Sociology 304

March 3, 1998

Neoclassical Economic Approaches

I. Issues of Collective Action

A. Free Rider Problem
B. False Consciousness

II. Neoclassical Economic Agents

A. REM - Example Model
B. IRSEP - Assumptions of Models
C. Conclusion

I. Issues of Collective Action

A. Free Rider Problem. See Folbre, p. 5. This is the tendency to let others do the work or take the risks and yet benefit from this action taken by others. Economists often use this concept when referring to the provision of a public good, which once paid for is generally available for all. For example, once the cost of making and broadcasting weather forecasts has been met, there is no further cost to providing it to more people. Another case is national defense, where the cost is in the initial provision. The question is who should pay for provision of the public good. This problem does not arise in the case of most goods and services that are bought and sold for individual consumption, although it could emerge in any good or service purchased for consumption by a group of people. Lipsey, Courant, and Purvis (LCP) give the example of a group of friends renting a videotape. Who pays for the video and how is the cost of rental distributed? If one individual pays, the others could be considered to be free riders. (LCP, pp. 391-2).

Folbre notes that the same could occur with collective action, and refers to the complexities of collective action (pp. 65-70). Efforts of time, effort, stress, and finances on the part of some in an organization may be necessary to achieve gains for the members. Once achieved, these are available for all, and those who did not assist in achieving these gains might be considered free riders. For example, all students may benefit from new forms of financial assistance that are established as a result of the effort of students leaders and students who undertake political action.

On way in which a public good can be paid for is by a tax on all - with provision by the state through the system of taxation. Charging individuals on the basis of their use is not possible (national defense, broadcasting), is costly (cost of collection high - roads), inefficient for allocation (economists' concern with equalizing marginal costs with marginal benefits), or inequitable (exclusion of those with little income). In this case, the principles of taxation come into effect, and the question is what is an equitable form of tax to pay for the provision of the public good. In the discussion of social welfare programs and collective action, these issues become especially important, and are very relevant in understanding political action. Folbre argues for greater equity in paying for the costs of social reproduction, partly by recognizing that some aspects of social reproduction are like public goods - they should be paid for out of general taxation and not provided only to those who can pay for them as private goods and services.

B. False Consciousness. See Folbre, p. 5, 34, 68. This is a failure to recognize the potential gains from collective action by the group of which the individual is a part. The concept of false consciousness comes from the Marxian approach to social theory. In this approach, false consciousness is a reason for the difficulty of developing collective action. The concept is somewhat different than the free rider problem, where people see the benefits, but do not want to pay the costs; that is, individuals may be selfish and find it in their best interests to let others take collective action. In the Marxian approach, the problem is that people do not see the benefits of a particular set of actions, or they see different consequences emerging from collective action. This lack of visions may occur as a result of ideologies that mask the true nature of the structures in capitalist society.

Marxist analysis contrasts class consciousness with false consciousness. Class consciousness is the ability of the members of a social class to see their position within the social structure and act together to work toward achieving what is in the best interests of this social class. For members of the working class, this means organizing collectively to counter the power of the capitalist class. Not being able to recognize the position of the class or not being able to act on these interests is false consciousness.

Folbre's analysis shows that class consciousness may be a slippery concept. In contemporary society, people may occupy multiple positions, with different or even contradictory interests, makes false consciousness problematic. In this situation, what is class consciousness and what is false consciousness? On page 68, Folbre gives some examples of interests that might be considered to demonstrate false consciousness, but really show how there are different bases for organizing identification and loyalty. For example, elderly people may attempt to preserve a particular status quo (perhaps to protect pensions or retirement savings), even when action to do this may not seem to be in the best interests of their social class or gender. Working class people with heterosexual sexual preference may unify across gender lines against those with a different sexual preference, and not act in accord with their interests as members of the working class.

