nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2010‒09‒11
seventeen papers chosen by
Erik Thomson
University of Manitoba

  1. Lucas on the relationship between theory and ideology By Michel DE VROEY
  2. Lucas on the Lucasian transformation of macroeconomics: an assessment By Michel DE VROEY
  3. Transaction Cost Economics: The Natural Progression By Williamson, Oliver E.
  4. The Methodologies of Neuroeconomics By Glenn Harrison; Don Ross
  5. “’Lost in Translation’? Towards a Theory of Economic Transplants” By Ioannis Lianos
  6. Theory, Experimental Design and Econometrics Are Complementary (And So Are Lab and Field Experiments) By Glenn W. Harrison; Morten Lau; E. Elisabet Rutström
  7. In defence of Kants league of states By Kjartan Kock Mikalsen
  8. Microfoundations: a decisive dividing line between Keynesian and new classical macroeconomics? By Michel DE VROEY
  9. How (Not) To Decide: Procedural Games By Gani Aldashev; Georg Kirchsteiger; Alexander Sebald
  10. Incentive and Information Properties of Preference Questions By Carson, Richard T; Groves, Theodore
  11. The World Cup of Economics Journals: A Ranking by a Tournament Method By László Á. Kóczy; Martin Strobel
  12. Minority Influence Theory By Nemeth, Charlan Jeanne
  13. The Gas Transportation Network as a ‘Lego’ Game: How to Play with It? By Jean Michel Glachant and Michelle Hallack
  14. Electoral Competition with Uncertainty Averse Parties By Sophie Bade
  15. Preferences for Redistribution and Pensions: What Can We Learn from Experiments? By Tausch Franziska; Potters Jan; Riedl Arno
  16. Extreme Value Theory as a Theoretical Background for Power Law Behavior By Alfarano, Simone; Lux, Thomas
  17. The Origin of Wealth By Punabantu, Siize

  1. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper concerns a neglected aspect of Lucas’s work: his methodological writings, published and unpublished. Particular attention is paid to his views on the relationship between theory and ideology. I start by setting out Lucas’s non-standard conception of theory: to him, a theory and a model are the same thing. I also explore the different facets and implications of this conception. In the next two sections, I debate whether Lucas adheres to two methodological principles that I dub the ‘non-interference’ precept (the proposition that ideological viewpoints should not influence theory), and the ‘non-exploitation’ precept (that the models’ conclusions should not be transposed into policy recommendations, in so far as these conclusions are built into the models’ premises). The last part of the paper contains my assessment of Lucas’s ideas. First, I bring out the extent to which Lucas departs from the view held by most specialized methodologists. Second, I wonder whether the new classical revolution resulted from a political agenda. Third and finally, I claim that the tensions characterizing Lucas’s conception of theory follow from his having one foot in the neo- Walrasian and the other in the Marshallian-Friedmanian universe.
    Keywords: Lucas, new classical macroeconomics, methodology
    JEL: B B B E
    Date: 2010–06–30
  2. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Robert Lucas is rightfully credited with having changed the course of macroeconomic theory. The aim of this paper is to document his transformation from a potential contributor to Keynesian macroeconomics to the master builder of an alternative paradigm, equilibrium macroeconomics. I reconstruct Lucas’s theoretical journey as involving seven steps: (1) his pre-macroeconomic years, (2) his early work as a macroeconomist, jointly with Rapping, (3) the ‘Expectations and the Neutrality of Money’ 1972 article, (4) his inaugural equilibrium model of the business cycle, (5) his all-out attack on Keynesian macroeconomics, (6) the passing of the baton to Kydland and Prescott, and (7) his standpoint after the victory of the approach he so much contributed to launch
    Keywords: Lucas, new classical macroeconomics
    JEL: B B E30
    Date: 2010–07–31
  3. By: Williamson, Oliver E. (University of California, Berkeley)
    Abstract: Oliver E. Williamson delivered his Prize Lecture on 8 December 2009 at Aula Magna, Stockholm University. He was introduced by Professor Bertil Holmlund, Chairman of the Economic Sciences Prize Committee.
