nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2010‒01‒30
fifteen papers chosen by
Erik Thomson
University of Manitoba

  1. D and Z in ROPE – Will the Real Keynes Please Stand Up? By Jochen Hartwig
  2. Well-Being, Preference Formation and the Danger of Paternalism By Mozaffar Qizilbash
  3. On Keynes’s criticism of the Loanable Funds Theory By Giancarlo Bertocco
  4. Youth Employment in Europe: Institutions and Social Capital Explain Better than Mainstream Economics By Bruno Contini
  5. Cognitive Issues in Policy Making By Akira IIDA
  6. Risk starvation contributes to dementias and depressions: Whiffs of danger are the antidote By Robin Pope
  7. Información y persuasión en los mercados financieros By Estrada, Fernando
  8. On Understanding the Human Nature of Good and Bad Behavior in Business: A Behavioral Ethics Approach By Cremer, D. de
  9. Two New Zealand Pioneer Econometricians By Peter C.B. Phillips
  10. Chaos Models in Economics By Sorin Vlad; Paul Pascu; Nicolae Morariu
  11. Stochastic Dynamics and Matching in the Old Keynesian Economics: A Rationale for the Shimer's Puzzle By Marco Guerrazzi
  12. How Did Financial-Crisis-Based Criticisms of Market Efficiency Get It So Wrong? By Ariane Szafarz
  13. Rational and Boundedly Rational Behavior in Sender-receiver Games By Massimiliano Landi; Domenico Colucci
  14. Social Preferences and Competition By Schmidt, Klaus M.
  15. References made and citations received by scientific articles By Pedro Albarrán; Javier Ruiz-Castillo

  1. By: Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: The Review of Political Economy (ROPE) welcomed the year 2009 with an issue in which the first two articles use an interesting yet not very popular modeling framework, namely the aggregate demand/aggregate supply (D/Z) model from Chapter 3 of Keynes’s General Theory. Unfortunately, as I intend to show in this paper, the interpretations of Keynes’s D/Zmodel proposed by these two articles contradict each other. To resolve this unsatisfactory state of affairs, I will offer an evaluation of which of the two interpretations is more in line with Keynes’s own suggestions.
    Keywords: Keynes’s D/Z model, effective demand, Post Keynesianism
    JEL: E12
    Date: 2009–11
  2. By: Mozaffar Qizilbash
    Abstract: Informed or rational desire, capability and prudential value list views of well-being - must accommodate human limitations, as well as address issues about adaptation and paternalism. They sometimes address adaptation by toughening the requirement(s) on those desires, satisfaction of which constitutes well-being. That exacerbates a concern that these accounts if adopted will encourage policies which override actual desires and enforce paternalistic restrictions. Sunstein, like Sen, invokes democratic deliberation to address the adaptation problem, and advocates autonomy promoting paternalistic restrictions. Sunstein and Thaler's 'libertarian paternalism' extends this flavour of argument to cover examples of irrationality from behavioural economics. Their variation of the informed desire account involves highly idealized preferences which cannot, in practical terms, guide a paternalistic social planner, but lead to a potentially large range of cases where paternalistic intervention might, in principle, be justified. I argue that the liberal paternalist policy agenda should as currently conceived be resisted.
    Keywords: Length 31 pages
    Date: 2009–12
  3. By: Giancarlo Bertocco (Department of Economics, University of Insubria, Italy)
    Abstract: Contemporary monetary theory, by accepting the theses of the Loanable funds theory, distances itself from Keynes, who considered the rate of interest as an exclusively monetary phenomenon, and overlooks the arguments Keynes used, following publication of the General Theory, to respond to the criticism of supporters of the Loanable funds theory such as Ohlin and Robertson. This paper aims to assert that the explicit consideration of the role of banks in financing firms‘ investments connected with the specification of the finance motive does not imply acceptance of the LFT, which holds that the interest rate is a real phenomenon determined by saving decisions, but makes it possible to elaborate a theory of credit alternative to the LFT and a sounder theory of the non neutrality of money than the one based on the liquidity preference theory.
