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Reality and Economic Theory
Abstract
When discussing the implications of uncertainty on economic activity and its policy implications, the fundamental differences among various economic theories involve (a) the analyst’s conception of the external economic reality in which decision-makers operate, and (b) the ability of agents to understand that reality.
... This debate about the 'inherent unknowability in the factors', 'we simply do not know', 'potential surprise' and 'residual hypothesis' was continued within post-Keynesian literature (Davidson 1988(Davidson , 1991(Davidson , 1996Dequech 2000Dequech , 2006Dow 2012;O'Donnell 2014-15). Davidson (1991Davidson ( , 1996 conceptualised uncertainty as an ontological condition of economic reality in which decision-makers operate. ...
... This debate about the 'inherent unknowability in the factors', 'we simply do not know', 'potential surprise' and 'residual hypothesis' was continued within post-Keynesian literature (Davidson 1988(Davidson , 1991(Davidson , 1996Dequech 2000Dequech , 2006Dow 2012;O'Donnell 2014-15). Davidson (1991Davidson ( , 1996 conceptualised uncertainty as an ontological condition of economic reality in which decision-makers operate. He used the concept of non-ergodicity 2 to argue that, in economics, the future is not merely a statistical reflection of the past. ...
... Hence, ignorance of possible future states is a centrepiece of Davidson's (1996, p. 491) concept: 'If […] the future is uncertain in an ontological sense, then sensible decision makers "know" it will always be impossible to possess at any future date a complete list of prospects for any specific further in the future date'. Thus, the non-ergodic situation should be modelled 'as a situation where agents "do not know what is going to happen and know that they do not know just what is going to happen"' (Davidson 1996, p. 482, quoting Hicks 1977. The possible future states are unknowable to economic agents, although the latter might be aware (or unaware) of this. ...
This paper is dedicated to the interpretation of Knightian and Keynesian uncertainty as a situation of unawareness in which agents lack perfect knowledge of possible future states (not just of probabilities assigned to those states). So far, a systematic and nuanced debate of unawareness with relation to Knight’s and Keynes’ legacy has been largely neglected. The paper aims to fill this gap. It discusses in detail how Knight’s, Keynes’ and also Shackle’s ideas about the state space, surprises and ignorance are echoed (but often unacknowledged) in contemporary unawareness research. Parallel reading of these two streams of the literature reveals strong commonalities in argumentation, suggesting that the topic of unawareness could facilitate the dialogue between Post-Keynesians and mainstream economics. The paper concludes with a list of research questions relevant to the development of such a dialogue.
... Critical perspectives like that of Paul Davidson [10], who rejects ergodicity for economic interactions, throw out the entire concept of equilibrium, though perhaps only because they are trapped in the same static equilibrium conception as many of the economists they criticize. A different critique was presented by [46] who points out that even under ergodicity, the time to convergence to the stationary equilibrium distribution may be arbitrarily long, so there is no justification for assuming that the observed distribution is such. ...
... This requires explicitly defining the model space of all distributional models considered in the analysis, each for which is defined by its own configuration of Θ, and choosing a prior across models. 10 ...
... While the clarity of this approach is attractive, a comparison across models based on more conventional fit metrics is a first step in the right direction and improvement over some common practices in the econophysics literature. 10 The prior across models may be uniform or may incorporate a penalty for model complexity either in terms of the number of parameters or the number of components. ...
We offer a brief review of the use of distributional mixture models with a finite number of components for the study of the distribution of income. In general, finite mixture models find a number of applications across fields, but they usually arise from theoretical considerations. Application to the distribution of income present a joint inference about the number and types of components to include in a mixture, corresponding to how different income generating mechanisms’ statistical signatures are represented in the observed data. Many of the contributions in this area rest on an implicit (and sometimes explicit) information theoretic approach to this inference problem. Our review concludes with new illustrative findings from the US based on restricted-access Census data.
... The third instance of epistemological error is a problem of ignorance of fundamentally unknowable information (see Table 3). It emerges when present information does not imply intertemporal change, so that the future remains open-ended (Davidson, 1996;Giménez Roche, 2016). Even if intertemporal change is also possible in the previous two instances of epistemological error, the future can still be implied from present information as in a closed system (Chick & Dow, 2005;Davidson, 1991Davidson, , 1996. ...
... It emerges when present information does not imply intertemporal change, so that the future remains open-ended (Davidson, 1996;Giménez Roche, 2016). Even if intertemporal change is also possible in the previous two instances of epistemological error, the future can still be implied from present information as in a closed system (Chick & Dow, 2005;Davidson, 1991Davidson, , 1996. In both cases, the sets of options (what action can be undertaken) and outcomes (what can be produced by action) are closed; ...
... The dispersed extensiveness and complexity of information constrained by the scarcity of time, and the creatively reflexive response of market agents make the objective evolution of the market process either completely unknowable-as with absolute uncertainty-or at least partially so-as with creative and environmental uncertainty (Packard et al., 2017). As long as uncertainty is present, it involves non-ergodic change, that is, non-predetermined socio-environmental change (Davidson, 1991(Davidson, , 1996Dequech, 2011). In other words, the information on probability distributions needed to make a secure choice simply does not exist in the present. ...
... In this context, distinguishing between ontological and epistemic levels of analysis helps clarify such limits. This distinction has already been made in one way or another in economic literature, in particular in post-Keynesian economics (Davidson, 1996) and in economics of conventions (Orléan, 1987). Moreover, as Dequech (2004, p. 375) points out, there is 'strong entwinement of ontology and epistemology' in this debate, as social reality and the production of knowledge remains entangled from a post-positivist perspective. ...
... While some theories examining risk and uncertainty recognize some limits in substituting risk for uncertainty, only few distinguish between their ontological and epistemic levels of analysis. As seen in the introduction, such distinction echoes previous analyses in Post-Keynesian economics (Davidson, 1996;Dequech, 2004) and economics of conventions (Orléan, 1987). We refer here to the epistemic dimension to explore the production of knowledge that is used to anticipate the future. ...
Dealing with uncertainty has become a matter of great concern for policy makers and scientific research in a world facing global, epochal and complex changes. But in essence, you cannot entirely predict the future. This article aims at conceptualizing the limits to anticipate the future-or what is often referred as the substitution of risk for uncertainty. In contrast to most theories examining risk and uncertainty, we start from the assumption that there are limits in the substitution of risk for uncertainty and that distinguishing between ontological and epistemic levels of analysis helps clarify such limits. The paper makes two arguments: first, most approaches see no ontological and/or epistemic limit in the substitution of risk for uncertainty; second, the pluralization of science is the only way to cope with limits in substituting risk for uncertainty. This second argument draws on the assumption that accounting for the uncertainty of the future depends on knowledge production processes able to overcome disciplinary boundaries and better include lay and expert knowledge. In times of great concerns regarding mitigation and adaptation to the ecological crisis, we illustrate our arguments with insights from global environmental governance.
... Note, this definition is based on who is doing the work and not what problems and methods define econophysics irrespective of disciplinary background. Because of the conflictual history of physics in economics, modern econophysics has had a mixed reception by economists [22,49,8]. Criticisms of conventional neoclassical economic doctrine by physicists may be well founded, but claims of scientific superiority and such statements as "The only scientific alternative [to economics] is to approach markets as a physicist, and ask the market data what are the underlying unstable dynamics" [45] will inevitably fall on economists' deaf ears. Economists embedded in the neoclassical "Citadel" tend to find a deep methodological disconnect with the statistical methods of modern physics and rationally prefer not to overhaul the canonical microfoundations of modern economic theory. ...
