nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2009‒06‒17
27 papers chosen by
Erik Thomson
University of Manitoba

  2. Mises on the Nation and the State By Cachanosky, Nicolas
  3. "The Social and Economic Importance of Full Employment" By L. Randall Wray
  4. The Empirics of New Economic Geography By Stephen J. Redding
  5. "New Consensus Macroeconomics: A Critical Appraisal" By Philip Arestis
  6. "How Does Behavioral Economics Change Policies?" (in Japanese) By Yasushi Iwamoto
  7. An Analytical Review of Different Concepts of Riba (Interest) in the Sub-Continent By Aziz, Farooq; Mahmud, Muhammad; Karim, Emadul
  8. Was the stock exchange crisis of 2007 predictable? By POPESCU, Ion; STOICA, Victor; MERUTA, Alexandrina
  9. The Economists of Tomorrow By Freeman, Alan
  10. La politique monétaire et la crise By Landais, Bernard
  11. La crisis económica actual, una visión desde la economía política By Sergio, Reuben
  12. Economics & aesthetics; how can art economists obtain the aesthetic knowledge they need for their economic purposes? By Aldo SPRANZI
  13. The Economics of Renewable Energy By Geoffrey Heal
  14. Eventological Theory of Decision-Making By Vorobyev, Oleg Yu.; Goldblatt, Joe Jeff; Finkel, Rebecca
  15. The Economics of Public Sector Information By Pollock, R.
  16. Optimal Taxation in Theory and Practice By N. Gregory Mankiw; Matthew Weinzierl; Danny Yagan
  17. Elegance with substance By Colignatus, Thomas
  18. Independent Central Banks: Some theoretical and empirical problems? By Peter Howells
  19. L’inefficienza della filiera artistica dell’industria culturale: l’antimanzonismo silente By Aldo SPRANZI
  20. Generalized Agency Problems By Randall Morck
  21. Evaluating information in zero-sum games with incomplete information on both sides. By Bernard De Meyer; Ehud Lehrer; Dinah Rosenberg
  22. Emotions, competence and confidence in choice under uncertainty By Anna MAFFIOLETTI; Michele SANTONI
  23. "The Return of the State: The New Investment Paradigm" By Marshall Auerback
  24. Never Waste a Good Crisis: An Historical Perspective on Comparative Corporate Governance By Randall Morck; Bernard Yeung
  25. Testing the Modigliani-Miller theorem directly in the lab: a general equilibrium approach By Jianying Qiu; Prashanth Mahagaonkar
  26. Axiomatic Equilibrium Selection for Generic two-player games By Srihari Govindan; Robert Wilson
  27. "The 'Unintended Consequences' Game" By Martin Shubik

  1. By: Ian McDonald
    Abstract: This paper argues that the theory of wage and price setting in macroeconomics should be broadened to include insights from behavioural economics, in particular prospect theory and loss aversion. The paper shows how broader microeconomic foundations can explain the main features of a realistic Phillips curve, which are the concurrence of a steep SRPC at low unemployment, a flat SRPC at high unemployment and speed-limit effects. The resulting macroeconomic model has the benefits of consistency with important properties of natural rate models, especially a crucial role for inflation expectations and, in determining the economy’s macroeconomic potential, for supply factors, plus the benefit of consistency with the standard IS/LM model. The paper also shows that the behavioural aspects of these broader microeconomic foundations were alluded to by Keynes and Robinson in 1936 when macroeconomics was created.
    JEL: E12 E24 E31
    Date: 2008–08
  2. By: Cachanosky, Nicolas
    Abstract: This article discusses the distinction Mises (1919) draws between the nation and the state as well as the relation of this distinction with the role of the state in the free society. A previous version of this article received the 1st Prize of the European Center of Austrian Economics Foundation’s 2007 Vernon Smith Essay Contest.
