The Theory of Economic Personality 1527556441, 9781527556447

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The Theory of Economic Personality

The Theory of Economic Personality By

Taner Güney

The Theory of Economic Personality By Taner Güney This book first published 2024 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2024 by Taner Güney All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-5275-5644-1 ISBN (13): 978-1-5275-5644-7

TABLE OF CONTENTS

Preface ...................................................................................................... vii Chapter 1 .................................................................................................... 1 Introduction: Why Economic Personality? Chapter 2 .................................................................................................. 17 Economics and Uncertainty: The Importance of Uncertainty Chapter 3 .................................................................................................. 49 Person’s Decisions in Uncertainty: The Structure of Behavior Chapter 4 .................................................................................................. 81 Economic Personality: Fundamental Determinants Chapter 5 ................................................................................................ 141 Economic Personality, Uncertainty, and Economy References .............................................................................................. 157 Index ....................................................................................................... 173

PREFACE

Do individuals have an economic personality? Is there a pattern in the economic behavior of real-life people? Are real-life economic behaviors predictable? Homo economicus, as defined in economics, is the most important one among the basic assumptions, on which the models of mainstream economics are based. The reason for this is the economic behavior of rational people. A rational person must repeat behavior that aims to maximize his benefit. For example, he should always choose the highest rate of return, preferring the most over the less. Therefore, there is a behavior pattern that a rational person must exhibit consistently in all his economic behaviors. Thanks to rationality, the behavior of Homo economicus is predictable and free from uncertainty. However, uncertainty is the most prominent and ancient problem regarding the economy. The uncertainty that arises in every significant crisis causes the economic theory based on rationality to be damaged. After the 2008 crisis, a theoretical debate started again between the schools of economics. This debate focuses again on the invalidity of rationality, which is a hardcore economic theory. Economists tend towards more realistic definitions of human beings instead of rationality eliminated from uncertainty. Behavioral economics, which gained popularity after the 2008 crisis, caused the bounded rationality of individuals to come to the forefront even more. Institutional economics, which accepts that the individual can have bounded rationality, pays importance to the behavior pattern of the institutional individual. Homo institutionalism draws on bounded rationality and habits acquired from experience in their repetitive economic behavior. Some experimental economists define Homo reciprocans. Homo reciprocans, who have a reciprocal behavior pattern, systematically display unselfish behavior in case of uncertainty. The economic behavior pattern of Homo reciprocans repeats the act of opposing someone, who takes advantage of it. On the other hand, some economists emphasized that human beings have an identity shaped by the psychological and sociological elements. A person, who defines himself with an identity, would be happy when repeating the behaviors required by this identity. Therefore, some economists consider the behavior of Homo moralis. The behavior pattern of Homo moralis makes the individual to repeat the decisions that will enable him to maintain moral standards in his economic

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behaviors in case of an uncertainty. The objective of this book is to reconsider human behavior in real life based on the individual behaviors given above. In other words, it aims to harmonize the real-life human behavior and the human behavior in economic theory. Thus, this book aims to redefine human behavior in case of uncertainty. Therefore, it defines the theory of economic personality. Personality, learning, genetics, geography, religion, culture, technology, institutions, and income comprise an economic personality. These nine factors constitute systematically repeated patterns of economic behavior in case of an uncertainty. Thus, the economic personality leads the individual to exhibit predictable behaviors in uncertainty without the need to be rational. This book has six critical features. First, it explains the systematics of human behavior patterns in real life. In other words, economic personality is a new definition of an individual. This new definition also considers the abovementioned behavioral patterns. Second, it describes the economic personality by considering the uncertainty. Therefore, it explains the inseparable relationship of propositions and theories in economics with uncertainty. Third, the economic personality describes human behavior much more realistically. Thus, the redefined individual can make the new theories produced in economics more realistically. For this reason, this book is a useful source for researchers, who want to use economic personality. Fourth, this book provides an example for economists, who wish to define an individual as more realistic and valuable for economic theory. Fifth, since the idea of economic personality proves that human beings exhibit predictable behaviors without the need for rationality, this book also shows how close the economics is to the sciences such as psychology, sociology, anthropology, geography, genetics, and physics. Therefore, it expands the field of cooperation between economics and other sciences. Sixth, this book contributes to preventing the significant disintegration in economics education after the 2008 crisis. The fact that school segregation is becoming increasingly evident causes students studying economics to experience confusion. The theory of economic personality, which causes predictable behavior, can help students get theoretical training without getting into this confusion.

CHAPTER 1 INTRODUCTION: WHY ECONOMIC PERSONALITY?

Do individuals have an economic personality? Are real-life economic behaviors predictable? How do people choose their economic behavior in case of an uncertainty? Is there a model of the economic behavior of reallife people? Do they have features that protect people from uncertainty and direct their behavior? Do systematically repetitive economic behaviors protect people from uncertainty? Uncertainty is the most significant and ancient problem in the economy. Due to the size of the uncertainty problem, there are many uncertainty approaches in economics (Lawson, 1988). However, the uncertainty approaches in economics can be divided into four parts (Alada, 2000). The first one of these is based on the measurability of uncertainty. The first uncertainty approach was the uncertainty, in which numerically measurable odds ratios were considered. Numerically measurable probability is a tool to gather information about the outside world. This uncertainty approach, which is very popular in economics, is adopted by highly influential economists. For example, R.E. Lucas, a leading pioneer of the rational expectations theory and an essential contributor to this theory, is one of these economists. J. F. Muth is another important pioneer of the rational expectations theory. The second uncertainty approach is similar to the first approach. In this approach, uncertainty can be measured numerically too. Differing from the first approach, however, probabilities in uncertainty, based on numerically measurable probability calculations, are not related to the outside world. Instead, measurable probabilities refer to an individual’s mental design and expectations. The pioneers of the second uncertainty approach are L.J. Savage and M. Friedman. Savage and Friedman play a crucial role in developing the expected utility maximization hypothesis. The second uncertainty approach, like the first, is mainly adopted by the mainstream (established, neoclassical) economists. There is a very close relationship between this understanding of uncertainty and the great ruptures experienced in the economics after each significant crisis. The third and

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fourth uncertainty approaches have remained in the background when compared to the first two approaches. Nevertheless, the third uncertainty approach adopted by Keynes is an understanding of uncertainty that economists pay attention to. In the third uncertainty approach, it is accepted that uncertainty cannot be measured. According to this approach, uncertainty is a probability that cannot be measured numerically or in situations without information about the probability. In the third uncertainty approach, probabilities correspond to mental design and individual expectations. On the other hand, probabilities are also independent of uncertainty. This uncertainty approach, which Keynes used in his macroeconomic analysis, is also called Keynesian uncertainty and accepted thanks to the success of Keynesian economics. Finally, the last uncertainty approach emphasizes that uncertainty should be divided into two. In this approach, uncertainty has measurable and unmeasurable properties. Measurable uncertainty, an indicator of risk, depends on statistical probabilities. Nonmeasurable uncertainty covers all situations, where probability calculations cannot be made. This approach, which F. H. Knight introduced to economics, is at the center of his economic analysis. Uncertainty, vital for the propositions produced by economists, has started to draw attention, mainly due to the developments in the twentieth century. It began to be accepted that the uncertainty, which Shackle (1983) especially emphasized, should be included in the science of economics after the 1929 depression. Even though the leading figures of the mainstream economics, such as Irving Fisher, said otherwise, the experience of a major crisis like the one in year 1929 caused the first significant uncertainty break in economics. Despite all of Veblen‘s warnings, the teachings of mainstream economics failed to foresee the coming of the 1929 crisis. Mainstream economists, who were surprised by the crisis, needed help understanding the inability of the market to improve the economy due to their understanding of uncertainty. Still, they believed in the market and said that, without any intervention, the market would get the economy to the point, where it needed to be (Galbraith, 1987). However, Roosevelt disagreed with them, revolutionizing the economic policy long before any economist. The “New Deal” implemented by Roosevelt, years before Keynes’ General Theory published in 1936, introduced the first examples of market intervention (Güney, 2016). After the economy started to improve thanks to the New Deal, when Keynes’ General Theory was published in 1936, a new era began for economics. It began to be accepted more by economists in General Theory and institutional economics, pioneered by Veblen (Güney, 2018). With the changing perception of uncertainty, established economists

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felt obliged to adapt themselves to Keynes’ macroeconomic revolution. The neoclassical synthesis, which emerged with the combination of established economics and Keynesian economics, expanded the field of economic theory. The 1973 oil crisis paved the way for established economists to defeat Keynes (Akerlof, 2019). Neoclassical economics getting closer to its understanding of uncertainty managed to drive the science of economics until the 2008 crisis. However, the established economy was affected by the 2008 recession more deeply when compared to the 1929 crisis. The profound collapse, which was experienced again with a great crisis, took away the defensible features of the economic theories of the mainstream economics (Stiglitz, 2011). Using the hypothetical deductive approach pioneered by David Ricardo, mainstream economics claimed that it produced economic propositions that were effective enough to compete with natural sciences by preventing uncertainty. Inspired by the theories of natural sciences, Adam Smith greatly influenced Ricardo in this regard. On the other hand, in History of Astronomy (1980) published in 1795, Smith stated that error and uncertainty affect economic factors. Smith’s idea of uncertainty remarkably changed in Wealth of Nations (1981) published in 1776. Ricardo chose to follow Smith in Wealth of Nations (1981) over Smith in History of Astronomy (1980). Thus, Ricardo, who imitated the science of physics, produced propositions resembling the physical theories. Isaac Newton, the famous physicist, emulated by mainstream economists, lost all his possessions to the financial crisis of 1720. Thereupon, Newton said, “I can even calculate the motions of the planets, but I cannot calculate the stupidity of man.” With this statement, Newton proved the difference between physics and economics long before the Wealth of Nations. After several events that discredited Smith, Ricardo became highly influential with his Principles of Political Economy and Taxation (1891). Ignoring Newton’s statements, he followed the economics of Adam Smith (1981). In Principles of Political Economy and Taxation (1891), Ricardo clearly stated his emulation of physical science and his understanding of uncertainty. Ricardo raised the individual to a level, where he could see the future perfectly. As stated by Ricardo, the propositions produced thanks to the individual, who could see the future as perfect, conveyed the science of economics to a very prominent level. Because, according to Ricardo, “the results of economics are as certain as the principle of gravitation in physics” (Sowell, 1994; Ricardo, 1952). Ricardo’s dominant economic understanding significantly influenced the economists, who came after him. In mainstream economics shaped in parallel with Ricardo’s uncertainty idea, N. Senior accepted the law of gravity and the theory of wages and profits as equal. Senior (1951)

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stated that political economy must reason from assumptions, not actual events. James Mill was significantly influenced by Condorcet’s idea that man is inherently perfect and prone to growth. Ricardo, inspired by James Mill, emphasized the individual, who can see the future perfectly (Halevy, 1952). This understanding of economics, followed by many economists and Senior, became a tradition that Schumpeter (1954) called “Ricardo’s curse.” Thanks to this tradition, economists have succeeded in eliminating uncertainty in economics. The most important assumption underlying this success is the individual, who perfectly predicts the future. The individual, whose behavior moves away from uncertainty, is used as a representative agent and allows for the production of economic propositions. The rational individual, which has turned into the “basic assumption” of economics, has turned into a light for economists (Güney, 2020). Fueled by this light, Cairnes (1965) compared the power of economic propositions to astronomy. J.S. Mill (1992) suggested that probabilistic calculations should be made to avoid disrupting factors from rendering economic forecasts ineffective. Mill aimed to save economics from uncertainty and turn it into a perfect abstract science. Jevons (1970), who took over Mill‘s idea of probability calculation, made probability calculations based on possible error margins and risks that may arise in the mind of a rational individual. For Jevons (1970), the probability calculation maximizes the Benthamian utility. Neoclassical economics continued introducing economic propositions until the 1929 crisis. The propositions of mainstream economics, which did not encounter any obstacles until the 1929 crisis, are the assumptions of time, where there is no uncertainty. In other words, the mentality of ergodic processes has already formed and only a force from outside the economy could disrupt this structure. P. Samuelson first used the “ergodic” concept to introduce the stochastic process as an indispensable element of economics. The concept of ergodic emphasizes that the future is only a statistical reflection of the past (Davidson, 1982). In an ergodic frame of mind, future knowledge is a statistical reflection that can be calculated based on past or present events. The basic assumption of such a thought is the rational human being. Theoretically, every individual defined in economics has a pattern of economic behavior that considers uncertainty. Homo economicus, the most crucial individual defined in economics, is reasonably necessary for the models of neoclassical economics since Homo economicus is rational. Because the rational person has a pattern of economic behavior (Blaug, 1993). The rational person repeats behaviors that would ensure the maximization of his utility. The utility of the rational person is based on J. Bentham‘s hedonism. Thus, without considering the welfare of others, the

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individual pursues his self-interest, chooses the highest rate of return, and prefers the more to the less. In more technical terms, the rational person consistently uses appropriate tools to achieve well-defined results with as much information as possible (Arrow, 1990). The individual, who does not repeat this behavior systematically will move away from being rational in uncertainty. The essential point in this technical definition is that the rational person must exhibit this economic behavior consistently. Since the individual not repeating this behavior systematically will move away from being rational, after utility theory was established in neoclassical economics, the self-interested behavior of the rational person had become inadequate. It was replaced by ‘certainty’ and ‘maximization of consistent preference ranking in the complete information condition’ (Broome, 1991). Then, the expected-benefit interpretation was used to stabilize the inconsistent economic behavior of rational persons caused by uncertainty (Von-Neumann and Morgenstern, 1953). The new classical economists used excellent knowledge of the probability distribution of future prices to obtain the consistent economic behavior that rational persons need to repeat in uncertainty. Because perfect and free information was essential for the repetitive economic behavior of the rational individual. However, it was not enough. In addition to excellent and accessible information, a stable, smooth-moving set of preferences was also required. Thus, the behavior pattern of the rational person has become an assumption that can never be proven false (Boland, 1994).

Hardcore The pattern of economic behavior that the rational person must consistently repeat is the hardcore of neoclassical economists’ research. Popper’s (1957) suggestions enabled the rational individual to become hardcore. In The Poverty of Historicism (1957), Popper stated that there is a scientific interest in social and political problems and physics. As emphasized by Popper, there were times when social science was considered more advanced than natural science in ancient times. However, physics was very successful with Galileo and Newton and surpassed all other sciences. Biology also achieved success close to physics, thanks to Pasteur. However, according to Popper, there has yet to be a Galileo in social sciences. For this reason, scientists dealing with any social science are intensely interested in methodological problems. Much of the discussion of the method by social science researchers concentrates on the methods of physics. For example, there is a conscious attempt to copy the methods of experimental physics in psychology. This attempt led to a reform in the

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science of psychology. Some economists wanted to make a similar attempt since J.S. Mill. Despite many disappointments, these attempts, which led to reform in psychology, yielded different results in economics. In the social sciences other than economics, these attempts have produced little besides disappointment. After these disappointments, it began to be discussed whether the methods of physics would be suitable for social sciences. Physics uses the experimental method, which means the utilization of artificial control and artificial abstraction to reproduce similar conditions. The experimental method is based on the idea that similar things can happen under similar conditions. As stated by Popper, historicists thought that the experimental method of physics is not suitable for social sciences like sociology. According to Popper, historicists claimed that historical prediction is the main goal of the social sciences. To achieve this goal, the rhythms, patterns, trends, or laws underlying the evolution of history must be uncovered. According to the historicist approach, even if the experimental method has an application area in social sciences, this method will not be of any use. Similar conditions in social sciences are limited to only one period. Experimental results obtained from such a limitation would also be of very limited importance. Popper claimed that artificial abstraction would eliminate the most critical factors in a science like sociology. Robinson Crusoe and his isolated individual economy can never be a valuable model for an economy arising from the reciprocal transactions of individuals and groups. Popper proposed the use of rationality as hardcore in the social sciences as used in an economic structure. Calling this the ‘zero methods’ or ‘situational logic’, Popper’s proposal is the same as the rationality assumption of neoclassical economics. Popper then stated that using his proposal as a ‘main assumption’ was incorrect; in other words, he was wrong. However, Popper continued to argue that rationality could be helpful. Because, according to Popper, rationality has proven to be quite valuable for studying economic behavior in the past. However, as emphasized by Blaug (1993), Popper needed to realize the importance of the role of rationality in the economy. The rationality assumption considers individual impulses and not all economists might wish to undertake such an analysis. Economists might even want to learn how consumers and producers in different markets behave in mass to better understand real-life human being. Economists, who use rationality to eliminate the uncertainty, must add more assumptions to the rationality assumption in order to develop their propositions. In other words, economic propositions that accept rationality as the basic assumption can eliminate uncertainty, look quite impressive, and even be compared to the theories of physics. However, as

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the number of assumptions increases, these propositions become increasingly disconnected from real-life people because Popper states that there is actually nothing new in the world, which he describes physics in. A new machine might be invented, but it is a rearrangement of the elements that are always the same. Innovation in physics consists of the innovation of arrangements and compositions. However, the same old factors in a new arrangement in social life are never old factors in reality. They have now adapted to the new by learning the new regulations. When nothing repeats itself, genuine innovations can occur through learning. In The Logic of Scientific Discovery (1959), Popper developed a reciprocal discrimination criterion named science and non-science. As can be understood from previous experience, there is a rather suspicious situation for the inductive method. How can one deduce future experiences solely from past experiences? It is a rather old notion that verifying the inductive method is a logical problem. For example, a universal law that states that the sun will rise every morning results from previous experiences. However, in this example, there is a case where accurate conclusions are necessarily drawn from true premises. If so, there can be no logical inference because we have no definitive proof that our experience will continue to exist. Therefore, as D. Hume also emphasized, there are fundamental differences between induction and deduction. Moreover, these methods have a fundamental asymmetry, such as scrutiny and falsification, proving and disproving, and asserting and denying the truth. To illustrate by using a commonly used example, let’s say we want to decide what color they are by observing swans. No matter how many white swans we observe, we cannot conclude that all swans are white. Furthermore, the fact that one of the swans is black is sufficient to refute the conclusion that all swans are white. In other words, a proposition that can be logically universal cannot be deduced from singular propositions. A universal proposition can be refuted by reasoning deductively. So, we can never show that something is materially true. But it is possible to show that something is materially wrong. This is the first proposition of the scientific proposition. Popper also uses this fundamental asymmetry to run the parsing criterion. As stated by Popper, synthetic propositions about the natural world that empirical observations can falsify can be science, at least in principle. According to this view, science is characterized by formulating and testing propositions. Therefore, science cannot be science by claiming the certainty of the subject or knowledge it deals with. The certainty of science must be the certainty of ignorance. In this sense, economics is in a terrible situation regarding mainstream teachings. Rationality, the ‘hardcore’ of established economics, is an assumption that

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is completely closed to falsification. Economists, who produced their propositions based on rationality and hypothetical deduction, caused a fierce debate on whether economics was a science after the 2008 crisis. Serious debates among economists included whether economics could be a profession. The history of economics proves that using only the deductive method in social sciences such as economics would be entirely wrong. In social sciences such as economics, it is more advantageous to use history and inductive and deductive methods. Many economists, such as David Hume and Adam Smith, used deductive abstraction, inductive empiricism, and history in a perfect harmony and balance. It is also worth emphasizing that, according to Blaug (1993), Popper’s (1959) line between science and non-science needs to be clarified. Both falsifiability and testability are concepts with varying degrees. The discrimination criterion describes a continuous spectrum. The main natural sciences, such as physics and chemistry, are at one end of this spectrum. A little above these sciences are biology, geology, and cosmology. At the other end of the spectrum exist the non-sciences such as poetry, art, literary criticism, etc. Thus, history and all social sciences are somewhere between the two ends of the spectrum. Of course, it is hoped that social sciences, including economics, would be closer to science. T. S. Kuhn, in The Structure of Scientific Revolutions (2012), fell apart from the idea that Popper was used to be close to. Kuhn‘s (2012) thoughts and emphases have a structure that includes positive descriptions rather than prescriptive commands. The actual objective of Kuhn (2012) was to preserve theories and develop defense mechanisms that will eliminate criticisms addressing these theories. Such an approach makes little sense for Popper. Kuhn considers normal science, such as problem-solving activity in the orthodox theoretical framework, as a rule. According to Kuhn, a thought replacing another one as a result of repeated refutations and increasing anomalies is an exception in the history of science. Thus, as emphasized by Kuhn, revolutionary science is scarce. Popper stated that science is always in a state of constant revolution. For this reason, science is always a history of conjectures and refutations. But, for Kuhn, the history of science cannot have such a structure. Instead, the history of science is in a form that can become evident over extended periods when the current situation is preserved. Long periods of scientific history can sometimes be interfered with. In some cases, these interventions result from jumping from one dominant paradigm to another. Most importantly, there is no conceptual bridge between the paradigms passed from one to the other. The transition from one paradigm to another is revolutionary. As in social and scientific revolutions, the new understanding of science

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reconstructs all knowledge at its core. From the perspective of the new paradigm, it is normal to think that everything is getting better and the new paradigm is better than the old one. Since every paradigm rewrites the history of science, it is incorrect to think that we are getting closer to the truth after the paradigm shift. That is, race or competition between paradigms does not ensure the correctness of a paradigm by proof. According to Kuhn, science thus becomes unable to follow a cumulative process. Since there is no scientific accumulation, we can mention scientific development or change instead of scientific progress. But, considering the history of science, it can be seen that the examples that can justify Kuhn are rare. Scientific accumulation is highly effective in terms of the history of science. For example, the revolution caused by Copernicus. The revolution initiated by Copernicus covers a period of one hundred and fifty years, each step of which has been discussed. It took at least more than a generation for the revolution initiated by Newton to be accepted in the scientific circles in Europe. There have been fierce debates between various physics movements over this long period. Darwin’s revolution in biology is also similar. However, the acceptance of Darwin’s revolution in biology only happened in stages. Darwin‘s reputation even had a decline as of the early twentieth century. Darwin’s revolution took nearly two centuries to take its final form. The debate and mutual disagreement between classical and quantum physics in the twentieth century might be far from supporting Kuhn’s ideas. The 20th century has witnessed quite controversial and revolutionary transitions in economics. The first effect powerful enough to allow for the testing of propositions introduced by the “uncertainty” understanding of the mainstream economics was seen in the 20th century. In the 20th century, an effect strong enough to test the propositions produced by the uncertainty understanding of mainstream economics emerged. The first major crisis after Smith’s Wealth of Nations, published in 1776, was the Great Depression in the year 1929. In about 150 years, while the propositions of mainstream economics increased and developed, the German Historian School, which had a shallow voice, lagged behind the mainstream. Economic propositions, which were thought to be free of uncertainty and compelling enough to be compared with the propositions of physics, made it difficult for other economic movements to spread. Thus, mainstream economics has provided a broad knowledge in 150 years. This accumulation of economic knowledge, to which many economists contributed, was thoroughly tested in the crisis of 1929. According to the propositions of neoclassical economics based on the rationality of Homo economicus, a crisis like 1929 was unthinkable.

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However, the crisis has shown that the propositions of established economics that remove uncertainty are not compatible with real life. In this case, Popper spoke of the first scientific revolution in economics. By criticizing the approach of mainstream economics eliminating the uncertainty, Keynes developed an approach that would allow the economic system to recover quickly. However, Keynes has not ignored the knowledge accumulation of the mainstream economics while developing his approach and focusing on the results of its application. On the contrary, he offered propositions that could be compatible with the propositions of mainstream economics in the long run. Two revolutions took place after the 1973 oil crisis, followed by the 2008 crisis. In the behavioral economics revolution after the 2008 crisis and previous economic science revolutions, economists considered the knowledge of economics. Economists contributing to the revolution want to improve their knowledge by accurately using all the previously produced information. Therefore, economics is closer to Popper’s ideas regarding the accumulation of knowledge. Unfortunately, it is too early to say that economics has answered all of Popper’s ideas.

Crises of Economic Science and Tales Significant crises such as those in the years 1929 and 2008 are so crucial to economics that it leads scientists to question whether economics is a science or not. With the influence of the Roaring 1920s, the US economy reached 1929 quite strong economically. The intensive production and the well-balanced employment market were causing the mainstream economy to experience its golden age. But, of course, there were a few problems by 1929 in the markets fed with low Fed interest rates. Low-income individuals were in debt and it was being discussed that the level of speculation in the financial markets was increasing. When the statements indicated that there was speculation in the market, the emphasis of mainstream economics on the free market and the Fed, which is the monetary authority, rendered these statements relatively insignificant. Even if the bonds held by the Fed were insufficient for open market operations, the free market operation was overcoming such minor problems. Indeed, even Irving Fisher, a famous economist of the time, was working with financial investment companies, proving how well the stock market worked. Fisher’s economic statements demonstrated the power of the roaring twenties and mainstream economics. In September 1929, when speculation rumors increased, the stock markets began to decline. The Fed’s meeting was held in a pessimistic atmosphere, and the Fed raised the discount rate. The interest rate, which

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rose from 5% to 6%, caused panic in the stock market. High sales were seen in the stock market. The pessimistic mood in the credit market was somewhat dissipated as several major banks announced that they would continue lending. Still, interest rates were rising in the market. On September 5, stock markets opened with a decline. A fluctuating course continued to be experienced in the stock market until Monday, September 21. After hearing that some European investors were leaving the market, remarkable losses started in the stock market. The stock markets bottomed out on October 24, known as Black Thursday. With fear and panic, the shares were being sold for almost nothing. On October 29, the stock market crashes even surpassed Black Thursday. Investment trusts, which were nearly trash in the stock market crash, suffered the most. However, economists like Irving Fisher repeated that, despite all those collapses, the stock market, companies, and the economy should be trusted. Just before the Great Depression, Fisher stated that the stock market was not at risk of crisis. Economists like Fisher talked about the potential of the stock market and the teachings of mainstream economics until the day of the crisis. Although some mainstream economists stated that the market data on the days when the stock market rose were not as desired, they needed to attach more importance to this. Mainstream economists said that the crisis would not affect the real sector. However, the great depression has put the economy and economists in a worse situation than ever. What the economists said no longer found a response in the market. After such a period, the New Deal began to fix the economy. Keynes’ economic approach close to the New Deal became the lifeline of economists. The uncertainty doctrine of mainstream economics tried to renew itself with Keynes. The neoclassical synthesis, the product of the effort to restore this uncertainty, brought the economy up to the 1973 oil crisis. According to this synthesis, the economy can reach equilibrium at a high price and wage level, and underemployment. Lowering prices and wages could lower interest rates, raising investment, national income, and employment. Since the fall in prices would also increase the real money supply, expenditures and national income would increase. Since it would take time for the economy to reach full employment, intervention in the economy shortened the path to full employment. Therefore, Keynesian economists accepted that the economy would get full employment in the long run. However, neoclassical economists accepted the intervention of Keynesian economics in the market since it takes time to achieve full employment. The oil crisis, which emerged for political reasons, was quite effective in the economy. The 1973 oil crisis paved the way for two economic revolutions. Mainstream economics, which started to criticize the uncertain understanding of Keynes’

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General Theory, became much more robust with the oil crisis because, according to neoclassical economics, the economic depression after the oil crisis was caused by Keynesian economics. Keynes stated that, when aggregate demand increases in an underemployed economy, the economy will go to full employment before inflation occurs. With the contribution of various economists, the Phillips curve, which describes the inverse relationship between inflation and unemployment, was introduced. As stated by mainstream economists, there was stagflation in the economy and Keynesian economics could not overcome it. Therefore, the expiration of the Phillips curve should have brought an end to Keynesian economics. Thus, M. Friedman, one of the neoclassical economists who carried out the counter-revolution, defined the natural rate of unemployment. Natural unemployment not only enabled the economy to reach a full employment balance but also put the perception of uncertainty in the form desired by the mainstream. New classical economists, a continuation of mainstream economics, criticized the inconsistency of macroeconomic analyzes of Keynesian economics without microeconomic foundations. Thanks to the works of these economists, Homo economicus was strengthened again and even rationalized his expectations. The resurrection of Homo economicus revived the feet of mainstream economics. As the economy failed to come to terms with the teachings of the counter-revolution, a revolution emerged against the monetarist and new classics. Thus, the New Keynesian and Post-Keynesian school, which has an entirely different understanding of uncertainty, emerged. While the teachings of these schools developed, the economy continued its volatile course until the 2008 crisis. Many countries had deregulated financial markets until the 2008 crisis. Financial markets, forced by deregulations, wanted to reach their profit targets by trying to find new ways. Securitization, one of the innovations found, made significant contributions to the profitability of market actors. In the early 2000s, when the Fed decided to keep interest rates low, the interest rate, which was 6.5%, was reduced to 1.75% in two years. The decrease in credit costs contributed to the development of the housing sector and the economy. Many economists expressed that a giant bubble had formed, especially in the housing market, at the time of economic progress, similar to the roaring twenties. However, their warnings did not draw much attention. Again, as in the Great Depression, there was a complete confidence in mainstream economics’ renewed and strengthened teachings. Lucas (2003), the mighty mainstream economist, relied heavily on the propositions of the uncertainty approach in economics, which is a social science. “From all practical points of view, our main problem of preventing depression has been solved,” says Lucas (2003) very confidently.

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Lucas was confident that the rational individual, which he removed from uncertainty, would also save the future of economy and announced this to all economists. Of course, economists did not expect a crisis like 2008 to happen upon this mighty economist’s incredible words, despite the great depression of 1929. However, things started to turn around as the Fed began raising interest rates again in the warming economy. First, the bubble in the housing market burst, then the financial crisis deepened and spread worldwide. The great crisis that the mainstream economics experienced for the second time paved the way for a new school of economics. Behavioral economics became much more popular after the 2008 crisis and strengthened new movements. Therefore, in my book (2016), I wrote about the importance of crises in giving a strong direction to economics. In my articles, I wrote that we should use economic crises as a laboratory in economics instead of Ricardo’s laboratory devoid of time and space (Güney, 2016; 2018; 2020). The most important effect of the 2008 crisis on economics was that it caused a tremendous and profound break between economists. The 2008 financial crisis once again revealed the extent of the uncertainty in the economy (Güney, 2016; 2018; Bernanke, 2010). It deepened the differences of opinion between economists (Krugman, 2009; Acemoglu, 2009; Stiglitz, 2011; 2018). The ‘hardcore’ of neoclassical economics came to be criticized much more strongly. Economists began to explain that the propositions of mainstream economics were incompatible with the market and wrong and, therefore, should be solely responsible for the crises. In this regard, the articles of Krugman (2009) and Stiglitz (2011; 2018) criticize established economics very harshly. As mentioned before, it was discussed even if economics could be a science. The economic models, which D. Rodrik (2015) likened to fairy tales, successfully explain the current state of economics and, therefore, the understanding of uncertainty. According to Rodrik (2015), most economists think the answer to all economic problems lies in the freely functioning market. But economics does not teach this. On the contrary, the answer to almost all questions in economics should be “depending on the situation.” According to by Rodrik, the best way to examine the economic models is to consider them as fairy tales. Tales often revolve around a few main characters. These characters live in ordinary places such as a village or a forest. Their behavior and interrelationships produce results that serve as lessons. Fairy tales do not strive to be realistic or paint a complete picture of the characters’ lives. Instead, they sacrifice realism and uncertainty to add clarity to the plot. Every fable provides a clear moral lesson. Rodrik likens economic models to such fairy tales. Economic models are also simple and include abstract terms. Most of the

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assumptions do not claim realism. Although there are real people and companies in economic models, the main characters exhibit behaviors that are primarily suitable for a specific pattern. Inanimate objects often play an essential role in models and play a driving role in events. The political implications of economic models are usually straightforward: free markets are efficient, motives matter, and opportunistic behavior in strategic interactions makes everyone worse off. Over time may forget specific details of models, but models continue to be used as templates to understand and interpret the world. Other researchers, such as Rodrik (2015), who liken models to fairy tales, state that this approach is necessary and innocent. According to Rodrik, if we use common sense when choosing fairy tales and economic models, we will achieve the result we want to achieve. As in fairy tales, many economic models compete with each other. Therefore, it is essential to choose the useful ones among these models. Following the fairy tale analogy, Rodrik (2015) compares economic models with laboratory experiments. Labs are artificial environments that isolate the materials used in experiments from realworld conditions. For example, when gravity affects the flawless operation of an experiment, the researcher experiments in a non-gravity environment. People, who build economic models, make similar isolations, protections, and definitions. Laboratory experiments deliberately manipulate the physical environment to observe causal relationships, whereas economic models use assumptions. Economic models construct mental environments to test hypotheses. These fable and experiment analogies are excellent examples of why it is discussed if economics is a science.

Definitions of Individual in Economics and Economic Personality The most crucial individual defined in economics is Homo economicus. However, there are also definitions of individuals other than Homo economicus. For example, Adam Smith (1795), Edgeworth (1881), Arrow (1973), and Sen (1977) showed that individuals might not be rational in their economic behaviors but exhibit an attitude putting morality forward. For this reason, individuals far from rationality might not make the best decisions for themselves in uncertainty; that is, they may make mistakes. This definition is the economic behavior pattern of Homo moralis. Therefore, Homo moralis also has a pattern of economic behavior. The behavior pattern of Homo moralis causes the individual to repeat behaviors that will enable him to maintain moral standards. In the 1950s,

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researchers such as Herbert Simon focused on bounded rationality. Simon (1955) provided empirical evidence that individuals might have irrational behaviors and repeat judgmental errors. As defined by Simon (1955; 1982), bounded rationality refers to a pattern of economic behavior with limited information processing capability. The lack of knowledge affects the repetitive economic behaviors of such an economic personality. Tversky and Kahneman (1974; 1989) showed that people could make systematic errors in case of uncertainty due to the design of their cognitive mechanisms. Thaler (1987a; 1987b) revealed that it is tough for the rationality postulate to be valid in stock markets. After the 2008 crisis, behavioral economics led by Thaler and Sunstein (2009) brought the bounded rational individual to the fore even more. The behavior of the irrational individual in behavioral economics is affected by psychological factors. Therefore, repetitive economic behaviors cannot maximize the future benefits of the person. Institutional economics, which accepts that the individual can be bounded rational, cares about the economic behavior pattern of the institutional human (Homo institutional). In his repetitive economic behaviors, Homo institutionalis follows his habits he acquired from limited rationality and experience (Myrdal, 1990; 1978). Some experimental economists define Homo reciprocans. Homo reciprocans, who have a “reciprocating” behavior pattern, systematically display unselfish behavior (Bowles and Gintis, 2002). The economic behavior pattern of Homo reciprocans repeats the behavior of opposing someone who takes advantage of it. Akerlof and Kranton (2000) emphasize that the person has an identity shaped by psychological and sociological elements. Identity is the most critical determinant of one’s opportunity and happiness. A person who defines himself with an identity is happy when he repeats the behaviors required by this identity. In conclusion, all these definitions of individuals have systematically repetitive economic behavior patterns. The purpose of this book is to reconsider human behavior in real life, starting from the individual behavior described in economics. In other words, it aims to align human behavior in real life with human behavior in economic theory. For this purpose, in this book, I reanalyzed human behavior in case of uncertainty without relying on assumptions or fairy tales. Economic personality is the process that causes individuals to exhibit consistent behaviors in their economic decisions due to various factors. In other words, the economic personality is the whole of systematically repetitive behavior patterns of persons. The components of economic personality are personality, learning, genetics, geography, religion, culture, technology, institutions, and income. While determining these factors, I considered the factors that affect the behaviors of Homo

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economicus, Homo moralis, bounded rational, Homo institutional, Homo reciprocans, and sense of identity. The components of the economic personality constitute the economic behavior patterns that are repeated systematically in an uncertain situation. Thus, the economic personality causes the non-rational individual to exhibit predictable behaviors in uncertainty. People show systematically repetitive behavioral patterns due to their economic personalities influenced by these components. The individual eliminates uncertainty for himself by systematically repeating consistent behavior patterns. That is, the individual is not rational. What is rational is that people repeat the behaviors required by their economic personality.