    Date: 2009–12
  4. By: Bruno Contini
    Abstract: Why did employment growth - high in the last decade– take place at the expense of young workers in the countries of Central and Southern Europe ? This is the question addressed in this paper. Youth unemployment has approached or exceeded 20% despite a variety of factors, common to most EU countries. According to neo-classical economics all would be expected to exert a positive impact on its evolution: population ageing and the demographic decline, low labor cost of young workers, flexibility of working arrangements, higher educational attainment, low unionization of young workers, early retirement practices of workers 50+. But neither seems to provide a convincing explanation. Historically based institutions and political tradition, cultural values, social capital – factors that go beyond the standard explanation of economic theory – provide a more satisfying interpretation.
    Keywords: youth employment, unemployment, social capital, institutions.
    JEL: J J0 J1 J6
    Date: 2009
  5. By: Akira IIDA (Policy Research Institute)
    Abstract: In any policy making exercise, whether it is about matters of economic, social or political problems, both domestic and international, such as diplomatic relations or national defense, there are various cognitive issues that affect the design and implementation of the policy. Without correct cognition of the actuality and history regarding the problems in question, or without correct cognition of the problems that might arise in the process of the policy implementation, the policy making exercise is bound to fail. Yet, in the history of economics, sociology or the study of the diplomacy or of national defense, philosophical inquiry about “cognitive issues in policy making� has been very poor. More specifically, on one hand, epistemologists have hesitated to go into this kind of inquiry, since policy making always embraces questions of values or other subjective judgments, and hence, objectivity is not assured. On the other hand, the attention of the economist, sociologist, or analysts on diplomacy and national defense has focused on the analysis of relationships among the economic, social, diplomatic or defense factors, while neglecting the cognitive issues in policy making itself. Policy makers should have far better knowledge in this area, but they have paid scarce attention to it, despite their policy failures, caused by their failures to recognize the factors that really mattered in the case in question
    Keywords: policy making, cognitive issues, epistemology theory, paradigm theory
    JEL: E61 E66 E60
    Date: 2010–01
  6. By: Robin Pope
    Abstract: This paper’s objective is to use SKAT, the author’s Stages of Knowledge Ahead Theory of risk, to shed fresh light on the treatment and prevention of mental disorders. SKAT employs a broad definition of risk that allows for nice – not merely nasty – possibilities. SKAT is here shown to solve eight epidemiological puzzles left unexplained by our current theories and associated treatments for the demented and depressed. SKAT does so by enabling a decision model of mental health that puts centre stage why people (and other soft-wired animals) have brains – to make decisions under risk. To make good decisions (be healthy), brains need exercise. Brains get beneficial exercise from what the paper terms “whiffs of danger”, namely sets of risks with the characteristics that the risks are 1) tiny, 2) varied, and 3) frequent. Brains deteriorate when there are shortfalls in such risk exercise. The paper terms such shortfalls “risk starvation”. Those lacking a history of whiffs find normal mishaps too stressful and frequently become depressed. A lot of time with an inadequate amount of whiffs generates the endemic co-morbidity of becoming demented as well as depressed. Socio-economic cultural changes such as the introduction of unemployment benefits and old age pensions and increasing protection of women and children have had the beneficial effects of removing big challenges and big dangers and thus of prolonging physical longevity. But these changes also removed the tiny challenges and tiny dangers formerly faced by those sub-groups in the population identified as more prone to depressions and dementias. Unintentionally, these sub-groups thus were deprived of whiffs of danger, and suffered from risk starvation. In both drug and psychotherapeutic stress research and treatments of the depressed and demented, there should be injections of whiffs of danger to enhance the likelihood of enduring improvements. It is unkind and dangerous for people’s brains to be treated with drugs while maintaining the modern socioeconomic culture of coddling parents and coddling college / university student counsellors, coddling unemployment benefits and coddling old age pensions. These coddles need to be complemented with whiffs of danger, tiny varied chances and challenges. These whiffs of danger need to be introduced in three forms: eliciting social security recipients’ whiffs of danger in the form of little obligations to help the community; alerting the poor and on how closeting females at home endangers their mental health; and educating parents on the damage from overprotecting children. Overprotection prevents children from becoming inoculated against depression with sensible hope developed over a childhood in which they were allowed to experience numerous failures, not merely numerous successes from parents too closely engineering their environment. Research is required on the likely role of risk starvation in mental disorders other than dementias and depressions and in some physical illnesses.
