nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2010‒10‒16
thirteen papers chosen by
Erik Thomson
University of Manitoba

  1. Adam Smith’s Newtonianism By Fiori Stefano
  2. The alleged stability of the labour share of income in macroeconomic theories of income distribution By Hagen Krämer
  3. La Salute Globale tra Beni Pubblici, Diritti Collettivi e Capability By Nicolò Bellanca
  4. Intergenerational Justice in the Hobbesian State of Nature By Paola Manzini, Marco Mariotti and Roberto Veneziani
  5. A Reason for Unreason: Returns-Based Beliefs in Game Theory By Velu, C.; Iyer, S.; Gair, J.R.
  6. Differentiability of the value function in continuous-time economic models By Juan Pablo Rincón-Zapatero; Manuel S. Santos
  7. Keynes’ Business Cycle: Animal Spirits and Crisis By John Harvey
  8. Stepwise Thinking in Strategic Games with Incomplete Information By Carsten S. Nielsen
  9. Robustness to Strategic Uncertainty (Revision of DP 2010-70) By Andersson, O.; Argenton, C.; Weibull, J.
  10. How Does Voice Matter? Evidence from the Ultimatum Game By Qiyan Ong; Steven M. Sheffrin
  11. Gender Differences in Economic Experiments By Selim Jürgen Ergun; Teresa García-Muñoz; M.Fernanda Rivas
  12. The neural basis of bounded rational behavior By Giorgio Coricelli; Rosemarie Nagel
  13. The Great Detour By Peter Skott

  1. By: Fiori Stefano (University of Turin)
    Abstract: Smith was certainly influenced by Newton’s analytic-synthetic method, and by his notion of “principle”. Nonetheless, in many fields of Smith’s inquiry he introduced elements which led him far from the Newtonian perspective. The present essay analyzes how historical dimensions, contingencies, institutions and conflicting human inclinations intervene in Smith’s discourse explaining economic systems. From this perspective, the intellectual Newtonian horizon seems to be profoundly modified. Finally, the paper focuses on how, in Smith’s view, institutions determine “unintended outcomes”, sometimes opposed to those of the market, when the reasons for their emergence have ceased but nevertheless persist over time. In this sense, the “invisible hand” is not only the result of the behaviour of myopic individuals trying to improve their condition, but also the outcome of the work of institutions which operate as structures autonomous with respect to individuals.
    Date: 2010–07
  2. By: Hagen Krämer (Karlsruhe University of Applied Sciences)
    Abstract: The labour share of income in national product has shown a declining trend in many advanced economies over the past 30 years. However, many economists still hold the view that the wage share remains almost constant in the long run. The notion of the relative stability of the wage share in the long run is considers to be a stylized fact or even sometimes called a “law of economics”. This paper attempts to show how the alleged stability of the labour share of income became known as one of the “great magnitudes in economics”. It also shows how this “law” made its way into the three major theories of macroeconomic income distribution, i.e. neoclassical, post-Keynesian, and Kaleckian distribution theory. Since the data show strong fluctuation of aggregate income shares over the long run, the conclusion is reached that the major macroeconomic theories of growth and distribution are built around an invalid – or at least highly questionable – assumption about the real world.
    Date: 2010
  3. By: Nicolò Bellanca (Università degli Studi di Firenze, Dipartimento di Scienze Economiche)
    Abstract: In this essay we look at global health as a public good, a collective right, and a human capability. On the one hand, we propose an analysis which is necessarily multi-disciplinary, as the three concepts originally stem from different disciplines. Indeed, while the concept of public good stems from the field of economic science, the concept of rights refers to the fields of law and political science, and that of capabilities finds its roots mainly in the field of ethics. On the other hand, we also suggest that to a great extent the three arguments converge to shape a new paradigm of interpretation, analysis and policy.
    Keywords: Global Health, Public Good, Human Rights, Capability.