CHAPTER 2 ECONOMICS AND UNCERTAINTY: THE IMPORTANCE OF UNCERTAINTY

Adam Smith was aware of the importance of uncertainty in economics. He thought that the predictions of the theories and propositions that economics would produce should be high. Rather than an abstractionist approach, Smith believed that economic theories should have the characteristics of propositions in physics. He was very fascinated by Newton’s physics theory that he sought ways to apply these theories to economic concerns. Therefore, there are differences between the uncertainty he analyzed in History of Astronomy (1980) and Theory of Moral Sentiments (1976) and his understanding of uncertainty in Wealth of Nations (1981). In History of Astronomy (1980), published in 1795 but written in the 1750s, Smith discusses the inseparable relationship between mental stability and uncertainty. Smith’s emulation of Newtonian theories is quite understandable in this respect. In History of Astronomy (1980), Smith describes a behavioral framework for the human mind to be balanced. When the human mind is balanced, the person feels peaceful and calm. However, when the human mind, which was in balance, collapses due to an unexpected factor, the peaceful environment disappears. For this reason, the individual wants to reach a climate of tranquility and peace again. In returning the mind to balance, one needs customs and traditions. Customs and traditions are behavioral patterns. These are patterns of behavior that society is accustomed to doing and conforming to and are expected to be repeated by community members. Communities form these behavioral patterns thanks to their accumulated knowledge, habits, morals, and cultural remnants since ancient times. Therefore, in the face of uncertainty, an individual can avoid the negativities caused by uncertainty by repeating his social customs and traditions. For example, customs such as marriage ceremonies, eating, celebrating, and blessing require regulating the social life in society and repeating certain behavioral habits. Adam Smith reveals that it is necessary to use behavioral patterns with little uncertainty to prevent the destruction of mental collapse caused by

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uncertainty. If individuals are mentally stable, the environment of trust expands and, thus, trade develops, firms grow, and even innovations increase. In that case, it is not desirable to disturb the mental balance of people. Adam Smith believed that if the theory of physics was applied to a social science such as economics and was successful, then a mental balance away from uncertainty could be achieved. Therefore, he emphasized that behavioral patterns, like social customs and traditions, should be used against ambiguity. In History of Astronomy (1980), Adam Smith bases the economic development and innovation on two substantial grounds. The first of these, of course, is mental balance. As stated by Smith, the individual needs an environment of justice, stability, and trust created by the mental balance of development and innovation. In such an environment, predictability is ensured. Decisions such as production, consumption, investment, and savings require stability. Data-supported stability in economic variables promotes economic development by causing entrepreneurs to have long-term future horizons. The second essential basis is the misconception caused by uncertainty. Smith emphasizes that innovations can arise from the effort of re-balancing the mental balance disturbed by uncertainty. According to Smith, people can be mistaken. Humans do not understand the present very well and can predict the future perfectly as the economists after Smith claimed. Therefore, the man described by Smith has two essential characteristics. In Wealth of Nations (1981), he makes a definition close to the human being who can predict the future perfectly. In this book, Smith states that man wants to increase wealth to live in better conditions and pursue his own benefit. However, in Theory of Moral Sentiments (1976), he explains that, while the individual follows his benefit, he takes the effect of this behavior on others through conscientiousness. In other words, while chasing after human use, he limits his behavior with his conscience. In Theory of Moral Sentiments (1976), Smith states that the path to wealth and virtue is almost the same. Because of this feature, human is very different from Homo economicus defined in economics. An individual who listens to the voice of his conscience may only sometimes want to exhibit behaviors that will maximize his benefit because conscience is a personality trait based on human moral values. As a personality trait, conscience directs people’s economic behavior in uncertainty. If the conscience of a person who wants to maximize his benefit suggests that his consumption will harm others, this person may give up his consumption. Such individuals may repeat the behavior of abstaining from consumption in a similar situation. Thus, the person prioritizes the conscience. Smith’s explanation of the ‘invisible hand’ makes the existence of an individual who cares about the voice of

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conscience even more imperative. According to Smith (1976), the invisible hand plays a vital role in the individual’s effort to bring his mind back to balance after a mistake. In other words, Smith uses the invisible hand to get the individual’s mind back to balance. As stated by Smith, the invisible hand is like a mechanism that directs the individual toward a goal he has never thought of while working for his benefit. In this sense, the invisible hand makes you feel that uncertainty and error can occur in every behavior. But, at the same time, it causes people to work for the benefit of both themselves and society in case of uncertainty. Smith reconsidered the invisible hand and the individual’s sense of error in Wealth of Nations (1981), making these two definitions more pro-market. In Wealth of Nations (1981), while the invisible hand and error factor control the competitive behavior of the individual in the market, they also enable the exchange of public goods in a healthy competitive environment. Competition, which continues its operation with the contribution of the invisible hand, is also necessary for the mental balance of the individual. Competition in the market constantly disciplines individuals as they pursue their interests. According to Smith, competition is the only factor that can enable each actor with different expectations in the market to pursue their interests in uncertainty. Freely functioning competition ensures that the market works well if everyone believes they are seeking profits on an equal footing with others in the market. In a market operating in free competition, the level of confidence increases, and uncertainty decreases. The mental balance of the individual who pursues profit on equal terms with his opponents is ensured. In a market where the competition does not work well, the mental balance of the individual is disturbed, and monopoly tendencies may occur in the market. Smith offers a normative solution (Rosenberg, 1990). Laissez-faire is a tool to minimize monopoly tendencies in Smith’s analysis. By letting competition to run freely, laissez-faire reduces uncertainty and leads to the individual’s mental stability. In addition, the free operation of competition also contributes to the formation of institutions that are living entities. When people encounter institutions far from meeting their own needs, feeling of insecurity increases and their mental balance is disturbed. Therefore, the prevalence of uncertainty arises from weak institutions. In History of Astronomy (1980), Smith points to legal regulation to remove the ambiguity caused by weak institutions. Unfortunately, the History of Astronomy (1980), which is quite striking regarding uncertainty analysis, has been ignored, especially by mainstream economists. After Adam Smith, the most crucial turning point in economics is David Ricardo. David Ricardo showed up when the economy needed a

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new perspective due to the high wheat prices, the instability of growth and income distribution, and the harmful effects of the Napoleonic wars. David Ricardo seems to be particularly interested in Adam Smith’s thoughts on applying the theory of physics to economics. Ricardo turned economics, which studies the growth of wealth, towards economics, which explores the distribution of wealth. In doing so, he followed a consistent, abstract, and deductive path because, in Principles of Political Economy and Taxation (1891), Ricardo revealed that he was aware of the great potential of uncertainty in economics. Ricardo’s aim in proposing self-consistent economic assumptions shows that he wanted to overcome uncertainty first. In Principles of Political Economy and Taxation (1891), Ricardo begins with the individual to overcome the uncertainty. According to Ricardo, all expectations of an individual who can predict the future perfectly are also correct. Ricardo fits Smith’s definition of the individual, who seeks utility, in the Wealth of Nations (1981). As a result, Ricardo introduced the postulate of perfect knowledge in economics because, by this definition, the economic agent was equipped with perfect knowledge. A selfconsistent economic proposition based on an individual who can obtain perfect information is far from uncertainty and is very powerful in terms of its results. Ricardo wanted to create a framework devoid of time and space to establish the laboratory of economics. Thus, he achieved success with the methods of physics in economics. Ricardo’s (1891) abstract deductive method of removing ambiguity produced propositions that became comparable to physical theories. A laboratory independent of time and space ensured the absence of uncertainty. For example, James Mill and Ricardo thought that the results of the economic propositions they introduced were as precise as the principle of gravity in physics. According to James Mill and Ricardo, the precision of their propositions was comparable to the certainty of Euclid’s propositions (Halevy, 1952). James Mill was one of the writers Ricardo was influenced by. Condorcet’s (2009) view of human nature to be open to development and perfection inspired James Mill and Ricardo. The economic theories that Ricardo put forward, influenced by James Mill and Bentham, paved the way for economics to become a science. Therefore, it is natural for economists to follow Ricardo and use his hypothetical deductive method. Neoclassical economics took Ricardo’s definition of a person far from uncertainty and created an economics science free from moral, political, and social dimensions. The economic propositions introduced by Ricardo’s abstract deductive thought revealed abstract results. Economists proposed abstract results for the solution of concrete life problems. The desire to use abstract results in solving concrete practices went so far that Joseph Schumpeter

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(1954) had to call efforts in this direction “Ricardo’s curse.” Schumpeter (1954), one of those influenced by Adam Smith’s History of Astronomy (1980), also reveals how long-lasting an effort Ricardo’s curse was. The great destruction of economics after the 2008 crisis (Krugman, 2009; Stiglitz, 2011, 2018) proves the level of Ricardo’s curse. By following the path opened by Ricardo, economists have led the disappearance of the normative and positive distinction in economics. The concept of normative essentially refers to “what should be” and value judgments that are not falsifiable. It is tough to test Ricardo’s predictions, which assume a normative structure and thus move away from uncertainty. The positive concept formulates “what is”. It explains and analyzes attitudes independent of economic regularities and value judgments. Adam Smith, just like David Hume, uses deduction, induction, and history together, preventing his theories from being only hypothetical (Alada, 2000). These authors have a perspective that will include the moral, political, historical, institutional, and legal characteristics of the period in their economic writings. In addition, Adam Smith and David Hume, like Ricardo, have hypothetical fiction on the functions of money and the functioning of the price system with a timeless approach. W.N. Senior constructed his economic theories following the abstract deductive method of Ricardo and James Mill. Senior argues in An Outline of the Science of Political Economy (1951) that economists should use reasoning rather than observation. According to him, economists make a pointless effort to bring events together. Senior (1951) believes that political economy should reason from assumptions rather than facts. The political economy should use unstated premises that have no connection with reality. Because the results of political economy, like geometry, are valid only in the abstract. Therefore, economic propositions are practical only under specific presuppositions. Senior’s insistence on the necessity of assumptions is his effort to avoid distortions in economic theory arose from uncertainty. When Senior (1951) used Ricardo’s hypothetical deductive method, he knew that he could only prevent uncertainty with the help of certain presuppositions. Therefore, Ricardo’s definition of man in economics is also very appropriate and helpful for Senior (1951). Selfconsistent economic statements, when constructed with certain initial assumptions, could be compared in their results to a science such as geometry. However, Senior (1951) went even further. Senior’s (1951) initial assumption is the individual who wants to gain the most with a minor sacrifice. All people have certain information and realize their wishes are far from uncertain. Thus, according to Senior (1951), this definition of the individual becomes a law of economics corresponding to

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the law of gravity in physics. This economic law is the cornerstone of the wage and profit theory. J. E. Cairnes (1965) had a similar mindset. Cairnes (1965) stated that economic theories away from uncertainty will resemble perfect theories like those in physics. In other words, if an economist approach economic events with the same precision as an astronomer when estimating events in space, then his will be sound and valid. Cairnes (1951) was so aware of the importance of uncertainty in economics that he compared the extent of uncertainty with the distorting causes in astronomy and mechanics. The hypothetical deduction method can eliminate disruptive terms with the help of initial assumptions. So, according to Cairnes (1951), economists should use the hypothetical deduction method. Unlike Cairnes, J. B. Say criticized Ricardo’s method. In A Treatise on Political Economy (2017), J. B. Say also criticized the views that Ricardo’s method contributes to economics. According to him, hypothetical deduction made initial assumptions in economics and physical science. The results derived from these assumptions were also considered to apply to reality. The results produced by Ricardo’s method were used to create another result. Then, as if these results were immutable facts, they formed the unshakable foundations of economics. However, according to Say (1972), economists should use the Baconian method of induction instead of a hypothetical deduction. Observing the continuity of facts under uncertainty allows scientific laws to be discovered. T. Malthus also agreed with Say. Malthus argued that economics is closer to ethics and politics (Hutchison, 1978) than mathematics. Malthus, who expressed his concerns that the abstractions made in economics could limit economic knowledge, also worked within an abstract model that rejected empirical falsification. Malthus drew attention to the distortions that a lack of information can cause in the market and removes the limits of intervention in the market. People, who obtain information precisely and accurately, work to maximize their interests systematically in an uninterrupted market. According to Malthus, a market where there is a lack of knowledge is uncertain. Since the supply and demand balance cannot be maintained in an uncertain market, it is inevitable to intervene in the market. Unlike Malthus, who criticized Ricardo but followed the same method, J.S. Mill has an apparent stance on the deductive approach. J.S. Mill was interested in hypothetical deduction as much as Senior and Cairnes. According to J.S. Mill (1992), reasons such as the lack of mathematical knowledge, the complex nature of events, the inadequacy of the equipment of the human mind, and the inadequacy of the initial conditions prevent a researcher from knowing the extent of the possible uncertainty. Mill (1992), aware that cannot prevent the emergence of uncertainty, finds the

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solution to uncertainty in defining political economy within the assumption of complete knowledge. According to Mill, political economy investigates a person’s effort, isolated from his passions and behaviors, only to acquire wealth and consume wealth in his social structure. Of course, it would be wrong to think that people will only exhibit wealth acquisition behavior. But limiting human behavior is imperative for science. According to Mill (1992), aspects of human behavior unrelated to wealth acquisition might draw the interest of economics, but such behavior has no place in political economy. Thus, political economy is only concerned with making wealth. This field of interest offers the economist a model. Mill (1992) reinforced this thought, which reveals the necessity of complete knowledge by considering the deductive method necessary. Mill explicitly claimed that the method of abstract deduction will make the political economy a perfect abstract science. He stated that all situations and conditions that may cause should know uncertainty to handle the assumed conditions together in deduction because self-consistent results obtained with a model without uncertainty are correct both in mathematics and in the abstract. Moreover, according to Mill (1992), coming to the truth in the abstract means coming to the fact in the concrete. Therefore, uncertainty, the biggest obstacle to reaching the truth, must also be addressed. Thus, Mill (1992) adopted Ricardo’s definition of man, as did all the economists before him. Thus, the uncertainty caused by human behavior becomes a subjective problem, not a general situation. However, Mill (1992) carried his view of uncertainty a little further from this point and took the dimension of uncertainty in economics to a new level. According to Mill (1992), any disturbance that may arise in economics, namely uncertainty, can prevent the predictions from being precise. Forecasts can therefore be considered by calculating the probabilities of their occurrence. Thus, Mill (1992) shifted the method of economics to the field of probability. In particular, Jevons’ perception of uncertainty in economics and its handling thus added another dimension to Ricardo’s curse. However, J.S. Mill has an approach that expands the field of study of economics in his Principles of Political Economy (1884). In this book, Mill (1884) moved the area of economic policy from focusing solely on economic growth and diversified it considerably.

Marginalists and After W.S. Jevons, one of the marginalist revolution pioneers, is an economist who is confused about uncertainty. Jevons emphasized in Principles of Science (1905) that reaching complete knowledge is beyond our power.

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According to him, we are content with partial knowledge, which is unknown and full of doubt, instead of complete knowledge. In his Principles of Science (1905), Jevons stated that coincidence has no place in economics and that coincidence cannot be the subject of economic theory. On the other hand, in Theory of Political Economy (1970), Jevons’ views on uncertainty were different. In 19th century economics, shaped by the search for equilibrium in economics, Jevons (1970) also knew how to incorporate uncertainty into the equilibrium sought to be achieved. Thus, Jevons, Carl Menger, and Leon Walras were helping the marginalist revolution shape classical economics. Marginalists had transformed the global equilibrium understanding of classical economics into microindividual equilibrium. The most crucial point to achieve micro-individual equilibrium is to clear individual behavior from uncertainty. Jevons (1970) adopted Ricardo’s definition of the human being, who sees the future as perfect. If uncertainty means deviations from a properly functioning reasoning system, these deviations prevent the targeted equilibrium from being captured. A self-consistent equilibrium can be achieved if the effects that break the cause-effect relationship can be eliminated or their impact can be calculated. Thus, the excellent foresight of economic agents could stop the distorting effects of uncertainty. For this reason, the individual who behaved entirely rationally and had perfect foresight in 19th century economics became the “basic assumption” in economics. Jevons’ (1970) use of this basic assumption was beneficial in terms of the results he wanted to achieve. Classical economics is a mentality that analyzes the economy by classes and then analyzes individuals. As a marginalist, Jevons had a market perception led by consumer sovereignty. In such a market, the decisions of individuals are essential. The theory of production and distribution is followed by the path opened by these individual decisions. Since personal decisions play an active role, subjective utility theory takes the place of the objective labor theory of value among marginalists. In this case, the benefit of individuals needs to be defined. Jevons, like Ricardo, preferred using Bentham‘s (1970) utilitarian psychology. Bentham’s (1970) utility theory, which is well suited to probability calculations, is an excellent option for establishing a rational pattern of behavior. Using the Bentham’s (1970) utility, Jevons and Menger shifted the focus of economics from wealth growth and distribution to the effective use of resources. In analyzing the effective use of resources, both consumers and producers act rationally. Individuals who act rationally also have excellent foresight, of course. Marginalist economists have further developed the rationality and perfect prediction of the future of the economic agent. In addition, marginalist economists have

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tried to include the uncertainty and margin of error that affect the economic decisions of individuals in positive economics. In the subjective utility theory, pursuing the individual’s current utility was insufficient for Jevons (1970). Jevons recognized the importance of the future and future benefits for individuals. The utility of individuals was not just a matter of today. When individuals maximized their current benefits, they had to work to maximize their future benefits thanks to their excellent foresight. Jevons (1970) showed that this is possible with expected utility. The unknowability of the future had to be included in the analysis to maximize the future benefits of individuals. When did not include uncertainty in the analysis, any future event could affect the benefit of individuals or the producer’s profit. For this reason, Jevons (1970) accepts the impact of all future events on individuals as if they were today. The reason why Jevons made such a presupposition is that he must imprison time in a single “moment.” This “moment,” which can be expressed as an infinitely small time interval or a point time, is more functional than calendar time, which includes ever-changing events and uncertainty. In the point-time assumption, it is accepted that economic variables change only around a certain average. Thus, disruptive terms that affect economic decisions, such as surprise and uncertainty, are excluded from the analysis. Instead of these factors, the probability of the variable circulating a specific mean is calculated. Jevons paved the way for probabilistic computation initiated by J.S. Mill. The expectations of the economic agent, who is the focal point of calculating such a probability, are also excellent. Therefore, time is reduced to “point time” by considering the future as if it were today, and the individual has acquired all the characteristics of Homo economicus. In other words, the human being in economics has become a self-centered being who works to maximize his benefit, who wants to reduce the pain and maximize his pleasure. To analyze the uncertainty, Jevons focused on the stocking time of perishable consumer goods and the probability of a ship with insufficient supplies reaching the nearest port at a certain distance. He adopted a research framework that emphasizes the margin of error in his analysis. The margin of error, according to Jevons, is “pre-calculated coefficients that show the ratio of future pleasures and pains, which are the source of predictions, to present pleasure and pain.” While measuring the uncertainty that expresses the margin of error, Jevons strictly adhered to the assumptions of the individual being rational and predicting the future perfectly. However, in Principles of Science (1905) published in 1874, after the Theory of Political Economy, Jevons showed that his method was similar to Smith’s method of science. For example, while explaining the

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relationship between the operation style of the human mind and consciousness, it highlights the characteristics of the human mind. Consciousness arises from the rupture between thinking at any given moment and the next. In this respect, Jevons (1905) is close to Smith’s analysis of re-establishing mental balance with scientific discoveries. From this point of view, besides his empirical approach, Jevons was trying to maintain the balance of deduction and induction. However, Leon Walras had a very ambitious idea about the power of the economic theories he produced. Walras (1985) expressed his admiration for the physical theories of economists, walking the path opened by Smith and Ricardo. Walras (1985) stated that the general equilibrium equations are similar to the universal gravitational laws. Walras aimed to ensure the smooth functioning of an economy by not leaving the “basic assumption” in general equilibrium analysis. The transformation of the factors disrupting the economic balance into an external variable allowed an economic operation away from uncertainty. If equilibrium in a market is achieved, the effects of all factors that can prevent equilibrium in this market have been eliminated. If uncertainty can be eliminated for an economy, then it could be done for all markets. Walras uses initial assumptions to eliminate uncertainty in the general equilibrium analysis. These initial assumptions, such as the “basic assumption,” helped bring the field of uncertainty to a measurable level. For example, an economy might have fixed or declining returns to scale or externality does not affect production and consumption. Thus, Walras revealed the general equilibrium in the economy by using the operation of relative prices and expressed how universal his method was. Carl Menger, like Jevons, pointed out two different aspects about uncertainty. In Grundsatze der Volkswirthschaftslehre (Principles of Economics) (1950), published in 1871, he focused on the fact that economics does not have a structure free from uncertainty. Menger’s (1950) move away from the idea that economics should have unshakable laws similar to the laws of physics necessitates a change in the individual’s behavior. Instead, Menger emphasized that the individual is far from being rational and cannot predict the future perfectly. If an individual cannot see the end as perfect, his economic behavior’s present and future results may differ. Menger (1950) also understood that he had to include time in his analysis. Economic events with a cause-effect relationship could not be separated from time. As stated by Menger, we cannot fully understand the relationship of events within the cause-and-effect relationship. According to him, if we use the time to understand the interrelationships between events, we can reveal the cause-effect relationship between events.

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According to Menger, the universe also has a cause-and-effect relationship framework. Uncertainty must be included in such a framework from somewhere. Analyzing at what stage of the interrelationship of economic events uncertainty may arise, Menger examines the relationship between production factors and consumer goods. Menger (1950) explored the transformation of high-level goods (factors of production) into low-level goods (consumption goods), first of all, dealing with consumers. Consumers do not doubt the quantity and quality of the consumer goods they have. Consumers satisfy their needs by using the goods they have. After consumers convey their demands for the goods they want to consume to the producers, these goods have a production process. A certain amount of time is needed for the completion of the production process of the goods. After the time-consuming production process, the goods reach the consumers. Consumers cannot accurately predict the quality and quantity of goods produced. For this reason, there is uncertainty between when individuals satisfy their needs and when they demand consumer goods. The producer, who has a certain amount of produced goods, has information about the quality and quantity of this good. It can make the consumer goods supply that will meet the demands of the consumers according to this information. However, the producer must use a certain quantity of factors of production to produce the same amount of goods. In other words, the producer demands the factors of production and it takes time to meet this demand. Since it cannot affect the quality and quantity of the production factors in a certain way, the producer is not sure of the quantity and quality of the goods he produces. Therefore, uncertainty arises between the demand for the factor of production and the supply of consumer goods. As a result, according to Menger (1950), time is needed to realize each economic activity in transforming production goods into consumer goods. Including time in the analysis, Menger reveals the effect of uncertainty on economic activities. When Menger wanted to analyze uncertainty over time, he describes the effect of incomplete information before or after the economic behavior of producers and consumers. Menger (1950), who says that the development of civilization will reduce uncertainty, states that emerging innovations help to eliminate the lack of knowledge in agriculture. Another question that Menger seeks to answer while analyzing uncertainty is how people can take action against uncertainty. According to Menger, people do not get into a problematic situation as expected in uncertainty. Individuals who own homes keep fire extinguishers to protect their homes from fire. Almost all people keep some possessions as a precaution against the worst. Although they cannot predict the future perfectly, people have a prediction of

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what might happen. This impressive uncertainty analysis by Menger has remained in Grundsatze der Volkswirthschaftslehre. Another remarkable book by Menger is Untersuchungen über die Methode der Sozialwissenschaften und der Politischen Oekonomie (1963), published in 1883. The English version of the book is Problems of Economics and Sociology. Menger in Untersuchungen (1963) stands close to the idea that economics should have definite laws. He aimed to reveal the same economic rules with the help of optimization and maximization calculations. Menger’s (1963) thoughts on the emergence of factors such as money, law, and language are pretty eye-opening in analyzing institutions. As stated by Menger, the emergence of institutions depends on deliberate and purposeful efforts and unexpected results. It has not been proven that the emergence of institutions such as money, law, and language depend on a social contract or the outcome of favorable regulations. Instead, these institutions appear as the unplanned results of natural formations and historical development. However, according to Menger (1963), not all institutions emerged spontaneously or as a result of unexpected events. According to him, some institutions were actually formed as a result of the common will of societies. For instance, treaties and positive laws are such institutions. On the other hand, some institutions arise from the actions of people who want to achieve their goals. In this case, individuals are in a passive ignorance. Menger’s analysis of institutions differs from Adam Smith’s analysis of institutions such as money and the development of banking. Smith has an understanding of automatic equalization and self-ordering (Hutchion, 1983; 1984) in his analysis of such institutions. However, Menger does not believe that institutions will necessarily emerge spontaneously. Nevertheless, Menger and Smith acknowledged the importance of uncertainty in analyzing institutions and showed that institutions could strengthen channels of response to uncertainty. This idea would later become highly influential on economists such as F. H. Knight, J. M. Keynes, R. Coase, and F. A. von Hayek. Alfred Marshall had more consistent views on the role of uncertainty in economics than Menger. Marshall described an individual very different from Jevons and Walras in his Principles of Economics (2013). Unlike the perfectly predictive Homo economicus, Marshall made an evolutionary and biological analysis. Thus, the primary purpose of Marshall’s economic research is not to remove uncertainty. Preferring a systemic rather than static analysis of behavior, he emphasized that the economist should be fed from economic biology. Marshall’s study, which is a relatively difficult path and includes the historical evolution process, deals with the central issue of economics as an organism. In such an analysis, it is challenging to

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exclude uncertainty. Especially in philosophical writings, he highlighted the social and cultural emphases that affect the human mind and behavior. Menger’s analysis of institutions and Marshall’s analysis of cultural influences on human behavior show how visionary these economists were. Without having to experience significant crises such as the 1929 and 2008 crises, these two economists gave examples of correctly defining people in economics. Marshall admitted that economics produces a pure theory based on certain assumptions on the way to becoming a science. However, according to Marshall, science cannot suddenly create universal laws. Instead, scientific laws can originate from a progressive and evolutionary process. Therefore, Marshall criticized the economic approach that treats man as a machine with perfect foresight to overcome uncertainty. Furthermore, Marshall is skeptical of the results of calculations that use a rational and purely utilitarian behavior free from uncertainty. Instead, Marshall favors addressing human behavior within the framework of social life in uncertainty. According to Marshall, people have a variable structure that is affected by changes in the socio-cultural environment, in which they live. Apart from the socio-cultural environment, the factors that Marshall stated to impact human behavior are inspiring. According to him, factors such as religious thoughts, urges to do good, work life, family, traditions, duties, praise, empathy, and sympathy significantly affect human behavior. In fact, instead of an individualistic consumption theory, he talks about a consumer theory in which traditions and habits are influential. Thus, according to Marshall, a human should not be considered a pain and pleasure calculator but a “living human being” that cannot avoid uncertainty. According to Marshall (2013), the characteristic of modern times is not selfishness but circumspection. Human behavior does not always occur within the framework of thinking and calculation. Every move is not thought through. According to Marshall (2013), people act based on habits, altruism, traditions, and intuition. These features are not the characteristics of an imaginary person, who is supposed to be able to see the future perfectly but of a real person with blood and flesh that we encounter every day. As you can see, Marshall is very successful in describing the real person. Moreover, Marshall stated that the human mind is constantly evolving and can change even when it is in behavior. Therefore, constantly under the influence of uncertainty, human behaviors and preferences differ from culture to culture. According to Marshall (2013), “social law” denotes a particular form of action that can expect from members of a social group under certain conditions. Therefore, social laws enable individuals in society to show the behaviors expected from them. Many motives influence societies. Cultural differentiation is very

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likely to occur as these motives vary from group to group and from time to time. According to Marshall, institutional arrangements result from habits operating differently. Different social characters direct the political arrangements in society and lead to the determination of economic life— for example, various forms of freedom guide other economic conditions. Thus, different economic conditions cause differentiation of social structures. For this reason, economic theories constructed by considering the human in economics only within the framework of rationality are pretty inadequate for Marshall. Cliff Leslie is another economist, who did not follow Ricardo’s economic thought. In The Known and the Unknown in the Economic World (1879), Leslie explained why classical economics is full of errors. Leslie, who has a historian’s point of view, stated that assumptions such as complete knowledge and perfect prediction cannot be valid in reality. He also wrote that Ricardo’s “economics laboratory,” devoid of time and space, cannot be valid either. According to Leslie (1879), the cause of economic imbalance is not economic fluctuations or depression but the reasons for establishing the modern economic world. This interpretation brings him closer to Karl Marx. According to Leslie, what classical economics expects from the “basic assumption” is not only to work for the benefit but also to obtain full knowledge of the future. Ricardo’s analysis explains that consumption can be made with prior knowledge. In addition, there is a level of competition to equalize the return on labor and capital, and the price of goods depends on production costs. This economic analysis is different from the one introduced by Adam Smith. Moreover, according to Leslie, assumptions such as perfect foresight, exact knowledge, and knowledge of the future can only be seen in traditional societies far from modernity. For example, in Asian communities that maintain ancestral traditions, individuality has not fully formed. As a result, individuals lack the motivation to pursue their benefits and acquire wealth but have full knowledge of the future. Therefore, uncertainty is not valid for such a community. Because the economic relations, which are usually determined by kinship ties, cause the prices to be customary and traditional in traditional village communities. In this way, individuals can predict their earnings in advance. However, this uncertainty seen in conventional societies cannot be considered valid for all societies. According to Leslie (1879), this is the biggest mistake of classical economics; when commercial relations start to go beyond kinship ties, society has to transition from traditional to modernity. With modernization, the factors that cause regular prices to disappear. And complete knowledge is replaced by ignorance. The transition from

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traditional society to modern one is only one of the stimuli of uncertainty. Non-economic events such as the economic policies produced by the wrong economic theory, the limited human mind, and wars cause uncertainty. In addition, according to Leslie (1879), immoral factors also create uncertainty. This analysis of Leslie showed that he is aware of the importance of actions such as greed, swindling, and fraud used to explain the 1929 and 2008 crises in economic life. In his analysis in 1879, Leslie stated that the development of commercial life and the deepening of financial markets in modernized societies will lead to the development of factors such as fraud and swindling. Factors that cause uncertainty also lead to stagnation and imbalance in the economy. Uncertainty and stagnation caused by the imbalance force individuals to carry out their economic activities without being able to foresee. Individuals are in a state of darkness in a market surrounded by the unknown. For this reason, there are disruptions in economic activities. Disruption of such a cause-effect relationship depends on reducing or preventing uncertainty. According to Leslie, to get out of such a situation, societies must produce a new norm that is different from the norms of classical economics. If a new market, product, or colony is discovered, it may break the chain of cause and effect caused by uncertainty. As a result, according to Leslie, economic activities operate in and through uncertainty. F. H. Knight analyzed a rather inspiring uncertainty framework in Risk, Uncertainty and Profit (1921). Knight (1921) revealed that uncertainty conveyed from Ricardo to Mill and from Mill to Jevons may be a “risk” analysis. Knight (1921) defined uncertainty as information gaps in the business. Uncertainty can be defined as a factor that cannot be replaced with knowledge. However, the risk is a constantly encountered event that can be eliminated by insurance activity in a company. Experimental and statistical estimations can reduce the risk. Knight’s (1921) definition of risk and uncertainty is thus clearly separated. Knight’s thoughts on probabilities are again different from those of Mill and Jevons. Knight provided a better understanding of the distinction between risk and uncertainty by analyzing probability and coincidences. According to Knight, chance or coincidences are elements of nature that cannot analyze. Probability theory, put forward by the science of economics, is mathematical representations calculated by making use of probable events. Therefore, probability and coincidence cannot be defined empirically. Uncertainty cannot be understood in such a way. According to Knight (1921), who described two types of probabilities, whether one can measure these probabilities is very important. The first possibility is the logical and mathematical one. There is no need for in-depth analysis of logical and

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mathematical possibilities that are not encountered in business life. The second type of probability is statistical. Statistical probability is related with business life. Applying statistics to everyday events in business can empirically yield some imprecise results. According to Knight, the cost of carrying the risk can be calculated in advance in both possibilities. Precalculated risks like chance or mathematical probability cannot be expected to affect economic variables. The introduction of various preventive factors may eliminate possible risks before they are effective. In other words, margins of error or risks that arise in business life and can be calculated statistically can be controlled at a particular cost. Therefore, predictable and measurable risks cannot be effective on an economic variable such as income distribution. Income distribution is a lagged variable that emerges after realizing unpredictable factors. Therefore, the third type of probability is needed in order to analyze income distribution or profit formation. Due to the nature of income distribution or profit formation, the size of the diameter of this third possibility cannot be known. And, of course, its effects are unpredictable and immeasurable. This possibility is “guesses.” Thus, the first two possibilities are measurable, and the third possibility is immeasurable. Knight (1921) emphasized that measurable risk or uncertainty does not actually mean uncertainty. Thus, unlike risk, uncertainty is non-quantitative and should form the basis of profit theory. In the final analysis, Knight approached J. M. Keynes’ idea of uncertainty in General Theory (1981). Both authors conclude that probability calculations do not play a role in perceiving uncertainty and finding answers to uncertainty. When Knight (1921) analyzed the factors that affect behavior in uncertainty, he tells us about the importance of experiences, convictions, and intuitions. According to Knight, in a situation where the future is unknowable, people are ignorant. In case of an uncertainty, people use their opinions, instincts, and experiences from past events. This view, which is more realistic and compatible with the market, is opposite to the Ricardian approach based on full knowledge or maximization.

After the 1929 Depression Keynes played a significant role in the change in economic thought that followed the 1929 crisis. The attitude that forces economic theory to take uncertainty into account has become an essential feature of the propositions of Keynes and his followers. However, Keynes grew up in the field of thought of neoclassical economics, which is built on the postulate of complete knowledge, which expresses the economic tradition

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of economists such as Jevons, Marshall, and Pigou. Keynes, in his Treatise on Probability (1973), published in 1921, emphasizes that an individual who has to decide before an unknown future does not calculate any possibility. The individual must have reasoning logic beyond calculating probability. Therefore, individual probability focuses on the ‘weight’ of reasoning rather than a decision calculation. Keynes (1973) uses the weight of reason to analyze an individual’s mental judgment change. He continues this analysis logic in his General Theory (1981), published in 1936. The weight of reasoning in General Theory expresses speculators’ anxiety, distrust, and ignorance about an unknown future. After Keynes’ General Theory (1981), he stood against the reasoning logic of neoclassical economics that reduces uncertainty to measurable status. After the 1929 crisis destroyed the propositions of neoclassical economics, Keynes seemed to have turned against the mainstream (neoclassical) economics, in which he grew up. Keynes saw that the propositions produced by an economic tradition built on the Benthamian calculation of utility and pleasure were doomed to collapse because they ignored uncertainty. That is why he wrote The General Theory after the Treatise on Probability, which was grounded on and drew lessons from the 1929 crisis. Keynes placed the uncertainty understanding in General Theory into the subjective and psychological states of individuals, who make demand and investment decisions. Thus, the mental structure of individuals, who have to make consumption and investment decisions in the future, is the essence of uncertainty. This uncertain understanding of Keynes, which is different from neoclassical thought, also comes to the forefront in Treatise on Probability, published before the 1929 crisis. Keynes stated in his Treatise on Probability that the future will never be like the past. Our vision and knowledge of the end are weak; therefore, it is tough to know what the future will bring. But living people are compelled to act. When we work, we try to maintain our mental balance. However, according to Keynes (1973), no human acts as neoclassical economics claims. Then, in General Theory, Keynes based uncertainty on three psychological factors. The three psychological factors are marginal capital efficiency, liquidity preference, and consumption propensity. Keynes (1981) stated these three psychological factors direct economic life. Keynes’ focus is on consumers considering how much of their income to consume and how much to save, the mental state of investors making investment decisions, and the mental state of individuals trying to decide the amount of money to keep. According to Keynes (1981), these three mental states are exogenous, that is, variables determined outside the model. Investors calculate the expected return on their investment in line with their subjective confidence

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levels. Individuals determine the amount of money they will hold according to the average opinion of the group they belong to and their subjective degree of confidence. As a result of the relationship between the marginal efficiency of capital and the rate of interest, the new volume of investment in the economy is determined. According to Keynes, since the volume of investment is the driving factor of effective demand, the volume of investment reveals the level of internal variables in the economy emerges. These internal variables are important economic data such as employment and national income. If the confidence level of individuals’ future expectations decreases, then people tend to speculate and hoard their money. On the other hand, if people look to the future optimistically, then they will direct their money to consumption and investment, which will positively affect employment and national income. According to Keynes, the expected return on investments the entrepreneur wants to make depends on the individual’s degree of confidence or insecurity about the future. The degree of subjective confidence or distrust in the future value of the interest rate is the most critical factor in determining the amount of money an individual will hold. In Keynes’ (1981) model, the dynamic driving force is the confidence level of the future expectations of entrepreneurs, investors, and the public. Therefore, Keynes’ uncertainty is measured by the level of confidence. When the confidence level of individuals regarding the future decreases, the level of uncertainty increases. The level of uncertainty determines if the economic conjuncture is to be stagnant, slow, or increasing. Such an understanding of uncertainty causes uncertainty to become very critical for the General Theory. Keynes (1981) advocated the lack of knowledge to be the cause of uncertainty, besides emphasizing that uncertainty is not measurable. However, a lack of knowledge does not mean that we will be helpless in case of uncertainty. Keynes stated that people, who constantly make decisions due to their economic activities, want to make decisions by considering certain events. In this way, people can avoid wrong decisions caused by uncertainty. According to Keynes, three elements can lead people to the right choices. The first of them is the present we live in. Instead of making decisions based on past events, people think that today is a better guide for the future. While experiencing what today brings us, we do not consider the expected future changes. The second element is the general opinion of society. The public opinion of our community is very effective on current production and prices. The general idea of society can also gather the future expectations accurately. For this reason, individuals do not hesitate to follow the society they live in when making decisions. The third element is people, who are considered to be more equipped. According to

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Keynes, when people realize their opinions are insufficient, they can turn to the decisions of those they think to be more knowledgeable and better equipped. People try to overcome uncertainty by repeating the behavior of the majority or the average. This understanding of uncertainty is similar to Adam Smith’s (1976) uncertainty as it aims to protect the mental balance of individuals. However, Keynes’ (1981) understanding of uncertainty shows that when included in the analysis together with external variables, individuals can also tend towards selfish and harmful behaviors for the economy while making uncertain decisions. For example, investors may exhibit unruly and impregnable behaviors in case of uncertainty (animal instincts), causing the economy to deteriorate. Therefore, Keynes’ (1981) uncertainty approach includes a normative dimension. Still, we may have to consider that Keynes analyzed the 1929 crisis well. Because, in a situation like the 1929 crisis, the future cannot be known precisely, and the expectations for the future worsen. In such an economic situation, investors in the private sector reduce or stop their spending by displaying maverick and irrepressible behaviors. This behavior is beneficial for investors but detrimental to the economy. So, an element that thinks about the economy in general and does not put its interests before the interests of the economy can increase its expenditures and help the economy to recover. Therefore, Keynes (1981) needed a headstrong, maverick, nonarbitrary economic actor. This definition is precisely the equivalent of the “New Deal” put into practice by the US economy in the 1929 crisis. According to Keynes, the public sector is such an actor because it has no animal instincts. Public sector investments are neither headstrong, maverick, nor arbitrary. Public economic intervention is justified and necessary since the public’s view of uncertainty is more objective. The public sector is Keynes’ first answer to uncertainty. The second answer is money. According to Keynes’ liquidity preference analysis, individuals hold cash for two reasons. The first one is the degree of confidence individuals have about the future. The second one is the presence of speculation. Individuals hold money in their hands in parallel with the confidence level in the future that emerges autonomously. As the confidence level rises, the money held decreases, while speculation can cause an economy of complete chaos. According to Keynes, money is a tool that removes our insecurity, in other words, uncertainty. Considering the uncertainty as incomplete information, this protective power of money in uncertainty can become more understandable. Despite his shortcomings in the place of uncertainty in the model, even Keynes’ channels of response to uncertainty continue to inspire economists after him.