    Keywords: Stress, whiffs of danger, decision, dementia, depression, risk starvation, risk, learning, hope, fear, risk-based emotions.
    JEL: B50 D81 D87 I10
    Date: 2009–07
  7. By: Estrada, Fernando
    Abstract: This paper aims to defend the importance of the information and persuasion in financial markets. The conviction relates to the developments of Argumentation Theory (AT). Understand that economic agents react according to the information they have, and that beliefs play an important role because it motivates the decisions to be made in certain circumstances. This paper is the first part will be illustrated in a second installment to the study of specific cases.
    Keywords: Economics of Networks; Neuroeconomics; Behavioral & Experimental Finance; Real Estate; Risk Management
    JEL: D11 D84 C71 D82 C72
    Date: 2010–01–19
  8. By: Cremer, D. de (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The numerous scandals in business, such as those at AIG, Tyco, WorldCom, Enron and Ahold, have made all of us concerned about the emergence of unethical and irresponsible behavior in organizations. Such widespread corruption in business and politics has, as result, prompted a growth of interest in the field of business ethics. At the same time, however, within the academic world it is also recognized that to tackle those unethical actions in an efficient way, the field of business ethics needs to integrate insights from behavioral science. In this inaugural address I focus more closely on the benefits that a behavioral approach can bring to the field of business ethics. In presenting these benefits, I draw a distinction between prescriptive and descriptive approaches and outline how the field of psychology can help in integrating these two perspectives so that we can move towards a more comprehensive understanding of behavioral business ethics. This integration is illustrated by my own research addressing how sanctioning and regulation systems affect behavior, the benefits of procedural fairness and the workings of trust repair strategies. Finally, I formulate some implications for academia, the government and economics.
    Keywords: business ethics;behavioral ethics;descriptive;trust repair;sanctions;procedural fairness
    Date: 2009–10–23
  9. By: Peter C.B. Phillips (Cowles Foundation, Yale University)
    Abstract: Two distinguished New Zealanders pioneered some of the foundations of modern econometrics. Alec Aitken, one of the most famous and well-documented mental arithmeticians of all time, contributed the matrix formulation and projection geometry of linear regression, generalized least squares (GLS) estimation, algorithms for Hodrick Prescott (HP) style data smoothing (six decades before their use in economics), and statistical estimation theory leading to the Cramér Rao bound. Rex Bergstrom constructed and estimated by limited information maximum likelihood (LIML) the largest empirical structural model in the early 1950s, opened up the field of exact distribution theory, developed cyclical growth models in economic theory, and spent nearly 40 years of his life developing the theory of continuous time econometric modeling and its empirical application. We provide an overview of their lives, discuss some of their accomplishments, and develop some new econometric theory that connects with their foundational work.
    Keywords: Aitken, Cramér Rao bound, HP filter, Minimum variance unbiased estimation, Projection, GLS; Bergstrom, Continuous time, Exact distribution, LIML, UK economy; Pioneers of econometrics
    JEL: B16 C00
    Date: 2010–01
  10. By: Sorin Vlad; Paul Pascu; Nicolae Morariu
    Abstract: The paper discusses the main ideas of the chaos theory and presents mainly the importance of the nonlinearities in the mathematical models. Chaos and order are apparently two opposite terms. The fact that in chaos can be found a certain precise symmetry (Feigenbaum numbers) is even more surprising. As an illustration of the ubiquity of chaos, three models among many other existing models that have chaotic features are presented here: the nonlinear feedback profit model, one model for the simulation of the exchange rate and one application of the chaos theory in the capital markets.