... Heterodox economists working in the tradition of Keynes, Veblen, or the Classical Political Economy of Smith, Ricardo, and Marx, share many of the same criticisms of neoclassical theory as econophysicists, but will often make the opposite claim of [45], preferring more inter-disciplinarity with history and the humanities. 3 The analogy of social and physical systems here is often seen as the original sin of modern economics and the idea of fixing the physics and not the economics is sensibly met with opposition [8]. Though it is claimed that "Econophysics does not mean lifting tools and models from statistical physics and then applying them directly to economics" it can be difficult for many economists to understand what exactly is meant by "Econophysics, simply stated, means following the example of physics in observing and modeling markets." ...
A coherent statistical methodology is necessary for analyzing and understanding complex economic systems characterized by large degrees of freedom with non-trivial patterns of interaction and aggregation across individual components. Such a methodology was arguably present in Classical Political Economy, but was abandoned in the late nineteenth century with a theoretical turn towards a purely mechanical approach to understanding social and economic phenomena. Recent advances in economic theory that draw from information theory and statistical mechanics offers a compelling statistically based approach to understanding economic systems based on a general principle of maximum entropy for doing inference. We offer a brief overview of what we consider the state of maximum entropy reasoning in economic research.
... Uncertainty by social interaction is defined as the inability to predict the behaviour of others since all individuals are simultaneously learning and adapting (Elster, 2009). Uncertainty results from a lack of available information when individuals have neither the ability nor the time to collect information nor are unaware of its existence (Davidson, 1996). In both cases, the uncertainty arises from the inability to properly forecast future risks or probabilities. ...
Numerous studies aim to connect negative fertility desires and outcomes with employment conditions deemed to be uncertain. However, there is a lack of consensus about how to define, conceptualise, and measure employment uncertainty. This paper considers issues surrounding the conceptualisation of employment uncertainty. It then reviews existing measures of employment uncertainty in the context of fertility decisions. Finally, it raises considerations about their use. While some aspects of employment uncertainty are well studied, there are still gaps between theory and empirical evidence. Researchers should be aware of existing population heterogeneity, contextual factors, and model selection when considering their conceptualisation of employment uncertainty.
... The former position, however, assumes an external reality that is not only uncertain but also transmutable or creative in the sense that is always susceptible to change, rendering the future fundamentally unpredictable. Davidson (1988Davidson ( , 1991Davidson ( , 1996 characterizes this difference as the distinction between living in an 'ergodic' or 'non-ergodic' world. Systems are ergodic if both their key parameters and structure remain stable over time. ...
The Global Financial Crisis (GFC) and the subsequent Covid-19 economic shock fed expectations of a radical overhaul of the set of economic ideas that have ruled (macro)economic policymaking since the 1970’s. Monetary policy especially saw a spectacular shift in new policies that were adopted. When nominal interest rates hit the zero lower bound, central banks of the Advanced Market Economies (AME) were forced to explore a broad range of new and rather unconventional policies. In terms of monetary policymaking the past decade and a half is marked by experimentation and innovation. Central banks’ role in the economy has massively expanded and new problems and responsibilities were entrusted upon them. This has come with new challenges. Since the start of the GFC and up until the Covid-19 economic shock, inflation has been persistently below target despite monetary policy being extremely accommodative. Seemingly signaling a chronical inability to control the level of inflation, this undermined the credibility of central banks. The coming climate crisis, in addition, has confronted AME central bankers with a ‘green policy dilemma’: should they engage with climate change and risk jeopardizing the consensus approach to monetary policy (focused solely on price stability) or should they refuse to do so and risk jeopardizing financial stability? These challenges have put the dominant paradigm of modern central banking under increasing stress. An unsettled issue is whether these multiple crises and new challenges have also led to a genuine ‘policy revolution’ or a true ‘paradigmatic shift’ in monetary policy-making. This dissertation will answer this question by analyzing AME central banks’ policy reactions to both the financial and Covid-crisis and the new challenges of lowflation and climate change. It will examine what these reactions have meant for the survival of the current macro-economic regime and will develop a more general theory on the potential drivers and barriers of radical policy change in monetary pol-icy. This is done by developing an idiosyncratic analytical framework that departs from Peter Hall’s classic framework on policy paradigms. By relying too heavily on the work of Thomas Kuhn, it is argued, Hall’s framework restricts the possible types of policy change by allowing only for slow incremental change (as part of ‘normal policymaking’) or a radical rupture or full-blown paradigm shift. Our alternative frame-work, in contrast, starts from the work of Imre Lakatos’ conception of paradigms or research programs as basically consisting of a set of tenacious ‘hard core beliefs’ that cannot be challenged and a set of ‘ancillary beliefs’ or ‘protective belt assumptions’ that are more malleable and subject to change. Based on this insight, the alter-native framework proposes three dimensions of change that mutually interact and together determine the degree of possible policy change: I) cognitive, II) normative-institutional, and III) socio-political change. Corresponding with Lakatos’ hard core beliefs, it is the normative-institutionalist ideas that central bankers hold that will eventually determine which new ideas and policies will be considered, deemed acceptable and put into practice. Based on this analytical framework the dissertation reaches the conclusion that the continued attachment by AME central bankers to certain core principles of the old paradigm (i.e. price stability, strict central bank independence, monetary dominance and the long-term neutrality of money) has prevented a full-blown paradigm shift taking place both in the aftermath of the GFC and Covid19-crisis. Because the normative-institutionalist ideas of the current monetary policy consensus were not questioned more fundamentally, practical alternatives legitimizing radically different policy solutions were never allowed to blossom.
... 3 In epistemological terms, post-Keynesians question the principle of rational decision-making assumptions. They all agree that agents do not have perfect foresight, and are in an environment that is permanently changing, and largely unpredictable (Davidson 1996). There is uncertainty, which is an inherent aspect of events seen in historical time (Arestis 1996). ...
In the last years, there has been an emergence of cultural-led development studies. On the one hand, there are studies that explore how culture contributes to regional economic regeneration and to job creation. On the other hand, recent works analyse from a supply-side perspective the complementary relationship between cultural capital and human capital in fostering national economic growth. This paper contributes to this last strand of the literature by analysing how the degree of inequalities in cultural engagement impact on economic growth. The argument is that cultural capital might be more effective in driving economic growth when there are higher rates of cultural engagement across social groups because more people can become inspired to be creative and innovative and because diversity is a source of innovativeness. To justify it, the article deploys a novel approach that combines cultural economics literature with post-Keynesian economics. Their fertile dialogue enables the consideration of power relationships and inequalities. It also furthers the understanding of the role of external demand in shaping economic growth by considering the differences in countries’ productive structure. Hence, a post-Keynesian growth model is adapted to embed inequalities in cultural engagement. Considering the role of the balance of payments constraint on long-run economic growth, the model is applied to different types of productive structures that differ in the uniqueness and diversification of their knowledge networks. The article concludes that higher cultural engagement fosters economic growth and that the size of this effect is stronger and more durable in more complex economies.
... Following Davidson "[...] Ergodicity implies that future outcomes are merely the statistical shadow of past and current market signals." [72]. Samuelson wrote in 1969 [73] that if economists wants to move Economics from "the realm of history" into "the realm of science" then ergodicity must be imposed. ...
The Global Financial Crisis of 2008 left was also a crisis for macroeconomic models. On the one hand, orthodox economists persist in using the skeleton of classical models, while on the other hand, various groups of heterodoxes have proposed different ways to change the foundations of Economics. My research aims to bridge the gap between Neo-classical Economics and complexity Economics using methods and techniques from statistical physics.Beginning with standard economic models, I study the addition of a self-reflexive feedback impacting the confidence of individual economic agents. This induces large output swings despite only minor variations in economic conditions. Within this framework, economic crises propagate endogenously and are amplified by interactions. Later on, I enrich the previous framework by taking into account heterogeneities, studying how economic recessions propagate through different strata of society.In the last part of this work, I present a behavioural economic model where the stability of the economy is jeopardised by the lack of investments in risky markets.
