Neoclassical Equilibrium Research Articles

The role of finance in production and international trade

We introduce finance in a neo-classical general equilibrium model of production and international trade to integrate the core microeconomic theory with the theory of finance. The stock of credit, as past savings, finances employment and the acquisition of machines or capital goods. The availability of finance or international financial flows does not affect production or trade patterns, except for nominal factor prices, in undistorted competitive structures. However, distortions such as unemployment, imperfect credit markets, and factor mobility do affect real outcomes and trade. Our results are consistent with contemporary empirical evidence and have policy implications for financial development and institutional quality. Numerical illustrations provide further insights.

Modelling the economy-wide effects of unilateral CO2 pricing under different revenue recycling schemes in Austria – Searching for a triple dividend

In this paper we identify policy implications for implementing carbon pricing in Austria, taking into account model structure uncertainty. Methodologically, we compare the results of two macroeconomic models, DYNK (a New Keynesian model) and WEGDYN-AT (a neoclassical general equilibrium model), to evaluate the effects of carbon pricing under different revenue recycling options. Specifically, we examine the model results with respect to their findings regarding a potential triple dividend, that we define as a simultaneous materialization of i) a reduction in CO2 emissions, ii) positive effects on GDP and employment, and iii) positive and distributionally progressive effects in household consumption possibilities. Accounting for model structure uncertainty improves the robustness of our results; at least within the macroeconomic frameworks applied here. Our results confirm the tradeoff between equity and efficiency identified in previous analyses. In the New Keynesian model, but not in the general equilibrium model, we find evidence for a triple dividend for a combination of the recycling options of non-wage labor cost reductions and lump-sum per-capita transfers (“climate bonus payments”).

Generalized kinetic equation for tokamak plasma equilibrium distribution function

A generalized kinetic equation for the equilibrium distribution function in a finite beta, arbitrary tokamak plasma is derived. The equation is correct to second order in ρ/L (ρ is the particle Larmor radius and L is the system size). Resolving the finite Larmor radius length scales with no restriction on the ratio of poloidal to total equilibrium magnetic field, Bϑ/B, it generalizes the drift kinetic theory of Hazeltine [Phys. Plasmas 15, 77 (1973)] to the limit of Bϑ/B∼1 (e.g., to ensure validity for spherical tokamaks). Two cases are considered. The first provides the equilibrium distribution function, consistent with the generalized gyrokinetic formalism of Dudkovskaia et al. [Plasma Phys. Controlled Fusion 65, 045010 (2023)], derived specifically to capture neoclassical equilibrium currents in the gyrokinetic stability analyses in strong gradient regions. The second assumes short length scales in the direction perpendicular to the magnetic field, which can occur as a result of small coherent magnetic structures in the plasma, such as neoclassical tearing mode magnetic islands close to threshold. This then extends the drift island equations of Dudkovskaia et al. [Nucl. Fusion 63, 016020 (2023)] for the plasma response to magnetic islands to a spherical tokamak plasma configuration. Resolving ρ∼ρϑ (or Bϑ∼B), where ρϑ is the particle poloidal Larmor radius, is also expected to influence calculations of the magnetic island propagation frequency and the associated contributions to the island onset conditions.

Сценарная оценка макроэкономических эффектов прогрессивного налогообложения в России

The purpose of the study is to assess the impact of alternative options of progressive taxation on Russia’s macroeconomic performance. For quantitative assessments, a neoclassical general equilibrium model with heterogeneous households subject to idiosyncratic income shocks was used. Three groups of scenarios were analyzed, setting a threshold progressive tax scale with thresholds of 30, 50, and 70 thousand rubles, under which state income tax revenues (1) grow, (2) remain unchanged, and (3) decline. The maximum personal income tax rate in the analyzed scenarios was 25%. Steady states and transitions were calculated for the scenarios. According to the quantitative estimates, the first reform leads to a loss of 0.3% to 1.3% of GDP in the long run, depending on the assumed rates and threshold. Despite the increase in lump-sum transfers, aggregate household consumption decreases by 0.5–1.7% in all cases. The second reform leads to a loss of 0.2% to 0.6% of GDP in the long run. The third reform leads to insignificant fluctuations of GDP within 0.1%: GDP increases at the threshold of 30 thousand rubles and decreases at other thresholds. The scale of inequality reduction, as measured by the Gini coefficient, increases with an increase in the top tax rate. However, as the threshold increases, the depth of the Gini index reduction first increases and then decreases. In the short run, there is upward pressure on wages and prices. This is because a decrease in labor supply with unchanged capital in the short run leads to an increase in wage rates (a shift along the labor demand curve), and an increase in wage rates means an increase in marginal costs for firms, leading to higher prices.

