nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2005‒02‒13
seventeen papers chosen by
Andy Denis
City University

  1. The Theory of the Firm and Its Critics: A Stocktaking and Assessment By Nicolai J. Foss; Peter G. Klein
  2. The 3-Equation New Keynesian Model: A Graphical Exposition By Carlin, Wendy; Soskice, David
  3. Personal Value Priorities of Economists By Gandal, Neil; Roccas, Sonia; Sagiv, Lilach; Wrzesniewski, Amy
  4. Agglomeration and Welfare: The Core-Periphery Model in the Light of Bentham, Kaldor and Rawls By Charlot, Sylvie; Gaigné, Carl; Robert-Nicoud, Frédéric; Thisse, Jacques-François
  5. Involuntary Unemployment : the Elusive Quest for a Theory By Michel, DE VROEY
  6. Real Business Cycle Models of the Great Depression : a Critical Survey By Luca, PENSIEROSO
  7. The temporary equilibrium method : Hicks against Hicks By Michel, DE VROEY
  8. On Dictatorship, Economic Development and Stability By Lionel, ARTIGE
  9. Retrospective on the Postwar Productivity Slowdown By William D. Nordhaus
  10. Behavioral Economics and Institutional Innovation By Robert J. Shiller
  11. Why is Economics not a Complex Systems Science? By Prof John Foster
  12. Power-laws in economics and finance: some ideas from physics By Jean-Philippe Bouchaud
  13. Financial markets as adaptative systems By Marc Potters; Jean-Philippe Bouchaud; Rama Cont
  14. Elements for a theory of financial risks By Jean-Philippe Bouchaud
  15. Keynes and the Birth of Modern Macroeconomics By David Laidler
  16. Alternative methodologies in studies on business failure: do they produce better results than the classic statistical methods? By Balcaen S.; Ooghe H.
  17. New Economic Geography By Hans-Friedrich Eckey; Reinhold Kosfeld

  1. By: Nicolai J. Foss; Peter G. Klein
    Abstract: Ever since its emergence in the 1970s the modern economic or Coasian theory of the firm has been discussed and challenged by sociologists, heterodox economists, management scholars, and other critics. This paper reviews and assesses these critiques, focusing on behavioral issues (bounded rationality and motivation), process (including path dependence and the selection argument), entrepreneurship, and the challenge from knowledge-based theories of the firm.
    Keywords: Coasian theory of the firm; Bounded rationality; Motivation; Entrepreneurship
    JEL: B4 D23 L14 L22
    Date: 2005
  2. By: Carlin, Wendy; Soskice, David
    Abstract: We develop a graphical 3-equation New Keynesian model for macroeconomic analysis to replace the traditional IS-LM-AS model. The new graphical IS-PC-MR model is a simple version of the one commonly used in central banks and captures the forward-looking thinking engaged in by the policy-maker. We show how it can be modified to include a forward-looking IS curve and how it relates to current debates in monetary macroeconomics, including the New Keynesian Phillips Curve and the Sticky Information Phillips Curve models.
    Keywords: A22 A23; monetary policy rules; New Keynesian macroeconomics; New Keynesian Phillips curve; sticky information Phillips curve; Taylor rules
    JEL: E52
    Date: 2004–09
  3. By: Gandal, Neil; Roccas, Sonia; Sagiv, Lilach; Wrzesniewski, Amy
    Abstract: Economists often play crucial roles in designing and implementing public policies; thus it is of importance to better understand the values that underlie their decisions. We explore the value hierarchies of economists in four studies: The first two studies examine whether value differences exist between students of economics and other social sciences students. The final two studies examine how value priorities important to economics students relate to identification with the organization and work orientation. Taken together, our findings indicate that economists have a distinctive pattern of value priorities that may affect their work-related perceptions and attitudes and hence impact their policy decisions and recommendations.
    Keywords: A13; economists; value priorities
    JEL: A12
    Date: 2004–10
  4. By: Charlot, Sylvie; Gaigné, Carl; Robert-Nicoud, Frédéric; Thisse, Jacques-François
    Abstract: The objective of this Paper is to apply different welfare approaches to the canonical model developed by Krugman, with the aim of comparing the only two possible market outcomes, i.e. agglomeration and dispersion. More precisely, we use the potential Pareto improvement criteria, as well as the utilitarian and Rawlsian welfare functions. No clear answer emerges for the following two reasons: (i) in general, there is indetermination when compensation schemes are used and (ii) the best outcome heavily depends on societal values regarding inequalities across individuals. However, simulations undertaken for plausible values of the main parameters suggest that there might be excessive agglomeration.
