Course

Despite its place in the principles-of-economics list, this is not a first course. Mankiw's Principles of Economics, Sloman, Garratt and Guest's Economics, the OpenStax Principles of Economics and the CORE The Economy 2.0: Microeconomics are introductory texts that teach the standard models, and it is better to know those models before reading Bowles.

Bowles is closest in spirit to the CORE text, which also starts from real-world problems, but it is far more formal. Among the listed books, Acemoglu and colleagues' Microeconomics is a graduate-level text integrating core theory with empirical evidence; it is the more conventional graduate companion, and Bowles complements it with institutions, social preferences and evolutionary models.

How to Use This Book

The book suits graduate students in economics and in neighbouring social sciences, and advanced undergraduates who have completed a principles course, some intermediate microeconomics and calculus. The game theory it uses is introduced in the text, so a separate game theory course is not required.

A practical reading order:

• Core: Chapters 1–5 in Part I give the toolkit (games, evolution, preferences, coordination, bargaining) used everywhere else.
• Institutions of capitalism: Chapters 6–10 are the most directly related to a standard microeconomics course, covering welfare theorems, contracts, labour, credit and the firm; they can be read straight after Chapter 5 by readers mainly interested in economic institutions.
• Evolutionary extension: Chapters 11–13 are the most specialised and can be postponed; Chapter 14 can be read on its own as a summary of the argument.

Attempt the problem sets at the end, and try the online simulations described by the publisher.