nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2007‒01‒28
four papers chosen by
Karl Petrick
University of the West Indies

  1. The hypostatisation of the concept of equilibrium in neoclassical economics By Andy Denis
  2. On the Convergence of Evolutionary and Behavioral Theories of Organizations: A Tentative Roadmap By Giovanni Dosi; Luigi Marengo
  3. Kahneman and Tversky and the Origin of Behavioral Economics By Floris Heukelom
  4. Comparative Industrial Evolution and the Quest for an Evolutionary Theory of Market Dynamics By G. Buenstorf

  1. By: Andy Denis (Department of Economics, City University, London)
    Abstract: This paper explores the meanings of ‘equilibrium’ in economics, distinguishing salient appropriate and inappropriate modes of deployment of the concept. I examine a specific instance of the deployment of the concept of equilibrium by a neoclassical writer – Robert Lucas – and conclude that the concept has been hypostatised, substituting an aspect for the whole. The temporary is made permanent, and process subordinated to stasis, with apologetic results. Under far-from-equilibrium conditions, equilibrium is not even an approximate description of the condition of the system, but an abstraction – something which might obtain should a process under consideration run to its conclusion. The order of the system is, not an equilibrium, but an ephemeral balance of forces, destined to be disturbed by the passage of time. I suggest that the hypostatisation of equilibrium exemplifies the contrast between formal and dialectical modes of thought, and that the heterodoxy can make its most telling contribution by applying a dialectical notion of equilibrium.
    Date: 2006–01
  2. By: Giovanni Dosi; Luigi Marengo
    Abstract: The behavioral theory of the firm has been acknowledged as one of the most fundamental pillars on which evolutionary theorizing in economics has been built. Nelson and Winter’s 1982 book is pervaded by the philosophy and concepts previously developed by Cyert, March and Simon. On the other hand, some behavioral notions, such as bounded rationality, though isolated from the context, are also at the heart of some economic theories of institutions such as transaction costs economics. In this paper, after briefly reviewing the basic concepts of evolutionary economics, we discuss its implications for the theory of organizations (and business firms in particular), and we suggest that evolutionary theory should coherently embrace an “embeddedness” view of organizations, whereby the latter are not simply efficient solutions to informational problems arising from contract incompleteness and uncertainty, but also shape the “visions of the world”, interaction networks, behavioral patterns and, ultimately, the very identity of the agents. After outlining the basic features of this perspective we analyze its consequences and empirical relevance.
    Date: 2007–01–22
  3. By: Floris Heukelom (ASE, Universiteit van Amsterdam)
    Abstract: Kahneman and Tversky and their behavioral economics stand in a long tradition of applying mathematics to human behavior. In the seventeenth century, attempts to describe rational behavior in mathematical terms run into problems with the formulation of the St. Petersburg paradox. Bernoulli’s celebrated solution to use utility instead of money marks the beginning of expected utility theory (EUT). Bernoulli’s work is taken up by psychophysics which in turn plays an important role in the making of modern economics. In the 1940s von Neumann and Morgenstern throw away Bernoulli and psychophysics, and redefine utility in monetary terms. Relying on this utility definition and on von Neumann and Morgenstern’s axiomatic constraints of the individual’s preferences, Friedman and Savage attempt to continue Bernoulli’s research. After this fails economics and psychology go separate ways. Economics employs Friedman’s positive-normative distinction; psychology uses Savag! e’s normative-descriptive distinction. Using psychophysics Kahneman and Tversky broaden the normative-descriptive distinction and argue with increasing strength for a descriptive theory of rational behavior. A prominent part of contemporary behavioral economics is founded upon the export of Tversky and Kahneman’s program to economics. Within this research, two different branches of research can be observed. One branch continues Kahneman and Tversky’s search for a descriptive theory of rational behavior and extends the normative-descriptive distinction with a prescriptive part. A second branch takes Tversky and Kahneman’s work as a falsification of positive economics. It argues that economics should take account of the psychological critique but stick to rigorous mathematical model building and Friedman’s positive-normative distinction.
    Keywords: Kahneman and Tversky; behavioral economics; expected utility theory; normative economics
    JEL: A12 B21 D01
    Date: 2007–01–11
  4. By: G. Buenstorf
    Abstract: The paper makes the case for an empirically grounded, "bottom-up" approach to theory building in evolutionary industrial economics. This approach is based on studying systematically selected industries that are comparable in key dimensions. It opens up opportunities for testing the relevance, preconditions, and generality of explanatory factors in industry evolution. An illustration of the approach is subsequently given by presenting some findings on the evolution of the historical U.S. farm tractor industry. Length 23 pages
    Date: 2006–12

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