    Keywords: agglomeration; compensation mechanism; economic geography; welfare
    JEL: F12 R13
    Date: 2004–10
  5. By: Michel, DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper addresses the issue of why Keynesian economists have had such a hard time in giving the concept of involuntary unemployment a place in economic theory. Is the gradual demise of this concept a manifestation of some inner defect in economic theory or is it due to some intrinsic weakness in the concept itself, which limits its usefulness when it comes to economic theorising? I have recently published a book which attempts to answer this question, and my aim in this paper is to present its main results. I start by characteristing Keynes’s programme as consisting of the following four elements : 1) demonstrating the existence of involuntary unemployment; 2) demonstrating that wage rigidity can be exonerated as its cause; 3) giving a general equilibrium or interdependency explanation of the phenomenon; 4) demonstrating that demand stimulation is the proper remedy for the problem. Next, I bring out four conceptual ambiguities that have plagued discussions about involuntary unemployment : the confusion between involuntary unemployment and underemployment; the confusion between involuntary unemployment in the individual disiquilibrium sense and involuntary unemployment in the frustration sense; a loose understanding of the notion of full emplyment; and, finally, a less than rigorous definition of the notion of rigidity. The paper continues by presenting my arguments on whether different types of New Keynesian modesls (implicit contracts, efficiency wages, coordination failures and imperfect competition) have succeeded in achieving Keynes’s programme. My conclusion is that they all fail on at least one of its items. In the final section of this paper, I speculate on whether it is still worthwhile for economists with a Keynesian inclination to keep fighting in defence of involuntary unemployment.
    Keywords: Keynes; Involuntary Unemployment; New keynesian Theory
    JEL: B22 E12 E24 J64
    Date: 2005–02–09
  6. By: Luca, PENSIEROSO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Recent years have witnessed a revival of interest in the Great Depression of the 1930s. Among the differing new interpretations, that of the real business cycle (RBC) is particularly significant. It represents an outstanding methodological innovation in trying to cast the Great Depression within an “equilibrium” framework. This paper critically reiews the RBC interpretation of the Great Depression, clarifying its theoretical and methodological foundations, and paving the way for future assessments of its validity.
    Keywords: Great Depression; Real Business Cycle Theory
    JEL: B22 N12
    Date: 2005–02–09
  7. By: Michel, DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Hicks is renown for having introduced the temporary equilibrium framework in his book Value and Capital. Subsequently, however, he partially recanted this framework by rejecting the market clearing idea while still keeping the week device. The aim of this paper is to assess whether this change was right. My answer will be broadly negative. To make my point, I will ponder on the meaning and implications of the week device, assess the validity of Hicks’ claim that slow adjustment can cause market rationing, examine his claim that the possibility of market clearing depends on the prevailing market form and, finally, assess his twofold filiations towards Marshall and Walras.
    Keywords: HICKS; Temporary Equilibrium
    JEL: B21 D50
    Date: 2004–04–15
  8. By: Lionel, ARTIGE (Universitat Autonoma de Barcelona (Spain))
    Abstract: This paper aims to account for varying economic performances and political stability under dictatorship. We argue that economic welfare and social order are the contemporary relevant factors of political regimes’ stability. Societies with low natural level of social order tend to tolerate predatory behavior from dictators in exchange of a provision of civil peace. The fear of anarchy may explain why populations are locked in the worst dictotorship. In contrast, in societies enjoying a relative natural civil peace, dictatorship is less likely to be predatory because low economic welfare may destabilize it.
