Neoclassical Equilibrium Research Articles

Uncertainty and the Limits of Markets

The article considers the place of the neoclassical equilibrium model as the basis for current views of markets as fair, efficient, or both. It also points to three threats the model poses for democracy and justice: it ignores the problem of inequality, it suppresses the socio-economic significance of uncertainty, and it conceals its own tradeoff between certainty and equality. Instead, the article lays out Frank Knight’s critical assessment of real markets, which rely on the tacit agreement between a handful of “daring” entrepreneurs and the “risk-averse” masses to bear the uncertainties of business-life in return for a substantially larger share of its direction and rewards. Knight’s influential conclusion, that this agreement mandates a nonmeritocratic social inequality and substantively divides humanity into leaders and followers, should be critically examined.

Fiscal harmonization in view of the Euro adoption: Economic implications for Poland

In this paper, we investigate the ex ante effects of fiscal policy harmonization that might be necessary for the adoption of the common currency on economic growth in Poland using a neoclassical dynamic two-sector general equilibrium model. We study two fiscal policy scenarios. In the first one, we adjust all taxes to German and EU-27 levels, respectively, while in the second one, we change only consumption taxes to German and EU-27 levels. We find that in the first scenario, the current Polish taxes yield the highest rate of growth due to lower capital taxation. However, in the second scenario, German and EU-27 taxes yield the highest rate of growth due to the lower consumption tax on capital-intensive good. From a policy perspective, our results suggest that fiscal policy with lower taxes on capital and capital-intensive goods can generate a higher rate of growth in the long-run. In the case of fiscal harmonization, our findings propose adopting only German or EU-27 consumption tax structure into the Polish tax system.

Book Review: Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly

John Quiggin's _Economics in Two Lessons_ alleges a failing in Henry Hazlitt's _Economics in One Lesson_: the absence of a discussion of market failure. Quiggin's adherence to the doctrine of neoclassical equilibrium misses an important fact: the absence of a neoclassical equilibrium is not a recession, but the ordinary course of the economy. _Economics in Two Lessons_ reveals a misunderstanding of Austrian business cycle theory, and the second lesson to a large extent consists of casting Hazlitt's lesson aside.

Entrepreneurship

In this paper, we reconsider the various states of rest within Austrian market process theory. While this theory certainly embodies a superior representation of market processes to the neoclassical general equilibrium theory, it falls short of producing a holistic theory of human action. The analysis left out those human actions that produce changes to the so-called ‘final state of rest,’ which have so far been taken as exogenous to the market process. These exogenous shocks include knowledge generation and preference shifting. However, I argue that these can and ought to be understood as market phenomena, and so belong within the scope of praxeological analysis. To capture these types of human action, I propose that a new and truly ‘final’ state of rest be introduced, which we term the ‘nirvana state of rest.’ This new state represents a ‘true’ final state, in which human action ceases because all needs, and thus all motivation to act, are completely and perpetually assuaged. Introducing this state into the analysis, we can break free from myopic analyses of mere present states of knowledge and values to observe and explain general tendencies in market processes, prices, and entrepreneurship. I also show how quarrels within Austrian circles might be resolved through this expanded, macroscopic lens.

Economic fluctuations, volatility changes and the role of government spending in China: A structural analysis

AbstractWe study the economic fluctuations in China by using a standard neoclassical general equilibrium model to provide a structural analysis. We have carefully constructed measurements for economic variables from Chinese data to be consistent with the literature. We show that the government spending behaviour plays an important role in accounting for the changes in the pattern of both absolute and relative volatilities. Although we find that a general moderation in economic fluctuations after 1978 can be largely explained by the total factor productivity (TFP) process, TFP itself cannot explain the change in the pattern of relative volatilities. We show that policy changes in government spending can account for the relative volatility divergency. Counterfactual experiments are also provided to discover the role of each factor in explaining the economic fluctuations in China.

