nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2014‒12‒24
seventeen papers chosen by
Erik Thomson
University of Manitoba

  1. The Emperor Has New Clothes: Empirical Tests of Mainstream Theories of Economic Growth By David Greasley; Nick Hanley; Eoin McLaughlin; Les Oxley
  2. Mainstream Macroeconomics in the Light of Popper By Iván H. Ayala; Alfonso Palacio-Vera
  3. Majorized correspondences and equilibrium existence in discontinuous games By Pavlo Prokopovych
  4. Bayesian Networks and Boundedly Rational Expectations By Spiegler, Ran
  5. The Great Depression, the New Deal, their Evaluation by Mainstream Economists and the Present Crisis of Europe By Stephan Schulmeister
  6. Sir James Steuart on the origins of the exchange economy By José M. Menudo
  7. An ultimatum game with multidimensional response strategies By Werner Gueth; Maria Vittoria Levati; Chiara Nardi; Ivan Soraperra
  8. Between Scylla and Charybdis: On the place of economic methods and concepts within ecological economics By Strunz, Sebastian; Klauer, Bernd; Ring, Irene; Schiller, Johannes
  9. Graphs Inducing Totally Balanced and Submodular Chinese Postman Games By Hamers, H.J.M.; Josune Albizuri, M.
  10. Money is More than a Memory By Maria Bigoni; Gabriele Camera; Marco Casari
  11. On Pareto theory of circulation of elites By Ricardo P\'erez-Marco
  12. Methodological Misconceptions in the Social Sciences. Rethinking social thought and social processes By Fusari, Angelo
  13. Stochastic stability of endogenous growth: The AK case By Raouf Boucekkine; Benteng Zou
  14. On the Process of Scientific Policy Advice - With Special Reference to Economic Policy By Kirchgässner, Gebhard
  15. Ideals should not be too ideal: Identity and public good contribution By Fuhai HONG
  16. Inefficiency in fiscal policy: A political economy of the Laffer curve By Yutaro Hatta
  17. Elite capture of democratic politics: the role of social identity By David Juárez-Luna; Christian Ghiglino

  1. By: David Greasley (School of History, Classics and Archaeology, University of Edinburgh); Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews); Eoin McLaughlin (School of Geography and Sustainable Development, University of St. Andrews); Les Oxley (Department of Economics, University of Waikato)
    Abstract: Modern macroeconomic theory utilises optimal control techniques to model the maximisation of individual well-being using a lifetime utility function. Agents face choices over current and future consumption (with resultant implied savings decisions) seeking to maximise the present value of current plus future well-being. However, such inter-temporal welfare- maximising assumptions remain empirically untested. In the work presented here we test whether welfare was in (historical) fact maximised in the US between 1870 -2000 and find empirical support for the optimising basis of growth theory, but only once a comprehensive view of what constitutes a country’s wealth or capital is taken into account.
    Keywords: inter-temporal utility maximisation;modern growth theory; US; comprehensive wealth
    JEL: E21 E22 C61
    Date: 2014–08
  2. By: Iván H. Ayala (Facultad de CC. Económicas y Empresariales. Universidad Complutense de Madrid. Campus de Somosaguas, 28223 Pozuelo de Alarcón, Madrid (Spain)); Alfonso Palacio-Vera (Departamento de economía Aplicada III (Política Económica), Facultad de CC. Económicas y Empresariales. Universidad Complutense de Madrid. Campus de Somosaguas, 28223 Pozuelo de Alarcón, Madrid (Spain))
    Abstract: Macroeconomics has been dominated over the last four decades by the Rational Expectations Hypothesis (REH) which implies that economies are inherently stable. REH is a key element of the New Neoclassical Synthesis (NNS) macroeconomic model which has also played a dominant role in theory and policy analysis over the last two decades. We analyse REH in light of Popper´s evolutionary theory of knowledge and learning. We claim that the latter provides macroeconomics with an epistemological and ontological foundation that, unlike REH, takes full account of human fallibility and upon which economists can build a more useful macroeconomic theory.