    Keywords: Anarchy; dictatorship; economic development; predation; social order
    JEL: H1 H5 O1 P16
    Date: 2004–10–14
  9. By: William D. Nordhaus (Cowles Foundation, Yale University)
    Abstract: The present study reviews the "productivity slowdown" of the 1970s and 1980s. The study also develops a new data set -- industrial data available back to 1948 -- as well as a new set of tools for decomposing changes in productivity growth. The major result of this study is that the productivity slowdown of the 1970s has survived three decades of scrutiny, conceptual refinements, and data revisions. The slowdown was primarily centered in those sectors that were most energy-intensive, were hardest hit by the energy shocks of the 1970s, and therefore had large output declines. In a sense, the energy shocks were the earthquake, and the industries with the largest slowdown were near the epicenter of the tectonic shifts in the economy.
    Keywords: Productivity, Economic growth
    Date: 2004–11
  10. By: Robert J. Shiller (Cowles Foundation, Yale University)
    Abstract: Behavioral economics has played a fundamental role historically in innovation in economic institutions, even long before behavioral economics was recognized as a discipline. Examples from history, notably that of the invention of workers’ compensation, illustrate this point. Though scholarly discussion develops over decades, actual innovation tends to occur episodically, particularly at times of economic crisis. Fortunately, some of the major professional societies, the Verein für Sozialpolitik, the American Economic Association and their successors, have managed to keep a broad discourse going, involving a variety of research methods including some that may be described today as behavioral economics, thereby maintaining an environment friendly to institutional innovation. Further, the broad expansion of behavioral economics that is going on today can be expected to yield even more such important institutional innovations.
    Keywords: Economic innovation, Invention, Psychological economics, Institutional economics, Social insurance, Workers’ compensation, American Economic Association, Germany, Verein fur Sozialpolitik
    JEL: B41
    Date: 2005–01
  11. By: Prof John Foster (School of Economics, The University of Queensland)
    Abstract: Economics is viewed as a discipline that is mainly concerned with 'simplistic' theorizing, centered upon constrained optimization. As such, it is ahistorical and outcome focused, ie, it does not deal with economic processes. It is argued that all parts of the economy are inhabited by complex adaptive systems operating in complicated historical contexts and that this should be acknowledged at the core of economic analysis. It is explained how economics changes in fundamental ways when such a perspective is adopted, even if the presumption that people will try to optimize subject to constraints is retained. This is illustrated through discussion of how the production function construct has been used to provide an abstract representation of the network structures that exist in complex adaptive systems such as firms. It is argued that this has led to a serious understatement of the importance of rule systems that govern the connections in productive networks. The macroeconomics of John Maynard Keynes is then revisited to provide an example of how some economists in earlier times were able to provide powerful economic analysis that was based on intuitions that we can now classify as belonging to complex systems perspective on the economy. Throughout the paper, the reasons why a complex systems perspective did not develop in the mainstream of economics in the 20th Century, despite the massive popularity of an economist like Keynes, are discussed and this is returned to in the concluding section where the prospect of paradigmatic change occurring in the future is evaluated.
    Date: 2004
  12. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;)
    Abstract: We discuss several models in order to shed light on the origin of power-law distributions and power-law correlations in financial time series. From an empirical point of view, the exponents describing the tails of the price increments distribution and the decay of the volatility correlations are rather robust and suggest universality. However, many of the models that appear naturally (for example, to account for the distribution of wealth) contain some multiplicative noise, which generically leads to *non universal exponents*. Recent progress in the empirical study of the volatility suggests that the volatility results from some sort of multiplicative cascade. A convincing `microscopic' (i.e. trader based) model that explains this observation is however not yet available. It would be particularly important to understand the relevance of the pseudo-geometric progression of natural human time scales on the long range nature of the volatility correlations.
    JEL: G10
  13. By: Marc Potters (Science & Finance, Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Rama Cont (Science & Finance, Capital Fund Management)
    Abstract: We show, by studying in detail the market prices of options on liquid markets, that the market has empirically corrected the simple, but inadequate Black-Scholes formula to account for two important statistical features of asset fluctuations: `fat tails' and correlations in the scale of fluctuations. These aspects, although not included in the pricing models, are very precisely reflected in the price fixed by the market as a whole. Financial markets thus behave as rather efficient adaptive systems.
