nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2015‒03‒05
fifteen papers chosen by
Erik Thomson
University of Manitoba

  1. Inequality, Sustainability and Piketty’s Capital By Nuno Ornelas Martins
  2. Essentials of Constructive Heterodoxy: Money, Credit, Interest By Kakarot-Handtke, Egmont
  3. Islam Versus Economics By Asad Zaman
  4. Why is this ‘school’ called neoclassical economics? Classicism and neoclassicism in historical context By Nuno Ornelas Martins
  5. The approval mechanism solves the prisoner's dilemma theoretically and experimentally By Tatsuyoshi Saijo; Yoshitaka Okano; Takafumi Yamakawa
  6. Structural Interdependence in Monetary Economics: Theoretical Assessment and Policy Implications By Cavalieri, Duccio
  7. "The Rise of Money and Class Society: The Contributions of John F. Henry" By Alla Semenova; L. Randall Wray
  8. Choosing a Good Toolkit: An Essay in Behavioral Economics By Kreps, David M.; Francetich, Alejandro
  9. Paul Krugman's "Liquidity Trap" and other Misadventures with Keynes By Lance Taylor
  10. Fear of novelty : a model of scientific discovery with strategic uncertainty By Besancenot, Damien; Vranceanu, Radu
  11. Menu Auctions and Influence Games with Private Information By Martimort, David; Stole, Lars
  12. Process and Order in Classical and Marginalist Economics By Nuno Ornelas Martins
  13. Chameleons: The Misuse of Theoretical Models in Finance and Economics By Pfleiderer, Paul
  14. Entrepreneurship. How important are institutions and culturally-based prior beliefs? By Ferrante, Francesco; Ruiu, Gabiele
  15. The Parade of the Bankers' New Clothes Continues: 23 Flawed Claims Debunked By Admati, Anat; Hellwig, Martin

  1. By: Nuno Ornelas Martins (Centro de Estudos em Gestão e Economia da Universidade Católica Portuguesa)
    Abstract: In the present article I address the implications of Thomas Piketty’s book Capital in the Twenty-First Century for our understanding of inequality and sustainability. I argue that although Piketty’s contribution is a significant one which has the potential to lead economic analysis in a more fruitful direction, its potential is constrained by its reliance on marginalist theory. The difficulties in addressing adequately the themes of inequality and sustainability spring from the assumptions employed in marginalist theory, which have been proven inconsistent in several debates throughout the history of economic thought. Once the constraints posed by marginalist theory are removed from Piketty’s contribution, its potential becomes much greater when addressing inequality, and has also important implications for such topics as sustainability, justice, and the environment.
    Keywords: Inequality, Sustainability, Cambridge Controversies, Capitalism
    JEL: B41 I31
    Date: 2014–12
  2. By: Kakarot-Handtke, Egmont
    Abstract: The goal of theoretical economics is to explain how the monetary economy works. The fatal methodological defect of Orthodoxy is that it is based on behavioral axioms. Yet, no specific behavioral assumption whatever can serve as a starting point for economic analysis. From this follows for Constructive Heterodoxy that the subjective axiomatic foundations have to be replaced. This amounts to a paradigm shift. Nobody can rest content with a pluralism of false theories. Based on a set of objective axioms all economic conceptions have to be reconstructed from scratch. In the following this is done for the theory of money.
    Keywords: new framework of concepts, structure-centric, Structural Law of Supply and Demand, stock of money, monetary profit, transaction unit, banking unit
    JEL: B59 E10
    Date: 2015–02–28
  3. By: Asad Zaman (Pakistan Institute of Development Economics, Islamabad)
    Abstract: The paper shows that fundamental Islamic principles regarding organisation of economic affairs are directly and strongly in conflict with teachings of conventional economic theories.
    Keywords: Islam and Economics, Economics and Religion
    JEL: A13 Z12
    Date: 2014
  4. By: Nuno Ornelas Martins (Centro de Estudos em Gestão e Economia da Universidade Católica Portuguesa)
    Abstract: This article addresses the origins of the term “neoclassical” economics, and the subsequent use of the term. It is argued that the present use of the term “neoclassical” economics is different from its original meaning when it was first introduced by Thorstein Veblen, who used it to denote a methodological inconsistency between vision and method, as Tony Lawson argues. I also argue here that the original meaning of the term, and its present use, are both contradictory with the original meaning of “classical political economy”. In fact, if we follow the original meaning of the term “classical political economy”, as a surplus approach concerned with the reproduction and distribution of the economic surplus, we find that many of those who are critical of “neoclassical economics” are actually in line with the classical perspective, to the extent that they also develop a surplus approach.
