nep-evo New Economics Papers
on Evolutionary Economics
Issue of 2009‒10‒24
nine papers chosen by
Matthew Baker
City University of New York

  1. Eliciting Welfare Preferences from Behavioral Datasets By Ariel Rubinstein; Yuval Salant
  2. Fundamental Uncertainty, Portfolio Choice, and Liquidity Preference Theory By Markus Pasche
  3. "Implementation and Mind Control" By Hitoshi Matsushima
  4. “What is so Austrian about Austrian Economics?” By David Colander
  5. International Norm Dynamics and ‘the End of Poverty’: Understanding the Millennium Development Goals (MDGs) By David Hulme; Sakiko Fukudu-Parr
  6. How Did Macro Theory Get So Far off Track, and what Can Heterodox Macroeconomists Do to Get it Back On Track? By David Colander
  7. How Economists Got It Wrong: A Nuanced Account By David Colander
  8. Endogenous Indoctrination: Occupational Choice, the Evolution of Beliefs, and the Political Economy of Reform By Saint-Paul, Gilles
  9. Limit Behavior of No-regret Dynamics By Andriy Zapechelnyuk

  1. By: Ariel Rubinstein; Yuval Salant
    Date: 2009–10–16
  2. By: Markus Pasche (Friedrich Schiller University Jena, School of Economics and Business Administration)
    Abstract: One of Keynes' core issues in his liquidity preference theory is how fundamental uncertainty affects the propensity to hold money as a liquid asset. The paper critically assesses various formal representations of fundamental uncertainty and provides an argument for a more boundedly rational approach to portfolio choice between liquidity and risky assets. The choice is made on the basis of individual beliefs which are subject to mental representations of the underlying economic structure. Self-consciousness arises when the agent is aware of the fact that beliefs are dispersed among agents due to the absence of a "true" model. Responding to this fact by increasing liquidity preference is rationalized by the higher ex post performance of choice. Moreover, we analyze the case that the portfolio is partially financed by debt. It is explored how fundamental uncertainty affects the volume of the portfolio and hence money and credit demand as well as the probability of debt failures.
    Keywords: liquidity preference, portfolio choice, self-con?dence, self-consciousness, fundamental uncertainty, bounded rationality, Keynes, Knight
    JEL: G11 D81 E41 B31
    Date: 2009–10–15
  3. By: Hitoshi Matsushima (Faculty of Economics, University of Tokyo)
    Abstract: This paper incorporates social psychology into implementation theory, where an uninformed principal manipulates a dynamic decision-making process without employing any tailored contractual device. We demonstrate the principal's mind-control method through which he can effectively utilize social psychology tactics to incentivize informed agents to announce their information in keeping with his wishes. We show that with incentive compatibility, the principal can implement any alternative that he wishes as the unique Nash equilibrium outcome, even if the psychological cost of each agent from disobeying the principal's wishes is small as compared to his total material benefits.
    Date: 2009–09
  4. By: David Colander
    Abstract: Modern mainstream economics is a plurocracy in which there is no orthodoxy of ideas, only an orthodoxy of method. Given the training it provides its students, mainstream economic’s natural domain is science. With the mainstream’s acceptance of complexity views of the economy, Austrian economist’s views can now get a hearing within the mainstream. Thus, within the science of economics, there is no need for a separate Austrian economics. However, there is a need for Austrian economics in political economy, that branch of economics that takes the insights of science and relates them to policy. The paper urges Austrian economics to embrace political economy as its domain, and to position its work as within political economy.
    Date: 2009–10
  5. By: David Hulme; Sakiko Fukudu-Parr
    Abstract: Since their emergence in 2001, the Millennium Development Goals (MDGs) have become accepted as consensus objectives of international development efforts. They have generated controversies and literature that focus on the economics of whether and how they can be achieved. However, little work has been done to understand why they became so widely accepted as an international normative framework of development. This paper focuses on the MDGs as ideas and international norms to explain how they emerged, became institutionalised, yet stalled in implementation and behaviour change. The paper applies Finnemore and Sikkink’s analytical framework of international norm dynamics, and argues that the MDGs have proved an effective mechanism to promote the broad norm of eradicating global poverty. Finnemore and Sikkink note that broad and vaguely specified norms are difficult to implement. Global poverty eradication is an example of such a norm, but the MDGs gave it specificity and then provided an effective vehicle for its diffusion and institutionalisation. This paper introduces the concept of the ‘super-norm’ to clarify the nature of poverty eradication, as being a composite of several sub-norms. The paper also introduces the concepts of message entrepreneurs (as distinct from norm entrepreneurs) who play a key role in this process, who are motivated primarily by organisational objectives rather than ideational commitments. This in turn influences the content of the norm itself. In its conclusion, the paper explains the way in which both realist and constructivist ideas have to be utilised to explain the faltering advance of extreme poverty being seen as morally unacceptable in an affluent world.