    JEL: G10
  14. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;)
    Abstract: Estimating and controlling large risks has become one of the main concern of financial institutions. This requires the development of adequate statistical models and theoretical tools (which go beyond the traditionnal theories based on Gaussian statistics), and their practical implementation. Here we describe three interrelated aspects of this program: we first give a brief survey of the peculiar statistical properties of the empirical price fluctuations. We then review how an option pricing theory consistent with these statistical features can be constructed, and compared with real market prices for options. We finally argue that a true `microscopic' theory of price fluctuations (rather than a statistical model) would be most valuable for risk assessment. A simple Langevin-like equation is proposed, as a possible step in this direction.
    JEL: G10
  15. By: David Laidler (University of Western Ontario)
    Abstract: The usual description of Keynes's macroeconomics as relying on the postulate of money wage stickiness to explain unemployment, and advocating fiscal policy as its cure, is largely mythical. Rather he was concerned with exploring the theoretical idea that an economy co- ordinated by monetary exchange is prone to market failures that create unemployment. The origins of this idea in what Keynes called "classical" economics can be traced back at least as far as John Stuart Mill, though he himself preferred to claim the much less orthodox Malthus as his antecedent. Be that as it may, Keynes's own emphasis on income and employment variations as both the result of and the "solution" to specifically inter-temporal failures was highly original. The idea that monetary exchange might involve co-ordinatioin failures of any sort has now largely disappeared from macroeconomics, under the influence of New-classical economics.
    Keywords: macroeconomics; Keynesian economics; markets; money; interest rates; unemployment; multiplier
    JEL: B12 B22 B31
    Date: 2005
  16. By: Balcaen S.; Ooghe H.
    Abstract: Over the last 35 years, the topic of company failure prediction has developed to a major research domain in corporate finance. Academic researchers from all over the world have been developing a gigantic number of corporate failure prediction models, based on various types of modelling techniques. Besides the classic cross-sectional statistical methods, which have produced numerous failure prediction models, researchers have also been using several alternative methods for analysing and predicting business failure. To date, a clear overview and discussion of the application of alternative methods in corporate failure prediction is still lacking. Moreover, frequently, different designations or names are used for one method. Therefore, this study aims to provide a clear overview of the alternative research methods, attributing each of them a fixed designation. More in particular, this paper extensively elaborates on the most popular methods of survival analysis, machine learning decision trees and neural networks. Furthermore, it discusses several other alternative methods, which can be considered to have a certain value added in the empirical literature on business failure: the fuzzy rules-based classification model, the multi-logit model, the CUSUM model, dynamic event history analysis, the catastrophe theory and chaos theory model, multidimensional scaling, linear goal programming, the multi-criteria decision aid approach, rough set analysis, expert systems and self-organizing maps. This paper discusses the main features of these methods and their specific assumptions, advantages and disadvantages and it gives an overview of a number of academically developed corporate failure prediction models. Several issues viewed in isolation by earlier studies are here considered together, which is of major importance for gaining a clear insight into the possible alternative methods of corporate failure modelling and their corresponding features. A second aim of this paper is to find an answer to the question whether the more sophisticated, alternative modelling methods produce better performing failure prediction models than the rather simple classic statistical methods. The analysis of the conclusions of a large number of empirical studies comparing the classification results and/or the prediction abilities of failure prediction models based on different techniques seems to indicate that we may question the benefits to be gained from using the more sophisticated alternative methods.
    Date: 2004–08–21
  17. By: Hans-Friedrich Eckey (Author-Workplace-Name: Department of Economics, University of Kassel); Reinhold Kosfeld (Author-Workplace-Name: Department of Economics, University of Kassel)
    Abstract: The standard model of New Economic Geography (NEG) presents a synthesis of polarization and neo-classical theories. Within a monopolistic competition framework it aims to explain processes of concentration and deconcentration of manufacturing in a two-sector economy. In this paper the effects of several assumptions of spatial agglomeration processes are addressed. In particular, we investigate the effects of transport costs for agricultural goods, spatial spillovers, the presence of non-tradable services and limited mobility of the labour force. It becomes clear that the tendency towards deconcentration of manufacturing is more marked - the higher the transport costs for agricultural goods, - the stronger the positive spillovers across the regions, - the more income spent on services, - the more limited the mobility of the labour force.
    Keywords: Neue Ökonomische Geographie, Transportkosten, nicht handelbare Dienstleistungen, Spillovers
    JEL: R10 R12
    Date: 2004–11

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