... Dans l'autre, c'est la réalité elle-même qui mute, changeante et instable. Le futur est dissemblable au passé, il ne saurait en être déduit, configuration causale que Paul Davidson (1987 ;1996), théoricien inlassable et influent de l'incertitude radicale, appelle « non-ergodicité ». Plus précisément, ce qu'il qualifie d'« ergodique » est la convergence des observations statistiques dans le temps et l'espace vers leur véritable probabilité, causale, d'occurrence, hypothèse sous-jacente à la théorisation mainstream, pour laquelle « tous les mouvements et transformations futurs sont déjà prédéterminés » (Davidson, 1996, p. 480 ; notre traduction) par une réalité sinon immuable, du moins dont les lois de métamorphose sont fixées 8. Au vrai, deux autres débats, de moindre importance, agitent les post-keynésiens. ...
Chapitre 8 de l'ouvrage collectif sous la direction de Virginie Monvoisin, Éric Berr et Jean-François Ponsot
... More recently, this distinction corresponds to the ergodic and non-ergodic processes in Post-Keynesians (Dunn, 2000). Davidson (1996) argues that even if economic agents' information about past and current events is perfect, this will not constitute a sufficient basis to form a probability distribution on the future events in non-ergodic processes. ...
Firms hold buffer stocks such as capital stocks, inventories, liquid assets, and retained earnings to absorb the effects of uncertainties they face. However, the existence of such buffers affects both the performance of all the firms in the economy and the aggregate income. In this study, a stock-flow consistent system dynamics model is built to analyze these effects. Dynamic equilibrium solutions present that the presence of uncertainty decreases both aggregate firm profitability and aggregate income. Furthermore, the effects of a change in the sentiment of entrepreneurs and firm managers on the aggregate variables if the levels of buffer stocks were affected by this sentiment in the presence of uncertainty is analyzed. Simulation results show that a change in the sentiment index causes the aggregate income to change in the same direction.
... According to Davidson (1996), the axiom of 'ergodicity' is invoked by the neoclassical analysis in general. This means that the world is predetermined and immutable. ...
This thesis intends to determine the effects of energy prices and their volatilities
on long-term macroeconomic uncertainty through the estimations of the system-GMM
and the dynamic panel threshold model on a panel data of 18 countries for the period
1999-2019. Besides, whether the level of dependence on energy imports is an essential
factor in determining the effect of energy price volatility on macroeconomic uncertainty
is another question that this study seeks to answer. In this context, this study confirms
previous findings that energy prices have a significant impact on macroeconomic
uncertainty and contributes to the literature by providing complementary evidence that
this effect also depends on energy price volatility and the degree of volatility.
The results indicate that the estimated threshold level of oil price volatility is
21.0%. Both regime-dependent coefficients indicating the marginal impacts of oil price
volatility for low- and high-volatility regimes are found to be positive and statistically
significant. This finding implies that volatility below the threshold level does not
necessarily accompany reduced uncertainty. However, the marginal effect on
uncertainty is stronger in the high volatility regime compared to the low volatility
regime; that is, uncertainty is sensitive to the degree of volatility in oil prices. In order
to explore the role of the level of dependence on energy imports, the sample is divided
into two subgroups: countries with low- and high levels of dependence on energy
imports. The results indicate that the level of dependence on energy import is an
important determinant in the interaction between energy prices and macroeconomic
uncertainty. As a result, these findings support the hypothesis of a nonlinear relationship
between energy price volatility and long-term macroeconomic uncertainty and show
that this relationship is also highly sensitive to the level of countries' dependence on
energy imports.
... Uncertainty by social interaction is defined as the inability to predict the behaviour of others since all individuals are simultaneously learning and adapting (Elster, 2009). Uncertainty results from a lack of available information when individuals have neither the ability nor the time to collect information or are unaware of its existence (Davidson, 1996). In both cases, the uncertainty arises from the inability to properly forecast future risks or probabilities. ...
... What is striking about this guidance is that no conceptual distinction was made between risk and uncertainty. This distinction was introduced by Knight (1921) and Keynes (1921Keynes ( /2006Keynes ( , 1937Keynes ( /1973, and has been further developed by some post-Keynesian economists (Davidson, 1988(Davidson, , 1991(Davidson, , 1996Dequech, 2000Dequech, , 2006Dow, 2012;Shackle, 1949Shackle, , 1955Shackle, , 1969. Knight, Keynes and Post-Keynesians distinguished between risk as a situation in which there is some objective basis for determining probabilities of possible outcomes, and uncertainty, in which there is no such basis, even if decision-makers assign subjective probabilities, since the events or actions are not taking place in identical or even similar conditions. ...
How can we account for differences in the extent of risk disclosure among companies? The paper expands the existing explanations by claiming that corporate risk reporting is not just financial but also political communication. The presented empirical analysis of how corporations disclose Brexit-related uncertainties suggests that risk reporting is a part of a company’s holistic conversation with multiple audiences in society (e.g. politicians, regulators, journalists and customers) and might have well-targeted but also unforeseen effects on each of them. The quantity and quality of risk disclosure can be explained – among other factors – by the extent to which companies want to participate in public discourse and wish their opinions on a particular political issue, such as Brexit, to be heard. In other words, risk reporting is a part of ‘the politics of expectations’ which should be investigated in its own right.
... This was the passage that Davidson (1981-82;1996) misunderstood, partly through Samuelson's fault, when he considered the classical fatalistic intuition identical with the ergodic hypothesis and credited Samuelson with the "misleading conclusion" that the ergodic axiom was a sine qua non for the scienti…c method of …nance. That said, Lucas and Sargent (1981) also proclaimed, independently of Davidson, that the ergodic axiom was a unique scienti…c method in the pursuit of economics. ...
The science of economics should focus on the benefits to mankind, and on increasing its welfare. The role of the market and the government was debated between mercantilists and physiocrats in the 17--18th centuries already and remains questionable to this day. Classical economists relied on a fatalistic intuition in explaining the role of the market, arguing that the mechanism of the market would automatically create an equilibrium in the long term, regardless of the initial conditions. In the 19th century, Ludwig Boltzmann put forward a similar principle in thermodynamics: the ergodic hypothesis. An ergodic system is homogeneous, without the past and future-making any difference to its state; time is analytical. The absence of ergodicity breaks the symmetry between past and future; time is historical. We will show that Paul A. Samuelson followed the fatalistic intuition of classical economists, which he ambiguously referred to as the ergodic hypothesis. The objections raised by Paul Davidson are based on that ambiguity. By contrast, John M. Keynes did not consider financial processes to be ergodic, arguing that the future was uncertain and the government was significant. Based on the criticism voiced by Frank P. Ramsey, we assess Keynes' logic of probability, which, for risk analysis, is seen as the scientific method of the uncertainty shrouding the General Theory and of the theory of long-term expectations.
... 6 Simon's two blades process analysis is richer than (7.5) since he allows for the case in which a change in the environment occurs independently of the effects of the feedback channel. I leave this additional layer of complexity aside in order to emphasize the role of the feedback channel in order to focus on the behavior of reflexive agents in Sect. 5. 7 In Paul Davidson's terms, the world is 'transmutable' (Davidson 1996). At the same time, the world is only 'evolutionary' in the loosest sense of the term. ...
