Neoclassical Paradigm Research Articles

An ecological economic interpretation of the Jevons effect

This article develops an ecological economic interpretation of the Jevons effect. Moreover, it is argued that under the neoclassical paradigm there are no elements with which to foresee the long-term existence of this phenomenon. The objective of these arguments is to demonstrate that the Jevons effect can be used to compare the ability of neoclassical and ecological economics describing the social appropriation of nature. This is elaborated in two steps. First, we show the importance of the thesis that the economy cannot be cut off from the biophysical materiality of what is produced to give consistency to the so-called Khazzoom–Brookes postulate. It is made clear that this supposition is exogenous to the neoclassical paradigm. Second, the supposition of the biophysical materiality of what is produced is utilized to make an ecological economic interpretation of the Jevons effect. Afterwards, a comparison is made between the neoclassical and the ecological economic perspectives. This comparison leads to the following conclusions: (i) the persistent presence of the Jevons effect in the long run is an anomaly in the neoclassical paradigm; (ii) the observation of the non-existence of the Jevons effect is a refutation of the supposition that economic growth and biophysical materiality are not separable, a central thesis defended by ecological economists. This situation makes possible to use the Jevons effect as a ‘laboratory test’ to compare the ability of neoclassical and ecological economic paradigms to describe the social appropriation of nature.

How Evolutionary is Evolutionary Economics?

The original drafts of most of the articles collected in this thematic issue were presented at the workshop ‘‘Models of Man for Evolutionary Economics,’’ the 22nd Altenberg Workshop in Theoretical Biology organized by Werner Callebaut, Christophe Heintz, and Luigi Marengo at the Konrad Lorenz Institute for Evolution and Cognition Research (KLI) in Altenberg, Austria in September 2009. The organizers want to express their warm thanks to the KLI Board for their financial support, and to KLI secretary Eva Karner for her most efficient and friendly handling of the workshop logistics. Richard Nelson, one of the founders of the now booming field of evolutionary economics, highlights that modern economies are always changing, with much of the energy coming from continuing innovation enabled and constrained by ‘‘technological paradigms’’ and the ‘‘creative destruction’’ (Joseph Schumpeter) innovation engenders. Nelson illustrates that Simonian ‘‘bounded rationality’’ better fits the view of human goal-oriented activity contained in evolutionary economics than the full-blown rationality of Homo oeconomicus dear to the neoclassical paradigm, and calls for more attention on behalf of cognitive scientists to the role shared culture plays in molding human cognition and behavior. Eugene Earnshaw, a philosopher, argues that Nelson and Winter’s (1982) evolutionary economics, although departing substantially from evolutionary biology’s canon, is a legitimate extension of Darwinism to a novel domain, and that the traditional conception of evolution by natural selection requires revision. Bernard Walliser examines ‘‘how game theory went to evolution and how biology later considered learning,’’ exemplifies the hybrid use of models of each type, and proposes a common framework for both types of models. Historian and philosopher of science Jean Gayon, comparing Nelson and Winter’s (1982) evolutionary economics with evolutionary game theory a la Walliser, shows that they understand natural selection in different ways, and that Nelson and Winter’s theory actually exemplifies ‘‘behavioral learning’’ rather than a Darwinian approach. Geoffrey Hodgson and Thorbjorn Knudsen locate their own position (Hodgson and Knudsen 2010) ‘‘some way from the most abstract level’’ of generalized Darwinism. In a two-part article, Werner Callebaut discusses ‘‘generalized Darwinism’’ from the perspective of a philosopher of biology, and points to developments in contemporary biology that look more promising as sources of inspiration for evolutionary economists. Bertin Martens argues that the economic exchange of knowledge embodied in goods and services constitutes a transmission channel per se (in addition to genetic, epigenetic, cultural, and environmental transmission channels) that makes efficient use of humans’ limited cognitive capacity. Developmental psychologist Katherine Nelson contrasts computational theories in psychology and cognitive C. Heintz (&) Department of Cognitive Science, Central European University, Budapest, Hungary e-mail: christophe.heintz@gmail.com