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Terence W. Hutchison successfully explained why he opposed such a theory by analyzing the economic theory that D. Ricardo wanted to create. However, despite distinguishing uncertainty and lack of information, Hutchison did not very well explain the distinction between uncertainty and lack of knowledge. From a broad perspective, Hutchison criticized the way mainstream economics handles uncertainty in almost all his writings. Hutchison criticized the rational behavior postulate based on the assumption of perfect expectations and complete knowledge in economics (e.g., Hutchison, 1937; 1977; 1978; 1988). Hutchison stated that the assumption of ideal prediction of the future, which Ricardo introduced into his economic theory, is a necessity. The fact that individuals have perfect future expectations under equilibrium conditions does not reflect how people in real life behave. This assumption is nothing but an explanation of the individual’s behavior patterns under equilibrium conditions. These assumptions fulfilled Ricardo’s wish for an economics laboratory devoid of time and space. However, according to Hutchison, the propositions made by the economics laboratory obtained in the abstract are far from understanding people’s behavior in real life in terms of uncertainty and lack of information. The assumption of the individual with perfect foresight is a tautology for Hutchison. When economic theory starts from a tautology, it needs much more. Therefore, one tautology gives birth to another tautology. Following Ricardo’s curse, economists added rationality to maximize the moral wealth of the consumer to the behavior that maximizes his material wealth. According to Hutchison, since the basic assumption is a tautology, it is also closed to testing as content. In other words, the basic assumption put forward as a definition cannot be falsifiable or verifiable. Hutchison thus brings Popper’s (1959) falsifiability criterion to economics. In The Significance and Basic Postulates of Economic Theory (1965), Hutchison clarified the distinction between empirical propositions and tautologies. According to Hutchison (1965), testability or falsifiability allows us to distinguish economic statements from tautology or definitions. Rather than keeping his economic propositions away from uncertainty, Hutchison accepted that people’s preferences for goods and services are between absolute certainty and absolute uncertainty. Under the assumption of perfect expectations, the level of utility derived from the consumption of goods is predetermined. In such a case, people’s initiative over their product preferences disappears. In the opposite case, uncertainty becomes absolute. In other words, the benefits obtained from the choices are incomparable. According to Hutchison, the individual’s will cannot emerge in situations of complete information and uncertainty. When economists cannot adequately deal

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with the effects of uncertainty, they add uncertainty to the model as a topdown assumption or they reduce the uncertainty to a risk factor and turn it into a computable variable within certain margins of error. While Keynes might exemplify the first case, neoclassical economics is, of course, the best reflective of the latter. Equilibrium conditions, in which individuals with perfect foresight are equipped with full knowledge, give results at a “moment” point devoid of time and space. According to Hutchison (1977), factors such as false expectations, lack of information, and uncertainty in real life contradict these models. Therefore, economists aiming to study real-life man should use empirical and historical research instead of the hypothetical deductive method. Contrary to an abstractionist understanding, more realistic theories can be produced based on falsifiable, real-life events with time and space. G.L. Shackle is one of the economists inspired by Keynes’ uncertainty analysis. Shackle proceeds from issues such as incomplete information, the explanation of unemployment, and the effects of uncertainty on investment decisions, which Keynes addressed in the General Theory. Taking Keynes as a starting point, Shackle was inspired by Adam Smith’s History of Astronomy. Influenced by J. Schumpeter’s Theory of Economic Development (1978), Shackle stated in The Years of High Theory (1983) that he uses Adam Smith’s method in the History of Astronomy. Shackle combined Smith’s approach with Keynes’ ideas on investment, unemployment and incomplete information. Like Knight and Keynes, Shackle sought a new economic theory instead of the probability calculation that neoclassical economics had so heavily studied. When Shackle sought a new theory of economics, he emphasized using the notion of time to analyze uncertainty. To understand uncertainty, he focused on the interrelationships of time and expectations. He did not use the assumption that individuals have complete information in his analysis. Thinking that he could start from a more realistic human behavior, he tried to support his economic ideas with philosophy and psychology. In Epistemics and Economics (1972), Shackle argued that the economic behavior of decision units that do not have complete information cannot be independent of time. According to Shackle, a steady state or a timeless analysis cannot be taken as the first approach to economics. In timelessness or stagnant situation analysis, it is a must to consider an individual with excellent foresight. In this case, essential factors such as real-life changes, mental effects, creative ideas, and solutions are ignored. Calendar time is one of the understandings of time in economics. Calendar time is a valid time for the universe in which man lives. In calendar time, which is a measurement unit, each time unit is equal to another. People use

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their points of view while performing their behaviors over time. According to Shackle, this perspective is a point in time that encapsulates people’s thoughts and decisions. When the decision units make evaluations about the past, present and future, since subjective perspectives will emerge, the time units are far from equal to each other. This is how Shackle’s concept of the “moment in formation” appears. According to Shackle, our time consists of two “moments.” Time is not a succession of different moments like yesterday, today, and tomorrow. Time is the formation of the experiences people have gained through their past lives and their expectations from the future in a single moment in their minds. An individual with future expectations does not have perfect foresight. However, the experiences he gained from his past affect the perception of uncertainty in the individual’s mind. Shackle makes an essential innovation for economics thanks to his understanding of time. According to Shackle, uncertainty is a future in which our knowledge about it is incomplete, besides being in the individual’s mind. The individual, who uses his experiences from the past, is faced with a mental gap or uncertainty because he cannot predict the future. To fill this gap, people make their choices today by seeking an answer to the question “what could happen” rather than “what will happen” in the future. According to Shackle, economic life is also different from the game “roulette.” In roulette, the probability of each number coming out is certain. Real-life experiences are not divisible and sortable. Even the most successful prospects can result in a future with very different effects than expectations. George Katona, whom some economists see as the founder of behavioral economics, criticized the teachings of neoclassical economics since the 1940s. In his Psychological Analysis of Economic Behavior (1952), Katona assumed that economic processes are the result of human behavior. Katona did not accept the basic assumption of rationality and the rigid economic ideas of mainstream economics. While Katona focused on the rationality of decision-making processes, mainstream economics focused on the rationality of results. Contrary to the hypothetical approach used to overcome uncertainty, the behavioral approach focused on studying human relations in the economy. Katona’s priority is not the elimination of uncertainty. He saw his approach as a discipline within economics. Katona stated that research in this discipline should be oriented toward an in-depth analysis of the human decision-making process. He conducted studies based on empirical observations rather than economic theories to avoid a strictly positivist approach. Katona’s main reason for adopting such an approach was that he was aware of the

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importance of psychology in understanding human behavior. According to Katona, human behavior is closely related to psychological factors. Katona stated that it is necessary to use psychology to get to the basis of the economic behavior of decision units. He even used not only psychology but also sociology in the analysis of economic behavior. The economic behavior he analyzed using psychology and sociology did not support neoclassical thought. Economic knowledge is not perceived in the same way by all economic agents. Economic behavior is a learned behavior. Learned economic behaviors change according to the way people process and perceive information. When the same information is presented differently, it causes different reactions because it is perceived differently. It is much more critical for the economist to examine the structure of economic behavior that emerges in uncertainty. Katona (1952), with an empirical approach, paid importance to the analysis of factors that can affect economic behavior. One of the factors Katona stressed most, like mainstream economists, is how expectations are formed. According to Katona, expectations are individuals’ subjective beliefs about a not-distant future. The source of these beliefs is the approval/rejection or satisfaction/dissatisfaction considered for a future decision. One of Katona’s impressive ideas in his stance against mainstream economics, which focuses on eliminating uncertainty, is his thoughts about the effects of religions on behavior. According to Katona, realizing individuals’ expectations depends on habits or learning. Katona expected people, who make economic decisions, to repeat similar situations in repeated situations. When an individual learns new information, when social effects differ, or when the case is perceived differently, the individual’s expectations also change. Identifying changing expectations provides essential information about which direction behavior might go. In addition to analyzing past trends in habits, Katona also tried to create subjective interpretations of individual expectations. Katona’s critical solid approach to mainstream economics is not the only example in the 1950s. Like Katona, Herbert Simon, thanks to his economic ideas, provided an essential accumulation of knowledge. Simon, who could work in fields such as economics, psychology, and computer science, did not believe that economics should be separated from other social sciences, unlike mainstream economics. Like Katona, Simon emphasized the need to understand the primary motivations underlying the behavior of economic agents. Thus, even existing theories of mainstream economics can be improved. In addition to rationality, which is the basic assumption of the mainstream, Simon did not want to use preconceptions such as self-interest. Instead, he chose to study the nature of decision-

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making. According to Simon, the choice theory of neoclassical economics is a device used to predict choice. The fact that Homo economicus has to know everything due to its rationality is incompatible with real life. In A Behavioral Model of Rational Choice (1955), Simon emphasized that people are a measure of the level of rationality. According to Simon (1955), a large portion of human behavior is determined by emotions. The limits of the human brain are clear and there is a lack of information and uncertainty in the decision-making process, whereas full rationality requires unlimited cognitive abilities. For example, a rational person should know the solution to all mathematical problems and can instantly make even the most complex calculations. However, the characteristics of people in real life are very different. Since people’s cognitive abilities are limited, Simon proposed bounded rationality. In Rational Choice and the Structure of the Environment (1956), Simon stated that individuals with limited time, knowledge, and resources can achieve success using the facts around them. Bounded rationality models do not focus solely on the outcome of the decision. Instead, these models describe how a decision is reached: heuristic processes or mechanisms close to them. These models classify situations in which heuristics will succeed or fail. These models do not need unrealistic assumptions that allow uncertainty to be eliminated. In Model of Man (1957), Simon described decision-making as a search process driven by aspiration levels. In such a process, the essence of Simon’s approach is “satisfaction,” not assumptions, to avoid uncertainty. In Rational Choice and the Structure of the Environment (1956), Simon stated that the human organism adapts to “satisfaction” but does not work for optimization. An organism having limited information and limited computation can only have “approximate” types of rationality. When an organism encounters a problem of rational or adaptive behavior in a particular environment, this behavior is not only related to sensory, neural, and other characteristics. These features are equally related to the environment. According to Simon (1956), we should carefully examine some of the basic structural features of the environment to better understand the mechanisms used in decision-making. For Simon (1956), the term environment is ambiguous. To circumvent this ambiguity, Simon dealt with the “habitat” of an organism living in a physical world. Simon’s “environment” refers to the needs, drives-goals, and perception of organisms. Instead of rationality, Simon identified some of the structural features of the psychological environment of the place, where people live. A person in such an environment needs elementary perceptual selection mechanisms to “satisfy” his needs and survive for a long time. No utility functions need to be assumed for human beings. There is no need for an

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elaborate procedure to calculate the probability between the individual’s different requirements. Simon (1956) irreversibly raised severe doubts about the usefulness of economic and statistical methods of rational behavior. Simon defined economic behavior as more realistic and compatible with psychological theories of cognition and perception than rational behavior. In other words, bounded rationality is a much more accurate description of the behavior. It was only in the early 1960s that economists who were skeptical of the teachings of mainstream economics proved that bounded rationality could be tested in a laboratory setting. In An Experimental Study of Competitive Market Behavior, published in 1962, Vernon Smith attempted to create a market environment similar to the real-life market. He randomly divided the subjects into two groups, potential buyers and sellers. Sellers and buyers provide the exchange of goods at different levels of knowledge. Smith, who controls the experiment, can plot the supply and demand curves in the market because he has all the information about the buyers and sellers. The current balance created by the buyers and sellers, who had to act with incomplete information in the experiment, approaches the theoretical current balance price. Economic agents, who have to act with incomplete information, cannot act rationally. This experiment, conducted in a controlled framework, showed that incomplete information makes it possible to approach the theoretical price level. Experimental economics, which increased with Vernon Smith, was initially to analyze the behavior of economic agents, which is the cornerstone of economics. Like Simon, Smith (1994) thought that it is essential to compare the environment in which individuals live. Economists conduct experiments to compare institutions, test an economic theory, and test why a theory fails. In other words, various human behaviors were tested in controlled environments, as if economics were restarting. Milton Friedman published an article in the early 1950s that divided the world of economics when monetarist economics was not yet fully formed. In his Essay on the Methodology of Positive Economics (1953), Friedman suggested that economists should not worry about making their problems “realistic.” Although the article does not mention Popper, the main idea of the article is very close to Popper’s notion of science-nonscience. Friedman (1953) stated that the assumptions don’t have to be realistic. This view was so stark that Friedman failed to persuade even some mainstream economists. Paul Samuelson (1966), naming this sharp suggestion the F-twist, offered its logical proof. Mainstream economists mostly adopted Friedman’s (1953) proposal. Theories produced with unrealistic assumptions have better predictive power because they contain

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a broader evaluation. What matters in such a view is not the truth but that economic theory has a good enough approximation for its purposes. If the theory makes sufficiently accurate predictions, it’s also good as an approximation. It is sufficient to compare the theory predictions with observations only. There is no methodological distinction between natural and social sciences, as theories in all sciences are ‘tools.’ In other words, the important thing is not the closeness of the assumptions to reality but the sharpness of the predictions. This economic thought is the thought that led most economists to produce propositions following Ricardo’s curse. This idea assumes the validity of theories produced with assumptions far from reality. It is helpful to remember the economists who compared their approaches with physics, astronomy, universal gravitational laws, and Euclid’s propositions. An economic proposition based on such a thought has no choice but to accept human beings as rational. Milton Friedman attributed the basis of monetarist economics to such an understanding of uncertainty. Friedman’s theory assumes that individuals have adaptive expectations. Therefore, like other economists, Friedman could not produce his theory without defining the individual. Adaptive expectations emphasize that individuals can make mistakes in the short term but will correct these mistakes in a long time. Short-term experiences help people to be rational in the long term. After defining such an individual, the 1973 oil crisis came to Friedman’s rescue. Thanks to the neoclassical synthesis, mainstream economics trying to absorb Keynes’ ideas were again strengthened after the oil crisis with the work of Friedman (1957; 1970). Friedman attributed the proof of Keynes’ theoretical invalidity to the “stagflation” in the oil crisis. Keynesian economics could not prevent the deterioration of the inverse relationship between unemployment caused by the oil crisis and inflation. According to Friedman, the collapse of this theory, known as the Philips curve, is a huge economic problem. Regardless of the effect of monetary changes on price and quantity in the short run, the adaptive expectations of individuals will be compatible with the money supply in the long run. According to Friedman, this theoretical approach, defined as “natural” unemployment, will eliminate the failure of Keynes. While Keynesian economics fell out of favor due to the oil crisis, monetarist economics came to the fore. Friedman resurrected mainstream economics and provided a wide range of activities for the economists he would inspire. Inspired by Friedman’s economic theory, the new classical economics, or rational expectations theory, provided Homo economicus with a tremendous reputation. Inflation, which the monetarist theory did not prevent, was the source of economic problems in the countries in the 1970s. Friedman’s

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idea of adaptive expectations was therefore questioned. Rational expectations theory sought to solve this problem by further developing adaptive expectations. According to rational expectations, people can quickly learn all the systematic and predictable elements that affect the inflation rate and convert them into price expectations. In other words, people are rational, and their expectations are close to perfect. Individuals’ price expectations become, on average, identical to real prices. Unexpected and coincidental events such as technological innovations, disasters, and sudden changes in preferences that might cause uncertainty in the economy may occur. In such cases, the Philips curve might be negatively sloped in the short run. In the long run, the Philips curve is strictly vertical. The mechanism that makes the curve vertical is Friedman’s natural unemployment rate. Individuals having rational expectations don’t make systematic mistakes. Contrary to the failure of Keynesian economics to affect actual variables, rational expectations theoretically prove the continuity of economic functioning. Using rational expectations, E.F. Fama (1970) analyzes how effectively capital markets can work thanks to information processing power. According to Fama (1970), since financial markets operate effectively in terms of information, assets such as bonds and notes reflect all available data in the market. These financial assets also react to new information as quickly as possible. Fama’s theory set the bar for rationality in mainstream economics relatively high. Some economists even claimed that Fama’s (1970) proposition has the most robust empirical evidence in economics. But, in those days, a crisis such as the one in 2008 was thought to be impossible. In the 1980s, the arguments Friedman used against Keynesian economics could not bring the expected improvement in the economy. Monetarist economics and the rational expectations theory of the new classics were far from realizing the long-term relationship in the Philips curve. The failure of Friedman and rational expectations, which revolutionized against Keynesian economics, caused economic theory to expand again. Therefore, there was also a revolution against those who carried out the counter-revolution. Two approaches, which were supposed to be fundamentally different, decided to reuse Keynesian economics. The New Keynesians did not depart from the assumption that the individual has complete knowledge and that the future is perfectly predicted. However, according to this approach, the complete information assumption might fail, information asymmetry might occur, and uncertainty about the future might influence individuals’ decisions. Keynes’ economic views can be reinterpreted when information asymmetry and possible future uncertainties are transformed into computable forms. New Keynesian

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economists do not want to leave mainstream economics due to uncertainty understanding. However, Post-Keynesians argue that economics is a social science and cannot have laws like the physical sciences. The individual and uncertainty understanding of economics, a social science, should be in accordance with social science. Based on Keynes’ analysis, postKeynesians focus on more realistic individual and firm behavior. Since it is necessary to leave the rationality postulate aside to define a realistic individual, post-Keynesians abandoned uncertainty based on calculating probabilities. When an individual makes any decision, he does not have any information about the future. Therefore, individuals make decisions without a data set about the future, which creates the economy’s fundamental uncertainty. According to post-Keynesians, economic agents make decisions in fundamental uncertainty. Paul Davidson (1991) mentioned three types of decision-making situations. In case of objective probability, individuals consider the past as a reliable guide to the future. In case of subjective probability, however, the individual makes decisions in the current time and information about the future consequences of the decisions he makes appears in his mind. This information helps him overcome future uncertainty. Both the objective and subjective cases of probability express the formation of expectations in mainstream economics and require the rationality of the individual. Therefore, uncertainty is not a problem for individuals. In economic events defined in point or logical time, an individual with rational expectations can predict the future perfectly, and uncertainty disappears. In such a time assumption, statistical averages obtained using historical data are close to those obtained from future time series. The future is a reflection of the past. According to Davidson (1991), real uncertainty is the third possibility. Post-Keynesian economists study an economy where this real uncertainty exists. In the case of real uncertainty, the point or logical time assumption is not valid. For post-Keynesians, historical time is valid in real life. In historical times, all events take place within a particular calendar time. It is impossible to turn back events and time, and it is impossible to predict the future. Therefore, it is impossible to calculate the future mathematically based on current events. Post-Keynesian economics calls this the non-ergodic process for short. Ergodic processes are processes in which the mean of time and area are equal. Ergodic processes are stochastic and have the essential property of stationarity. Economic events in stationary processes move close to averages over time. Therefore, rational expectations are possible in ergodic processes. Non-ergodic processes are the opposite of this situation. In non-ergodic processes, the means obtained from the time series are not equal to each other. Therefore, in non-ergodic processes,

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there is absolute uncertainty. Real-life economic events are subject to nonergodic processes, and rational expectations cannot hold. As a result, economics, a social science, has no laws like the natural sciences. According to post-Keynesians, ontological uncertainty applies to economics. In other words, full employment may not be the inevitable result of market forces. Effective demand may not be enough for markets to reach full employment. However, certain effects in ergodic processes, where rational expectations are valid, can always lead to certain results. If it can be calculated that certain internal effects in economics will always yield certain results, then there is epistemological uncertainty. In ergodic processes using rationality, epistemological uncertainty is valid. In nonergodic processes where people are not rational, ontological uncertainty applies. According to post-Keynesians, irrational people act on the animal instincts of Keynes. Because of animal instincts, people might be inactive in economic decisions or want to take action. As a result, they can develop various behavioral patterns to overcome uncertainty. For example, manufacturers can make long-term agreements to overcome uncertainties in the production process. Of course, these agreements are monetary agreements. Therefore, money and agreements that reduce uncertainty complement each other. Money connects the unchangeable past and the uncertain future. For this reason, according to post-Keynesians, money is significant for individuals, economy, and uncertainty, as with Keynes. For example, since individuals are afraid of the uncertainty of the future, they increase the demand for money, the safest tool. Increasing demand for money leads to a decrease in money in financial markets. The rise in interest, which is the price of money, affects production and the entire economy. When individuals’ confidence in the uncertainty of the future rises, this process works in reverse. In an economy where uncertainty decreases, individuals’ confidence levels in the future increase. The rising level of trust positively affects economic functioning through money. According to post-Keynesians, people can hold cash or invest in valuable papers. Individuals who hold money in economies where there is uncertainty know that income and wealth uncertainties can occur. When they have securities instead of cash as liquid assets, they experience income uncertainty. The capital values of the securities invested in the spot markets might rise or fall. This is wealth uncertainty. Both income uncertainty and capital uncertainty cause unease among savers. The best way to provide peace of mind to uncertain savers is to hold money as a liquid asset.

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2008 Crisis and Post-Crisis Neuroeconomics, on which economists started to work intensively since the 1990s, is making good progress in the 2000s. Neuroeconomics, which expands the field of behavioral economics with a neurological approach, focuses on the brain, the decision center of human beings. According to neuroeconomics, the main center of human actions is the brain. Human beings plan and perform their activities using their brains. Since economic decisions are also made in the brain, the human brain is an economic system. Studying the human brain’s neural system can provide precise predictions of behavior. An accurate and original decision mechanism of human behavior can be created. Experiments in neuroeconomics showed that emotions and the human brain are influential in decision-making (Camerer et al., 2004). Neuroeconomics claim that neurochemical activities are the determinant, even the main factor, in the decision-making process, due to the findings they obtained from experiments. Mainstream economics does not consider the influence of neurochemical reactions when examining individual behavior. Neuroeconomic research argues that individuals can make decisions that do not maximize their utility, contradicting the rationality assumption. Neuroeconomics seeks alternative models to Homo economicus. The studies of Glimcher (2009; 2011), Camerer et al. (2005), and Camerer (2008) expanded the knowledge of neuroeconomics. On the other hand, after the 2008 crisis, the world economy and the science of economics were shaken. While discussing the propositions and theories of economics, neuroeconomics takes a very assertive approach. They claimed that the use of economics and psychology in decision-making is insufficient, and they use neurology together with economics and psychology. Thus, neuroeconomics emerged as an interdisciplinary approach. Neuroeconomics brings together the natural sciences and the social sciences and applies the methods of the natural sciences to economic behavior. Neuroeconomics, which aims to develop a realistic explanation of human decision-making, are in confusion about uncertainty due to their interdisciplinary perspectives. Neuroeconomics aims to present models that criticize the rationality assumption while maintaining the methodology of mainstream economics. Therefore, a significant crisis like 2008 is unfortunate for neoclassical and neuroeconomic researchers. Neuroeconomics wants to create a realistic approach to decision-making by using factors such as emotion, intuition, instinct, habit, and subconscious that neoclassical economics has never mentioned. It must be admitted that in the final analysis, neuroeconomics enriches the theory of economics. Factors that neoclassical economics does not consider can lead to irrational

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decisions in experiments, contrary to the rationality assumption. According to neuroeconomics, cognitive capacity is another reason people cannot make rational decisions. Neuroeconomics describes the human brain as a resource-limited construct and argues that the energy spent making a decision is compared with the cost/benefit derived from that decision. Even in a rational decision, the decision has to pass the benefit/cost test. Moreover, these factors affecting the decision-making process may prevent individuals from acting solely based on self-interest. Instead of being rational, individuals might exhibit altruistic and pro-social behaviors. As it can be seen, neuroeconomics starts from the assumptions of neoclassical economics but reaches results outside of the individual and uncertainty understanding of neoclassical economics. For this reason, the 2008 crisis will inevitably impact neuroeconomics and other schools. The great recession of 2008 was so influential for economics that it even questioned whether economics was a science. As a result, economists had to reconsider the perception of uncertainty and individual with the 2008 crisis. Afterward, a deep divergence began to occur among economists, which was based on the understanding of uncertainty and the individual. While some economists want to stay true to the teachings of mainstream economics, others believe that mainstream teachings should be abandoned altogether. In other words, after the 2008 crisis, everything will not be the same for economics. It is possible to understand the first example of this from Ben Bernanke’s speech at Princeton University. Bernanke (2010) states that the 2008 crisis caused deep uncertainty and that more studies are needed on the behavior of economic agents in times of deep uncertainty. Bernanke, the head of the Fed during the 2008 crisis, says in his speech that economists should not be criticized too much for not understanding the economy. Bernanke (2010), who thus revealed the extent of uncertainty, also acknowledged that economic engineering is problematic. On the other hand, Paul Krugman (2009) showed the uncertainty separation arising from the understanding of the individual among economists in a very harsh article. Krugman (2009) used highly thoughtful expressions to write the reason for the 2008 crisis. According to Krugman (2009), mainstream economics, which is overconfident in its theories, is far from predicting the 2008 crisis. According to Krugman, the formation of the bubble in the housing market and the bursting of this bubble are the fault of the efficient markets hypothesis. Krugman (2009) supported his statement by quoting Eugene Fama’s words on the market bubbles that may appear. Fama stated in an interview in 2007 that people will be cautious with big purchases like a house. Fama says that he finds the idea of a bubble forming in the market ridiculous because of this.

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Krugman (2009) recalled that Lucas (2003) said that the fundamental problem of preventing depression in the economy has been solved and stated that mainstream economists believe that everything is under control in the real world. Lucas, the most important name of the theory of rational expectations, wanted to explain how strong his theory’s foundation and future prediction were with this speech. Joseph Stiglitz (2011; 2018) went much further and declared that the theories produced by economics after the 2008 crisis have largely collapsed. Stiglitz (2018) suggested reconsidering the dynamic stochastic general equilibrium models created with the assumptions made in economics. According to Stiglitz (2018), dynamic general equilibrium models based on assumptions cannot predict a significant crisis like 2008. Stiglitz (2018) suggested that asymmetric information and behavioral economics should be used to establish a more realistic general equilibrium with these models. Stiglitz (2018) stated that the uncertainty element that economics tries to overcome with assumptions can be added to the models by defining the individual more realistically. Akerlof (2019) and Acemoglu (2009) can be added to the criticisms of Krugman (2009) and Stiglitz (2011; 2018). Unfortunately, despite several attempts, mainstream economists have not responded satisfactorily to Krugman and Stiglitz’s criticisms.

CHAPTER 3 PERSON’S DECISIONS IN UNCERTAINTY: THE STRUCTURE OF BEHAVIOR

Homo Economicus Uncertainty applies to all individuals defined in economics. All types of individuals described in economics are constantly struggling with uncertainty. Homo economicus, which eliminates uncertainty with the assumption of rationality, is a definition that is genetically brought to the forefront. Condorcet’s book Outlines of an Historical View of the Progress of the Human Mind (2009), published in 1795, inspired Ricardo and James Mill and emphasized the perfection and openness to development in defining humans. According to Condorcet (2009), the outcome of each moment at hand has the power to influence the outcome of the next moments and the outcome of the previous moments. This situation, which has emerged due to the progress of human intelligence, describes the development of the human race by constantly renewing itself. In that case, the unceasing progress of human intelligence reveals the perfection in the essence of man and ensures its continuous development. If so, the fact that a person can have perfection in his essence can be explained by the fact that his genes are suitable for it. The progressive nature of human intelligence also fit to Descartes’ mindset. The basis of Condorcet, James Mill, and Ricardo’s belief in the perfectionist nature of man depends on the framework that the genes allow for it. The individual described by Ricardo in his Principles of Political Economy and Taxation (1891) was also able to obtain excellent knowledge by making good use of the advantage of his genes. Ricardo stated that perfect knowledge will enable an individual to see the future without any mistakes and emphasized that an individual, who is perfect at the core, should not be afraid of the future, that is, uncertainty. According to Ricardo, when people are free to use their capital as they wish, they would look for ways to use it most profitably. For example, if it is possible to earn a 15 percent return on an investment, another investment with a 10 percent return would not satisfy

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the individual. Therefore, a person whose genes are suitable for perfection also has a highly developed cognitive structure, as defined by Ricardo. In this definition, the individual has a cognitive ability to analyze the information he has obtained. Their enhanced cognitive ability also enables individuals to predict the future without errors, thanks to what they learned from the information processed. For Ricardo, human learning capacity is also highly developed. Ricardo’s conception of the genetically perfect individual is compatible with Adam Smith’s definition of the individual in Wealth of Nations (1981). The selfish individual, defined by Smith (1981) in Wealth of Nations, has to calculate the returns he will get from the investment because he looks after his benefit. The individual that Ricardo describes is also very compatible with Jeremy Bentham‘s utilitarianism. Jeremy Bentham, in An Introduction to the Principles of Morals and Legislation (1970) published in 1789, described utility for the first time. According to Bentham (1970), man is a result of the laws of nature. Nature has allowed man to be ruled by two independent masters. These are pain and pleasure. Using pain and pleasure as criteria, people can grasp right and wrong, the cause-and-effect relationship between events. Bentham proposed the happiness of the greatest number of people as the measure of right and wrong. If an individual’s action gives pleasure and happiness, then it is the right action. This approach, which Bentham (1970) called hedonism, explains how human behavior is directed. Due to the characteristics that originate from the laws of nature, that is, the genes, the desire to enjoy pleasure and avoid pain drives human behavior. Any person, by the laws of existence, implements their behavior in such a way as to achieve a balance between pain and pleasure. The pain and joy coming from presence are so dominant that they also control the ambitions and desires of the human being. Before an action, a person calculates the pleasure he will get from the action and the pain resulting from the action. Since people will always prefer joy and happiness and benefit over pain, people will act selfishly to increase their satisfaction. The selfish person, who pursues his benefit, can decide what to do or not do by looking after his benefit. According to Bentham (1970), value arises from the utility. While utility provides the benefit, advantage, pleasure, goodness, and happiness of anything, it can prevent pain, harm, evil, and unhappiness. Bentham’s (1970) highly influential utilitarian approach gives an excellent argument for economics, in which an individual is genetically fit for perfection. Using Ricardo’s abstractionist method, Mill, who examined human behavior away from uncertainty, realized the usefulness of utilitarian thinking. Mill explained even the measure of civilization with benefits. Thus, the selfish individual prone to development turns into a

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Homo economicus by working to maximize his benefit. In Essay on Some Unsettled Questions Of Political Economy (1992) published in 1844, Mill defined Homo economicus as a rational, well-informed, selective, selfish person with consistent preferences, preferring more to less. As a result, the basis of Homo economicus’ behavior is the perfection of human genes, openness to development, cognitive ability, and learning capacity. Like Ricardo, Mill also emphasized the learnings that rational man acquires by processing exact knowledge. Gathering complete knowledge would be of no use to the individual if learning, which is the result of an individual’s cognitive ability, was not. A person who cannot process and analyze complete information and learn about changes or developments will not be rational because he cannot make the right choices. For this reason, Homo economicus, who obtains full knowledge, should always have a very advanced learning level. Mill (1992), close to Bentham’s utilitarianism, highlights factors that reflect human nature, such as individuality and happiness. The person whose learning ability is at the forefront knows that the benefit gives joy; therefore, he should avoid pain. For Mill, the basis of human behavior is a pleasure. That is, the concept that best describes Homo economicus is the pleasure. Mill emphasized that the science of economics should deal with the measurable aspects of the behavior of Homo economicus, who has a high learning ability. For economics to evaluate people and determine their behaviors, it is sufficient to analyze the superficial characteristics of people and make observations. Thus, Mill stated that the most profound and comprehensive information is obtained from determining the simplest features. Importance he paid to simple features caused Mill to leave Adam Smith. According to Mill, all people love wealth; people naturally want to gain more benefits and pleasure with little effort. While Adam Smith stated that selfishness is the basis of economic preferences, Mill emphasized that the basis of economic preferences is to prefer more over less and seek pleasure. Economists such as Jevons (1970), Walras (1985), and Menger (1892; 1950) took the rational individual’s learning and superior cognitive ability to a new dimension. By emphasizing that the rational individual tries to maximize his utility, Walras and Jevons further increased the cognitive ability of Homo economicus. These economists have mathematically demonstrated the psychological factor of utility maximization in a robust and precise way. Therefore, robustness and certainty that prevents uncertainty are possible with the brain of a person who wants to make decisions that will maximize its utility, working like a supercomputer. Another economist who realized the importance of human consciousness is Walras. According to Walras, a person is aware only of his consciousness and is obliged to

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pursue his interests. Conversely, Menger defined rationality as satisfying needs in the perfect way possible. According to Menger, the source of human needs is impulses. Impulses originate from the nature of human beings. Nevertheless, Menger considered man as a universal individual isolated from society. Homo economicus, separated from his community, turns into a pleasure machine with the contributions of Edgeworth (1881). By defining man as a perfect hedonist, Pareto stated that Homo economicus must be an abstract entity for the propositions of economics to operate with mechanical precision. Therefore, abstract Homo economicus, separated from society and social influences, became represented by his superior cognitive ability and learning features by getting rid of his natural genes. Homo economicus took on another dimension with the contributions of Lionel Robbins in An Essay on the Nature and Significance of Economic Science (2007), published in 1932. However, the continuation of the approaches that treat humans as psychological beings was seen a little in the 19th century. In the 20th century, Robbins’ rational choice theory settled at the center of established economics and ended this idea. Robbins (2007) defined a self-interested, rational, and wealth-seeking person, who is entirely outside of psychological factors. As a result, the abstract Homo economicus, who has acquired all the necessary learning by processing complete information with its cognitive abilities in a perfect computer format, became a necessity for the mainstream economics that can never be proven false. Monetarist economic theory wanted to take advantage of the power of Homo economicus to achieve the results aimed in monetarist economics. Milton Friedman and his students included the expectations that would further improve Homo economicus cognitive ability and learning ability in their analysis. The fact that individuals have the foresight to predict general price changes made the economic behavior of Homo economicus much more specific. Monetarist economics argues that individuals’ future prediction depends on adaptive expectations that enable them to anticipate changes in the general price level. Individuals, who analyze the price level formed in previous periods, form price expectations regarding the future price level. In the 1970s, inflation expectations were based on the weighted average of past inflation values. Random effects occur on the actual wage level if an unexpected price increase occurs. So, the level of production and the rate of employment change. The invalidation of the Philips curve, which Friedman used to criticize Keynesian economics, led monetarists to find a solution to this issue. Adjusting the expectations of Homo economicus would ensure the success of monetarist economics. Let us assume that the general level of prices in the future is determined by the average of the general price level that has

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occurred in the last period. In such an assumption, the price expectations of individuals are formed correctly. Increases in the inflation level in the current period will cause the individual with adaptive expectations to expect an increase in future inflation. As John F. Muth noted in Rational Expectations and The Theory of Price Movements (1961), rational expectations are the source of new classical economics’ further development of adaptive expectations. New classical economists, especially Robert Lucas, argue that individuals have rational expectations, not adaptive expectations. Homo economicus having adaptive expectations in monetarist economics can be mistaken in the short run due to inflationary policies. However, in the long term, the individual’s advanced learning ability ensures that he has the right expectations by reviewing the changes and analyzing the necessary information. Muth and the new classics argued that monetarism underestimates the current economic functioning. If individuals can create their expectations by using all the information they have obtained free of charge, they can avoid possible mistakes in the short term. For example, when one wants to estimate the value of any variable Y, the history of the values of the variable Y should be examined. Suppose historical values show that the value of Y varies between 50 and 60 units over ten periods. In such a case, the value of Y should be expected to be between 50 and 60 units in the future. If the value of Y is within the same values in the future, there is a specific process and a certain operation that determines the value of Y. According to the new classics, economic policies realized according to expectations are not effective on actual variables. Economic variables are the results of systematic processes. While experiencing systematic processes, individuals get full knowledge of economic variables by using all available information that can affect their expectations. The superior cognitive ability of Homo economicus is sufficient to carry out such a demanding trading process. Of course, Homo economicus with rational expectations can make mistakes in his expectations about economic variables. But this is not because the individual cannot be rational or unable to obtain knowledge. The leading cause of errors is external factors that develop outside the economic functioning. However, the effect of these factors is also short-term. A solution can be produced for Homo economicus when the individual having rational expectations makes mistakes regarding the future values of the variables. For example, let’s suppose that an unexpected change occurs in any variable. The fact that individuals’ expectations about the variable have a zero mean solves the problem. In other words, if the mean of the prediction errors of the individual is equal to zero, then rational expectations are correct. All necessary information should be considered

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for rational expectations to be accurate, and an average should be formed in line with expectations. For this reason, the superior learning and cognitive ability of Homo economicus are beneficial. The rational expectations of the individual, which consider all the information needed, have the power not to be mistaken even in the short run. As a result, Homo economicus is successful even in the short run. Individuals with rational expectations do not make systematic mistakes. New classical economists such as Thomas Sargent and Lucas argued that each parameter to be put into the models should be encouraged by individual optimization. Otherwise, according to Sargent and Lucas, the model will not go beyond a temporary adjustment; in other words, the model will not be successful without Homo economicus. Karl Popper, on the other hand, in The Poverty of Historicism (1957), recommended using rationality as a hardcore in all social sciences. According to Popper, understanding the individual with the power of rationality is a zero method. Popper (1957) wrote these thoughts without making direct reference to economics. But the rationality assumption of mainstream economics is quite close to Popper’s suggestion. Popper later stated that his proposal may have been faulty. However, according to Popper, the rational individual with learning capacity and superior cognitive ability has been very useful in studying economic behavior. This is what the new classical economists are trying to convey. Rational people should be open to learning because they can only overcome uncertainty with these learnings. Considering the technology and input factors, the individual, trying to maximize his utility, clears all his economic behaviors from uncertainty (Blaug, 1993; Hollis and Nell, 1975). By a complete and transitive order of preference, an individual can be rational only when he can access the information he needs free of charge and perfectly (Hutchison, 1988; Ricardo, 1952). However, Homo economicus must have another feature. As can be understood from the points made in this chapter, that trait is the repetition of behavior. A rational person should systematically repeat the correct decisions by overcoming uncertainty in each economic decision. When an individual makes any decision without exceeding uncertainty, he cannot be rational because he cannot make the right decisions to maximize his benefit. As a result, Homo economicus has a behavioral pattern.

Homo Moralis Homo moralis is a person who cannot make the best decisions in case of uncertainty; in other words, he is not rational. Adam Smith stated in The Theory of Moral Sentiments (1976) that sympathy is the fundamental

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motive for human behavior. According to Smith (1976), people want to make economic decisions to maximize their self-interest. However, another very powerful decision-maker sets the limits of the individual’s interests. In implementing the decisions made to maximize their interests, people also consider how much others are affected by these decisions. Decisions made by listening to the voice of one’s conscience may not maximize their interests, but it leads the individual to display ethical behaviors. It is possible to see a similar approach in Edgeworth (1881). However, Edgeworth (1881) tried to prove an affinity between ethics and mathematics. Why uncertainty arises is not the subject of economics, but people’s responses to uncertainty explain Smith’s (1976) morality in economics. Thus, the individual described in The Theory of Moral Sentiments (1976) is not Homo economicus but a Homo moralist. According to Smith, the absolute satisfaction caused by the earnings from economic activities is not above people’s feelings, such as mental peace and security. Any individual from any family, whether rich or poor, seeks to increase his wealth or peace of mind. Between increasing wealth and peace, there is a moral balancer. According to Smith, individuals carry the characteristics of the family, firm, or class to which they belong through generations. The individual cannot acquire wealth that previous generations could not obtain without losing his mind calm. Therefore, Smith stated that individuals must lose something to increase their wealth. The story of the poor man’s son is quite interesting. A poor man goes to a palace with his son. While the poor young man is visiting the palace, he suddenly feels quite envious of the rich life. A desire to reach such wealth awakens in him. However, the poor young man begins considering the costs of acquiring wealth. He thinks that he will have to work hard to become rich, get little sleep because he will work, and lose many friends. He realizes that all these factors he will lose will disturb his inner peace. The poor young person, who wants to choose between attaining wealth and losing his peace, realizes that he wants to choose a life he lived in peace and poverty. Even kings are fighting to live the peace that this poor man wants to achieve. As a result, being virtuous has triumphed over wealth. As a Homo moralis, the poor man did not pursue his dream of getting rich. Smith is concerned with the meaning people attach to wealth and poverty. According to Smith (1976), we display our wealth and hide our absence because people tend to feel pity and sympathy. While people share our joy by seeing our wealth, they pity for our poverty. Therefore, while the individual wants to pursue wealth, he avoids being poor. Rich people proudly display their wealth because they think it will attract other people’s attention. People welcome wealth with good feelings, a rich

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person is proud of their wealth, and his commitment to wealth increases even more. Poor people are ashamed of their poverty. Since other people will look at poverty with pity, poor people think that people will not feel close to them. It is such impulses of pity and sympathy that drive economic activity. Therefore, people pursue requests that are acceptable to others. According to Smith, since man is a social being, he gives importance to the evaluations of others more than anything else. However, people also act according to the principle of self-love. On the other hand, Smith (1976) distinguished self-love and Mandeville’s understanding of selfishness. In The Fable of The Bees; or, Private Vices, Public Benefits (1806), Mandeville (1806) stated that immoral acts constitute a society that operates in line with the interests of all. According to Mandeville, who equated immoral behaviors with selfishness, people who pursue their interests increase demand and production. Smith (1976) thought that Mandeville completely obliterated the immoral and moral distinction. Therefore, Smith considered Mandeville’s (1806) system to be very dangerous. According to Smith, Mandeville thinks that every behavior done for reasons such as a sense of decency, the desire to be admired, or the urge to receive praise from people is due to showing off. It is Mandeville’s mistake to compare moral behavior to an immoral passion for whatever purpose. Dignity, glory, and honor are things that people always want. But the desire for dignity, glory, and honor differs from the desire to earn them. The desire for dignity, glory, and honor expresses moral feelings. The desire to gain prestige, glory, and honor are selfish impulse. In The Theory of Moral Sentiments (1976), Smith was concerned with the well-being of a community of individuals driven by moral feelings. With the moral structure he inherited from his family, individuals act by considering how the act of gaining glory or honor for their interests will affect other people. Working by keeping morality in the foreground, Homo moralis prefers decisions that are the appeal of society instead of the rational decision for him. David Hume also defended the sympathy that Smith (1976) paid importance to. Hume considered moral responsibilities and rights as the product of societies. Morality is the inevitable result of human nature. Therefore, we can gain knowledge about morality through studies of human nature. In An Inquiry Concerning the Principle of Morals (1998) published in 1751, Hume wrote that, like Smith, Mandeville supported a selfish moral system. According to Hume’s implicit criticism, Mandeville accepted that pleasure is not or cannot be neutral and is a form of selflove. According to Hume, being beneficial to society is a measure of moral worth. Therefore, the source of people’s basic actions is sympathy. Moral

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judgments must be based on the sympathy of an impartial observer. Sympathy is the essential feature of moral distinctions and represents a force that is sufficient to elicit approved societal sentiments. According to Hume’s morality understanding, reason is only a tool for passion. Thus, while self-interest is the weak side of human psychology, stronger sides, such as benevolence, represent common interests. Common interests are the underlying motivation for social solidarity. According to Hume, passions can be used to determine the limits of an individual’s reason, emotions, and will. Passions that can be used to understand human nature are also effective in human behavior. Passions can be observed and explained. The mind has to be a slave to the passions. Reason cannot refrain from serving and obeying passions. Therefore, since the logic cannot determine passions, man cannot be considered a rational being. People feel the pleasure and pain of others through sympathy. The purpose of moral behavior is to make others happy and to guide them to choices that reduce their unhappiness. What makes an individual unhappy is the choices that make others sad. Hume’s analysis of the relationship between passions and reason forms the basis of Kant’s theory of economic choices. Kant drew attention to the demandingness of the moral system when considering why people should be moral. He explained quite simply why people should be moral. People should be moral because it is right to act morally. Behaviors based on such righteousness should not need any other motivation. Any behavior that advises individuals to pursue their interests only is not morally Kantian because selfishness does not constitute the motivation for behavior in Kant’s understanding of morality. Any person cannot be motivated by actions that will benefit him in the long run due to good deals and profitable business activities. As a rule, Kant defined categorical necessity. Categorical imperatives are rules that do not examine proposed action plans to assess a person’s moral makeup. For example, a person may donate to charities to gain tax benefits, improve oneself, or strengthen their position in society. Although such a donation is still commendable, the person’s primary purpose is self-interest. Of course, such an act is moral if he only donates to help others. Any action is moral if it is not done for a particular personal purpose, i.e., outside the duty of the action. In The Groundwork for the Metaphysics of Morals (1785), Kant perfectly explained the task and categorical necessity of action. Kant (1785) gave the impression that he was more concerned with duties and morality than with the individual’s feelings of happiness, well-being, or pleasure. This impression continues in his Critique of Practical Reason (1788). In The Metaphysics of Morals (1797), Kant mentions the importance of happiness.

