nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2021‒04‒12
nine papers chosen by
Erik Thomson
University of Manitoba

  1. Rethinking the Role of the Representativeness Heuristic in Macroeconomics and Finance Theory By Roman Frydman; Morten Nyboe Tabor
  2. Economics in Nouns and Verbs By W. Brian Arthur
  3. The Hicks-Morishima Approach Reconsidered:Another Look at the Interdependence of Several Markets By Yasuhiro Sakai
  4. The Erroneous Foundations of Law and Economics By Mark Glick; Gabriel A. Lozada
  5. The implicit in Sarasvathy’s work: Highlighting a communication theory in entrepreneurship By Christophe Schmitt
  6. Changing Objectives of Firms and Managerial Preferences: A Review of Models in Microeconomics By Kumar B, Pradeep
  7. Concentration of power at the editorial boards of Economics journals. By Lorenzo Ductor; Bauke Visser
  8. To Be or Not to Be: The Entrepreneur in Endogenous Growth Theory By Henrekson, Magnus; Johansson, Dan; Karlsson, Johan
  9. A Pragmatist's Guide to Prediction in the Social Sciences By Verhagen, Mark D.

  1. By: Roman Frydman (Department of Economics, New York University); Morten Nyboe Tabor (Institute for New Economic Thinking (INET))
    Abstract: We propose a novel interpretation and formalization of Kahneman and Tversky's findings in the Linda experiment which implies that subjects are rational in the sense of Muth's hypothesis and provides an approach to specifying rational assessment of uncertainty in macroeconomic models. Behavioral-finance theorists have appealed to Kahneman and Tversky's findings as an empirical foundation for a general approach replacing rational expectations. We show that behavioral models' specifications of participants' irrational forecasts and predictable errors are incompatible with Kahneman and Tversky's findings. Our interpretation of Kahneman and Tversky's findings is supportive of Lucas's compelling critique of inconsistent macroeconomic models.
    Keywords: Uncertainty in Economic Models; Kahneman and Tversky's Experimental Findings; Behavioral Finance; Muth's Hypothesis; REH.
    JEL: B41 D80 D81 D91 E71 G41
    Date: 2020–12–14
  2. By: W. Brian Arthur
    Abstract: Standard economic theory uses mathematics as its main means of understanding, and this brings clarity of reasoning and logical power. But there is a drawback: algebraic mathematics restricts economic modeling to what can be expressed only in quantitative nouns, and this forces theory to leave out matters to do with process, formation, adjustment, creation and nonequilibrium. For these we need a different means of understanding, one that allows verbs as well as nouns. Algorithmic expression is such a means. It allows verbs (processes) as well as nouns (objects and quantities). It allows fuller description in economics, and can include heterogeneity of agents, actions as well as objects, and realistic models of behavior in ill-defined situations. The world that algorithms reveal is action-based as well as object-based, organic, possibly ever-changing, and not fully knowable. But it is strangely and wonderfully alive.
    Date: 2021–04
  3. By: Yasuhiro Sakai (Faculty of Economics, Shiga University)
    Abstract: This paper aims to shed some new light on the Hicks-Morishima approach to the interdependence of several markets. In spite of its rather simple and ambitious framework for the interdependence of several markets, it is quite unfortunate that this approach has been rather neglected in the academic circle. I suppose that there are several reasons for this. First, the traditional general equilibrium approach developed by Lionel W. McKenjie, Gerald Debreu and Kenetth W. Arrow exclusively works with the good space rather than the price space. In contrast, the Hicks-Morishima approach based on Hicks' classical bookValue and Capital exclusively operates on the price space, thus against the current main stream of economic theory. Next, the majority of economics readers are usually familiar with the straightforward notion of demand and supply curves, but not with the twisted concept of excess demand curves. It is one of my main purpose to mend such unfortunate tendency, presumably proceeding toward the establishment of a new grand system of social science. We can learn new lessons from old teachings.
    Keywords: J.R. Hicks・M. Morishima・Value and Capital・excess demand curves・general equilibrium analysis・comparative statics
    JEL: B31 C62 D51
    Date: 2019–10
  4. By: Mark Glick (University of Utah); Gabriel A. Lozada (University of Utah)
    Abstract: The fundamental originating principle of law and economics (L&E) is that legal decisions should be (and are) based on maximizing efficiency. But L&E proponents do not define 'efficiency' in the way agreed to by most economists, as Pareto Efficiency. A Pareto optimal condition is obtained when no one can be made better off without making someone worse off. Pareto Improvements are win-win changes where no losers exist. In the judicial system, however, there are always winners and losers, because under Article III § 2 of the Constitution a legal case does not exist unless there is a justiciable 'case or controversy' in need of resolution. Unable to use Pareto Efficiency, L&E scholars have been forced to adopt alternative definitions of efficiency. Most L&E scholars claim to define 'efficiency' based on the work of Kaldor and Hicks, but (perhaps unwittingly) instead use a definition of 'efficiency' derived from the 19th century idea of consumer surplus, which encompasses L&E notions such as 'wealth maximization,' and 'consumer welfare' in antitrust. Neither of these alternative definitions is viable, however. Outside of L&E, the Kaldor-Hicks approach has long been recognized to be riddled with logical inconsistencies and ethical failures, and the surplus approach is even more deficient. Remarkably, virtually none of the numerous L&E textbooks even hint at such problems. Critically, all definitions of efficiency improvements in economics are biased in favor of wealthy individuals or firms, either because they are dependent on the status quo ante distribution of assets, or because they bestow large advantages on parties with political influence or who can afford to bring lawsuits quickly. Many L&E practitioners treat efficiency improvements instead as being objectively good, an error revealing that L&E is primarily motivated by its neoliberal policy agenda.
    Keywords: law and economics, antitrust economics, efficiency, wealth maximization, legal realism, neoliberal theory, Kaldor Hicks, Pareto Optimality
    JEL: K1 D61 L4
    Date: 2021–02–15
  5. By: Christophe Schmitt (CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)
