nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2009‒12‒19
fourteen papers chosen by
Erik Thomson
University of Manitoba

  1. The paradox of monetary profits: an obstacle to understanding financial and economic Crisis? By Bruun , Charlotte; Heyn-Johnsen, Carsten
  2. Fundamental uncertainty, portfolio choice, and liquidity preference theory By Pasche, Markus
  3. A reason-based theory of rational choice By Dietrich Franz; List Christian
  4. General aggregation problems and social structure: A model-theoretic generalisation of the Kirman-Sondermann correspondence By Frederik Herzberg; Daniel Eckert
  5. Venezuelan Economic Laboratory. The Case of the Altruistic Economy of Felipe Pérez Martí By Alejandro Agafonow
  6. On the Travesty of the Tragedy of the Commons: Hardin's Nontrivial Error By Funk, Matt
  7. From stability to growth in neoclassical multisector models By Mario, Pomini
  8. Social Networks By De Martí, Joan; Zenou, Yves
  9. Fairness: A Critique to the Utilitarian Approach By Philipp Kircher; Sandra Ludwig; Alvaro Sandroni
  10. Upon Daedalian Wings of Paper Money: Adam Smith and the Crisis of 1772 By Hugh Rockoff
  11. The origins of a paper money economy - the case of Norway By Lars Fredrik Øksendal
  12. The Great Depression Analogy By Michael D. Bordo; Harold James
  13. Financial crises and cyclic development according to the approach of Paolo Sylos Labini By Corsi, Marcella; Guarini, Giulio
  14. Is Posner's Principle of Justice an Adequate Basis for Environmental Law? By Tisdell, Clem

  1. By: Bruun , Charlotte; Heyn-Johnsen, Carsten
    Abstract: The paradox of monetary profits has been a recurrent theme in macroeconomics since the problem was first formulated by Marx. Capitalists as a whole can at most get from workers, what they already paid out in wages. Marx did not solve this problem, and neither did Keynes, who had to face the problem in “The General Theory”. A consequential logical conclusion to Keynes’ treatment of the problem, leaves his concept of aggregate income indeterminate—based on imaginary magnitudes. Both Marx and Keynes tried to solve the problem by addressing current transaction flows, which is also the approach taken by more recent contributors. Another solution to the problem is to regard monetary profits as a flow arising from changes in stock magnitudes—more specifically the monetary valuation of real capital performed at financial markets. Besides solving the paradox of monetary profits, this solution also provides us with a very strong connection between the real and the financial spheres. The monetary profit inducing capitalist production, emanates from the sphere of finance. In a world of fundamental uncertainty this gives us an explanation of, not only what may drive financial booms and busts, but also how these movements on financial markets are related to the real sphere of production. --
    Keywords: Monetary production theory,stock-flow consistency,finance,national income accounting
    JEL: E44 E01 E11 E12 E25
    Date: 2009
  2. By: Pasche, Markus
    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 bounded 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-confidence,self-consciousness,fundamental uncertainty,bounded rationality,Keynes,Knight
    JEL: G11 D81 E41 B31
    Date: 2009
  3. By: Dietrich Franz; List Christian (METEOR)
    Abstract: The standard rational choice paradigm explains an individual’s preferences by his beliefs and his fundamental desires. For instance, someone’s preference for joining the army might be explained by certain beliefs about what life in the army is like and a desire for such a life. While beliefs may change (by new information), fundamental desires are totally fixed. One shortcoming of this paradigm is that reasons and motivations play no explicit role. Some of the more fundamental preference changes that one can undergo seem to reach beyond information-learning and to involve a change in the reasons or goals by which one is fundamentally motivated. Such changes of motivating reasons may come in connection with a changing ability to abstractly represent certain aspects of the world (like the thirteenth move in a game) or to imagine certain qualitative aspects of the world (like feelings of complete loneliness). Standard rational choice models implicitly assume away such changes. This paper proposes a formal reason-based model of preferences. The model explains an individual’s preferences by the set of reasons that motivate him. The preference of our example individual for joining the army would be explained by the set of reasons that motivate him, such as service to his country, an athletic body, and comradeship. Preference change in our model thus stems not exclusively from new information but often also from a change of the set of motivating reasons. If our example individual suddenly loses his preference for joining the army and joins a charity, new reasons (such as worldwide justice) might have become motivating while others (such as an athletic body) might have lost their motivational power. Our notion of a ‘(motivating) reason’ is open to different interpretations and applications, like ones related to conceptualisation or imagination abilities. We formulate two natural axioms on reason-based preferences, the first ensuring that preferences are determined by the motivating reasons and the second ensuring that preferences change in a coherent way as additional reasons become motivating. These two axioms are shown to imply a parsimonious representation of preferences: a single binary relation (which ranks the consistent reason sets) is sufficient to generate all individual preferences across possible individual states (i.e., possible sets of motivating reasons).