    Keywords: nation; state; Mises; institutions
    JEL: K00 B25 B15
    Date: 2009–05–20
  3. By: L. Randall Wray
    Abstract: Unemployment was singled out by John Maynard Keynes as one of the principle faults of capitalism; the other is excessive inequality. Obviously, there is some link between these two faults: since most people living in capitalist economies must work for wages as a major source of their incomes, the inability to obtain a job means a lower income. If jobs can be provided to the unemployed, inequality and poverty will be reduced--although such policy will not directly address the problem of excessive income at the top of the distribution. Most importantly, Keynes wanted to put unemployed labor to work--not digging holes, but in socially productive ways. This would help to ensure that the additional effective demand created by government spending would not be exhausted in higher prices as it ran up against bottlenecks or other supply constraints. Further, it would help maintain public support for the government's programs by providing useful output. And it would generate respect for, and feelings of self-worth in, the workers employed in these projects (no worker would want to spend her days digging holes that serve no useful purpose). President Roosevelt's New Deal jobs programs (such as the Works Progress Administration and the Civilian Conservation Corps) are good examples of such targeted job-creating programs. These provided income and employment for workers, actually helped increase the nation's productivity, and left us with public buildings, dams, trails, and even music that we still enjoy today. As our nation (and the world) collapses into deep recession, or even depression, it is worthwhile to examine Hyman P. Minsky's comprehensive approach to resolving the unemployment problem.
    Date: 2009–05
  4. By: Stephen J. Redding
    Abstract: Although a rich and extensive body of theoretical research on new economic geography hasemerged, empirical research remains comparatively less well developed. This paper reviewsthe existing empirical literature on the predictions of new economic geography models for thedistribution of income and production across space. The discussion highlights connectionswith other research in regional and urban economics, identification issues, potentialalternative explanations and possible areas for further research.
    Keywords: New economic geography, market access, industrial location, multiple equilibria
    JEL: F12 F14 O10
    Date: 2009–04
  5. By: Philip Arestis
    Abstract: This paper is concerned with the New Consensus Macroeconomics (NCM) in the case of an open economy. It outlines and explains briefly the main elements of and way of thinking about the macroeconomy from the standpoint of both its theoretical and its policy dimensions. There are a few problems with this particular theoretical framework. We focus here on two important aspects closely related to NCM: the absence of banks and monetary aggregates from this theoretical framework, and the way the notion of the “equilibrium real rate of interest” is utilized by the same framework. The analysis is critical of NCM from a Keynesian perspective.
    Date: 2009–05
  6. By: Yasushi Iwamoto (Faculty of Economics, University of Tokyo)
    Abstract: This paper discusses how behavioral mistakes, focused by behavioral economics, alter normative economics that presumes rational individuals. Behavioral mistakes do not necessarily call for paternalistic policies. Insights of behavioral economics have more significant impact on paternalism than on libertarianism, which has already recognized the limit of individual's rationality and admired liberty. Behavioral economics rather provides the theoretical foundations of the limited ability of government. Researchers have proved, only in few areas, the behavior of others as irrational. Policy is motivated not from the irrational behavior of individuals but from its impacts on the economy. The claim that the irrational behavior leads to undesirable outcome for the society is a joint hypothesis of the individual behavior and its effects on the economy. Traditional analytical tools in economics remain to play an important role in examining the latter hypothesis. The above qualifications do not imply the irrelevance of behavioral economics to policy making. The application of behavioral economics with noticing these qualifications may help to improve policies. The idea of "soft paternalism" elaborated by behavioral economics can refine the conventional idea about paternalism in economics.
    Date: 2009–05
  7. By: Aziz, Farooq; Mahmud, Muhammad; Karim, Emadul
    Abstract: The traditional concept of Riba (interest) is an excess amount on loan, which creditor receives from debtor on the repayment of loan. There is almost a consensus on the sprit of this concept that it is traditional thought or school; but along with that some other point of views also exist, which present Riba, in somewhat different ways, will be termed as non-traditional approach in this paper. Both of these schools are agreed on the point that, Riba is just restricted to debt, and the increment on it is Riba; but the main difference among these is that: former approach claims that, each and every addition on loan, regardless of purpose and time duration of loan is Riba; but, the later approach demand’s some room for that on different grounds. Actually both of them do not have any sound base. When the concept of unearned income (the income, which is not the result of human labor), is a recognized fact in Islamic economics in different forms, like: ijara (rent), Mudoraba and Mazara’a (Share Cropping); then definitely no logical reason is left to avoid excess income on loan. Both approaches are just unable to give a concrete concept of Riba.