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According to Kant, people deserve happiness only in proportion to their actions. The pursuit of only his interest, the desire to maximize his utility, and the rationality of his preferences are incompatible with Kant’s individual who gives importance to happiness. The morality of the individual, who is worthy of happiness in proportion to his actions, is imposed by his cause. Thus, according to Kant, morality is not based on prudence, happiness, sacrifice, or even the pleasure of doing the right thing. Since the individual’s cause imposes morality, moral actions must be performed for appropriate reasons. The activities of the individual exhibiting the behaviors required by his morality do not seem suitable for the methods that are reduced to the measurement of utility mathematically. Amartya Sen (1977) referred to Edgeworth’s (1881) approach to morality and criticizes the economic measurement based on the individual’s self-interest. According to Sen (1977), morality is a part of society’s culture. Economic systems of countries have a structure, which exceeds the net benefit calculation of individuals and in which social conditioning is effective. For example, economic difficulties in Britain raise motivational problems outside of a reward and punishment economy. The behavior of individuals influences moral reasoning, but these problems are cultural issues, including morality. However, as an extreme example, China’s cultural revolution aims to increase the sense of commitment of individuals. Revolution seeks to revolutionize people’s ideology, thus achieving faster, bigger, and better results in all fields of work. According to Sen (1977), morality and culture underlying people’s commitment to policies might have a limited scope. Business ethics problems that need to be applied in a limited area might arise in working life. For example, in wage negotiations, the relationship between the parties might have defined boundaries. Therefore, such limitations may not be compatible with an approach such as utilitarianism. So, a dual structure is missing even when expressing moral judgments from an impersonal point of view. Sen (1977), therefore, suggested that we should consider the order of preference to express moral judgments. A particular morality approach can be seen as the most moral ordering of a series of actions. Morality should also be seen as a morally designed sequence of steps. For example, in a decision set, there is a decision order of A, B, and C. Ranking A shows the order of personal well-being, representing self-interest. Ranking B represents self-interest, where sympathy is ignored. Ranking C means which real choices the individual prefers. An M ranking, seen as the most moral, can be either A or B or any of the rankings. Or an order that is very different from these three might be seen as the most moral one because the individual’s action choices may not be the most moral in terms of the morality in question.

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The moral system may also require sacrificing self-interest. Even in such a case, it is still unclear how A, B, and C would rank among themselves. Self-interest, which includes the pleasure and pain of sympathy, may be morally superior to pure self-interest. Again, morally, one’s real choices may override personal interests. Thus, the moral level in question might indicate the M-rank as the morally best. However, this result cannot be generalized to all moral systems. According to Arrow (1973), moral behavior is not an action that should be considered only for individuals. Acting on the responsibility of individuals to others, Arrow investigated the signs of morality in firm behavior. Arrow (1973) analyzed firm behavior in this context, arguing that there are some responsibilities towards other people in economic activities. Arrow made some observations to explore the widely accepted thesis that the individual has some responsibility to others in his economic affairs. Individuals can take various actions to achieve social goals that are accepted in their society. To avoid harming others during these actions, the person may need to give up profits or other interests. The society we live in may have taught us that there are several conditions in this regard. Business firms, like individuals, might want to consider how their economic activities affect other firms. As a firm buys and sells goods in product and factor markets, it competes with other firms and also influences them. According to Arrow, the moral dimension of this interaction between firms that are very close due to their economic activities is essential. Alger and Weibull (2013) stated that there might be a relationship between moral behavior and kinship ties. Individuals can exhibit an attitude that emphasizes morality in their economic behaviors. An individual with moral behavior may prefer a decision that may be beneficial for his friend or relative rather than a decision that may be beneficial for him. It is genetic for Homo moralis to want to help his relative. A gene found in humans is likely to be found in a relative. The morality of Homo moralis, which causes systematically similar behaviors, also helps the individual to avoid uncertainty. The moral conduct of unrelated people should depend on many factors, such as culture, values, and beliefs, that affect morality. Thus, Homo moralis behaves according to the moral structure that develops depending on genetics, culture, and belief. Morality is a teaching that requires the repetition of a particular behavior pattern. When a person exhibits the behavior needed by his morality, he reduces the effect of uncertainty for himself. Because in another event similar to this one, he should repeat the behavior required by his morals. Otherwise, he will display immoral behavior regarding the

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morals he has acquired. Thus, the morality of Homo moralis turns into repetitive behavior patterns in uncertainty.

Homo Reciprocans Some empirical economists focus on the behavior of Homo reciprocans, instead of taking the economic behavior of Homo economicus as basis. When Homo reciprocans see that an individual is not complying with a legal obligation, he opposes it and makes a complaint where appropriate. Such protest or denunciation can be costly for Homo reciprocans. However, Homo reciprocans do not refrain from exhibiting the necessary behavior under any circumstances. This behavioral trait is an essential feature of Homo reciprocans. Having a responsive nature, Homo reciprocans is eager to work with people who are willing to cooperate. Homo reciprocans tend to punish uncooperative people. According to Bowles and Gintis (2002), the presence of a significant number of Homo reciprocans in a society composed of people with different personality types would make quite a difference. Equitable redistribution mechanisms and democratic institutions of political participation can be quite successful under the influence of responsive behavior. Becker (1981) mentioned that, unlike Homo economicus in society, individuals with unselfish behaviors should have characteristics such as altruism and reciprocity. Evolutionary biology can be used as a tool for the survival of such unselfish behavior patterns. The fact that individuals exhibit behaviors that care about themselves and others shows that evolutionary biology can be used. While selfish people want to exploit unselfish people, unselfish people can form communities within themselves to oppose this abuse. Through these communities, they can minimize interaction with selfish people. Generous people with less contact with selfish people can increase their power and continue to exist in their society. This is called group selection. Group selection models are natural and social processes that determine the diversity of behavioral traits. Becker (1976) stated that the discovery of human nature has just begun due to the development of modern biology and population genetics. Humans and animals acquired their permanent characteristics due to a life cycle that takes many years. As life on Earth evolved over millions of years, the enduring features of humans have been genetically selected in different social arrangements and physical environments. People, who exhibit altruistic behaviors, can be studied by group selection and kinship selection models. Therefore, the behavioral basis of Homo reciprocans is based primarily on genetics. There are selfish people in every society and it is obvious that they have

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enough motivation to pursue their interests. On the other hand, a person can set limits on self-interested behavior regarding his sibling. For example, let’s assume that a person exhibits altruistic behavior towards his sibling—genetic selection and genetic fitness are essential in explaining the reciprocal behavior between two siblings. Genetic selection is the change in the relative frequency of genotypes due to differences in the ability of their phenotype to obtain representation in the next generation. Genetic fitness is a genotype’s relative contribution to the next generation’s genotype distribution. Genotype in the description refers to the genetic makeup of an organism, while phenotype refers to the observable characteristics of an organism. Therefore, it can be assumed that the individual having altruistic behaviors is willing to reduce their fitness level to increase their sibling’s genetic fitness. According to Becker (1976), when the altruistic sibling’s congruence decreases by b units, altruistic behaviors may increase the sibling’s agreement by c units. Since almost half of the siblings’ genes are shared genes, the altruism level of c>2b increases the expected fitness of the altruistic sibling. Genetic fitness will be seen especially in genes that contribute to altruism. Thus, altruistic treatment can be given to siblings, grandchildren, children, or anyone with common genes. The existence of such behavior towards gene partners increases the chances of survival of altruism. The fact that people show altruistic behavior towards people, whom they share common genes with, thus becomes a permanent element of human nature. According to Simon (1993), behaviors among groups in society are worth examining in terms of altruism. For example, an altruistic individual in a group might contribute more to the fitness of others than the level of fitness he lost. In such a situation, altruistic behavior becomes a force in competition with other groups. A group with altruistic behaviors increases its chances of survival in competition with another group, thanks to altruism. On the other hand, the development of altruism genes is highly dependent on specific conditions. Altruistic behavior among close relatives, such as siblings and children, may increase the chances of survival of altruistic behaviors due to their shared genes. However, more is needed. Altruistic behaviors must also make an adequate contribution to the appropriateness of others. Although the altruistic individual may show altruistic behaviors towards those whose genes are unfamiliar, it cannot be expected that the altruism in the group will be permanent. Altruistic behavior can increase group cohesion. However, as the group grows, the number of altruistic individuals in it will decrease or even disappear. When the rate of altruistic behavior becomes too low, the group will lose cohesion. The framework for altruistic behavior includes the distribution of relatively scarce food

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and other resources and market competition. Although mainstream economics emphasizes only individual rationality, altruistic behavior researchers do not see such an approach as a priority. Experiments showed that the social and physical environment discourages inappropriate behavior while promoting appropriate ones. As stated by Fehr and Gächter (1998), Homo reciprocans is influenced by incentives and deterrents in trust and gift exchange behavior. Reciprocity interaction can lead individuals to exhibit positive and negative behavioral patterns. For example, let’s play a gift exchange game with individuals A and B. Player A can volunteer to transfer his resources to player B. Player A’s transfer of resources to player B represents a gift. Player B has no obligation to pay for assistance from A. However, in return for A’s gifting behavior, B may also want to transfer his resources to A. If player B also transfers resources to player A, the general situation of both players is improved. On the other hand, it is possible for player B not to make such a transfer. If player B is selfish, then selfishness prohibits transferring free resources. Still, most people avoid selfish behavior in such a game. In the games, player A mostly shows the behavior of giving gifts. Player B often responds to such a gift with a free gift. Even though player B doesn’t behave like this in all games, people usually take a stance in favor of rewarding kindness. In turn, people are even willing to pay the price to eliminate hostile behavior. In such a gift exchange game, individuals cannot know who they are against. Therefore, people continue to exhibit reciprocity without knowing who they interact with. Even if the behaviors in the game are not observed, reciprocity behaviors may occur. Therefore, a distinction between positive and negative behavior for reciprocity can be made for reciprocity. Positive reciprocity is the urge to be kind to people, who treat them kindly. De Waal (1991) provided an example of such an impulse and desire with a striking experiment. Most humans, even animals, have clear patterns of reciprocity behavior. For example, food sharing among chimpanzees is quite common. When sharing food, chimpanzees make decisions based on their past experiences. According to De Waal (1991), chimpanzee A exchanges food with chimpanzee B in a food exchange game. A’s food to B positively affects B’s behavior of giving food to A. When individual A asks for food from B, the past food sharing between the two comes to the fore. If A has not previously shared food with B, B may respond to the food request with aggression. Thus, the deep roots of reciprocity behavior in living things emerge. So much so that reciprocity behavior can be observed even in one-time interactions between strangers that do not involve gift-giving.

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According to Becker (1976), an altruistic individual, by its definition, is willing to increase the consumption of others by reducing his consumption. Selfish people think that their consumption is more than the individual with altruistic behaviors. Even if selfish and altruistic individuals have equal wealth, consumer interaction will undermine individuals’ equality. Since altruistic individuals will spend some of their wealth on the consumption of other people, the consumption of selfish individuals will exceed those of altruists. Moreover, the wealth of selfish individuals must be greater than those of altruists. Because, as specified by Becker (1976), altruists both reduced their consumption and transferred some of their wealth to others for free. Altruists also voluntarily give up behaviors that may cause adverse effects, considering the impact of their self-interested behavior on other people. Selfish people will not hesitate to exhibit self-seeking behavior that can increase their wealth. But in terms of genetic fitness, analysis of altruistic and selfish individual behavior also shows that the distribution of wealth and consumption can change. According to Becker (1976), the consumption and wealth of altruistic individuals can exceed those of selfish individuals. The ability of the altruistic individual A to transfer wealth to the selfish individual B may depend on the extent of A’s sacrifice, the wealth of A and B, the cost of transferring wealth, and whether the genes are shared. Moreover, there might be social controls that restrict the behavior of selfish individuals. Every society can have social norms. A norm is a set of rules or principles that determine how group members should behave in various situations. Social norms, then, are patterns of behavior that have regularity. Rules that show how people should behave must be based on a particular common belief. Otherwise, the individual may find any law unimportant or avoid following a practice. In such a case, there must be informal sanctions of social norms. Informal sanctions trigger the implementation of predicted and expected behaviors by individuals. Social norms aim to provide and maintain social order. Social norms developed in response to behaviors such as lying, stealing, and fraudulent sales effectively deter such behaviors. Social norms shape human behaviors since destructive behaviors that adversely affect social life are not desired in every society. Social norms restrict individual behavior beyond economic factors such as knowledge and budget. Social norms can govern most family, neighborhood, and workplace relationships. Thus, reciprocity performs an essential function in implementing social norms. For example, Fehr and Gächter (2000) planned a game in which two individuals must agree on dividing a certain amount of money. Individual A, the bidder, can offer how the money should be divided. Person B, the responder to the offer, can accept

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or decline the amount provided by A. If individual B rejects A’s offer, neither can make any money. If B accepts the offer, the two individuals get a certain amount of money. Hundreds of iterations of experiments revealed that, if A offers less than 30 percent of the money to B, then the offer is highly likely to be rejected. B’s reason for rejecting the request is usually because A is gaining an unfair advantage over B. Therefore, it is natural that unjust gain is not welcomed in all societies. According to Fehr and Gächter (2000), this rejection behavior has been observed in Indonesia, Japan, many European countries, Russia, and the USA. People, who are part of any society, do not allow self-interested individuals to win everything all the time. Homo reciprocans, who want to punish unfair behavior, show a very high level of cooperation. The collective action of people and the enforcement power of social norms is one of the most critical consequences of reciprocity behavior. For example, we are more willing to tip the servers, who greet us with a smile in a cafe. When the company we work for reduces the wages we receive, our view of our work and workplace might change negatively. Receiving small rewards from charities, which we want to donate to, positively affects the number of donations we make and the repetition of contributions. Furthermore, the fact that a small amount of some products is given free of charge in the markets we shop in may cause us to buy the product even, if we do not like it. As a result, Homo reciprocans want to reward appropriate behaviors and punish unfair ones. Homo reciprocans have cognitive biases that influence this type of behavior. Any individual can be open to mutual altruism enough to ensure that his and his competitor’s monetary incomes are linear. People who care about social respect may care more about the approval they get from people they approve of. High-income people can endure social welfare sacrifices that will increase the incomes of lowincome people. Genetics, culture, perception level, and age affect these positive and negative reciprocities. Therefore, the behavior of Homo reciprocans in uncertainty is driven by genetic, psychological, cultural, and environmental variables. Systematically repeated reciprocal responses are motivated by reason and create the individual’s behavior patterns in uncertainty.

Bounded Rationality In History of Astronomy (1980), Adam Smith stated that people have mental imbalances due to mistakes and cannot be rational due to economic functioning. Being able to restore mental balance after an error does not

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guarantee that a person will not be mistaken again. According to Smith (1976), being wrong and making mistakes are characteristics that are always in the individual. Similarly, Keynes stated in General Theory (1981) that individuals have limited knowledge of the future and that people just do not know. Therefore, an individual with limited cognitive ability and short-term vision is a critical element of Keynes’ normative theory. Smith and Keynes’ base on a person with limited cognitive ability is very close to Leibenstein’s (1966) mentality. Criticizing M. Friedman’s views on the behavior of firm managers, Leibenstein developed the theory of X-efficiency. Leibenstein (1966) showed that firm managers’ cost or profit maximization behaviors are a particular case of general firm manager behaviors. According to Leibenstein, in the absence of maximization-oriented behaviors, inefficiencies might occur due to a lack of information and can occur even under free competition conditions. This result, which expresses deviations from x-efficiency, can be eliminated. Elimination of variations from x-activity depends on changes in the factors that determine motives. According to Leibenstein, individuals make decisions under two influences. The first of these effects is awareness of the factors that can limit decisions and the opportunities that decisions can bring. The second effect is the factors that put pressure on the decisionmaking process. In addition to calculating the limits of the decisions he will take, the individual feels the discomfort of the stress caused by his consciousness. The individual who decides such a contradiction deviates from rationality. Deviations from rationality caused by a lack of information can occur even under conditions of perfect competition. Herbert Simon is very close to Leibenstein’s (1966) idea of deviating from Homo economicus. According to Simon (1976; 1978), Homo economicus, which mainstream economics insistently defends, shows the shortest way to produce theory without making observations about people. However, according to Simon (1955), being rational at the level of perfection means that humans are equal to computers. It is unthinkable to equate human beings in real life with computers. The level of knowledge and information processing capacity of human beings is limited. Simon (1955; 1978; 1986) questioned the rational individual, considering the difficulty of a problem that requires a decision, the time needed for making a decision, and the cognitive capacity of the mind. For Simon, man is bounded rational. Bounded rational people in uncertainty have limits in formulating and solving complex problems and processing (receiving, storing, retrieving, transmitting) information. The individual, who has limits in receiving and processing information, has difficulties arising from these limits while

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making a decision. For this reason, in case of uncertainty, people seek any option that can satisfy them instead of the perfect choice. A bounded rational individual should have various equipment to solve a problem he encounters. The unchanging information processing process is supported by the plans that can solve the problem and the adequacy of the problem representation that will enable taking short-cut decisions. These factors, from which the individual receives help, allow him to gain sufficient experience to solve the following problem. The individual uses these limited and informative experiences to solve the next issue that may arise in uncertainty (Simon and Newell, 1970). Since it is sufficient for the individual to solve the problem, there is no need for an optimum solution to the problem. People act by their subjective models. Behaviors incompatible with the goal of utility or profit maximization are very likely to occur. So, according to Simon, there are elements that reveal bounded rationality. One of these elements is complex calculations to find the optimum solution. A person with limited cognitive ability cannot calculate the perfect solution offered by the information that will answer the problem. Another critical factor is how to devote many resources to problem-solving and searching for alternative solutions. Finally, people in real life must make decisions with incomplete information instead of uninterrupted and accessible information. Thus, cognitive capacity and environmental constraints prevent the calculation of the decision’s cost. For this reason, experiences gained from past lives gain importance in decision-making processes in uncertainty. Therefore, experiences turn into behavioral patterns. Simon’s definition of bounded rationality helps correct Von-Neumann and Morgenstern’s (1947) theory of expected utility. On the other hand, Kahneman and Tversky’s (1984) approach is more realistic than VonNeumann and Morgenstern’s (1947). Von-Neumann and Morgenstern (1947), who laid the foundation of modern decision theory, state that the preferences of the rational individual occur in the same order and a consistent manner. Kahneman and Tversky (1984) showed that individual decisions do not fit such a definition. Kahneman and Tversky (1984) obtained evidence on this subject from several experiments. For example, in one experiment, subjects were asked to choose between the two specified programs when their country faced a terminal illness. Although there is no difference in probability between the two choices presented to the subjects in the first program, most subjects favor the choice that gives a positive impression. In the second program, the topics were again presented with two options. Although there is no difference between the preferences in terms of probability, the majority of the subjects are in

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favor of positive statements. Given the results obtained from the experiment, rational individuals are not consistent in their preferences. Individuals respond differently when the same situation is presented in different ways. This is the framing effect, which explains the inconsistency in individuals’ decisions. People try to maintain their positions when making decisions instead of calculating probability. The perception of gain and loss causes systematic and consistent deviations in the individual’s behavior. Therefore, according to the framing effect, the individual can only be bounded rational. On the other hand, individuals can take risks to avoid possible losses, which causes bounded rationality. When individuals want to make a selection between various choices, they avoid taking risks in case of potential gain. However, individuals are willing to take risks when there is a possibility of loss. Consequently, winning or losing cannot always be expressed similarly for an individual at risk. Winning and losing for at-risk individuals depend on what reference point they are starting from. Individuals are inconsistent in their preferences because their psychological tendencies at the time of decision are in the foreground. Kahneman and Tversky’s (1979) prospect theory offers an alternative calculation for choices to be made at risk. Prospect theory proceeds from the fact that the expected utility theory based on rationality is insufficient as a descriptive model. Decisionmakers may react differently when winning and losing are probabilistic and in cases of sure wins and losses. While making decisions under risk and uncertainty, people shape their behaviors in line with risk perception and reference points. According to Kahneman and Tversky (1979), the missing point of the expected utility theory is that it equates the uselessness of losses with the benefit of gains. Yet the distinction between winners and losers is worth examining. When making decisions, individuals are influenced by psychological and emotional factors, so they may choose a different option than what benefits them most. It is the value function, not the utility function, that individuals use. When it comes to certain gains, individuals avoid taking risks. People take risks when it comes to uncertainty regarding the profit to be obtained. Thus, expectancy theory states that people affected by psychological and emotional factors generally enjoy winning. The reference point here is the experiences of individuals from their previous behavior. According to Kahneman and Tversky (1979), a bounded rational individual, who cannot be Homo economicus because he deviates from rationality, can use the behavioral patterns taught by his experiences. When people go from a dark place to a very bright spot, they react to high light compared to their previous lightless state. Taking his current financial situation as the reference point, the individual considers the

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income above the reference point as profit. Income below the reference point is regarded as a loss. But this is not just about income. People can also use reference points for health, prestige, etc. As a result, the value function created for any factor is form of S. Upward deviations from the reference point generate gains and are usually concave. Parts below the reference point are losses and are convex. Our experiences may cause us to choose a preference that we are used to instead of the one, which will benefit us the most, when making any decision. Kahneman’s book Thinking, Fast and Slow (2011) defines System 1 and System 2. Kahneman (2011) described why people move away from rationality with two-system definitions. People use System 1 and System 2 in the decision-making process. Both systems operate according to different types of mental processes. System 1 is about intuition. System 1 is the mental aspect of our mind that works quickly with little or no effort or automatically. Decisions are fast in System 1, which is subject to no voluntary control. The automatic activity of System 1 generates many idea patterns and is difficult to change or control. It is from this System 1 that most decision-making errors of individuals originate. System 2, on the other hand, manages attention, complex calculations, and demanding mental operations. According to Kahneman (2011), human usually identifies with System 2. System 2 includes consciousness that determines actions and choices. However, beliefs and the reasoning self are within the scope of System 2. According to Kahneman, System 1 is used first in decision-making processes. When System 1 fails, then System 2 kicks in. Therefore, the real hero is System 1. Thus, System 1, which has intellectual patterns, limits the rationality of the individual by causing him to make mistakes. Neuroeconomics analyzes bounded rationality by breaking down the decision-making process into mechanical parts. According to neuroeconomics, decision-making results from brain processes involved in the representation, prediction, evaluation, and selection of choice opportunities. Certain areas of the brain may represent the value of the outcome of the action before the decision. Other brain regions may represent the action’s value or value at the time of decision. Examination of economic psychology at the neural level can show the limits of rationality. Indeed, Kahneman et al. (1997) proposed to analyze the concept of utility by dividing it into subsections. Loss aversion, according to neuroeconomics, is the interaction of neural structures used to predict, record, and calculate the hedonic effect of a risky decision. In many neuroeconomic experiments, subjects tend to choose risky decisions rather than uncertain ones. For example, let’s say we have two decks of 20 cards. Ten cards are red, and ten are blue in the

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problematic deck. The ratio of blue and red cards is unknown in the second deck containing uncertainty. Each time subjects choose a red card, they earn $1. When subjects have to make a choice, they choose the risky deck. According to decision theory, individuals have no reason to make such a choice (Huettel, 2006). Neuroeconomic research detected vigorous activities in many brain areas, especially the amygdala, in uncertain decisions. Midbrain dopaminergic neurons calculate the probability and magnitude of losses in any decision. Moreover, dopaminergic neurons learn from mistakes made. Information learned from errors may cause the following behavior to be biased. Here, according to neuroeconomics, the individual who can make biased decisions is Homo neuroeconomicus. Homo neuroeconomicus is an individual, who uses logic less in his choices and has a flexible and complex nervous system in his emotional reactions. Given this definition, the Homo neuroeconomicus is a quick decision-maker. In his daily life decisions, he can act according to the direction of his emotions. Thanks to Homo neuroeconomicus, it is not ignored that the individual can make decisions by being influenced by his beliefs, desires, and emotions. An individual, who can use the patterns taught by his experiences in his decisions and who is affected by his beliefs, feelings, and desires, should not be expected to be rational. As Thaler and Sunstein (2009) showed, an individual’s irrational behaviors can be directed toward desired areas. According to Thaler and Sunstein (2009), individuals are not rational as mainstream economics claims and they therefore need help. Various nudge policies that do not restrict the individual’s freedom of choice can direct the individual’s behavior toward the desired goal. For example, an individual who makes a wrong decision may stay in this decision or choose to turn to a decision that they find more appropriate. According to Thaler and Sunstein (2009), other decisions should be allowed to direct an individual with limited rationality to the desired behavior. Thus, the individual is not restricted and is encouraged to turn to the behavior he finds suitable for him. This encouragement refers to a well-planned learning process. Thaler and Sunstein (2009) preferred using the learning feature of the bounded rational individual. Vernon Smith (1994) had a similar approach. Vernon Smith (1994) offered a learning style that can guide expectations. The audible stairs in Italy constitute a perfect example of the nudge action described by Thaler and Sunstein (2009). The sound stairs were designed and implemented in Italy on the road to the metro station. People use the stairs to go to the subway. However, people mostly prefer escalators. One of the causes of obesity, a huge problem today, is being inactive. For this reason, it is necessary to move people who are

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immobile away from the escalators. Experts devised a mechanism to encourage people to climb regular stairs. Thanks to the mechanism, piano sounds are produced when people step on the steps of the stairs. Such a nudge got people interested in regular stairs. And people started using traditional stairs instead of escalators. While there are standard escalators, people can choose regular stairs for their health. Without restricting individuals’ freedom of choice, another option has become attractive. Similar nudge policies are also used in the US and UK.

Homo Institutional The foundations of Homo institutional’s behavior were laid by economists such as T. Veblen, J. Commons, and V. Mitchell. These economists were strongly influenced in thought by the German historical school, especially Gustav von Schmoller. For a good understanding of the behavior patterns of Homo institutional, it is necessary to study the German historical school well. The German historical school is against the definition of the individual and the abstractionist method that classical economics learned from Ricardo. The historical school has assigned social duties to the state in response to the self-interest understanding of Homo economicus. The people’s economy, separated from the competitive structure due to the social state principle, is oriented towards cooperation and state control. Because according to the German historical school, economics is not a natural phenomenon. Economics is a cultural reality that combines social, political, national, and historical factors. Such a cultural reality is only inductive. This method’s comprehensive comparison of historical events is the primary instrument. Therefore, according to the historical school, it is not a historical reality to accept that economic agents are rational (Nau, 2000). People are under the influence of irrational motives. Societies are an organic unity that includes the economy. Since the individual cannot be considered separately from society, the individual should not be isolated with assumptions and analyzed separately from this organic structure. In other words, according to the historical school, human behavior cannot be analyzed by reducing it to a single feature level. People don’t just act out of the desire to earn more. On the contrary, people direct their behavior at the intersection of many conflicting motives. Schmoller (1900; 1904) transferred the human being under the influence of his impulses to the economy, which he defines as a cultural phenomenon. According to Schmoller (1900), psychology is the key to social sciences such as economics. Therefore, individual behaviors affected by cultural and social factors are also affected by psychology. According to Schmoller, morality

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is a critical determinant of a society. Societies transition from a chaotic environment created by natural impulses, simple needs, satisfaction, and emotions to a regulated order. This transition is reconciliation and acceptance. Such an order becomes a solid morality through transferences shaped by compromise and acceptance. Morality, which completes its formation, is the glue of society, which includes the individual and the economy. People build a new cultural world with the morals they have acquired. In the human world, the political economy also takes its place. The economy is the result of individuals’ behavior, therefore, a cultural phenomenon, according to Schmoller. Thus, each society’s economic growth and development will be different from each other, and economic growth and development will not be independent of habits. According to Schmoller, the economy cannot be understood without the cultural cortex of society. The social consensus of the community is, as it has been, a normative institutional basis. Without this foundation, regulatory mechanisms cannot exist. In other words, the individual cannot be understood without morality, and economic activities such as the market, swap, and division of labor cannot exist. According to Schmoller, even the state structure cannot emerge. The human being, which classical economics has squeezed into Homo economicus, is an incomplete definition. T. Veblen is an economist, who follows Schmoller’s thoughts and distances himself from Homo economicus. Veblen’s understanding of the individual is not uniform like mainstream economics’ hedonistic and utility-maximizing individual. In The Theory of the Leisure Class (1973), Veblen attributed the still existence of some painful behaviors to the institutional fabric of these behaviors. Veblen’s individual is dynamic. The individual is affected by the time, culture, and institutions, in which the culture is located. Therefore, Veblen thought that the anthropological origins of the individual should be examined. Veblen sought to understand race and racial characteristics by determining the characteristics of societies with a historical approach. Veblen thought that the characteristics of races from the past and the stability of these characteristics affect economic and social developments. Veblen dealt specifically with motives to understand societies. In this sense, instincts have different characteristics according to race. In The Instinct of Workmanship (1964), Veblen examined of the stability of racial type. The stability of racial type refers to the inherent nature of a society or its unchanging characteristics over time. Economics has an evolutionary structure due to its human nature. According to Veblen (1898), human activities are shaped according to the social and cultural structure due to an evolution that has continued for centuries. Therefore, the economy must emerge as a particular case of

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certain motives. According to Veblen, instincts, the stable sources of human nature, should be brought to the fore instead of the individual being reduced to a uniform definition like Homo economicus. These instincts are workmanship, curiosity, parental bent, mutual exploitation, and predatory bent. According to Veblen, the beginning of the definition of human is genetics. The basic instincts that come from these genes are the essences that make people human. The basic instincts, which are relatively stable, reveal various lifestyles and behavioral habits depending on the characteristics of the culture. Habits as behavioral patterns become an essential factor that leads to the formation of a unique culture. Veblen’s individual, defined more realistically, indicates that the rationality assumption cannot solve economic phenomena. For this purpose, Veblen (1973) described the relationship of a correctly defined individual and his habits with institutions. According to Veblen (1973), institutions are habits of thought inherited from the past. Institutions shape the tendencies of individuals, their relations with each other and society, and their preferences and values. Institutions inherited from the past exist by adapting to past processes. However, institutions might not be fully compatible with the period, in which people live. The evolutionary development of societies and the evolution of institutions are adaptation processes. According to Veblen (1973), the evolution of communities and institutions becomes the development of society. The human being participates in institutional change and does not act only to maximize his benefit. W.C. Mitchell gives place to the psychological effects of individual behaviors, which Veblen did not mention much. Mitchell (1910a; 1910b) criticized mainstream economics and all economists, who ignore human psychology. According to Mitchell, research on human psychology will help to understand human nature better. As coherent psychological concepts are ignored in the formulation of economic theory, a person who hides behind assumptions emerges. According to Mitchell, this is why the individual is squeezed into the framework of hedonism and rationality. Mitchell (1910b) considered the use of such an individual in economic propositions as a way to achieve the intended goals. However, against the rationality assumption, there are habits caused by motives. Like Veblen, Mitchell (1910a) thought that motives can influence all human activities. At the core of the instincts are the primary emotions found in all people and remain unchanged. These basic emotions are escapism and fear, curiosity and wonder, abomination and disgust, self-deprecation and dependence, irritability and anger, fatherhood and compassion, and pride and self-assertion. There are also instincts with less emotional tendencies, according to Mitchell. Such instincts include reproduction, communal

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living, usefulness, and existence. According to Mitchell (1910a), all instincts are the beginning of pleasure and pain. To analyze human behavior more accurately, it is necessary to focus primarily on instincts and habits formed by instincts. At the basis of all the complex behaviors that make up the life of society are the instincts brought by the human race from the past. For Mitchell, the main economic theory research topic is human nature. Studying human nature also means learning institutions with psychological roots. Institutions from behavioral habits standardize human behavior. Mitchell thinks institution-centered behavior analysis will provide an understanding of institutions’ behavior patterns. Understanding the behavioral patterns of individuals will make it easier to reach the collective and social consequences of these patterns. Therefore, instead of individual behavior limited by various assumptions, actual behaviors that institutions can stereotype are worth examining. J.R. Commons also stated that the individual understanding of economics cannot be separated from the institutional context. In Institutional Economics (1959), Commons said that the individual he is interested in is the institutionalized mind. According to Commons (1931; 1936), an economic individual is a legal person or citizen formed by artificial institutions. Economic theory, then, should treat the individual as a citizen and a member of the social institutions he is a member of. Like Veblen and Mitchell, Commons opposes the pleasure-based economic agent in economic theory. The institutions that draw the framework of the economic behavior of the individual also determine the rights and duties of the individuals with the language of morality and law. Collective actions, or in other words, institutions, offer security, comfort, and freedom to individuals while protecting the independence of other individuals. Legal institutions with high enforcement power, such as law, are becoming indispensable for the Commons because the behaviors of the individual are affected by these legal rules. For example, the restriction of an individual’s action always results in the gain or loss of another individual. Since the locomotive of human behavior is human beliefs and free will, laws are necessary to limit free will. On the other hand, according to Commons, the science of economics should also deal with the psychological aspect of the individual, who uses his free will. This is because free human will, which has a psychological part, chooses between alternative decisions. C.E. Ayres, who has an important place in the transformation of institutional economic theory, took the Commons’ idea of considering the psychological aspect of will a little further. According to Ayres (1968), behaviors should be related to psychological factors and cultural characteristics because individual behaviors represent all trends of modern

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psychology. Therefore, the core of the study of behavior is the relationship between psychology, culture, and behavior. Economic activities are a result of human behavior. According to Ayres (1944), mainstream economics cannot succeed because it fails to understand the critical tripartite nature of human behavior. As people learn from their previous experiences, individual behavior is affected by experiences. However, the environment in which the individual is located also affects behavior. Even though they are from the same family, the two siblings accumulate different experiences due to various environmental factors. For Ayres (1952), the individual’s roles in life are essential in forming his personality, and the individual’s personality is a unique set of these roles. Every society and the behavior of all parts of it are affected by their past experiences. Ayres, thus, defined culture as the sum of everything learned. Learning also has a place in Ayres’ definition of the individual. Dealing with the individual in a very detailed and successful manner, Ayres paved the way for institutional economists to construct an economic theory with more realistic assumptions. Considering all kinds of social needs, economists began investigating how they could meet them. Since the economy is located in a sizeable socio-cultural system, the definition of the individual based on the rationality of Homo economicus becomes unusable. The process started with the German historical school and was completed with Ayres, and Homo economicus was replaced by Homo institutional. Homo institutional makes choices based on past experiences, habits, learning skills, and unlimited rationality. Ayres’ emphasis on bounded rationality by abandoning the rationality of Homo economicus remarkably influenced new institutionalist economists. Since the new institutional economists prioritize the bounded rational individual, they also stay close to the behavioral approach (Myrdal, 1990; 1978). That is, the new institutional roots of Homo institutional, whose bounded rationality is emphasized, emerge. For example, according to Williamson (1994), people in real life do not act rationally as suggested by mainstream economics. Psychological factors also influence the actual individual with bounded rationality. Even if people in real life want to be entirely rational, their natural characteristics will prevent this. For example, a person with a moral weakness may be influenced by his fault while pursuing his interests. Since people have bounded rationality and moral vulnerabilities, institutions such as contracts have to regulate people’s interrelationships. According to Coase (1937; 1988), transaction costs play a determinant role in the activities of the bounded rational individual. Therefore, the institutions that form the framework of the economic activities of individuals are also the cause of the costs that may arise after the economic

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activities. Once transaction costs arise, the boundary of the individual’s economic activities is also drawn. According to Coase, even the question of what to produce is determined by the state of transaction costs. By assuming zero transaction costs, mainstream economics made the behavior of Homo economicus more feasible. However, transaction costs are not zero. Moreover, transaction costs appear at every stage of the operation of the economic system. The bounded rational individual, who is a part of the institution he is in, tries to manage the transaction costs by following the determined legal rules. Similarly, North (1990; 1991; 1993) prioritized transaction costs. According to North, the individual has incomplete knowledge and bounded rationality. In the world of instrumental rationality advocated by the mainstream, institutions are not needed. Individual ideas and ideologies do not matter, as effectively functioning markets regulate the economy and politics. Real-life people are neither entirely rational nor fully informed. Ideas and ideologies help people interpret the world and determine their preferences. Institutions determine the degree of influence of ideas and ideologies on preferences. As stated by North, the factor that directs the decisions of individuals is not self-interest. Institutions exist in order to ensure the realization of economic functioning and regulate the interaction between individuals. The most important factor ensuring institutions’ existence is the need to transact. Since individuals’ mental capacities are limited and their knowledge is lacking, institutions realize transactions. The reason for the emergence of transaction costs is the cost of new information, which will ensure the elimination of missing information of individuals. As a result, according to North, Homo institutional should consider these transaction costs in every economic decision.

