nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2012‒08‒23
24 papers chosen by
Erik Thomson
University of Manitoba

  1. Bounded rationality: psychology, economics and the financial crisis By Schilirò, Daniele
  2. A New Stationary Game Equilibrium Induced by Stochastic Group Evolution and Rational Individual Choice By Dai, Darong; Shen, Kunrong
  3. "Veblen's Institutionalist Elaboration of Rent Theory" By Michael Hudson
  4. Beliefs and Endogenous Cognitive Levels: An Experimental Study. Games and Economic Behavior, vol. 75, issue 2 By Marina Agranov; Elizabeth Potamites; rew Schotter; Chloe Tergiman
  5. Critical realism, grounded theory, and theory construction in heterodox economics By Lee, Frederic
  6. Do Ethics Matter? Tax Compliance and Morality By James Alm; Benno Torgler
  7. General Hamilton and Dr. Smith By Scherer, F. M.
  8. The Evolution of Endogenous Business Cycles By Roger E.A. Farmer
  9. The Neoliberal and the Powerlessness of Ideas By William Coleman
  10. The Evolution of Endogenous Business Cycles By Farmer, Roger E A
  11. Measuring, Explaining, and Controlling Tax Evasion: Lessons from Theory, Experiments, and Field Studies By James Alm
  12. Different approaches to the causes and consequences of the financial crisis By Botos, Katalin
  13. Government performance indicators in a strategic approach By Kárpáti, József
  14. Codes of Conduct, Private Information and Repeated Games By Juan I Block; David K Levine
  15. Taking, Punishment and Trust By Simon Halliday
  16. La formulation du modèle keynésien et le choix de l'unité de mesure By Alain Béraud
  17. Awareness To Accounting And Role Of Accounting At Religious Organisations. The Case Of Brotherhoods Of Seville At The Last Decade Of 16th Century By Jesus Damian Lopez Manjon; Juan Baños Sanchez-Matamoros; Maria Concepcion Alvarez-Dardet Espejo
  18. Inverse Thinking in Economic Theory: A Radical Approach to Economic Thinking By Jaime Gomez-Ramirez
  19. Econometric Fellows and Nobel Laureates in Economics By Ho Fai Chan; Benno Torgler
  20. GINI DP 38: Inequality and Happiness: A Survey By Ada Ferrer-i-carbonell; Ramos, X. (Xavier)
  21. Walras et la notion de bien d'intérêt public By Alain Béraud
  22. A "happiness test" for the new measures of national well-being: How much better than GDP are they? By Delhey, Jan; Kroll, Christian
  23. Cycles of Distrust: An Economic Model By Daron Acemoglu; Alexander Wolitzky
  24. Extending the Nash solution to choice problems with reference points By Sudhölter, Peter; Zarzuelo, José M.

  1. By: Schilirò, Daniele
    Abstract: Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice. In particular, the present paper will focus on the concept of bounded rationality. The work also makes some references to behavioral economics and to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets. Finally, following the approch of Simon, the paper proposes an analytical model to describe the behaviour of agents which are rationally bounded, risk averse and loss averse, emphasizing the relationship between psychology and economics which helps to explain the crisis in financial markets.
    Keywords: Bounded rationality; rational choice; cognitive economics; behavioral finance; risk aversion
    JEL: D81 B52 D83 C60
    Date: 2012–07
  2. By: Dai, Darong; Shen, Kunrong
    Abstract: In the present paper, a new approach to equilibrium selection for very general normal form games has been constructed by introducing stochastic optimal stopping theory into classical evolutionary game theory. That is, the new game equilibrium is induced by both stochastic group evolution and decentralized rational individual choice. Moreover, stability of the game equilibrium is confirmed from both time and space dimensions.