    Keywords: Riba; Interest; Rent; Share Cropping
    JEL: E43 E51 P45 P59 P52
    Date: 2008–12–31
  8. By: POPESCU, Ion (Universitatea Spiru Haret, Facultatea de Finante si Banci); STOICA, Victor (Universitatea Spiru Haret, Facultatea de Finante si Banci); MERUTA, Alexandrina (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: The aim is to try to solve the dilemma if could be predictable exchange crisis from 2007 in the conditions of market globalization, including stock exchange, under the risk of system. In such circumstances, the value judgments based on those three major developments (The Big Three) recorded in three representative locations: New York Stock Exchange (NYSE), London Stock Exchange (LSE) and Tokyo Stock Exchange (TSE). The analysis led to a technique conslusion, namely the level of support is a time of stability in the case of the fall, but this may be reduced through investor-buyers intervention, who estimated that the level of the lowest possible has been achieved: creating a sliding side of the course, forming the support level; ceiling being exceeded arose danger that the phenomenon of decline to continue. How the three stock exchanges: NYSE, LSE and TSE hold together more than 50% of total mondial capitalization was natural that the downfall stock exchange triggered in the United States to spread almost instantaneously throughout the world. An example is even the german index the Frankfurt DAX. Bucharest Stock Exchange has made no exceptional leadership leading the Romanian Banking Association (ARB) and National Bank of Romania (NBR) to discuss the technical level of a system with fluidity of internal markets, respectively those monetary and foreign exchange in times of turbulence.
    Keywords: trend; history of maximum (minimum); point of resistance; upward tunnel (downward); peak; DJIA; FTSE; Nikkei 225
    JEL: G15
    Date: 2009–06–01
  9. By: Freeman, Alan
    Abstract: This paper is a prepublication version of a submission to the International Review of Economics Education. It outlines a code of conduct for economics, in the form of a pluralist benchmark for Quality Assurance in economics education. This is a necessary corrective to the publicly-recognised failure of economics in the face of the 2008 crisis, which Colander et al (2009 term its “systemic failure”. This systemic failure is analysed as a consequence of the regulatory capture of the academic profession of economics, arising from and institutionalised by its present peer ranking procedures. Pluralism is the necessary antidote. It affords two decisive benefits: it produces good economics and better economists. The paper is part of a broad consultation on teaching in economics, organised by the UK-based Association for Heterodox Economists (AHE). It argues that a pluralist subject benchmark, derived from a pluralist code of conduct, is a prerequisite for the reform of the profession. Critical, pluralistic and independent thinking should be the primary requirement good economic practice, and pecific provisions should be made to recognise, promote, defend and guarantee this good practice in teaching and assessment alike. Systemic failure requires a systemic solution. The paper explains how the built-in tendency of the economic profession to select for conformity has led to its regulatory capture. Existing UK benchmarks have substituted peer-ranking – the appointment of judges selected for comformity – for collaborative peer review – the pluralistic integration of the strengths of the academic community. This past practice has become institutionalised at every level. The profoundly non-scientific practice of simply reproducing a politically acceptable consensus has thereby replaced the independent and critical pursuit of knowledge as the primary peer-recognised hallmark of quality. Tomorrow’s economists need to be defended against the systemic failure of the economics of today. This requires a conscious regulatory intervention – benchmarking for pluralism.
    Keywords: Economics Teaching; Pluralism; Heterodox Economics
    JEL: A13 B5 A11
    Date: 2009–06–14
  10. By: Landais, Bernard
    Abstract: This paper presents the interrelations between the economic and financial crisis and monetary policy. Its emphasizes three dimensions of the problem. First, monetary policy is partialy responsible of the financial and economics events of these last years. Second, strong monetary actions are needed and implemented with some success for curing the consequences of the crisis. Third, after the crisis, monetary policy may be never like before...
