Neoclassical Analysis Research Articles

Balancing Threat, not Capabilities: European Defence Cooperation as Reformed Bandwagoning

Cladi and Locatelli's conceptualization of CSDP as an instance of bandwagoning on US power has significant analytical leverage; however, their analysis fails to outline an alternative systemic explanation to the balance of power. This contribution argues that European defence cooperation is best understood by using a neoclassical realist analysis that integrates the insights of Stephen Walt's ‘balance of threat’ theory. Furthermore, it is argued that the analysis presented by Pohl neglects the role of the Atlantic Alliance in European security. In doing so, Pohl misses the nature of CSDP as the central element of the ‘reform’ of western Europe's Cold War bandwagoning on US power. One should not, therefore, expect CSDP operations to necessarily be about frustrating or helping US strategic objectives. CSDP is instead an institution that is designed primarily to meet security challenges within Europe's geopolitical neighbourhood that the US is unwilling or unable to tackle.

Money and value: a synthesis of the state theory of money and original institutional economics

The paper proposes a synthesis of original institutional economics and in particular of the work of John R. Commons with the state theory of money, constructing a theoretical framework for the analysis of economic value in relation to money. The argument developed resists the naturalistic, individualistic, neoclassical analysis of value, proposing an account based on antagonism and negotiation framed by social institutions and more specifically by the institution of money. Money plays an active role in the process of the constitution of the system of prices, creating possibilities of mediation in the conflicts around the distribution of social production and contributing towards the establishment of 'reasonable value' in economic transactions.

From Neo-Classical Economics to New Institutional Economics and Beyond: Prospects for an Interdisciplinary Research Programme?

Institutional approaches have seen a remarkable revival in social science research within the last decades. In particular New Institutional Economics (NIE) has progressed rapidly over the last years and attracted a considerable deal of attention by social scientists in particular from the disciplines of sociology, economics and political science. NIE is often either rejected as a hybrid concept that lumps together incompatible competing assumptions or it is championed and selectively instrumentalised as convenient catch-it-all ad-hocery. This essay argues that NIE is nevertheless a very valuable concept that deserves its current place in the limelight. By reviewing the fundamental assumptions of neo-classical theorising and tracing their gradual elaboration, it attempts to make a point that NIE can be viewed as a consequent logical refinement of neo-classical methodology. NIE goes beyond the myopic and overly restrictive methodological framework that informs much of current applied neo-classical analysis and reopens orthodox economic thinking to sociological reasoning and paves the way for an interesting cross-fertilisation between these long-alienated disciplines.

Markets in the Light of Political-Economic Actors and Democracy Reconsidering Conceptual Framework for Sustainability Politics

The conceptual framework of neoclassical economics has been quite stable over the years while present challenges point in the direction of a need for new thinking and a new conceptual framework. Neoclassical economics is more or less blind to equality issues and not enough to deal constructively with present unsustainable trends. I will suggest important elements of such a new conceptual framework as part of a pluralistic understanding of economics. When compared with neoclassical economics, the political dimension is emphasized thus making democracy a fundamental principle for relationships in markets and in society at large. A political economics is suggested where individuals are understood as political economic persons and organizations as political economic organizations. This leads to a different understanding of markets from that of neoclassical supply and demand. The ethics and responsibilities of market actors in a democratic society is considered relevant and something to be investigated for purposes of sustainability politics. Approaches to decision-making are also discussed. Emphasis on democracy suggests a different approach from that of neoclassical Cost-Benefit analysis (CBA).

Is China Becoming More Aggressive? A Neoclassical Realist Analysis

In this article I seek to improve the dominant neorealist analysis of China's rise. I offer a neoclassical realist analytical framework in order to identify the influence of certain Chinese domestic developments and priorities on Chinese foreign and security policy behavior. Rather than reflecting a more self-confident and aggressive China, developments in Chinese foreign and security policy in recent years reveal an internally conflicted, inward-looking, and reactive China not yet ready for its new international role. Beijing is uncertain how to manage the challenges and the inevitable tension, both domestically and internationally, arising from China's rapid development.