    Keywords: Stochastic replicator dynamics; Rational choice; Normal-form game; Stability
    JEL: C70 C62
    Date: 2012–01–15
  3. By: Michael Hudson
    Abstract: As the heirs to classical political economy and the German historical school, the American institutionalists retained rent theory and its corollary idea of unearned income. More than any other institutionalist, Thorstein Veblen emphasized the dynamics of banks financing real estate speculation and Wall Street maneuvering to organize monopolies and trusts. Yet despite the popularity of his writings with the reading public, his contribution has remained isolated from the academic mainstream, and he did not leave behind a "school." Veblen criticized academic economists for having fallen subject to "trained incapacity" as a result of being turned into factotums to defend rentier interests. Business schools were painting an unrealistic happy-face picture of the economy, teaching financial techniques but leaving out of account the need to reform the economy's practices and institutions. In emphasizing how financial "predation" was hijacking the economy's technological potential, Veblen’s vision was as materialist and culturally broad as that of the Marxists, and as dismissive of the status quo. Technological innovation was reducing costs but breeding monopolies as the finance, insurance, and real estate (FIRE) sectors joined forces to create a financial symbiosis cemented by political-insider dealings—and a trivialization of economic theory as it seeks to avoid dealing with society’s failure to achieve its technological potential. The fruits of rising productivity were used to finance robber barons who had no better use of their wealth than to reduce great artworks to the status of ownership trophies and achieve leisure-class status by funding business schools and colleges to promote a self-congratulatory but deceptive portrayal of their wealth-grabbing behavior.
    Keywords: History of Economic Thought; Institutionalism; FIRE Sector; Financialization
    JEL: B15
    Date: 2012–08
  4. By: Marina Agranov; Elizabeth Potamites; rew Schotter; Chloe Tergiman
    Keywords: Guessing game, Beliefs, Level-k theory
    JEL: I
    Date: 2012–07–30
  5. By: Lee, Frederic
    Abstract: This paper proposes an approach to theory creation and evaluation for heterodox economics that is based in the integration of critical realism and the method of grounded theory. Critical realism provides the concepts of structures and causal mechanisms that form the outline of theory construction, while the grounded theory method provides the research strategy to transform them into a theory. After this is set out in the first two sections of the paper, research methods issues, such as data triangulation, case studies, analytical statistics (econometrics), and mathematics and modeling, are discussed. The final section of the paper deals with the historical character of critical realist-grounded theories and the implication for heterodox economic theories.
    Keywords: Heterodox; Critical Realism; Grounded Theory
    JEL: D0 B5 B41
    Date: 2012–07
  6. By: James Alm (Department of Economics, Tulane University); Benno Torgler (School of Economics and Finance, Queensland University of Technology)
    Abstract: In this paper we argue that puzzle of tax compliance can be explained, at least in part, by recognizing the typically neglected role of ethics in individual behavior; that is, individuals do not always behave as the selfish, rational, self-interested individuals portrayed in the standard neoclassical paradigm, but rather are often motivated by many other factors that have as their main foundation some aspects of "ethics". We argue that it is not possible to understand fully an individual's compliance decisions without considering in some form these ethical dimensions. Specifically, we argue here that there is much direct and indirect evidence that ethics differ across individuals and that these differences matter in significant ways for their compliance decisions. We then put this in the larger context of the inability of the standard neoclassical paradigm to explain compliance of at least some individuals, and we suggest several possible avenues by which theory can be expanded to incorporate ethics. We conclude by arguing that a full house of compliance strategies is also needed to combat tax evasion, strategies that include the traditional "enforcement" paradigm suggested by and consistent with neoclassical theory, a less traditional "service" paradigm that recognizes the important role of a "kinder and friendlier" tax administration in encouraging compliance, and, importantly, a new "trust" paradigm that is built on the foundation of ethics, in which the tax administration must recognize that it can erode the ethics of taxpayers by its own decisions.
    Keywords: economics-of-crime, ethics, expected utility theory, tax evasion, behavioral economics, social norms, tax morale
    JEL: H26 H31
    Date: 2012–07
  7. By: Scherer, F. M. (Harvard University)
    Abstract: In 1791 Alexander Hamilton submitted as U.S. Secretary of the Treasury a now-famous Report on the Subject of Manufactures. In it he criticized arguments that the U.S. colonies should remain preponderantly agricultural. He does not name the "respectable patrons of opinions" whose views he was contradicting. This paper attempts to clear up the identity mystery.
    Date: 2012–07
  8. By: Roger E.A. Farmer
    Abstract: This paper distinguishes between two kinds of Endogenous Business Cycle models, and discusses the evolution from first generation EBC1 models to second generation EBC2 models. I argue that EBC1 models, which display dynamic indeterminacy, are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models, which display steady-state indeterminacy, are a more radical departure from the classical Real Business Cycle model; they represent a return to one of the most important ideas to emerge from Keynes' (1936) General Theory; that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.