    JEL: I18 I38 O15
    Date: 2010
  4. By: Paola Manzini, Marco Mariotti and Roberto Veneziani (University of St Andrews, University of St Andrews, Queen Mary University of London)
    Abstract: We analyse the issue of justice in the allocation of resources across generations. Our starting point is that if all generations have a claim to natural resources, then each generation should be entitled to exercise veto power on the unpalatable choices of the other generations. We analyse this situation as one of bargaining à la Rubinstein, Safra and Thomson [15], which incorporates a notion of justice as mutual advantage, rather than justice as impartiality, as in the Kantian-Rawlsian tradition. Our framework captures some key aspects of the interaction between isolated agents in a Hobbesian state of nature, in which agents are not placed behind a veil of ignorance, but none of them is sufficiently strong to impose their will against all others (state of war of all against all). We analyse some new social welfare relations emerging from this Hobbesian framework. JEL Categories: D63, Q01
    Keywords: Intergenerational justice; bargaining; Hobbes; social choice.
    Date: 2010–09
  5. By: Velu, C.; Iyer, S.; Gair, J.R.
    Abstract: Players cooperate in experiments more than game theory would predict. We introduce the ‘returns-based beliefs’ approach: the expected returns of a particular strategy in proportion to total expected returns of all strategies. Using a decision analytic solution concept, Luce’s (1959) probabilistic choice model, and ‘hyperpriors’ for ambiguity in players’ cooperability, our approach explains empirical observations in various classes of games including the Prisoner’s and Traveler’s Dilemmas. Testing the closeness of fit of our model on Selten and Chmura (2008) data for completely mixed 2 × 2 games shows that with loss aversion, returns-based beliefs explain the data better than other equilibrium concepts.
    Keywords: Rationality, Subjective Probabilities, Returns-Based Beliefs
    Date: 2010–10–01
  6. By: Juan Pablo Rincón-Zapatero; Manuel S. Santos
    Abstract: In this paper we provide some sufficient conditions for the differentiability of the value function in a class of infinite-horizon continuous—time models of convex optimization arising in economics. We dispense with an interioiity condition which is quite restrictive in constrained optimization and it is usually hard to check in applications. The differentiability of the value function is used to prove Bellman's equation as well as the existence and continuity of the optimal feedback policy. We also establish uniqueness of the vector of dual variables under some conditions that rule out existence of asset pricing bubbles.
    Keywords: Constrained optimization, Value function, Differentiability, Envelope theorem, Duality theory
    JEL: C61 E20
    Date: 2010–09
  7. By: John Harvey (Department of Economics, Texas Christian University)
    Abstract: Today, we are in the midst of the worst economic crisis since the Great Depression. Recovery has not been swift, and policymakers and citizens throughout the globe have turned to economists for answers. While in the mainstream, the general opinion is that the collapse was unpredictable and caused by exogenous events (i.e., poor policy decisions), those in the Post-Keynesian school not only raised voices of concern well before the crisis struck, but they have argued consistently that the problems we face are systemic. They base this conclusion on theories developed by John Maynard Keynes. This paper attempts to determine the primary factors creating instability by building and then analyzing a system dynamics model of Keynes’ explanation of the business cycle. It shows that the financial sector is key and that while, of course, exogenous factors can play critical roles, they are unnecessary: cycles are generated endogenously.
    Keywords: Keynes, business cycle, system dynamics
    JEL: E12 E17 E32
    Date: 2010–03
  8. By: Carsten S. Nielsen (Department of Economics, University of Copenhagen)
    Abstract: This paper proposes a general incomplete information framework for studying behavior in strategic games with stepwise (viz. `level-k' or `cognitive hierarchy') thinking, which has been found to describe strategic behavior well in experiments involving players' initial responses to games. It is shown that there exist coherent stepwise beliefs, implied by step types, that have the potential to encode all relevant information. In the structure of stepwise beliefs, players are unaware of opponents doing at least as much thinking as themselves. As a result, there exists a Bayesian Nash equilibrium strategy profile in which any player at some step fixes the best responses of opponents at lower steps and then best responds herself.