II. Neoclassical Economic Agents - REM and IRSEP

A. Rational Economic Man. REM.

While economics certainly recognizes structure in the form of scarcity and constraint, the focus of much economic theory is on "rational choices of self-interested agents" (p. 17). It is these models of rational behaviour that form the core of neoclassical economics. There are two parts to the neoclassical economic model, and this may not always be apparent in Who Pays for the Kids? The first part is the model of individual behaviour and the second part is what are the results of the model for groupings larger than the individual or for the whole society.

1. Model of individual rational choice. These are the microeconomic models of rational choice by individuals who are attempting to maximize their own utility or satisfaction through these choices, as briefly outlined on the first half of p. 18. That is, these models deal with issues of individual decision-making at the micro or individual and household level. Such models of individual choice focus on how people make rational economic decisions in a situation where there are scarce resources. This approach emerges from the utilitarian approach of Jeremy Bentham (1748-1832) who coined the term "utilitarian" and who made the famous phrase "the greatest happiness for the greatest numbers" popular. Bentham's idea was that individuals make choices that increase their utility or happiness, and reduce their pain or disutility. "Bentham argued that self-interests, properly understood, are harmonious and that the general welfare is bound up with personal happiness." (The New Columbia Encyclopedia, 1975). The latter argument is the second part of the individual rational choice model.

2. Societal Result. The second aspect of the model is the macroeconomic or the result for society when large numbers of individuals and enterprises each make rational choices in their own self-interest. According to the ideal model, the result of such pursuit of individual self-interest is to produce the maximum benefit for society as a whole. Here Folbre refers to the model as eliminating excess profits and unemployment, and even discrimination (last half of p. 18). Discrimination is eliminated because those enterprises who do not make the best economic use of resources are not as efficient as those who do. The less efficient (the discriminators) cannot offer the product at as low a price or with as good service as the more efficient (the non-discriminators), so that the discriminators are driven out of business. This second part of the model is based on a number of restrictive assumptions which may or may not come close to describing markets and societies.

3. Example of an Economic Model with Rationality - Choice Concerning Job Hours.

Note. Please obtain the diagrams for this section from the instructor or from the binder on reserve in the Library.

This example is intended to illustrate the method that is often used in neoclassical economics, a model of choice within the context of constraint. Following the example is a discussion of the implications of the model and the assumptions on which the model is constructed. The model is described in words here and Figures 1-3 illustrate the construction and workings of the model.

This example examines how an individual might decide how many hours to put in at a job each week. Suppose that there is a fixed wage rate, and there is a choice concerning how many hours the individual will work during a week. What is the process by which that individual decides how many hours to work? How many hours worked does this result in and what is the total pay?

In order to make the decision, a choice has to be made between two scarce things, time and money. Each extra hour worked means greater pay, but at the same time the worker gives up some free time or time that could be spent at other activities. Examining this choice from the other direction, if the worker wants more time for other activities, this means reducing the hours worked at the job with the consequence that total pay is also reduced.

Suppose the wage rate is $10 per hour. One possibility is that a worker decides to not work at all at a job, and in this case the pay is $0. At the other end of the spectrum, since time is limited to 168 hours in the week, the maximum amount of money that can be earned during the week is 168 x $10 = $1,680. But this would require working 24 hours a day for seven days a week. In between this, there are many combinations of allocation of time and pay.

From the straight line in Figure 1, the pay associated with each choice of hours of employment can be determined. At the lower left, with 0 hours worked, pay is $0. The line can be extended upwards to the right, so that at the top right, total pay is $1,680 when there are 168 hours at the job. More likely, hours worked are 50 or less per week. When a worker works 20 hours per week, pay is 20 x $10 = $200 and when 40 hours per week are worked, pay is 40 x $10 = $400. In Figure 1, call the straight line giving these various combinations of hours worked and pay, the income line.

In order to answer the question of how an individual choose the number of hours worked during a week, it is necessary to think of the relative value of money and time to the individual. Suppose the worker is working relatively few hours each week and we ask the worker how much they would need to be paid to work 1 more hour? It might be that $5 an hour would be sufficient to induce the worker to work one more hour. At this point the worker may be desperate for some money, and if the alternative is idle time, then it might not take all that much pay to induce the worker to work an extra hour.