    Keywords: Politique monétaire ; crise financière ; récession ; déflation ; mesures non-orthodoxes
    JEL: E52
    Date: 2009–06
  11. By: Sergio, Reuben
    Abstract: The paper criticizes the conception of value on behalf of the conventional economic theory, blaming it for the current economic school’s incapacity to explain the actual economic crisis and to offer an adequate perspective to settle a solution. It proposes an explanation based on the tendency to concentration and centralization of capital’s accumulation and its effects on income distribution, which conforms inadequate and unbalanced structures of production and distribution, withdrawn from the appropriate and thorough use of scarce common resources. In the middle, long term, these structures determine ruptures in the process of accumulation of capital triggering crisis like the actual. The theory of regulation is used in this paper, in order to explain the growth of concentration and centralization of capital and of social gap during the last years, which is understood as the result of the crisis of Fordist regime of accumulation and of the surge of a new transnational regime.
    Keywords: Economic crisis; Financial crisis; Regulation theory; Regime of accumula-tion; Economic development; Social inequality; Economic theory; Political Economy; Development theory; Economic equilibrium.
    JEL: D5 E32 P2 P1 H44
    Date: 2009–03–30
  12. By: Aldo SPRANZI
    Abstract: The insurmountable obstacle against which economists’ attempts to confront and solve the economic problems of art – public funding as the first among many – and that has forced them to retreat after the ignominious attempt to save face by promoting art as a ‘merit good’ is the total lack of any form of aesthetic knowledge whatsoever. No one knows what the nature of art is, hence what need it satisfies, and as a consequence, the nature and dynamics of the act of consumption are unknown, as is, more generally speaking, the social function of art. Thus, art economists are not able to confront a problem of industrial efficiency. The problem seems to be unsolvable: how can the economist acquire unlimited aesthetic knowledge – because this is what it is all about – and then: how can this knowledge be used in a professional, scientific way, and in complete autonomy? In this study, a solution to the problem is put forward. Constructed thanks to an innovation brought about by Chance, it enables the economist to acquire unlimited aesthetic, pedagogic and critical tools that he/she can use professionally – not as a dilettante – and in complete autonomy, so as to be able to confront and solve the economic problems of art, which are problems in marketing and industrial economics.
    Keywords: Art economics, culture economics, culture industry, art marketing, cultural policies
    JEL: Z11
    Date: 2009–02–28
  13. By: Geoffrey Heal
    Abstract: Greater use of renewable energy is seen as a key component of any move to combat climate change, and is being aggressively promoted as such by the new U.S. administration and by other governments. Yet there is little economic analysis of renewable energy. This paper surveys what is written and adds to it. The conclusion is that the main renewables face a major problem because of their intermittency (the wind doesn't always blow nor the sun always shine) and that this has not been adequately factored into discussions of their potential. Without new storage technologies that can overcome this intermittency, much of the decarbonization of the economy will have to come from nuclear, carbon capture and storage (CCS) and energy efficiency (geothermal and biofuels can make small contributions). Nuclear and CCS are not without their problems. New energy storage technologies could greatly increase the role of renewables, but none are currently in sight.
    JEL: Q3 Q4 Q5
    Date: 2009–06
  14. By: Vorobyev, Oleg Yu.; Goldblatt, Joe Jeff; Finkel, Rebecca
    Abstract: The eventological theory of decision-making, the theory of event-based decision-making is a theory of decision-making based on eventological principles and using results of mathematical eventology [1]; a theoretical basis of the practical eventology [2, 3, 4]. The beginnings of this theory which have arisen from event-based representation of the reasonable subject and his decisions in the form of eventological distributions (E-distributions) of sets of events [5] and which are based on the eventological H-theorem [6] are offered. The illustrative example of the eventological decision-making by the reasonable subject on his own event-based behaviour in the financial or share market is considered.