This chapter develops a conception of reflexive economic agents as an alternative to the standard utility conception and explains individual identity in terms of how agents adjust to change in a self-organizing way, an idea developed from Herbert Simon. It seeks to model the behavior of economic agents in a manner that builds on the important contributions of Stefano Zambelli to the understanding of computation and dynamical economic systems. This chapter distinguishes closed equilibrium and open process conceptions of the economy and argues the former fails to explain time in a before-and-after sense in connection with Aristotle’s sea battle problem. A causal model is developed to represent the process conception, and a structure-agency understanding of the adjustment behavior of reflexive economic agents is illustrated using Merton’s self-fulfilling prophecy analysis. Simon’s account of how adjustment behavior has stopping points is then shown to underlie how agents’ identities are disrupted and then self-organized, and the identity analysis this involves is applied to the different identity models of Merton, Ross, Arthur, and Kirman. Finally, the self-organization idea is linked to the recent ‘preference purification’ debate in bounded rationality theory regarding the ‘inner rational agent trapped in an outer psychological shell,’ and it is argued that the behavior of self-organizing agents involves them taking positions toward their own individual identities.
... Nonetheless, Keynes had a more positive view of animal spirits (without them, entrepreneurs would be paralyzed by doubts), even though he acknowledged they may also engender wild fluctuations. What would be irrational is to stick to methods (like mathematical expectations) which cannot be applied by lack of relevant data, because the future is fundamentally uncertain (Davidson 1991(Davidson , 1996. Thus, we need to improve our understanding of how animal spirits work. ...
When it comes to investment expectations, entrepreneurs rely on their gut feelings, aka “animal spirits.” And yet, in most models, animal spirits are seen as “black box” irrationality that would cause random shocks. The purpose of this paper is to open this black box in order to comprehend how animal spirits work. First, we draw on Keynes’s texts and insights from psychology and neuroscience so as to elaborate a theoretical model of animal spirits. It seems they estimate prospective yields in an analogical and emotional fashion. Second, we implement a field study (presumably the first of its kind) in the context of a very realistic business game simulation in order to assess the animal spirits of would-be entrepreneurs and see whether they weigh more in investment expectations than the real factors so far outlined by the literature (profits, debt, the rate of capacity utilization, etc.). We find that emotions play a prominent role in investment decisions and that some of them enable entrepreneurs to cope with radical uncertainty.
... Representatives of many different heterodox schools have long argued that by portraying people's actions as a determinate response to their circumstances, orthodox economic models exclude the possibility of genuine human choice (because the latter requires that people could have decided to act differently than they did in any given set of circumstances, something that is ruled out by standard rational choice theory). This argument has long characterised Austrian economics (Mises [1949(Mises [ ] 1966Lachmann 1977Lachmann , 1986O'Driscoll and Rizzo 2015) as well as some varieties of Post Keynesianism (Shackle 1969(Shackle , [1972(Shackle ] 1992(Shackle , 1979Davidson 1996). It is also a long-standing feature of Old Institutionalism (Veblen 1898;Hodgson 1988) as well as the capability approach (Sen 1987(Sen , 1997(Sen , 2002. 2 An interesting and important example of this kind of argument can also be found in the writings of the Nobel Prize-winning economist James Buchanan, one of the founding fathers 1 We would like to thank Shaun Hargreaves Heap and Jochen Runde for helpful comments on an early draft of this paper. ...
Historians of economic thought are paying greater attention to issues of social ontology (i.e. to the assumptions that economists make about the nature of social reality). We contribute to this burgeoning literature by exploring the hitherto neglected way in which James Buchanan invoked ontological considerations, concerning in particular the nature of human choice, both in criticising neoclassical economics and also in setting out his own contributions to constitutional political economy. We focus on Buchanan’s account of man as an artifactual being who has the capacity to choose the kind of person he wishes to become, in particular by selecting the kind of preferences he wishes to have and the kinds of rules under which he wishes to live. We discuss how Buchanan’s thinking on this issue was shaped by Frank Knight and G. L. S. Shackle and explain why Buchanan explicitly described his argument as ontological in nature. Finally, we contend that Buchanan’s approach would have benefited from further ontological elaboration, in two ways: first, because his arguments would have been stronger had he said more about the attributes of the human agent that help to secure their engagement in thinking creatively about themselves and the rules of society (‘the constitutional moment’), and second because his account would benefit from a deeper discussion of the interplay between human agency and social structure, especially with regard to the question of which structures might constrain or facilitate creative choices of the kind by which he set such great store.
... (Kregel, 1996). Diversos autores cepalinos, pós-keynesianos, kaleckianos, sraffianos e economistas evolucionários como Furtado (1974), Davidson (1996), Coricelli & Dosi (1988) e Kirman (1992), entre outros, criticam os fortes e pouco realistas pressupostos existentes na base da teoria tradicional. Esses economistas, críticos à visão convencional, propõem analisar a economia por perspectivas distintas em vista a compreender e simular cenários para determinar o comportamento real do sistema econômico. ...
O objetivo deste trabalho é apresentar um modelo econômico de corte neokaleckiano com parâmetros de estrutura produtiva, simulá-lo para a economia brasileira e discutir seus resultados à luz de discussões teóricas. No primeiro capítulo do trabalho, serão mapeadas visões acerca das funções de algumas variáveis macroeconômicas sobre sistemas econômicos. Entre tais visões destacar-se-ão as tradições ortodoxa, novo-desenvolvimentista e estruturalista. Em seguida, será introduzido o modelo neokaleckiano de crescimento e distribuição. O objetivo final será analisar possibilidades e impactos da aplicação do modelo neokaleckiano para a economia brasileira para o ano de 2011. Com tal objetivo, será utilizado o modelo descrito por Cimoli, Lima e Porcile (2013) para o curto prazo, que acrescenta aos modelos neokaleckianos tradicionais elementos de estrutura produtiva e mudança estrutural. Os parâmetros do modelo serão calibrados a partir de dados empíricos e calculados por uma metodologia proposta no segundo capítulo. Por fim, serão feitas simulações e interpretados os resultados a partir das visões inicialmente discutidas no primeiro capítulo.
... Thus, while the ergodic or stochastic representation of statistical equilibria is a parsimonious and mathematically convenient representation of economic processes, it seems ultimately to introduce even more unnecessary complications in applications to social systems than exist in statistical mechanics. The fact that we do not and can not even possess strong enough behavioral postulates to establish an analog to the equations of motion or principles of conservation for an economic system has already ruled out statistical equilibrium thinking in many economists' minds (Davidson, 1996;Mirowski, 1991). It may ultimately be worth seriously evaluating Jaynes' goading claim that "It appears to be a quite general principle that, whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought." ...
Economic systems produce robust statistical patterns in key sate variables including prices and incomes. Statistical equilibrium methods explain the distributional properties of state variables as arising from specific institutional and behavioral postulates. Two traditions have developed in political economy with the complementary aim of conceptualizing economic processes as irreducibly statistical phenomena, but differ in their methodologies and interpretations of statistical explanation. These conceptual differences broadly mirror the methodological divisions in statistical mechanics, but also emerge in distinct ways when considered in the context of social sciences. This paper surveys the use of statistical equilibrium methods in analytical political economy and identifies the leading methodological and philosophical questions in this growing field of research.
... Examples of work in this tradition include the literature on speculative bubbles in financial markets (Shiller 1989;Rosser 1997), theories of "sunspot equilibria" (Azariadis 1981;Cass and Shell 1983), and the literature on coordinating expectations as a means of selecting among multiple equilibria (Cooper and John 1988;Colander 1996). Davidson (1996) is critical of much of this work, arguing it "[m]erely [raises] epistemological problems of finding a self-adjusting immutable equilibrium" (this criticism pointed out by Rosser (2001), p.556). However, not all economists working in alternative traditions are so critical. ...
