Contemporary Economic Theory Research Articles

Pareto and contemporary economic theory

This paper provides explanations for Pareto’s apparently contradictory approach to demand theory in simultaneously insisting that measurability of utility is not needed to explain the equilibrium of consumers in competitive markets, and embracing concavifiability and thus measurability of utility when this implies restrictions on consumers’ behavior such as the law of demand. It also treats his method of calibrating an aggregate demand function by employing his law of income distribution, so as to reproduce “Gregory King’s law”. Finally, some disputed issues are dealt with concerning the nature of Pareto’s contributions to welfare economics. (JEL: B13, D11, D60).

Human agency and free will: choice and determinism in economics

PurposeThe assumption of free will in contemporary economics is an important starting point for socio‐economic analysis in contrast to methodologies which assume that human action is pre‐determined by forces beyond individual control. However, contemporary economic theory is devoid of choice in critical domains with important implication for economic analyses and public policy, given the ancillary assumption of the importance of market forces in determining choice behavior. The purpose of this paper is to argue that freedom of choice exists given traditional constraints such as relative prices and income.Design/methodology/approachThis is a theoretical paper examining the assumption of free will in choice behaviour in economic theory. It makes reference to literature in economics and philosophy that shed light on this critical working assumption in economics.FindingsConventional analysis pays little heed to non economic constraints on human action that affect and delimit but do not preclude free choice or free will. Of vital importance to free will in choice behavior are institutions which delimit the extent of coercion in the decision‐making process.Practical implicationsAn important implication for research is the determination of the necessary and sufficient conditions for the existence of free will in choice behaviour. Given the existence of free will and free choice, individuals are morally responsible for their choices. It is therefore important to determine the extent which free will exists and that which constrains free will in choice behaviour.Originality/valueThis paper challenges the extremes of the free will debate in economics and suggests the boundaries within which free will exists in economic behaviour. It also suggests the welfare implications of limitations on free will where no negative externalities exist.

Connecting Economic Models to the Real World

Can social phenomena be understood by analyzing their parts? Contemporary economic theory often assumes that they can. The methodology of constructing models which trace the behavior of perfectly rational agents in idealized environments rests on the premise that such models, while restricted, help us isolate tendencies, that is, the stable separate effects of economic causes that can be used to explain and predict economic phenomena. In this paper, I question both the claim that models in economics supply claims about tendencies and also the view that economics, when successful, necessarily follows this method. When economics licenses successful policy interventions, as it did in the case of the Federal Communications Commission spectrum auctions, its method is not to study tendencies but rather to study the phenomenon as a whole.

Cognition, Incentives, and Public Governance

The second-generation theory (SGT) of fiscal federalism, which draws upon contemporary economic and industrial organization theory, hitherto focuses only on the negative benefits of public decentralization: the potentially superior ability to align perverse incentives vis-à-vis the centralized governance alternative. The SGT neglects the positive benefits of decentralization (mistake-ridden learning, flexibility, and option discovery), although the limitations of organization theory do not justify such neglect. By likening intergovernmental grants to incomplete contracts, this work shows that the SGT can include the laboratory nature of decentralization.

Behavioral Game Theory and Contemporary Economic Theory

Abstract It is widely believed that experimental results of behavioral game theory undermine standard economic and game theory. This paper suggests that experimental results present serious theoretical modeling challenges, but do not undermine two pillars of contemporary economic theory: the rational actor model, which holds that individual choice can be modeled as maximization of an objective function subject to informational and material constraints, and the incentive compatibility requirement, which holds that macroeconomic quantities must be derived from the interaction and aggregation of individual choices. However, we must abandon the notion that rationality implies self-regarding behavior and the assumption that contracts are costlessly enforced by third parties.