    Keywords: eventology; event-based decision-making; eventological H-theorem
    JEL: D7 C0 G0
    Date: 2008–01–15
  15. By: Pollock, R.
    Abstract: We give an overview of the economics of `public sector information' (PSI) focusing on the question of funding and regulatory structure. That is: who should pay to maintain public sector information and what regulatory structure should be put in place to support this.
    Date: 2009–05–09
  16. By: N. Gregory Mankiw; Matthew Weinzierl; Danny Yagan
    Abstract: We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around.
    JEL: H21 H24 H25
    Date: 2009–06
  17. By: Colignatus, Thomas
    Abstract: National parliaments around the world are advised to each have their own national parliamentary enquiry into the education in mathematics and into what is called ‘mathematics’. Current mathematics namely fails and causes extreme social costs. The failure in mathematics and math education can be traced to a deep rooted tradition and culture in mathematics itself. Mathematicians are trained for abstract theory but when they teach then they meet with real life pupils and students. Didactics requires a mindset that is sensitive to empirical observation which is not what mathematicians are basically trained for. When mathematicians deal with empirical issues then problems arise in general. The stock market crash in 2008 was caused by many factors, including mismanagement by bank managers and failing regulation, but also by mathematicians and ‘rocket scientists’ mistaking abstract models for reality (Mandelbrot & Taleb 2009). Another failure arises in the modelling of the economics of the environment where an influx of mathematical approaches causes too much emphasis on elegant form and easy notions of risk but insufficient attention to reality, statistics and real risk (Tinbergen & Hueting 1991). Errors by mathematicians on realistic assumptions have important consequences for civic discourse and democracy as well (Colignatus 2007). The failure in math education is only one example in a whole range. The discussion of mathematics in this book can be understood by anyone with a decent command of highschool mathematics. While school math should be clear and didactically effective, a closer look shows that it is cumbersome and illogical. (1) This is illustrated with some twenty examples from a larger stock of potential topics. (2) Additional shopping lists for improvement on both content and didactic method can be formulated as well. (3) Improvements appear possible with respect to mathematics itself, on logic, voting theory, trigonometry and calculus. (4) What is called mathematics thus is not really mathematics. Pupils and students are psychologically tortured and withheld from proper mathematical insight and competence. Other subjects, like the education in economics, biology or physics, suffer as well. Application of economic theory helps us to understand that markets for education and ideas tend to be characterized by monopolistic competition and natural monopolies. Regulations then are important. Apparently the industry of mathematics education currently is not adequately regulated. The regulation of financial markets is a hot topic nowadays but the persistent failure of mathematics education should rather be high on the list as well. It will be important to let the industry become more open to society. When you want to understand the underlying historical processes that cause the current state of the world then this is the book for you. Mathematics education must be tackled, both as a noble goal of itself and for the larger causes.
    Keywords: education; mathematics; economics; school; college; university; training; skill; ability; human capital policy; human development; capacity formation; remediation; lifecycle skill formation; software; ICT; computer algebra; textbook publishing; learning; teaching; efficacy; regulation; policy evaluation;
    JEL: A20 I20 P16
    Date: 2009–05–11
  18. By: Peter Howells (UWE, Bristol)
    Abstract: In little more than twenty years, it has become widely accepted that the optimal design of monetary policy should include provision for a central bank that is independent of government influence. This is a remarkably short period of time for any idea in economics to become so widely-accepted. But there are problems. In this paper we show that there are many confusions and even some contradictions associated with central bank independence. To begin with, it is not entirely clear what it is exactly that central banks need to be independent of. Furthermore, there is confusion over the mechanisms whereby independence is supposed to deliver its benefits. The literature which is commonly said to provide the rationale for independence is often misunderstood and the evidence that independence does in fact enhance policy outcomes is extremely weak.