One of the most debated questions in alternative macroeconomics regards whether demand policies have permanent or merely transitory effects. While demand matters in the long run in (neo-) Kaleckian economics, both economists operating within other Keynesian traditions (e.g. Skott 1989) as well as Classical economists Duménil and Levy (1999) argue that in the long-run output growth is constrained by an exogenous natural growth rate. This paper attempts to bridge the gap by analyzing the role of firm beliefs about the state of the economy in a labor-constrained growth and distribution model based on Kaldor (1956) and Goodwin (1967) that is also compatible with the evolutionary perspective on coordination (or the lack thereof) within markets by Metcalfe et al. (2006). The main innovation is the inclusion of beliefs about economic activity in an explicitly dynamic choice of capacity utilization at the firm level. We show that: (i) the relevance of such beliefs generates an inefficiently low utilization rate and labor share in equilibrium, but (ii) the efficient utilization rate can be implemented through fiscal policy. Under exogenous technical change, (iii) the inefficiency does not affect the equilibrium employment rate and growth rate, but expansionary fiscal policy has positive level effects on both GDP and the labor share. However, (iv) with endogenous technical change à la Verdoorn (1949), fiscal policy has also temporary growth effects. Finally, (v) the fact that the choice of utilization responds to income shares has a stabilizing effect on growth cycles, even under exogenous technical change, that is analogous to factor substitution.
... To simplify, orthodox microeconomic theory assumes perfect knowledge: the future is knowable (and hence fixed, or 'ergodic'), and everybody acts on that knowledge. 67 The debate mostly revolved around this perfect-knowledge assumption. ...
This chapter discusses the significance of a Nobel Prize in economics. In a turbulent world, the prizes that Alfred Nobel endowed in 1895 shine as beacons of enduring value. They signal that effort, integrity, and success in pursuit of truth can earn mighty acclaim. In 1968, the Swedish central bank persuaded the Nobel Foundation to add a prize in economics, identical in all but name to those in science, literature, and peace. For a paltry investment, it extended the aura of Nobel authority to the discipline of economics. It was an entrepreneurial move worthy of Alfred Nobel himself. Like Nobel's invention of dynamite, the economic prize was a force with potential for good but also for harm. But how does one think of economics as science? Specialists in scientific method, practising economists, and Nobel Prize winners tell different stories. This matters when we look to economics for policy advice.
... While this might be representative of the case put forward by the advocates of bounded rationality, this is not the position taken by Keynes or the post-Keynesians. Although Keynes, the post-Keynesians, Simon and others all try to reformulate economic theory so that it accords better with real life economic processes, they differ in their content and approach, as argued by Dunn (2001), Farmer (1995 and Davidson (1996). " 6 (Olesen,2010,p.115). ...
Although Herbert Simon never read J M Keynes’s A Treatise on Probability (1921) or understood the necessary connections between the General Theory (1936) and the A Treatise on Probability, he independently discovered an alternate formulation that was equivalent to Keynes’s approach, but nowhere as technically advanced. Simon’s approach thus leads to the same kind of conclusions and results that Keynes provided in the A Treatise on Probability in 1921.
On p.xii, Shiozawa correctly states that “Bounded rationality is the basis of all evolutions of economic entities…” and “Because of bounded rationality, any existing entities are not optimal at any time.”, it will be necessary to connect Keynes’s degree of logical probability, P(a/h) =α, where α is a degree of rational belief, which is defined on the unit interval between 0 and 1, to Simon’s work. Keynes’s interval valued probability is always bounded below and above by lower and upper probabilities. This is what Keynes meant by uncertainty, which requires the evidential weight of the argument, V (a/h)=w, also defined on the unit interval between 0 and 1, to almost always be less than 1, so that risk assessments can’t, in general, be made about future outcomes unless one is dealing with the short run or immediate or near future. As noted by Keynes in chapter 5 of the General Theory, these short run expectations are usually fulfilled most of the time, so that w is close to, near, or approximately 1, unless negatively impacted by changes in long run expectations regarding fixed investment/technical Innovation,which have low to very low w values. Therefore, simple three to six day moving average models can be reliably used to forecast short run production, inventory, stockout, buffer stock, and consumption activities (see chapters 4 and 5 by Morioka and his construction of “ … a dynamic and multisector model of the multiplier theory…” first theoretically developed by Keynes in the A Treatise on Probability in 1921 in chapter 26 on page 315 in footnote 1, which was then applied by Kahn and Kalecki later in the 1930’s. Taniguchi provides valuable mathematical and applied analysis of Operations Management, Production Management, and Supply Chain subjects and issues, that are used in the quantity adjustment process of the firm. This point was originally introduced by Shiozawa in an earlier chapter in the book.)
However, in the case of total ignorance (Shackle’s complete and total uncertainty or fundamental uncertainty, w=0, which he developed based on the ideas of Joan Robinson), Post Keynesians argue that such mathematical models ,as used by Shiozawa, Morioka, and Taniuchi, would not be applicable. This is precisely Joan Robinson’s claim, that mathematics can not be used in economics because no one ever knows anything about the future, be it near or far; hence, the mathematical equations and functions do not, and can’t, exist. However, for Keynes, this type of argument, about the impact of total ignorance on analyzing outcomes, deals only with the distant or far future and not with the near or immediate future.
The Post Keynesian school, following Joan Robinson, G L S Shackle and Paul Davidson, has completely confused the definition of uncertainty made by Keynes in chapter 12 of the General Theory on page 148 in footnote 1, where Keynes defined uncertainty to be an inverse function of the weight of the argument, V, which must come in degrees, with a notion that there is always complete and total uncertainty about any event in the future, so that it does not matter in distinguishing the short run (near or immediate future) from the long run (distant or far future). All events can only be either certain or they must be uncertain for the Post Keynesian school, since uncertainty is the negation of certainty. It is impossible to have degrees of uncertainty or liquidity or disquietude for the Post Keynesian school, just as it is impossible to have degrees of ergodicity or non ergodicity. Post Keynesians, who argue that there are degrees of uncertainty and that uncertainty requires non ergodicity, are involved in an immense logical contradiction.
It is very likely, then, that Post –Keynesians, who are unanimously loyal to the agenda established by Joan Robinson, while implicitly completely rejecting Keynes’s A Treatise on Probability and General Theory approach to uncertainty ,will also reject Shiozawa’s, Morioka’s and Taniuchi’s Microfoundations for Evolutionary Economics (2019), due to the necessary mathematical formulations contained in their book that are absolutely needed in order to develop important analysis required from operations management, production management, and supply chain management applications, which can be viewed as major advances on Keynes’s early 1930’s emphasis on the importance of maintaining sufficient buffer (safety) stocks. Buffer stocks must be maintained to avoid supply side shocks ,such as those that hit the world economy in the mid-1970’s to mid-1980’s at both the macro and micro levels.
The second important point made by Shiozawa is that optimal results can’t ever be calculated, but, following Simon, satisfactory results can be expected to result from a process involving study, memory, intuition, experience and expertise. The conclusion that optimization can’t be accomplished under bounded rationality was also arrived at by Keynes with respect to his definition of degree of rational probability, α. Keynes’s worked out examples of his conventional coefficient of weight and risk, c, in footnote 2 on page 315, which was offered by Keynes as an alternative formulation to the much more difficult interval valued approach of using upper and lower bounds, that Keynes had worked out in Parts II and III of the A Treatise on Probability, which he called approximation and inexact measurement, leads to the same conclusion. Optimal results require exact,precise probabilities, but Keynes’s imprecise probabilities can allow a decision maker in a firm-industry to obtain a satisfactory result. Simon is implicitly relying on imprecise probability assessments by decision makers.
Everything developed in this book is based on, and follows from, the foundation supplied by H. Simon to Shiozawa, Morioka, and Taniuchi. Unfortunately, H. Simon’s approach has been rejected by Post Keynesians, who, instead of using Keynes’s very similar approach, are using a diametrically conflicting approach to uncertainty and risk that was authored by Joan Robinson, G L S Shackle, and P Davidson.
