38th Congress of the European Regional Science Association: "Europe Quo Vadis? - Regional Questions at the Turn of the Century", 28 August - 1 September 1998, Vienna, Austria
Neoclassical economic theory, with its roots (partly) in the marginal revolution of the Nineteenth Century, has been the dominant paradigm for economic thought throughout most of the Twentieth Century?up to the present day. However, for the past several decades economists have been deeply divided on the validity of neoclassical theory, thereby rendering the discipline less effective than it could be in helping to understand socio-economic change. A mathematical synthesis of prominent contributions to psychological and economic theory since the mid-Nineteenth Century has emerged in recent years, resulting in a substantive formulation of individual behavior. Rather than incorrectly assign utility directly to consumables thereby excluding time as an essential parameter, as is the case in mainstream economic theory, this new methodology assigns instantaneous utility exclusively to the expected (intertemporal) process-of-knowing attending mental/physical activity. The result is a canonical theory that represents the expectational and?barring surprise?actual time-dependent interaction of the individual with his environment, including other agents. The paper will provide an overview of basic and applied theory, and its relation to the mainstream and Austrian schools. Applications at the microeconomic level, including the psychological contribution to the real interest rate and the essential relationship between capital and labor, will be addressed. Also discussed will be the initial perceptions yielded by this new mathematical theory on the social psychology of group behavior, including the social-identity approach. New results will be provided on capital function, the etiology of interest rates, the nature of value, the determination of market prices, and other topics of interest.