nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2008‒06‒21
nine papers chosen by
Erik Thomson
University of Chicago

  1. Uncomputability and Undecidability in Economic Theory By K. Vela Velupillai
  2. The complexity approach to economics : a Paradigm shift By Fontana Magda
  3. Economics and Common Sense By Gil Kalai
  4. Applications of Statistical Physics in Finance and Economics By Thomas Lux
  5. Economic Theory and Electrical public Utilities Organization in the first part of the twentieth century: French and US Experiences By Frédéric Marty
  6. The Mathematization of Macroeconomics: A Recursive Revolution By K. Vela Velupillai
  7. Evolutionary Modelling in Economics: A Survey of Methods and Building Blocks By Karolina Safarzynska; Jeroen C.J.M. van den Bergh
  8. Gibbard-Satterthwaite and an Arrovian Connection By Stensholt, Eivind
  9. Overconfidence and Moral Hazard By Leonidas Enrique de la Rosa

  1. By: K. Vela Velupillai
    Abstract: Economic theory, game theory and mathematical statistics have all increasingly become algorithmic sciences. Computable Economics, Algorithmic Game Theory ([28]) and Algorithmic Statistics ([13]) are frontier research subjects. All of them, each in its own way, are underpinned by (classical) recursion theory - and its applied branches, say computational complexity theory or algorithmic information theory - and, occasionally, proof theory. These research paradigms have posed new mathematical and metamathematical questions and, inadvertently, undermined the traditional mathematical foundations of economic theory. A concise, but partial, pathway into these new frontiers is the subject matter of this paper. Interpreting the core of mathematical economic theory to be defined by General Equilibrium Theory and Game Theory, a general - but concise - analysis of the computable and decidable content of the implications of these two areas are discussed. Issues at the frontiers of macroeconomics, now dominated by Recursive Macroeconomic Theory, are also tackled, albeit ultra briefly. The point of view adopted is that of classical recursion theory and varieties of constructive mathematics.
    Keywords: General Equilibrium Theory, Game Theory, Recursive Macro-economics, (Un)computability, (Un)decidability, Constructivity
    JEL: C60 C63 C68 C70 C79
    Date: 2008
  2. By: Fontana Magda
    Date: 2008–05
  3. By: Gil Kalai
    Date: 2008–06–09
  4. By: Thomas Lux
    Abstract: This chapter reviews recent research adopting methods from statistical physics in theoretical or empirical work in economics and finance. The bulk of what has recently become known as 'econophysics' in broader circles draws its motivation from observed scaling laws in financial markets and the abundance of data available from the economy's financial sphere. Sec. 2 of this review presents the robust power laws encountered in financial economics and discusses potential explanations for scaling in finance derived from models of stochastic interactions of traders. Sec. 3 provides an overview over other applications of statistical physics methodology in finance and attempts to evaluate the impact they have had so far on financial economics. With the following section, the review turns to recent work on the emergence of wealth and income heterogeneity and the recent inception of new strands of research on this topic, both within econophysics and the neoclassical economics tradition. Sec. 5 reviews the new stylized facts that have been identified in cross-sectional data of firm characteristics and agent-based approaches to industrial organization and macroeconomic dynamics that have been motivated by these findings. We conclude with an assessment of the major methodological contributions of this new strand of research
    Keywords: stylized facts, power laws, agent-based models, econophysics
    JEL: C10 C51 G12
    Date: 2008–06
  5. By: Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR6227 - Université de Nice Sophia-Antipolis, OFCE - Observatoire français des conjonctures économiques - FNSP)
    Abstract: The purpose of the paper is to highlight the role of economists in the institutional building of the electric systems in the first part of the twentieth century. It aims at showing how the organization of electricity sector and its regulation were largely the fruits of the economists’ works not only at a theoretical point of view, but also trough their individual commitment in the public regulation building. <br />Economists participate to the electricity sector re-organization by their academic researches and by their intervention in the new legislative framework building or directly in the firms’ management. Both US experience of private regulated firms and French experience of a public-owned monopoly testimony of such commitment.<br />Through these two examples, the communication will aim at putting into relief the dynamics between scholar debates and electricity sector reforms and the links between economic history and history of economic thought. Finally, the purpose will be to highlight to what extent these two historical experiences and the related economics debates can help us in the current European reform.