Fuzzy Continuity of Almost Linear Operators

In this paper, the author studies relations between fuzzy continuity and boundedness of approximately linear operators in the context of neoclassical analysis. The main result of this paper (Theorem 1) demonstrates that for approximately linear operators, fuzzy continuity is equivalent to boundedness when the continuity defect (or measure of discontinuity) is sufficiently small. The classical result that describes continuity of linear operators becomes a direct corollary of this theorem. Applying Theorem 1, we demonstrate (Theorem 2) that for linear operators in normed vector spaces, fuzzy continuity coincides with continuity when the continuity defect is sufficiently small, i.e., when it is less than one. Results are oriented at applications in physics, theory of information and other fields where operator equations play an important role. Several open problems and directions for future research are considered at the end of the paper.

Managing Relative Decline: A Neoclassical Realist Analysis of the 2012 US Defense Strategic Guidance

The Defense Strategic Guidance (DSG), released by the White House in January 2012, was widely acknowledged as the most significant reassessment of America's strategic posture in a decade. Sustaining U.S. Global Leadership: Priorities for 21st Century Defense is not simply a response to systemic-level threats and interests, but reflected principles best articulated by neoclassical realism (NCR). By examining systemic, domestic, and elite influences affecting the United States in 2012, this article demonstrates that the DSG illustrates the core principles of neoclassical realism. The strategy reflected the Obama administration's filtration of systemic-level imperatives through elite perceptions and domestic politics. The DSG is realist because it sought foremost to address systemic challenges, including American relative decline. It is neoclassical realist because the strategy was markedly influenced by elite perceptions and domestic politics, resulting in deliberate gambles. Neorealism continues to have great value explaining systemic trends, but it cannot explain the specific foreign policies of individual states. NCR provides a way to retain the most effective analytical features of neorealism while incorporating the influence of domestic politics and elite perceptions on state policy-making. Neoclassical realism is a promising theoretical framework for foreign policy analysis, but further testing and refining is needed to ensure that it retains its descriptive accuracy and predictive capability.

Housing markets, signals and search

Research into the spatial structure and functioning of local housing markets typically focuses on market outcomes, particularly house price changes and household movement patterns. Explanatory models are usually based upon a standard neoclassical analysis of the housing market. That approach de-emphasises the importance of imperfect information, real market processes and the signals they generate. The inherent nature of housing means that partly informed households typically engage in search activity prior to purchasing a property. Search is inevitably a spatial process. Housing market search modelling remains relatively undeveloped. However, analysis of this process can provide important additional insights to both better explain consumer behaviour and support more informed decision-making by housing planners and market providers. We illustrate these arguments using housing search data for Scotland.

Development as Division of Labor: Adam Smith Meets Agent-Based Simulation

Adam Smith thought the key to raising productivity was specialization and the division of labor, but this explanation has been marginalized in economic theory because it doesn't fit into neoclassical models. Using agent-based simulation (in particular an adapted version of the Howitt-Clower model of money) to step outside the constraints of traditional Walrasian equilibrium, I show how allowing for an endogenous division of labor vindicates several explanation of long-run growth which neoclassical analysis seems to rule out. For example, it is not the case, as the Solow model purports to demonstrate, that growth based on capital accumulation has a well-defined upper bound due to diminishing returns and depreciation, except in the special case where population and capital previously sufficed to exhaust the scope for productivity-enhancing specialization. In other cases, capital accumulation triggers the introduction of new goods, which were technologically known but not economically viable, and there is no particular limit to how much growth might be achieved in this way. The model provides a template for multiple candidate explanations for the Industrial Revolution: higher savings rates, larger markets due to international trade, or one or two new inventions, could all suffice to ignite a virtuous cycle in which exploration of the goods space expands the division of labor, which raises productivity and drives further exploration of the goods space, both from the demand side (larger markets make it easier to cover fixed costs of producing a new good) and the supply side (more capital is available to overcome the fixed cost hurdle). The model follows Romer (1990) in interpreting technological change as introduction of new goods; complements Romer (1990) by showing why the state of technology might differ across countries even when they have access to the same knowledge; and rivals Romer (1990) by opening up the possibility that the costs of invention might not be an important factor limiting growth via the introduction of new goods. (The alternative story is that it's easy to invent goods once they've become economically viable.) All results are derived from a simulation software developed by, and available from, the author.