    Abstract: La macroeconomía ortodoxa ha estado dominada durante las últimas cuatro décadas por la llamada “hipótesis de expectativas racionales” (HER) que conlle-va el supuesto implícito de que las economías de mercado son inherentemente estables. A su vez, la HER constituye un elemento esencial de la llamada “Nueva Síntesis Neoclásica” en macroeconomía que también ha desempeñado un papel dominante tanto en la teoría macroeconómica como en la política económica durante las últimas dos décadas. En este trabajo analizamos la HER a la luz de la teoría popperiana del conocimiento y el aprendizaje y afirmamos que esta última dota a la teoría macro-económica de unos fundamentos epistemológicos y ontológicos que, a diferencia de la HER, incorporan plenamente el concepto de falibilidad humana y sobre los cuales los economistas pueden construir una teoría macroeconómica más útil.
    Keywords: knowledge, Learning, Rational expectations, Evolutionary, Popper, Conocimiento, aprendizaje, expectativas racionales, evolucionista, Popper.
    JEL: A12 B41 B50
    Date: 2014–10
  3. By: Pavlo Prokopovych (Kyiv School of Economics and Kyiv Economics Institute)
    Abstract: This paper is aimed at widening the scope of applications of majorized correspondences. A new class of majorized correspondences -- domain U-majorized correspondences -- is introduced. For them, a maximal element existence theorem is established. Then, sufficient conditions for the existence of an equilibrium in qualitative games are provided. They are used to show the existence of a pure strategy Nash equilibrium in compact quasiconcave games that are either correspondence secure or correspondence transfer continuous.
    Keywords: Majorized correspondence; Qualitative game; Better-reply secure game; Correspondence secure game; Transfer continuous game
    JEL: C65 C72
    Date: 2014–11
  4. By: Spiegler, Ran
    Abstract: I present a framework for analyzing decision makers with an imperfect understanding of their environment's correlation structure. The decision maker faces an objective multivariate probability distribution (his own action is one of the random variables). He is characterized by a directed acyclic graph over the set of variables. His subjective belief filters the objective distribution through his graph, via the factorization formula for Bayesian networks. This belief distortion implies that the decision maker's long-run behavior may affect his perception of the consequences of his actions. Accordingly, I define a "personal equilibrium" notion of optimal choices. I show how recent models of boundedly rational expectations (as well as new ones, e.g. reverse causality) can be subsumed into this framework as special cases. Some general properties of the Bayesian-network representation of subjective beliefs are presented, as well as a "missing data" foundation.
    Keywords: Bayesian networks; boundedly rational expectations; coarse reasoning; directed acyclic graphs; misspecified models; personal equilibrium; reverse causality
    JEL: D03
    Date: 2014–07
  5. By: Stephan Schulmeister (WIFO)
    Abstract: Roosevelt's New Deal stays in sharp contrast to the course followed by European policy since 2009. At first, Roosevelt focussed on fighting the generally pessimistic mood of the public, on strictly regulating the financial sector and on setting up investment and employment programmes. After that, structural reforms were carried out in order to strengthen confidence and social coherence. The most important measures were the introduction of unemployment insurance and of a public pension scheme as well as regulations to ensure "fair" labour conditions. The New Deal policy was successful: GDP expanded in the USA between 1933 and 1937 by 43 percent, mainly due to a boom in investments (+140 percent). By fighting the social-psychological depression and "speculation with other people's money", Roosevelt anticipated those two main messages of Keynes' "General Theory" (1936) which were later forgotten: first, the importance of the "state of confidence" and, second, the necessity to radically restrict financial speculation. The most influential thesis of Friedman – Schwartz (1963) according to which the Great Depression was primarily caused by a too restrictive monetary policy, i.e., by the state, turns out to be more based on ideology than on empirical facts. This holds even more true for the thesis of Cole – Ohanian (1999) and of Prescott (1999) according to which the depression was prolongued by New Deal policies. At present, a re-orientation of economic policy in Europe along Roosevelt's guidelines and, hence, a "New Deal for Europe" might help to lead the economy out of the persistent crisis.
    Keywords: Makroökonomische Politik, Depressionen, New Deal
    Date: 2014–11–17
  6. By: José M. Menudo (Department of Economics, Universidad Pablo de Olavide)
    Abstract: This paper examines James Steuart’s explanation of the emergence of the exchange economy. An initial hypothesis holds the decisive influence of a plan designed and implemented by merchants. Our proposal evokes the importance, acknowledged by Steuart, of the construction of institutions, involving designs aimed at achieving self-interest purposes. It is argued that “commercial” subordination explains how individuals become dependent on a new institutional organisation. Finally, we conclude that Political Œconomy is a science of the artificial that seeks to understand the functioning of non-natural mechanisms and to create instruments that the statesman adapts to the needs and of objectives individuals..