This book effectively develops a microeconomics consistent with quantity (output) adjustment that follows directly from Keynes's Principle of Effective Demand. I believe that the authors can extend this to Keynes's macroeconomic structure in the General Theory in the future.
... Simon's two blades process analysis is richer than [5] since he allows for the case in which a change in the environment occurs independently of the effects of the feedback channel. I leave this additional layer of complexity aside in order to emphasize the role of the feedback channel in order to focus on the behavior of reflexive agents in section 5.6 In Paul Davidson's terms, the world is 'transmutable'(Davidson, 1996). At the same time, the world is only 'evolutionary' in the loosest sense of the term. ...
... Simon's two blades process analysis is richer than [5] since he allows for the case in which a change in the environment occurs independently of the effects of the feedback channel. I leave this additional layer of complexity aside in order to emphasize the role of the feedback channel in order to focus on the behavior of reflexive agents in section 5.6 In Paul Davidson's terms, the world is 'transmutable'(Davidson, 1996). At the same time, the world is only 'evolutionary' in the loosest sense of the term. ...
This paper develops a conception of reflexive economic agents as an alternative to the standard utility conception, and explains individual identity in terms of how agents adjust to change in a self-organizing way, an idea developed from Herbert Simon. The paper distinguishes closed equilibrium and open process conceptions of the economy, and argues the former fails to explain time in a before-and-after sense in connection with Aristotle's sea battle problem. A causal model is developed to represent the process conception, and a structure-agency understanding of the adjustment behavior of reflexive economic agents is illustrated using Merton's self-fulfilling prophecy analysis. Simon's account of how adjustment behavior has stopping points is then shown to underlie how agents' identities are disrupted and then self-organized, and the identity analysis this involves is applied to the different identity models of Merton, Ross, Arthur, and Kirman. Finally, the self-organization idea is linked to the recent 'preference purification' debate in bounded rationality theory regarding the 'inner rational agent trapped in an outer psychological shell,' and it is argued that the behavior of self-organizing agents involves them taking positions toward their own individual identities.
... Broader interpretation of rationality axiom is that pursuit of utility is only done by rational economic behaviour and everything else is irrational. In neoclassical view, consumers make rational choices that lead to maximizing their utility (Davidson, 1996). If applied to financial decisions, consumers are expected to act rationally when deciding about type and size of credit they use. ...
This paper explores the existence of different forms and underpinning reasons of exploitation at households’ level. The empirical analysis, based on data from the British Household Panel Survey (BHPS) collected for the purpose of understanding the social and economic change in Britain, aims to identify underpinning factors of mixed conclusions from empirical evidence on the existence of exploitation of payday loan users. This paper goes beyond traditional economic explanation and focuses on factors defining conditional relative advantage exploitation leading to voluntary exploitation. The results suggest that due to an “act in desperation”, current regulations on payday loan lending are powerless and cannot prevent households being voluntary exploited. In addition, results show that increased household financial burden and additional borrowing increase the likelihood of households to take a gamble in order to provide basic needs. The results provide more insight into why current policy regulations fail to tackle the problem of payday loan lending.
Herbert A. Simon developed the idea of boundedrationality from his earliest works (Simon 1947, 1955a, 1957), which is viewed as the foundation of modern behavioral economics. Behavioral economics contrasts with more conventional economics in not assuming full information rationality on the part of economic agents in their behavior. In this regard, it draws on insights regarding human behavior from other social science disciplines such as psychology and sociology, among others. Without question, one can find earlier economists who argued that people are motivated by more than mere selfish maximization. Indeed, from the very beginnings of economics with Aristotle, who put economic considerations into a context of moral philosophy and proper conduct, through the father of political economy, Adam Smith in his Theory of Moral Sentiments (1759), to later institutional economists such as Thorstein Veblen (1899) and Karl Polanyi (1944) who saw peoples’ economic conduct as embedded within broader social and political contexts. Nevertheless, it was Simon who coined both of these terms and established modern behavioral economics.
The paper compares the Post Keynesian and North’s approaches to an analysis of uncertainty and uncertainty-reducing role of institutions. Author emphasizes that Post Keynesianism was the first school of economic thought that has made uncertainty the starting point of own research program. Many of North’s line of reasoning about uncertainty were mentioned by the Post Keynesians long before his works had been published. It is not fortuitous that in the course of discussion of ergodicity and non-ergodicity North cites Davidson, leader of Post Keynesianism. Both approaches conclude that Neoclassical theory cannot be applicable to the solution of the real world’s problem because it ignores “genuine” (fundamental) uncertainty. The paper considers also differences between these two approaches. Whereas North’s theory explains inability of many systems to grow steadily, the Post Keynesians emphasize problems of systems perceived as successful. These problems exist due the fact that institutional evolution decreases effectiveness of uncertainty’s reduction and are revealed in macroeconomic and financial crises.
The objective of this article is to elaborate an economic and historical approach to the notion/concept of strategy. More specifically, it aims to propose a definition of strategy that helps to unravel this important topic from a paralysing tangle of schools, approaches and definitions. It was also sought to delimit more clearly its nature and what can (and what should not) be considered as strategy. For that, the research work adopts a historical perspective and, as starting point, the approach proposed by Simon (1993). Besides that, it was made an additional effort to specify better and enrich the Simon’s driveway with the contributions from some other pertinent authors - mainly from the Keynesian and Schumpeterian schools.
Mercantilism has as object, the study of money and its intrinsic value, and it does not get to study economics as a relatively autonomous system, which encompasses production, consumption and exchange. Economic Science, i.e., the study of the economic system as a whole, was born with the Physiocracy, developed with Smith, Ricardo and Marx, and later with Marginalism. I will study the different episteme that characterizes the Classical and the Neoclassical Schools, as well as the internal ambiguities of each one.
In this chapter, I carry out the following synthesis. It is about answering the following question: to what extent can these three controversies be explained from the analysis made by Foucault? After having identified the explanatory limits of the concept of episteme, I propose to substitute the concept of episteme for the concept of order.
This chapter aims to define the different conceptions regarding the nature of epistemology and, ultimately, to determine the relative weight of internal and external history in these different approaches. This leads us to elaborate a reflection on the nature of scientific explanation, the relationships between subject and object, and the Historicity or universality of Science; this also leads us to question the concept of scientific progress, at least with regard to Economics. After having defined the concept of episteme, as well as the different epistemes that characterize the different epistemological temporalities, in the context of a comparison with Kuhn and Lakatos, I will emphasize the explanatory value of this concept and its limits.
This paper criticizes the epistemic foundations of democratic state-building, which are derived from a model of political transitions according to which liberal democratic institutions will transform a hitherto authoritarian and troubled country into a more prosperous and stable society and, therefore, foreign interventions to establish these institutions are realistic and worthy investments, provided they are properly planned based on knowledge of what has worked elsewhere. This expectation is based upon two epistemological premises. The first premise, linearity, is that social and institutional change exhibits identifiable input–output relations connecting socioeconomic conditions and outcomes. The second premise, ergodicity, is that these relations, inferred from past samples, provide reliable probabilistic projections about future outcomes, which can guide the focus of policy interventions. Drawing from the study of complex systems, the paper indicates why these two premises offer a flawed conception of political transitions and why radical and large-scale interventions, such as state-building, will tend to generate unintended consequences rather than the planned effect.
Through a market‐level examination of shifts in power, this article investigates the impact of potential power and actual power variables on negotiation outcomes viewed in terms of capital ($) in exchange for equity (%). The object of the negotiation is an embryonic firm, and the negotiation task is an exchange of capital invested by the angel investor for equity ownership offered by the entrepreneur. The structure of the interaction is an (n) versus (1) negotiation context with the following generalizable conditions: (1) competition exists among the set of buyers, (2) cooperation is allowed among the set of buyers, and (3) all parties have the ability to walk away. Our hypotheses can be summed up in the age‐old question: Is greater value placed on a bird in the hand, or two in the bush? Analyzing the final negotiated outcomes in relation to a common starting point across 147 market instances, we find that potential power initially has a stronger significant impact than actual power. However, after accounting for the impact of coalitions, actual power variables become highly significant while potential power variables become insignificant.