    Keywords: independent central banks
    JEL: E52 E58
    Date: 2009–06
  19. By: Aldo SPRANZI
    Abstract: This paper analyses the perverse effects that the inefficiency of the artistic chain of the cultural industry has on art consumption, which is due to the fact that the schools have been forced to accept an ‘official’ model of use that is hostile to the modus operandi of art – a relativistic, metatextual model imposed by official artistic culture.This cultural pathology is particularly clear if examined in reference to a masterpiece of Italian literature – Alessandro Manzoni’s The Betrothed – both because of the fact that the whole of official artistic culture is responsible for how it has been atrociously misunderstood, as well as for the fact that this wrong way of reading the masterpiece is required in all of the Italian schools. ‘Silent anti-Manzonism’ – a form of rejecting the novel – is the main perverse effect produced by this malfunctioning of the artistic chain. The argument put forward in this paper is supported by (a) the correct reading of the novel; (b) the significant testimony of a ‘rebellious’ intellectual of the twentieth century: Guido da Verona; (c) the results of an imposing investigative survey in 1993, in which 2600 Italian high school teachers participated.
    Keywords: Art economics, culture economics, culture industry, art marketing, Manzoni’s Betrothed
    JEL: Z11
    Date: 2008–05–21
  20. By: Randall Morck
    Abstract: Agency problems in economics virtually always entail self-interested agency exhibiting "insufficient" loyalty to principal. Social psychology also has a literature, mainly derived from work by Stanley Milgram, on issues of agency, but this emphasizes excessive loyalty -- people undergoing a so-called "agentic shift" and forsaking rationality for loyalty to a legitimate principal, as when "loyal" soldiers obey orders to commit atrocities. This literature posit that individuals experience a deep inner satisfaction from acts of loyalty -- essentially a "utility of loyalty" -- and that this both buttresses institutions organized as hierarchies and explains much human misery. Agency problems of excessive loyalty, as when boards kowtow to errant CEOs and controlling shareholders, may be as economically important in corporate finance as the more familiar problems of insufficient loyalty of corporate insiders to shareholders. Overt conflict between rival authorities is shown to reverse the "agentic shift" -- justifying institutions that formalize argumentation such as the adversary system in Common Law courts; the Official Opposition in Westminster democracies; discussants and referees in academia; and independent directors, non-executive chairs, and proxy contests in corporate governance.
    JEL: D02 D72 D87 G3 K0 P37
    Date: 2009–06
  21. By: Bernard De Meyer (Centre d'Economie de la Sorbonne); Ehud Lehrer (School of Mathematical Sciences - Tel Aviv University); Dinah Rosenberg (LAGA Institut Galilée - Université Paris 13)
    Abstract: In a Bayesian game some players might receive a noisy signal regarding the specific game actually being played before it starts. We study zero-sum games where each player receives a partial information about his own type and no information about that of the other player and analyze the impact the signals have on the payoffs. It turns out that the functions that evaluate the value of information share two property. The first is Blackwell monotonicity, which means that each player gains from knowing more. The second is concavity on the space of conditional probabilities.
    Keywords: Value of information, Blackwell monotonicity, concavity.