Share Price as a Poor Criterion for Good Corporate Law

Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price. Contemporary economic and corporate theory (as well as recent business history) nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, including the problem of private information; obstacles to effective arbitrage; investors' cognitive defects and biases; options theory and the problem of multiple residual claimants; and the problem of corporate spillover effects that erode diversified shareholders' returns. These considerations argue against assuming there is a tight connection between stock prices and underlying corporate wealth generation. A corporation or a corporate law system designed around the philosophy that anything that raises share price is good is likely to produce a firm that cooks its books; that avoids long-term projects that won't appeal to unsophisticated investors; that chases after investment fads and fancies; that tries to opportunistically exploit creditors, employees, and customers; and that pursues business strategies that harm its diversified shareholders' other investment interests. The Essay concludes that, if we allow our desire for a universal performance measure to blind us to the fallibility of share price, we court costly error. The Essay examines three recent examples of just such erroneous triumphs of hope over experience: the rise and fall of the Revlon doctrine; the 1990s infatuation with options-based executive compensation; and academics' current preoccupation with event studies, regressions on Tobin's Q, and other forms of empirical scholarship that attempt to judge the quality of corporate law and practice according to changes in share price.

Une économie plus historique et plus politique : deux tâches pour une pensée économique réellement réflexive

This paper argues that, since contemporary economic theory is part of the broader endeavor of an individualistic sociology of rational choice, it should impose on itself at least one consistency criterion: the economists working using that paradigm should explain in what sense it was a rational choice for them to become rational-choice economists. Performing this test throws up some interesting properties, as is shown in the paper – not the least, that if (as is highly likely) an individual turns out to have become a rational-choice economist by applying axiological or critical rationality, he ought to endow his model-agents with a similar capacity to formulate non-instrumental goals and to reflect on the society they desire. This, however, undermines the pretense of rational-choice economics to stand as a fluent, “neutral” language hovering above the landscape of theories and paradigms. More historical and political relativity is called for.

Economic Methodology: Heterogeneity and Relevance

questions will be asked than will, in fact, be answered. The intention is to propose a broad-based critique of contemporary economic methodology starting off from the recognition of the deep-seated heterogeneity of the subject matter of economics. There is a good deal of discontent about the methods and traditions in vogue in contemporary economic theory. I shall argue that while parts of that disquiet are well grounded, they have to be separated from others that seem to take insufficient note of the particular nature of the exercises under attack. In particular, some reproaches are based on an inadequate recognition of the diversity of motivations and concerns underlying different types of economic theory. In reading the literature, I am sometimes reminded of an old story concerning two estranged brothers one a general and the other a bishop who meet after many years in a desolate railway station and find their old dislikes revived. The bishop asks the general: Assistant Station Master, tell me when is the next train to London? The general replies to the bishop: Madam, in your condition, do you think it is safe to travel? Our ability to misrepresent or misunderstand what others are up to is quite striking. As a consequence oddly inappropriate broadsides can come mixed with pertinent and penetrating criticisms. The need for sorting out is, thus, quite central. To some extent, this is what

Ethical Assumptions in Economic Theory: Some Lessons from the History of Credit and Bankruptcy

This paper evaluates the economic assumptions of economic theory via an examination of the capitalist transformation of creditor–debtor relations in the 18th century. This transformation enabled masses of people to obtain credit without moral opprobrium or social subordination. Classical 18th century economics had the ethical concepts to appreciate these facts. Ironically, contemporary economic theory cannot. I trace this fault to its abstract representations of freedom, efficiency, and markets. The virtues of capitalism lie in the concrete social relations and social meanings through which capital and commodities are exchanged. Contrary to laissez faire capitalism, the conditions for sustaining these concrete capitalist formations require limits on freedom of contract and the scope of private property rights.

The Last Collapse? An Essay Review of Hilary Putnam's The Collapse of the Fact/Value Dichotomy and Other Essays

Hilary Putnam's The Collapse of the Fact/Value Dichotomy and Other Essays serves as his latest installment attempting to detail some of the historical background and recent controversies over the so-called fact/value distinction. In it, Putnam claims that the positivists' influence led to an inflated dichotomy, rather than distinction, between descriptive sentences and evaluative sentences. He argues that such a dichotomy is unwarranted through a number of arguments intended to show that attempts to “disentangle” facts from values always fail. However, in the process Putnam overlooks a number of interesting motives underlying the positivist movement, and disregards a now-enormous body of literature in the philosophy of science on descriptive and evaluative statements. Hence, his attempt, towards the end of the collection, to construct a viable philosophy of language that can support the dichotomy's collapse and an ethical theory that can support his discussion of the dichotomy's collapse appears somewhat weak. Nevertheless, Putnam engages his philosophical discussion with contemporary economic theory in order to motivate his central claim: that taking a somewhat interesting distinction between facts and values and inflating it into a dichotomy can, and often does, lead to disastrous policy decisions. Thus, the collection shines by highlighting real-world, practical and ethical consequences of certain philosophical and theoretical commitments.