Now, at the other end of the spectrum, suppose the worker working a lot of hours, say 60 hours a week. How much would you need to be paid to work one more hour? Perhaps free time has now been cut so much for this worker, that the worker will only put in extra hours at the job if paid a lot more. While Figure 2 may exaggerate the situation, beginning at 60 hours worked, in order to get the worker to work 10 more hours, the pay must be $40 per hour. Given a reasonable pay level, by the time the worker works 60 hours, he or she has already received considerable pay for the week, and free time away from the job is becoming very hard to get, and for the worker is becoming more valuable.

The idea here is that as a worker puts in more hours at the job, the value of time for the worker is likely to increase. He or she will consider it necessary to be paid more for each extra hour worked. Starting at only a few hours on the job, the employer need not pay all that much in order to get a worker to put in more hours - the money is really needed, there are no other alternatives, and the worker has considerable free time so he or she is willing to give some free time for not all that much money. But as the number of hours worked is increased, the worker will need to be rewarded by higher wages to get them to continue working more hours. At some point the worker may say it is not worth working any more hours, or there is danger of physical or mental exhaustion. At this point, no extra amount of money would induce the worker to work more hours.

The curved line in Figure 2 demonstrate this set of individual preferences and it can be called the line of equal preferences. While the height of the line is arbitrary, the curved nature of the line is important. At smaller number of hours worked, say 30, extra hours worked can be obtained by the employer by paying $10 per hour. That is, to get the worker to move from 30 to 40 hours worked per week, the employer must pay $10 per hour, for a total of (40 - 30) x $10 = $100. As noted above, for the employer to get 10 more hours work from the worker when the worker is already working 60 hours requires payment of (70 - 60) x $40 = $400.

There could be several such lines of equal preference that illustrate the choices or trade-offs that the individual is willing to make based on his or her preferences and evaluation of the utility of income and the disutility of extra hours at the job. At few hours of employment, the individual is willing to sacrifice considerable time in order to get money, at many hours of employment, it takes much more money to induce the individual to work more hours at the job. In principle, it should be possible to measure the shape of these curves for individuals. It would seem no more difficult than measuring attitudes, opinions, or many psychological variables.

Figure 3 puts the lines from Figure 1 and Figure 2 together to show the choice made by the worker. The equilibrium solution shown is where a worker works 40 hours per week, and if the pay is $10 per hour, total pay for the week is 40 x $10 = $400. The reason for this solution is as follows. If the hourly pay is fixed at $10 per hour, the worker will work just enough hours so that the last hour worked is worth $10 to him or her. That is, the worker was actually willing to work for less than $10 per hour if only fewer hours were available. But the employer is offering $10 an hour, so the worker decides to work more hours, giving up free time. Up to 40 hours a week, that free time was "worth" less than $10 per hour to the worker. But as hours worked increase, the line of equal preferences becomes steeper, so that each extra hour of free time is worth more. For example, the 41st hour might be worth $10.50 to the worker. If the employer only is offering $10, the worker decides to stop working after 40 hours. That is, at 40 hours, the disutility of one more hour of work ($10) just equals what is gained from working up to that 40th hour ($10). But beyond this point, the disutility of working an extra hour exceeds $10, so an hourly pay of $10 is insufficient to induce the worker to work beyond 40 hours.

Diagramatically, Figure 3 illustrates an equilibrium solution at the point where the line of equal preferences just touches the income line. This is where the extra gain from working one more hour ($10) is just exactly balanced with the amount of disutility (also $10) associated with one less hour of free time or one more of work. Given the way these hypothetical diagrams are constructed, this is at 40 hours of employment, giving an income of $400 per week.