Abolishment of Proft tax Effects in the Republic of Armenia

Problems in tax administration, especially direct taxation, are one of the most important challenges for the taxation system of Armenia. The high level of the informal sector further affects the effective functioning of the system and the replenishment of the state budget. In this regard, there is a need for reforms in direct taxation presented in this article. The research objective is to evaluate possible effects of abolishment of proft tax in the Armenian economy. For this purpose, we approached the neoclassical dynamic general equilibrium model presented in expanded form and in discrete time. Impact assessment of the reforms in corporate taxation system in Estonia and Georgia was also based on the same model. Therefore, after the effects of the abolishment of proft tax in the Armenian economy are assessed, a comparative analysis of the results observed with those of Estonia and Georgia will be conducted. The model calculates the effect of changes in income tax rates on government revenues, capital per unit of labor, level of consumption and output in the country. The article also presents the parameterization of the model considering the specifcs of the Armenian economy. The study has revealed that reforming the taxation system for organizations in Armenia will lead to an increase in the general welfare of the population, net investments and aggregate output. At the same time the tax revenues of the state budget of Armenia will decrease by 3.92%. The results of the study will allow the government of Armenia to apply a new approach to taxing the profts of organizations. It will lead to an increase in the transparency of business, a decrease in the level of corruption and the concealment of the profts.

On turbulence driven stationary electric currents in a tokamak

This paper investigates the influence of turbulent dynamics on the neo-classical equilibrium in a tokamak, with an emphasis on the turbulence driven stationary electric current. The neo-classical solution is evaluated using the Hirschmann-Sigmar formalism, in which the turbulent dynamics enter as a forcing term. The latter forcing terms are evaluated through time averages of gyro-kinetic turbulence simulations and are linked with the velocity non-linearity in the gyro-kinetic equation. The time averaged turbulent forcing terms connected with the velocity non-linearity provide a non-negligible current drive, despite being a correction of second order in the normalized Larmor radius. For ITG turbulence, the force exerted due to the heat flux balance is the dominant contribution to the current. The parallel fluctuations of electron density/temperature and the electrostatic potential drive the majority of the current, which is in magnitude comparable to the bootstrap current in the kinetic cyclone base case and increases the total current by a few percent in cases with an experimentally relevant heat flux. An up-down symmetry breaking mechanism is required for turbulent current drive, which is provided in this study by a background rotation or rotation gradient. Consequently, the current is nearly linear in the plasma rotation or its gradient.

Secular stagnation: Theory and remedies

To investigate secular stagnation, I add two features to a standard Ramsey model with money: (i) Households have a preference for wealth; (ii) Wages are downward rigid. In this framework, there exists a frictionless neoclassical steady state equilibrium characterized by a low natural real interest rate. In addition, if wages are sufficiently rigid and the natural real interest rate sufficiently low, then there also exists a Keynesian secular stagnation steady state characterized by under-employment, low inflation, and a binding zero lower bound on the nominal interest rate. As wages become more flexible, the Keynesian steady state diverges away from the neoclassical steady state, until wages are so flexible that it ceases to exist. If monetary policy is excessively restrictive, then the secular stagnation steady state is the unique steady state equilibrium of the economy. The optimal policy response to secular stagnation is to move the economy to the neoclassical steady state. This can either be achieved by raising the central bank's inflation ceiling or by taxing wealth and subsidizing investment in physical capital. This optimal tax policy is revenue-neutral.

Should I Stay or should I Go? Bandwagons in the lab

We experimentally investigate the impact of strategic uncertainty and complementarity on leader and follower behavior using the model of Farrell and Saloner (1985). At the core of the model are endogenous timing, irreversible actions and private valuations. We find that strategic complementarity strongly determines follower behavior. Once a subject decides to abandon the status quo the probability that other players jump on the bandwagon increases sharply. However, there is a reluctance to lead when leading is a conditional best response. We explain this deviation from the neo-classical equilibrium by injecting some noise in the equilibrium concept. We also find that cheap talk improves efficiency.