    JEL: C72 C73 D80 D82 D83
    Date: 2009–05
  22. By: Anna MAFFIOLETTI; Michele SANTONI
    Abstract: This paper presents the results of two experiments testing reaction to risk and uncertainty of a sample of 66 Italian university students. Risky prospects were based on games of chance, while uncertain lotteries were based on the forthcoming results of either the May 2001 Italian general political election or the June 2004 election for the European Parliament. We computed decision weights for risk and uncertainty; we also collected data as regards the subjects’ degree of belief, expressed by probability judgements, for the same uncertain events. Our results show that the subjects’ behaviour is consistent with expected utility theory as regards risk, but not under uncertainty. In particular, our subjects show a strong superadditivity in the decision weights and the possibility effect (lower subadditivity) is stronger than the certainty effect (upper subadditivity). There is also evidence that emotions, actual competence and confidence positively affect the possibility effect, whereas they do not have any influence on the certainty effect, reinforcing the lack of symmetry between the two effects
    Keywords: Uncertainty, Subadditivity, Emotions, Competence, Confidence
    JEL: D81
    Date: 2007–09–18
  23. By: Marshall Auerback
    Abstract: To save America--indeed, the global economy as a whole--the private/public sector balance has to shift, and the neoliberal economic model on which the country has been based for the past 25 years has to be modified. In this new working paper, Marshall Auerback details why the role of the state needs to be reemphasized. The abandonment of a mixed economy and corresponding diminution of the role of government was hailed as the "rebirth of individualism," yet it caused rising inequality and the decline of median wages, and led to the widespread neglect of public goods vital to its citizens' welfare. Meanwhile, the country ran through the public investment it had made from the 1930s to the 1970s, with few serious challenges from policymakers or mainstream economists. The neoliberal model was also aggressively exported: the "optimal" growth strategy for all emerging economies was supposedly one that emphasized limited government, corporate governance, rule of law, and higher levels of state-owned and -influenced enterprise—in spite of significant historical evidence to the contrary. Not even the economic wreckage in Mexico, Argentina, Thailand, Indonesia, and Russia seemed sufficient to challenge, let alone overturn, the prevailing paradigm. That is, until now: in reaction to the financial crisis, many governments—led by the United States—are enacting massive economic stimulus packages and taking a central role in promoting economic growth strategies. This reemergence of state-driven capitalism constitutes a "back to the future" investment paradigm, one that is consistent with a long and successful pattern of economic development. But once we get beyond the pothole patching and school repairing, what industries can be pushed forward using public seed capital or through Sematech-like consortiums? What must be brought to the fore is the need for a new growth path for the United States, one in which the state has a significant role. There are already indications that the private sector is beginning to adapt to this new, collaborative paradigm.
    Date: 2009–05
  24. By: Randall Morck; Bernard Yeung
    Abstract: Different economies at different times use different institutional arrangements to constrain the people entrusted with allocating the economy's capital and other resources. Comparative financial histories show these corporate governance regimes to be largely stable through time, but capable of occasional dramatic change in response to a severe crisis. Legal origin, language, culture, religion, accidents of history (path dependence), and other factors affect these changes because they affect how people and societies solve problems.
    JEL: G34 N2 P1
    Date: 2009–06
  25. By: Jianying Qiu (Department of Economics, University of Innsbruck SOWI Building, Universitaetstrasse 15 6020 Innsbruck, Austria // Max Planck Institute of Economics, ESI Group, Kahlaische Str. 10, D-07745 Jena, Germany); Prashanth Mahagaonkar (Max Planck Institute of Economics, EGP Group, Kahlaische Str. 10, D-07745 Jena, Germany // Schumpeter School of Business and Economics, University of Wuppertal, Germany)
    Abstract: In this paper, we directly test the Modigliani-Miller theorem in the lab. Applying a general equilibrium approach and not allowing for arbitrage among firms with different capital structures, we are able to address this issue without making any assumptions about individuals' risk attitudes and initial wealth positions. We find that, consistent with the Modigliani-Miller theorem, experimental subjects well recognized the increased systematic risk of equity with increasing leverage and accordingly demanded higher rate of return. Furthermore, the correlation between the value of the debt and equity is -0.94, which is surprisingly comparable with the -1 predicted by the Modigliani-Miller theorem. Yet, a U shape cost of capital seems to organize the data better.
    Keywords: The Modigliani-Miller Theorem, Experimental Study, Decision Making under Uncertainty, General Equilibrium
    JEL: G32 C91 G12 D53
    Date: 2009–06
  26. By: Srihari Govindan; Robert Wilson
    Date: 2009–05–31
  27. By: Martin Shubik
    Abstract: A simple consideration of history tells us that each new piece of legislation contains loopholes that benefit a new class of entrepreneurs; some of these loopholes are small, but others are such that one could drive a bullion-laden truck through them. In this new Policy Note, Martin Shubik suggests creating a “war gaming group” to stress-test all major new legislation, with a first prize of $1 million to be awarded to the competing lawyer or team of lawyers who finds the most egregious loophole—a small amount relative to the potential savings.
    Date: 2009–04

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