4. Some Implications of the Model.

a. Overtime Wages. Figure 4 illustrates why employers generally pay higher wages for overtime. After the regular, agreed upon, number of hours worked, the only way that the employer can induce the worker to work extra hours is to offer a higher wage rate for these extra hours.

b. Supply Curve of Labour. This approach also explains how people alter their hours of work as pay rates increase, with the result that people may not be willing to work very long hours at employment. As wage rates increase, individuals are willing to substitute more non-working time with hours worked. That is, the higher pay induces them to put up with more disutility of work or less free time. But the higher wages also have a positive effect on their incomes, producing higher and higher incomes. As the individual's income rises, there may be a preference for less time being spent at the job, and more hours spent as free time. This latter (income effect) tends to dominate, producing an equilibrium at reduced hours worked. This is what economists call the backward bending supply curve of labour.

In Figure 5a, a wage increase from $5 to $10 per hour leads to a worker deciding to work more, increasing hours worked from 30 (point A) to 50 (point B). But as wages increase more, to $20 per hour, the worker cuts back hours of work to 40 hours (point C).

Another way of thinking of this is that the worker may have a target income that is to be achieved, and this produces the same result. That is, if you need $250 per week, and if the wage rate is $10 per hour, then you work 25 hours. If the wage rate is $15 per hour, you need only work $250/15 16.7 hours.

c. Different Preferences of Male and Female REM. Folbre notes how it is sometimes argued that some people who have a greater preference for household work or leisure than do others. Alternatively expressed, some people have a greater disutility associated with employment than do others. Given the same wage rate, those with greater preference for free time and greater aversion to work will put in less hours at a job than do those people with less preference for these. In Figure 6, the line of equal preferences is steeper for F than for M, at least at the point where F decides not to take on more hours of employment. That is, for F, each extra hour worked requires that the pay be greater than for M. If F is female and M is male, then F will work considerably fewer hours than A. This is the reason given by REM at the top of page 19 of Folbre. "Women want to save their energy for housework and child care." Also near the bottom of the same page, "Women place a greater value on family amenities in general, children in particular. They are willing to pay a higher price for family life, because they enjoy it more."

Of course, if there is a target income, or if M and F are husband and wife and M does not share his income with F, then the result could be quite different. Folbre notes (bottom of p. 19) that this might be REM's response to the issue of the sexual division of labour, that is, that females have a greater preference than do males for family amenities and children. The feminist response is that this might explain why women are less likely to marry now.

d. Different Male and Female Wages. A lower wage for females than for males could also explain the fewer hours of employment for females. With similar curves of equal preference, females might choose to be employed for fewer hours, because it is just not worth their while to put in long hours away from the home when they are paid little. In addition, if males and females pool their incomes in the household, then the female can benefit from the higher male wage, as the income from the latter is redistributed within the family (the family wage). This is illustrated in Figure 7.

5. Evaluation of the Model of Choice of Hours Worked.

a. Positive aspects. The model is concise, relatively simple, and strips away many issues that may confuse the question of how choice is made. It focuses directly on the main element of choice - between time and money, and produces a quick and understandable set of results. In principle the model is testable, as are each of the implications noted in section 4. The model can be widely applied, across space, time, social groups, and societies, and it is not specific to any one time or place. The explanation provided by the model is reasonable, that is, that time spent at a job has a disutility which must be compensated for by wages. This model provides an example of the power of some of the neoclassical economic models.

b. Negative features. At the same time, the model may be too simplistic, in that in reality other factors impinge - types of jobs, varied sets of responsibilities, limited incomes, coercion, limited opportunities, and discrimination. This choice is not one that is available to most individuals. Employers often dictate the number of hours of the job, and the only choice is one of whether to take that job or not. The model does not consider reasons for different preferences. For example, poverty or low income may dictate very long hours worked, regardless of preferences. Unemployment may mean that an individual faces the possibility of no hours of employment being available. Trade unions and employers each act as organized groups, dramatically affecting the structure of the labour market and the choices available for individuals and employers.