Uncertainty is endemic to innovative economies and complex societies, but policymakers underestimate how damaging this is for many of their guiding assumptions. In particular, the discourse of best practice, “global solutions for global problems,” and regulatory harmonization becomes questionable when there is substantial uncertainty about the future. This uncertainty makes it impossible to know what best practice will be and increases the danger that harmonization will result in highly correlated errors and shared analytical blind spots. The transnational harmonization of regulation has well-known advantages, but – especially in technocratic policy areas – also creates vulnerability to unexpected challenges by constraining how we think as well as homogenizing how we act. Faced with uncertainty, policymakers should be wary of monocultures in regulation, analysis, and practice, and in-stead focus on managing policy diversity to limit its costs. This paper’s theoretical argument is grounded in philosophy, the history of ideas, and even biology. However, we also present empirical examples and consider some implications for political theory.
Economic systems produce robust statistical patterns in key sate variables including prices and incomes. Statistical equilibrium methods explain the distributional properties of state variables as arising from specific institutional, environmental, and behavioral postulates. Two broad traditions have developed in political economy with the complementary aim of conceptualizing economic processes as irreducibly statistical phenomena but differ in their methodologies and interpretations of statistical explanation. These conceptual differences broadly mirror the methodological divisions in statistical mechanics, but also emerge in distinct ways when considered in the context of social sciences. This paper surveys the use of statistical equilibrium methods in analytical political economy and identifies the leading methodological and philosophical questions in this growing field of research.
We start out with an observation that TCE conflates opportunism, bounded rationality, and uncertainty. We then propose ways to increase their definitional precision. Particularly, we highlight the need to categorize uncertainties according to their perceived controllability, which not only better fits a behavioral approach but also broadens the scope of uncertainties for TCE research. Next, we discuss whether opportunism is a necessary assumption in TCE and whether TCE is suited to the study of uncontrollable uncertainties. We conclude that, instead of opportunism, uncertainty controllability is what TCE tacitly assumes. Considering that the conflation originates from TCE’s lack of a clear philosophical foundation, we proceed to call for critical realism (CR). The link between CR and effectuation and that between uncertainty controllability and effectuation are articulated.
At the outset, it is described how human action is shaped through a logical sequence that starts from human needs and goes through the cultural background of a society as well as its institutions. Specifically, the decision-making process is described, together with the creation of stereotypes, the behavior of businesses and individuals, and the birth of the cultural background and institutions. Also, the question of the chosen theoretical infrastructure is raised with respect to behaviors, preferences, and institutions, as well as the role of space and time in institutions and behaviors. Furthermore, a presentation of the overview of cultural background and institutions at global level is provided, highlighting the significant differences that exist between geographical areas around the world.
This chapter aims to answer basic questions strongly related to the methodology in economics. For this purpose, a set of criteria for evaluating explanatory theories is presented. The analysis continues with a comparison of positivism against normativism. For better understanding, three additional methodological concepts are analyzed: the rhetoric approach, social constructivism, and eclecticism. At the same time, the notion of models and theories in economics is clarified along with the extended use of mathematics as an auxiliary tool for understanding the process of economic growth. Furthermore, there is a presentation of the criteria (empirical and logical) according to which a theory is chosen. Another section of the chapter addresses the issue of space and time in economic development which lead to different economic models (temporal and geographical) each playing a major role in economic policy decision. These methodological issues impact on the way we understand development and growth. In the last part of the chapter ways are discussed to synthesize available methodological tools to that end.
The all-too-common tendency to ignore, misunderstand, misinterpret or misrepresent the central arguments of Keynes’s General Theory is the result not of flaws or a lack of clarity in their expression but rather of Kuhnian incommensurability. The paradigms of Keynes and of General Equilibrium are fundamentally at odds. Attempts to reconcile Keynes’s arguments with, or to address his arguments within, a General Equilibrium context are thus likely to entail misunderstanding, misinterpretation and misrepresentation, and an inclination to ignore their original meaning. At a time when his arguments are as important as ever, methodological intransigence still prevents much of the profession from understanding that he offers a template for developing a better understanding of the functioning, and malfunctioning, of market systems, and that he identifies crucially important policy solutions within this framework.
J. K. Galbraith’s economics may be ‘foundational’ to integrating Original Institutionalism and Post Keynesianism (Dunn, S. P. 2011. The Economics of John Kenneth Galbraith, Cambridge, UK, Cambridge University Press). This paper seeks a stronger justification of the emancipatory potential of structural interventionism favoured by the above approaches, by interpreting Galbraith’s ‘emancipation of belief’ as implying a self-trusting capacity, applying the argument to Galbraith’s theory of social balance and advocating a supporting notion of individual psychological balance. John Davis’s capabilities characterisation of ideal human psychological development is built upon, incorporating insecurity under uncertainty. Carl Rogers’ humanistic psychology is used to understand how actual and ideal psychological development diverge. Since Rogers’ work lacks institutional context but shares with Veblenian Evolutionary Economics an organismic view of the individual, a ‘middle range’ conception of the psychologically developing institutionalised individual emerges. A counterpart to a Galbraithian ‘organisational’ view of capitalisms, this ‘organismic’ conception explains how ‘social balance’ maintenance (i.e. structural intervention) may be necessary for psychologically balanced self-trusting individuals.
Explanations for fertility decisions based on structural constraints—such as labor, housing condition, or income—do not account for the contemporary fertility downturn faced by many countries in Europe. In this paper, we posit that the rise of uncertainty is central for understanding contemporary fertility dynamics. We propose a theoretical framework (the Narrative Framework) for the study of fertility decisions under uncertain conditions based on expectations, imaginaries and narratives. Relying on the idea of future–oriented action, we argue that uncertainty needs to be conceptualized and operationalized taking into account that people use works of imagination, producing their own narrative of the future. Narratives of the future are potent driving forces helping people to act according to or despite uncertainty. We present the different elements of the Narrative Framework and address its causal validity. We conclude by highlighting the advantages of taking into account the narratives of the future in fertility research.
A country’s wealth and prosperity over time depend almost entirely on its ability to increase productivity, an affirmative answer might seem reasonable. Economists have long puzzled over the factors that enhance productivity and the relationship between productivity and growth. This chapter has an introductory character and surveys the sources of growth and development. The concepts of diminishing returns and productivity lie at the centre of the theoretical analysis for the construction of growth policy. Thus, the scope of the chapter is to identify the pro-growth factors and also to give a concise and comprehensive view of the evolution of the theory of growth and development.
RESUMO Este artigo tem por objetivo resenhar a teoria institucional de Douglass North. Após uma breve introdução e alguns comentários relacionados ao seu método, resume-se o core teórico que propõe a partir da análise de três de suas principais obras sobre o assunto.
This paper explores UK public sector outsourcing to offer a critique of the theory of liberal institutional convergence. The latter argues that NPM is a case of empiricist scientific rationalism but the neoclassical economics that justifies public sector outsourcing operates with a closed-system ontology of the economy that has more affinities with Stalinist central planning than to empirical political economic science, and this has real institutional consequences. The argument sets out the neoclassical logic behind outsourcing, the unanticipated risks in its conception and the deepening problems with its intensification as practice. It shows how, when we put the market rhetoric of NMP to one side, outsourcing necessitates the central planning of private actors, and the success of this venture hinges on the viability of the outsourcing contract as an effective junction of instruction and control. If there is institutional convergence in New Public Management it is with Soviet enterprise planning. It follows that it is not simply ‘second-best-world’ neoclassical theories that can shed light on outsourcing's chronic failures but also the critiques of Soviet central planning. The latter help explain why incomplete contracts in outsourcing are just the start of bargaining games that the state cannot win.