    Keywords: mathematical economics;
    Date: 2009
  4. By: Frederik Herzberg (Institute of Mathematical Economics, Bielefeld University); Daniel Eckert (Institute of Public Economics, Graz University)
    Abstract: This article proves a very general version of the Kirman-Sondermann [Journal of Economic Theory, 5(2):267-277, 1972] correspondence by extending the methodology of Lauwers and Van Liedekerke [Journal of Mathematical Economics, 24(3):217-237, 1995]. The paper first proposes a unified framework for the analysis of the relation between various aggregation problems and the social structure they induce, based on first-order predicate logic and model theory. Thereafter, aggregators satisfying Arrow-type rationality axioms are shown to be restricted reduced product constructions with respect to the filter of decisive coalitions; an oligarchic impossibility result follows. Under stronger assumptions, aggregators are restricted ultraproduct constructions, whence a generalised Kirman-Sondermann correspondence as well as a dictatorial impossibility result follow.
    Keywords: Arrow-type preference aggregation, judgment aggregation, systematicity, model theory, first-order predicate logic, filter, ultrafilter, reduced product, ultraproduct
    JEL: D71
    Date: 2009–11
  5. By: Alejandro Agafonow (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: Felipe Pérez Martí, who was the Venezuelan Minister of Planning and Development in the government of Hugo Chávez, proposes an economic model that he calls the altruistic economy or fourth way, which leads cooperative game theory to its logical extremes postulating a pure communism. Here we sustain that, first, it is impossible in the model of Pérez Martí to marginally allocate non-primary goods to those most in need or who most value them, facing a problem of defective economic calculation, and second, in order to achieve equality, he would have to replace his atomic local planners by a central planner, who would be unable to overcome the problem of imperfect and and incomplete information.
    Keywords: altruism, Nash equilibrium, game theory, planning, communism, equality
    JEL: B5 D5 D7 D8 O2 P2
    Date: 2009–11
  6. By: Funk, Matt
    Abstract: Garrett Hardin’s "Tragedy of the Commons" remains one of the most frequently cited works across the spectrum of science — indeed, a visit to the website of the influential journal which published this paper in 1968 reveals that this revolutionary communique remains amongst its ‘top articles’. But Hardin's enduring, influential theoretical development presents a serious problem: it is not a single theory, but rather four major theories in a stormy sea of ill-conceived and untenable auxiliary conjecture. Moreover, the solid core of Hardin's central thesis was simply a restatement of a previously published theory, the promethean vision of William Forster Lloyd.
    Keywords: Tragedy of the Commons; William Forster Lloyd; Garrett Hardin; Scientific Method;
    JEL: Q50 B40 Q20
    Date: 2009–12–11
  7. By: Mario, Pomini
    Abstract: Analysis of the multisector models was an important strand of inquiry within neoclassic growth theory from the early 1960s and at the end of the decade the multisector approach constituted one of the most promising areas of inquiry within growth theory as a whole. Studies in this area dwindled away at the end of the 1970s but the situation abruptly changed with the advent of endogenous growth theory in the second half of the 1980s which with Lucas (1988) and Romer (1990) was from the outset framed in a multisectorial perspective. The multisector approach was resumed in the literature on endogenous growth, but with features different from those that had previously characterized it. The aim of this paper is to analyze the evolution of some particular aspects of the neoclassical multisector approach from the first studies of the 1960s until current theorization.
    Keywords: multisector economic growth; neoclassical growth models
    JEL: O41 B13
    Date: 2009–12–03
  8. By: De Martí, Joan; Zenou, Yves
    Abstract: We survey the literature on social networks by putting together the economics, sociological and physics/applied mathematics approaches, showing their similarities and differences. We expose, in particular, the two main ways of modeling network formation. While the physics/applied mathematics approach is capable of reproducing most observed networks, it does not explain why they emerge. On the contrary, the economics approach is very precise in explaining why networks emerge but does a poor job in matching real-world networks. We also analyze behaviors on networks, which take networks as given and focus on the impact of their structure on individuals’ outcomes. Using a game-theoretical framework, we then compare the results with those obtained in sociology.
    Keywords: centrality measures; game theory; network formation; random graph; weak and strong ties.
    JEL: A14 C72 D85 Z13
    Date: 2009–12
  9. By: Philipp Kircher (Department of Economics, University of Pennsylvania); Sandra Ludwig (Department of Economics, University of Pennsylvania); Alvaro Sandroni (Department of Economics, University of Munich)
    Abstract: We address a basic diffculty with incorporating fairness into standard utilitarian choice theories. Standard utilitarian theories evaluate lotteries according to the (weighted) utility over final outcomes and assume in particular that a lottery is never preferred over getting the most preferred underlying outcome with certainty. While nearly universally adopted in economics (including behavioral economics) and appealing for choices among consumption goods, this approach is problematic when choices directly affect the payoffs of other individuals. A difficulty is that randomization may in itself be valued as a desirable procedure for allocating scarce resources. We highlight this in two simple choice settings. Individuals can choose between three options: to get more money; to get less money and someo ther good; to flip a coin between these two alternatives. When the good is a regular consumption good like a coffeemug, hardly any of our subjects randomize. When the good is a social good that yields payoffs directly to some other individual,nearly a third of our subjects choose to randomize. Our results indicate that fairness concerns are conducive to behavioral anomalies that the standard utilitarian model cannot accommodate.