c. Relation to Structure of Theory. (Refer to schema of January 6 and 8, 1998). The model of choice of hours worked illustrates an ideal type model of the central panel in the diagram. The model makes assumptions about preferences and wages; uses concepts such as utility, wage, job; constructs statements (written or diagrammatic); puts these in formats like the diagrams shown; and yields hypotheses and explanations. It appears to illustrate all the aspects of the middle panel. Where the model is weaker is in relation to what is noted on the left and right panels, such as the fact that most employers do not offer work on this basis. Some hypotheses and conclusions from the model can be verified (overtime paid at a higher than normal rate of pay, backward bending supply curve of labour), other hypotheses such as the different preferences of male and female for household as opposed to market work may also seem to be verified, but also are consistent with other models. In addition, the policy and practice portion of the model may be weak. But the model is internally consistent, makes sense once the assumptions are adopted, and yields some useful conclusions.

6. Terms Associated with Models.

Exogenous - originating from without. The rules, norms, and preferences are exogenous to the model because they are assumed to be given. In the model of hours at the job, the wage rate is exogenous, because it is fixed by the employer. Rules that do not allow a worker to choose the number of hours to be worked and modify the contract between worker and employer are exogenous to the above model. That is, they are based on social practice that is set out in laws or agreed upon practice.

Endogenous - originating from within. In the model of hours at the job, the number of hours at the job chosen by the worker, the number of hours of free time resulting, and the costs and benefits obtained from this decision are endogenous to the model.

B. IRSEP - Imperfectly Rational Somewhat Economic Persons.

The model of rational economic man (REM) is the model that typifies the neoclassical economic approach. This is the model of many textbooks in economics, and it emerges from the classical liberal economic model. In stylized form, Folbre summarizes the model succinctly as follows:

REM - Traditional Neoclassical Stylized Model (p. 24).

Exogenously given factors: rules, norms, preferences

Agents: individuals

Processes: exchange

Sites: markets

In recent years, the REM model has come under considerable criticism, because it seems quite different from the experiences of people and differs from the institutional features that exist in the economy and society. As a result, economists have modified their models and Folbre describes some of the modifications on pp. 20-25. She labels this model the imperfectly rational somewhat economic person (IRSEP). In summary form, this model is described as follows (p. 24):

IRSEP - Neoclassical Institutional

Partially endogenous and partially exogenous factors: rules, norms, preferences

Agents: individuals, interest groups

Processes: exchange, bargaining, coordination

Sites: markets, social institutions

The IRSEP model brings the theoretical economic approach closer to the institutional reality that people experience in contemporary society. But the result of the modifications is that IRSEP "undermines any strong claims about the inherent efficiency of a pure market economy" (p. 24). That is, the very strong positive social and economic result of the REM model may no longer hold. For example, if there is not perfect, costless information, with reasonable certainty about the future, there is no assurance that consumers will select those products that maximize their satisfaction. They may instead consume products on the basis of habit and custom, ease of availability, or advertising.

Assumptions and Modifications. The following notes contain a discussion of the assumptions associated with the REM model, and the changes to these assumptions that appear in the modified IRSEP models.

1. Individual. The model focuses entirely on the individual. The individual is isolated, with no reference to interaction with other individuals. This is sometimes referred to as an atomistic model of society, whereby the individual is the basis of society (Hunt, p. 41). A decision is made by an individual without any reference to others, with that individual considering only his or her own choices, opportunities, monetary gain, and disutility. This is the basis of a liberal model of society - i.e. a society constructed from the set of all the individuals, although in the original liberal model, the individuals were all male. These individuals have a certain equality with each other, although there may be much debate about what the nature of that equality is.

One way in which this model has changed is that economists have introduced a wider range of types of decision makers. In the IRSEP model, the decision makers could be individuals, households or families, or interest groups.

a. Household and family. There is now a whole new household economics, considering factors such as choices within the family, choices concerning the number of children, the benefits of love and sex, and the costs of exit from the model (divorce or separation). It is not clear in the REM model why REM would even want to form a family.