New Institutional Economics: A Critique to Fundamentals & Broad Strokes Towards an Alternative Theoretical Framework for the Analysis of Institutions

This article explicitly deals with and scrutinises what can be perceived to be the core analytical issues and methodological concepts of new institutional economics. New institutionalism seeks to explain not just the origins and evolution of institutions of capitalism, but more generally the scope of the theory is supposed to be universally applicable. Granted this, new institutionalists often interpret the historical emergence and evolution of institutions in abstract logical terms. This is because of the static, timeless, ahistorical and asocial nature of marginalism and neoclassical equilibrium analysis used by new institutionalists. Hence, an attempt is made to propose certain methodological and theoretical premises that can pave the way for the construction of an alternative, qualified theory of institutional arrangements. In this vein, the issues of social structure, social relations, power and conflict come to central stage.

Basics of the Wolfgang Stützel’s Balance Mechanics

Introduction, Purpose. The article considers the aspects of the Balance Mechanics developed in the middle of the XXth century by the German economist Wolfgang Stützel. Balance Mechanics aggregates all the interactions between the financial and real economic sectors. Since general orthodox neoclassical equilibrium DSGE models failed to predict the global financial crisis of 2007-2008, and due to their fundamental failure to simulate crisis situations in the economy, the post-Keynesian stock-flow consistent approach appears to be the main alternative in building macroeconomic models. Methods. A key feature of the SFC models is that they aggregate the full integration of real and financial sectors of the economy. These models use the system based on double-entry and four-entry accounting principles. Results. On the basis of the analysis of Stützel’s Balance Mechanics, it is possible to define some important concepts and terms, i. e. expenditure and revenue which influence the net value of financial assets of the economic agent; payments and revenue receipts which influence the volume of payment assets of the economic agent. It has been established that the total amount of all expenses shall be necessarily equal to the total income. Therefore, the total amount of financial savings (changes in the net financial value of assets) of all the economic agents in a closed economy (or world economy) always equals zero. The only way to provide the economy with savings is to increase the amount of non-financial assets, i. e. physical capital. Discussion. In accordance with Stüzel’s approach, the analysis of the macroeconomic paradoxes performed on the basis of neoclassical approach involves the “fallacious composition”, when the facts and assumptions which are true to an economic agent or a group of economic agents are fallaciously and unreasonably transferred to the whole aggregate of the economic agents.

Market failure vs. system failure as a rationale for economic policy? A critique from an evolutionary perspective

This paper reconsiders the explanation of economic policy from an evolutionary economics perspective. It contrasts the neoclassical equilibrium notions of market and government failure with the dominant evolutionary neo-Schumpeterian and Austrian-Hayekian perceptions. Based on this comparison, the paper criticizes the fact that neoclassical reasoning still prevails in non-equilibrium evolutionary economics when economic policy issues are examined. This is more than surprising, since proponents of evolutionary economics usually view their approach as incompatible with its neoclassical counterpart. In addition, it is shown that this “fallacy of failure thinking” even finds its continuation in the alternative concept of “system failure” with which some evolutionary economists try to explain and legitimate policy interventions in local, regional or national innovation systems. The paper argues that in order to prevent the otherwise fruitful and more realistic evolutionary approach from undermining its own criticism of neoclassical economics and to create a consistent as well as objective evolutionary policy framework, it is necessary to eliminate the equilibrium spirit. Finally, the paper delivers an alternative evolutionary explanation of economic policy which is able to overcome the theory-immanent contradiction of the hitherto evolutionary view on this subject.

Intersectoral Labor Immobility, Sectoral Comovement, and News Shocks

AbstractSectoral comovement of output and hours worked is a prominent feature of business cycle data. However, most two‐sector neoclassical models fail to generate this sectoral comovement. We construct and estimate a two‐sector neoclassical Dynamic Stochastic General Equilibrium (DGSE) model generating sectoral comovement in response to both anticipated and unanticipated shocks. The key to our model's success is a significant degree of intersectoral labor immobility, which we estimate using data on sectoral hours worked. Furthermore, we demonstrate that imperfect intersectoral labor mobility provides a better explanation for the sectoral comovement than an alternative model emphasizing the role of labor‐supply wealth effects.