Class Struggle: Some Diluting Effects of Inter-Generational Mobility

Karl Marx viewed class struggles to be so central as to assert that all societal history was, and will in the future be, merely a succession of struggles between classes. Many authors have elaborated upon such themes within Marxist frameworks; some have used these as prisms to interpret various past events, especially outside North America.Our neoclassical analysis posits that the welfare of one’s own progeny matters to each individual. Taking this into account, each of the classes (namely, the poor and the rich) chooses how much resources to spend on influencing the stochastic outcomes of class struggle in their respective favors. These conflicts are depicted as non-cooperative games. An implication of the inter-generational concerns is that a society’s inter-class economic mobility across generations turns out to be a central determinant of the classes’ choices. Among the results that we present is that, in a society with greater class mobility: (i) the poor spend less on class struggle, (ii) the rich may spend less or more, but (iii) the probability of a successful class struggle is lower. Our analysis also suggests that class struggle might disappear altogether in societies with high levels of class mobility.

An Application of the Individual Channel Analysis and Design Approach to Control of a Two-input Two-output Coupled-tanks System

Frequency-domain methods have provided an established approach to the analysis and design of single-loop feedback control systems in many application areas for many years. Individual Channel Analysis and Design (ICAD) is a more recent development that allows neo-classical frequency-domain analysis and design methods to be applied to multi-input multi-output control problems. This paper provides a case study illustrating the use of the ICAD methodology for an application involving liquid-level control for a system based on two coupled tanks. The complete nonlinear dynamic model of the plant is presented for a case involving two input flows of liquid and two output variables, which are the depths of liquid in the two tanks. Linear continuous proportional plus integral controllers are designed on the basis of linearised plant models to meet a given set of performance specifications for this two-input two-output multivariable control system and a computer simulation of the nonlinear model and the controllers is then used to demonstrate that the overall closed-loop performance meets the given requirements. The resulting system has been implemented in hardware and the paper includes experimental results which demonstrate good agreement with simulation predictions. The performance is satisfactory in terms of steady-state behaviour, transient responses, interaction between the controlled variables, disturbance rejection and robustness to changes within the plant. Further simulation results, some of which involve investigations that could not be carried out in a readily repeatable fashion by experimental testing, give support to the conclusion that this neo-classical ICAD framework can provide additional insight within the analysis and design processes for multi-input multi-output feedback control systems.

The fundamental role of money and banking in macroeconomic analysis and policymaking

The crisis that burst in 2007 has revealed a number of conceptual and methodological flaws of neoclassical economic analysis, based on rational behaviour, representative agents, and microfounded macroeconomics, where money and banking are considered as pertaining to the microeconomics of goods and business activities. Macroeconomic analysis requires a systemic approach to money and banking, both of which are essential for the working of any economic system. In this perspective, the paper explains how both have to be integrated into that analysis. It points out that macroeconomic analysis and policy making require a deep knowledge of the history of monetary thinking.