There are many within household strategies. An example of how changes in social and economic conditions changes the relationship between children and family (middle of p. 23). In societies where the child depends on a bequest from the parents, then within family solidarity may be strong, and children contribute to family income and maintain the elderly parents. This could be characteristic of many agricultural societies, or groups that have family enterprises. As industrialization occurs, with the development of a more jobs and activities outside the household, children may become less committed to the family of origin, and contribute little to the parents. Education, jobs and incomes are part of the market economy and the child has little choice but to become committed to finding a place there.

b. Collectivities. Trade unions. Individuals may take actions that impose considerable cost on themselves, without any assurance of immediate gain, other than some promise that if all in the same situation act together, all are likely to gain. Strikes impose many costs on not just the individual workers but family members and other individuals. But in the end this may be worthwhile for the trade union members. Because these choices involve discussion and strategizing with other members, these cannot be individually based decisions, but must be collective in nature. At the other end, those who decide to become racists, discriminating against certain types of other individuals, may themselves bear costs.

Individuation. Folbre (p. 28) asks how collective action occurs. People start as individuals and become socialized into a certain group. Folbre argues that the process of individuation may be a collective one. As individuals develop links and commitments to others, this helps them define their identity - so that one is not just a female, a worker, a lesbian - rather, the individual may be none or all of these, and her view of her own identity is one that develops as a result of a complex of interactions and processes involving these. The process of socialization of children, whereby children become individuals, but simultaneously become part of a peer group shows that the process of development of the individual cannot be considered apart from the collective.

c. Boundaries. For Folbre, this also raises the issue of where the individual ends and where the collectivity begins. This is clear cut for REM and probably IRSEP, but not so clear in practice. These boundaries may shift depending on the context in which the individual is in, they are likely to change over time, and they imply difficulty defining the utility or interest of the individual. For example, the model of choice of hours might have made sense at one time, but if an individual is part of a family, the decision concerning hours worked is likely to be a joint one, between partners (how many hours each will work), and perhaps with respect to child care responsibilities (how much time to devote to those). The individual is no longer clearly able to make decisions in isolation - some decisions may occur this way, others are made jointly with partner, children, parents, or friends, so the boundaries shift depending on what decision is being considered. Many of the decisions may interact, so that there are both shifting boundaries and interacting decisions, making simple models such as the choice of hours worked less clear cut.

2. Economic Self-Interest. The decision in the model is a self-centred one, in that there is no reference to the feelings, utility, or well-being of other workers, associates, friends, family, or household. In addition, the focus of the model is on economic or monetary self-interest. Other variables may be considered as being present, in terms of preferences, but do not form a central role in the decision-making process. For example, in the case of choice of hours worked, the individual balances monetary gain against the value of the loss of free time. While this is reasonable, there may be a more complex process involving non-monetary characteristics of the job, relationships with co-workers, family commitments, and norms concerning work behavior. These latter variables might be captured by the shape of the curves of equal preference (see item 6 below), but there is little explicit analysis of these.

The modifications in the IRSEP model may recognize love, caring, help for others, or altruism: "unselfish devotion to the interests and welfare of others" and altruistic behaviour: "thoughtful of welfare of others" "unselfish" (Gage). Folbre questions how someone could be so narrowly self-centred in market behavior and so altruistic in the home (p.20). The two forms of motivation seem at odds with each other and it is not clear that individuals can act so differently in different situations. What Folbre proposes is that families can be considered to be sites where there are "shifting and somewhat unpredictable mixtures of selfishness and altruism" (p. 23). Both of these are reasonable explanations of what we consider to be types of household behavior, and each is rational. At the same time, these two forms are always being considered, balanced, re-considered, or re-negotiated. These two are somewhat reminiscent of Talcott Parsons pattern variables.