    Keywords: Transaction; costs
    JEL: D70 H10
    Date: 2009–12–08
  4. By: Glenn Harrison; Don Ross
    Abstract: We critically review the methodological practices of two research programs which are jointly called 'neuroeconomics'. We defend the first of these, termed 'neurocellular economics' (NE) by Ross (2008), from an attack on its relevance by Gul and Pesendorfer (2008) (GP). This attack arbitrarily singles out some but not all processing variables as unimportant to economics, is insensitive to the realities of empirical theory testing, and ignores the central importance to economics of 'ecological rationality' (Smith 2007). GP ironically share this last attitude with advocates of 'behavioral economics in the scanner' (BES), the other, and better known, branch of neuroeconomics. We consider grounds for skepticism about the accomplishments of this research program to date, based on its methodological individualism, its ad hoc econometrics, its tolerance for invalid reverse inference, and its inattention to the difficulties involved in extracting temporally lagged data if people's anticipation of reward causes pre-emptive blood flow.
    JEL: A12 B41 C51 C81 C91 D87
    Date: 2010–09
  5. By: Ioannis Lianos
    Abstract: Abstract: The rise of economics as one of the main (some will advance the most important) “source” of competition law discourse is well documented. This study focuses on a facet of the integration of economic analysis in competition law: "economic transplants". The term “economic transplants” refers to specific economic concepts that were incorporated into the legal discourse by an act of “translation”. They represent the ultimate degree of interaction between the legal and the economic systems. Using a paradigmatic approach the study examines their specific characteristics and what distinguishes them from other forms of integration of economic analysis in competition law. It critically assesses their role and their impact on the legal and the economic discourses. The study concludes that the “paradigm” of translation constitutes the most appropriate explanatory framework for taking into account the dual nature of economic transplants and, more broadly, for conceptualizing the interaction of law with other social sciences. It should be distinguished from the existing methodologies of interaction between the disciplines of law and economics, such as the concept of “economic law” and the law and economics approach.
    Keywords: economic law; European law; competition policy; economics; history; law
    Date: 2009–10–08
  6. By: Glenn W. Harrison; Morten Lau; E. Elisabet Rutström
    Abstract: Experiments are conducted with various purposes in mind including theory testing, mechanism design and measurement of individual characteristics. In each case a careful researcher is constrained in the experimental design by prior considerations imposed either by theory, common sense or past results. We argue that the integration of the design with these elements needs to be taken even further. We view all these elements that make up the body of research methodology in experimental economics as mutually dependant and therefore take a systematic approach to the design of our experimental research program. Rather than drawing inferences from individual experiments or theories as if they were independent constructs, and then using the findings from one to attack the other, we recognize the need to constrain the inferences from one by the inferences from the other. Any data generated by an experiment needs to be interpreted jointly with considerations from theory, common sense, complementary data, econometric methods and expected applications. We illustrate this systematic approach by reference to a research program centered on large artefactual field experiments we have conducted in Denmark. An important contribution that grew out of our work is the complementarity between lab and field experiments.
    Date: 2010–09
  7. By: Kjartan Kock Mikalsen
    Abstract: This paper presents a defence of Kant’s idea of a voluntary league of states. Kant’s proposal that rightful, or just, international relations can be achieved within the framework of such a league is often criticized for being at odds with his overall theory. Given Kant’s view on the institutional preconditions for justice in the domestic sphere, where subjection to a public authority with coercive power is seen as constitutive of rightful interaction between persons, as well as the analogy he draws between an interpersonal and an international state of nature, it is often argued that he should have opted for the idea of a world state. Agreeing with this standard criticism that a voluntary league cannot establish the institutional framework for international justice, others also suggest an alternative stage model interpretation. According to this interpretation, Kant’s true ideal is in fact some sort of world state, whereas the league is merely introduced as a temporary and second best surrogate. In contrast to both the standard criticism and the stage model interpretation, I argue that fundamental normative concerns speak in favour of a voluntary league rather than a world state. I also argue that Kant’s defense of such a league is consistent with his position on the conditions of justice in the domestic case due to crucial differences between the state of nature among individuals and external state relations.