Inside the Black Box: Incentive Regulation and Incentive Channeling on Energy Markets

This paper aims to achieve more insight into the complex interplay between the “external” market regulations and “internal” regulations (corporate governance) of energy firms. In recent years, many countries have deregulated the incumbent energy monopolies and have introduced new modes of regulation. However, the new incentive schemes do not represent an unmitigated success story. A major problem seems to be the neoclassical framework that is used for the analysis of energy markets. Therefore, an important goal of this paper is to clarify the boundaries of neoclassical regulation theory. There are two restrictions that hamper the neoclassical analysis of energy markets. The first is the difficulty of overcoming the widely held “black box” view of firms. The second is the idea that agents always make rational choices. The paper proposes a kind of theoretical division of labor for understanding the effectiveness of regulatory schemes in energy markets. Neoclassical economics points out to the sources of market failure, and helps to identify where in particular on the supply chain one is likely to observe natural monopolies. Transaction cost economics explains appropriate governance of vertical relations along the supply chain. And organizational theories can elucidate what happens within firms: their response to regulation, competition, and relations with suppliers. A research agenda for the third component is proposed, drawing on insights from New Sociological Institutionalism and organizational behavior.

Europæisk afhængighed af russisk gas – Har vi noget at frygte?

The Russo-Ukranian gas dispute of 2009 has sent ripples through European energy policy debates. Does dependence on Russian gas represent a threat to European energy security via politically motivated supply interruptions? Or was the conflict simply a dispute over the right price of a good?This paper represents a contribution to this debate. Rather than focusing on the outcomes of or motives behind the conflict, we conduct a neoclassical realist analysis of Russian foreign energy policy in order to assess Russia’s ability to use gas as a political instrument of coercion. Our analysis will show that structural conditions promote an increasing emphasis on gas. Furthermore we will show that this shift translates into Russian foreign policy elite consensus about using gas as a foreign policy instrument, and that this consensus is facilitated by an increase in state cohesion since Vladimir Putin assumed the offce of president in 2000.

Coase and the Kirznerians

I interpret the theory of entrepreneurial discovery from the perspective of the theory of property rights. I analyze pure entrepreneurial profit and the logical construction of the theory as an extension of neo-classical microeconomic analysis and I argue that the key motivation for entrepreneurial discovery, the opportunity to discover pure entrepreneurial profit, is given by the structure of property rights. The structure of property rights determines entrepreneurial claims for pure profit, the level of protection against conflict of interest, costs of exclusive production means and social order.

German ‘Ordnungstheorie’ from the Perspective of the New Institutional Economics

German “Ordnungstheorie” (~ system theory, ordo theory) relates essentially to Walter Eucken (Freiburg) who attempted to strike a balance between the economics of the German Historic School, still relevant in Germany of the 1930s, and its opposing neoclassical analysis. The paper starts, therefore, with a brief description of Eucken’s morphological approach, his “isolated abstraction,” as an analytic method that is focusing on a precise description of the institutional framework of the analysed economy with only vague assumptions on human wants, behaviour, behavioural constraints etc. Its considerations may be loosely compared with the strategic reasoning of lawmakers who are primarily interested in the general consequences of their draft bills and not in (theoretically or econometrically established) predictions of their effective functioning. Marginal analysis is abandoned and replaced by general behavioural assumptions such as “…all normal men everywhere and at all times act in accordance with the economic principle.” Target of Eucken’s Ordnungspolitik (ordo policy) is to minimize (measurable market) power instead of striving for (immeasurable) Pareto efficiency. Eucken’s morphology, his ideal typical description and ordering of institutional frameworks by way of “isolating abstraction,” may be seen as a predecessor of Williamson’s formation and use of “efficient governance structures.” Eucken’s questioning of the regulative ability of laissez faire anticipates (instinctively) the consequences of Olson’s logic of collective actions. Eucken, together with the other members of the Freiburg school, demand from the state the establishment and guarantee of an economic constitution of a free market economy based on David Hume’s principles of natural law: private property, freedom of contract and personal liability. This paper continues with a neoinstitutional discussion of Eucken’s ordo-liberal principles of Ordnungspolitik, which served as basis of the West German Wirtschaftswunder after the currency reform of 1948. It ends with a critique of Eucken’s deliberations and some reflections on Douglass North’s “adaptive efficiency” as another substitute for the empty concept of “Pareto efficiency”.