    Abstract: We commonly consider the contribution of the effectuation developed by Sarasvathy as an alternative perspective to the causation one. In this paper, the author defends the idea that, even if these two logics were built on different pillars, the causation and the effectuation are eventually two sides of a coin. To understand the structuring of these two logics, the author mobilize Palo Alto's theory of communication, which is extended in order to include entrepreneurship in another paradigm: the paradigm of entrepreneurial action. The paper ends with a discussion of the interest of the latter within entrepreneurship research.
    Abstract: Il est commun, en entrepreneuriat, de considérer que l'apport de la logique effecuale développée à partir des travaux de Sarasvathy se situe avant tout dans une perspective d'alternative à la logique causale. Dans cet article, nous avançons l'idée selon laquelle, même si ces deux logiques se sont construites sur des piliers différents, la logique de causation et la logique effectuale ne sont finalement que les deux faces d'une même pièce. Pour comprendre la structuration de ces deux logiques, nous mobilisons la théorie de la communication de Palo Alto afin d'inscrire l'entrepreneuriat dans un autre paradigm : le paradigme de l'agir entrepreneurial. L'article se termine par une discussion portant sur l'intérêt de ce nouveau paradigme dans le cadre de la recherche en entrepreneuriat.
    Date: 2021
  6. By: Kumar B, Pradeep
    Abstract: Theoretically, producer behavior models postulate that firms have had different objectives ranging from profit maximization to setting aspirational levels. The assumption of objective of profit maximization was shaped on the basis of the rationality principles which has lost relevance with the coming of the principle of behavioral economic in recent time. The present paper intends to throw some light on changes that have been made in the objective of firms over years and attempts to review some models emphasizing managerial utility as the core objective of firms.
    Keywords: Profit Maximization, Sales Maximization, Managerial Utility Function, Managerial Discretionary Powers, Slacks and Salaries, Behavioral Economics
    JEL: D01
    Date: 2021–07–06
  7. By: Lorenzo Ductor (Department of Economic Theory and Economic History, University of Granada.); Bauke Visser (Erasmus University Rotterdam and Tinbergen Institute)
    Abstract: Evolutionary arguments and incentive theory point to the importance of variety and rotation of editorial board members to stimulate innovative research. Using a unique dataset covering more than 100 economics journals over the period 1990-2011, we document trends in the incidence of multiple positions, editorial duration and institutional background for more than 6,100 board members. We put these figures into perspective using the literature on boards of directors and measures of market concentration. The picture that emerges is of a discipline with a high concentration of institutional and individual power, especially at the more prestigious journals. Evidence suggests this indeed matters; there is a strong negative association between editorial duration and journal impact.
    Keywords: editorial boards, journals, concentration, power, busyness, innovation, impact
    JEL: A11 A14 O31
    Date: 2021–03–28
  8. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Johansson, Dan (Örebro University School of Business); Karlsson, Johan (Centre for Family Entrepreneurship and Ownership (CeFEO))
    Abstract: We examine the conceptualization of entrepreneurs in neo-Schumpeterian growth theory, which has reintroduced entrepreneurs into mainstream economics. Specifically, we analyze how neo-Schumpeterians relate to the contradiction between the entrepreneur-centered view of Schumpeter (1934) and the entrepreneurless framework of Schumpeter (1942), with the two frameworks entailing vastly different economic and policy implications. The analysis is based on a review of approximately 750 peer-reviewed articles over the period 1990–2018. The articles were identified using text mining methodology and supervised machine learning. The results show that the literature leans towards Schumpeter (1942); innovation returns are modeled as following an ex ante known probability distribution. By assuming that the outcomes of innovation activities are (probabilistically) deterministic, the Schumpeterian entrepreneur becomes redundant. In addition, the literature abstracts from genuine uncertainty, thus evading central issues regarding the economic function of the entrepreneur, especially with respect to disruptive innovations, ownership, and profits. To incorporate genuine uncertainty, the literature needs to adopt a broader conceptual foundation that goes beyond equilibrium modeling.
    Keywords: Creative destruction; Economic growth; Entrepreneur; Innovation; Judgment; Bibliometric analysis; Knightian uncertainty
    JEL: B40 O10 O30
    Date: 2021–03–29
  9. By: Verhagen, Mark D.
    Abstract: Making out-of-sample predictions is an under-utilised tool in the social sciences, often for the wrong reasons. Many social scientists confuse prediction with unnecessarily complicated methods, or narrowly predicting the future. This is unfortunate, because prediction understood as the simple process of evaluating a model outside of the sample used for estimation is a much more general, and disarmingly simple technique that brings a host of benefits to our empirical workflow. One needn't use complicated methods or be solely concerned with predicting the future to use prediction, nor is it necessary to resolve the centuries-old philosophical debate between prediction and explanation to appreciate its benefits. Prediction can and should be used as a simple complement to the rich methodological tradition in the social sciences, and is equally applicable across a vast multitude of modelling approaches, owing to its simplicity and intuitive nature. For all its simplicity, the value of prediction should not be underestimated. Prediction can address some of the most enduring sources of criticism plaguing the social sciences, like lack of external validity and the use of overly simplistic models to capture social life. In this paper, I illustrate these benefits with a host of empirical examples that merely skim the surface of the many and varied ways in which prediction can be applied, staking the claim that prediction is one of those illustrious `free lunches' that can greatly benefit the empirical social sciences.
    Date: 2021–04–07

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