3. Perfect information. In the above model, the wage rate is known to the worker. Also implicit in the model is that the worker knows the wage rates of other employers and the state of the labour market. Utility or disutility of work is also known, or the individual finds it possible to balance these two. In models of commodity markets, consumers know prices and qualities, and there is no cost of obtaining information about these.

The IRSEP model recognizes that (i) the future is not known with certainty, but is uncertain, (ii) obtaining information is costly, so that decisions are likely to be made on the basis of very limited and partial information, and (iii) the process of making a decision may take time and be a difficult and costly process. (p. 20) As soon as these modifications are recognized and included in a model, the decision-making process may be much less clear-cut and difficult to conduct in a rational manner. For example, in terms of daily activities, people may continue with their usual course of action because they have inadequate information to make a rational decision about changes in these actions.

4. Rationality. In order to reach an equilibrium point in the model or to undertake an activity, the individual must make a decision. The models assume that the decision-making process is rational, that is, the individual carefully weights the advantages and disadvantages of any course of action, making this process considered and deliberate. The result of the decision is to produce the best course of action for the individual.

There are many circumstances where it may be difficult for an individual to be so rational. For example, a worker may wisely save hard earned income for retirement, and then go on a gambling or spending binge for a short time if a windfall comes his or her way. For the REM model, this is clearly irrational. But money is a social good, with different forms of money having different meanings for individuals - in violation of the rational principles of the model.

Again, the IRSEP model may recognize irrationality (p. 21), or the individual may be rational in some aspects of behavior, but may be irrational in others. Forms of behavior such as religious activity, love, discrimination against others all could be considered irrational in the REM model, because each of these could result in not being able to obtain the greatest economic benefit for himself or herself.

Folbre discusses some of the meanings of rationality (pp. 26-28) in a manner similar to some of the meanings of rationality discussed by Max Weber. Within the REM model, rationality is assumed to be a clearly delineated self-interest, and no more. Folbre notes that (i) rationality may involve something more than self-interest, and could include care for others or a decision to act in concert with others, and (ii) that self-interest itself may be a fuzzy concept, with shifting and contradictory meanings. For example, more goods for self leave less for children or partner, more time working at trade union means loss of family time. How are all these to be balanced. Folbre proposes what she calls substantive rationality or purposeful choice (p. 28). This means that we "ask how people define and pursue their desires, but avoids any implicit dichotomy between rational and irrational" (p. 28). Certainly economic self-interest is part of this, but this is only part of a larger set of motivations for decision-making.

5. Inert. In the REM model, the individual is inert in that the individual does nothing unless some utility can be obtained it. The above model would have people working no hours, and essentially doing nothing, unless they are rewarded monetarily. This idea emerged in nineteenth century liberalism by those who thought of people as lazy and unwilling to work. (Hunt, p. 41). While this is not an aspect of the models noted by Folbre in REM or IRSEP, it was part of the original liberal economic and political model.

6. Tastes and Preferences Given. While the REM model recognizes that there may ve very different sets of preferences among different individuals, the models themselves are not particularly concerned with the different sources of these. In the model of hours worked, the slopes and shapes of the lines of equal preference are determined outside the model, or are exogenous to the model. These are based on norms and preferences, which are part of sociology, not economics.

The IRSEP model recognizes some of this as a problem, and may attempt to incorporate the idea that norms are slow to change (p. 22), or that the economy, through advertising or other cultural activities may influence the individual and result in changed preferences. That is, more than prices and incomes are involved in determining choices. An IRSEP model might permit certain norms such as "a good day's work for a good day's pay," or the "family wage" to be instituted within the labour market. Note that the main modification Folbre makes here is that the rules, norms, and preferences become partly endogenous factors, rather than purely exogenous factors. This makes the analysis much more sociological in that norms, preferences, rules, and culture all form an essential aspect of sociological analysis.