Identity Akerlof and Kranton (2000, 2010) expanded the field of economic theory by developing an economic analysis that includes identities. The fact that Homo economicus deals only with goods and services is a shortcoming for Akerlof and Kranton. According to Akerlof and Kranton, in the 18th century, Adam Smith was trying to reach a science designed according to moral philosophy to create a good society. Today’s economists continue this effort. Adam Smith’s scheme utilizes all human desires and social institutions. In the 19th century, economists added the rational individual acting with economic motives to Adam Smith’s economics. They used mathematical models for the rational individual to achieve utility maximization. According to Akerlof and Kranton, the characteristics of

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Homo economicus continued to improve thanks to mathematical models. However, Homo economicus did not go beyond goods and services. Adding all kinds of personal preferences to the utility function by Gary Becker (1957; 1981) and his followers has been a good step towards overcoming Homo economicus. In The Economics of Discrimination published in 1957, Becker described a new utility function with a taste for discrimination. If the individual has the opportunity to discriminate, he may act as if he is ready for payments that will cause his income to decrease. Such individual behaviors can occur when he has to relate to people instead of someone else specific. Among other acts, Becker developed theories about fertility, marriage, delinquency, punishment, addiction, and altruism. More recently, behavioral economists identified the bounded rational individual. According to Akerlof and Kranton (2000, 2010), identity economics constitutes the next stage of this evolution. Identity economics adds the social context to all this scientific accumulation. The social context includes the new economic individual, who resembles real people in natural conditions. According to Akerlof and Kranton, identity economics is a more comprehensive definition than Homo economicus, Homo moralis, Homo reciprocans, Homo institutional, and bounded rationality. Akerlof and Kranton (2010) stated that, before defining identity economics, they evaluate the work of sociologists, anthropologists, psychologists, political scientists, historians, and literary critics. As a result of these discussions, they determined the focal point of identity. The identity defined by Akerlof and Kranton has several focal points. These focal points are people’s ideas about what behavior they and others should exhibit, the behavior patterns society teaches people, and how ideas and behavior patterns motivate people. According to Akerlof and Kranton, identity economics brings identities, norms, and social categories to economics. The word identity is an acronym for norms, social categories, and identities. People’s identities define their social categories and who they are. Identities influence people’s decisions because different norms of behavior are associated with various social categories. Social categories are the first forms of behavior. Norms are in second place. Norms decide the way an individual in any social category behaves. That is, norms affect behavior. On the other hand, according to Akerlof and Kranton, identity, norms, and their attachment to social categories show great diversity. Identities can represent interactions that are daily, momentary, annual, lifetime, or even over several generations. Therefore, it should be accepted that identities have a genetic basis. For example, a woman can be a mother at home during the day and a professional worker at work. The social category expresses what this

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woman saw herself as at that time. Akerlof and Kranton form the framework of identity economics from four main areas. These are organizations, education, race, poverty, and gender. In the past years, economists developed theories about incentives in the workplace, as they were aware of the importance of wages and bonuses. For example, according to theory, a good company accurately determines the incentives it will give. However, a more detailed analysis expresses almost the opposite of the conclusion reached by this theory. Therefore, according to Akerlof and Kranton, identity economics includes a new expression of organizations. Employees, who only care about wages and bonuses, may disrupt the system’s functioning. Employees do not need to engage in behaviors that benefit the customer or the company. They do what they have to do to win the jackpot. According to Akerlof and Kranton, monetary incentives are not successful. Identity economics shows that companies can achieve their goals more efficiently when employees identify themselves with companies. Companies and employees are the backbones of the economy. Therefore, the organizational approach of identity economics expands the knowledge of the factors that enable or hinder the functioning of the economy. According to Akerlof and Kranton (2000, 2010), behavioral norms depend on people’s social position. For example, people’s preferences to act fairly depend on the people and social environments in contact with each other. Experimental evidence cited by Akerlof and Kranton (2010) supports this idea. In experiments that explicitly match people with different social identities, subjects treat other people differently. Akerlof and Kranton’s (2010) utility functions include norms and individual tastes. Economists may not make any assumptions about the individual’s level of consciousness in utility maximization. However, Akerlof and Kranton thought that the socialization emphasis of identity economics on individual consciousness can contribute to utility theory. According to Akerlof and Kranton, social science researchers can generally attribute individuals’ behavior to socialization. People often behave because of their habits. On the other hand, people are a product of their social environment. Therefore, they may need to be made aware that they may behave differently. That is, economists consider every individual to be socialized similarly. By revealing its difference in this regard, identity economics takes individual tastes into the utility function. Because individuals acquire the likes of the society in which they live. If they do not master all of these norms, they learn some of them. The approval and rejection given by society to the behaviors help the individual internalize the likes. Norm transmission can take place through stories, gossip, and public and

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personal censorship. In that case, individual tastes and social norms can direct the individual’s preferences. Another essential norm is the requirements. People have ideas about how they and other people should behave. These considerations (requirements) can mean ethical or moral considerations. Akerlof and Kranton (2010) expand on the necessity to obey a social rule that is primarily internalized and unconscious. There are many such rules in all societies. According to Akerlof and Kranton, this broad perspective of identity economics is also equivalent to sociology and anthropology. Identities and norms are the results of social interaction and power relations. People in any group differentiate themselves from other groups or classes using common symbols. Due to group consciousness, people willingly conform to the norms they have because otherwise, they will be punished. Moral rules are also included in this framework. If a person lies, cheats, or steals, then he violates the moral code. Such behavior is unacceptable and should be punished. With the implementation of punishments, no one can go beyond the ethical rules. In this case, moral rules are also norms. If all the individuals in the society do not violate the moral rules, even if they do not believe, the society will function healthily. Even in small communities, practicable norms must be relied upon. Otherwise, a disintegration may occur in society. In this sense, norms are like the cement of society (Elster, 1989). Identity economics adds the desire to conform to the norm to the utility function. According to Akerlof and Kranton, norms and social categories should automatically be linked. Although identities, norms, and social classes may appear abstract, their reality is quite strong. Norms become apparent when people have an ideal of who they are and how they should behave. This ideal refers to any exemplary behavior or quality associated with any social category. For example, religion is very prominent and influential in this area. The founder, saint, or prophet of a religion is an example of people, who have adopted that religion. Social categories determine the behavior of people and show who the person is. In other words, social classes that are part of identity require behavioral patterns. For example, Akerlof and Kranton cited the results of ethnographic research and refer to people’s categorical views on jobs. People still think that there are jobs that are appropriate for men and women to do. Pierce’s (1996) research in a law firm is quite striking. Anthropologist Pierce (1996) worked in a law firm for a time, recording men’s and women’s thoughts about their work. Women lawyers saw themselves as lawyers, but they also faced a dilemma. Being a good lawyer was perceived as acting like a man. This perception meant having courage, fearing nothing, and doing great work. Similarly, in the 1970s, thought that men in the USA should earn a living by working in occupations

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such as construction, engineering, and accountancy. If women had to work, it was customary for them to work as nurses, teachers, and secretaries. Therefore, the male nurse, the male secretary, the female atomic engineer, and the female marine corps seemed contradictory. However, the gender discrimination law in the USA is based on the seventh article of the Civil Rights Act, which was passed in 1964. According to this law, any person cannot be discriminated against in recruitment, including gender. But US statistics show that even the rate of doing housework between men and women is different. While men do men’s work at home relatively less, women do women’s work more. Men do about 10 percent of the average housework. The distribution of duties in the household chores of the spouses is not done randomly but according to traditional thinking habits. Sharper examples can be given for such patterns of thought. For instance, historically speaking, there were rules in the United States that showed how black and white people should behave. These rules were particularly pronounced in the South. A black woman was arrested and fined for refusing to give her seat on the bus to a white man. Although there are no such strict rules today, gender differences can still be found in the labor market. In the US labor market, women are employed in jobs that are more commonly seen as women’s work. Secretaries are often referred to as office wives. Gender elements are almost ingrained in the core of business relations. Secretaries are expected to be respectful of their male bosses and attentive to their personal needs. Taking care of children is also traditionally seen as a women’s job. Most nursery, kindergarten, elementary, and middle school teachers in the United States are women. The identity defined by Akerlof and Kranton is highly related to the education preferences of individuals. According to Akerlof and Kranton, economists developed a theory of education based on monetary costs and utility. In these theories, economists have studied cost and benefit issues such as students’ impatience behaviors and the effect of peer groups on learning. Akerlof and Kranton argued that these issues became more tangible thanks to identity economics. The cost of continuing education and efforts to continue education largely depends on norms. The education demand of students, namely how much education they receive, primarily depends on how students see themselves and their thoughts about attending school. Schools with low dropouts and high academic achievement have the power to transform students’ identities and norms. Therefore, identity economics addresses two issues in academic economics. One of the two issues is which students enroll in the schools and why, whereas the other is what factors determine whether the schools will be successful or not. Identity economics cares about students,

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who want to take place among their peers and schools as social institutions. Schools are not just institutions that teach particular skills, as human capital factories. As historians, sociologists, anthropologists, and educators put it, schools are institutions with social goals. Schools not only teach specific skills, but they also teach students the norms of who they should be and how they should behave. Students decide whether or not to stay in school in line with the social goals of the school. The extent of information students learns while in school depends on the school’s goals. According to the perspective of identity economics, the school preferences of the parents are determined according to the purposes of the schools. As a result, social categories such as education, age, religion, and occupation cause people to have different behavioral patterns. Social classes have norms that determine how people behave or not. These norms guide and shape people’s behavior. Individuals acquire the appreciation of their community. If there are norms that he does not know, he is open to learning these norms. People’s behavior may depend on a social rule that is primarily internalized and unaware of. A person with a specific social category repeats the behaviors brought to the fore by this category. Because the identity of man defines who he is, that is, the behaviors required by his social class. Influenced by social categories, norms, and learning, identity is the most critical determinant of an individual’s opportunity and happiness. A person, who defines himself with an identity, becomes happy when he repeats the behaviors required by this identity.

CHAPTER 4 ECONOMIC PERSONALITY: FUNDAMENTAL DETERMINANTS

Mainstream economists want to understand the nature of behaviors by examining the process before the behavior. If human behavior is to be observed before it happens, then it is imperative to use Ricardo’s (1952) laboratory, which is devoid of space and time. Behavioral outcomes from observing behaviors devoid of time and space will not be compatible with the real world, as they will be devoid of time and space. Behavioral economists, unlike mainstream economists, seek to understand how people behave after the behavior occurs. As behavioral economists observe and analyze human behavior in the lab, which has time and space, the first significant conclusion they discovered is that humans lack complete rationality. People with limited cognitive capabilities can only be bounded rational, as stated by Simon (1955; 1976). As Thaler and Sunstein (2009) revealed, people are also open to being directed toward various ends in various social experiments. The expansion of behavioral economics (such as experimental economics and neuroeconomics) also reveals multiple characteristics of the bounded rational individual. This book aims to understand real-life human behavior without trying to control the uncertainty. The fundamental question here is: how can any entity acquire a behavioral trait? So, why is an apple tree called an apple tree? How do we know that a cow is giving milk? Why is a person called an intelligent, angry, successful investor or a clumsy person? Why is a behavior called consumption, production, work, sale, or investment? This book uses a new way to answer all these questions. In order to determine the characteristics of human behavior in the uncertainty, this book focuses on systematically repetitive behaviors. If a behavior occurs once and does not repeat itself, no conclusion can be drawn regarding the behavior. Behaviors that repeat once remain in uncertainty. The behavior that occurs once is thus called uncertainty. However, systematically repetitive behaviors move away from uncertainty and become observable. Space-time, of which man is a part, can be observed because he has systematically repeated behaviors. In

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space-time, systematically repetitive behaviors have an essential value as information. For example, the universe continues its expansion behavior systematically. Gravity in galaxies holds together systems of stars, stellar debris, interstellar gas, dust, and other matter. Stars can be classified according to their repetitive luminosity and surface temperature behavior. The Earth systematically continues its rotation around the sun and itself. These systematically repetitive behaviors in the universe are essential for the universe’s operation. For example, the world does not postpone its systematic rotation for a day. Or, when the average temperature in the world rises above the required values, global warming negatively affects human life. If the behavior of subatomic particles did not repeat systematically in case of uncertainty, it would not be known that these particles have uncertain behaviors. How subatomic particles behave in uncertainty is now predictable. A boulder is predictable because of its repetitive self-inactive behavior. A green apple tree got this name because it repeats the behavior of giving green apples every year. The same applies to a cow. It is rational to expect any cow to repeat the behavior expected of a cow. A cow is a cow because she has to repeat cow behavior. Mainstream economics, which imitates physics, attaches great importance to rational people who do not systematically make mistakes so that the economic structure in uncertainty can be predictable. These characteristics, which mainstream economics attributes to rational persona, must be repeated in every economic behavior. The representative agent must repeat his utilitarian behavior, which must be systematically repeated, or the economic propositions of mainstream fall short. The desire of the mainstream to overcome uncertainty and the effort to use the repetitive behaviors of the person is a very understandable and well-intentioned effort. However, the person accepted as rational is valid only in the models that Rodrik (2015) likens to fairy tales because the economic models of mainstream economics are built upon assumptions used to overcome uncertainty. The main aim of the mainstream economics is to produce economic theory using the methods of physical science instead of realistic economic propositions. Due to assumptions detached from real life, the theories produced are only fairy tales. However, examining human behavior patterns, which is a physical part of space-time, can lead to the production of more realistic and accurate economic theories. People are born with genes from a mother and father in a particular geography. He lives his childhood in a family of a certain income level. Influenced by the family’s religion and culture, he receives a specific primary education. He has to adapt to his country’s institutional structure, economic structure, and economic system. All of these lead to the consistent behavior of a real-

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life person. As we understand from Maslow (1943) that the hierarchy of needs begins with physiological needs, humans are primarily physical beings. Therefore, he should systematically meet his physical needs every day. For example, every morning when he wakes up, he should have breakfast, have lunch or dinner, and go to sleep. A healthy person also needs to go to the toilet every day. A person with physical existence has behaviors that do not change easily. The reasons for behaviors that cannot change easily are genetic characteristics and environmental interaction. For example, habits and experiences are such behaviors. Veblen (1898), Smith (1976), Marshall (2013), Schmoller (1900; 1904), and Katona (1952) also attached significant importance to habits. Experiences are the behavioral characteristics that Knight (1921), Shackle (1972), Simon (1955; 1978; 1988), Kahneman and Tversky (1979), and Kahneman (2011) primarily focus on. Every person in real life reveals their preferences by exhibiting consistent behavior patterns. As a result of the systematic repetition of consistent behaviors, as Kahneman (2011) points out, a person may be described by his neighbor as shy, introverted, helpful, or dreamy. This is true for all of us. As a result of our systematically repeated behaviors, we all conform to definitions such as helpful, irritable, mildtempered, and talkative. With such definitions, our behavior can be predictable for our neighbors. For example, the waiter who knows me has no uncertainty about the dessert I will order at the patisserie I always go to. Every time I go to the patisserie, I only order rice pudding from many beautiful and delicious desserts. A dozen desserts in the patisserie are much more excellent and popular than rice pudding, which people consume all the time. All my life, I have always liked rice pudding the most. And in every dessert shop I went to, I wanted to eat rice pudding. This pattern of behavior can be exemplified by the economic decisions of each of us. Any person can be described as stingy, generous, thrifty, meatloving, wine-loving, successful in financial transactions, entrepreneurial genius, etc. We all repeat the behaviors that cause us to be given these adjectives. The adjectives we take are the names of behavior patterns and behavior patterns make the individual’s behavior in uncertainty predictable. This is what I call the economic personality. The economic personality of a person is the set of systematically repetitive behavior patterns. In other words, economic personality is the process that causes individuals to exhibit consistent behaviors in their economic decisions due to various factors. What is the cause of the individual’s behavioral patterns then? This question reveals the most crucial purpose of the book. If the factors that determine the behavior patterns of individuals can be accurately

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identified, then people’s economic behavior in case of uncertainty can be more accurately explained. As explained in chapter three, people defined in economics have behavioral patterns. For example, Homo economicus has a specific behavioral pattern because he has superior cognitive ability and learning. His exceptional cognitive ability shows the genetic structure of Homo economicus. Homo moralis has behavioral patterns caused by kinship genes, morals, beliefs, and values. Homo reciprocans is influenced by evolutionary biology, population genetics, kinship genes, culture, psychology, and personality. The economic behavior of the bounded rational individual is influenced by psychology, the cognitive ability to process limited information, and learning through nudges and experiences. For Homo institutional, institutions are pretty at the forefront. Outside of institutions, drives, psychology, culture, morals, race, habits, and instincts determine the behavior of Homo institutional. For the identity economics, behavior patterns are caused by genetics, norms, social categories, education, morality, learning, and religion. The reasons for the behavior patterns of individuals identified in economics can be classified and summarized as shown in Table 1. As I explained above, all individuals shown in the table are under the influence of their genes in their behavior. Homo economicus, bounded rational individual, Homo institutional and identities are affected by learning. While Homo economicus and identities are directly affected by learning, bounded rational individuals and Homo institutional should be open to learning due to experiences and habits. Our experience is the accumulation of knowledge we have learned. Our habits are routines of behavior that have become learned because we repeat them regularly. According to the table, culture is an essential determinant for Homo moralis, Homo reciprocans, Homo institutional, and identity. Homo moralis, Homo institutional, and identity are influenced by religious values (beliefs). Since morality has religious origins, Homo reciprocans is also affected by religious values. Psychological factors influence the behaviors of Homo reciprocans, bounded rational, and Homo institutional. Homo institutional and identity are under the influence of institutions. As seen in Table 1, the six individuals identified are individually affected by genetics, learning, culture, religion, psychology, and institutions. Only Homo institutional has all of these factors. In this book, these factors are considered to be determinants of economic personality. According to Veblen, Malthus, Hutchison, Leslie, Shackle, and Akerlof, as mentioned in the previous sections, economics should be close to philosophy, psychology, anthropology, history, geography, politics, and entrepreneurship. These six factors that influence behavior are also beneficial for this book. Beliefs are

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considered rather than religion to take a broader perspective in this book. Any non-religious belief can determine the behavior of any person. Alternatively, any person may have a belief that is against religious teachings. Also, in this book, culture is conveyed in a way that covers values and norms. Finally, the psychological factors are examined within the framework of personality. Table 1. Causes of behavioral patterns Homo economicus

Genetic

Learning

-

Homo moralis

Genetic

-

Culture

Homo reciprocans

Genetic

-

Bounded rationality

Genetic

Homo institutional Identity

-

-

Religion

-

-

Culture

Religion

Psychology

-

Learning

-

-

Psychology

-

Genetic

Learning

Culture

Religion

Psychology

Institution

Genetic

Learning

Culture

Religion

-

Institution

The personality of people is affected by many factors from birth to death. These can be classified as biological and hereditary factors, familial, social and cultural factors, social structure and social class factors, geographical and physical factors, and other factors (Krueger and Johnson, 2007; Goldsmith, 1983; Forman and Forman, 1981). In addition, personality is an indicator of behavioral consistency. Without behavioral consistency, personality theory would have to investigate behaviors under temporary situational conditions divided into unpredictable fragments (Van Veldhoven, 1988). In other words, as Jackson and Paunonen (1980) emphasized, personality is an individual process. Individual processes interact with biological, developmental, and social forces. Therefore, personality, which results from consistently repetitive behaviors, is part of the person’s economic personality. On the other hand, economic personality cannot consist of only genetics, learning, culture, beliefs, institutions, and personality. First of all, income must be added to these factors. Economic behavior is inseparable from the income. As Van Raaij (1981) pointed out, the determinants of economic decisions are personality, cultural factors, situational factors, and, of course, income. Second, people must be born in a specific geography as part of space-time. To put it more clearly, every person must constantly be in any geography.

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We have to live or travel as geography permits. Humans cannot be detached from geography. People use their accumulated knowledge, namely technology, wisely to overcome the boundaries drawn by geography. So much so that humanity has come to a point, where it can live in the space station in the world’s orbit. Therefore, the technology factor should be added to the factors that constitute the economic personality. Thus, as seen in Figure 1, nine factors are identified to constitute the economic personality. These are genetics, learning, culture, beliefs, institutions, personality, geography, technology, and income. People, in case of uncertainty, have systematically repetitive economic behaviors due to their economic personalities being influenced by these nine factors. Due to these economic behaviors, which are consistent because they repeat systematically, the economic decisions of the persons remove the uncertainty from their minds. However, an economic personality cannot completely eliminate the uncertainty. Uncertainty in real life is not a factor as mainstream economists understand it. As Keynes, Hutchison, Leslie, and Shackle point out, real-life uncertainty is immeasurable. Despite the immeasurable nature of uncertainty, people in real life realize their economic behaviors in this uncertainty. Uncertainty in real life includes all factors such as coincidence, chance, probability, prediction, and expectations, and a significant lack of information, such as the future being unknowable. All entities and time in the universe are included in uncertainty and people are only a small element of this uncertainty. Uncertainty for people is what will happen. This is a state of complete uncertainty. The realized is the state of complete certainty. Humanity stands between this absolute certainty and absolute uncertainty. If we want to predict perfectly what will happen, we must reduce time to a moment, as mainstream economics has done since Ricardo. Mainstream economics can only assume that people can achieve full rationality. A person, who can predict the future perfectly with such an assumption, can make the best economic decisions with the information he can obtain free of charge. However, a person in real life cannot act on assumptions. As a result, when uncertainty is removed, a person who can predict the future ideally can only be valid in fairy tales. Since uncertainty covers all environmental factors, time, and economic variables, the level of economic information obtained about the future is relatively small. Nevertheless, real-life people make economic decisions to the extent, which uncertainty allows, and try to realize these decisions. Since the basis of the individual’s economic decisions is uncertainty, the most crucial factor influencing the economic personality is uncertainty. Unmeasurable and unpreventable uncertainty is the most crucial determinant

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of each variable that constitutes economic personality. Since it cannot be measured and prevented, uncertainty does not create any behavior patterns. Homo economicus Homo moralis Homo reciprocans Bounded rationality Homo institutional Identity Genetic Geography Personality Culture Beliefs Learning Technology Institutions Income Economic Personality

UNCERTAINTY

Figure 1. Economic personality components

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For this reason, uncertainty takes its place in economic decisions as a disruptive factor. The real-time we live in is an element of uncertainty and is a set of information that we cannot know without living. People in real life rely on the behaviors required by their economic personality to be protected from the uncertainty that is always a disruptive factor. Real-life human’s economic decisions are not one-offs. People, who have to make economic decisions systematically in case of uncertainty, need behavioral patterns of their economic personality. Therefore, the economic personality helps the individual to avoid economic uncertainty in his mind. Uncertainty avoidance applies to any economic decision. In the case of making any economic decision, uncertainty will again emerge as a disruptive factor. Therefore, individuals have to make economic decisions systematically and struggle with uncertainty. In other words, people use their economic personality, a result of what has happened, in their decisions regarding the economic events that will happen. Therefore, it is rational to expect the behavior required by the economic personality to be repeated. Nevertheless, the economic personality cannot eliminate the uncertainty of the external world. As a result, the individual in uncertainty does not have any rationality. What is rational is that the person repeats the behaviors required by his economic personality in case of uncertainty. Therefore, it is necessary to explain why these nine factors that make up economic personality are behavioral patterns. The following sections explain why these nine factors are behavior patterns.

Genetic A human is a biological entity. This characteristic of a human is a part of his economic personality. Since our genes turn into our behavioral patterns, the effects of genes that individuals have on their economic personality may differ. As life on earth evolved over millions of years, enduring features of human and animal nature were genetically selected under differing environments and social arrangements (Becker, 1976). With the help of their genes, parents can pass on behavior patterns to their children, replicas of their behavior. According to behavioral genetics studies that deal with the nature and origins of behavior, all behavioral traits and disorders are influenced by genes. According to these studies, while environmental factors have effects on behaviors, the effect of genes tends to increase as individuals age (McGue and Gottesman, 2014). The human genome is organized into 23 pairs of chromosomes, and these 23 pairs chromosomes constitute the DNA. Of each 23 pairs of chromosomes, one comes from the father and one from the mother. Therefore, persons

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inherit their genes from their parents. A small part of the genome, which represents all the genetic codes found in an organism’s hereditary material, consists of genes. Genetic variation in genes and the genome is strong enough to explain the variation in a person’s behavioral traits (Beauchamp et al., 2011). Starting with Francis Galton’s studies on twins, researchers analyzed whether the differences between the characteristics of fraternal and identical twins are entirely due to genetic factors. In the 1940s, J. L. Lush defined the heritability index and the concept of heredity. Following Lush, scientists claimed that hereditary and environmental factors determine individuals’ physical and behavioral characteristics. Scientists argued that the effect of genetic and environmental factors on behavior can be measured numerically. The scientific community, which adopted this view, began to increase its studies on how much physical and behavioral characteristics are affected by the environment and genes. Thomas J. Bouchard’s study on twins is one of the most famous studies on twins. In his studies twins, which started in 1979, Bouchard found that twins raised in separate families nevertheless showed a great deal of similarity (Bouchard et al., 1990). Although the twin siblings were raised in different environments, they had almost the same behavioral traits. Adopted twins, who had to grow up separately, were as similar to each other as twins, who grew up together, in terms of many characteristics, such as personality, cognitive abilities, religious attitudes, and professional interests. The genes are the main element of this behavioral similarity that the twins repeat. Bouchard, who was very impressed by the life story of Jim Springer and Jim Lewis, the subject of the news on television in 1979, wanted to investigate these twin brothers. These twin brothers were born in 1939. They were given up for adoption to different families a week or two after birth. Each twin brother was told they had a twin, but they were also said to have died. When Jim Springer, one of the twins, turned 40, he searched for his twin brother and succeeded in finding him. Reuniting with his brother, Jim noticed the similarity of his life story to his brother’s. Both twins have been married twice. The name of the first woman the two brothers married was Linda, and the name of the woman they married second was Betty. Both gave the same name to their born son, with only one letter different. These names are James Alan and James Allan. They both owned a dog as children and their dog’s names were the same: Toy. They both worked as part-time conductors where they lived. Therefore, their income aligns with Taubman’s (1976) research. Taubman (1976) showed that identical (monozygotic) twins exhibit similarity in terms of education and income. Jim Springer and Jim Lewis went on vacation to the same region and drove a car of the same color and brand while on

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vacation. The twins have gone on holiday to Pas-Grille Beach in Florida several times, albeit at different times. They drove a light blue Chevrolet while on vacation. They both smoke and prefer the brand “Salem.” They both drink Miller Lite brand beer. Both have nail-biting habits. The twins also suffer from the same headaches from the age of 18. This pain is a migraine-tension mixed with a headache in both. They both prepared love notes for their spouses and placed them around the house. Both enjoyed carpentry work and loved making mechanical drawings. After Bouchard, studies on twins gained a lot of intensity. On the other hand, adoption studies investigated how much the adopted individual is physically and behaviorally similar to the biological family and the adopting family. According to studies, 90% of the height differences in the population are caused by genetic factors, while this rate is between 50-80% in body weight. Since the height and weight of people interact with each other, the heritability of body mass index is also worth investigating. Studies show that the heritability in body mass index varies between 50% and 90%. There is no difference in body mass index between twins grown together or separately. Parents with a particular trait do not simply pass on the gene for that trait to their children. Parents also provide their children with a suitable environment that helps them develop this trait. For example, a father who is socially strong and active gives his child the gene for these traits. At the same time, the social father constantly takes his child out and takes him to various activities, ensuring that his child grows up as a social and active individual. In other words, genetic and environmental factors can interact with each other. According to the active gene-environment correlation theory, the individual can choose the environment and activities suitable for his genes as a result of his own choices. For example, a child who is an extrovert with the genes he inherited from his parents would feel comfortable in social situations. By constantly entering social environments, he will reinforce the environment with the influence of his genes. As stated in the reactive gene-environment correlation theory, the genes we inherit from our parents can attract appropriate responses from the people around us. Thus, a feedback mechanism emerges. For example, a baby who is easily ill-tempered and can hardly be calmed down will get adverse reactions from his parents because of his behavior. These adverse reactions can cause the baby to take on a more irritable character as he grows up. Segal (2000) stated that babies with fraternal twins in the first six months have equal intelligence levels. After the first six months, the intelligence levels of babies differ. The heritability of human intelligence is 20% in infancy, 40% in childhood, 50% in adolescence, and 60% in adulthood. Therefore, the reason for the differences

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in intelligence tests is genetic factors at the rate of 20% in infancy, 40% in childhood, 50% in adolescence, and 60% in adulthood. As people age, the influence of genetic factors increases. Despite the factors such as experiences, choices and habits gained as we get older, the impact of the environment on the individual decreases. The shared environment, which includes the school, neighborhood, family, and peer groups that the individual shares with others, is the environmental factor, effects of which decreases the most. The unshared environment explains about 30% of adults’ IQ differences. Unshared environment refers to the minor differences arising from chance or individual choices among people, who share the same genes or the same environment. The correlation level of IQ scores has a very high value of 0.86 in identical twins reared together. A correlation value of 1 indicates that the measured feature is the same, while a value of 0 indicates that it is entirely different. Therefore, the intelligence level of identical twins reared together is very similar. The correlation level of IQ scores was 0.75 for identical twins separately raised, 0.60 for fraternal twins, 0.50 for non-twin siblings, 0.42 for parents and children, and 0.15 for cousins. The correlation level of the IQ scores of the half-siblings is 0.17. According to Segal (2000), individual differences in verbal, perceptual, and spatial skills are also affected by genetics. The determination level of genetics in this area is between 50% and 55%. According to studies carried out on twins, financial opportunities such as having a dictionary, telescope, and artwork at home in childhood do not have an effect on IQ. Parents’ educational and economic status and parenting methods do not affect IQ. On the other hand, 20% to 50% of personality differences in people are related with genetic factors. Bouchard (1990) stated that the heritability index of personality traits is 41% on average. According to Plomin et al. (2016), heritability estimates for personality are generally between 30% and 50%. Extraversion, one of the main characteristics in the Five Factor Personality Inventory which is the most reliable scale for measuring personality traits, has the highest heritability index. 49% of the differences in extraversion traits are due to genetics. This ratio is 39% for agreeableness. The personalities of identical twins raised separately are similar to those of identical twins raised together. Therefore, the unshared environment and genes have a very determining power on personality. Happiness level, tendency to divorce, aggression, religiosity, traditionalism, social attitude, and even psychosocial characteristics such as aggression are affected by genetic inheritance, as well as environmental and social factors. For example, according to studies conducted at the University of Minnesota, the happiness and shyness similarity rate in

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identical twins is higher than in fraternal twins. Identical twins reared separately are as similar in happiness, stress, and aggression as identical twins raised together. Many genes influence complex behaviors such as happiness and susceptibility to divorce. The genes that affect happiness and divorce also interact with the environment. For example, individuals with a high level of compliance with rules and authority have a low divorce rate, while individuals who are maltreated have a higher divorce rate (Segal, 2000). The similarity in social attitudes, such as religiousness and traditionalism, of identical twins reared separately is almost the same as identical twins raised together. Religiosity is a behavioral pattern having genetic origins. According to studies carried out at the University of Minnesota, the hereditary rate of authoritarianism, which is close to religious and social attitudes, is 62%, and the genetic rate of radicalism is 65%. This rate is 54% for fixed-mindedness and 59% for religious activities in leisure time. In a Swedish study on older twins, events entirely influenced by the environment, such as retirement, the death of a parent’s child, a spouse’s mental illness, and financial turning points, were examined. According to the research, 40% of the variation in the real-life events of twins is determined by genetic factors. However, the susceptibility level of individuals to psychological disorders is also affected by genetic factors. For example, if a twin has schizophrenia, the probability of the same disease being seen in an identical twin is 48%. There is also a relationship between susceptibility to crime and genetics. For example, while the probability of committing a crime among individuals, whose biological parents commit crimes, is 12.1%, whereas the probability of committing crimes among individuals, whose stepparents commit crimes, is 6.7% (Wright, 1999). In addition to the fact that a particular gene is associated with the level of generosity of people (Knafo et al., 2008), there is also a relationship between specific genes and changes in risk preferences (Dreber et al., 2009; Kuhnen and Chiao, 2009). For example, in two studies on portfolio selection data, Barnea et al. (2010) and Cesarini et al. (2010) found heritability estimates ranging from approximately 0.25 to 0.60 in various financial decisions. According to Barnea et al. (2010), genetics explains about one-third of identical twins’ variance in stock market participation and asset allocation. Twins who grew up in different environments continue exhibiting similar investing behaviors. Cesarini et al. (2010) found that approx. 25% of Swedish adults’ variation in portfolio risk is due to genetics. De Neve et al. (2012), who investigated the effect of genetic variation on well-being using a twin design and genetic association study, revealed that 33% of the variation in life satisfaction is explained by

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genetic variation. It is now known that phenotypic relationships among cognitive abilities such as intelligence, reading, mathematics, and language are mediated significantly by genetic factors. Plomin et al.’s (2016) metaanalytic review of 10 studies for well-being based on 56,000 people gave a heritability estimate of 36%. Studies such as Wallace et al. (2007) and Cesarini et al. (2009a; 2009b) showed that economic preferences derived from induced experiments or surveys are typically heritable in the range of 20% to 30%. According to Turkheimer (2000), all psychological traits have significant and substantial genetic effects. Although most of the studies in this direction were carried out in the United States and Western European countries, significant genetic effects were also found in countries such as Russia, former East Germany, Japan, and India (Plomin and Simpson, 2013). It seems that, if only a few genes were responsible for the heritability of a trait, the gene’s effect on individuals in new generations would have disappeared as generations changed. However, studies in this area show that the effect of genes on behavioral traits continues despite the change of generations. Veblen’s (1964) anthropological approach to animal instinct is worth recalling here. Similar to Schmoller (1900), Veblen (1964) attributed the survival of human beings to instincts and typical guiding behaviors of humans. Instincts, which are inherent in a living organism and express its tendency to turn to another complex behavior, ensure that the next generations of the creature repeat similar behaviors. Thus, Veblen (1964) discussed the stability of the racial type. The stability of racial type refers to the inherent nature of a society or its unchanging characteristics over time. As stated by Sedlacek (2011), the animal spirit, an indicator of instincts, is like a remnant of our ancient past. Although mankind left wildlife behind and stepped into civilization, he did not leave wildlife behind. The behavior of past generations continues to guide our behavior through the animal spirit. In General Theory, Keynes stated that people in an environment of uncertainty have animal instincts that cause them to act inertly-it reveals how realistic this determination of Keynes is. Schumpeter (1978) also emphasized that the basis of the creative destruction process is the animal spirit, which determines the importance of taking action and giving life to people. As a result, it was known since ancient times that trust, fear, anxiety, impulses, and motives affect human behavior in uncertainty (Akerlof and Shiller, 2010). It is clear that humans also inherited the behavior of past generations through animal instincts. Becker and Tomes (1979) focused on factors such as race, talent, and skill that children genetically inherit from their parents. According to Becker and Tomes (1979), each family has a utility function that spans several generations. The income of children, who receive more

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human and non-human capital from their parents, was found to increase. Children’s income can be increased by genetically determined race and ability. According to epigenetics studies, fathers can pass on their environmental experiences to their children through sperm and semenrelated epigenetic modifications (Finegersh and Homanics, 2014; Pembrey et al., 2006). In other words, biological paternity is much more than transferring the DNA of the winning sperm to the fetus. The science of epigenetics reveals mechanisms that play a role in heredity, apart from DNAs. Epigenetic research shows that parents can transfer the effects of the environment they live in to their children and even to their grandchildren several generations later through epigenetic mechanisms. For example, in humans, body fat percentage can affect genetic information in sperm through epigenetics. Children of obese fathers may be born with more appetite and a weak sense of satiety. Family tree studies prove that the nutritional environment of not only fathers but also grandfathers is effective (Burggren, 2016). Moreover, not only the food environment but also the smoking and alcohol habits of fathers can affect children’s behavior. The results suggest that genes turn into behavioral patterns. Therefore, behavior patterns caused by genes enable the individual to exhibit specific behaviors in uncertainty.

Geography Humans are geographical entities. Geography, which causes behavioral patterns in people, is a part of economic personality. Every human being is born in a specific geography with the genes he inherited from his parents. Every person lives in a specific geography of the world, in any place. People do not lack geography, as Ricardo (1891) argued. The characteristics of the geography they live in have an effect on the behavior of people. Jeremy Bentham, whom Ricardo highly influenced, is one of the writers who discovered man’s close relationship with the place he lives in. Jeremy Bentham, the pioneer of hedonism, designed a prison called the panopticon. This prison was built on a ring of single-room cells on several floors. Every single cell without a door was open to the interior of this ring. There were windows on the walls of the cells. The prisoners, who had nowhere to hide in the cells, were constantly watched by the watchers on the guard tower hidden in the middle of the ring. Prisoners afraid of repeating lousy behavior could become good people by repeating their good behavior. The point to understand here is that the person exhibits behaviors in a geographical place. And these places shape behavioral repetitions. An individual living in any place has behavioral patterns

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caused by the geography he lives in. Behavioral patterns caused by geography are added to the habits and values of the individual. The Inuit, for example, live in a vast Arctic region, including Northern Canada, Alaska, Greenland, and Siberia. The Inuit had to lead a life shaped by the characteristics of the problematic and vast geography, and they lived in those regions because they could adapt. The Arctic region, where the Inuit live, is an ice-covered barren land where half the year is cold. No vegetables grow on this land in the Arctic, and no edible fruit or roots. Due to the very long cold periods and unproductive terrain, the Inuit cannot cultivate plants. The only opportunity geography enables the Inuit is to hunt. This is why the Inuit are excellent hunters. Thus, the Inuit built their subsistence economy on their superior hunting skills. Inuit hunters need a high number of calories to survive in the cold conditions of their geography. To reach a high rate of calories, they turned to animals that could live in their geography. Thus, they began to consume animal fat and meat as a calorie opportunity that geography offered them. For the Inuit, animal fat and meat are indispensable food sources. The Inuit hunt animals such as whales, reindeer, seals, foxes, musk ox, and trout. Apart from these foods, they also consume duck eggs, mussels, and similar crustaceans, albeit rarely. Due to the strain of their cold geography, the Inuit can also consume the animals they hunt raw. While the Inuit consume the meat of the animals they hunt, they use fur of animals to protect them from freezing weather conditions. Therefore, the geography they live in determines the way the Inuit dress. Eskimos catch the most seals. They store the animals they hunt for later consumption. The Inuit are very lucky because of the cold weather, which is also suitable for storing game animals. Hunting when animals are plentiful, they preserve their smoked prey in rocks and ice. Some Inuit communities had established large villages in different regions. They left their villages seasonally to hunt in groups during the winter months. To prepare for the cold’s dangers, the Inuit lived in nomadic communities. Challenging geography also determines the way they build their shelters. For this reason, the Inuit need to be able to make their homes reasonably quickly and easily. When they leave the relatively temperate areas where they stay in the summer, they build snow structures called igloos to protect them from the harsh arctic conditions. They construct igloo shelters by using the snow, which is the product of geography. The igloo is an excellent example of how the Inuit adapted to geographic conditions and used geography to their advantage. Igloos are built by stacking snow blocks formed at certain angles. Dome-shaped igloos are made in a short time. An average-sized igloo takes only 20 to 30 minutes for a master Eskimo to build. As a result,

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an Inuit living in Greenland has little choice regarding economic decisions. The products that an Inuit can use for consumption or production are in the variety and quantity that geography allows. Making choices as the uncertainty of geography allows is the systematic behavioral routine of the Inuit. A Bedouin living in the desert is in a similar situation to an Inuit. It’s not the heat or the sands that make any desert a desert. It is a thirst that makes the desert a desert. But thirst does not mean that there is no water in the desert. The problem with deserts is that their precipitation and various water sources have irregular and infrequent flows. Deserts make up one-third of the world’s surface area. Most of the world’s hot deserts lie between latitudes 250-350 of the equator, where dry air is compressed between the main wind belts and storm systems. Deserts are formed as a result of low rainfall. Deserts also have unusual temperatures and rapid temperature changes. In the Sahara Desert, the air temperature regularly rises above 50°C, while the ground temperature can reach 70°C. Bedouins live in the Sahara Desert, stretching from the Atlantic Ocean to the Western Desert, the Sinai Peninsula, and the Najaf Desert to the Arabian Desert. Due to the opportunities of their geography, the Bedouins do not go out of the lands of the tribe they belong to. As a result, the number of resources that can be used in the desert is minimal for everyone. Bedouins generally have to live as nomads. Bedouins herding livestock in the desert constantly move to find pastures for their animals to graze on. They know the climatic conditions of the desert well, watch the clouds, and travel by predicting when it will rain. Bedouins feed their animals with plants grown for a few days in places where it rains. Therefore, the Bedouins need to protect the limited desert resources. The second important point is the camels, the primary livelihood source for the Bedouins. Camels are central to the life of the Bedouins. Camels can survive for days without drinking water in the arid desert climate. Instead, Bedouins use the camel’s meat, milk, bone, wool, dung, skin, and urine. Bedouins discovered that camel urine was beneficial for pest control. The clothes of the Bedouins, who dress as the desert geography allows, are pretty simple. A long shirt, a belt that wraps around the waist, and a hood that protects the head from heat are the main elements of their clothing. Bedouins do not need clothing like trousers. They prefer very little shoes. The camel, of which clothes and tents are made from their wool and leather, provides transportation for Bedouins and serves as the capital. Many issues, such as the inheritance of a father to his children, the dowry of married women, and the money paid to the family of the murdered person, are calculated over the value of the camels. In the desert, where water is scarce, milk from camels or other animals is one of the most

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valuable foods for Bedouins. Dates adapted to desert conditions are another essential food. Milk, consumed as a liquid, is also used to make butter and cheese. These foods can be consumed by mixing them with water. Bedouins do not eat a lot of meat. Meat is consumed only on special occasions and festivals. Bedouins love to hunt. Game animals that can live in the desert are another food source for Bedouins. They can hunt animals such as gazelles, lizards, mountain goats, wild donkeys, wild cattle, rabbits, ostrich, and partridges. Bedouins, who cook the locusts, which are abundant in the desert, can consume them with dates. Therefore, Bedouins, like the Inuit, acquire behavioral patterns to the extent that their geography permits. The geography where people live may not be a very cold or scorching region. For example, there are many human communities settled on the Amazon River. One of the most notable of these human societies is the Pirahã. The settlement of the Pirahã, consisting of only a few hundred people, is 400 kilometers from Porto Velho in Brazil. To reach the territory of the tribe, it is necessary to take a boat trip lasting four days. This tribe, in a location far from civilization and technology, has its behavioral habits shaped by geography. The Pirahã are interested in hunting and gathering, just like in ancient times, in a geography far from culture and technology. This tribe does not use money or technologies such as television, refrigerator, and telephone. The Pirahã, who live in a very fertile geography, work only to meet their essential needs. They do not harm any living thing other than the animals they hunt. The food gathered by the tribe members is shared equally among the tribe members. Besides finding food and eating, they prefer chatting or having fun. Each of the tribe members is considered equal in status. Therefore, there is no hierarchical relationship in the tribe. Moreover, the language used by the tribe does not have an alphabet. They do not know and do not use numbers. The tribe does not have any language or numbers that can be written. Instead, they make noises or whistle while talking. From time to time, they imitate the sounds of nature or the sounds they hear from animals. The tribe members imitate the sounds of animals so skillfully that they can drive the monkeys away with their imitation. Or they can summon an eagle to their side. The Pirahã do not have any concept of past time or future time. There is only now for them. They don’t even have thoughts about yesterday, tomorrow, month, year, or week. They lead such a comfortable life that they do not have any problems with quantities. For them, it is a question of little fish or many fish. They don’t know how many fish are needed for a kilo of fish or 10 kilos. They are only concerned with whether the quantities are sufficient. If there’s enough of

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anything for their tribe members, they don’t care what the number is. The Pirahã hardly remember any of their grandparents. Mothers do not feel the need to tell stories to their children. There is no story to be told in this tribe. The personal experiences of the oldest living member shape the collective memory of the tribe. This tribe has no interest in modern life. Moreover, the Pirahã do not understand modern people’s lifestyles. Despite this, they have begun to wear clothes and use tools such as kitchen utensils, thread, matches, and fishing gear, albeit a little. The Inuit, Bedouins, and the Pirahã show the power of geography in forming people’s behavioral patterns. People now live outside the world’s geography. The body characteristics, daily diet, clothing, and all other behaviors of the astronauts living on the International Space Station for a short time must match the space-time they live in. Economics is aware of the importance of geography. Von Thünen (1826), who dealt with the effect of geography on individual behavior simply and successfully, led to the formation of extensive economic geography literature by using the concept of space. Economic geography, which examines the changes in the spatial form and geographical appearance of economic activities, focuses on the unequal development of economic activities according to places. Space constitutes the unique feature of a geographical-economic system (Markus, 1993). It leads to the emergence of complex and interactive behaviors in it. Geography, which has the power to draw the framework of people’s economic behavior, can also cause a region to be backward or more developed compared to another part. For example, coastal areas and areas connected to the coasts by river routes are highly advantageous for development. On the other hand, inland countries are disadvantaged because they do not have access to the seas. Even though some countries are at the same distance from the sea as the regions in the interior regions of the coastal countries, their disadvantaged position remains. Emigration is almost impossible, primarily because of borders. It is challenging for countries, which are far from the coasts, to reach the level of developed countries by investing in infrastructure near the border. Today, the significant migrations from the underdeveloped and Middle East countries, which are in war, to prosperous and happy Europe (especially Germany) continue. High population densities in regions with access to coasts provide favorable conditions for economic development in terms of access to internal, regional, and international trade. Notably, the increasing returns in infrastructure networks or the deepening of the division of labor in places where population densities are observed create such favorable conditions. High population densities in areas without coastal access slow or hinder development (Gallup et al., 1999). Countries

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more technologically advanced than others have a geographically attractive structure as they will have a faster growth trend. Labor and capital flows can be experienced from relatively underdeveloped countries to the geography of developed countries. Endogenous growth theories argue that labor, capital, and other factors will be concentrated in certain regions thanks to the functioning of the market mechanism, economies of scale, and forces that encourage agglomeration in a specific geographical region (Romer, 1986). It is not a coincidence that economically specialized industrial zones, such as the Ruhr area in Germany, are interconnected, and local industry is resurgent. The emergence and self-empowerment of high-tech clusters like Silicon Valley is also a good example. Because, as Krugman (1996) explained with path dependence, slight differences in the initial conditions in a particular geography can significantly affect the region’s long-term structuring. The geographical area can organize itself with its path dependence. Raw materials such as oil, natural gas, iron, steel, aluminum, or high-tech products are unequal in every geography. The unequal distribution of factors such as limited natural, social and economic resources causes socio-economic and spatial differentiations. Various factors cause a geographical region to be an economic center of attraction. These factors include technology, trade costs, transportation costs, sufficient market size and increased returns to scale, professions based on expertise and an intense labor market, and pure external economies that include knowledge overflows (Krugman, 1999). Persons living in economically appealing centers are also more advantageous in their economic decisions compared to those not in these regions. As Dixit and Stiglitz (1977) emphasized, the number of tradable goods and services in a city determines the utility of the household in the town. When the number of goods and services subject to trade increases, the benefit of the people in the city increases. According to Krugman (1991), a consumer’s utility in a given economic geography depends on the amount of agricultural and manufacturing industry goods consumed. As a result, our geography affects our economic and other decisions. The places, where we exhibit our economic behavior, set the limits of our behavior. From our daily consumption routines to our savings and financial preferences, the geographical conditions of the region we live in turn into our behavioral patterns. Thus, behavior patterns caused by geography enable the individual to exhibit specific behaviors in uncertainty. Therefore, the economic decision habits of an Inuit, such as production, consumption, investment, and savings, must differ from those of an individual living in Silicon Valley. Geography shapes the behavioral patterns of the Inuit, Bedouins,

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and Silicon Valley individuals. All these make our geography a part of our economic personality.