Ronald H. Coase, Friedrich A. Hayek, and the Institutional Structure of Production and Exchange

AbstractThe essay investigates the parallels and connections between Friedrich A. Hayek and Ronald H. Coase. It emphasizes the shared context at the London School of Economics (LSE) in the 1930s within which both authors reacted, in particular the role of the so-called LSE tradition on opportunity cost. We focus attention on the same pattern of institutional reaction to the formal similarity proposition of neoclassical general equilibrium theory exposed in both authors. In “The Nature of the Firm” (1937a), Coase’s pioneer transaction cost argument was decisively constructed and shaped by the controversy around the possibility of rational economic calculation under socialism. This debate was crucial to Hayek’s fundamental reformulation of neoclassical equilibrium analysis in terms of a social coordination problem in “Economics and Knowledge” (1937). In a parallel manner, although focused on the microstructure of production, Coase (1937a) was reacting to the standard general equilibrium theory and its postulates. Traditional microeconomic theory could not explain the decisions to make within the firm or to buy in the market, nor the many hybrid organizational arrangements that lie between the centralized firm and the decentralized market process. In “The Problem of Social Cost” (1960), Coase develops his argument advanced in 1937 to the welfare corollaries of the general equilibrium framework encapsulated in the first and second welfare theorems. In this case, the connection was made through the influential ideas of his long-LSE friend, Abba P. Lerner. Finally, the essay explores Hayek’s instrumental role in the intellectual and institutional foundations of the Law and Economics movement at the University of Chicago.

The dark side of shareholder orientation: A reflection of Rappaport's concept of shareholder value

AbstractThe concept of shareholder value has been the subject of heated debate for 40 years. Surprisingly, the literature seems to overlook the fact that shareholder orientation by management is something completely different from the implementation of this idea in the well‐known shareholder value concept, which aims to measure the contribution of management to shareholder welfare. Using a market‐oriented framework, this study shows that the fundamental orientation of shareholders' subjective preferences is supported by a property rights perspective inspired by the ideas of the Austrian School of Economics. In contrast, Alfred Rappaport's shareholder value concept is based on neoclassical equilibrium thinking and, therefore, counteracts the real, imperfect environment of the corporation's decision‐makers, especially their subjective values. This results from individual preferences and decision parameters, as well as incomplete and asymmetric information. Thus, it ignores the reality of managerial decision‐making. Based on these considerations, we argue that the advocacy of a general managerial orientation toward shareholders' objectives does not logically imply full support for the implementation of the idea under Rappaport's concept. In doing so, this essay contributes to a more differentiated discussion on valuation, corporate governance, and managerial decisions.

Digitalization and economic growth in the new classical and new structural economics perspectives

This paper introduces ‘data elements’ into a neoclassical general equilibrium model and the new structural general equilibrium model to study the choice of economic growth paths for developing countries. It derives and compares a general expression for the economic growth rate in equilibrium within the two analytical frameworks following the introduction of digital development comprising primarily the data elements. Additionally, the optimal economic growth path for developing countries before and after the introduction of data elements under both frameworks is identified with important policy implications regarding direct technological progress with respect to the two alternative general equilibrium frame works. This study finds that: (1) No matter what kind of general equilibrium corresponding economic growth path the developing countries choose, the economic growth rate after the introduction of data elements will always be higher than before. (2) Developing countries find the optimal path of economic growth by comparing the different results of economic growth rates under the two analytical frameworks. This paper aligns with a view that when developing countries choose the path of economic growth, they need to combine their own endowment conditions and choose a new structural economics analysis framework for decision-making.