Investigating the Intellectual Origins of Euroland's Macroeconomic Policy Regime: Central Banking Institutions in West Germany After the War

This paper investigates the (re-)establishment of central banking in West Germany after 1945 and the history of the Bundesbank Act of 1957. The main focus is on the early emphasis on the 'independence' of the central bank, which, together with a 'stability-orientation' in monetary policy, proved a lasting German peculiarity. The paper inquires whether contemporary German economic thought may have provided a theoretical case for this peculiar tradition and scrutinizes the political calculus that motivated some key actors in the play. Contrary to a widespread presumption, Ordoliberalism, the dominant contemporary force within the German economics profession widely held to have shaped the new economic order of West Germany called 'Soziale Marktwirtschaft' (social market economy), is found to have had no such impact on the country's emerging monetary order at all. In fact, important contradictions between the postulate of central bank independence and some key ideas underlying Ordoliberalism will be identified. Nor can an alternative - more Keynesian - policy regime and model of central bank independence that was developed in the mid 1950s by the Economic Advisory Council of Ludwig Erhard, West Germany's famous first economics minister, claim any credit for the eventual legal status of the central bank that became enshrined in the Bundesbank Act of 1957; a regime that subsequently remained untouched despite the (Keynesian) 'Stability and Growth Act' of 1967. It appears that, while contemporary economic theory had no decisive influence on the outcome, the central bank's role as a political actor in its own right and in carving public opinion should not be underestimated in explaining a peculiar German tradition that was finally exported to Europe in the 1990s.

Old and New Theories of Fiscal Federalism, Organizational Design Problems, and Tiebout

This work intends to contribute to the Second Generation Theory (SGT) of fiscal federalism that studies fiscal federalism through contemporary economic and industrial organization theory. First, it establishes context by introducing the two classic motivations in support of federalism, namely, incentives and knowledge. Second, it succinctly discusses the incentive-based organizational approach of the SGT. Third, it shows that the Tiebout model already embeds an organizational approach, which instead rests on a knowledge motivation.

Ideology, markets and money

Contemporary economic theory is considered in terms of the science/ideology distinction. Marx’s critique of Hegel is then used to derive a demarcation criterion that sharply separates scientific knowledge from ideology. This critique interprets Hegelian methodology as fundamentally ideological because it understands reality in terms of

China's Retreat from Equality: Income Distribution and Economic Transition (review)