Personality Humans are entities that have personalities. Personality leads to the formation of behavioral patterns. To have any personality trait, an individual must systematically repeat the behaviors required by his personality. Therefore, personality determines the behavior of the individual in case of uncertainty. For a waiter, it is clear what a customer who always eats the same food would want. It will be surprising for the waiter that the customer, who constantly orders the same dish, wants another dish. As mentioned earlier, personality is an indicator of behavioral consistency. If personality did not have behavioral consistency, personality theory would have to investigate behaviors in uncertainty (Van Veldhoven, 1988). Thus, personality becomes an essential part of economic personality. Using the insights produced by the science of psychology, it can be determined how personality can affect economic choices. Although there is no consensus on the definition of personality in psychology, according to Jackson and Paunonen (1980), personality is influenced by biological, developmental, and social forces. In Kant: Anthropology from A Pragmatic Point of View (2006), Kant explained how to know the inside of a person from the outside with an anthropological approach. Kant focused on race, gender, and personality in his anthropological approach. Many theories were introduced in psychology to explain the personality affected by these essential factors. These theories deal with people’s unique feelings, thoughts, and behaviors (Burger, 2004). Personality can determine an individual’s unique thoughts, characters, and behaviors. People differ from others because they exhibit unique behaviors due to their personalities. An essential part of the characteristics that distinguish one person from another comes from their parents through genetic inheritance. As mentioned in the section on genetics, personality psychologist Turkheimer (2000) emphasized that everything about human beings is hereditary. According to Segal (2000), 20% to 50% of personality differences are due to genetic factors. Although, according to Bouchard (1990), this ratio is 41% on average, Plomin et al. (2016) estimate personality heritability is between 30% and 50%. The personalities of identical twins reared separately are similar to those of identical twins reared together. The personality of people is constantly affected by internal and external stimuli. For example, children learn and repeat their behavior patterns by observing their parents’ behavior. Daughters tend to adopt the behavior of

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their mothers, and boys tend to acquire the behavior of their fathers. People’s personalities can also be affected by social environment and geography. People living in coastal, rural, or terrestrial regions and regions with relatively hot or cold temperatures might have different personality traits. People in regions with relatively warm climates might have a warmer, docile, and mild-tempered character. People living in regions with cold or continental climate conditions have a more complex and duller character. The social class, in which the individual interacts, also allows the formation of various behavioral patterns. For example, schoolmates, playmates, teammates, and coworkers are very effective in forming the social groups, to which the individual belongs. The habits and especially the experiences, which social groups teach individuals, affect the formation and development of personality. Knight (1921), Shackle (1972), Simon (1955; 1978; 1988), Kahneman and Tversky (1979), and Kahneman (2011) also highlighted the effect of experiences, which are the products of knowledge, on behavior (Experiences also have an impact on Friedman’s theory of adaptive expectations). Empedocles, who lived in 400 BC, defined personality as a concept consisting of elements such as water, air, earth, and fire. Hippocrates discovered that people could have similar behavioral patterns by observing his patients. Based on his observations, Hippocrates identified four different behavioral traits. They are optimists, corelics, melancholics, and cold-blooded people. The common characteristics of people exhibiting these four behavioral patterns show how others understand them. For example, the most repeated behavior of optimist individuals is to talk loudly and be late for appointments. People who fall into the corelics group can be leaders. Melancholic people have very orderly lives and are generally pessimistic. Finally, cold-blooded people love to observe other people. Highly influenced by people’s behavior, cold-blooded individuals tend to go in all directions, following the decisions of others. Today, psychology has a comprehensive definition of personality. Humanisticexistential personality theorists adopt as a fundamental principle that human nature is inherently good. They deal with people with emotional, mental, and social factors. Every person is different from each other and observing their behavior is of great importance in understanding people (Feist and Feist, 2006). Observing repetitive behaviors showed that specific needs of people arise at every stage of development. As Maslow (1943) showed in his hierarchy of needs, all persons begin with physiological needs and reach the final stage of self-actualization. Persons may prefer different components of goods and services, starting from physiological needs while reaching their needs for safety and other higher

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needs. Even if all persons reach the stage of self-actualization, they must repeat their consumption behaviors every day to meet their physiological needs. Some people may eat three meals a day, some may consume two, and some may only consume one or less. However, these differences between persons do not change the fact that they have repeated eating needs. Almost everyone wakes up every morning, has breakfast, goes to work, eats lunch, comes home from work, eats dinner, and sleeps. The person who aims to achieve psychological self-actualization transforms these behavioral routines into behavioral patterns. John B. Watson (1917; 1924), the leading name of behaviorist theory, defined personality as the end product of the habit system. Since habit is the behavior that a person has acquired in the past and repeated at certain intervals, the behaviors that individuals repeat can come from their habits. Veblen (1898), Smith (1976), Marshall (2013), Schmoller (1900; 1904), and Katona (1952) showed that individuals have economic behaviors caused by habits. For example, an individual who is aggressive, low in social skills, anxious, efficient, reliable, adaptable, self-confident, or an entrepreneur, has behaviors and habits that he repeats in his economic decisions because these behaviors have important psychological contents such as perception, motivation, attitude, preference, decision-making, choice, and satisfaction. Economic behavior is an inevitable consequence of human nature and the result of many psychological processes about the human himself (Van Veldhoven, 1988). Katona (1975) emphasized the importance of personality in analyzing economic behavior. According to Katona (1975), personality affects economic behavior together with economic conditions. According to Katona (1952), people making economic decisions expect similar things to occur in repeated cases. When an individual learns new information, differs in social influences, or perceives the situation differently, his behavioral expectations change. According to Strumpel (1974), economic environment and personality traits are determinants of subjective wellbeing. An individual’s personality affects subjective well-being and satisfaction with social issues and problems, as well as the economic environment. According to Van Raaij (1981), there is a reciprocal relationship between the personality of the individual and the perceived economic environment. Personality traits such as mental abilities, goals, values, and cognitive styles can affect the economic environment in which the individual lives. Akerlof and Kranton (2000) emphasized that a person’s identity, shaped by psychological and sociological elements, is the most critical determinant of the person’s opportunity and happiness. In other words, a person who defines himself with an identity is happy when he repeats the

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behaviors required by this identity. When an individual does not exhibit the behaviors required by this identity, he will not belong to that identity. Thus, the repetition of behaviors required by identity is highly consistent. Von Mises (1998) emphasized that human behavior is purposeful and conscious. In other words, people care about if the behaviors, which they repeat with the purpose and consciousness of their economic behavior, bring them benefits and happiness. Therefore, according to Simon (1955), people cannot be rational during economic behavior. In fact, as Kahneman (2003) stated, they can be selfish and bring the instinct of possession (Thaler, 1980) to the fore too much. These may differ depending on the personality of the person. Since the personality of the individual will cause them to exhibit consistent behaviors, the behaviors exhibited with selfishness or possessiveness motive should also be repeatable. Burrhus F. Skinner (1974; 1976; 1995), stating that it is impossible to know the entire inner world of the individual, claimed that personality consists of the behaviors exhibited by a person. People show reactive and operant behavioral patterns. Skinner discussed two types of conditioning for these two types of behavior. Classical and operant conditioning are behavioral repetitions of persons to certain stimuli. Therefore, there is a close relationship between the repetition of one’s behavior and learning. There is also a close relationship between repetitive behaviors and the transformation of learning into habits. Thus, individuals can be classified as having an internal or external locus of control. Persons, whose behavioral repetitions, are focused on internal control can be expressed as efficient, reliable, harmonious, self-confident, entrepreneur, researcher, etc., which are behavioral patterns. Persons, whose behavioral repetitions, are focused on external control can be expressed as stressed, aggressive, with low social skills, anxious, lonely, etc. Five-factor personality theory examines personality in five basic dimensions based on the factors that may cause individuals to differ from other individuals. There are types of conscientiousness, agreeableness, extraversion, neuroticism, and openness to experiences in the five-factor personality model based on scientific observations (Schultz and Schultz, 2009; Allport, 1961). Scientific observations revealed that persons have repetitive behaviors. Moreover, the five-factor personality model, created by observing repetitive patterns of behavior, was validated in many crosscultural studies. In conscientiousness, which is one of the five-factor personality types, the individual’s self-control is high. The individual considers all possible dimensions of his behavior before taking an action and wants to act cautiously. People with conscientiousness are careful, hardworking, sensitive, reliable, responsible, and have a strong will to

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succeed. Responsible people are very successful in business life. The ability of such people to cope with stress in business life and to solve problems is highly developed. People with a low level of responsibility are scattered, unplanned, undisciplined, lazy, forgetful, reckless, careless, and unreliable. Since they are not problem-solving-oriented, they cannot cope with stress. Therefore, individuals with the conscientiousness personality trait repeat the behaviors of diligence, adherence to rules, perseverance, and caution. Extrovert individuals project their energy into the environment they live. Extravert people have a very active social life and are sociable. Quite outspoken and straightforward to make friends, extravert individuals are energetic, enthusiastic, talkative, and adventurous. Such people are risk-loving, full of life, and want to live life with positive emotions. If any individual repeats distant, cold, quiet, reserved behavior, that individual is not extraversion. Such people are less likely to be successful in business as well. However, extroverted people can be successful in business life. Such people, who have developed problem-solving abilities, also have leadership qualities. In addition to being assertive and impressive, he is open to innovative ideas. Extroverted individuals have many friends because they can establish relatively healthy human relationships. Since they are successful in group work, they prefer doing sports and being a member of clubs. They are successful in adapting to a different culture. Agreeableness refers to the more humane side of a person. The agreeableness dimension covers honesty, forgiveness, generosity, reliability, selflessness, meekness, frankness, humility, good-heartedness, courtesy, dignity, and compassion. Agreeable people are prone to altruism. These types of people act by thinking of other people before themselves. Agreeable people who care about helping others are also very prone to be forgiving. Agreeableness is, therefore, the personality dimension most relevant to interpersonal behavior. Such people care about being understanding in interpersonal relations and respecting the other party’s wishes. Agreeable people are known for their helpful behavior. They care more about being reconcilable than competing. Even if they experience conflicts in competitions with other people, they do not prefer using force and pressure against people in these conflicts. Agreeable people are very successful in professions that require healthy communication. For example, these people come to the fore with their personalities in teaching, customer relations, marketing, and health services. Non-agreeable people are less successful in such occupations. Because non-agreeable people are selfish, arrogant, angry, grumpy, suspicious, argumentative, challenging, and competitive, they cannot communicate well with people. Individuals with neuroticism repeat behaviors such as fear, guilt, sadness, haste,

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sensitivity, depression, irritability, restlessness, impatience, sudden emotional transitions, uneasiness, tension, anxiety, and shyness. Neurotic people experience a variety of psychosomatic disorders. Chronic fatigue, headache, loss of appetite, insomnia, and visual difficulties are disorders. These people who lack emotional stability are also more unsuccessful in terms of positive thinking skills. Therefore, neurotic individuals may encounter many problems in their daily lives, but they probably have a tough time coping with these problems. Because they experience emotional instability, neurotic individuals are more introverted, unhappy, and indecisive. People with emotional stability are calmer and less anxious. Because of these negative traits, it is tough for neurotic people to find a job, in which they can be successful. However, people with an openness to experiences are highly productive. The cognitive abilities of people with an openness to experiences are highly developed and open to innovation. These people are open to innovations, independent, liberal, and intelligent, with a keen interest in the arts. Moreover, openness to experiences is associated with behaviors such as imagination, aesthetics, emotionality, respect for values, and sensitivity. On the other hand, people, who are not open to experience are intellectually uninterested, conservative, shy, closed to innovations, have no interest in art and aesthetics, and have little imagination. Therefore, the productivity level of such people is also low. In Friehe et al.’s (2018) research, it is possible to see some examples of repeated economic preferences caused by five-factor personality traits. For instance, non-agreeable people place less emphasis on comparing their income to those of others. On the other hand, conscientious people can make income comparisons. Conscientious people tend to make more intense income comparisons with their colleagues at work and less in their private lives. There is an important relationship between agreeableness, conscientiousness, neuroticism, and the level of income earned. Economic behavior is the achievement of desired goals by using scarce resources such as money, time, and power. Psychological factors, which are influential in forming personality, affect economic behaviors (Katona, 1952). Therefore, economic behavior and personality are inseparable. Behavior patterns caused by personality enable the individual to exhibit specific behaviors in uncertainty.

Culture People are cultural entities. The culture of societies causes specific behavior patterns to be repeated. Therefore, culture is an essential part of

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economic personality. People living in different communities have a robust cultural system that determines their daily behavior and actions. For example, there has been a tradition of burial since the 17th century, which the people of Madagascar call Famadihana. This cultural tradition is an adaptation of the funeral traditions seen in Southeast Asia and Oceania. The practice of Famadihana is the ceremony of rotating the bones of the deceased, usually every five to seven years. In the Famadihana ceremony, the families of the deceased exhume their relatives from their graves. They wrap the corpses of their deceased ancestors in a new cloth, and they always write the names of the dead on these cloths so that they are not forgotten. Then, they begin to carry the corpses, wrapped in new material, on their heads. They dance along with the music playing during the transfer. The bodies, taken with the accompaniment of dancing, also wander around the grave of the dead before being returned to the family cemetery. Madagascarians believe that thanks to this tradition, they celebrate the life lived by their deceased relatives, because, according to the Malagasy people, those who die do not immediately join the ancestral realm. The tradition of Famadihana ensures that the souls of the dead finally enter the ancestral realm. However, for the souls to join the ancestral realm, the dead body must be wholly dismembered, and appropriate ceremonies must be systematically repeated, which may take many years. After the burial of the dead, all family members are expected to come together at each Famadihana ceremony. Thanks to these ceremonies, extended families gather, and even family members with problems show solidarity. Tujias living in China have an exciting marriage tradition. The Tujia community, which usually lives in the Wulin mountains of Hunan province, has a population of approx. 8 million. According to the customs and traditions of the Tujia community, the eighth-most populous ethnic group in China, married women are required to cry. A married woman is separated from her family and women have no say in their marriage. The more beautiful the married woman cries, the higher her intelligence and virtue. Crying, a critical measure, doesn’t just happen during the wedding. Brides should start crying for an hour each night, 30 days before the wedding date. Ten days after the bride begins to cry, her mother starts to cry with her daughter. At the end of the 20th day, the grandmother, if any, her sister, and aunts also join the crying. The night before the wedding, eight unmarried girls in the neighborhood join the bride’s family and sing together until morning. That night, the bride cries ten times in total and a plate of food is given each time she cries. Ten plates are then collected one by one. In this cry ceremony with food, the bride and her mother must

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lament a kind of lament. The aim is to let the bride shed all her sadness on the wedding day and be happy in her marriage. In other words, the bride must cry. Culture is a complex thing that includes art, morals, customs, habits, and all other skills acquired by the individual. Individuals are influenced by the culture they have when they define the benefits they will derive from their economic behavior or exhibit the behaviors required by their profit targets. The norms, values, and routines of the culture, to which people feel they belong, shape such behavior. Norms are social conventions that teach society which behavior is correct and what is wrong and serve as a control. Norms include written rules, such as laws and regulations, and unwritten behavior patterns, such as customs and traditions. As Becker (1976) emphasized, social norms aim to provide and maintain social order. Every society develops social norms that will prevent behaviors such as lying, stealing, and selling fraudulently. Developed social norms deter bad behavior and prevent social life from being adversely affected. Since any bad behavior is not desired in every society, human behavior is shaped by social norms. Social norms, therefore, restrict individual behavior. Social norms govern most relationships in the family, neighborhood, and workplace. Values are the definitions that show the individuals in society which behavior is good or bad. According to Weber (1930), the paths to be followed in a particular order are determined by social values. Culture is the basis of social behavior, whereas values that turn into mental programs constitute culture’s essence. The codes of values are written in the family from infancy, developed by society in education and institutions, and processed in people’s subconscious (Hofstede, 2001). Culture is shaped by language, religion, history, science, art, customs, and societal traditions. In other words, culture can be defined as the programming of the collective mind that distinguishes members of one group or category of from another. Culture, in its essence, requires individuals with behavioral patterns. As Inglehart (1997) stated, culture is a system of attitudes, values, and knowledge widely shared in society and transmitted from generation to generation. Migration and colonialism in the history of humanity also caused the cultures of communities to be shaped. Therefore, we will likely encounter the cohesion of social components in any society at any time because, for societies to survive, they need political, economic, and cultural systems that mutually support each other (Schwartz, 2003). Therefore, the behavioral patterns repeated by the individuals who make up the societies ensure the existence of societies as a cultural indicator. Economics is very close to culture. As a matter of fact, according to the

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German historical school, economics is not a natural phenomenon. It is a cultural reality that occurs mainly with social, political, national, and historical factors. According to Schmoller (1900; 1904), from the German historical school, a cultural reality that affects the changes in the economic order is necessary. According to Schmoller (1900; 1904), the common phenomenon of a nation is not only the state. The common phenomenon of a nation is much deeper, including everyday language, history, morals, ideas, and history. A common feeling and a common thought world and the idea of shared sovereignty unite the economy of societies. Every society has a lifestyle that grows and becomes objective based on agreed psychological impulses. A typical mental structure in society affects all people’s behavior, including their economic behavior. Within this mental structure, a person builds a cultural world for himself thanks to his moral understanding. Economics is necessarily included in the cultural world of man. Therefore, according to Schmoller, economic variables such as money and the market also need a cultural basis. Social inequalities are also the product of cultural conditioning. Social inequality can only occur in a culturally shaped development process. Such a legacy, which has the power to divide societies into classes, is not simply a legacy. The dominant cultural history is the legacy that causes societies to give the same lifestyle to the same families from generation to generation. The formation of cultural behavior patterns is a reality that Marshall also cared about. In Principles of Economics (2013), Marshall highlighted a person affected by changes in the socio-cultural environment. As mentioned before, Marshall stated that factors such as religious thoughts, urges to do good, work life, family, traditions, duties, compliments, empathy, and sympathy significantly affect human behavior. He built his theory of consumption on habits and traditions. Because, according to Marshall (2013), people act in line with habits, intuitions, altruism, and traditions. In every society, a particular form of action can be expected from the members of society under certain conditions. These social laws enable individuals in society to show the behaviors expected of them. In The Theory of Moral Sentiments (1976), Adam Smith argued that mutual sympathy holds society together. As a manifestation of individualism, people will behave in an orderly and moral way rather than taking advantage of each other cruelly. These behaviors, repeated by individuals in multiple ways, will reveal a morally developed society. Smith (1976) stated that family morality is inherited from generation to generation. With a thought close to Smith, Kant (1785; 1788) stated that people should be moral. Because, according to Kant (1785; 1788), acting morally is the correct behavior. As stated by Kant, individuals, who constitute society, do

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not need any other means of motivation to exhibit the right behaviors. From this perspective, selfishness should not be a motivation for the correct behavior. Scientific data support that the structure of a person’s mental model is developed through communication with other individuals. For example, early childhood is essential for gaining value. Until the age of ten or twelve, individuals quickly and primarily unconsciously acquire information from their environment. Core values are the most critical information obtained and parents play a vital role in forming these values (Inglehart, 1997). As Veblen (1964) emphasized, parenting is instinctive. The parental instinct is the tendency for social solidarity in the reproduction of material life beyond the formation of family ties. For example, a maze problem is given to high and low-caste children in India. When the caste identities are not disclosed to the children, the results of high and low-caste children are very close. When caste identities were revealed, the performance of lower caste children dropped significantly. In an experiment conducted with two groups of eleven-year-old boys in the USA, the groups were taken to a park away from their families. Interventions that would enable them to compete caused the groups to fight and the interventions to make them friends caused the two groups to play together (Akerlof and Kranton, 2010). Ethnic identity causes the behaviors required by belonging to a group or culture, such as family. The phrase “acting like white” used by Hispanic or black groups in the US exemplifies this. It can be seen that young people in these communities restrict some of their behaviors because they are afraid of acting ‘like white’. Young people want to show that they are from that group by repeating behaviors that those in the same ethnic group will notice. Otherwise, they could be fined or beaten. Arrow (1972) showed that racial and ethnic groups can have different behavioral patterns. For example, in the USA, white people give little support to government aid to low-income groups. As individuals identify as white, they are less supportive of tax regulations. Gender is another factor that can cause social inequality. Behaviors that are expected from gender, such as “men go to work, and women work at home,” is an indicator of inequality between men and women. Women join the workforce more slowly, as it is not an expected behavior from their gender. Even today, women’s participation in the workforce might be low in countries, where there have historically been societies where physical force was used a lot. The same applies to housework. As Akerlof and Kranton (2000) defined as identity, women do housework, whereas men are not expected to do housework such as cleaning. Men may be sailors because they are more gender-appropriate, but women are less likely to be sailors. In other words,

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jobs are affected by the behavior patterns of individuals in the cultures they belong to. As Hofstede (1980, 2001) stated, culture is strong enough to cause individuals and societies to acquire different behavioral patterns. Hofstede examined this power of culture by dividing countries into five groups. The generations in the countries included in the groups can belong to any of these five cultures by repeating similar behaviors. For example, countries such as Japan, Italy, Venezuela, Ireland, and Mexico are under the influence of masculine culture. Individuals in these societies are ambitious and live to work. In countries where feminine culture is common, such as Sweden, Norway, Denmark, the Netherlands, and Finland, individuals attach importance to the quality of life. For individuals in these countries, achieving the work necessary to live a good life is sufficient. In countries with cultures that tend to invest and be frugal, such as China, Japan, and South Korea, individuals intend to repeat their behavior of perseverance and effort. Thus, they use their production resources and savings correctly. Finally, individuals care more about spending than saving in countries such as America, England, and Spain. Societies in these countries put pressure on individuals to spend. Hofstede (1980, 2001) stated that cultural power distribution also shapes social behaviors. The power level difference is high in Latin America, Africa, Asia, and Eastern European countries. As a result of the disproportionate distribution of power in these countries, individuals do not struggle against their superiors in working life. In countries like New Zealand and Australia, where power distance is low, individuals can reach higher statuses more easily. Individuals in these countries can increase their job position and income if they put in enough effort. In individualist cultures, individuals are free to make their own decisions. In countries such as Australia, America, and England, individuals tend to put their responsibilities and economic preferences to the fore. However, collectivism is at the forefront in countries such as Guatemala, Pakistan, and Indonesia. Individuals in these countries are us-oriented. Therefore, individuals work not for themselves but for the small communities to which they belong. Individuals in countries such as Japan, Greece, and Russia avoid risky and uncertain situations. In other words, the culture in these countries supports behaviors that require individuals to avoid uncertainty. Individuals in Jamaica and Singapore are much less likely to avoid uncertainty. According to Hofstede (2001), the cultural values of societies have an important feature, such as being stable. Even if the generations change, the behavioral repetitions required by the culture of the community show themselves in each generation (Putnam, 1993). In this regard, intergenerational transmission is considered the most important way.

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Gene-culture coevolutionary theory models the transmission of genes and cultural traits from generation to generation. Gene-culture theory studies how genes and cultural traits interact with each other and is a branch of theoretical population genetics. The human being, a species that transmits culture in a way that leads to quantitative growth over generations, is also the subject of research in sociobiology. Man transforms his natural environment to facilitate social interaction and collective behavior. According to the gene-culture theory, genes and culture are intertwined information systems that are subject to double evolutionary processes. Human cultural capacity is a social learning mechanism developed to acquire the information necessary for decision-making. This learning mechanism facilitates the acquisition of locally adaptive behaviors at a relatively low cost. Social learning styles cause multiple stable equilibria in social interactions and cumulative evolutionary products that continue over generations. Moreover, social learning styles take a much shorter than genetic evolution (Camerer, 2003; Gintis, 2003). Henry et al. (2005) explained the evidence obtained from 12 countries on four different continents within the framework of the theory of coevolution. Societal differences in issues such as market integration and the local importance of cooperation explain a significant portion of behavioral differences between groups. As a result, the culture carried from generation to generation strongly influences the economic behavior of the individual. Cultural behavior patterns in countries have the feature of being repeated over generations. The culture that people have is a part of their economic personality. Behavior patterns created by culture make the individual’s behavior specific in uncertainty.

Beliefs Humans are entities having beliefs. Their beliefs mandate and teach people the behavioral patterns they should have. Behavior patterns yielded by beliefs make the behavior of individuals specific in case of uncertainty. Therefore, beliefs become part of people’s economic personality. For example, the Aghori, known as the fearless, are a community in Uttar Pradesh, India. The Aghori tribe belongs to a sect of Hinduism that has existed since the 7th century AD and worships Shiva, the Hindu god. The faith of the Aghori is based on two crucial principles from the broader belief system, Shaiva. The first of these beliefs is that God Shiva is perfect. The omniscient, omnipotent, and omnipresent Shiva can only be perfect. Secondly, Shiva is responsible for all circumstances, causes, and consequences, that is, for everything that happens. Therefore, everything

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that exists must be perfect. To deny the perfection of any being is to go against the sanctity of all life. Those who deny perfection also deny the Supreme Being. According to the Aghori belief, every human soul is Shiva. People cannot become sadasiva (the omnipotent, luminous absolute, highest manifestation of Shiva), and they cannot achieve moksha (freedom, liberation) due to various significant obstacles. These significant obstacles include fear, anger, lust, obsession, greed, and sensual pleasure. Aghori religious practices are based on getting rid of these bonds. They want to become sadasiva and achieve moksha by getting rid of all obstacles. Hence, the Aghori are devotees of Shiva and monists seeking freedom and deliverance from the cycle of reincarnation. According to the belief of the Aghori, one of the most significant obstacles, the fear of death, appears at a very young age. Children become increasingly discriminatory as they grow older and learn about their parents’ culturally specific attachments and hatreds. Children become increasingly aware that they are mortal when they fall to the ground or bump their heads. They begin to fear being mortal and find ways to deny death completely, alleviating their fear of death. Therefore, the Aghori live on cremation grounds to dispel the fear of death. They rub the ashes of the cremated dead on their bodies. Since they consider the fear of death to be their greatest fear, they believe that they can overcome it by eating a piece of the flesh of the dead. To get rid of sexual desires and the shame of nudity, they practice rubbing the ashes of the dead on their bodies and using drugs. Tribal members can eat all kinds of human or animal residues in the garbage to overcome the human ego and end the perception of beauty. The bizarre rituals of the Aghori include living in cemeteries, using human skulls for decorations and bowls, and meditating on corpses. The Aghori also have a ritual of practicing healing through purification. Patients, who want to be purified, believe that an Aghori can transfer his health to the patient and purify the patient from impurities. The Aghori belief thus has a transformative form of healing. The Aghori also believe that, in some cases, animal or human sacrifice is necessary to complete healing successfully. Aghori scholars refer to this process of sacrifice as karma transmission. The well-known Indian caste system, which is almost 2000 years old, has been abolished in India since 1975. However, the caste system still maintains its influence in rural areas of the country. Approx. 70% of the population in India lives in rural areas. It is natural for the local people to adhere to centuries-old traditions and not to break with these beliefs. In the cities, traces of the caste system continue in terms of marriage and meal customs. The caste system defines and limits the behavior of all individuals

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in the castes because, in the caste system, people’s interests and abilities have nothing to do with the work they will do. Individuals have to conform to the requirements of the caste class. Thus, the Indian caste system has strict rules that believers of the Hindu religion must follow. The strict rules of the caste system are like a social ladder. According to the system, every Hindu is born into a caste. In other words, every Hindu has a unique position in society, and because of this position, he is distinguished from other groups. Children enter a caste with the genes they inherit from their parents. Even professions are passed from father to son. An individual who believes in the Hindu religion spends his whole life strictly adhering to the rules of the caste to which he belongs. For example, Brahmans of the highest caste should only study and interpret their holy book, the Vedas, and engage in the education and training of their religion. Vaishyas are the ruling class of economic life. They are involved in agriculture and trade and do all the production and trade business. An individual in this class may engage in agriculture and trade, raise livestock, give alms, offer sacrifices to gods, and read scriptures. Particular organizations were established within the caste for people to obey the caste rules and ensure the caste’s functioning because caste violence continues to be a significant problem in the country. Given official statistics, more than 40,000 crimes against member of lower castes were reported in 2016 alone. If any individual does not abide by the caste rules, he receives penalties depending on the extent of the rule he does not obey. Each caste has its law. When a person kills someone of the same caste or higher caste, the penalty for the murderer is death. If the murdered person is in the lower caste of the murderer, the murderer is not executed. Instead of execution, the murderer is fined. The amount of punishment increases as the caste of the murderer rises. One of the most severe punishments given to those who do not comply with the rules of the caste system is expulsion from the caste system. A person who is excluded from a caste is excluded from society. Besides, individuals cannot eat with an inferior caste. A person of any caste cannot eat the food prepared by a person of a lower caste. Marriages are also tied to caste rules. For example, Brahmans can marry four women, Kshatriyas three, Vaishyas three, and Sudras one. Marriage out of caste is forbidden and takes a person out of their caste. If a woman becomes a widow, remarriage is prohibited in all castes. If a woman gives birth to a child from a lowerclass man, then the man and woman are punished. Most importantly, the child born is considered a Dalit. Dalits are the lowest class, excluded from the caste system. This class, which has no legal rights, is also isolated from social life due to caste rules. Dalits, who do not have regular jobs, are not

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even allowed to be in the same quarters as other castes. Today, more than 200 million Dalits are responsible for the worst and dirty work that other castes do not want to do. It is Dalits’ duty to bury the bodies of the those having no relatives. Living outside the village and town, they can only wear clothes left over from the dead, cannot touch anyone in the caste system, and shall only eat on broken plates. Dalits are called untouchables because they do things that Hindus of other castes find disgusting and humiliating, such as cleaning toilets (by hand) and caring for animals. Dalits are considered to be too filthy to touch because they do odious and degrading work. For this reason, Dalits, who are not welcomed as ordinary people, cannot have any other animal than a donkey and a dog. Moreover, they are prohibited from walking around the cities and villages at night, they must carry symbols, etc. showing that they are Dalits in the towns during the day. Moreover, their children cannot receive an education in school, and Dalits cannot marry one of the other castes. As can be seen, religion is an essential part of human life and a concept that is highly related to the economy. In The Theory of Moral Sentiments (1976), Adam Smith emphasized the relationship between economics and religion by expressing that the path to virtue and wealth is almost the same. According to Smith (1976), individuals draw the limits of their behavior for their benefit by listening to the voice of their conscience, which considers the impact of their actions on third parties. However, it is not only the conscience that limits the individual’s behavior. When individuals work for their benefit, they are guided by an invisible hand beyond their control. Because every person has a job, to which he is called. And, in an economy, there is a natural division of labor that people should not contradict. Smith’s (1976) interpretation of the invisible hand remains the same in Wealth of Nations. Malthus stated that economics is closer to politics and morality than mathematics, emphasizing that morality and economics are very related (Hutchison, 1978). In The Principles of Economics (2013), Alfred Marshall noted that people are most influenced by their religious ideals regarding their daily work and, thus, the material resources they provide. According to Marshall (2013), the two major shaping agencies of world history are religious and economic. In The Theory of the Leisure Class (1973), Veblen stated that religion is closely related to social and economic development. In Essays in Our Changing Order (1934), Veblen explained the reason for this relationship. According to Veblen (1934), in the light of the principles of modern science, Christian morality or monetary rivalry are common habits of thought, like all other habits of behavior. Religion includes both the practices of people regarding their belief systems and the mindsets that inform these systems.

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Religious practices are indicators of behavioral repetitions in formal and informal groups and behaviors that people repeat alone in line with their beliefs. Religion is, therefore, a behavioral habit that is repeated at various temporal intervals. For example, every Saturday for Jews, every Sunday for Christians, and every Friday for Muslims is reserved for worship. Muslims and Jews should repeat the behavior of not eating pork all their lives. Muslims, Christians, Jews, Hindus, and Buddhists should fast yearly at a specific time interval. In other words, religion can be defined as shared beliefs, activities, and institutions based on belief in supernatural powers (Iannaccone, 1998). Activities in religious groups are similar to those in social groups such as a person attending a football club, tennis club, or political party meeting. Meetings in these groups can be used as a tool for the creation of economic activities. The values taught by the adherents of any religion or by its most essential leaders can affect the economy of a society, in which they live. Beliefs in salvation in religions such as Hinduism, Buddhism, Christianity, and Islam provide people with different economic incentives. The redeeming right, a result of a person’s life-long activities, is the key concept here. To increase the chances of gaining a good position in the afterlife, religions teach that savior merit can be earned in this life. Catholicism, Hinduism, and Islam have moderate redemptive values (McCleary and Barro, 2006). Max Weber (1930), who examined the relationship between Protestantism and capitalism, saw religiosity as an essential variable affecting economic variables. In The Protestant Ethic and the Spirit of Capitalism (1930), Weber emphasized that religious beliefs affect the economy by promoting traits such as business ethics, honesty, trust, thrift, philanthropy, and hospitality. To obtain these behavioral patterns, it is necessary to repeat the behaviors in this direction. According to Weber, the capitalist system is based on purely commercial intelligence and a completely calculated system. Capitalism stands with principles such as the acceptance of money being efficient and empowering, the functioning of the interest system, diligence, moderation, and punctuality. These principles reveal the moral condition of being faithful to one’s debt and a good ‘payer’. Such a moral structure is very much in line with Protestantism, which perceives work as a profession acquired through talent. Protestantism makes gaining an understanding of the profession, producing, and working a purpose of life. Thus, Protestantism becomes the driving force of capitalism. According to Weber (1930), capitalism is also found in Islam because of its most profound theological wisdom and initial features. Islam emerged in lands, where trade tradition and practice were intense. Islam encourages returning to work even after Friday prayers. In Islamic tradition, money

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received from a job is considered fully deserved. According to Ibn Khaldun, Islamic societies have a behavioral characteristic such as “to endure all kinds of sacrifices for a common value.” This behavioral repetition shows that the motivation for economic work and achievement in Islamic societies is identical to the motivation for high achievement mentioned by Weber (1930). Islamic business ethics states that all kinds of income obtained by force is an indicator of dishonor, and the income earned by deserving, even if small, is fruitful. However, as in other religions, practices in different regions of Islam have different characteristics (Kuran, 2004; 2007). Therefore, Islamic regions have different levels of development in the capitalist system. According to Sombart (1962), Judaism plays a vital role in capital accumulation in the first stage of capitalism. The behavioral traits of wealth and power in Judaism, where it is ordered not to trade on Saturday, are more suitable for capitalism. In Judaism, earning a lot of money and having gold and silver means going to heaven. Borrowing behavior in business life is also a teaching. While Jews do not receive interest from lending transactions among themselves, interest can be obtained from non-Jews by bargaining. These repetitions learned as a behavioral habit can turn Jews into more rational people in economic life when compared to Christianity and Islam. In addition to these three major religions, the teachings of Zen, Buddhism, or Shintoism are influential on the economic behavior of individuals. For example, according to Masaaki (1986), the kaizen doctrine has a significant role in Japan’s economic success. Kaizen, which means improvement, refers to a rapid improvement in employees, business processes, time, and technology and a decrease in costs. With the excellent functioning of all these variables, it aims to increase customer satisfaction and competitiveness in a certain period. In Japan, a competitive religious market leads individuals to religiosity (Witham, 2010). Barro and McCleary (2003) show that the economy responds positively to religious beliefs and quickly to church attendance. In other words, economic growth depends on the degree of trust in belonging. Furthermore, religious faiths include individual characteristics that increase economic performance. Barro and McCleary (2006) emphasize that economic development and growth interact with religious devotion. According to Barro and McCleary (2006), irreligiousness can also impact economic variables. This is quite normal. Beliefs cause economic variables to be affected by repeating individual behaviors. Irreligious individuals may exhibit behavioral patterns that they think to not belong to any religion due to this belief. These behavioral repetitions can have an impact on the market through economic choices. As a result, any belief can shape specific repetitions of behavior. These

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behavioral repetitions also become a part of the economic personality, differing in relation to beliefs. Behavior patterns created by beliefs make the individual’s behavior specific in uncertainty.