Rethinking Development Economics

Twelve years ago, when I was chief economist of the World Bank, I suggested that the major challenge to development economics was learning the lessons of the previous several decades: a small group of countries, mostly in Asia, but a few in other regions, had had phenomenal success, beyond anything that had been anticipated by economists; while many other countries had experienced slow growth, or even worse, stagnation and decline—inconsistent with the standard models in economics which predicted convergence. The successful countries had followed policies that were markedly different from those of the Washington Consensus, though they shared some elements in common; those policies had not brought high growth, stability, or poverty reduction. Shortly after I left the World Bank, the crisis in Argentina—which had been held up as the poster child of the country that had followed Washington Consensus policies—reinforced the doubts about that strategy. The global financial crisis, too, has cast doubt over the neoclassical paradigm in advanced industrial countries, and rightly so. Much of development economics had been viewed as asking how developing countries could successfully transition toward the kinds of market-oriented policy frameworks that came to be called “American style capitalism.” The debate was not about the goal, but the path to that goal, with some advocating “shock therapy,” while others focused on pacing and sequencing—a more gradualist tack. The global financial crisis has now raised questions about that model even for developed countries. In this short essay, I want to argue that the long-term experiences in growth and stability of both developed and less developed countries, as well as the deeper theoretical understanding of the strengths and limitations of market economies, provide support for a “new structural” approach to development—an approach

Behavioral Economics

This article discusses the challenges behavioral economics poses for neoclassical economics and the ways in which the young field may move forward. After reviewing some of behavioral economics’ accomplishments and the responses to these accomplishments, the article asks whether its findings can be incorporated into the neoclassical paradigm and suggests additional steps behavioral economics may consider undertaking in order to expand its reach.

Decentralization, Communication, and the Origins of Fluctuations

We consider a class of convex, competitive, neoclassical economies in which agents are rational; the equilibrium is unique; there is no room for randomization devices; and there are no shocks to preferences, technologies, endowments, or other fundamentals. In short, we rule out every known source of macroeconomic volatility. And yet, we show that these economies can be ridden with large and persistent fluctuations in equilibrium allocations and prices. These fluctuations emerge because decentralized trading impedes communication and, in so doing, opens the door to self-fulfilling beliefs despite the uniqueness of the equilibrium. In line with Keynesian thinking, these fluctuations may be attributed to coordination failures and animal spirits. They may also take the form of fads, or waves of optimism and pessimism that spread in the population like contagious diseases. Yet, these ostensibly pathological phenomena emerge at the heart of the neoclassical paradigm and require neither a deviation from rationality, nor multiple equilibria, nor even a divergence between private and social motives.

Maturity of Social Institutions and the Questionable Foundations of Public Choice Theory

The last decade in Russia has been marked by an expansive growth of interest to measuring the level of institutional maturity and quality. These measurements are carried out through international comparisons, correlation coefficients between the quality of institutions and GDP are calculated. However, these estimations are mostly possible within the framework of assumptions of the public choice theory. The paper attempts to prove that this theory uses the same assumption of homo oeconomicus, as conventional microeconomics. Therefore, the public choice theory has the same shortcomings that may be attributed to the neoclassical paradigm as a whole.

Environmental economics and ecological economics: the contribution of interdisciplinarity to understanding, influence and effectiveness

SUMMARYThis paper reviews developments in both environmental economics and ecological economics with respect to their progress towards environmental interdisciplinarity and towards providing solutions to environmental problems. The concepts, methods, theories and assumptions of each field of knowledge are reviewed and the extent to which they depart from the dominant neoclassical paradigm of economics is assessed. The contribution that interdisciplinarity has made to the success of each field is analysed in terms of understanding, influence and effectiveness and the constraints that it has imposed upon that success. Environmental economics has adopted the dominant economic neoclassical paradigm, including the power of the market to allocate environmental resources efficiently and in a socially optimal way. The solution to environmental problems is thus seen as a matter of ensuring that the environment is properly priced to reflect the relative scarcity of natural resources and assets and to ensure that environmental values are incorporated into the market. This specialized view of environmental problems is now reflected in government policy around the world including the use of extended cost benefit analyses, contingent valuations, environmental charges and emissions trading. Nevertheless, environmental problems continue to grow in severity and the solutions provided by environmental economists have proven ineffective. Thus lack of interdisciplinarity does not prevent a field of knowledge from gaining influence and dominance, however its effectiveness in terms of understanding environmental problems and solving them is impeded. Ecological economics seeks to incorporate the research of economists, ecologists, philosophers and social scientists, however its influence seems to be have been limited to areas in which it retains the standard economics framework, and this limits its effectiveness in terms of environmental solutions. Thus interdisciplinarity may increase understanding of the real world but it cannot overcome political and social barriers to translating that understanding into the widespread implementation of effective environmental measures.

Marshall and Walras: Incompatible bedfellows?

The standard view about the relationship between the Marshallian and the Walrasian approaches is that they are complementary to each other. My aim in this paper is to show that, on the contrary, they constitute alternative sub-research programmes within the wider neoclassical paradigm. I make my point by contrasting the two approaches against the following benchmarks: the purpose of economic theory according to Marshall and Walras; their views as to the role of mathematics; their specific ways of tackling complexity; the conception of equilibrium underpinning their theories; and, finally, their trade organisation assumptions.