    Keywords: James Steuart, development, institutions, subordination, economic system.
    JEL: J31 J24 J41
    Date: 2014–09
  7. By: Werner Gueth (Max Planck Institute of Economics); Maria Vittoria Levati (Department of Economics (University of Verona)); Chiara Nardi (Department of Economics (University of Verona)); Ivan Soraperra (Department of Economics (University of Verona))
    Keywords: Ultimatum; Social preferences; Incomplete information; Experiments
    JEL: C72 C91 D63 D74
    Date: 2014–08
  8. By: Strunz, Sebastian; Klauer, Bernd; Ring, Irene; Schiller, Johannes
    Abstract: Ecological Economics inherently faces a challenge akin to sailing between Scylla and Charybdis. In Greek mythology these are two monsters located on opposite sides of a narrow strait, and falling victim to one or other of them is unavoidable. In the recurring process of establishing and refining its conceptual foundations, Ecological Economics runs the risk of, on the one hand, losing important insights by trying to be radically different from mainstream economics and, on the other hand, becoming a redundant appendix to mainstream environmental economics by routinely applying its concepts and methods. We argue that avoiding both fallacies is possible by using Ecological Economics' orientation towards sustainability as a guiding principle. The scientist's power of judgment supports her decision concerning which methods are suitable for tackling a given sustainability problem. The intersubjective quality of judgment prevents the resulting methodological pluralism from drifting toward arbitrariness.
    Keywords: ecological economics,methodological pluralism,power of judgment,ontology,sustainability
    Date: 2014
  9. By: Hamers, H.J.M. (Tilburg University, Center For Economic Research); Josune Albizuri, M.
    Abstract: Abstract A Chinese postman (CP) game is induced by a a weighted undirected, connected graph in which the edges are identified as players and a vertex is chosen as post-office location. Granot and Granot (2012) characterized graphs that give rise to CP games that are balanced. This note completes this line of research by characterizing graphs that give rise to CP games that are submodular (totally balanced, respectively).
    Keywords: Chinese Postman games; submodularity; totally balancedness
    JEL: C71
    Date: 2013
  10. By: Maria Bigoni (University of Bologna); Gabriele Camera (Economic Science Institute, Chapman University and University of Basel); Marco Casari (University of Bologna and IZA)
    Abstract: Impersonal exchange is the hallmark of an advanced society. One key institution for impersonal exchange is money, which economic theory considers just a primitive arrangement for monitoring past conduct in society. If so, then a public record of past actions—or memory—supersedes the function performed by money. This intriguing theoretical postulate remains untested. In an experiment, we show that the suggested functional equality between money and memory does not translate into an empirical equivalence. Monetary systems perform a richer set of functions than just revealing past behaviors, which proves to be crucial in promoting large-scale cooperation.
    Keywords: Cooperation, intertemporal trade, experiments, social norms, social dilemmas
    JEL: C70 C90 D03 E02
    Date: 2014
  11. By: Ricardo P\'erez-Marco
    Abstract: We prove that Pareto theory of circulation of elites results from our wealth evolution model, Kelly criterion for optimal betting and Keynes' observation of "animal spirits" that drive the economy and cause that human financial decisions are prone to excess risk-taking.
    Date: 2014–12
  12. By: Fusari, Angelo
    Abstract: Contemporary social teaching suffers from a grave deficiency: it is lacking rules of methodology and procedure suited to social reality that are, in particular, able to reconcile increasing creativity (implying irreversibility) with rationality, which are indispensable for the scientific judgement of theoretical ideas. Unfortunately, this lack is largely ignored, and eminent social scholars have even explicitly and emphatically theorized a rejection of method. This allows rhetorical and literary skills to prevail over the reasons of science, thereby promoting a deceptive instead of constructive pluralism, confusion in the study of contemporary societies and growing ineptitude in their government, what represents a main source of afflictions in the present world. Method is a two-edged sword: it offers powerful assistance in and enhances our capability of understanding and solving the problems of everyday life; but if the chosen method is inappropriate,it can seriously obstruct the advancement of knowledge. Significantly, the best contributions to social knowledge have been ad hoc studies that disregard method and simply apply common sense. But ad hoc studies suffer a lack of coordination, and the neglect of method makes it difficult to evaluate and select findings and results. As a consequence, ad hoc analyses have little chance of stimulating the cumulative growth of knowledge. However, the present study is intended as a contribution that prevents method from becoming a prison for the mind as opposed to a stimulant of creativity and knowledge.