    Keywords: Classical, Neoclassical, closed system, surplus, marginalism
    JEL: B41
    Date: 2015–01
  5. By: Tatsuyoshi Saijo (School of Economics and Management, Kochi University of Technology); Yoshitaka Okano (School of Economics and Management, Kochi University of Technology); Takafumi Yamakawa (Osaka University)
    Abstract: Consider a situation where players in a prisoner's dilemma game can approve or reject the other's choice such as cooperation or defection. If both players approve the other's choice, the outcome is the one they chose, whereas if either one rejects the other's choice, the outcome is the one when both defect, which we name the approval mechanism herein (this is inspired by the Cold War doctrine of mutually assured destruction). Experimentally, we find that the cooperation rate with the approval mechanism is 90% in round one and averages 93.2% across the 19 rounds. The questionnaire analysis also allows us to find that subjects' behavior is consistent with subgame perfect elimination of weakly dominated strategies (SPEWDS) rather than Nash equilibrium (NE) or subgame perfect Nash equilibrium (SPNE) behavior. Theoretically, this mechanism implements cooperation in SPEWDS, but not in NE or SPNE.
    Keywords: prisoner’s dilemma, approval mechanism, mutually assured destruction, cooperation, subgame perfect elimination of weakly dominated strategies, experiment
    JEL: C72 C73 C92 D74 P43
    Date: 2015–02
  6. By: Cavalieri, Duccio
    Abstract: This is a theoretical analysis of structural interdependence in monetary economics. Some recent attempts to integrate money and finance in the theory of income and expenditure are critically examined. The Sraffian dichotomic interpretation of classical political economy is refused. A version of the classical surplus approach devoid of separating connotations is sketched, where flows and stocks are consistently reconciled and net financial wealth vanishes in the aggregate. Marx’s law of value is criticized and set aside, as historically outdated by the advent of cognitive capitalism. New Consensus and New Neoclassical Synthesis macroeconomic models are criticized from an orthodox Keynesian point of view. Two further results emerge from the analysis: the illegitimacy of Marx’s asymmetrical treatment of constant and variable capital in the theory of value and the suggestion of a correct method for measuring the unit cost of real capital. Some reasons for reconsidering in this perspective the traditional approaches to monetary theory and policy are indicated.
    Keywords: monetary theory; monetary policy; fiscal policy; structural interdependence; Sraffian dichotomy; post-Keynesian economics; SFCA; MMT; MEV
    JEL: B22 E12 E44 E52 M41
    Date: 2015–02–25
  7. By: Alla Semenova; L. Randall Wray
    Abstract: This paper explores the rise of money and class society in ancient Greece, drawing historical and theoretical parallels to the case of ancient Egypt. In doing so, the paper examines the historical applicability of the chartalist and metallist theories of money. It will be shown that the origins and the evolution of money were closely intertwined with the rise and consolidation of class society and inequality. Money, class society, and inequality came into being simultaneously, so it seems, mutually reinforcing the development of one another. Rather than a medium of exchange in commerce, money emerged as an "egalitarian token" at the time when the substance of social relations was undergoing a fundamental transformation from egalitarian to class societies. In this context, money served to preserve the façade of social and economic harmony and equality, while inequality was growing and solidifying. Rather than "invented" by private traders, money was first issued by ancient Greek states and proto-states as they aimed to establish and consolidate their political and economic power. Rather than a medium of exchange in commerce, money first served as a "means of recompense" administered by the Greek city-states as they strived to implement the civic conception of social justice. While the origins of money are to be found in the origins of inequality, a well-functioning democratic society has the power to subvert the inequality-inducing characteristic of money via the use of money for public purpose, following the principles of Modern Money Theory (MMT). When used according to the principles of MMT, the inequality-inducing characteristic of money could be undermined, while the current trends in rising income and wealth disparities could be contained and reversed.
    Keywords: Nature of Money; Chartalism; Metallism; Origins of Money; Origins of Coinage; Inequality; Class; Ideology; Religious Ideology; State Formation; State Theory of Money; Modern Money Theory
    JEL: B5 B25 B41 E11 E12 E42 E52 E62 E63 H6 N1 N2 P1 P4 P5 Z1
    Date: 2015–02
  8. By: Kreps, David M. (Stanford University); Francetich, Alejandro (?)
    Date: 2014–05
  9. By: Lance Taylor (Schwartz Center for Economic Policy Analysis (SCEPA))
    Keywords: Krugman, Liquidity Trap, Keynes
    Date: 2013–05
  10. By: Besancenot, Damien (Centre d'Economie de l'Université Paris Nord (CEPN)); Vranceanu, Radu (ESSEC Business School and THEMA)
    Abstract: This paper analyzes the production of fundamental research as a coordination game played by scholars. In the model, scholars decide to adopt a new idea only if they believe that a critical mass of peers is following a similar research strategy. If researchers observe only a noisy idiosyncratic signal of the true scientiÖc potential of a new idea, we show that the game presents a single threshold equilibrium. In this environment, fundamental research proceeds with large structural breaks followed by long periods of time in which new ideas are unsuccessful. The likelihood of a new idea emerging depends on various parameters, including the rewards of working in the old paradigm, the critical mass of researchers required to create a new school of thought and scholarsí ability to properly assess the scientific value of new ideas.