    Date: 2009
  6. By: David Colander
    Abstract: This paper argues that the ideas that win out in economics are not necessarily those that a representative researcher would choose, but are rather the emergent result of the competition of ideas in which system replicator dynamics dominate. This means that those ideas that fit the analytic technology available to researchers at the time dominate, while “better” ideas that do not offer advancement to researchers lose out. This paper spells out that view. It differentiates a consumer’s understanding of theory from a producer’s understanding of theory, and argues that a consumer’s understanding of theory is often better suited to applied policy than is a producer’s understanding of theory. Because the replicator dynamics of the economics profession does not reward people for acquiring a consumer’s understanding of theory, that understanding is often neglected. Heterodox economists often have a better consumer’s understanding of theory than do mainstream economists but because they do not prepare students to be successful in economic institutional environment, their views do not receive the hearing they should in the profession. The paper offers a number of suggestions for heterodox European macro economists for competing and shaping the economic institutional environment.
    Date: 2009–11
  7. By: David Colander
    Abstract: This paper considers how economists failed society by not preparing society to expect and plan for a possible financial crisis. It argues that the story told by Paul Krugman in his recent NYT Magazine article was too black and white in that it made it look as if Classical economists who were blinded by the beauty of mathematics, are to blame and that Keynesian economics is the path of the future. This paper takes issue with both those claims. It reviews the evolution of economic thinking from Classical to modern times, and shows the Keynesian/Classical terminology misses many of the nuances of policy discussions. It suggests that the solution for the macroeconomics profession isn’t the solution that Krugman suggests it is—to re-embrace Keynes. The solution is to re-embrace the broader Classical economic tradition, and to recognize that Keynes was an important part of that Classical tradition.
    Keywords: Keynes, Classical, Krugman, macroeconomics, crisis, depression
    Date: 2009–09
  8. By: Saint-Paul, Gilles (University of Toulouse I)
    Abstract: Much of the political economy analysis of reform focuses on the conflict of interest between groups that stand to gain or lose from the competing policy proposals. In reality, there is also a lot of disagreement about the working of the policy: in addition to conflicting interests, conflicting views play an important role. Those views are shaped in part by an educational bureaucracy. It is documented that the beliefs of that bureaucracy differ substantially from those of the broader constituency. I analyse a model where this effect originates in the self-selection of workers in the educational occupation, and is partly reinforced by the insulation of the educational profession from the real economy (an effect which had been discussed by Hayek). The bias makes it harder for the population to learn the true parameters of the economy if these are favourable to the market economy. Two parameters that govern this capacity to learn are social entropy and heritability. Social entropy defines how predictable one's occupation is as a function of one's beliefs. Heritability is the weight of the family's beliefs in the determination of the priors of a new generation. Both heritability and social entropy reduce the bias and makes it easier to learn that the market economy is "good", under the assumption that it is. Finally I argue that the capacity to learn from experience is itself affected by economic institutions. A society which does not trust markets is more likely to favour labour market rigidities that in turn reduces the exposure of individuals to the market economy, and thus their ability to learn from experience. This in turn reinforces the weight of the educational system in the formation of beliefs, thus validating the initial presumption against the market economy. This sustains an equilibrium where beliefs and institutions reinforce each other in slowing or preventing people from learning the correct underlying parameters.
    Keywords: ideology, beliefs, political economy, labor market reform, occupational choice, education, employment protection, civil service, market economy, unemployment
    JEL: E24 I21 I28 J22 J23 J24 J45
    Date: 2009–10
  9. By: Andriy Zapechelnyuk (University of Bonn and Kyiv School of Economics)
    Abstract: Consider a repeated game where all players follow no-regret strategies by reinforcing the actions that they regret not having played enough in the past. We show that a resulting no-regret dynamic approaches in the long run a best-response dynamic and leads to its invariant sets: rest points (Nash equilibria) or periodic orbits. The convergence results for best-response dynamics known in the literature immediately apply to no-regret dynamics. Thus, every no-regret dynamic leads to Nash equilibrium in zero-sum games, weighted potential and two-player ordinal potential games, supermodular games with diminishing returns, and some other special classes.
    Keywords: Regret minimization, no-regret strategy, best-response dynamic, Nash equilibrium, Shapley polygon, curb set
    JEL: C44 D81 D83
    Date: 2009–10

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