Genesis of the 2008 global financial crisis and challenges to the neoclassical paradigm of finance

The paper presents the genesis of 2008 global financial crisis, discusses systemic changes in the financial world, and rises the question about the need for the new paradigm of finance in the lieu of the witnessed turbulent processes. A hypothesis is formulated that the neoclassical theory of finance lost its credibility due to systemic changes that have happened within institutions, markets, and instruments over the last three decades. It is suggested that the theory should be modified in line with dynamically changing financial environment. Conclusion is reached that an interdisciplinary approach is needed in the search for an adequate theory of finance. (original abstract)

Anomalies in Economics and Finance

The term “anomaly” played a crucial role in Thomas Kuhn’s characterization of scientific progress. For Kuhn, an anomaly is a puzzle which challenges an accepted paradigm. Puzzles only achieve anomalous status once an alternative paradigm becomes available which allows explanation of the puzzle. Anomalies were introduced into the finance literature by Michael Jensen but more as resolvable puzzles than Kuhnian anomalies. They entered economics via Richard Thaler who saw behavioural economics as the alternative to the neoclassical paradigm. Both authors use the term anomaly in a deliberately Kuhnian manner. Kuhn formulated his ideas by looking back across the history of physics. By contrast, behavioural economists use Kuhn’s concepts in a forward-looking manner as a marketing tool for their ideas.

Do Ethics Matter? Tax Compliance and Morality

In this article we argue that puzzle of tax compliance can be explained, at least in part, by recognizing the typically neglected role of ethics in individual behavior; that is, individuals do not always behave as the selfish, rational, self-interested individuals portrayed in the standard neoclassical paradigm, but rather are often motivated by many other factors that have as their main foundation some aspects of “ethics.” We argue that it is not possible to understand fully an individual’s compliance decisions without considering in some form these ethical dimensions. Specifically, we argue here that there is much direct and indirect evidence that ethics differ across individuals and that these differences matter in significant ways for their compliance decisions. We then put this in the larger context of the inability of the standard neoclassical paradigm to explain compliance of at least some individuals, and we suggest several possible avenues by which theory can be expanded to incorporate ethics. We conclude by arguing that a full house of compliance strategies is needed to combat tax evasion, strategies that include the traditional “enforcement” paradigm suggested by and consistent with neoclassical theory, a less traditional “service” paradigm that recognizes the important role of a “kinder and gentler” tax administration in encouraging compliance, and, importantly, a new “trust” paradigm that is built on the foundation of ethics, in which the tax administration must recognize that it can erode the ethics of taxpayers by its own decisions.

The genesis of the 2008 global financial crisis and challenges to the neoclassical paradigm of finance

In the first step, this paper briefly discusses the macroeconomic background of the 2008 financial crisis. Next, we take a wider approach and we look at systemic changes that global economics, and financial markets in particular, had undergone. We wonder if these transformations, and their effects so dramatically demonstrated in 2008, give grounds to modify the theoretical background of finance. The neoclassical paradigm might be seen as an idealized normative benchmark. On the other hand, behavioral approach helps explain deviations from this benchmark, however itself it lacks the normative character. We conclude that in contemporary circumstances an interdisciplinary approach is needed in the search for an adequate theory, as the financial world is getting more and more complex and dynamic.

A new look at the Austrian School of Economics: review and prospects

This paper looks at the Austrian School of Economics from the subjectivist perspective. It begins by reviewing the major architects in the Austrian School, Carl Menger, Ludwig von Mises, Friedrich A. Hayek, Murray N. Rothbard, Ludwig M. Lachmann and Isaac M. Kirzner. The paper then elucidates the major tenets of the Austrian School of Economics, namely methodological subjectivism and interpretative economics; entrepreneurship, knowledge and coordination problems in the market process; central planning and Austrian business cycle. It highlights the agreements with public choice school, new institutional economics, evolutionary economics, feminist economics and disagreements with the Marxist economics, Neo-Ricardian School and orthodox neoclassical paradigm. It also clarifies similarities and differences between the Chicago School and Austrian School of Economics. The paper ends with further suggestions on the Austrian subjectivist approach to economic problems by using two illustrations of recent international events, Financial Crisis in 2007 and nuclear meltdown in Japan.

How Did the Neoclassical Paradigm Conquer a Multi-disciplinary Research Institution?

