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party faithful. In the end, the disillusioned either quit the party or relinquish their intellectual integrity—they “learn to believe blindly in some authority” and become “hostile to reasonable argument” (OSE II, 192). It is not my intention to assess the validity of Popper’s account of the degeneration of the Communist party. I merely want to suggest that it provides an example of a situational model of a typical political phenomenon. Popper seems to regard his account as a description of what happened to numerous Communist parties across Europe. He tries to explain the decay of the Communist party by describing how workers and party members produce the unintended effect of party degeneration simply by acting rationally, given their social situation and their beliefs.The explanatory act is essentially one of untangling the interaction of workers and party members and thereby laying bear the mechanisms that lead to party degeneration. Note that it is not an idiographic, historical account of the decay of one particular party; it is meant to explain a type of event—the general tendency toward decay found in Communist parties—by clarifying the logic of the situation. Popper’s description does not explain the logic of political parties in general; rather, it is meant to explain the logic of Communist parties during a certain historical era. As such, it stands as a historical theory of middle range, hovering between idiography and universal theory. SUMMARY Popper said that the main task of social science should be uncovering patterns of human interaction that lead to unintended consequences. Many explanations in economics do just that.Thus, in the beginning, Popper was led, somewhat precipitously, to recommend adoption of economic methods by other social sciences. But Popper’s claim that situational analysis is merely the method of economics generalized is not tenable, in his own work or in examples relevant to the social sciences. While it is evident that situational analysis in its early formulation was clearly modeled on economic theory, the theory in the final formulation developed by Popper represents a quite different approach to explaining the social world. Although it shares with some economic theories the goal of uncovering patterns of human interaction and the unintended consequences that they produce, it does so without relying upon the model of human rationality employed by economic theory. I conclude this chapter by noting that behavioral economic theory resembles situational analysis more than does standard economic theory. Behavioral economists, such as Truman Bewley, Robert Shiller, Robert Frank, and George Akerlof, seek to develop a richer understanding of thought processes that inform economic action. Many of them have incorporated some of the models of psychological processing developed by Daniel Kahneman and Amos Tversky that describe various typical mental “heuristics” used by people to solve problems. As I will argue in chapter 6, situational analysis would benefit from SITUATIONAL ANALYSIS AND ECONOMIC THEORY 79 incorporating thought processing into its situational models, even though this might seem contrary to Popper’s anti-psychologism. But, in addition to developing more nuanced models of human thinking, behavioral economists also seek to incorporate norms into their explanatory models. Bewley, for instance, has explored the puzzling fact that wages generally do not fall during recessions (Bewley 1999). Standard economic theory predicts that employers should lower labor costs during economic downturns, but for some reason employers are reluctant to do so, preferring instead to lay off some workers rather than cut every worker’s pay. However, after many failed attempts to explain this puzzling phenomenon with standard economic models, Bewley decided to examine what actual economic actors have to say on the matter. After conducting extensive interviews with hundreds of employers, labor leaders , and business management consultants, Bewley concluded that employers are unwilling to reduce wages during recessions largely because it violates a widely shared norm of fairness among workers. Bewley shows that workers will often punish employers who cut wages, even at the expense of the their own economic interests. Employers typically decline to cut wages party because of their own sense of fairness, but more because it violates employees’ sense of fairness and therefore hurts company morale. Another component in Bewley’s explanation relies on psychological facts about people—the typical person’s aversion to loss is greater than his or her attraction to gain, and the average person also tends to be unrealistically optimistic. Workers tend to vastly underestimate the possibility of losing their jobs, even as co-workers are laid off. By incorporating norm...