Reviewed by: China's Retreat from Equality: Income Distribution and Economic Transition Kristen Parris (bio) Carl Riskin, Zhao Renwei, and Li Shi, editors. China's Retreat from Equality: Income Distribution and Economic Transition. Armonk, New York: M. E. Sharpe, 2001. vii, 358 pp. Hardcover $85.00, ISBN 0-7656-0690-9. Paperback $32.95, ISBN 07656-0691-7. When the Chinese Communist Party first inaugurated its reform program in 1978, China was one of the most egalitarian countries in the world. Two decades later, even the most casual observer is struck by the glaring gaps in income and wealth that have developed in China during this period of rapid growth and change. By the mid-1990s China had become one of the "more unequal countries in its region and among developing countries generally" (p. 3). This new book edited by Riskin, Zhao, and Li contributes to a growing body of recent research on the Chinese economy that is focused on analyzing the changing distribution of household income and delineating the patterns and causes of "China's retreat from equality." China's pattern of development, interesting in itself, also represents an opportunity for an in-depth examination of the more general relationship between growth, liberalization, and inequality. Such an examination can provide insights into one of the key debates in contemporary economic theory and practical politics: do growth, liberalization, and globalization bring efficiency, equity, and shared prosperity, as proponents of liberal economic theory hold, or do they dramatically increase inequality and poverty, as many critics have argued?1 Taken together, the careful studies in this book suggest that there is no simple, generalizable answer to this question. While reform policies have reversed, and indeed were intended to reverse, what was considered China's excessive and artificial egalitarianism, the rapidity and extent of the increase in inequality and an attendant decline in poverty reduction have been exacerbated, if not caused, by what Zhao calls "policy inertia" in the traditional planned economy. This includes a regressive system of taxes and fees, restrictions on migration, and the highly de-equalizing pattern of government subsidies and benefits. Thus, as contributors Knight and Song argue, there may be no stable relationship between these dynamics; rather, initial conditions and specific government policies are as important for understanding patterns of distribution and poverty as are rates of growth and the extent of liberalization (p. 85). Written by a team of economists from China, Europe, and the United States, the studies in this book are based on two national surveys for the years 1988 and 1995, designed by the authors under the auspices of the Institute of Economics at the Chinese Academy of Social Sciences in Beijing. The surveys were drawn from the national urban and rural samples used by the Chinese State Statistical Bureau [End Page 522] (SSB) for its own annual household surveys. Using data for 1988 and 1995, the authors adjusted the income estimates in order to correct perceived weaknesses in the original SSB data and to bring them into accord with international standards of household income. In particular, they imputed the rental value of housing, widened the range of subsidies counted as income, and revalued self-consumed farm products. This reappraisal produced significant differences from the SSB data by increasing household income per capita, generating higher Gini coefficients (0.45 as opposed to 0.41 for overall inequality), and revealing no significant increase in the average urban-rural income gap between the two years under study. This volume is one of a number of recent publications using these surveys. While covering some of the same ground as others, most notably Khan and Riskin's Inequality and Poverty in China in the Age of Globalization,2 it represents a valuable contribution by providing more in-depth and technical analyses of the data within a set of narrowly focused studies. Some of the findings are familiar but important nonetheless: land exercised an equalizing effect on overall wealth distribution because it was so equally distributed, but income from farming was falling sharply as a share of total rural income. The single most important source of increased rural inequality was unequal access to wage income from off-farm employment...

“epicures in rural pleasures”: revolution, desire and sentimental economy in sarah scott'smillenium hall

This article examines the politics of female pleasure inMillenium Hallboth in relation to the contemporary economic theories with which it engages, and in the light of the anonymousHistories of Some of the Penitents in the Magdalen-Houseupon which Scott's text is substantially modelled. When read in these contexts, this article suggests that the much vaunted pleasures of the ladies ofMillenium Hallappear decidedly penitential. The argument is framed by a discussion of the problematic status of influential but “conservative” female writers for feminist scholarship.

The absence of power in contemporary economic theory

The absence of power in contemporary economic theory

Australia’s ‘Employment Approach’ to International Postwar Reconstruction: Calling the Bluff ofMultilateralism

In the 1940s Australian economists sought an international agreement that would bind countries to the pursuit of full employment. Seen as a necessary prerequisite to agreements on monetary and commercial policy, the ‘employment approach’ was advanced with a ‘crusading zeal’ before the great international conferences concerned with postwar reconstruction. Sometimes regarded as Australian posturing, the employment approach was based on a sound understanding of contemporary economic theory. The purpose of this paper is to reappraise the employment approach in terms of this theory. It concludes that the Australian economists were correct in their advocacy; their actions are a timely reminder of a period when Australia sought to positively engage the international community.