The paper analyses the social conditions of a disciplinary evolution and paradigmatic shift. It is based on the history of economics at the EHESS from 1948 to 2005. An analysis of the PhD committees database enables us to trace the importance and evolution of different economic paradigms within this institution. In the early eighties, the traditional interdisciplinary humanist economics was challenged by a new generation of neoclassical engineer-economists. Far from being a mere declination of a general trend in the discipline, this paradigmatic shift was largely contingent, resting on local context and the influence of a few key persons. The exhibition of international capital and the building of political alliances within the assembly were also key elements for the change and for the survival of the new lineage in a rather hostile environment.

Sustainable Fiscal Policy and Interest Rates under Flexible Exchange Rates

Central to current policy debates regarding public pensions, the appropriate macroeconomic policy mix, and any number of other issues related to growth, development, poverty alleviation, and so forth, is the concept of fiscal sustainability. For neoclassical economists, fiscal sustainability is analyzed via the intertemporal government budget constraint (IGBC). Recently, the IGBC has been still more explicitly incorporated into analyses by the IMF and the World Bank internationally and in the U. S. by the Social Security/Medicare Trustees Reports and the Congressional Budget Office (whose current director, Peter Orszag, is a leading author on fiscal sustainability from within the neoclassical paradigm). The purpose of this paper is to demonstrate that key assumptions made by many applying the IGBC – most importantly the notion that interest on the national debt is set in private credit markets – in fact are not applicable to governments issuing their own currencies while operating under flexible exchange rates.

Examining social processes with agent-based models

It is plain that the Austrian revival that began in the 1970s has yet to succeed in convincing the mainstream of the academy to jettison their physics-based mathematical models in favor of the sort of models and forms of argumentation that contemporary Austrians advocate. Agent-based computational modeling is still in its relative infancy but is beginning to gain recognition among economists disenchanted with the neoclassical paradigm. The purpose of this paper is to assuage concerns that readers might have regarding methodological consistency between agent-based modeling and Austrian economics and to advocate its adoption as a means to convey Austrian ideas to a wider audience. I examine models developed and published by other researchers and ultimately provide an outline of how one might develop a research agenda that leverages this technique. I argue that agent-based modeling can be used to enhance Austrian theorizing and offers a viable alternative to the neoclassical paradigm.

Socio-Economics - An Overview

Socio-Economics is a multi-disciplinary, holistic approach to economics that has gained growing acceptance in legal education and that is helpful in advocating economics justice. Socio-economics approaches economic understanding much as Adam Smith did (before there were separate disciplines) with a foundation based on natural and moral philosophy. Nevertheless, it explicitly acknowledges the powerful and pervasive influence of the neoclassical paradigm on contemporary thought. Recognizing that people first adopt paradigms of thought and then perform their inductive, deductive, and empirical analyses, socio-economists seek to examine the assumptions of the neoclassical paradigm, develop a rigorous understanding of its limitations, improve upon its application, and develop alternative, perhaps complementary, approaches that are predictive, exemplary, and morally sound. Grounded in the scientific method, socio-economics draws upon all relevant schools of thought and disciplines that shed light on economic phenomena and policy. It is a helpful foundation for exploring economic issues based on university-wide interdisciplinary collaboration in the public interest.

'Progress' Revisited: A Historical Materialist Reappraisal

This paper attempts to restore the relevance of the notion of as a valid analytic concept from a critical historical-materialist perspective and situates it in the aporias of the liberal market society. It maintains that the idea of progress has its genealogy in the discursive attempts to navigate the tensions between the liberal self-image of capitalism and the coercive practices of expropriation (primitive accumulation) that typifies its historical reality. The paper illustrates this contradiction through a critical analysis of an influential neoclassical paradigm of political economy, new institutionalism.

Behavioral Anatomy of the Financial Crisis

In view of the challenges facing the neoclassical paradigm of economy, behavioral finance which offers an alternative way of looking at the processes taking place in capital markets is growing in importance. By referring to psychology and pointing out the imperfections of a human mind, it reveals mistakes committed by both individual and professional investors. In the 2008 financial crisis, behavioral inclinations affected not only the investors but also market-supporting entities and regulatory institutions. This article presents a brief macroeconomic background and then focuses on the behavioral aspects of the recent market turbulence. The findings of the paper may help avoid psychological traps associated with investing and are important for both investors and regulatory institutions responsible for securing the stability of financial systems.

Krugman on the Malaise of Modern Macro: Critique Without Alternative

The views of Paul Krugman on modern macro in terms of the global financial crisis representing a collective failure of an economics profession which had become complacent, believing that financial markets could not, in themselves, cause non-trivial recessions is discussed. Krugman is right to question the capability of economics developed under the auspices of the dominant neoclassical paradigm to predict business cycle events; however, a more constructive critique is required.