    Keywords: federalism; supranationalism; sovereignty; normative political theory
    Date: 2010–06–15
  8. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: It is often argued that what marks the difference between Keynesian macroeconomics and new classical macroeconomics (the first installment of dynamic stochastic general equilibrium models) is the presence of microfoundations. These are deemed to be absent in the Keynesian approach, but central to the new classical one. The aim of my paper is to critically discuss this view. Lucas and Sargent defined the microfoundations requirement as consisting of two elements, optimizing behavior and market clearing. I claim that an alternative, weaker, definition is conceivable, which can be traced back to Hayek and Patinkin. According to them, the microfoundations requirement consists of a single criterion, optimizing planning. This definition, I claim, is better than the new classical one. Next, I examine whether Keynesian macroeconomics, which admittedly does not abide by the Lucas-Sargent definition, does accord with the Hayek-Patinkin approach. My conclusion is that Keynes’s General Theory is indeed microfounded in this sense, although no single conclusion can be drawn for Keynesian models in general.
    Keywords: microfoundations, Keynes, new classical macroeconomics
    JEL: B E E
    Date: 2010–05–31
  9. By: Gani Aldashev; Georg Kirchsteiger; Alexander Sebald
    Abstract: Psychologists and experimental economists …nd that peoples behavior is shaped not only by outcomes but also by the procedures through which these outcomes are reached. Using Psychological Game Theory we develop a general framework allowing players to be motivated by procedural concerns. We present two areas in which procedural concerns play a key role. First, we apply our framework to policy experiments and show that if subjects exhibit procedural concerns, the way in which researchers allocate subjects into treatment and control groups influences the experimental results. The estimate of the treatment e¤ect is always biased as compared to the e¤ect of a general introduction of the treatment. In our second application we analyze the problem of appointing agents into jobs that di¤er in terms of their desirability. Because of procedural concerns the principals choice of appointment procedure a¤ects the subsequent e¤ort choice of agents. We test this theoretical hypothesis in a …eld experiment. The results are consistent with our predictions.
    Keywords: Procedural concerns; Psychological game theory; Policy experiments; Appointment procedures
    JEL: A13 C70 C93 D63
    Date: 2010–08
  10. By: Carson, Richard T; Groves, Theodore
    Abstract: This chapter is both a commentary on and extension of the Carson and Groves (2007) (hereafter CG) article reprinted in this volume. The substantial attention the paper has received has been enormously gratifying. Reception of CG has largely been positive with little if any substantive criticism directed toward it; and, there are many papers now being presented at conferences that are testing or relying on various aspects of it. Our remarks are organized into a series of short sections. The first points out that the main purpose of CG was to extend the revealed preference paradigm to cover some types of survey responses. The second notes that CG provides the theoretical foundation that some critics of contingent valuation (CV) had argued was missing. The third takes the concepts of “hypothetical†and “hypothetical bias†head on and argues that these concepts are, for the most part, ill-defined or simply wrong and have done enormous damage to clear and careful thinking about the nature of the response to stated preference questions. The fourth examines the properties of cheap talk which is often proposed as a way to reduced hypothetical bias. The fifth provides some elaboration on CG and the issue of how to interpret information extracted from preferences questions. The sixth poses an answer to the often asked question: Is a single binary discrete choice (SBC) question always the best elicitation format for a researcher to use? The seventh provides some elaboration on the payment card elicitation format, which in recent years has seen resurgence. The eighth turns to an examination of some of the properties of the now widely used discrete choice experiment. The ninth considers the usefulness of economic experiments to help determine the performance of preference elicitation formats. The last section addresses the relationship between CG and the behavioralist critique of neoclassical economics with a focus on the different-answers-to-the-same-underlying-question issue.
    Keywords: revealed preference paradigm
    Date: 2010–04–01
  11. By: László Á. Kóczy (Óbuda University); Martin Strobel
    Abstract: A ranking of journals is manipulable if a particular journal's position can be improved by making additional citations to other journals. We introduce a simple ranking method that is not not manipulable and is invariant to citation intensities, journal scaling and article-splitting. The ranking of economics journals is presented and is compared to rankings by alternative methods in the recent years.