Knut Wicksell: Zum Geburtstag des Begründers einer kritischen Vertragstheorie

Zusammenfassung Im vorliegenden Beitrag wird Knut Wicksell anläßlich seines 150. Geburtstages gewürdigt. Zunächst wird Wicksells Leben und Werk kurz vorgestellt, bevor auf seine zentralen Leistungen für die Theorie der Besteuerung eingegangen wird. Das von Wicksell entwickelte Prinzip der Einstimmigkeit ist Grundlage einer ökonomischen Vertragstheorie, mit der dem Bürger Möglichkeiten von Kooperationsvorteilen aufgrund der Bereitstellung bestimmter öffentlicher Leistungen aufgezeigt werden können. Wicksell wird in dem Beitrag als Begründer einer kritischen Vertragstheorie präsentiert. Eine kritische Vertragstheorie muß drei Elemente beinhalten: Als erstes muß ihre Argumentation streng individualistisch sein. Zweitens sollte nach einem gerechten Verfahren und nicht nach einem „gerechten“ Ergebnis bei der Bestimmung öffentlicher Aufgaben gesucht werden. Und drittens sollte eine kritische Vertragstheorie die Verteilungsfrage nicht aus dem Blick verlieren. Alle drei Elemente wurzeln im Wicksellschen Werk. Obwohl Wicksell der Lösung der Verteilungsfrage, mit dem von mir als „produktive Regeln der Umverteilung“ bezeichneten Konzept, sehr nahestand, war er selbst bezüglich ihrer prinzipiellen Lösung eher pessimistisch. Bei kritischer Betrachtung fällt auf, daß Wicksell in seinem Modell die Entscheidungskosten nicht berücksichtigte. Daher wird am Schluß des Beitrages dargelegt, wie ihre Berücksichtigung Möglichkeiten für weitere Forschung bietet.

Urban Labour Markets: The Causes and Consequence of Change

The labour market plays a key role in mediating the relationship between economic competitiveness and social cohesion within nations, cities and regions. It transmits external shocks and internal restructuring of the economy to the employment prospects, incomes and quality of life of individuals and communities. Key issues concern the pace and nature of economic change, the ability of the labour market to adjust, whether some groups bear a disproportionate burden, and what policies can help to mitigate these effects. The labour force should also be viewed as more than a passive recipient of economic change. In the language of urban competitiveness, labour can be regarded as an urban asset, with an in uence on economic performance through its productivity, creativity and availability. The issues surrounding labour market adjustment, exibility and employability go to the heart of many contemporary economic and social theories and policies. This paper provides an overview of contemporary labour market developments in Britain’ s cities. It also updates research from over a decade ago to establish the long-term trends, incorporates a selective review of recent literature, and discusses the implications for government policy. This approach is felt to be justi® ed on the grounds that there has been less synoptic research on urban labour markets in Britain during the past decade than there was in the 1970s and 1980s. Research has tended to become more specialised and focused on particular features of the labour market, such as the growth of `non-employment’ and social exclusion; particular localities or city types, such as `global’ and `polycentric’ cities; or particular adjustment processes, such as migration, commuting or wage exibility. Meanwhile, there is a growing body of literature asserting that there has been a turn-around and recovery in the performance of cities, but with limited supporting evidence. Coincidentally, there have been important developments in labour market policy, including increasing emphasis placed on supply-side perspectives, individual behaviour, skills and choice, while the differential demand for labour in different places has been downplayed. The ® rst section analyses the long-term changes in labour demand, looking particularly at the scale and composition of employment trends in the 1980s and 1990s compared with earlier decades. Despite major restructuring of the British economy and

Convergence criteria and EMU membership: Theory and evidence

This article evaluates proposed alternative criteria to determine the suitability for membership of the European single currency. They comprise the Maastricht Treaty convergence targets, the UK Treasury tests and those advanced by contemporary economic theory. Each set of criteria is analysed to reveal its ability to indicate a country's suitability to participate in the common currency together with the probability of these targets being attained. The UK Treasury tests are found to be a superior series of indicators to those stipulated in the Maastricht Treaty, but they remain insufficient without complementary criteria derived from ‘optimum currency area’ theory. Moreover, the available evidence suggests only sporadic conformity with the Maastricht criteria, with a minority of member states consistently demonstrating prior economic convergence. UK Treasury tests indicate that Britain remains unsynchronized with continental Europe, necessitating long‐term structural convergence prior to EMU membership to avoid potentially disadvantageous economic consequences.