Quantifying the role of higher order neoclassical corrections to gyrokinetics in tokamak plasmas

We implement the higher order gyrokinetic theory developed in Dudkovskaia et al (2023 Plasma Phys. Control. Fusion 65 045010), reduced to the limit of , where B 0 is the tokamak equilibrium magnetic field, and B ϑ is its poloidal component, in the local gyrokinetic turbulence code, GS2. The principal motivation for this extension is to quantify the importance of neoclassical flows in electromagnetic gyrokinetics, with a particular interest in sharp pressure gradient regions where the bootstrap current becomes dominant. To incorporate neoclassical equilibrium physics, GS2 is coupled to NEO, a multi-species drift kinetic solver. It is found that the regions where microinstabilities are most likely to be influenced by neoclassical equilibrium effects are in a pedestal plasma and a spherical tokamak core plasma.

From Austrian theory of capital to dissent: Nicholas Kaldor, Friedrich A. Hayek and the way to disequilibrium

PurposeIn the early 1930s, Nicholas Kaldor could be classified as an Austrian economist. The author reconstructs the intertwined paths of Kaldor and Friedrich A. Hayek to disequilibrium economics through the theoretical deficiencies exposed by the Austrian theory of capital and its consequences on equilibrium analysis.Design/methodology/approachThe author approaches the discussion using a theoretical and historical reconstruction based on published and unpublished materials.FindingsThe integration of capital theory into a business cycle theory by the Austrians and its shortcomings – e.g. criticized by Piero Sraffa and Gunnar Myrdal – called attention to the limitation of the theoretical apparatus of equilibrium analysis in dynamic contexts. This was a central element to Kaldor’s emancipation in 1934 and his subsequent conversion to John Maynard Keynes’ The General Theory of Employment, Interest, and Money (1936). In addition, it was pivotal to Hayek’s reformulation of equilibrium as a social coordination problem in “Economics and Knowledge” (1937). It also had implications for Kaldor’s mature developments, such as the construction of the post-Keynesian models of growth and distribution, the Cambridge capital controversy, and his critique of neoclassical equilibrium economics.Originality/valueThe close encounter between Kaldor and Hayek in the early 1930s, the developments during that decade and its mature consequences are unexplored in the secondary literature. The author attempts to construct a coherent historical narrative that integrates many intertwined elements and personas (e.g. the reception of Knut Wicksell in the English-speaking world; Piero Sraffa’s critique of Hayek; Gunnar Myrdal’s critique of Wicksell, Hayek, and Keynes; the Hayek-Knight-Kaldor debate; the Kaldor-Hayek debate, etc.) that were not connected until now by previous commentators.

Global gyrofluid simulations of turbulence in tokamak plasmas

We develop a tokamak plasma turbulence simulation code based on a fluid model using the BOUT++ framework. The model corresponds to a global extension of the local gyrofluid model (Beer and Hammett, 1996 [11]), where external sources and neoclassical equilibrium flows are included but some higher-order kinetic effect terms are ignored for the global nonlinear simulation. Hyper-viscous damping terms are introduced to compensate for the stabilizing effect of the missing kinetic terms. With an appropriate hyper-viscosity, we obtain reasonable linear and nonlinear results on ion temperature gradient modes compared to global gyrokinetic simulations. We perform global flux-driven simulations with self-consistently evolving profiles with external heat sources/sinks. A spectral analysis of heat flux in flux-driven turbulence exhibits a broad 1/f (f is the frequency) spectrum observed in gyrokinetic simulations, indicating the prevalence of self-organized criticality-like heat avalanches. We also investigate the effect of an externally imposed vorticity source on turbulence suppression and transport barrier formation. It is shown that internal transport barrier can form even for a monotonic safety factor profile when a sufficiently strong vorticity source is applied.

Impact of magnetic ripple on neoclassical equilibrium in gyrokinetic simulations

The effect of magnetic field ripple on tokamak plasma without turbulence is studied numerically and augmented with a reduced analytical model that includes neoclassical processes in the presence of non-axisymmetric perturbation and stochastic transport. For this study, a magnetic field ripple perturbation has been implemented in the GYSELA gyrokinetic code. This implementation has been verified thanks to a test of toroidal angular momentum conservation. The GYSELA code was then successfully benchmarked against the NEO code, which solves the drift kinetic equation, and against the reduced model in the collisionality range [0.05–0.5] for several amplitudes of the magnetic ripple. An observation, shared by the model, the NEO code and GYSELA simulations is that the thermal drive of the mean poloidal velocity—measured by the coefficient—decreases sharply for large yet experimentally relevant magnetic ripple amplitudes, and may even change sign.