    Date: 2010
  12. By: Nemeth, Charlan Jeanne
    Abstract: The study of minority influence began as reaction to the portrayal of influence as the province of status and numbers and from a realization that minorities need not just be passive recipients of influence but can actively persuade. From these beginnings, a considerable body of research, including ours, has investigated how minority views prevail. . In the decades that followed, we concentrated, not so much on persuasion or attitude change but, rather, on the value of minority views for the stimulation of divergent thinking. Dissent, as has been repeatedly documented, “opens†the mind. People search for information, consider more options and, on balance, make better decisions and are more creative. Dissenters, rather than rogues or obstacles, provide value: They liberate people to say what they believe and they stimulate divergent and creative thought even when they are wrong. The implications for group decision making, whether in juries or companies, have been considerable and there is increasing interest in research and in practice for the value of authentic dissent in teams and in creating “cultures†of innovation.
    Date: 2010–05–08
  13. By: Jean Michel Glachant and Michelle Hallack
    Abstract: Gas transportation networks exhibit a quite substantial variety of technical and economical properties ranges roughly from an entrenched natural monopoly to near to an open competition platform. This empirical fact is widely known and accepted. However the corresponding frame of network analysis is lacking or quite fuzzy. As an infrastructure, can a gas network evolve or not from a natural monopoly (an essential facility) to an open infrastructure (a highway facility)? How can it be done with the same transportation infrastructure components within the same physical gas laws? Our paper provides a unified analytical frame for all types of gas transportation networks. It shows that gas transport networks are made of several components which can be combined in different ways. This very lego property of gas networks permits different designs with different economic properties while a certain infrastructural base and set of gas laws is common to all transportation networks. Therefore the notion of gas transportation network as a general and abstract concept does not have robust economic properties. The variety and modularity of gas networks come from the diversity of components, the variety of components combinations and the historical inclusion of components in the network. First, a gas network can combine different types of network components (primary or secondary ones). Second, the same components can be combined in different ways (notably regarding actual connections and flow paths). Third, as a capital-intensive infrastructure combining various specific assets, gas transportation networks show strong path dependency properties as they evolve slowly over time by moving from an already existing base. The heterogeneity of gas networks as sets of components comes firstly from the heterogeneity of the network components themselves, secondly from the different possibilities to combine these components and thirdly from the ‘path dependence’ character of gas network constructions. These three characteristics of gas networks explain the diversity of economic proprieties of the existent gas networks going from natural monopoly to competitive markets.
    Date: 2010–05–15
  14. By: Sophie Bade (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The nonexistence of equilibria in models of electoral competition involving multiple issues is one of the more puzzling results in political economics. In this paper, we relax the standard assumption that parties act as expected utility maximizers. We show that equilibria often exist when parties with limited knowledge about the electorate are modeled as uncertainty-averse. What is more, these equilibria can be characterized as a straightforward generalization of the classical median voter result.
    Keywords: Uncertainty Aversion, Multiple Priors, Median Voter, Electoral Competition over many Issues
    JEL: D81 D72
    Date: 2010–05
  15. By: Tausch Franziska; Potters Jan; Riedl Arno (METEOR)
    Abstract: Redistribution is an inevitable feature of collective pension schemes and economic experiments have revealed that most people have a preference for redistribution that is not merely inspired by self-interest. Interestingly, little is known on how these preferences interact with preferences for different pension schemes. In this paper we review the experimental evidence on preferences for redistribution and suggest some links to redistribution through pensions. For that purpose we distinguish between three types of situations. The first deals with distributional preferences behind a veil of ignorance. In the second type of situation, individuals make choices in front of the veil of ignorance and know their position. Finally, we discuss situations in which income is determined by interdependent rather than individual choices. In the closing parts of the paper we discuss whether and how these experimental results speak to the redistribution issues of pensions. For example, do they argue for or against mandatory participation? Should we have less redistribution and more actuarial fairness? How does this depend on the type of redistribution involved?Keywords: redistribution, fairness, pension, insurance, experiment
    Keywords: public economics ;
    Date: 2010
  16. By: Alfarano, Simone; Lux, Thomas
    Abstract: Power law behavior has been recognized to be a pervasive feature of many phenomena in natural and social sciences. While immense research efforts have been devoted to the analysis of behavioral mechanisms responsible for the ubiquity of power-law scaling, the strong theoretical foundation of power laws as a very general type of limiting behavior of large realizations of stochastic processes is less well known. In this chapter, we briefly present some of the key results of extreme value theory, which provide a statistical justification for the emergence of power laws as limiting behavior for extreme fluctuations. The remarkable generality of the theory allows to abstract from the details of the system under investigation, and therefore allows its application in many diverse fields. Moreover, this theory offers new powerful techniques for the estimation of the Pareto index, detailed in the second part of this chapter.