Learning Humans are entities that are learning constantly. A man celebrating his wife’s birthday wants to buy a present for her. He has yet to decide what gift he should buy. First, he starts by thinking about what his wife likes and dislikes. He wants to give her a fondue set as a gift. However, he quickly gives up on this idea. He does not wish for the present he will buy for his wife to be an item his wife can buy herself. If he buys the fondue set, he thinks he will have purchased a gift for his wife and himself. Then he starts to think about which gift his wife might be more pleased with and which gift she might want more. So, he begins to wander through the bookstores. He reviews art books and newly released novels. Meanwhile, he remembers the gift his wife gave him. On his last birthday, his wife has given him a photo album as a gift, containing the story of early-period photography. When he remembers the gift he received from his wife, he gives up buying books. Instead, he starts looking for an antique candlestick or old lamp that he thinks would make a better gift. However, while he is about to receive the gift he found as an antique, he realizes he still has a doubt. He thinks that there might be better gifts than an antique item. While he is in these thoughts, a garnet ring catches his eye. He was pleased to see this ring. His wife told him about a memory of having such a ring before. When the woman was a little girl, she was happy to wear a ring that her grandmother gave her. Thus, the man realizes he has found his wife’s right gift. On the woman’s birthday, he gives his wife’s gift, together with a carefully prepared table and cake. This example, described by Wulf (2004), shows a man’s effort to seek a gift for his wife, prepare the atmosphere for giving the gift, and present the gift. According to Wulf (2004), no one in his community has told this man what rules apply to birthdays and gifts. Despite this, the man may think that he should buy a gift for his wife, that this gift should be unique for his wife, and that he should give the present with a special preparation on a special day. Furthermore, no one told the woman how she should react to her husband in return for the special gift he received. However, both women and men know their roles well, think about what the behaviors required by these roles should be, and exhibit the necessary behaviors. Since these two people grew up in a family, they both witnessed their parents’ birthday preparations. They attended surprise birthdays for themselves, their

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siblings, relatives, or a friend. They received a gift or chose a gift to give. Of course, these birthdays do not always have the same gift, the same decorated table, the same cake, or the same surprises. However, they both learned the birthday ritual required by their culture. Therefore, all birthdays are similar in many aspects. According to Wulf (2004; 2013), actions learned through imitation are not merely the reproduction of the imitated. As a nine-month-old child, an individual can use imitation abilities. For example, a baby responds to a smiling parent with a smile. The feelings of the individual who establishes a relationship with the people he lives with begin to learn through such exchanges. As people relate to others, they learn to awaken feelings within themselves and how people can influence those feelings. The development of the brain is related with such exchanges with the environment. Certain parts of the brain are trained through interactions with the environment. The cultural conditions at the beginning of life are ingrained into the brains and bodies of young children. Knowledge acquired through imitations leads to the creation of individual behaviors. Within the framework of the culture of the society they live in and in the light of previously experienced situations, individuals acquire skills that teach them how to act in a social case. Knight (1921), Shackle (1972), Simon (1955; 1978; 1988), Kahneman and Tversky (1979), and Kahneman (2011) highlighted experiences for this reason. By participating in people’s lives in society, people expand the life practices that are necessary for them. People make new cases that fit them by recreating previously experienced situations for themselves. Behaviors that are repeated at regular intervals create a society because a community cannot be formed without rituals. Patterns occupy a central position in almost all spheres of human existence. Repetitive behavior is inevitable in religion, politics, science, families, and the economy. The rituals we learn connect our society’s past, present, and future. Rituals provide continuity and change and facilitate the transition of culture to new generations and experiences of transcendence. Cultural behavior patterns such as weddings, worship services, and dance performances express the epitome of culture to both its members and foreigners (Singer, 1959). Therefore, learning and culture are actually intertwined. Without ability to learn, the development of culture would not be possible. If we were beings who are not capable of learning, it would be tough to pass on the culture to the next generations. Since people can learn, they can live in any society. According to the example of Thaler and Sunstein (2009), an individual with a planner personality also has a “maker” in his soul, who follows his powerful desires. This person, who plans very well for his life goals, is an

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academician. The planner plans to complete his doctorate before he starts teaching at the faculty or in his first year of teaching. However, there are developments that the planner should have taken into account. The university announced that it would employ him as a lecturer, not an assistant professor until he finished his doctorate. With this decision, the university did not contribute to the planner’s retirement plan, which amounted to 10% of the planner’s annual salary. The planner knew he needed to finish his thesis quickly. On the other hand, the maker in the planner was making more exciting plans instead of writing a doctoral dissertation. The planner enlisted the help of a friend. His friend made a plan for the planner. If he didn’t deliver a particular portion of his thesis to his friend at the end of each month, the planner would give him $100. His friend would also use this money for fun. His friend was teaching the planner a plan of behavior, for which he would be punished if he did not repeat it. The planner faced two behavioral challenges. His college graduation plan forced him to work, while his friend did it for $100. But the $100 push was successful, and the planner completed his thesis in four months. His friend’s use of the $100 for fun was far more upsetting and overpowering for the planner than the cut to his retirement plan. The individual, who repeats the planning behavior, learns that it will be much better for him to perform the behaviors he is forced to repeat rather than endure such sadness. People can have behavioral patterns such as aggressive, low social skills, anxiety, efficiency, reliability, adaptability, self-confidence, and enterprising. Human is a being constantly learning and experiencing while repeating the behaviors he has acquired. In this sense, learning results from the relationship between the individual and his environment. As Bandura (1999) emphasized, the human brain is not only reactive but also productive, creative, proactive, and self-reflective. People produce thoughts that have decision-making functions. In case of uncertainty, people make plans to adapt to changing situations, evaluate the functional aspects of their behavior, and organize strategically chosen preferences. They assess the possible consequences of their behavior. People interacting with their environment can acquire the desired behaviors with social reinforcements such as approval, smile, attention, appraisal, and encouragement from other people. Behavioral changes that occur with nudging, which Thaler and Sunstein (2009) described with the planner and musical staircase, reflect this learning feature. Vernon Smith (1994) offered a learning style that can guide expectations in a two-player game. Two bargainers both want to win in a game played repeatedly over a long time with an ambiguous ending. The other person can punish a decision made by one of

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the bargainers in the designed game. In the game, it is assumed that the bargainers have common expectations (knowledge). According to repeated plays, common expectations are obtained by a game process, not by deductive analysis. The replays clearly showed that part of this process could be due to instructional manipulation caused by punishment. Thaler and Sunstein’s (2009) automatic contribution increase program called Save More Tomorrow is precious in this context. The program was first implemented in 1998 in a medium-sized firm. Company employees were first told about the level of savings rates. Employees were surprised because savings rates were so low. Employees participating in the program were told that they must increase their savings by 3 percent with every salary increase. While those who participated in the program were the least saving workers, they started saving 13.6 percent of their salaries after 3.5 years and four salary increases. As a result, those participating in the program had the highest employee savings rate. As Bandura (1989) pointed out, humans and social environment are systems interacting with each other. In other words, the individual also learns by observing the experiences of others instead of learning everything directly. For example, children who see their parents repeating their reading behavior can learn to read books. Children, who watch their aggressive parents, can acquire aggressive and violent behavior. People, who see individuals who provide financial support to the needy, may decide that this behavior is moral and may repeat the helping behavior themselves. Therefore, the individual should be considered together with his environment. People need a lot of reinforcement in the learning process. Factors affecting individual behavior are not only related to personal needs but also psychological needs. Therefore, social reinforcers can turn into desired behavior patterns. The individual’s observation that other people’s behaviors are rewarded or punished may affect the individual’s acquisition or non-acquisition of those behaviors. For example, an individual who sees an athlete winning a gold medal in the Olympics by working hard may want to train to develop physically. A person can also reinforce his behavior by giving rewards or punishments to himself. For example, a student who rewards himself with a slice of cake in exchange for an hour of study will affect positively. The cake gift he gives allows him to speak positively to himself and have positive feelings. As Maslow (1943) pointed out, even human personality is a learning process from beginning to end. People, who healthily fulfill this learning process in their environment, can reach the stage of selfactualization. All these show that the individual learns a lot from his environment. Learning can be seen as the most fundamental cause of individual behavior because economic behaviors such as purchasing and

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saving are not innate. Such economic behavior patterns are shaped by what people learn from their economic environment (Lea et al., 1987). In other words, as Kantona (1952) stated, economic behavior is a learned behavior. According to Bandura (1977), factors such as imitation, modeling, and stimulus-response effect come to the fore in this learning process. While individuals are under the influence of these factors, cognitive factors such as expectations and self-regulatory also become a part of the learning process. Expectations are related to the predictive capacity of the individual. According to Bandura (1989), human behavior is goal-oriented and regulated by foresight. An individual’s experiences form expectations or predictions about the consequences of the behavior before the behavior is performed. Expectations about the outcome of any behavior affect the likelihood of that behavior being repeated more than the consequences of the behavior. Expectations are what the individual predicts about the outcome of the behavior in advance. The capacity of the individual to regulate their expectations and behaviors provides a mechanism that can enable predictive behavior. Foresight turns into motivation and actions with the self-regulation mechanism of the individual. Anticipatory behavior becomes possible because people can symbolize. People add meaning, shape, and continuity to their lives by using symbols such as pictures or words. The capacity to symbolize allows the individual to use the information that will enable them to improve themself in their memories for future use. Self-regulatory provides the basis for purposeful behavior by observing external factors. According to Wood and Bandura (1989), self-regulatory is an individual’s belief in their capacity to generate motivation, cognitive resources, and action patterns necessary to achieve specific situational goals. Self-regulatory is when people compare their capacity with the performance they need to do and act according to the result of this comparison. Each individual has a level of belief in their capacity to cope with the difficulties they may encounter. Self-regulation determines how people feel, act, think, and motivate themselves. A strong self-regulatory level increases people’s satisfaction and success. People, who are confident in their abilities, cope more successfully with their challenges. While the factors influence the individual in the learning process, expectations and self-regulation also become a part of the learning process. In other words, a human is both the product and the producer of his environment (Thorndike, 1913). The transformation of the process of being both the product and the producer of their environment into repeated behaviors is related to processing the information obtained from the environment. Data is received with stimulating events from the environment and people process

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the information that reaches them. In the information processing process, the environment is an important variable. In addition to the environment, previously acquired knowledge, reward/punishment/expectations about the subject of knowledge, approach to learning, and cultural judgments/values are also effective in processing information. As the mind is an information processing system, as Shuell (1986) points out, learning is an acquisition of mental processes. As Hebb (1949) explained, the connections between brain cells become stronger as experiences occur. As a result of the learning process, new axon strands are formed in brain cells (neurons). Thus, every bit of learning that takes place means forming new synaptic bonds. As a result, the human mind processes all the data it receives like a computer system. The mind passes the data through a series of cognitive processes and performs learning. For example, a person who wants to make an account while shopping uses the information of his shopping as input. Considering the product price, budget, and price-benefit balance, he applies transactions, and the individual achieves a solution. That is, the human mind has output. This output is the decision to buy or not to purchase the product. Decisions made through acquiring and processing information are stored and made available again when necessary. Reusable knowledge means learned. In other words, learning turns into repeated economic behavior patterns. Behavior patterns created by learning make the individual’s behavior specific in uncertainty. Therefore, learning is an essential part of economic personality.

Technology Humans are technological entities. Humanity, which develops technology for itself, experiences behavioral changes due to technology and acquires new behavioral habits and patterns. For example, before the plow was used for the first time in BC, people tried to work the soil with stones and sticks. Later, using trees and rocks, they invented primitive plows. People who thought that the plow, operated by human power at first, could be used more efficiently and effectively started to develop the plow. Thanks to some add-ons and tools, it started to work with animal power and became more efficient and effective. The humankind, who thought about improving the plow and succeeded in doing it, now lives in a station they built in space. That is, humanity has now become a part of space-time. The International Space Station, where astronauts live at regular intervals, orbits the Earth at a speed of 28,000 km per hour. At this speed, an astronaut at the station sees more than 15 sunrises and sunsets in 24 hours. This figure is many times higher than the sunrise and sunset were seen by

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a person living in the world in 24 hours. The gravity experienced by astronauts living on the International Space Station is different from the gravity experienced by humans on Earth. Every celestial body in space has its gravitational force. The International Space Station, about 400 km from Earth, is affected by the Earth’s gravity. The gravity of the International Space Station is less than the gravity on the Earth’s surface, but it is not zero. Since the station constantly moves in Earth’s orbit, gravity is balanced by centrifugal force. Researchers are studying the effects of the station’s near-weightless environment on human bodily functions, growth, development, and evolution. Therefore, humanity has evolved from the behavioral habits of plow technology to the behavioral habits of technology that can experiment in space-time. While technology has transformed the behavioral habits of people, it has also transformed the boundaries of the geography in which they live. Humanity has transformed the technology it has developed into geography. People are no longer concerned with the limits of geography but with the limits of technology. As a result of the transformation of technology into geography, the space economy, which has indirect and direct contributions, is constantly growing. According to the report of Morgan Stanley (2018), the size of the space economy has reached 350 billion dollars by the end of 2018, and this figure is expected to reach 1.1 trillion dollars in 2040. The size of the space economy was predicted to be 2.7 trillion dollars by Bank of America Merrill Lynch (Sheetz, 2017) for 2040. Valuable elements, which have an important place in economic and technological development and were extracted from the Earth’s crust, came to the world with asteroid rains. Some of these elements formed due to the cooling of the Earth’s crust are iron, gold, manganese, cobalt, molybdenum, platinum, nickel, rhenium, osmium, rhodium, palladium, tungsten, and ruthenium. These elements, which will be brought from space, will help people develop more by eliminating the scarcity of scarce resources on Earth. Humanity, which plans to colonize nearby planets such as Mars, will lead to the emergence of an interplanetary economy, as well as move to a new stage in technology. Since resources in space are not scarce, the interplanetary economy will not have to deal with the distribution of scarce resources. Therefore, technology will cause the science of economics to change fundamentally. Technology can be considered as a product of a dynamic process. New knowledge can be developed by reusing previously produced tools, equipment, knowledge, and skills. According to Schmoller (1900), technological development is an evolutionary process that takes a long time. Stating that technology is a single holistic process, Schmoller thought that the technological evolution

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continues from the first hammer to the dynamo machine. According to Schmoller (1900), technological evolution results from humanity’s fortunate circumstances and excellent spiritual ability. As people use old production methods for the technological evolution, the new technique results from the relationship with the old ones. Thus, Schmoller’s idea of technical and economic development is at the center of his analysis of society and social transformation. An essential part of the economic activities of any society is possible with the development of technology. In economic politics, activities used for economic purposes are vital for communities—clear thoughts, spiritual ideas, and technical knowledge guide these activities. Therefore, developing a society requires more than technological development. Along with technological development, societal advances and appropriate institutional developments are also necessary to develop a society. In The Instinct of Workmanship (1964), Veblen regarded technology as a joint stock of knowledge owned by the community. Veblen (1964) put technological change at the core of his analysis. Referring to the cumulative nature of technology, Veblen wanted to explain the link between the development of technology and the cultural and organizational change of societies. Examining the relationship between the development of technology and cultural values and preconditions, Veblen analyzed technology from an anthropological perspective. Technology is the accumulation of knowledge inherited from previous generations of society rather than a personal initiative or innovation. Because of Darwinian social development theory, Veblen’s (1973) starting point is the values of a stable business environment. Veblen also added a socio-economic element to his analysis. He brought to the fore the idea of evolutionary change, which he thought would enable the development of the economic structure. Veblen argued that the multiple interactions of instincts, institutions, and technology determine social behavior. For this reason, according to Veblen (1919), after the industrial revolution, the industry in which technological products emerged in modern society coincides with the nature of humanity. The industrial process became the most crucial element that shapes an individual’s daily life and thought habits. As a result, the individual has learned to think with the concepts formed in technological processes. According to Veblen, technology has become a habit for society due to technical actions arising from natural human activity. According to Veblen (1964), the technological development process is the most crucial element of social change, starting with the individual. The technical actions of society shape society’s structures, rules, customs, and culture. Habitual patterns of behavior and thinking become permanent for individuals and

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society and form habits of thought over time. Therefore, the technology that shapes society’s structures, rules, traditions, and culture becomes an institution for the community. According to Veblen, a change in the industry leads to a material change in society. A material change in society turns into new habits of thought. These habits of thought lead to common behavior patterns over time. In modern civilization, the industry is a product of human creativity. Industrial processes and products are the main factors that shape the daily routine of human life. As a result, as Veblen (1919) stated, humanity has learned a way of thinking that keeps up with technological change. Technology is as much about learning as culture and institutions. Institutions that can change the vital habits of societies can affect the speed and direction of technological change. Technology that affects institutions can also affect the evolution and development of institutions. Therefore, according to Veblen, technology establishes a link between changes as an internal factor. According to Veblen, economic development is human nature, and human tendencies are not just about economic development. Human tendencies determine the beginning of modern industry, social change, technological development, and, more generally, the essence of the evolutionary process. At all stages of social action, human’s natural inclinations in the form of instincts play a very active role. Instincts are human tendencies to act purposefully. These instincts are shaped by human rational thought and intelligence. Instincts form the building block of Veblen’s theories of cumulative causality. Not all people, who act with their instincts, are equally exposed to changing technological conditions. Social segments exposed to less technological change have more difficulty adapting to the conditions created by technology than segments more affected by technological change. For this reason, the mental adaptation of different parts of society to the new economic conditions also differs. Moreover, various cognitive adaptations cause cultural delays. Thus, the same technology has a different development path in other societies and may reveal different behavioral habits. Focusing on the relationship between technology, institutions, and organizations, Joseph Schumpeter integrates an evolutionary perspective with historical analysis. Stating that innovation can be a social phenomenon, Schumpeter said that innovation can evolve the economic system. In Theory of Economic Development (1978), Schumpeter argued that the capitalist economy does show stable development (düzenli bir geliúme). According to Schumpeter (1978), the reason for stable development (düzenli bir geliúme) is the continuous renewal of the economy, thanks to new production methods and goods. New production methods and goods,

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among the main innovations of economic change, are internal economic structure variables. Technology, which plays a crucial role in the development of humanity historically, socially, and institutionally, thus causes an evolution in economic preferences. In other words, technology is the driving force of capitalist growth (Freeman and Soete, 1997). As the application of factors, which are the internal variables of economic development, develops, many economic actors, including business circles, will have to keep up with this development. The resulting change will lead to the development of the entire economic structure. Therefore, innovations become a reason for economic development. Another reason, the entrepreneur is at the center of the mechanisms of economic change, according to Schumpeter (1947). According to Schumpeter, capitalist evolution is based on technological competition between firms. To sustain competition, capitalist firms must increase production with new and more efficient means of production. Firms using new and more efficient technology will increase their average profits, while other firms that fail to do so will have to withdraw from the market. According to Schumpeter, unlike traditionally accepted price competition, this type of technological competition is closer to the nature of competition in the capitalist system. The innovations that are the product of the capitalist system operate the capitalist mechanism and keep it working. Thanks to innovations, the capitalist system is experiencing a continuous process of revolution and renewal. In this continuous renewal process, revolutions and innovations are constantly destroying old factors and creating new ones. This creative destruction is the basis of capitalist development. Every entrepreneur, sooner or later, has to adapt to this development. Endogenous growth theory (Romer, 1994), which emphasizes the dynamic process of technological development, successfully explains this phenomenon. In other words, technology, the engine of capitalist economic functioning, is always very effective in economic decisions. Here, it is helpful to remember five titles that, according to Schumpeter (1978), are the source of creative destruction. The first innovation is producing a product that consumers did not know before or improving the quality of a good used by society. The second innovation is developing a production technique that has not been tried before. The third is the opening of a new market. This innovation situation also includes the entry of any good that exists in another market into another market for the first time. The fourth innovation is allocating a new resource for the supply of raw materials or semi-finished goods. The fifth state of innovation is the industry’s transition to a new organizational order. As can be seen, Schumpeter’s innovation concept does not only cover a technological innovation

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process. Innovation is also the whole of organizational, institutional, and technical factors in societies. According to Veblen (1964), the technological development process is the most critical element of social change, starting with the individual. Marketing theorists are very successful in analyzing the relationship between technologic advancement process and societal change. Marketing theorists use technology-based market segmentation to identify their target customers successfully. It is seen that generations have common economic behaviors depending on their relationship with technology. Individuals divided into generations according to age exhibit similar behaviors depending on technology. In other words, the association of individuals with technology causes individuals to exhibit repeated economic behaviors. These repetitive behaviors are distinctive for individuals in different parts of the world. For example, the baby boomer generation, who experienced 1946-1964, is the first generation to realize the importance of television technology. After the devastating effects of the World War II and the austerity policies, people used television to feel free and make their voices heard worldwide. The legendary 68 generation, the architect of the baby boomer generation, is a perfect example of this. Baby boomers are adaptable, focused, and hardworking. The common feature of the X generation following the baby boomer is that they coincided with a period when technological innovations came one after another. Technological innovations in the 1965-1980 period caused people to be very interested in brands and eager to try their entrepreneurial talents. An uncertain economic structure has made such individuals contented and committed to their jobs. The anxiety about the future they experience due to uncertainty has forced this generation to work hard, make a career, and earn more money. The generation in 19812000 following the X generation is called the Y generation. The people of the Y generation are very optimistic about technology and consumption. Mainly as a result of internet technology, people have acquired multiple identities. This generation’s people immediately want any good for free and immediately consume the good. This generation, which has a passion for speed, has opened the door to a world based on consumption. Generation Z follows Y generation and is seen as a technology-dependent generation. This generation coincided with the aftermath of 2000 when technological change experienced very rapidly in the world. Persons in this generation, therefore, emphasize instant consumption in their economic behavior. It is predicted that all other generations will significantly change their marketing and consumption habits and shape the consumer profile of the future. Generation Z is entirely at the forefront in this regard. Generation Z can easily connect with people worldwide and is

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dependent on technology. People in Generation Z are also impulsive, internet-savvy, creative, and capable of multiple considerations and multiple decision-making. In addition to all these generations, market research companies have recently talked about the Generation C. The Generation C, which includes 18-34-year-olds, is identified with the words “consumer, connected, content, communication, computerized, and clicking” (Hardey, 2011). Those in the Generation C, who use technology a lot, prefer digital communication instead of face-to-face communication. As they accelerate, technological innovations bring trade and entrepreneurial behaviors to the fore more. Technical innovations that make geography unimportant increase the speed and efficiency of information sharing of the Generation C. Generation C, which uses much digital information in their consumption behavior, has become the largest consumer group. Behavioral repetitions related to technology make itself felt quite a lot in the Generation C. In other words, technology is more influential on the economic personality today than ever before. Persons acquire habits and behavioral repetitions in their economic behavior, depending on the transformative power of technology. Behavior patterns created by technology make the individual’s behavior specific in uncertainty. Technology, which is an integral part of the development of humanity, is also an essential part of economic personality.

Institutions Humans are institutional entity. Acemoglu and Robinson (2012) described the importance of institutions quite successfully, starting from the city of Nogales, which is divided into two by a fence. In the US side of the town of Nogales, the average income per household is about $30,000. The population in the city is relatively healthy, life expectancy is high, and most of the population is over 65 years old. State-provided electricity, telephone, sewerage, and road networks connect to other cities. People do not complain about the safety of life and property because they can get adequate public order services. They can vote to elect mayors, congress members, and senators. Under democratic conditions, they have a wellserved municipality on average. The part of Nogales city which is within the borders of Mexico that is very near is known as Nogales Sonora. Those in Nogales Sonora enjoy well-being slightly above the Mexican average. However, the average income per household in Nogales Sonora is onethird of that in Nogales. Few in Nogales Sonora have a high school diploma. Public health is inadequate, life expectancy is low, and public order is terrible. The crime rate is very high and the functioning of the

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legal system is very backward. Those in Nogales Sonora, where democracy is not fully functioning, do not hesitate to risk their lives to cross the US border. Institutions are the reason for the deep differentiation between these two cities, which have the same ancestors, food, music, and culture. Nogales benefits from the economic institutions offered by the United States. Economic institutions enable the people of Nogales to choose their profession freely, get the education they want and develop themselves, investors can invest in the fields they want, and qualified workers get higher wages. Political institutions cause democracy to function smoothly. However, Nogales Sonora does not have such institutions. From this perspective, institutions include elections, market, and firms. Institutions can have an unlimited number of forms. Laws, ethical rules, university regulations, customs, holidays, hospitality, and customs are some of these forms. Institutions can often be seen as rules and constraints created by people that shape the interaction between people (North, 1990). For example, law is such an institution. Commons (1936) referred to an institution as a collective unity that controls individual behavior and constrains their development and diffusion. As mentioned before, according to Commons (1931; 1936), law is a fundamental institution. An economic individual in any society is a legal person or citizen formed by artificial institutions. Therefore, economics should treat the individual as a citizen and a member of the institutions of society. In economic theory, Commons (1931; 1936) is against the pleasure-seeking individual. While institutions draw the framework of the economic behavior of the individual, moral and legal institutions determine the rights and duties of individuals. Institutions, which can be defined as collective actions, provide security, comfort, and freedom to individuals while protecting the freedoms of other individuals. For this reason, legal institutions with high enforcement power, such as the law, are indispensable. The behavior of individuals takes place in line with the rules of law. While people direct their behaviors with their beliefs and free will, laws that draw the limits of the individual’s free will are necessary. According to Coase (1988), decision-making units and firm managers tend to seek and create new opportunities with the structuring of markets by law. Thanks to the power of legal regulation, a predictable and game-rules framework are presented to decision-makers. Thus, the market is where goods and services are bought and sold, and corporate transactions are made. These institutional transactions encompass economic activities’ order, structure, and predictability. The market, then, is an institution that exists to facilitate exchange. Persons can easily make economic decisions in the market thanks to their behavioral habits. Veblen’s definition of the

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institution in The Theory of the Leisure Class (1973) is remarkable. According to Veblen (1973), the institution is the habits of thought and behavior that are widely accepted in a certain period. From such a perspective, institutions can be viewed as an option set or a collection of values. While laws, constitutions, contracts, and property rights can be counted as institutions, morals, traditions, ethical rules, taboos, techniques, and ideologies are also institutions. In The Instinct of Workmanship (1964), Veblen stated that the anthropological origins of the individual should be examined. Individual are affected by time, culture, and the institutions, in which the culture is located. The stability of the characteristics of social races from the past affects economic and social developments. In the Principles of Economics (2013), Marshall’s analysis covering the historical evolutionary process considers the central issue of economics as an organism. Marshall emphasized that institutional arrangements result from habits that operate differently. Different social characters direct the political arrangements in the society and cause it to be determined in its economic life. For example, various forms of freedom lead to different economic conditions. Thus, the different economic conditions cause the differentiation of social structures. According to the German historian school, the pioneer of institutionalism, every society has its unique conditions in the historical process. Institutions can only find the value they deserve when economic facts are analyzed from a historical point of view. According to Schmoller (1900; 1904), developing industrialization can increase the welfare of some societies noticeably and make them stand out compared to other communities. But industrialization also has adverse social effects. For example, such effects include unemployment, housing problems, unplanned urbanization, the collapse of the family structure, hunger, social deprivation, exploitation, and the emergence of a new proletarian class. According to Schmoller, if the national economy is redesigned based on science, then appropriate institutions can be created to intervene in such effects. According to Menger’s (1892, 1963) analysis on organic institutions, those organic institutions include language, state, law, division of labor, market, and money. According to Menger, purposeful activities that will enable individuals to meet their needs better may reveal structures that were not previously thought of at the social level but that are positive. Persons with relatively higher intelligence and skill in society can initiate the formation processes of organic institutions by finding different ways to meet their personal needs. The fact that other individuals follow the same paths causes the best way to meet the requirements to become a social habit, that is, its institutionalization. This process works naturally and

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spontaneously, without legal regulation or government influence. In other words, institutions can arise from a natural and complex process that operates spontaneously. That is why language, state, law, division of labor, market, and money are organic institutions. Therefore, these institutions cannot be created due to human calculations or arrangements. Institutions restrict and control everyone as a product of joint activities (Mitchell, 1949). For this reason, individuals repeat the behaviors shaped by institutions every time. Persons who repeat the behaviors required by the institutions thus have a safer and more stable living space. It is possible to see this process in Veblen (1898). Veblen (1898), who opposed the idea of a person pursuing purely economic interests, argued that social and cultural structures shape human activities due to an evolutionary process going on for centuries. According to Veblen (1964), humans have economic instincts, which are the stable sources of human nature. These basic instincts make people human and are relatively stable. Depending on the society in which people live, various lifestyles, habits of thought, and behavior emerge from these steady cores. All these different forms and habits shape unique institutions. Thus, institutions and individuals complement, strengthen, and maintain each other. As Acemoglu and Robinson (2012) reported, the economic advantages offered to individuals by economic institutions in the city of Nogales are more than those in Nogales Sonora. On the other hand, because of their strong relationships, institutions change when people’s thinking habits change. As Veblen (1973) points out, today’s conditions shape future institutions. Schumpeter’s (1978) institutional view is similar to this idea. According to Schumpeter (1978), the formation of the institutional change process depends on rationality, ensuring the fulfillment of material life’s realities. This rationality is above the social and economic structure. For example, the factor that brought about capitalism was that such rationality acted and led to the emergence of institutions such as private property and freedom of contract. Uncertainty and institutions change together. During this change, people have difficulty making healthy predictions. As Knight (1921) pointed out, people cannot predict everything that might happen in the real world. Thus, the possibility of making decisions in uncertainty can be infinite. In such a situation, individuals rely on the guidance of institutions to find out how they should behave (Smith, 1994). In other words, institutions are not needed in a world without uncertainty. Therefore, people benefit from institutions to reduce the effect of uncertainty. For example, Hutchison (1984) attributed the existence of money and monetary institutions almost entirely to uncertainty. As it can be remembered,

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Keynes, in his General Theory (1981), also used money as a solution to uncertainty. Individuals hold money because of their degree of confidence in the future and the existence of speculation. When confidence in the economy rises, the money held by individuals decreases. In contrast, in the opposite case, individuals will want to keep more money as speculation in the economy will increase. According to Keynes, the animal instincts of individuals will be dominant in the uncertainty that arises due to economic collapses such as economic crises. When speculation increases, individuals tend to engage in selfish and detrimental behavior to the economy, while investors display headstrong and unruly behavior. All these behaviors can cause the economy to get worse. In situations of such a significant uncertainty, an actor who thinks about the economy in general and does not put his interests before the interests of the economy is required. Such a headstrong, maverick, and non-arbitrary institution could increase its spending and help the economy recover. According to Keynes, this institution is only the government. Thus, the government is Keynes’ second solution to uncertainty. In The Great Transformation (1944), Polanyi revealed the importance and impact of the state institution on the economic structure. Knight (1921), Coase (1988), and Smith (1981) also accepted that uncertainty and institutions evolve together in economic thought. The institution of competition in Wealth of Nations (1981) is the only institution that can enable each actor with different expectations in the market to pursue their interests in uncertainty. Smith states that the idea of the capitalist firm does not like competition, so they are looking for ways to prevent competition. For anti-competition efforts to fail, Smith recommends that the legal system be organized and developed to ensure equal opportunity. According to Smith, there is a close relationship between the demands and behaviors of people, who are their judges, and institutions. For this relationship to be sustainable, there is a need for a law that puts an end to people’s fear of stockpiling and establishes freedom. In a capitalist market, the invisible hand and errors control the competitive behavior of the individual in the market. These two factors also ensure the exchange of public goods in a healthy competitive environment. As individuals pursue their interests, competition in the market constantly disciplines them. If every actor in market believes that they are equal with other players in the market thanks to competition, then the market is functioning well. As uncertainty decreases in a well-functioning market due to free competition, actors’ confidence in the market will increase. Otherwise, since the competition in the market will not work well, uncertainty will increase, and the actors’ trust will decrease. Therefore, monopoly trends will arise in the market. According to Smith, liberal

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regulations are a tool to minimize monopoly tendencies. Thus, laissezfaire leads to the free functioning of competition. In other words, the free functioning of competition also contributes to the transformation of institutions. If there is no intrusive system, then new institutional arrangements compatible with individuals’ demands and calm their minds will automatically come into being. An environment that allows such regulations to occur spontaneously is a precursor of new institutions. It is possible for individuals to predict the future better and to open their future horizons with the emergence of new institutions. With this expression, according to Smith, institutions are the natural result of man’s relationship with his environment. Close to Smith’s thought, Hayek argued in his economic analysis that institutions are formed spontaneously. Hayek’s (1952) approach can also be called social engineering. According to such an approach, the idea that institutions such as the market, money, and law are pre-designed by certain authorities cannot be accurate. Institutions do not arise under the conscious control or mind of people or a group. Institutions are formed involuntarily as a result of the behavior of individuals. Knowledge is not voluntarily stored in the minds of a single person, group, or government executive. Knowledge is an organic process. It occurs scattered, incompletely, or inconsistently in the minds of individuals, involuntarily in their behavior, habits, and understandings. Facts such as the market, money, morality, and language are not products that have been pre-designed by human hands. The civilization arose as a result of the accumulation of individual knowledge. But civilization is not the result of the conscious and explicit association of this information within any single brain. Civilization is an expression of symbols people use without knowing exactly what is in their habits, institutions, tools, and concepts. As it can be understood, there is a strong causal relationship between the institution and the individual. Hodgson (1988; 2000) also expressed the solid causal relationship between the institution and the individual. Hodgson’s (1988; 2000) evolutionary perspective emphasized the importance of some aspects of strategic thinking and expresses the weight of routine and habit in behavioral formation. According to Hodgson, parts, and wholes, individuals and institutions mutually constitute and determine each other. None of the individuals and institutions has an analytical priority. Society cannot exist without individuals and individuals cannot precede social reality. Individuals both form society and are formed by the community. Therefore, the causal relationship between the individual and society is both bottom-up and up-down. This mutual exchange is neither one-way nor one-sided. This change results in the evolution of behavioral habits of people, mental attitudes, or values

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transferred from generation to generation. In line with North’s (1990) approach, economic activities are a playground if we define institutions as the rules of the game. Individuals, firms, companies, and organizations are players in this playground. All these players need rules, or behavior patterns, to follow during the game. Institutions are game rules that all players must repeat in every economic game. Therefore, institutions are common behavioral patterns. The behavioral habits required by each institution are the habits expected from each individual in society. Undoubtedly, all these common behavior patterns have to be repeated. A behavior created by any institution if only once, could not become institutionalized and become a decisive behavior pattern for society. Persons have to repeat the behavioral habits required by the institutions in the communities, in which they live. In other words, institutions cause individuals to acquire behavioral patterns. Behavior patterns created by institutions make the individual’s behavior specific in uncertainty. Therefore, institutions are an essential part of the economic personality.