Tech-advancement Vs. Online Sexual Activities Country-wise: Market Economic Assessment under Welfare Analysis

Internet is a blessing for humankind where one can have all good-things rather bad-things from it. It is easy to get stuck into dark-&-ugly world of civilization with just a click to online-sexual-activities—Pornography and Online-live-sex. Besides emotional-problems, it has linkages with today’s high-rise-rate of divorce, rape, family-conflicts in society country-wise such as Bangladesh. For policy-guidance, this study analyses basic issues of Online-sex-market in terms of marginal-damage analysis under neoclassical partial equilibrium demand-supply theory. It further analyses the reasons of disparity between social-cost and private-cost by conventional marginal-damage analysis. Findings show that because of online-sex-activities, marginal social-costs are higher than marginal private-costs. Continuation of increasing it in Bangladesh, results a higher welfare-loss incurred from higher social-costs. Because of its high rise demand due to continuation of rising per-capita-income and having easy-access to supportive-factors, prices of services are becoming upward-trends, which dominate producer-surplus. Service-providers generate high revenues and consumers face high market-prices, which create higher deadweight-losses. Thus, there is an urgency for national policy-design. Probable-policies can advance in three-folds a) how to quit online-sex b) how to perform treatment of online-sex-addiction and c) how to prevent newcomers. Besides having effective-monitoring, raising awareness and engaging public, Internet-companies & officials, calling for Conferences may play significant-roles country-wise.

The circular economy and the optimal recycling rate: A macroeconomic approach

This paper studies the economic implications of the circular economy and recycling activities from a macroeconomic perspective. The paper incorporates the circular economy into an otherwise standard neoclassical dynamic general equilibrium linear economy model, in which the production function depends on capital, labor, and raw materials. Raw materials are a composite of natural resources (the linear economy) and recycled material (the circular economy). Waste is a function of consumption but can be incorporated back into production activities through recycling. We find the existence of a positive S-shaped relationship between the optimal recycling rate and economic development, indicating that increasing the circularity of the economy is a necessary condition to augment social welfare in a growing economy. The optimal recycling rate depends positively on the pollution damage and waste content of final consumption goods. Simulation of the model supports the existence of a steady-state Environmental Kuznets Curve (EKC) relationship between the stock of waste and the output in the presence of a circular economy. Finally, we find that while a permanent improvement in recycling technology has positive effects on output, expanding the circularity of the economy, an increase in the cost of natural material has harmful effects on output, increasing waste accumulation and reducing recycling.

Is farmland financial innovation narrowing the urban-rural income gap? A cross-regional study of China.

Over the past four decades, China's economy has experienced tremendous economic growth but also a widening urban-rural income gap. Given the dilemma of the urban-rural income gap in China explained by neoclassical equilibrium theory, this paper attempts to provide a new theoretical explanation for the large-income gap between urban and rural areas in China. We select data from 30 provinces(cities) in China over the period from 2006 to 2017 as a sample to investigate whether and how the degree of farmland financial innovation narrows the urban-rural income gap. The results show that the coefficient for farmland financial innovation is significantly negative at the 1% level, signifying that financial innovation can narrow the urban-rural income gap in China. The mediation effect test provides evidence that farmland financial innovation narrows the urban-rural income gap by promoting the permanent migration of the labor force and upgrading the industrial structure. Our results indicate that the government should promote various forms of farmland financial innovation, establish rural property rights transaction system and free farmers from deep farmer-land attachment to realize permanent labor migration.

Market formation in China from 1978

This paper studies the formation of market economy in China from 1978 to 1992, a period in which market economy was introduced and developed alongside planned government procurement for agricultural goods. Under the “dual track system” (DTS), rural farmers were obligated to fulfill government procurement before selling to the market, whereas urban consumers enjoyed de facto subsidies to agricultural products. Using a neoclassical general equilibrium model with heterogeneous firms and workers and input-output linkage, this paper exploits historical data and analyzes allocation, prices, and the formation of markets in China during this DTS period. Theoretically, while DTS will distort the resources allocation between rural and urban (misallocation effect), it selects workers and farmers in the rural (selection effect). What is more, comparing to the economy under Soviet-style big bang reform, DTS activates industrialization by providing intermediate goods with lower-than-market price (activation effect). Quantitatively, directly switching to market economy in 1978 would decrease total output by 4.5% as the activation effect dominates. On the intensive margin, reform on DTS (procurement price was getting closer to market price) had contributed to total output by 4.4% from 1978 to 1992.