    JEL: B22 E0 E3
    Date: 2012–08
  9. By: William Coleman
    Abstract: Keynes famously claimed 'soon or late, it is ideas, not vested interested which are dangerous for good or evil'. His neoliberal critics have frequently concurred with this contention, and have happily used the example of Keynes to illustrate it. But is 'the power of ideas' consistent with neoliberal doctrine? The paper argues that the most conclusive case for categorical 'market success' propositions will eliminate ideas as explanatory of economic failure , and imply such failures must be traced to exploitation of by special interests . However, the paper argues that neoliberalism is committed to 'government failure' not 'market success', and government failure does give room for ideas to have power, for good or ill.
    Date: 2012–07
  10. By: Farmer, Roger E A
    Abstract: This paper distinguishes between two kinds of Endogenous Business Cycle models, and discusses the evolution from first generation EBC1 models to second generation EBC2 models. I argue that EBC1 models, which display dynamic indeterminacy, are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models, which display steady-state indeterminacy, are a more radical departure from the classical Real Business Cycle model; they represent a return to one of the most important ideas to emerge from Keynes' (1936) General Theory; that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.
    Keywords: indeterminacy; self-fulfilling propcheices; sunspots; unemployment
    JEL: B22 E20 E32
    Date: 2012–08
  11. By: James Alm (Department of Economics, Tulane University)
    Abstract: In this paper, I assess what we have learned about tax evasion since Michael Allingham and Agnar Sandmo launched the modern analysis of tax evasion in 1972. I focus on three specific questions and the answers to these questions that have emerged over the years. First, how do we measure the extent of evasion? Second, how can we explain these patterns of behavior? Third, how can we use these insights to control evasion? In the process, I illustrate my own answers to these questions by highlighting various specific examples of research. My main conclusion is that we have learned many things but that we also still have many gaps in our understanding of how to measure, explain, and control tax evasion. I also give some suggestions – and some predictions – about where promising avenues of future research may lie.
    Keywords: tax evasion, behavioral economics, experimental economics
    JEL: H2 H26 D03 C9
    Date: 2012–07
  12. By: Botos, Katalin
    Abstract: Unquestionably the behavior of the financial institutes caused the US financial crisis which became a worldwide phenomenon. It is too easy but not enough to blame greedy banker (though not superfluous). The subprime crisis was the consequence of the profit-seeking activity of the different financial institutions (which belongs to the logic of the market). What happened was not against the market but according to the logic of the market. There were some mistakes in functioning of the market institution which must be corrected. These distortions were caused mainly by the intervention of the states. Competitiveness in the sector was confused by the belief that some big institutions will be saved by the state because they are too big to fail. (And at the end they were not disappointed, that was what happened.) According to Raghuram Rajan the fault lines causing the crises lay in the income situation of the society and in the government interventions. According to him too much state in business should be reduced. Financial institutions should take the responsibility of their activity, state should not rescue them, and probably only the very small institutions should have even deposit insurance. The customers of the financial institutions should learn to make differences between correct and too much risk-taking institutions. Another famous American expert, Richard Portes doesn’t share his views about too much state. He says the deregulation process which started in the early seventies has the main responsibility. There is much more state regulation necessary within and between states, maybe not in the midst of the crises but soon afterwards. Both scientists agree that the remuneration system of the financial sector employees should be changed and bound to the long term effect of their activity.
    Keywords: financial crisis; state intervention; banking regulation; fault lines; social safety network
    JEL: G01
    Date: 2012
  13. By: Kárpáti, József
    Abstract: When state intends to keep an active role in economy and everyday interactions in society - as it tends to be a trend among states after the crisis, called the "Neo-Weberian" type of state, one of it's greatest challenges is to report on it's own activity and confirm it's decisions, according future plans, current redistribution etc. since the society expects a clarification in exchange for the active state role. Both economic phenomena and others beyond need to be measured and interpreted somehow. Numerous countries and international organizations started creating strategic level indicator sets to monitor the activity with more or less success. This paper summarizes the current status of these approaches and introduces a possible complex strategic level of indicators in Hungary to assess four sides of the story: state organization, fiscal, economic and social phenomena.
    Keywords: Neo-Weberian state; strategic indicators; government performance
    JEL: H50 H11
    Date: 2012
  14. By: Juan I Block; David K Levine
    Date: 2012
  15. By: Simon Halliday
    Abstract: Is a trusting person more or less likely to steal? Is a trusting person more or less likely to punish someone who steals? A great deal of research has examined how trust and social capital correlate with altruistic, reciprocal and punishing behaviours, but less research has been dedicated to understanding the roles of trust and social capital in peoples' choices between a strictly antisocial behaviour - like stealing - and generosity, or in a third party's choice to punish taking behaviour. Using a series of dictator games with third-party punishment and an option for a dictator to take, we show that trust plays a strong role in dictator behaviour and third-party behaviour. For dictators, trust correlates with the probability that the dictator refrains from self-interested behaviour and it correlates with the amount the dictator offers to their partner. For third parties, trust correlates with a third party's choice to punish self-interested behaviour and it correlates with the amount a third party spends on punishment. Social capital does not produce any such robust results.