7. Free Choice. In the REM models, the individual has choice, but within the context of scarcity. Note that no one dictates the hours of work, and this can be freely chosen. Choice is freely selected, no one is telling the worker how many hours to put in at the job. Coercion, discrimination, treatment on the basis of race, ethnicity, or sex play no role in this model

Folbre notes that IRSEP has developed a number of models to deal with some aspects of this. On p. 21, she notes that employers may make hiring decisions on the basis of superficial characteristics such as skin colour or sex, using these as a proxy for what they think may be the abilities of workers, without ever attempting to find the true ability of each worker. Institutions also promote people within the institution, either because there is an internal labour market, or because of union seniority rules, or both. These again limit individual choice and lead to models such as bargaining models and game theory. Marxist structural models make a more systematic and thorough critique of this assumption.

8. Personal and Financial Assets Given. This may not be so apparent in the above model, but is an assumption of the microeconomic REM models. While the size of an individuals assets may change over time, through decisions concerning education or starting a business, the choice models often do not question the amount of these at any one point in time. In addition, these models do not usually consider the consequences of great differences in assets.

The IRSEP models address these concerns by considering that there is not always equal opportunity, or by examining the distribution of income and wealth that occur in society. An examination of this usually shows great inequality, with a few very wealthy, considerable numbers of poor and disadvantaged individuals, families, and groups, and the bulk of the population between these two extremes.

9. Competition. For the general positive economic and social results of the REM model to occur in society, there must be competition, that is, large numbers of producers and consumers, with no one able to influence the price, and with no barriers to entry or exit from the market.

In practice, there are many ways in which this is violated in the REM models and a large part of the IRSEP approach is to build models that show how imperfect competition, oligopoly, and monopoly affect decision-making. Some of these models use bargaining and coercion, rather than free choice, as means of reaching a solution. There are models that incorporate barriers to entry (financial barriers such as inability to raise capital or high entry fees). Contracts may be broken or may not work as anticipated. Discrimination, unemployment, and boom and bust cycles all interfere with the ideal workings of competition.

Folbre points out though that once all these elements are introduced into the model, the very positive social and economic consequences of the REM model are unlikely to occur. That is, if the REM model works properly, production using the scarce resources is maximized and individual satisfaction is also maximized, so that there is economic efficiency. But if the modified IRSEP models produce very many deviations from the original equilibrium solution, there is no way to judge the efficiency of the outcome. Different outcomes may be evaluated against each other, but there is no assurance that there is not some other outcome that might be a lot better.

C. Conclusion.

Folbre concludes the section on neoclassical economic models by noting that there have been many modifications and improvements in these models. Her analysis builds on these changes, but she also notes that a feminist approach must go beyond the rational choice models. In addition to the detailed modifications she notes, her discussion of (i) purposeful choice, and (ii) strategies, are both worth considering (p. 28).

Purposeful choice is a concept that looks on individuals as making choices. However, these choices need not be characterized as rational or irrational, individual or collective, or so decisive as in the REM model. For Folbre, people make choices in the context of others, with more than pure individual economic self-interest being the chief consideration. There may be a range of motivations, some selfish and some altruistic; there may be shifting boundaries among individuals and groups; and there may be imperfect information within which to make decisions. Choices do occur, but it is necessary to consider "how people define and pursue their desires" (p. 28).

A related concept is that of strategy, whereby purposeful choice defines a range of actions that an individual might take. For example, Folbre notes how collective action may be a "defensive strategy for protecting against a public 'bad' being imposed from without" (p. 28). It may be that there is a range of choices, but (i) each set of choices involves aligning the individual with others in different ways, and (ii) the choice may have a longer term set of consequences. Folbre does not really develop the implications of this idea, but it seems implicit in her analysis.


Hunt, E. K., Property and Prophets, sixth edition.

Lipsey, Richard G., Paul N. Courant, and Douglas D. Purvis, Microeconomics, eighth Canadian edition, New York, HarperCollins, 1994.

Notes for February 26 and March 3, 1998 class. Last edited on March 3, 1998.

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