Ankara Hacı Bayram Veli Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi 22(2)
https://dergipark.org.tr/tr/pub/ahbvuibfd/issue/56396/721959
Well-established results in the mainstream theory of economic policy show that under assessable risk and asymmetric information, selfish policymakers generate inefficiencies that are generally more harmful than market ones. Market failures are hence an insufficient condition to justify government activism. This conclusion motivates the article’s attempt to understand whether the same conclusion applies under fundamental uncertainty, where selfish policymakers cannot be conceived as maximising inter-temporal expected utility (or any other objective function) calculated by the use of objective probability distributions. After summarising the traditional literature, I stress the difficulty of employing the notion of Pareto optimality in this environment. I then argue that group decision-making and mutual monitoring support Forte’s (1967) and Demsetz’s (1969) early claims that no superiority of one institution (market versus government) over the other can a priori be established. The conclusion that the government cannot generally improve on market outcomes does not hence apply.
Can extrinsic uncertainty ("animal spirits," "market psychology," "sunspots,"...) play a significant role in rational expectations equilibrium models? We establish that extrinsic uncertainty cannot matter in the static Arrow-Debreu economy with complete markets. But we also establish that extrinsic uncertainty can matter in the overlapping-generations economy with complete markets but where market participation is limited to those consumers alive when the markets are open. Equilibrium allocations in which extrinsic uncertainty plays no role are Pareto optimal in the traditional sense. Equilibrium allocations in which extrinsic uncertainty does play a role are Pareto optimal in a (weaker) sense which is appropriate to dynamic analysis.
Imagine a bargaining model (say, involving diplomats negotiating tariff levels or a disarmament treaty) in which each party has been instructed by higher headquarters to respond to each new offer by her opposite number with a counteroffer that is to be calculated from a simple reaction function provided in advance. Both negotiating parties are prohibited from revealing their own reaction functions to the other. If the perfectly deterministic sequence of offers and counteroffers that must emerge from these simple rules were to begin to oscillate wildly and apparently at random, the negotiations could easily break down as each party, not understanding the source of the problem, came to suspect the other side of duplicity and sabotage. Yet all that may be involved, as we will see, is the phenomenon referred to as chaos, a case that is emphatically not pathological, but in which a dynamic mechanism that is very simple and deterministic yields a time path so complicated that it will pass most standard tests of randomness. Chaos has become a subject of great interest to specialists and nonspecialists alike. Besides economics, it has entered the literature of geometry, physics, ecology and meteorology. It has been written about at length in the New York Times Magazine and Scientific American, as well as technical publications. This article seeks to describe what it is, how it works, and what it means for economics.
Mainstream perspectives involving uncertainty presume that expectations are based on either a statistical analysis of past data, with market signals providing information about objective probabilities, or on subjective perceptions of these probabilities founded on the axioms of expected utility theory. Post Keynesians, following Keynes, have developed a different perspective, where probability distributions are not the basis for comprehending real world behavior under uncertainty. According to this analysis, there are many important situations where "true" uncertainty exists regarding future consequences of today's choices. Whenever conditions of true uncertainty prevail, human behavior may differ systematically from what is implied by the standard expected utility perspective. This paper explains how the Post Keynesian perspective differs from the orthodox probability theory approach, thereby providing a more general theory which can explain long-run decisions regarding liquidity demands, investment decisions, the existence of long period underemployment equilibrium, the long-run nonneutrality of money, and the unique and important role Keynes assigned to nominal contracts and especially the money wage contract.
"Here are Japanese women in infinite and fascinating variety -- ardent lovers, lonely single women, political activists, betrayed wives, loyal wives, protective mothers, embittered mothers, devoted daughters. ... a new sense of the richness of Japanese women's experience, a new appreciation for feelings too long submerged". -- The New York Times Book Review
The current international payments system does not serve the emerging global economy well. The Financial Times and The Economist, both previously strong advocates of the existing floating rate system, have acknowledged that the system is a failure and was sold to the public and the politicians under false advertising claims.1 Can we not do better?
To many economists Keynesian economics deals with important relevant problems and General Equilibrium theory deals with no relevant problems at all. This view is often the consequence of the ease of learning Keynesian macro-arithmetic compared with reading Debreu. But it also has, alas, an element of truth. This is quite simply that General Equilibrium theorists have been unable to deliver one half at least of the required story: how does General Equilibrium come to be established? Closely related to this lacuna is the question of what signals are perceived and transmitted in a decentralised economy and how? The importance of Keynesian economics to the General Equilibrium theorist is twofold. It seems to be addressed to just these kinds of questions and it is plainly in need of proper theoretical foundations.
Proponents of the rational expectations hypothesis (hereafter REH) claim they have developed a general theory of how expectations are formed. To assure that these rational expectations generate efficient, unbiased forecasts which do not display any persistent errors when compared to the actual outcome over time, REH theorists assume that information exists and is available for processing by all decision makers. This information, consisting primarily of quantitative time series data, it is assumed, is a finite realization of a stochastic process; from this data the probability distribution of actual outcomes today and for all future dates can be estimated. Or as John Muth puts it, ‘the hypothesis can be rephrased a little more precisely as follows: that expectations of firms (or more generally, the “subjective” probability of outcomes) tend to be distributed, for the same information set, about the prediction of the theory (or the “objective” probability distribution of outcomes)’ (1961, p. 316).
Addressing The General Theory chiefly to his ‘fellow economists’ (1936, p. v), Keynes insisted that
the postulates of the classical theory are applicable to a special case only and not to the general case … Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience, (ibid., p. 3)
This book addresses some basic questions in economics, all of which have a common core - they all refer to forming behaviour, to the emergence of order, its adaptation, its transformation, and its ultimate dissolution into chaos. Starting with the notion of self-organization, the author analyses the operation and the demise of institutions in economics. In doing so, he takes into account the consequences of the intervention of history, chance, necessity, and will - a subject little undertaken in contemporary economic theory. Starting with the theory of microeconomics itself, the author builds precise models based on explicit hypotheses and draws out the significance of the propositions obtained. The book draws on systems theory, evolutionary theory, the literature on institutional economics, and existing general equilibrium theory, and steps outside the present conceptual framework of microeconomics.
The General Theory of Employment, Interest, and Money / John Maynard Keynes Note: The University of Adelaide Library eBooks @ Adelaide.
No, and maybe not. [additional text from author's introduction] To us, the possibility of providing a compelling case that real GMP is either trend or difference stationary seems extremely small, certainly on the basis of post-war data. This is because there is only one difference between these two types of processes and that difference is completely summarized by the answer to the question. How much should an innovation to real GMP affect the optimal forecast of real GMP into the infinite future? If the answer is zero, then real GMP is trend stationary. If the answer is not zero, then real GMP is difference stationary. The competing hypotheses have no other testable differences. Once we pose the question in this way, it seems clear that economists ought to be extremely skeptical of any argument that purports to support one view or the other. Simply put, it's hard to believe that a mere 40 years of data contain any evidence on the only experiment that is relevant.
This paper discusses the reemergence of Keynesian economics during the past decade. It highlights the substantial differences between new Keynesian economics and the convictions of early Keynesians. In particular, it points out that new Keynesians have adopted many views that were once considered "monetarist" or "classical." It concludes that the term "Keynesian" may have outlived its usefulness.
Non-linear Dynamics: Introduction
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- P Malgrange
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Comments on the Critics’ in Milton Friedman’s Monetary Framework A Debate With His Critics
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