    Keywords: Social Norms, Punishment, Reciprocity, Social Preferences, Trust, Social Capital.
    JEL: C72 C91
    Date: 2012–08
  16. By: Alain Béraud (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: Cette contribution analyse la façon dont Keynes et les keynésiens posèrent la question du choix de l'unité de mesure des agrégats macroéconomiques. Soulignant les rapports étroits qui existent entre les cours que Keynes professa entre 1933 et 1935 et les diverses versions du modèle IS-LM, elle montre que les problèmes naissent de la façon dont Keynes avait abordé ce problème. Raisonner sur la valeur monétaire des agrégats conduit à dichotomiser le modèle et ne permet pas d'analyser correctement l'interdépendance entre le marché du travail d'une part et les marchés des biens et de la monnaie d'autre part. Le modèle ainsi formulé ne permet pas de traiter de façon rigoureuse les effets d'une variation du salaire monétaire. Il laisse à penser, à tort, qu'il existe nécessairement un équilibre de plein emploi.
    Keywords: Keynes; IS-LM; unité de mesure
    Date: 2012–06–07
  17. By: Jesus Damian Lopez Manjon (Department of Financial Economics and Accounting, Pablo de Olavide University, Seville, Spain); Juan Baños Sanchez-Matamoros (Department of Financial Economics and Accounting, Pablo de Olavide University, Seville, Spain); Maria Concepcion Alvarez-Dardet Espejo (Department of Financial Economics and Accounting, Pablo de Olavide University, Seville, Spain)
    Abstract: This work questions if religious organizations with common shared beliefs and sacred objectives, but which members had a different level of awareness to accounting, should show a different behaviour concerning: a) the status of accounting in their internal organisations; and b) the permeability of such organizations to new accounting techniques. To reach our aim, we have analysed the content of 6 rules of brotherhoods located in the city of Seville (Spain), and enacted at the last decade of the 16th century. We have split the brotherhoods depending on its link or not with a guild or professional group.We can conclude that the awareness to accounting of its members and the perception of the belief system are explanations to cover the dissimilar behaviour of the brotherhoods in relation to accounting.
    Keywords: Accounting History; Religious Organizations; 16th century; Belief System
    Date: 2012–05
  18. By: Jaime Gomez-Ramirez
    Abstract: The seriousness of the current crisis urgently demands new economic thinking that breaks the austerity vs. deficit spending circle in economic policy. The core tenet of the paper is that the most important problems that natural and social science are facing today are inverse problems, and that a new approach that goes beyond optimization is necessary. The approach presented here is radical in the sense that identifies the roots in key assumptions in economic theory such as optimal behavior and stability to provide an inverse thinking perspective to economic modeling of use in economic and financial stability policy. The inverse problem provides a truly multidisciplinary platform where related problems from different disciplines can be studied under a common approach with comparable results.
    Date: 2012–08
  19. By: Ho Fai Chan; Benno Torgler
    Abstract: An academic award is method by which peers offer recognition of intellectual efforts. In this paper we take a purely descriptive look at the relationship between becoming a Fellow of the Econometric Society and receiving the Nobel Prize in economics. We discover some interesting aspects: of all 69 Nobel Prize Laureates between 1969 and 2011, only 9 of them were not also Fellows. Moreover, the proportion of future Nobel winners among the Fellows has been quite high throughout time and a large share of researchers who became Fellows between the 1930s and 1950s became Nobel Laureates at a later stage. On average, researchers become Fellows relatively early in their career (14.9 years after their PhD) and those who were subsequently made Nobel Laureates become Fellows earlier than other researchers. Interestingly, Harvard and MIT have been the dominant PhD granting institutions to generate Fellows and Nobel Laureates in the past.