    Keywords: Extreme Value Theory; Power Laws; Tail index
    JEL: C13 C14 C01
    Date: 2010
  17. By: Punabantu, Siize
    Abstract: What is wealth? This paper proposes wealth and poverty are opposite sides of the same coin and to know the source of one is to understand the cause of the other. It delves into the premise that if contemporary economics could consummately answer the question: what is wealth? scarcity, economic strife and poverty would not exist in the world today. Two kinds of wealth are discussed, aesthetic and technical wealth. Is it possible that contrary to belief, the use of assets and liabilities as a measure of wealth belong to the aesthetic view in the sense that in human psychology an asset is merely an object or factor that evokes positive emotional feelings; the capacity to measure this kind of wealth using complex mathematics does not turn assets and liabilities into real or technical wealth. Consequently wealth may be none of the popular or common notions human society perceives; this includes money, assets and so on. In addition to the psychological influence the tendency of money and assets to fluctuate over time reinforces its aesthetic stature. Businesses commonly publish financial statements in national media often as a legal requirement or a means of demonstrating their financial health or quite simply the state of their wealth , when in fact a financial statement, despite the mathematics applied to it, may be considered an example of aesthetic wealth; hence it is not reliable for clearly understanding or appreciating what wealth is as it is common knowledge even robust businesses can post attractive profits for the year in review then post losses for the same period the next year. Money is unlikely to be a form of real wealth either, it behaves like psychological or aesthetic wealth; the value of a large bank account which could purchase a boat may years later after the ravages of inflation may only purchase a golf cart. Appreciating this quandary is important in the sense that the rational processes motivating it affect financial literacy. There are many conundrums like this where what is observed is not necessarily what is taking place that defy conventional wisdom in economics, for example; the expenditure fallacy. Even brick and mortar assets are likely to be a form of aesthetic wealth rather than real wealth; the value of property can change dramatically year on year. Wealth is only as reliable as the economic operating system it functions in, in the same way that, as earthquakes demonstrate, a building, no matter how sturdy, has its sturdiness ultimately determined by the ground it stands on. Consequently, this paper introduces the concept of real or technical wealth; this is the capacity to understand what wealth actually is by being knowledgeable about how it functions at the level of the economic operating system. Blurring the lines between aesthetic and technical wealth can lead to an ambiguity about wealth as well as an inability to diagnose what prosperity is and where it originates from in the economy that leads to the inability to protect aesthetic wealth or create it in sufficient quantities. It also may lead to the immense disparities and peculiar discomforts of contemporary economies impaired by scarcity. A consequence of this may be a modern day inability to end poverty, unemployment and other economic problems. Consequently this paper employs cost curves to explain how the real wealth of businesses can be affected and determined by the economic operating system they function in. It goes further to employ the equation of exchange to demonstrate how wealth can be created in an economy at constant price and how the calibration of the economic operating system predetermines whether a country or economy is ultimately wealthy or wealthless.
    Keywords: Scarcity; banking; credit creation; resource creation; implosion; wobble effect; economic thought; poverty; wealth; equation of exchange; cost curve; money; price; mark-up; cost plus pricing; rationality; operating level economics; economic growth; barter; expenditure fallacy; paradox.
    JEL: E31 D01 B41 A11
    Date: 2010–09–01

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