nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2012‒09‒22
seventeen papers chosen by
Erik Thomson
University of Manitoba

  1. One Hundred Years From Today: A. C. Pigou's Wealth and Welfare By Michael McLure
  2. Self-Interest, Sympathy and the Invisible Hand: From Adam Smith to Market Liberalism By Avner Offer
  3. Behavioural economics perspectives: Implications for policy and financial literacy By Altman, Morris
  4. Guilt causes equal or unequal division in alternating-offer bargaining By Kohler, Stefan
  5. Impossibility of interpersonal social identity diversification under binary preferences By Naqvi, Nadeem
  6. Some Reflections on the Recent Financial Crisis By Gary B. Gorton
  7. How is non-knowledge represented in economic theory? By Ekaterina Svetlova; Henk van Elst
  8. Runs, Panics and Bubbles: Diamond Dybvig and Morris Shin Reconsidered By Eric Smith; Martin Shubik
  9. The use of mathematics in economics and its effect on a scholar's academic career By Espinosa, Miguel; Rondon, Carlos; Romero, Mauricio
  10. Policy Implications of Alternative Economic Paradigms: Some surprises from endogenous technological changes By Richard G. Lipsey
  11. Envy can promote more equal division in alternating-offer bargaining By Kohler, Stefan
  12. Sequential decision making without independence: a new conceptual approach By Antoine Nebout
  13. Nonlinear and Complex Dynamics in Economics By Barnett, William A.; Serletis, Apostolos; Serletis, Demitre
  14. Stabilizing the economy: Market design and general equilibrium By Jacob K. Goeree; Luke Lindsay
  15. General Equilibrium as a Topological Field Theory By Eric Kemp-Benedict
  16. In and out of Equilibrium II: Evolution in Repeated Games with Discounting and Complexity Costs By Matthijs van Veelen; Julian Garcia
  17. The Institutional Blind Spot in Environmental Economics By Burtraw, Dallas

  1. By: Michael McLure (Business School, University of Western Australia)
    Abstract: This paper marks the centenary of A. C. Pigou’s Wealth and Welfare, published by Macmillan in 1912. Consideration is given to the content and contributions of Wealth and Welfare and: its relationship to Pigou’s earlier articles; its relationship to Pigou’s subsequent work on wealth and welfare; its reception within the broader economic community; and its relationship to Marshall’s approach to economics. In contrast to the conclusion of a recent study, it is suggested in this paper that Pigou’s general approach to wealth and welfare was complementary to, and not contrary to, the work of Marshall. Wealth and Welfare is a book that makes important and enduring contributions to economics, but it does so while remaining firmly within the Marshallian tradition.
    Date: 2012
  2. By: Avner Offer (All Souls College, University of Oxford)
    Abstract: Adam Smith rejected Mandeville’s invisible-hand doctrine of ‘private vices, publick benefits’. In The Theory of Moral Sentiments his model of the ‘impartial spectator’ is driven by not by sympathy for other people, but by their approbation. Approbation needs to be authenticated, and in Smith’s model authentication relies on innate virtue, which is unrealistic. An alternative model of ‘regard’ is applied, which makes use of signalling and is more pragmatic. Modern versions of the invisible hand in rational choice theory and neo-liberalism are shown to be radical departures from the ethical legacy of Enlightenment and utilitarian economics, and are inconsistent with Adam Smith’s own position.
    Date: 2012–08–14
  3. By: Altman, Morris
    Abstract: This paper summarizes and highlights different approaches to behavioural economics. It includes a discussion of the differences between the “old” behavioural economics school, led by scholars like Herbert Simon, and the “new” behavioural economics, which builds on the work of Daniel Kahneman and Amos Tversky and is best exemplified by Richard Thaler and Cass Sunstein’s recent book, Nudge. These important currents in behavioural economics are also contrasted with the conventional economic wisdom. The focus of this comparative analysis is to examine the implications of these different approaches in behavioural economics for financial literacy.