Inside the black box: incentive regulation and incentive channeling on energy markets

This paper aims to achieve more insight into the complex interplay between the “external” market regulations and “internal” regulations (corporate governance) of energy firms. In recent years, many countries have deregulated the incumbent energy monopolies and have introduced new modes of regulation. However, the new incentive schemes do not represent an unmitigated success story. A major problem seems to be the neoclassical framework that is used for the analysis of energy markets. Therefore, an important goal of this paper is to clarify the boundaries of neoclassical regulation theory. There are two restrictions that hamper the neoclassical analysis of energy markets. The first is the difficulty of overcoming the widely held “black box” view of firms. The second is the idea that agents always make rational choices. The paper proposes a kind of theoretical division of labor for understanding the effectiveness of regulatory schemes in energy markets. Neoclassical economics points out to the sources of market failure, and helps to identify where in particular on the supply chain one is likely to observe natural monopolies. Transaction cost economics explains appropriate governance of vertical relations along the supply chain. And organizational theories can elucidate what happens within firms: their response to regulation, competition, and relations with suppliers. A research agenda for the third component is proposed, drawing on insights from New Sociological Institutionalism and organizational behavior.

Making urban real estate markets work for the poor: Theory, policy and practice

This paper explores the relationship between theory, policy and practice, linking urban real estate markets and poverty alleviation. The paper argues that the contribution of urban real estate markets to poverty alleviation has not been optimised due, in part, to inadequate or inappropriate policy. The article attributes this to conceptual and methodological problems arising from the traditional neoclassical analysis of urban real estate markets, ambivalence to the idea that freer markets in real estate are a good thing for the urban poor and insufficient regard to lessons of experience from years of implementing urban anti-poverty land projects. Based on new analytical perspectives provided by institutional economics, this paper proposes specific policy interventions more likely to facilitate pro-poor outcomes in urban real estate markets.

ERP Diffusion and Mimetic Behaviors

The emergence of enterprise resource planning systems (ERP) has often been presented as one of the main factors of organizational change within companies in the course of the last few years. The neoclassical and socio-rational analyses show that ERP adoption is often a rational choice in that it results from a cost-benefit analysis and indeed an optimization calculation. However, as articulated by Rogers’ analysis (1983), firms are also influenced by information on the attributes of innovation collected from other members of their social environment. The mimetic chains theory provides a better understanding of the reasons why some companies in situation of uncertainty rely more on the positions taken by others than on their own private calculations thus triggering a process of diffusion by imitation.In this article, we try to verify this hypothesis on a sample of French companies. For most of the firms, the perceived benefits determine decision-making, securing competitive advantages and the possibility of adopting a transversal organization. However, for a number of companies in situations of uncertainty as a result of the relative lack of pertinence of the information collected, ERP adoption frequently occurs as a result of mimetic behaviour. Over half the companies surveyed acknowledge being influenced by the decisions taken by the leading companies in their sectors.

From Wald to Savage: Homo Economicus Becomes a Bayesian Statistician

Bayesian rationality is the paradigm of rational behavior in neoclassical economics. A rational agent in an economic model is one who maximizes her subjective expected utility and consistently revises her beliefs according to Bayes’s rule. The paper raises the question of how, when and why this characterization of rationality came to be endorsed by mainstream economists. Though no definitive answer is provided, it is argued that the question is of great historiographic importance. The story begins with Abraham Wald’s behaviorist approach to statistics and culminates with Leonard J. Savage’s elaboration of subjective expected utility theory in his 1954 classic The Foundations of Statistics. It is the latter’s acknowledged fiasco to achieve its planned goal, the reinterpretation of traditional inferential techniques along subjectivist and behaviorist lines, which raises the puzzle of how a failed project in statistics could turn into such a tremendous hit in economics. A couple of tentative answers are also offered, involving the role of the consistency requirement in neoclassical analysis and the impact of the postwar transformation of US business schools.