    Keywords: none
    JEL: B4 B40 B50 B51 B52 B53 B59 Y90
    Date: 2013
  13. By: Raouf Boucekkine (GREQAM, Aix Marseille University); Benteng Zou (CREA, Université de Luxembourg)
    Abstract: This note studies the stochastic stability of the standard AK growth model un- der uncertain output technology. Capital accumulation follows a stochastic lin- ear homogenous differential equation. It’s shown that exponential balanced paths, which characterize optimal trajectories in the absence of uncertainty, are not robust to uncertainty. Precisely, it’s demonstrated that the economy almost surely col- lapses at exponential speed even though productivity is initially arbitrarily high.
    Keywords: Optimal growth, AK model, Ito stochastic differential equation, balanced growth paths, stochastic stability
    JEL: O40 C61 C62
    Date: 2014
  14. By: Kirchgässner, Gebhard
    Abstract: We first show three major disagreements among today’s leading economists: the minimum wage, the effects of large government debt and the politics of the European Central Bank. Using a prominent and highly relevant example, the possible deterrent effect of death penalty, we demonstrate how political convictions can have an impact on the results of empirical research even if the most advanced statistical methods are applied. Then we deal with three different approaches to analyse the process of political advice: the traditional approach, the Public Choice approach and the Political Economy of Scientific Advice. Contrary to the two others, the latter consistently applies the economic model of behaviour to all agents of this game: economic agents, politicians, but also scientists as political advisors. We then deal with the process of policy advice; the main scope is to show how this process has to be organised in order to allow for at least some objectivity, even if advisors are politically biased. To understand (and perhaps even improve) this process, the economic model of behaviour should be applied to all agents; a ‘new’ economic theory is not necessary.
    Keywords: Economic Policy Advice, Minimum Wage, Government Debt, Death Penalty, Objectivity, Self-Interest
    JEL: A11 H19 H63 K14 J31
    Date: 2014–12
  15. By: Fuhai HONG (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological Univer- sity. Address: 14 Nanyang Drive, Singapore, 637332.)
    Abstract: This paper incorporates identity into a model of voluntary public good contribution. An ideal of contributing to public goods divides players to di¤erent social categories: Players who identify with the ideal become insiders, obtaining identity utility but incurring disu- tility if their contributions depart from the ideal, while players who do not identify with the ideal remain as outsiders. We show that identity could increase public good contribution; the ideal that best resolves the free-riding problem in the public good game equals either the contribution level of the most altruistic player in the absence of the identity, or a level that makes the least altruistic player indi¤erent between becoming an insider and not, depending on the size of the group. These results have implications for social policymaking.
    Keywords: Ideals, Identity, Public Goods, Social Categories
    JEL: D03 H41
    Date: 2014–11
  16. By: Yutaro Hatta (Graduate School of Economics, Osaka University)
    Abstract: This paper studies investment decisions by economic agents in cases where the tax rate is decided through voting. It will be shown that, in some cases, only a Pareto-dominated tax policy on the wrong side of the Laffer curve is supported under rational expectations. Thus, the governments may collect revenue in an inefficient way. To that end, a quite plausible assumption, the endogeneity of the return on investment, is essential. Therefore this paper warns about the danger of inefficiency in a wide variety of policies. Further, the model predicts that when the inequality in an economy is low, the tax policy on the wrong side is likely to arise.
    Keywords: Political economy; The Laffer curve; Inefficiency in fiscal policies
    JEL: E22 E62 H21
    Date: 2014–12
  17. By: David Juárez-Luna; Christian Ghiglino (Division of Economics, CIDE)
    Abstract: In the present paper we uncover a novel mechanism through which a minority can gain a disproportionate power in a perfectly functioning democracy. In our model, a government elected by majority within a two party democracy, decides on a unique redistributive instrument, the tax rate. We show that a minority characterised by a high degree of social identification may, in the presence of ideological motives, influence the policy outcome. In particular, a rise in social identification among the rich minority may be able to reduce the tax rate. Importantly, this may happen even if the minority is more ideological than the majority. Finally, we attempt an explanation of the divide in the tax rate between the US and Europe.
    Keywords: Democracy, Influential elite, Social identity, Tax rate, Redistribution.
    Date: 2014–05

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