    Keywords: electricity, regulation, economic theory
    Date: 2008–06–09
  6. By: K. Vela Velupillai
    Abstract: Frank Ramsey's classic framing of the dynamics of optimal savings, [51] as one to be solved as a problem in the calculus of variations and Ragnar Frisch's imaginative invoking of a felicitous Wicksellian metaphor to provide the impulse-propagation dichotomy, in a stochastic dynamic framework, for the tackling the problem of business cycles [17], have come to be considered the twin fountainheads of the mathematization of macroeconomics in its dynamic modes - at least in one dominant tradition. The intertemporal optimization framework of a rational agent, viewed as a signal processor, facing the impulses that are propagated through the mechanisms of a real economy, provide the underpinnings of the stochastic dynamic general equilibrium (SDGE) model that has become the benchmark and frontier of current macroeconomics. In this paper, on the 80th anniversary of Ramsey's classic and the 75th anniversary of Frisch's Cassel Festschrift contribution, an attempt is made to characterize the mathematization of macroeconomics in terms of the frontier dominance of recursive methods. There are, of course, other - probably more enlightened - ways to tell this fascinating story. However, although my preferred method would have been to tell it as an evolutionary development, since I am not sure that where we are represents progress, from where we were, say 60 years ago, I have chosen refuge in some Whig fantasies.
    Keywords: Macrodynamics, Mathematical Economics, Dynamic Economics, Computational Economics.
    JEL: B16 B22 B23 C60
    Date: 2008
  7. By: Karolina Safarzynska; Jeroen C.J.M. van den Bergh
    Abstract: In this paper we present an overview of methods and components of formal economic models employing evolutionary approaches. This compromises two levels: (1) techniques of evolutionary modelling, including multi-agent modelling, evolutionary algorithms and evolutionary game theory; (2) building blocks or components of formal models classified into core processes and features of evolutionary systems - diversity, innovation and selection - and additional elements, such as bounded rationality, diffusion, path dependency and lock-in, co-evolutionary dynamics, multilevel and group selection, and evolutionary growth. We focus our attention on the characteristics of models and techniques and their underlying assumptions.
    Keywords: bounded rationality, evolutionary algorithms, evolutionary game theory, evolutionary growth, innovation, multilevel evolution, neo-Schumpeterian models Length 51 pages
    JEL: B52 C60 C73
    Date: 2008–06
  8. By: Stensholt, Eivind (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: A very close link of G-S, the Gibbard-Satterthwaite theorem to Arrow’s "impossibility" theorem is shown. G-S is derived as a corollary: from a strategy-proof singleseat election method F is constructed an election method G that contradicts Arrow’s theorem.
    Keywords: Preferential election methods; impossibility theorem
    JEL: D72
    Date: 2008–06–12
  9. By: Leonidas Enrique de la Rosa (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: In this paper, I study the effects of overconfidence on incentive contracts in a moral-hazard framework in which principal and agent knowingly hold asymmetric beliefs regarding the prob- ability of success of their enterprise. Agent overconfidence can have conflicting effects on the equilibrium contract. On the one hand, an overconfident agent disproportionately values success- contingent payments, and thus prefers higher-powered incentives. On the other hand, if the agent is overconfident in particular about the extent to which his actions affect the likelihood of success, lower-powered incentives are sufficient to induce any given effort level. If the agent is overall moderately overconfident, the latter effect dominates; because the agent bears less risk in this case, he actually benefits from his overconfidence. If the agent is significantly overcon- fident, the former effect dominates; the agent is then exposed to an excessive amount of risk, which is harmful to him. An increase in overconfidence - either about the base probability of success or the extent to which effort affects it - makes it more likely that high levels of effort are implemented in equilibrium.
    Keywords: overconfidence, heterogeneous beliefs, moral hazard
    JEL: A12 D81 D82
    Date: 2007–07–10

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