ABSTRACT
Over the last two decades a number of attempts have been made to broaden the behavioural foundation of economics. This chapter looks especially at Herbert Simon’s attempt to replace the ‘substantive’ concept of rationality with a ‘procedural’ one. Starting with the ‘growth of knowledge’ literature it is attempted to clarify what theoretical problems, anomalies, antinomies, etc. within the optimization paradigm, are the reasons behind this development. First the so-called ‘general argument’ in favour of the procedural concept of rationality is discussed, which maintains that we encounter a self-reference problem when we attempt to incorporate optimization costs into the optimization calculus. While this anomaly is found in an analysis of a single economic agent, the chapter argues that a far greater problem of self-reference is posed in analyses of the interaction between economic agents. This anomaly was first pointed out in the 1930s by, respectively, F.A. Hayek (1937) and Oskar Morgenstern (1935). The chapter attempts to demonstrate how this problem emerges in different areas of the optimization paradigm such as the theory of perfect competition, oligopoly theory, the theory of rational expectation and finally non-cooperative game theory.