    Keywords: Financial literacy, behavioral economics, imperfect information, heuristics, trust, nudging, decision-­‐making environment,
    Date: 2012–05–04
  4. By: Kohler, Stefan
    Abstract: Parties in a bargaining situation may perceive guilt, a utility loss caused by receiving the larger share that is modeled in some social preferences. I extend Rubinstein (1982)'s solution of the open-ended alternating-offer bargaining problem for self-interested bargainers to a game with equally patient bargainers that exhibit a similar degree of guilt. The bargaining parties still reach agreement in the first period. If guilt is strong, they split the bargaining surplus equally. In contrast, if guilt is weak, the bargaining outcome is tilted away from the Rubinstein division towards a more unequal split. As both bargainers sensation of guilt diminishes, the bargaining outcome converges to the Rubinstein division.
    Keywords: alternating offers; bargaining; bargaining power; behavioral economics; equity; fairness; guilt; inequality aversion; negotiation; social preferences
    JEL: D03 C78 D63
    Date: 2012–09–10
  5. By: Naqvi, Nadeem
    Abstract: Diverse identities, some socially shared, arise from a person’s affiliation with multiple overlapping communities, which are non-disjoint subsets of persons in society. I prove that identification of each individual with binary preferences or their utility function representation, commonplace in economic theory, implies the impossibility of social-identity diversification of persons. Therefore, if the goal is to explain injustices based on social identity distinctions such as racial discrimination, the conceptual reach of economic theory needs extension. I propose a generalization by assigning non-binary preferences to each individual player to achieve endogenous social diversification, to potentially serve as a basis for explaining discrimination.
    Keywords: justice; social identity; discrimination; race; gender; non-binariness; maximization
    JEL: D46 D63 J15 J16
    Date: 2012–09–15
  6. By: Gary B. Gorton
    Abstract: Economic growth involves metamorphosis of the financial system. Forms of banks and bank money change. These changes, if not addressed, leave the banking system vulnerable to crisis. There is no greater challenge in economics than to understand and prevent financial crises. The financial crisis of 2007-2008 provides the opportunity to reassess our understanding of crises. All financial crises are at root bank runs, because bank debt—of all forms—is vulnerable to sudden exit by bank debt holders. The current crisis raises issues for crisis theory. And, empirically, studying crises is challenging because of small samples and incomplete data.
    JEL: E02 E3 E30 E32 E44 G01 G1 G2 G21
    Date: 2012–09
  7. By: Ekaterina Svetlova (Karlshochschule International University); Henk van Elst (Karlshochschule International University)
    Abstract: In this article, we address the question of how non-knowledge about future events that influence economic agents' decisions in choice settings has been formally represented in economic theory up to date. To position our discussion within the ongoing debate on uncertainty, we provide a brief review of historical developments in economic theory and decision theory on the description of economic agents' choice behaviour under conditions of uncertainty, understood as either (i) ambiguity, or (ii) unawareness. Accordingly, we identify and discuss two approaches to the formalisation of non-knowledge: one based on decision-making in the context of a state space representing the exogenous world, as in Savage's axiomatisation and some successor concepts (ambiguity as situations with unknown probabilities), and one based on decision-making over a set of menus of potential future opportunities, providing the possibility of derivation of agents' subjective state spaces (unawareness as situation with imperfect subjective knowledge of all future events possible). We also discuss impeding challenges of the formalisation of non-knowledge.
    Date: 2012–09
  8. By: Eric Smith; Martin Shubik
    Date: 2012
  9. By: Espinosa, Miguel; Rondon, Carlos; Romero, Mauricio
    Abstract: There has been so much debate on the increasing use of formal mathematical methods in Economics. Although there are some studies tackling these issues, those use either a little amount of papers, a small amount of scholars or cover a short period of time. We try to overcome these challenges constructing a database characterizing the main socio demographic and academic output of a survey of 438 scholars divided into three groups: Economics Nobel Prize winners; scholars awarded with at least one of six prestigious recognitions in Economics; and academic faculty randomly selected from the top twenty Economics departments worldwide. Our results provide concrete measures of mathematization in Economics by giving statistical evidence on the increasing trend of number of equations and econometric outputs per article. We also show that for each of these variables there have been four structural breaks and three of them have been increasing ones. Furthermore, we found that the training and use of mathematics has a positive correlation with the probability of winning a Nobel Prize in certain cases. It also appears that being an empirical researcher as measured by the average number of econometrics outputs per paper has a negative correlation with someone's academic career success.