A comprehensive study on rotation reversal in KSTAR: experimental observations and modelling

Dedicated experiments have been performed in KSTAR Ohmic plasmas to investigate the detailed physics of the rotation reversal phenomena. Here we adapt the more general definition of rotation reversal, a large change of the intrinsic toroidal rotation gradient produced by minor changes in the control parameters (Camenen et al 2017 Plasma Phys. Control. Fusion 59 034001), which is commonly observed in KSTAR regardless of the operating conditions. The two main phenomenological features of the rotation reversal are the normalized toroidal rotation gradient () change in the gradient region and the existence of an anchor point. For the KSTAR Ohmic plasma database including the experiment results up to the 2016 experimental campaign, both features were investigated. First, the observations show that the locations of the gradient and the anchor point region are dependent on . Second, a strong dependence of on is clearly observed in the gradient region, whereas the dependence on , , and is unclear considering the usual variation of the normalized gradient length in KSTAR. The experimental observations were compared against several theoretical models. The rotation reversal might not occur due to the transition of the dominant turbulence from the trapped electron mode to the ion temperature gradient mode or the neoclassical equilibrium effect in KSTAR. Instead, it seems that the profile shearing effects associated with a finite ballooning tilting well reproduce the experimental observations of both the gradient region and the anchor point; the difference seems to be related to the magnetic shear and the value. Further analysis implies that the increase of in the gradient region with the increase of the collisionality would occur when the reduction of the momentum diffusivity is comparatively larger than the reduction of the residual stress. It is supported by the perturbative analysis of the experiments and the nonlinear gyrokinetic simulations. The absence of the sign change of even when a much lower collisionality is produced by additional electron cyclotron heating brings further experimental support to this interpretation.

Kritik der Politischen Ökonomie im 21. Jahrhundert.

While the majority of the scientific community holds Marxian Value and Price Theory to be internally inconsistent because of the so-called “transformation problem”, these claims can be sufficiently refuted. The key to the solution of the “transformation problem” is quite simple, so this contribution, because it requires the rejection of simultanism and physicalism, which represent the genuine method of neoclassical economics, a method that is completely incompatible with Marxian Critique of Political Economy. Outside of the iron cage of neoclassical equilibrium economics, Marxian ‘Capital’ can be reconstructed without neoclassical “pathologies” and offers us a whole new world of analytical tools for a critical theory of capitalist societies and its dynamics.

Wider economic impacts of transport infrastructure investments: Relevant or negligible?

Wider economic impacts (WEI) comprise all effects that are not assessed appropriately in conventional cost-benefit analysis (CBA). These effects are generated by market imperfections, in the view of neo-classical equilibrium theory. In real economies such imperfections are not exemptions but frequent phenomena, e.g. stemming from increasing returns to scale or scope, or structural changes of products and industrial processes. Although the existence of WEI is not in question, they are usually not considered in practical assessments of transport infrastructure investments because they can only be estimated with high uncertainty and – in industrialised countries in particular – they are assumed to be of negligible magnitude. This paper presents approaches to WEI measurement based on GDP and on welfare, analyses the feasibility for combining WEI with conventional CBA, and discusses issues related to decision-making in situations where consideration of WEI appears to be relevant.

On the effect of neoclassical flows on intrinsic momentum in ASDEX Upgrade Ohmic L-mode plasmas