Income Humans are monetary entities. Without income, the economic thoughts of the individual cannot be transformed into economic behaviors. People have to have an income to meet all their needs. In other words, economic behavior is a necessary consequence of human nature. For this reason, income is much more important than the other eight factors that make up the economic personality. The emergence of the needs listed by Maslow (1943) and the necessity of meeting these needs are a requirement of human nature. People should therefore have a job, where they can generate income. However, the income obtained should also be repeatable because systematically recurring needs throughout life can only be met with regular income gains. Therefore, working for income is a large and essential part of human behavior. As mentioned above, according to Veblen (1898), human activities are evolving, and social and cultural structures shape this. Humans have economic instincts, which are stable sources of human nature. Workmanship, one of these instincts, is of fundamental importance for Veblen (1964). Throughout history, people have been working to turn things into use. The primary purpose of all industrial progress is to better perform the work activity. Almost all other motives of people having different instincts are related with the work instinct. So much so that it is the instinct of work that saves humanity from brutality and brings it to the current level of society. In some periods, the work instinct can take the form of a moral self-esteem motive. However,

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work ultimately emerges as the determinant of people’s possibilities in solving realistic problems. The work instinct is also very influential in developing culture and spreading other human works. Therefore, work is also a behavioral habit for human. Every working person leaves their home and goes to the workplace every day. They earn income by exhibiting the behavioral patterns required by their profession. A barber repeats the behavior of cutting people’s hair, while a teacher repeats the behavior of lecturing. People’s occupations are the name of behavioral patterns. People participate in production and gain respect and honor thanks to the instinct to work. In the modern economy, working people spend about a quarter of their time at work (Webley et al., 2002). The spread of systematically repetitive work behavior over a long period of human life shows that work is not just a source of income. Work is a tool to realize the sense of being active, creative, controlling, or dominating that people need. In the study of Morse and Weiss (1955), the decision of the participants to work and retire is examined. Four hundred one employees were told they inherited an inheritance high enough to have a comfortable retirement. Eighty percent of the participants in the experiment stated that they would continue their work. Working in a job helps people eliminate the psychological problems they may experience. In other words, work is a fundamental economic behavior for human psychology. Working people use their time more regularly and efficiently than the unemployed. Working people regularly gain experience and acquire social skills due to their work. Depending on the work they do, people develop their creativity by working and increasing their sense of superiority. People, who participate in the production of anything, have a much higher sense of purpose than those, who are unemployed because they join in helpful action. Almost all work is a source of mobility because it requires physical or mental effort. A person’s occupation is an essential indicator of his status in society, as Malow (1943) emphasized. Moreover, the profession of people gives status to both themselves and their families. For this reason, the study also provides the bond between society and family. As Earl (2005) stated, work behavior structures time, provides opportunities for social relationships and gives the person a sense of identity. People, who do not work will not only lose their status and identity but also their self-confidence and self-esteem will decrease. Work enables money and resources to exchange hands between households and firms. Employees work by supplying their labor; in return, they receive money from companies for this labor. With their income, they buy the goods and services the companies offer. The amount purchased does not provide the full employment required by Say’s law. However,

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work constitutes an essential part of the activities that form the center of economic behavior. In other words, work, the equivalent of income, plays a significant role in transforming economic personality into behaviors. As Keynes emphasized in General Theory, people use money to meet their present and near-future needs. People need money they can save for installment payments, interest payments, and to use when they are in distress. In this way, they are prepared for the negativities that may arise. As they move up the hierarchy of needs, people also use the money for their needs, such as achieving success, earning, and gaining public appreciation. For example, according to Veblen, people may indulge in conspicuous consumption due to seeking status. As Shefrin and Thaler (1988) and Thaler and Sunstein (2009) analyzed, people can save for various purposes thanks to their income. Saving behavior depends on personal economic conditions and economic expectations (Katona, 1975). People want to obtain a stable amount of consumption throughout their lives because they have a certain standard of living. As Veblen (1973) stated, the standard of living is a state of habit. Since people’s income can change over time, they want to strike a balance between the money they can spend immediately and the amount they save. Income increases due to work experience, pay rises, and promotions. From a person’s birth, their consumption also continues to grow. Incomes are generally expected to increase during the working period and decrease during the retirement period. When people retire, they want to increase their declining salary with the money they save. As Piketty (2013) emphasizes, people give importance to saving so that their welfare level does not change during their old age. Thus, people who think they have an income-consumption balance feel better than those who do not save. Because people want to be able to manage their cash, to feel safe, to be able to leave a legacy, and not to be poor in the face of the uncertainty of the future. Transactional and precautionary money demand, also included in Keynes’ economic analysis, is a perfect example. People think about future payments, such as installment payments and interest payments. Therefore, the money people achieve by saving does not only provide purchasing power. Money is seen as a reward for people’s success and society’s appreciation for their service. The experiment of Shefrin and Thaler (1988) is quite striking since it shows the measure of the dominant propensity to save. Shefrin and Thaler (1988) told experimenters that they would receive $2400 from an unexpected place just once. They then asked the experiment participants how much of this $2400 they could spend. In the case of the first expense, $2400 is a new bonus the following year that the business will give out in monthly payments of $200. In the first spending case, the median subject

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said they would spend $100 per month, consuming a total of $1200. The money saved is $1200. In the second spending case, $2400 will be deposited in one lump sum in the first pay month. In the second case, the median subject reported spending $400 immediately, spending $35 each month for the next eleven months. Thus, the total consumption of the participant will be $785. Savings is $1615. In the third case, $2400 will be deposited in an interest-bearing time deposit account over five years. Subjects will receive $2400 and all accumulated interest. Therefore, the present value of $2400 is preserved. The median response of the respondents in the third case is that they will not spend any part of the incoming money this year. In other words, when the time to get the money is too long, the subjects pay more importance to saving in comparison to consumption. According to post-Keynesian economics, this is quite understandable because money is a vital trust tool for people. Time has an irreversible property. For an economic activity such as production, a historical time is necessary. A certain amount of time must pass for any economic product to emerge. Economic decision units make specific commitments in this period before production results emerge. The commitments of decision units are primarily monetary. Agreements incorporating commitments are about money. Thus, money and contracts become inseparable. Money connects the past and the present and the present and the future (Davidson, 2011). Since the past is a given and cannot be changed and the future is uncertain and unknowable, money intervenes and connects the past and the future. Having such a feature, money is significant for decision units and the entire economic system. The importance of the role of income in the formation of economic behavior can be seen in Fisher (1930), Keynes (1981), Friedman (1957), Duesenberry (1949), and Modigliani and Brumberg (1954). For example, Fisher (1930) divided people’s lives into two periods and analyzed the decisive role of income, wealth, work, and savings in human life. According to Fisher (1930), households have an income stream throughout their lifetime and prefer a consumption stream appropriate to their lifetime income. Therefore, the income and consumption flow of the households act in harmony with each other. In other words, as an indicator of economic personality, the balance between income and consumption has a systematic repetition. For example, households may consume more or less than the income of the relevant period. If they consume less and save more, they will use these savings for higher consumption. If they consume more, they will save negatively in the present period. And as a result of this negative saving, they will reduce their consumption in the next period. In General Theory (1981), Keynes emphasized that individuals have

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consumption habits. To acquire consumption habits, individuals must have systematically repeated a consumption behavior and an income to enable this behavior. According to Keynes’ analysis, individuals cannot adjust their consumption to changes in their income in the short run due to their consumption habits. An increase in income can only affect repeated economic behaviors in the long run. As a result of a long-term income increase, an individual who meets most of his needs and approaches satisfaction can increase his savings. Milton Friedman’s (1957) permanent income analysis, like Keynes’ (1981), emphasizes that individuals have repeated consumption behavior. According to Friedman (1957), consumers do not want their consumption to fluctuate regardless of their income and want to experience a normal consumption process throughout their lives. Therefore, they want to avoid uncertainty. For this reason, there is a very close relationship between the long-term consumption of consumers and their long-term income. In his analysis using social psychology, James S. Duesenberry (1949) revealed that individuals want to adapt to the consumption patterns of the social groups they feel they belong. The individual shapes his economic personality by systematically repeating the consumption behavior required by his perceived social status. Therefore, Duesenberry (1949) emphasized that consumption has a social character. With a certain income level, consumers create a certain standard of living and a social stance for themselves. According to Modigliani and Brumberg (1954), individuals have a habitual consumption level and want it to remain the same throughout their lives. The habitual consumption level, an indicator of consistently repeated economic behaviors, shows that people want a balanced level of welfare in every period of their lives. For this reason, people aim to eliminate the effect of fluctuation in their income on consumption throughout their lifetime. Therefore, as Campbell and Mankiw (1989) mentioned, income is a constraint on welfare. In Katona’s (1975) analysis on economic behavior, income is also considered a constraint. Katona (1975) based his analysis on economics, personality, and behavior. Income is one of the economic variables in the study, in addition to recession, inflation, unemployment, and interest rate. And as an indicator of economic condition, income is a constraint of economic behavior. Thus, the economy in Katona’s (1975) analysis shows the opportunities and economic level held by individuals or households. Personality includes lifestyle, internal and external control of power, and expectations. The economic behavior in the analysis consists of investment, savings, purchase, and sale of goods and use. Economic conditions and personality traits affect the consumer’s or entrepreneur’s economic behavior. Therefore, both the personality and income of

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individuals shape their economic behavior. According to Katona (1975), there is also feedback from economic behavior to economic conditions. For example, consumers’ spending and saving decisions cause economic changes. Economic conditions and economic behaviors affect each other, forming individuals’ repetitive economic and behavioral gains. Since individuals in an economic environment are guided primarily by their motives and attitudes, Strumpel (1974), with a similar approach to Katona (1975), examined the relationship between income and economic behavior. In Strumpel’s (1974) suggestion, economic environment and personality traits are determinants of subjective well-being. Subjective well-being here refers to the satisfaction of individuals in matters such as consumption, work, marriage, and living standards, as well as the income they earn. In Strumpel’s (1974) analysis, income is an essential economic constraint. According to Strumpel (1974), the economic environment, personality traits, and subjective well-being affect satisfaction with social issues and problems. In other words, the economic behavior in Strumpel’s (1974) analysis is more comprehensive than Katoya’s. Like Strumpel (1974) and Katona (1975), Van Raaij (1981) analyzed the relationship between economic environment, personality, and economic behavior. Van Raaij (1981) provided important information about the role of income in formation of economic behavior. According to Van Raaij (1981), there is a reciprocal relationship between personality traits and economic environment perceived by consumers and entrepreneurs. Personality traits such as mental abilities, goals, objectives, values, and cognitive styles can affect the economic climate of individuals. Economic environments, including income and income distribution, can affect economic behavior. In other words, there is feedback between the characteristics of individuals that can cause behavioral habits and income that affects economic behavior. Individuals use their personal experiences and mass media in their economic environment and shape their economic behaviors by evaluating the information they perceive from the environment through communication tools and personal experiences. For example, while consumers experience price increases caused by inflation, entrepreneurs experience whether interest rates are suitable as investment loans. Thus, the economic environment affects economic behavior hierarchically. In other words, the information perceived from the environment is evaluated, and the evaluated information leads to purchasing or saving behavior. As a result, a certain level of income saved, borrowed, or earned by working causes a certain standard of living in any economic environment. Maintaining a certain standard of living, which turns into habits, also requires a certain income. Income earned by working transforms the individual’s economic

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thoughts into behavioral patterns in the uncertainty of a specific economic environment. Thus, the economic behavior of the individual becomes definite. Income, necessary for maintaining human life, is the most crucial part of the economic personality. Economic behavior patterns such as systematically repetitive work, consumption, purchase, savings, and financial investment are closely tied to people’s income.

CHAPTER 5 ECONOMIC PERSONALITY, UNCERTAINTY, AND ECONOMY

The economic personality is quite successful in explaining the real-life economic behavior of individuals. A person is born with genes from a mother and a father in any geography. He lives his childhood in a family of a certain income level. Influenced by the family’s religion and culture, he receives a certain level of fundamental education in a specific geography. He gets a job that generates a certain income within his country’s institutional and economic structure. Thanks to his certain income level, he realizes his economic preferences. For example, when I go to any patisserie, I do not want to order only rice pudding. It is a requirement of my economic personality. Such a behavior is not rational for a Homo economicus. It does not matter whether the price of rice pudding is higher than other desserts or if there is another dessert that is more popular than rice pudding. These alternative desserts are the options I would like to choose only when rice pudding is not available. Among these alternatives, of course, there is a specific sequence required by my economic personality. But, in any country or anywhere within the country, my first choice for dessert is rice pudding. The result is that the economic personality and Homo economicus are compatible in terms of the consistency of preferences. A Homo economicus should also be consistent in his choices because of his behavioral pattern. The success of an economic personality in explaining the economic behavior of any individual in real life is his consistent behavior that has been put forward as an assumption. The factors that constitute the economic personality of people in real life yield consistent behavior patterns. Thus, the uncertainty in the individual’s mind disappears, and the individual’s behavior becomes predictable. Behavior patterns formed by the economic personality are valid for each person. For those who know him, a person can be stingy, generous, thrifty, a meat lover, a wine lover, successful in financial transactions, entrepreneurial genius, etc. All of these adjectives are examples of behavior patterns. For example, we remember a neighbor with

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his famous stingy behavior because our neighbor systematically shows us these behaviors, just like in a well-known story. The stingy man lives in any geography of any country in the world. This stinginess has extensive and fertile soils. This man, who is very hardworking and handy with housework, knows about construction work enough to build a tiny house. He does all the jobs that need to be done by someone else to save money. Therefore, he has saved his money rather than spent it, and this accumulation continues to increase daily. He also pays attention to converting his savings into various investment instruments such as foreign currency and gold. His stinginess is so advanced that he does not want to give a share of his savings, even to his closest relatives. When he reaches the age of ninety after a long life, he naturally becomes unable to meet his own needs. When his body weakens, he has to be hospitalized. As his health deteriorates, he has to tell his children about his savings at home. Because he forgot or didn’t want to give money in fact, the man wouldn’t tell his kids exactly where the money he saved up was. Still, his children find the money. However, the gold that the man has accumulated is inside the walls he has built in the house’s garden. He tells his children that they can get gold. But the children can’t find the gold, and they keep looking. We all know a person, who looks stingy. Or the economic personality of people who do the professions we come across daily is not based on assumptions. For example, a person living in London, England, and working as a barber earns an average of 18-24 thousand pounds per year. This barber in London works six days a week, following the institutions’ regulations. As required by the culture he belongs to, he makes his breakfast with the foods he fits on a single plate before going to work in the morning. He usually drinks milk tea or orange juice with his fried food. At work, he exhibits the same routine behaviors every day. He consumes, saves, or invests in proportion to his income in return for his work. He probably buys consumer goods suitable for the culture he grows up in from the markets he deems most appropriate. Since he is always together with his friends or relatives, he drinks something he likes in the evenings with them. In America, a barber earns an average of 43 thousand dollars annually. A good barber earns around $52,000 a year in New York. This income finances the barber’s life in New York. Before going to work in the morning, he still prefers fried foods besides filtered coffee for breakfast. He may not have very healthy eating habits, as required by the culture he belongs to. In his workplace, he cuts hair of those, who want their hair cut, according to their cultural habits. He determines working and vacation days by institutional regulations. Again, he goes to bars where he drinks his favorite drinks with his friends, whom he spends time

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with. As a result, every person with or without a profession exhibits the behaviors his economic personality requires. Thaler and Sunstein’s (2009) Save More Tomorrow automatic contribution program was developed closely related to the five psychological principles that underlie human behavior. One of these psychological traits is that people hate loss. Actually, people hate seeing a drop in their paycheck. Besides that, many people want to save more; they plan but never realize these plans. According to the third psychological principle, most people think about starting a diet but delay it. Inertia plays an essential role in human behavior. And according to the last principle, people necessarily have a dream of money. People perceive, internalize, and reflect these five psychological principles differently. Therefore, each individual has a different economic personality. Not everyone may want to participate in a participation program that will save more. At the beginning of the Save More Tomorrow program, 10% of employees refused to meet face-to-face with a financial advisor. Twenty-five percent of employees agreed to save the recommended five percent more. The Save More Tomorrow program includes employees who do not accept this offer. Some employees decided to participate in the program and then chose to leave. Therefore, people decide to join, stay in, or leave such a program according to their economic personality. We know that, besides people working in various professions, there are also people with a very high level of creativity. While Steve Jobs continued his high school education in California, he also attended training at Hewlett-Packard’s headquarters. Since he was so successful, he was accepted into Hewlett-Packard’s summer internship. After completing high school, Jobs wanted to continue his education at Reed College. However, he left his university education halfway because he thought he was a financial burden on his family during his university years. Despite dropping out of university, he continued attending classes he wanted to take. Having accumulated an excellent knowledge of calligraphy in the classes he attended, Jobs stated that he owes the success of his creativity to calligraphy. Working in various companies, Jobs founded Apple in 1978 with Wozniak. Apple exhibited at the Personal Computing Festival. Later, he decided to take an investing partner in the rapidly rising Apple company. Jobs, whose business grew with the investor, started to sell products that shaped the market. When he left Apple in 1985 for commercial failure, he again did what he knew best. He produced products with his company called Next and followed his creativity. In 1996, he sold his Next company to Apple for a large sum and returned to Apple. At Apple, Jobs’ creative ideas helped the company rise again.

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Some people’s economic personalities are at the forefront of creating, using, or selling financial instruments. In 2008, the article titled “Bitcoin: A Peer-to-Peer Electronic Cash System” by Satoshi Nakatomo was sent to a mailing group. The cryptocurrency Bitcoin was launched based on the ideas in this article. When Bitcoin was first announced, people were surprised. Then, it caught the attention of market players in all countries and quickly became a financial instrument known to the world. Bitcoin, the value of which in the market increased very rapidly, first reached a total of more than 300 billion dollars. People have attributed value to Bitcoin as long as they avoid financial transaction costs by using Bitcoin. Based on an impressive mathematical theory, Bitcoin gains importance as a virtual asset as it is seen to be valuable. When the value of one of the Bitcoins, which followed a fluctuating course, exceeded $ 60 thousand, some market players stated that they should be cautious with Bitcoin. Warren Buffett likened Bitcoin to a slot machine. One way or another, Bitcoin, a perfect example of financial creativity, along with all its altcoins, has reached enormous value today. By examining Bitcoin, central banks understood that a more secure and effective digital currency was needed and they started working on this issue. However, some practices, such as financial innovation, are better suited to Warren Buffett’s critique. For example, when Charles Ponzi decided to immigrate to America in 1903, he had a lot of money in mind. He moved to New York, following the urge to make a lot of money due to his economic personality. He had no money and didn’t know anyone in New York. Ponzi worked for a while in newspaper delivery, as a milkman, and various jobs on ships. Finally, he settled in Boston in 1917. While working on launching an export magazine here, he came across mailing coupons. Ponzi’s drive to make a lot of money had paid off in mailing coupons. Because postal coupons were sold at different prices in each country, a one-dollar coupon in the United States could be sold for up to ten dollars in another country. He could make a lot of money by buying postal coupons in a cheap country and selling them in an expensive country. Ponzi opened an office to do this job. With a successful advertising campaign, he convinced people of the high earnings they could achieve in 45 days. Ponzi’s dream came true when he distributed the first profits to the investors. Queues formed before Ponzi’s office, where he was doing his nonexistent job. Ponzi used the money of later depositors to pay the profits of the people who made the first deposit. Thus, he signed a creative financial innovation. For the business to work, new people had to invest money constantly. People who wanted to make money the easy way didn’t care much for how the business went because they took their profits, as did the “gold rushes” in

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the 1850s. Ponzi had invested in these aspects of greedy people. When he was arrested for fraud and forgery, his office only had sixty-dollar stamps. After his lengthy prison sentence, he again did similar work with postal coupons in Florida, but without success. Ponzi developed the pyramid system, which is well known today. Therefore, also Ponzi, a very extreme example, has an economic personality. All these examples and the behavior patterns of people in real life that we can think of take place in uncertainty. All these explanations show how successful the economic personality theory is in explaining the economic behavior of individuals in real life in uncertainty. From a Bedouin in the desert to an Inuit in the Arctic, from a man working in any job in Manhattan to an astronaut on the space station, all individuals must have an economic personality.

Being Brave in Economics A rational person, who exhibits his economic behavior in an economic environment without an uncertainty, can have information that prevents him from making systematic mistakes. Thanks to this information, the rational person avoids systematic errors, makes the best economic decisions for himself, and systematically repeats consistent behaviors. Mainstream economists are so confident in the results of the behavioral pattern they attribute to Homo economicus that these economists demonstrate the boldest approach in economics. No one or no school of economics can be compared to established economics in being brave. Such boldness cannot possibly be found in any other social science. On this subject, it is helpful to recall what I wrote before. Ricardo’s comparison of propositions produced in a laboratory devoid of time and space with propositions in physics is quite daring. Because of this boldness, James Mill and Ricardo think that the consequences of economic propositions are as precise as the gravitational principle in physics. As bold as these economists are, Senior (1951) believed that political economy should reason from assumptions rather than facts. According to Senior (1951), the results of political economy, like geometry, are valid only in the abstract. Senior (1951) stated that the wage and profit theory and the gravitational principle are comparable. According to Cairnes (1965), an approach close to the astronomer’s method is required to understand economic events. The economic proposition will achieve sound and valid conclusions only with such an approach. Cairnes (1965) emphasized that, in this way, economic theories will resemble perfect theories as in physics. According to Mill (1992), one of the essential milestones of mainstream economics, getting closer to reality in theory means getting closer to reality in real life. Jevons

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(1970) accepted the effect of all future events on individuals as if they were today. According to Walras (1985), general equilibrium equations are similar to universal gravitational laws. Irving Fisher, who believed in the power of established economic propositions and took his courage from these propositions, did not hesitate to explain how well the stock market worked until the day the Great Depression in 1929 began. Lucas (2003), on the other hand, was even securing the future with incredible courage. Lucas goes so far as to declare that he has forever solved the problem of preventing depression, our main economic problem. In economics, which is a social science, Lucas needed a hardcore to calculate the future and solve potential depressions before they even occur. It was Popper (1957), who presented the hardcore to brave economists. These familiar examples showed that other economists lack the immense courage of mainstream economists. Keynes, who made a great revolution against the established economy after the 1929 crisis, designed the General Theory (1981) as a normative theory. Realizing the effect of uncertainty in economics, he sought a solution to prevent uncertainty and produced a short-term theoretical approach. By saying, ‘we are all dead in the long run,’ he avoided comparing his theory with the laws of physics. Along with Keynes, Knight, Shackle, and Hutchison are also economists, who understood the extent of uncertainty well but did not compare their theories with the theories of physics. Simon’s (1976) view of the propositions of mainstream economics is wise and remarkable. Simon (1976) stated that it is desirable that classical economics can draw strong conclusions from a few a priori assumptions with little need for empirical observation. However, right after that, he said, ‘unfortunately, we have to accept the world as it is.’ According to Simon, as economics has moved from static to dynamic, its uncertainty handling became more apparent. As economics develops theories of the business cycle, growth, dynamic investment, innovation, and technology, the way economics understands uncertainty must change. According to Simon, uncertainty is not in the outside world but in the perspective and mind of the individual. Mainstream economics is concerned with rational behavior in a world with uncertainty. A real-life person cannot accurately predict the future. According to Simon, a person who does not know the future cannot act rationally. People can only adopt a rational choice procedure for their future predictions. Therefore, economists should examine the procedure used by people, who want to deal with uncertainty. According to Simon, economists should expand their horizons for such a study because uncertainty does not require only an estimation procedure. It also requires actions that reduce uncertainty or make selection results less

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dependent on uncertainty. These actions include obtaining data that will improve forecasts, buffering forecast errors, expanding choices, and obtaining results that are not dependent on competitors’ behavior. Simon states that a bounded rational individual can be freed from uncertainty with these actions listed. Thus, Simon’s analysis resembles that of Keynes. Both economists are looking for a way to reduce or eliminate uncertainty. But Simon’s courage to challenge the full rationality of Homo economicus differs from that of Keynes. Simon’s courage showed the place of uncertainty in behavioral economics. However, some behavioral economists, who criticize established economics, think their propositions should be close to the approach of mainstream economics. For example, as Jean Tirole (2012) clearly stated, theories with normative implications and assumptions have a limited framework. However, behavioral economists argue that experiments that will allow normative analyzes to be carried out should be done. This approach emphasizes how close behavioral economics is to established economics regarding uncertainty thinking. Diamond and Vartiainen (2012) emphasized the long-term integration into mainstream economics. On the other hand, Veblen’s institutional economics thought expands with the contributions of new institutionalists. Since the new institutional economists prioritize the bounded rational individual, it is closer to the behavioral approach, unlike the neoclassical (North, 1991). In other words, institutional economics does not agree with the method and propositions of established economics (Myrdal, 1990; 1978). The Homo institutional individual makes his choices in uncertainty according to his bounded rationality and habits. The intellectual conflict of being close to the mainstream theory caused by Myrdal leads institutional economics towards a theory that closes the gaps of neoclassical economics. Thaler’s (2000) explanation of the transformation of Homo economicus before the 2008 crisis is as interesting as Simon’s (1976) approach. However, Thaler went further than Simon and provided excellent foresight and accurate direction. Thaler predicted that, about seven years before the 2008 crisis, Homo economicus, the mainstay of the powerful and unrivaled mainstream economics, will evolve into Homo sapiens. According to Thaler, descriptive economic models will increase their explanatory power by basing their economic agent on more realistic concepts. The rational expectations hypothesis, brought to the fore by economists such as Muth and Lucas, made the individual in economics hyperrational. In such a theory, Model A will do better than Model B if Model A’s agents are more intelligent than that of Model B. Therefore, according to Thaler, Homo economicus is limited only to the IQ of the smartest economists. Thaler stated that the rational individual assumption should change depending on

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the content of the subject being studied. For example, competitors are asked an initial guess in a “guess the numbers” game. Competitors are asked to guess a number between zero and one hundred. All contestants have expectations about the predictions of others. The equilibrium state of such a game would be zero if all the competitors were entirely rational. The contestants who guessed zero in the game are pretty knowledgeable. According to Thaler, individuals in advanced economic models will be more sophisticated than agents modeled earlier. Today, economists have to explain why they use a definition other than the rational agent in their models. Thaler (2000) predicted that, thanks to improved economic models, future authors will have to explain why they use rational agents in their models. As economists seek to understand the real man, psychologists, sociologists, and anthropologists will help define economic behavior accurately. Homo economicus will become more emotional, meaning economists will emphasize studying emotions. Thaler cited Elster’s (1998) article as an example in this regard. Although not explicitly, Elster (1998) addressed emotions such as pride, anger, guilt, hatred, liking, joy, shame, malice, disgust, fear, and love. Thaler stated that many economists are working on these issues, but primarily young economists should act more courageously. These ideas, expressed by Thaler in 2000, seem pretty accurate when we look back. But when this article was written, it was not considered by mainstream economists who produced fairy tales. After the 2008 crisis, two more economists are expressing their ideas strongly. However, the mainstream critiques of Krugman (2009) and Stiglitz (2011; 2018) are naiver than the mainstream economists comparing their propositions to the theories of physics. Because Krugman and Stiglitz state that the assumption that established economics has been used for approximately 250 years is wrong. Moreover, such an assumption is always false. Mainstream economics has produced theories with hypothetical deduction methods for centuries, using assumptions that cannot be claimed otherwise. But criticizing such an approach gained importance after the 2008 crisis. Mainstream economists seem determined to follow their accustomed way of producing knowledge despite two major financial crises. Economists, who understand the economic effects of uncertainty correctly and want to create economic theory by describing the real person, should be at least as brave as established economics. The historical process proved how erroneous mainstream economics was, thanks to two major crises. For this reason, economic theories that want to understand real people should not hesitate to use induction, deduction, and historical process together. Testing the economic theory produced in such a way is possible again with economic crises. Economists, who seek the real

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individual and the right economic proposition, must act boldly. The theory of economic personality is the product of such a thought.

Uncertainty and Human People constantly live in uncertainty. Uncertainty is a natural result caused by nature and people living together. If we limit the uncertainty to the individual’s mind, as Simon, Savage, and Friedman did, we will eliminate the uncertainty of the external world. When we accept the human mind and its expectations as rational, there is no reason for the disruption of the functioning of the market. Thus, we make depression and crises an exogenous factor, as mainstream economics does. Since when people act rationally and rationalize their expectations, the market should not go into crisis. However, since the depressions and crises in the history of economics are real, uncertainty cannot be only in the human mind. Uncertainty has its place in the human mind. However, the larger uncertainty is the uncertainty of the outside world. The uncertainty of the outside world encompasses all natural phenomena and human activities that have not yet occurred. Uncertainty doesn’t matter in a world without humans. Therefore, uncertainty is essentially a human product. In other words, as Leslie (1879) stated, human activities cause uncertainty. As Leslie (1879) stated, in real life, modernization, economic policies produced by wrong economic theory, the limited human mind, immoral factors, political actors, and the market create uncertainty. Apart from human activities, it should be noted that natural activities such as changes in nature, earthquakes, and floods also constitute the elements of uncertainty. Uncertainty is unpredictable and immeasurable and, besides that, its dimensions cannot be known precisely. Since uncertainty encompasses all that will happen, people cannot avoid the uncertainty that they do not know for sure. The factors that cause uncertainty also cause stagnation and imbalance in the economy. Uncertainty and stagnation force individuals to carry out their economic activities without being able to see their way. But history proved that all the achievements of humanity from past to present have been achieved in uncertainty. In other words, people have successfully formed behavioral patterns in uncertainty. Gains such as traditions, customs, cultures, institutions, technology, and the economy have survived to the present day despite uncertainty. In the future, uncertainty will continue to be the factor with the highest disruptive effect on these gains. Although the tales of the neoclassical economic tradition ignore uncertainty, people will constantly struggle with the uncertainty that affects their economic behavior. On the other hand, since people create

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their behavior patterns in uncertainty, how much should we be afraid of uncertainty? The answer to this question is quite clear. We should not fear uncertainty because people have achieved gains in uncertainty throughout history. We don’t need to try to eliminate uncertainty with assumptions. Popper (1957) may have accepted history as an unusable method in all sciences. However, this point of view does not change the fact that history is necessary for economics. History proves that the real human, whom we know not to be rational, has learned to live in uncertainty. As Hutchison (1965) stated, people have to make their preferences for goods and services between full certainty and full uncertainty. Under the assumption of perfect expectations, the benefit from consumption is predetermined. In such a case, people’s initiative over their product preferences disappears. Otherwise, i.e., in case of complete uncertainty, the uncertainty becomes absolute. In other words, the benefits obtained from the choices are incomparable. Therefore, the individual’s will cannot emerge in situations of complete information and uncertainty. As Leslie (1879) stated, economic activities occur despite uncertainty. As explained in the previous section, people establish behavioral patterns that constitute their economic personality in real-life uncertainty. The behavior patterns of an individual who has to make decisions in constant uncertainty help him overcome the uncertainty in his mind. In other words, as long as people live in all kinds of uncertainty, they form their economic personality. The uncertainty in the outside world is more comprehensive than in the individual’s mind. Uncertainty in the outside world also constantly affects the uncertainty in the individual’s mind. Since uncertainty cannot be predicted or measured and its dimensions cannot be known precisely, it affects the mental balance of individuals. Individuals cannot see the future accurately in an environment of uncertainty. A person, who cannot see the end correctly, cannot make the best decisions about the future. An individual, who cannot make the right decision about the future, cannot be considered rational. Therefore, Lucas’ (2003) mathematical solution to future depression problems may only be a fairy tale. Using their economic personality, people who cannot interfere with the uncertainty in the outside world eliminate the disruptive effect created by uncertainty on their minds. Individuals must realize their economic decisions in an economy with uncertainty. When uncertainty increases, individuals may prefer to remain inactive for a while as they may lose their confidence in themselves and the market. However, people can only stand still or live by making decisions. Continuously procrastination on the work to be done by individuals can lead to depression or sadness. People cannot live with their depression or sadness for a long time. Therefore,

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people have to make decisions in uncertainty. The market continues to function in real life, even when uncertainty is high and the future is dark. Goods are bought and sold, although their prices vary. Even if it gets shallow, transactions continue to be made in the financial markets. Exchanges may be closed for a while but must be reopened eventually. Even if the amount is small, stocks are priced in the stock market, and investors continue to invest. While individuals make such economic decisions, they still do not know the future exactly. That’s why people use their acquired behavior patterns because the future is unpredictable due to uncertainty. People adapt to shocks caused by uncertainty by making use of the behavioral patterns required by their economic personality. Thus, despite the uncertainty, they manage to continue their economic activities. The individual develops his economic personality by using his learning ability as long as the uncertainty in the outside world is continues. Therefore, the economic personality enables the individual to make decisions in uncertainty without removing the uncertainty in the outside world. Decisions taken in line with the economic personality vary according to each individual. In other words, economic personality is how the individual expresses himself in economic decisions. Therefore, the economic personality causes the individual to exhibit unique behaviors and maintain mental balance. Because economic personality is the way an individual expresses himself, it is predictable because, as explained at length in the fourth chapter, economic personality is systematically repetitive patterns of behavior. Thus, the economic personality gains a testable and falsifiable feature. Therefore, the economic personality does not contain any tautology or assumptions.

From Economic Personality to National Economic Character History is very important for economics. In my book, published in 2016, I wrote that we could use the crises in the history of economics as the laboratory of economics. I stated that crises, which are not devoid of time and space, hold essential lessons for economists. Economists can go back from the very end of the crises that have taken place and understand how the market mechanism deteriorated. If you can understand how a mechanism is broken, you can learn how it should work correctly. By preventing the factors that cause the mechanism to break down, you can ensure that the mechanism does not fail again. Economists, who are experts in economics, do not yet understand how this mechanism works. For this reason, economists desperately need a laboratory and history that

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includes real events such as crises. The Great Depression and the 2008 crisis are the two biggest financial crises the world has ever seen. These financial crises and the 1973 oil crisis revealed that economic propositions were true or false. For all these reasons, crises are the source of the most accurate information in economics. Here is the first lesson I learned from crises in my book, crises produce the most precise information in economics. Economists only try to produce the most accurate information. The 1929 crisis caused established economics to fall into disgrace and brought Keynes to the fore. The 1973 oil crisis led to the failure of Keynes and the rise of monetarists and the new classics. The 2008 crisis enabled Keynesian economics to gain strength again against the monetarists and the new classical economics. Another lesson I’ve learned from the two major financial crises is that the financial markets are the weak spot of the economy. As Minsky (1972, 1992) mentioned, the financial system is the biggest suspect that can cause major economic crises. The financial system before the 2008 crisis was functioning smoothly, incomparably with the pre-1929 financial system. Because, after the Great Depression, the financial system was knitted with rules. But even such a strictly regulated financial system led to a financial crisis. Therefore, regardless of the attempts to regulate it via laws and regulations, the financial system is likely to be the most significant cause of crises in the future. The USA is the center of the Great Depression and the 2008 crises. These two major crises spread from the US financial system to the world. Another lesson that can be drawn from the two major crises is that the economy never allows asymmetric or incomplete information. Before the Great Depression, thanks to investment trusts, information was hidden from the market. In contrast, before the 2008 crisis, information was hidden from the market thanks to the mortgage market and credit rating agencies. However, the confidential information kept from the market was revealed again by the market. The pursuit of asymmetric and incomplete information in the US financial system could save our economy from another significant crisis. In my book (2016), I wrote that the most crucial reason for the asymmetric and incomplete information in the financial system in the USA is the ‘gold rush.’ Descendants of the gold rush generation in the USA also wanted to get rich quickly. For example, investment trusts, the most striking example of speculative investments in the late twenties, were around 300 in number in 1927. In 1928, 186 new investment trusts were established, while a new investment trust was being formed every day in the first months of 1929. As a result, 265 new investment trusts emerged that year. Investment trusts had increased stock sales from $400 million in 1927 to $3 billion towards

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the end of 1929. $3 billion is about three-quarters of the new capital released that year. The assets of investment trusts have increased elevenfold since 1927, reaching $8 billion in 1929. When investment trusts began to be established in the USA in the 1920s, the USA was behind Europe in this regard. Contrary to British trusts, trusts in the US became more and more investment institutions. Initially, the investor had a stake in shares invested in a trust. Then, investment trust entrepreneurs had set rules for themselves about what shares to buy, how to keep, and how to manage them. The trusts were allowed to be listed on the stock exchange in 1929. Then, discovering the size of the profit and the shortcut to get rich the easy way, the entrepreneurs rushed for the ‘gold’ from the trusts. Then, they turned the trusts into investment institutions. The establishment of a trust depended on getting the support of another company. Investment banks, commercial banks, commission agencies, securities trading organizations, and other trusts sponsored and supported the establishment of investment trusts. Most of the sponsors were investment banking companies. Thus, these banks had the opportunity to issue more stocks to the market. Before the Great Depression, the market had high confidence in the investment decisions of trust managers. When these executives launched stock, many were ready to bid above the quoted price. The firm, a trust supporter, first seized the company’s powers, whose shares were traded in the market. The sponsor firm was buying the shares that would enable it to seize the controls at the bid price. The firm then sold these shares to the public at a much higher price. They shared their effortless and increased profits with the sellers who put the shares on the market. Thus, buyers and sellers had acquired the ‘gold’ they were attacking. The value of the trusts’ high-yielding shares far exceeded the total value of their holdings. Sometimes it was almost twice as much. The trusts, which usually did not have offices and were managed from the sponsoring firm’s premises, had cash, various stocks, securities, mortgages, and bonds. When all of these are sold, the total profit obtained was usually less than the value of the investment company’s existing shares. The difference between the two values was purely speculative. This speculative game was a product of financial genius. The first product of financial genius that caused the 2008 crisis was securitization. Securitization is a derivative product used in the US economy since the 1970s. Securitization is pooling certain types of assets and then repackaging them into interest-bearing securities. Securitization has become widespread and turned into a ‘gold’ because of its appealing properties. Securitization mobilized frozen assets-resources. While a financial institution’s loan at a reasonable interest rate is profitable, loans

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made freeze the financial institution’s resources. Therefore, a financial institution that wants to make new investments should raise capital or borrow money. However, without enduring such trouble, selling an asset based on their receivables in monetary or capital markets would render the company’s capital reusable. Moreover, the regulatory capital allocated to such securities was relatively low. Risky loans on the balance sheet can be hidden in securities and made invisible on the balance sheet. Most importantly, risky mortgage loans were sold to investors who did not even know the name and content of the portfolio they invested in. Therefore, it was inevitable that securitization, which was so appealing, would diversify and become widespread in the market. Indeed, before the 2008 crisis, securitization did diversify and become widespread. Investors who bought the securities were looking at the risk-free profit they would get from these securities, relying only on the rating given by the credit rating agencies. Therefore, launching new and different securities with complex financial techniques was very profitable. With these methods, the risk content of the securities could be changed as desired, and more risky subprime loans could be added to the new securities. Thus, subprime loans increased eightfold in the period 2000-2007. It should have been unexpected that the collapse in subprime loans, which was at the core of the 2008 crisis, led to its second-largest economic crisis. Since the subprime mortgage market is about $1.3 trillion, and it’s not even 10% of the US mortgage market. Banks wanted to avoid the risk of subprime loans, thanks to financial innovation that turned illiquid loans into products that could be sold at a profit. As a result, approximately 80% of subprime loans were securitized during 2005-06. The economic personality very accurately describes the human being in real life. For this reason, economic personality is necessary to produce economic propositions compatible with real life. The economic personality can also form the national economic character in any market. For example, during the Great Depression and the 2008 crisis, many people in the US markets wanted to get rich making use of financial innovations. It cannot be a coincidence that both significant financial crises occurred in the United States. People in the US wanted to get rich easily, as the descendants of the gold rush generation. Therefore, these people want to use the gold rush opportunity that has arisen in the financial sector. People, who ‘rush for gold’ as a requirement of their economic personality, transform the market by transacting in the financial markets in the USA. Thus, the economic personality reveals the economic character of a market. I detailed in Chapter 4 how deep the cultural roots of the economic personality are. Therefore, people in the USA continue to rush for gold

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due to their economic personality. In other words, economic personalities determine the national economic character. From this perspective, crypto assets also become more understandable because it is not surprising that financial innovation, namely crypto assets, is also becoming a tremendous economic value in the USA. Crypto assets are the latest example of the gold rush. However, economic personality causes the national economic character of each country to be different. National economic character requires differentiation of economic policies according to countries. In addition, the national economic character can even solve economic contradictions such as the Leontief Paradox. Therefore, after economic personality, the issue of the national economic character caused by the economic personality should be addressed.

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INDEX

A Acemoglu, 13 Adaptive expectations, 43 Akerlof, 3 Akerlof and Kranton, 15 Alada, 1, 21 Arrow, 5 Ayres, 73

E Economic behaviors, 1 Economic personality, 1, 15, 83, 84, 85, 86, 88, 94, 100, 106, 111, 117, 122, 128, 134, 136, 137, 141, 144, 149, 150, 154 Elster, 78, 148 Ergodic, 44

B Becker, 60 Behavioral economics, vii Bentham, 4, 20, 24, 50, 94, 158, 163 Bernanke, 13 Bitcoin, 144 Blaug, 6 Beliefs, 111 Boland, 5 Bounded rationality, 64 Broome, 5 Brumberg, 137

F Falsifiability, 8 Fama, 43 Fehr and Gächter, 62 Fisher, 11 Friedman, 1, 41

C Cairnes, 4 Camerer, 46 Coase, 74 Commons, 70 Condorcet, 49 Culture, viii, 105 D Darwin, 9 Davidson, 4 De Waal, 62 Decisions, 151 Duesenberry, 137

G Galbraith, 2 General Theory, 2 Genetics, viii, 88 Geography, viii, 94 Glimcher, 46 Great Depression, 12 Güney, 2 H Habits, 142 Hayek, 28 History of Astronomy, 18 Homo economicus, vii, 4, 49 Homo institutionalist, vii Homo institutional, 70 Homo moralis, vii, 54 Homo reciprocans, vii, 60 Hume, 7 Hutchison, 36

174

Index

J James Mill, 20 Jevons, 4

P Patterns, 6 Personality, 100 Pigou, 33 Piketty, 136 Ponzi, 145 Popper, 5 Post-Keynesians, 45

K Kahneman and Tversky, 66 Kant, 57 Katona, 38 Keynes, 2 Knight, 2 Krugman, 13 Kuhn, 8

R Rational expectations, 43 Rationality, 6 Religion, viii Repetitive behaviors, 81 Ricardo, 3 Robbins, 52 Rodrik, 13

L Learning, viii, 117 Leibenstein, 65 Leslie, 30 Lucas, 1, 12

S Samuelson, 41 Savage, 1 Say, 22 Schmoller, 70 Schumpeter, 4 Sen, 58 Senior, 3, 21 Shackle, 2, 37 Shefrin and Thaler, 136 Simon, 14 Simon and Newell, 66 Smith, 3 Stiglitz, 3 Strumpel, 139 Systematically repetitive, 1 Systematics, viii

ø Identity, vii, 75 Income, viii, 134 Institutions, viii, 128

M Mainstream economics, 82 Malthus, 22 Mandeville, 56 Marshall, 28 Maslow, 83 Menger, 24 Mill, 4 Minsky, 152 Mitchell, 70 Modigliani, 137 Muth, 1 Myrdal, 15 N National economic character, 155 Neuroeconomics, 47 Newton, 9 Non-ergodic, 44 North, 75, 147

T Technology, viii, 122 Thaler, 15 Thaler and Sunstein, 15, 69 Theory of Moral Sentiments, 18 Tirole, 147 Tversky and Kahneman, 15

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U Uncertainty, 86

Von Neumann and Morgenstern, 5 Von-Neumann and Morgenstern, 66

V Van Raaij, 139 Veblen, 2 Vernon Smith, 41

W Walras, 24 Wealth of Nations, 18 Wulf, 172