    Keywords: game theory; interactive epistemology; unawareness; Bayesian Nash equilibrium; bounded rationality; level-k; cognitive hierarchy
    JEL: C70 C72 D80 D82
    Date: 2010–07
  9. By: Andersson, O.; Argenton, C.; Weibull, J. (Tilburg University, Center for Economic Research)
    Abstract: We model a player’s uncertainty about other players’ strategy choices as smooth probability distributions over their strategy sets. We call a strategy profile (strictly) robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence (all sequences) of strategy profiles, in each of which every player’s strategy is optimal under under his or her uncertainty about the others. We derive general properties of such robustness, and apply the definition to Bertrand competition games and the Nash demand game, games that admit infinitely many Nash equilibria. We show that our robustness criterion selects a unique Nash equilibrium in the Bertrand games, and that this agrees with recent experimental findings. For the Nash demand game, we show that the less uncertain party obtains the bigger share.
    Keywords: Nash equilibrium;refinement;strategic uncertainty;price competition;Bertrand competition;bargaining;Nash demand game
    JEL: C72 D43 L13
    Date: 2010
  10. By: Qiyan Ong; Steven M. Sheffrin (Department of Economics, Tulane University)
    Abstract: Prior research in economics and psychology has shown that process can matter in determining outcomes in many social situations. In particular, the opportunity to express ones opinion-voice-has been found to be highly influential. However, little is known about the channels through which voice may operate. In this paper, we develop a simple economic model of voice to explore these channels. We show that individuals value voice for: 1) its effect on outcomes, 2) its inherent value, or 3) its role in signalling one's social standing. Through the introduction of a hypothetical round in the standard ultimatum game, we were able to test the channels of voice directly by observing recipients' responses to offers which are lower than what they asked for. Our experimental results suggest that voice works primarily through its inherent value which appears to exceed its contribution to the perception of procedural fairness. Further, unlike voice which softens the impact of an unfair outcome, the possibility for voice may have dichotomous effects.
    Keywords: voice, ultimatum game
    JEL: D30 C91
    Date: 2010–09
  11. By: Selim Jürgen Ergun (Middle East Technical University - Northern Cyprus Campus. Economics Program and GLOBE); Teresa García-Muñoz (Departamento de Métodos Cuantitativos para la Economía y la Empresa - Universidad de Granada); M.Fernanda Rivas (Middle East Technical University - Northern Cyprus Campus. Economics Program and GLOBE)
    Abstract: This paper reviews the experimental economics literature on gender differences concerning four subjects: risk aversion, trust, deception and leadership. The vast majority of the articles we have revised document gender differences in behavior; differences which could be explained by sex-role stereotypes and/or hormonal differences
    Date: 2010–10–01
  12. By: Giorgio Coricelli (University of Southern California and Centre of Cognitive Neuroscience, Bron (Lyon), France.); Rosemarie Nagel (Universitat Pomepu Fabra)
    Abstract: Bounded rational behaviour is commonly observed in experimental games and in real life situations. Neuroeconomics can help to understand the mental processing underlying bounded rationality and out-of-equilibrium behaviour. Here we report results from recent studies on the neural basis of limited steps of reasoning in a competitive setting – the beauty contest game. We use functional magnetic resonance imaging (fMRI) to study the neural correlates of human mental processes in strategic games. We apply a cognitive hierarchy model to classify subject’s choices in the experimental game according to the degree of strategic reasoning so that we can identify the neural substrates of different levels of strategizing. We found a correlation between levels of strategic reasoning and activity in a neural network related to mentalizing, i.e. the ability to think about other’s thoughts and mental states. Moreover, brain data showed how complex cognitive processes subserve the higher level of reasoning about others. We describe how a cognitive hierarchy model fits both behavioural and brain data.
    Keywords: Game theory, Bounded rationality, Neuroeconomics
    Date: 2010–10–01
  13. By: Peter Skott (University of Massachusetts Amherst)
    Abstract: This note comments on the state of macroeconomics, arguing that the ‘micro founded’ macro that developed after 1970s has been a wasteful detour. The paper will appear in a symposium in Homo Oeconomicus, vol. 27 (2), 2010, on the crisis and the response from the British Academy to the questions from the British Queen. JEL Categories: E1, B41
    Date: 2010–09

This nep-hpe issue is ©2010 by Erik Thomson. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.