    Keywords: Nobel Prize, Mathematics, Economics, Reputation
    JEL: N01 B3 C14 C81
    Date: 2012–09
  10. By: Richard G. Lipsey (Simon Fraser Unviersity)
    Abstract: One of the most neglected issues in modern economics concerns the consequences of technological change that is ubiquitous and endogenous. To address these we need to model technology as more than a scalar value in an aggregate production function, dealing with technological change in its messy micro economic details. This paper illustrates these points by considering the policy implications of some alternative economic theories that treat technology differently. The first section contrasts the policy implications of neoclassical and evolutionary economics with respect to the evaluation of the efficiency of the price system, policies with respect to 'distortions,' policies to discourage monopolies, to encourage economic growth in general, and infant industries and specific technological advances in particular. The second section contrasts New Classical and various versions of Keynesian economics with respect to micro behavioural underpinnings of macro relations, the place of technology as a driving force of economic change, and aggregate demand as both a source of fluctuations and a variable to be manipulated by policy makers.
    Keywords: Technological change, Keynesian Economics, New Classical Economics, infant industries, picking winners, aggregate demand, microeconomic underpinnings.
    JEL: B50 H1 O
    Date: 2012–04
  11. By: Kohler, Stefan
    Abstract: Bargainers in an open-ended alternating-offer bargaining situation may perceive envy, a utility loss caused by receiving the smaller share that is modeled in some social preferences in addition to self-interest. I extend Rubinstein (1982)'s original solution of the bargaining problem for two self-interested bargainers to this strategic situation. Bargainers still reach agreement in the first period and their bargaining shares increase in the strength of their own envy. As both bargainers' envy diminishes, the agreed partition converges to the Rubinstein division. If equally patient bargaining parties exhibit similar envy, then the agreed partition is tilted away from the Rubinstein division towards the equal division. Notably, the potential sensation of envy also boosts the share of the eventually envy-free party who leaves the bargaining with the larger share under the agreed partition. This gain in bargaining strength through envy can result in a bargaining outcome that is more unequal than predicted by the Rubinstein division.
    Keywords: alternating offers; bargaining; bargaining power; behavioral economics; envy; equity; fairness; inequality aversion; negotiation; social preferences
    JEL: D03 C78 D63
    Date: 2012–09–10
  12. By: Antoine Nebout
    Abstract: This paper is a critical reflection on the notion of dynamic consistency that is commonly used in the literature in Economics and Decision Theory and on the difficulty to test it in an experimental set up. Building on the possible characteristics of individual dynamic preferences, we propose a conceptual categorisation of possible sequential decision making behaviors. In particular, we show that not conforming to Expected Utility Theory does not necessarily implies a violation of dynamic consistency and propose a simple set of decision tasks that allows to reveal different strategic types of resolution of a sequential decision problem by a non-expected utility maximizers.
    Date: 2012–09
  13. By: Barnett, William A.; Serletis, Apostolos; Serletis, Demitre
    Abstract: This paper is an up-to-date survey of the state-of-the-art in dynamical systems theory relevant to high levels of dynamical complexity, characterizing chaos and near chaos, as commonly found in the physical sciences. The paper also surveys applications in economics and …finance. This survey does not include bifurcation analyses at lower levels of dynamical complexity, such as Hopf and transcritical bifurcations, which arise closer to the stable region of the parameter space. We discuss the geometric approach (based on the theory of differential/difference equations) to dynamical systems and make the basic notions of complexity, chaos, and other related concepts precise, having in mind their (actual or potential) applications to economically motivated questions. We also introduce specifi…c applications in microeconomics, macroeconomics, and …finance, and discuss the policy relevancy of chaos.