Black carbon and other pollutants from brickfields country-wise: Impact assessment and policy guidance under welfare analysis

The brick industry in developing world is a vast, coal burning and polluting industry. Nearly 1,500 billion bricks are produced globally each year where 87% are from Asia. China dominates the world in producing bricks using coal combustion and woods as fuels where Australia placed the last. Bangladesh placed the 5th in the world, and it mostly uses woods as fuels. These industries are owned privately. It is a type of industry that is mostly driven with business mentality without emphasizing the hygiene and health aspects where government laws are barely active in practices where rapid urbanization has been increasing demand of bricks. But, in most cases, this industry uses inefficient and dirty technology that causes environmental externalities. Brick-kilns inject huge volume of effluent gases. It causes depletion of atmospheric O2 level. Addressing the issue for policy guidance, this study first analyzes the consequences of these externalities in terms of marginal damage (MD) under neoclassical partial equilibrium demand & supply theory. It further analyzes the reasons of disparity between social-cost and private-cost by conventional marginal damage analysis. Findings show that due to gases emission from brickfields, the marginal social-costs are higher than marginal private-cost. In this economic dilemma, brick-kilns are benefiting with the expense of human-society country-wise. As it has been going on, the rises of brick-prices have been causing upward trends of welfare losses where producer surplus is dominating the total surplus. This consequential economic situation has been causing higher deadweight loss year after year. The reason is that the bricks-customers distribute this expenditure away from now more expensive bricks. Now there is an urgency for national policy actions for ensuring cleaner & sustainable brick production. On this aspect, reforestation efforts can be achieved in multi-faucets including brickfields’ charity and govt. policies on planting trees and for motivational efforts inspiring citizens of this country. These motivational efforts can be in multi-faucets: (a) inspiring “birthday celebration by planting trees”, (b) forcing to use green Tech in brick kilns and (c) conducting research in both phases of govt. and academicians where financial supports can be inspirational.

Entrepreneurship and Equilibrium

Neoclassic economic theory regards equilibrium, whether general or partial, as a crucially important foundation of the dismal science[1]. In the view of mainstream economists, the general equilibrium framework not only an investigation of the economy in terms of its perfect qualities, but also is suitable as an end or goal of action. The Austrian school, in contrast, sees equilibrium (or the evenly rotating economy - ERE) merely as a tendency for economic activities to move us in that direction, but it is never attained. Praxeological economics has thus concentrated not on equilibrium, but on the process by which the market moves toward it. Since the process of shifting resources to meet these ends cannot be achieved spontaneously, entrepreneurship plays a key role. In Mises and Rothbard’s view, entrepreneurship involves uncertainty bearing which beyond the alertness emphasized by Hayek and Kirzner; on the other hand, unlike Lachmann looks the economy as a kaleidoscope and rejects the ERE, Mises and Rothbard regard the ERE as an indispensable way to understand the economy.
 
 [1] As Frank H. Hahn said “Whatever economics is used or thought about, equilibrium is a central organizing concept.” (Hahn 1984: 43). Many economists and philosophers of science consider mathematical neoclassical general equilibrium theory as one of the peak achievements of economics (Rosenberg, 1992). Tieben (2012) stated that policy-makers and theorists of all schools of economics all use some form of equilibrium theory to develop their ideas and support their main theoretical and political claims. Lawson (2005) indicated that the equilibrium concept is a major cause of controversy between different schools of economic thought. A.W. Bob Coats even deems it the case that “economics has been dominated throughout its history by a single paradigm – the theory of economic equilibrium via the market mechanism.” (Coats 1969: 292).

Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints

The analogies between economics and classical mechanics can be extended from constrained optimization to constrained dynamics by formalizing economic (constraint) forces and economic power in analogy to physical (constraint) forces in Lagrangian mechanics. In the differential-algebraic equation framework of General Constrained Dynamics (GCD), households, firms, banks, and the government employ forces to change economic variables according to their desire and their power to assert their interest. These ex-ante forces are completed by constraint forces from unanticipated system constraints to yield the ex-post dynamics. The flexible out-of-equilibrium model can combine Keynesian concepts such as the balance sheet approach and slow adaptation of prices and quantities with bounded rationality (gradient climbing) and interacting agents discussed in behavioral economics and agent-based models. The framework integrates some elements of different schools of thought and overcomes some restrictions inherent to optimization approaches, such as the assumption of markets operating in or close to equilibrium. Depending on the parameter choice for power relations and adaptation speeds, the model nevertheless can converge to a neoclassical equilibrium, and reacts to an austerity shock in a neoclassical or post-Keynesian way.

The Role of Entrepreneurship in Economic Growth and Development Models

For decades, the entrepreneur was considered the” invisible man”. The role of entrepreneurship was ignored in economic literature until the 20th century and in economic growth and development models until the early the 1990s. Since then, the role of entrepreneur is included in different branches of economics. The purpose of this paper is to review the role of the entrepreneurs and entrepreneurship in economic growth and development models. After being considered an invisible man in the economics literature, Schumpeter 1911, 1934 considered economic development as a dynamic process that disturbs the closed circular flow of the economic system. Schumpeter considered the entrepreneur as an innovator who plays a fundamental role in the process of economic development. However, few attempts have been made to include entrepreneurship in neoclassical and general equilibrium growth and development models due to the assumptions of perfect competition, static market equilibrium and perfect information about markets and production processes. Endogenous growth models (Romer 1986, 1990; Lucas 1990; Schmitz 1989; Aghion and Howitt 1992) make it possible to include entrepreneurship and entrepreneurs in growth models by emphasizing the role of knowledge externalities, innovations and returns to scale. They consider entrepreneurship as the channel through which these processes affect economic growth. The paper also reviews empirical studies using three macroeconomics databases to describe the entrepreneurial impact on growth, productivity and employment. JEL Codes: B00, O00, O11

InvisaWear: evolving the entrepreneurial mind-set

Theoretical basis Why do some individuals become entrepreneurs while others do not? This fundamental question has vexed entrepreneurship scholars for some time, giving rise to various schools of thought. Traditional economic motivation theories, for example, suggest that entrepreneurial opportunities arise from changes in either supply (Shane, 2000) or demand (Dew et al., 2004) and emphasize personal economic gain as a motivator for pursuing entrepreneurship. Both neoclassical equilibrium and psychological theories take a person-centric perspective whereby stable, enduring differences among people’s characteristics, determines who becomes an entrepreneur. Opportunity recognition may be enhanced through perspective taking (i.e. putting oneself in the shoes of another person) (Prandelli et al., 2016). Research methodology The founders of the company provided us with access to the inner workings of the company, their mentors and advisors and themselves. This study used archival research and interviews when preparing this case. Interviews allow for the development of uncensored, real-life insights into the entrepreneur’s business experience. The authors first conducted a 90-min interview with Rajia and Ray at DifferenceMaker® Central on the UMass Lowell campus. DifferenceMaker® provided us with pictures and timelines from when Rajia and Ray participated in the various DifferenceMaker® activities and competitions. A follow-on 90-min interview was conducted with the founders four months later at the UMass Lowell Innovation Hub to delve deeper into their transition from engineers to entrepreneurs. Case overview/synopsis In the summer of 2016, the future of invisaWear suddenly became uncertain. Rajia Abdelaziz and Ray Hamilton had conceived an idea for smart jewelry that they felt solved a real problem. But it was one thing to have a great idea and quite another to turn that idea into a real business. As engineering students, they were accustomed to solving problems, but if they truly wanted to make an impact, they had to learn to solve problems as entrepreneurs. With the help of DifferenceMaker® and their mentors, they developed an entrepreneurial mind-set and decided to build invisaWear into a company. Complexity academic level This case is suitable for an undergraduate course in business or entrepreneurship. This case is intended to illustrate to both business and non-business students how individuals with different backgrounds can become entrepreneurs. Presented as a real-life example of how engineering students can make the transition to an entrepreneurial mind-set, the case can also be used to hone in on select topics including opportunity recognition, problem-solving, ideation and the business model canvas.