    Keywords: Economics of science; Scientific discovery; Strategic complementarity; Strategic uncertainty; Global games
    JEL: A14 C72 O31
    Date: 2015–02
  11. By: Martimort, David; Stole, Lars
    Abstract: We study games in which multiple principals influence the choice of a privately-informed agent by offering action-contingent payments. We characterize the equilibrium allocation set as the maximizers of an endogenous aggregate virtual-surplus program. The aggregate maximand for every equilibrium includes an information-rent margin which captures the confluence of the principals’ rent-extraction motives. We illustrate the economic implications of this novel margin in two applications: a public goods game in which players incentivize a common public good supplier, and a lobbying game between conflicting interest groups who offer contributions to influence a common political decision-maker.
    Keywords: Menu auctions, influence games, common agency, screening contracts, public goods games, lobbying games
    JEL: D82
    Date: 2015–02–23
  12. By: Nuno Ornelas Martins (Centro de Estudos em Gestão e Economia da Universidade Católica Portuguesa)
    Abstract: In this article I compare the classical theory of value with the theory of value that emerged after the marginal revolution, taking into account the underlying conceptions of process and order that are implicit in each theory. In classical political economy, the economy is conceived of as a continuous process of reproduction, wherein a surplus is distributed through various social classes. After the classical period, the notion of reproduction is replaced with the notion of equilibrium, while the analysis of society in terms of social classes is replaced by methodological individualism. Value also starts to be seen in terms of marginal utility, rather than cost of production. This transformation brought important changes to the implicit philosophical conceptions of process and order that have underpinned the dominant economic doctrine from the classical period until today, leading to the marginalist belief that market exchange is always the most efficient coordinating mechanism of the economy. The classical perspective, however, contains a broader conception of socio-economic reproduction, which is consistent with different institutional arrangements.
    Keywords: Process, order, reproduction, exchange, value.
    JEL: B41
    Date: 2014–12
  13. By: Pfleiderer, Paul (Stanford University)
    Abstract: In this essay I discuss how theoretical models in finance and economics are used in ways that make them "chameleons" and how chameleons devalue the intellectual currency and muddy policy debates. A model becomes a chameleon when it is built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy. I discuss how chameleons are created and nurtured by the mistaken notion that one should not judge a model by its assumptions, by the unfounded argument that models should have equal standing until definitive empirical tests are conducted, and by misplaced appeals to "as-if" arguments, mathematical elegance, subtlety, references to assumptions that are "standard in the literature," and the need for tractability.
    Date: 2014–03
  14. By: Ferrante, Francesco; Ruiu, Gabiele
    Abstract: Although there is still no consensus on the causes of large differences in income per capita across countries, a growing literature considers culturally-based beliefs and institutions as main drivers of the latter differences (Guiso et al. 2006; Tabellini 2010). The intuition is that institutions and beliefs affect the incentive to accumulate human and physical capital. Other strands of literature stress that the supply of entrepreneurship is a fundamental ingredient of economic growth and job creation. In this paper, we argue that the two views should be reconciled on the basis of the following arguments: a) occupational choices and the decision to accumulate human capital are affected by cultural and institutional factors; b) occupational choices are the main tool to allocate human capital within societies; c) entrepreneurs govern the allocation of resources in the economy, including the human resources. Confirming our hypothesis, our empirical analysis show that cultural factors matter and fatalism exerts a particularly negative effect on opportunity perception and on opportunity driven entrepreneurship. For what regards institutional variables, three interesting and somehow non conventional results emerge from the analysis. First, low start-up cost are particular favorable for necessity driven entrepreneurship but not for the opportunity driven ones. Second, labor market flexibility yields a lower probability of being an entrepreneur and this results holds for both necessity and opportunity driven entrepreneurs. Third, the more burdensome the administrative requirement (permits, regulations, reporting) in entrepreneurial activity, the lower the probability of being an opportunity driven entrepreneur. On the whole, our results yield some policy relevant implications: a) culturally-based beliefs matter for entrepreneurship and fatalism is more important than trust in others; b) education can affect people’s fatalism; c) entrepreneurial education can be an important tool for fostering good quality entrepreneurship, i.e. opportunity driven entrepreneurship; c) institutions matter for entrepreneurship and growth but, somehow, in unconventional ways.
    Keywords: entrepreneurship, culture, fatalism, institutions
    JEL: E02 O43 L26 D83 M13 J20
    Date: 2014
  15. By: Admati, Anat (Stanford University); Hellwig, Martin (Max Planck Institute for Research on Collective Goods)
    Abstract: The debate on banking regulation has been dominated by flawed and misleading claims. The title of our book The Bankers New Clothes: What's Wrong with Banking and What to Do about It (Princeton University Press, 2013, see refers to flawed claims about banking and banking regulation, and the book discusses and debunks many of them. Flawed claims are still made in the policy debate, particularly in the context of proposals that banks be funded with more equity and rely less on borrowing than current or new regulations would allow. Those who make the flawed claims do so without addressing our arguments, even when they comment on the book or on our earlier writings. Because the financial system continues to be dangerous and distorted, however, flawed claims must not win the policy debate. This document provides a brief account of claims that we have come across since the book was published in February, 2013. We provide brief responses, with references to more detailed discussions in the book and elsewhere. Nothing that we heard or read changes our conclusions or our strong policy recommendations.
    Date: 2013–06

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