    Keywords: Complexity; chaos; endogenous business cycles
    JEL: C51 C13 C30 C61
    Date: 2012–09–11
  14. By: Jacob K. Goeree; Luke Lindsay
    Abstract: We employ laboratory methods to study stability of competitive equilibrium in Scarf's economy (International Economic Review, 1960). Tatonnement theory predicts that prices are globally unstable for this economy, i.e. unless prices start at the competitive equilibrium they oscillate without converging. Anderson et al. (Journal of Economic Theory, 2004) report that in laboratory double auction markets, prices in the Scarf economy do indeed oscillate with no clear sign of convergence. We replicate their experiments and confirm that tatonnement theory predicts the direction of price changes remarkably well. Prices are globally unstable with adverse effects for the economy's efficiency and the equitable distribution of the gains from trade. We also introduce a novel market mechanism where participants submit demand schedules and prices are computed using Smale's global Newtonian dynamic (American Economic Review, 1976). We show that for the Scarf economy, submitting a competitive schedule, i.e. a set of quantities that maximize utility taking prices as given, is a weakly dominant strategy. The resulting outcome corresponds to the unique competitive equilibrium of the Scarf economy. In experiments that employ the schedule market, prices do not oscillate but instead converge quickly to the competitive equilibrium. Besides stabilizing prices, the schedule market is more efficient and results in highly egalitarian outcomes.
    Keywords: Scarf economy, tatonnement, global Newtonian dynamic, instability, general equilibrium, market design
    JEL: C92 D50
    Date: 2012–09
  15. By: Eric Kemp-Benedict
    Abstract: General equilibrium is the dominant theoretical framework for economic policy analysis at the level of the whole economy. In practice, general equilibrium treats economies as being always in equilibrium, albeit in a sequence of equilibria as driven by external changes in parameters. This view is sometimes defended on the grounds that internal dynamics are fast, while external changes are slow, so that the economy can be viewed as adjusting instantaneously to any changed conditions. However, the argument has not been presented in a rigorous way. In this paper we show that when conditions are such that: a) economies do respond essentially instantaneously to external influences; b) the external changes are small compared to the values that characterize the economy; and c) the economy's dynamics are continuous and first-order in time (as for Walrasian tatonnement), the resulting economic theory is equivalent to a topological field theory. Because it is a topological theory it has no dynamics in a strict sense, and so perturbatively---that is, when examining dynamics in the region of a critical point---the field theory behaves as general equilibrium posits. However, the field-theoretic form of the theory admits non-perturbative instanton solutions that link different critical points. Thus, in this theory, and in contrast to general equilibrium, the internal dynamics of the model occasionally make an appearance in the form of abrupt, noise-driven transitions between critical points.
    Date: 2012–09
  16. By: Matthijs van Veelen (University of Amsterdam); Julian Garcia (Max-Planck-Institute for Evolutionary Biology)
    Abstract: We explore evolutionary dynamics for repeated games with small, but positive complexity costs. To understand the dynamics, we extend a folk theorem result by Cooper (1996) to continuation probabilities, or discount rates, smaller than 1. While this result delineates which payoffs can be supported by neutrally stable strategies, the only strategy that is evolutionarily stable, and has a uniform invasion barrier, is All D. However, with sufficiently small complexity costs, indirect invasions - but now through 'almost neutral' mutants - become an important ingredient of the dynamics. These indirect invasions include stepping stone paths out of full defection.
    Keywords: repeated games; evolutionary game theory; complexity costs; indirect invasions; robustness against indirect invasions; neutrally stable strategy; evolutionarily stable strategy; iterated prisoners dilemma
    JEL: C73
    Date: 2012–09–06
  17. By: Burtraw, Dallas (Resources for the Future)
    Abstract: Economic approaches are expected to achieve environmental goals at less cost than traditional regulations, but they have yet to find widespread application. One reason is the way these tools interact with existing institutions. The federalist nature of governmental authority assigns to subnational governments much of the implementation of environmental policy and primary authority for planning the infrastructure that affects environmental outcomes. The federalist structure also interacts with the choice of economic instruments; a national emissions cap erodes the additionality of actions by subnational governments. Even the flagship application of sulfur dioxide emissions trading has been outperformed by the venerable Clean Air Act, and greenhouse gas emissions in the United States are on course to be less than they would have been if Congress had frozen emissions with a cap in 2009. The widespread application of economic tools requires a stronger political theory of how they interact with governing institutions.
    Keywords: environmental federalism, additionality, emissions cap, Clean Air Act, sulfur dioxide, carbon dioxide
    JEL: Q50 Q58 H77
    Date: 2012–08–24

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