    Date: 2010–01
  11. By: Marco Guerrazzi
    Abstract: Following the Farmer’s (2008a-b, 2010) micro-foundation of the General Theory, I build a competitive search model in which output and employment are demand-driven, prices are flexible, the nominal wage is used as numeraire and agents are divided in two categories: wage and profit earners. Within this framework, I show that the model economy has a continuum of demand constrained equilibria that might be consistent with a certain degree of endogenous real wage stickiness. Moreover, calibrating and simulating the model economy in order to fit the US first-moments data, I show that this setting can provide a rationale for the Shimer’s (2005) puzzle, i.e., the relative stability of real wages in spite of the large volatility of labor market tightness.
    Keywords: Stochastic Dynamics, Competitive Search, Old Keynesian Economics, Demand Constrained Equilibrium, Numerical Simulations.
    JEL: E12 E24 J63 J64
    Date: 2010–01–18
  12. By: Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles.)
    Abstract: Criticizing the Efficient Market Hypothesis (EMH) on the basis of highly volatile asset prices is conceptually wrong as efficiency is about rationality and information, not about stability. Speculative bubbles are compatible with rational valuation, and hence with market efficiency. As rational expectations are auto-referential, multiple solutions are a natural outcome. This paper attributes the prevalent confusion between bubbles and irrationality to the bad reputation of multiple-solution models often considered as underspecified. It argues that multiple solutions rather represent an opportunity to economists by bringing theoretically sound degrees of freedom to empirical implementation. Moreover, the recognition of multiple price dynamics compatible with market efficiency thwarts irrationality-based theories and, as such, is a valuable asset largely underestimated by the profession.
    Keywords: Efficient Markets, Multiple Solutions, Rational Expectations, Speculative Bubbles, Volatility.
    JEL: G14 G12 B41
    Date: 2010–01
  13. By: Massimiliano Landi; Domenico Colucci (Singapore Management University)
    Abstract: We consider a signalling game in which a population of receivers decide on the outcome by majority rule, sender and receivers have conflicting interests, and there is uncertainty about both players’ types. We model players rationality along the lines of recent findings in behavioral game theory. We characterize the structure of the equilibria in the reduced game so obtained. We find that all pure strategy equilibria are consistent with successful attempts to mislead the receivers, and relate them to the message bin Laden sent on the eve of the 2004 US Presidential elections. The same result holds if we allow for some uncertainty about the sign of the correlation between the sender’s and the receivers’ payoffs.
    Keywords: bin Laden, sender receiver games, US Presidential elections, signalling game, payoffs
    JEL: C70 D72 D70
    Date: 2010–01
  14. By: Schmidt, Klaus M.
    Abstract: There is a general presumption that social preferences can be ignored if markets are competitive. Market experiments (Smith 1962) and recent theoretical results (Dufwenberg et al. 2008) suggest that competition forces people to behave as if they were purely self-interested. We qualify this view. Social preferences are irrelevant if and only if two conditions are met: separability of preferences and completeness of contracts. These conditions are often plausible, but they fail to hold when uncertainty is important (financial markets) or when incomplete contracts are traded (labor markets). Social preferences can explain many of the anomalies frequently observed on these markets.
    Keywords: Social preferences; competition; separability; incomplete contracts; asset markets; labor markets
    JEL: C9 D5 J0
    Date: 2010–01
  15. By: Pedro Albarrán; Javier Ruiz-Castillo
    Abstract: This paper studies massive evidence about references made and citations received after a five-year citation window by 3.7 million articles published in 1998-2002 in 22 scientific fields. We find that the distributions of references made and citations received share a number of basic features across sciences. Reference distributions are rather skewed to the right, while citation distributions are even more highly skewed: the mean is about 20 percentage points to the right of the median, and articles with a remarkable or outstanding number of citations represent about 9% of the total. Moreover, the existence of a power law representing the upper tail of citation distributions cannot be rejected in 17 fields whose articles represent 74.5% of the total. Contrary to the evidence in other contexts, the value of the scale parameter is between three and four in 15 of the 17 cases. Finally, power laws are typically small but capture a considerable proportion of the total citations received
    Date: 2009–12

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