    Keywords: Fellows of the Econometric Society; Nobel Laureate; ececonomics of science; awards
    JEL: D71 A14
    Date: 2012–08
  20. By: Ada Ferrer-i-carbonell (Campus U.A.B., Institut d'Anàlisi Econòmica, IAE(CSIC)); Ramos, X. (Xavier)
    Abstract: In recent years there has been an accumulation of empirical evidence suggesting that individuals dislike inequality (Alesina and Giuliano, 2011 and Dawes et al., 2007). The literature has built upon estimating the degree of this dislike as well as its causes. The use of self-reported measures of satisfaction or well-being as a proxy for utility has been one of the empirical strategies used to this end. In this survey we review the papers that estimate or examine the relationship between inequality and self-reported happiness, and find that inequality reduces happiness in Western societies. The evidence for non-Western societies is more mixed and less reliable. Notwithstanding that, trust in the institutions seems to play an important role in shaping the relationship between income inequality and subjective wellbeing. We conclude with suggestions for further research.
    Date: 2012–05
  21. By: Alain Béraud (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: Walras définit les biens d'intérêt public comme ceux dont le besoin n'est senti dans toute son étendue que par la communauté ou l'Etat. L'article étudie la cohérence de cette définition, ses implications et ses rapports avec les définitions que les économistes avaient données ou donnent aujourd'hui des biens publics.
    Keywords: Walras; biens publics; services publics
    Date: 2012–08–08
  22. By: Delhey, Jan; Kroll, Christian
    Abstract: Across the globe there is growing skepticism about the usefulness of GDP as a measure of national well-being. Consequently, several alternative quality-of-life (QOL) measures were developed which either aim at healing the GDP, complementing it, or replacing it. This chapter portrays some of these new measures and puts them to a happiness test: compared to the GDP, are the new QOL measures better able to capture what makes people happy and satisfied with their lives? Using data for 34 OECD societies, we can show that from a happiness perspective, there is-surprisingly-little wrong with the GDP, and most alternative QOL measures do not outperform GDP. Yet, one measure actually does a better job: the OECD's Better Life Index which is particularly effective when it comes to predicting subjective well-being in the richest OECD countries. In sum, the chapter demonstrates that a happiness perspective can add important insights along the way to facilitate the search for a new, widely accepted, internationally comparable measure of well-being. --
    Keywords: Better Life Index,GDP,happiness,Human Development Index,life satisfaction,national well-being,quality of life
    JEL: I31
    Date: 2012
  23. By: Daron Acemoglu; Alexander Wolitzky
    Abstract: We propose a model of cycles of distrust and conflict. Overlapping generations of agents from two groups sequentially play coordination games under incomplete information about whether the other side consists of “extremists” who will never take the good/trusting action. Good actions may be mistakenly perceived as bad/distrusting actions. We also assume that there is limited information about the history of past actions, so that an agent is unable to ascertain exactly when and how a sequence of bad actions originated. Assuming that both sides are not extremists, spirals of distrust and conflict get started as a result of a misperception, and continue because the other side interprets the bad action as evidence that it is facing extremists. However, such spirals contain the seeds of their own dissolution: after a while, Bayesian agents correctly conclude that the probability of a spiral having started by mistake is sufficiently high, and bad actions are no longer interpreted as evidence of extremism. At this point, one party experiments with a good action, and the cycle restarts. We show how this mechanism can be useful in interpreting cycles of ethnic conflict and international war, and how it also emerges in models of political participation, dynamic inter-group trade, and communication - leading to cycles of political polarization, breakdown of trade, and breakdown of communication.
    JEL: D72 D74
    Date: 2012–07
  24. By: Sudhölter, Peter (Department of Business and Economics); Zarzuelo, José M. (Faculty of Economics and Business Administration)
    Abstract: In 1985 Aumann axiomatized the Shapley NTU value by non-emptiness, efficiency, unanimity, scale covariance, conditional additivity, and independence of irrelevant alternatives. We show that, when replacing unanimity by "unanimity for the grand coalition" and translation covariance, these axioms characterize the Nash solution on the class of n-person choice problems with reference points. A classical bargaining problem consists of a convex feasible set that contains the disagreement point here called reference point. The feasible set of a choice problem does not necessarily contain the reference point and may not be convex. However, we assume that it satisfies some standard properties. Our result is robust so that the characterization is still valid for many subclasses of choice problems, among those is the class of classical bargaining problems. Moreover, we show that each of the employed axioms – including independence of irrelevant alternatives – may be logically independent of the remaining axioms.
    Keywords: Bargaining problem; Nash set; Shapley NTU value
    JEL: C71 C78
    Date: 2012–08–13

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