A gyro-kinetic analysis of intrinsic rotation is presented for the ASDEX Upgrade tokamak. The gyro-kinetic turbulence code, GKW and the neoclassical transport code, NEO are coupled so that the neoclassical equilibrium distribution function is included in the background distribution function in the gyro-kinetic turbulence simulation. This implementation is benchmarked against a similar implementation in the gyro-kinetic code, GS2 (Dorland et al 2000 Phys. Rev. Lett. 85 5579) and against analytical predictions.A quasi-linear and non-linear gyro-kinetic turbulence analysis is performed on Ohmic L-mode ASDEX Upgrade plasmas showing that the symmetry breaking effects due to neoclassical background flows can produce significant toroidal momentum transport. While its magnitude is of the order of other symmetry breaking mechanisms, such as the Coriolis pinch, up–down asymmetry in the magnetic flux surfaces and flow shear, the flow gradients it can sustain are appreciably smaller than the maximum gradients measured at the mid-radius of the ASDEX Upgrade tokamak core, which can be up to an order of magnitude larger.It is found that the gradient of the diamagnetic flow, and therefore the second derivatives of the density and temperature gradients are critical to the production of residual toroidal momentum flux. A quasi-linear estimate indicated that the second derivatives required to match the experimental flow gradient are up to an order of magnitude higher than the measured second derivatives. This analysis suggests that turbulent transport driven by neoclassical flows is not sufficient to explain the maximum flow gradients observed in ASDEX Upgrade.

Reply

The issues discussed in my reply are: whether Marx’s prices of production are long-run equilibrium prices, and the relation between Marx’s prices of production and neoclassical long-run equilibrium prices, the overall logical structure of Capital, the nature of the initial givens in Marx’s theory (monetary vs. physical quantities), the determination of constant capital in particular, and the relation between Marx’s theory of the rate of profit and Sraffa’s theory of the rate of profit.

Estimation of Macroeconomic Effects from the Decline in Oil Export Duty

The article studies macroeconomic effects of reducing oil export duty, depending on various development scenarios for oil refining sector and the implemented economic policy measures in the framework of neoclassical general equilibrium model for the Russian economy. Relevance of the work is based on the fact that oil export duty subsidises both oil refining industry, allowing it to exist in the market with low efficiency compared with foreign producers, and petroleum customers, which translates into a lower cost of petroleum products as compared to the world prices. Our paper mainly focuses on a comparison of the different effects of the tax manoeuvre on the abolition of oil export duty. The positive effects can arise from increase in the efficiency of the oil refining industry, which the abolition of export duty on crude oil should create incentives for. The negative effects on the economy are mainly related to the appreciation of the prices for the most important factors of production — oil and petroleum products, which can lead to a loss in competitiveness of Russian non-energy export. The transition process to the new efficient technologies is set exogenously in the model. It is expected that the abolition of oil export duty will force companies to carry out the modernisation of production process. In this case, we build scenarios with gradual reduction of tariffs in 5–7 years that should not lead to the collapse in the domestic petroleum products market in the short run due to the inability of certain enterprises rapidly switch to the new technologies. It is shown that in the current economic environment with low oil prices, this tax reform can be virtually painless for the economy. At the same time, if considered economic policy measure will force the oil refining industry to modernise its production facilities, there will be a positive effect on output in the economy and the welfare of domestic economic agents in the long run.

National income taxation and the geographic distribution of population

We study how different national taxation schemes interact with geographic variation in productivity and consumption amenities in determining regional populations. A neoclassical migration equilibrium model is used to analyze the current nominal income tax system in Norway. The analysis is based on estimated regional income differences accounting for both observable and unobservable individual characteristics and the value of experience. Given regional differences in incomes and housing prices, quality of life and productivity are calibrated to model equilibrium. Compared to an undistorted equilibrium with lump-sum taxation, nominal income taxation creates a disincentive to locate in productive high-income regions. The deadweight loss due to locational inefficiencies is 0.18% of gross domestic product (GDP). We study real income taxation and equal real taxes as alternative tax systems. Both alternatives generate a geographic distribution of the population closer to the undistorted equilibrium, and hence with lower deadweight loss. In an extension of the analysis, we take into account payroll taxes. The existing regionally differentiated payroll taxes to the disadvantage of cities generate a deadweight loss of 0.22% of GDP in an economy with lump-sum income taxation. The two distortionary taxes interact and strengthen each other and the combined distortionary effect of income and payroll taxation in the Norwegian system is 0.46% of GDP.