    Keywords: risky choice, betweenness axiom, social preferences, preference for randomness
    JEL: D81 C91 D63
    Date: 2009–11
  10. By: Hugh Rockoff
    Abstract: Adam Smith advocated laissez faire for most sectors of the economy, but he believed that banking and finance required several forms of regulation including usury laws and the prohibition of small-denomination bank notes. Smith’s support for banking regulation appears to have been a response to the shocks that hit the Scottish banking system during the time that he was composing the Wealth of Nations. The most important was the Crisis of 1772, which has been described as the first modern banking crisis faced by the Bank of England. It resembles the Crisis of 2008 in a number of striking ways. This paper describes the Crisis of 1772, the other shocks that hit the Scottish banking system, and the evolution of Smith’s views on the regulation of banking. It is based on Smith’s writings, the secondary sources, and a quantification of the new issues of Scottish bank notes during Smith’s era.
    JEL: N1
    Date: 2009–12
  11. By: Lars Fredrik Øksendal (Norwegian School of Economics and Business Administration (NHH))
    Abstract: This article sketches the origins of paper money in Norway back to the last half of the 18th century and asks why there was no circulation of full-bodied coins even after notes had become convertible into silver at par in 1842. The argument put forward is that the choice of fiat paper money reflected the relative economic backwardness of the country. Although Gresham’s law also applied for Norway, the most important reason paper money caught on and maintained that position as the most important part of the money stock was the chronic shortage of means of payment. In such a situation, bad money was not that bad after all. Moreover, times of war and political havoc besides, paper money managed to stay fairly stable and fulfil an essential function as a store of wealth. With time, paper money became institutionalised in the Norwegian economy, overwhelmingly dominating the domestic circulation and functioning as the key monetary reference (unit of account). Thus, convertibility in 1842 linked the domestic currency with international money at fixed rates, but had hardly any bearing on the domestic function of money.
    Keywords: Banknotes, bullion standard, convertibility, Gresham’s law, paper money
    JEL: E42 E58 N23
    Date: 2009–12–04
  12. By: Michael D. Bordo; Harold James
    Abstract: This paper examines three areas in which analogies have been made between the interwar depression and the financial crisis of 2007 which reached a dramatic climax in September 2008 with the collapse of Lehman Brothers and the rescue of AIG: they can be labeled macro-economic, micro-economic, and geo-political. First, the paper considers the story of monetary policy failures; second, there follows an examination of the micro-economic issues concerned with bank regulation and the reorganization of banking following the failure of one or more major financial institutions and the threat of systemic collapse; third, the paper turns to the issue of global imbalances and asks whether there are parallels that might be found in this domain too between the 1930s and the events of today.
    JEL: E58 N0 N12
    Date: 2009–12
  13. By: Corsi, Marcella; Guarini, Giulio
    Abstract: In his “Le prospettive dell’economia mondiale” (“Prospects for the world economy”) of 2003 Paolo Sylos Labini analyses the real and financial factors of the American economy and expresses pessimistic forebodings on the future economic trends in the USA and other parts of the world which, in the light of the events occurring as from 2007, can now be seen to have been justified. The aim of this paper is to provide his ideas with a place in the present debate on the American financial crisis and, to this end, the paper is divided into three parts. To begin with we will delineate the approach taken by Paolo Sylos Labini in examining the links between the financial system and economic system, highlighting the classical, Schumpeterian and Keynesian elements contained in it. We will then turn the focus on the four key elements of financial crisis according to Sylos: income distribution, innovation, market forms and debt sustainability. Finally, we will recall some considerations by Sylos on the three themes central to the present debate on the American crisis, namely the rate of interest in monetary policy, the role of the managers, and expectations.
    Keywords: Paolo Sylos Labini; financial crises; cyclic development
    JEL: O10 B50
    Date: 2009–09–20
  14. By: Tisdell, Clem
    Abstract: Posner adopted the economic principle of wealth maximization as a guiding principle for the dispensation of justice. This resulted in his endorsing the Kaldor-Hicks principle (also known as the potential Paretian improvement principle) as a basis for just laws. This article explores whether this principle is an adequate basis for environmental law. As can be deduced from Fleming, the legal approach adopted by Posner is by no means new because early British tort law was applied in a manner intended to foster economic growth. Nevertheless, the wealth maximization principle is not adequate as a basis for just environmental laws because for one thing it ignores questions involving changes in income distribution. Consequently, Rawlsâ principle of justice is examined and compared with that of Posner. The role of property rights in relation to the state of the environment is assessed in the light of Posnerâs principle of justice, as is Coaseâs theorem supporting a clear definite allocation of private property rights as a solution to environmental problems. Furthermore, in this context, the justification for the taking of private property by the state is examined. It is argued that additional factors to wealth maximization and income distribution must be taken into account in determining whether laws are just. In addition, it is suggested that it is not the sole purpose of the law to dispense justice.
    Keywords: Coase theorem, law and economics, Posnerâs principle of justice, principles of justice, property rights, Rawlsâ principle of justice, tort law, welfare economics, Environmental Economics and Policy, K, K1. K11. K13, K32, Q5,
    Date: 2009–06

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