On economic disequilibrium and free lunch

There is a sharp disagreement between mainstream economists and advocates of energy efficiency as regards the potential for free lunches or no regrets policies to cut greenhouse gas emissions. From an economics perspective, the critical question is whether the economic system is — or is not — close to a Pareto-optimum equilibrium state. If so, it follows that most technological systems now in place are optimum, or nearly so, from an economic perspective. If not, there may be many sub-optimal technologies in place, with corresponding opportunities for very high returns on appropriate investments. This paper presents some of the evidence supporting the latter thesis.     

Full-cost pricing in the classical competitive process: A model of convergence to long-run equilibrium

In the last 10–15 years a lot of attempts has been devoted to study the calssical process of convergence of market prices toward natural prices. The two forces that one has thought could achieve this target were capital mobility, that determines the dynamics of output, and demand-supply forces, that determine the dynamics of prices. In this article a model of classical competition is proposed in which a full-cost pricing mechanism is adopted in the rule of evolution of market prices. An asymptotical stability result of long-run equilibrium is proved for a two-commodity model with and without a final demand.     

Ein Entscheidungsmodell für Konsumieren und Sparen

Summary The present study analyses the simultaneous problem of consumption and saving by means of a consistent demand system; for this purpose the linear—expenditure—system (LES), developed by R. Stone, has been modified and used as a methodological base. Saving takes, for the sake of operationality, the character of a consumer—good and becomes an argument of the utility function. The usual neoclassical assumption of utility maximization allows the derivation of a linear expenditure system of consumption and saving (LESSC) when prices and income are given. The simultaneous LESSC-model has remarkable weaknesses, however: the assumption of certainty, the static character of the model, the disregard for major savings—motives and private expenditure on homebuiding led to bad elasticity—estimates. The assumpion of directly—additive utility functions causes furthermore collinearity between income—and price—elasticities such that the meaning of the derived elasticities is greatly reduced.The income—elasticities derived from the LESSC are positive throughout but show a remarkable variance. The calculation of the Friedman—bias demonstrates a rather strong bias due to the assumption of certainty. A modification resulted in income—elasticities of private consumption and savings of around 0,93 (unmodified: 0,88) and 1,41 (unmodified: 1,76). The demand for consumption goods of great necessity was income—inelastic whereas the demand for goods of less importance to survival was income—elastic. An analysis of income—elasticities of the disaggregated system and the relation between transitory components of consumption and income existing in Austria gave the impression that unexpected changes in income are not only reflected in saving but also in changes of the consumption—structure.The respective price—elasticites are all negative and smaller than 1. For less important consumption—goods lower price—elasticities have been measured and for easily substitutable goods higher ones. Marked crossprice—elasticities could only by discovered with clothing and food products. Generally it can be said that an increase in prices of goods of the daily needs hits both the expenditure on easily substitutable consumption goods and causes dissaving.A comparison with the elasticities calculated through OLS shows a greater reliance of LESSC—elasticities as far as data of differing aggregation levels are concerned.

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Mécanique Sociale may one day take her place along with Mécanique Celeste throned each upon the double—sided height of one maximum principle, the supreme pinnacle of moral as of physical science.     

Welfare effects of 1992: A general equilibrium assessment for EC and EFTA countries

In this paper production, trade and welfare effects of European integration are discussed, with particular emphasis on the effects for the EC and EFTA. Insights from previous partial and general equilibrium analyses of the internal market are reviewed, and new model simulations are presented. In addition to the standard experiments of 1992 — as reduced trade costs and as full market integration — for the EC alone, and for the European Economic Area (EEA), an intermediate case, with full integration in the EC but only lower trade costs between the EC and EFTA, is analysed. All cases show that EFTA will benefit significantly from freer trade and closer integration with the EC. With regard to non-European regions, the simulations of European integration show some degree of trade diversion, but stylized model experiments indicate that a successful outcome of the Uruguay-round may more than offset the trade-diverting effects of 1992.     

The allocation of ideological structures

This article tries to make allocation in the sociology of knowledge more teachable. What may appear as a sectarian magic is transformed into a rational procedure to be used by teacher and student alike. Allocation requires a number of steps by which (1) the ideological structure is made part of an ideology; and (2) the ideology is related to a particular social situation of past or present either by reflecting it in symbolic expression or by reflecting the exact opposite.The old puzzle of how ideological relativism can be asserted from a theoretical position, which — by social background — cannot be anything but relative in itself, falls by the wayside. Temporarily positivism is claimed for any viewpoint which allows empirical verification. It asserts its relativisim but never reaches absolute and final truth. Relative advantages only can be claimed for the many comprehensive social theories at any given time.The term imputation is replaced by the term allocation in this article. Imputation is a direct translation of the German word Zurechnumg. Borrowed from economic theory, this term is unnecessarily complicated. We cannot do more than allocated ideologies in a manner not amenable to precise numerical imputation.     

Anonymous sequential games: Existence and characterization of equilibria

Summary In this paper we consider Anonymous Sequential Games with Aggregate Uncertainty. We prove existence of equilibrium when there is a general state space representing aggregate uncertainty. When the economy is stationary and the underlying process governing aggregate uncertainty Markov, we provide Markov representations of the equilibria.Table of notation Agents' characteristics space ( ) - A Action space of each agent (aA) - Y Y = x A - Aggregate distribution on agents' characteristics - (X) Space of probability measures onX - C(X) Space of continuous functions onX - _X Family of Borel sets ofX - State space of aggregate uncertainty ( ) - x _t=1 aggregate uncertainty for the infinite game - = (₁,₂,...,_t,...) - ^{t t} (₁, ₂,..., _t) - L₁(^t,C ×A),v _t Normed space of measurable functions from ^t toC( x A) - 8o(^t,( x A)) Space of measurable functions from ^tto( x A) - X^t X^t= x _s=1 ^t X - _X ^t Borel field onX ^t - v Distribution on - v_t Marginal distribution of v on ^t - v(^t)((¦^t)) Conditional distribution on given ^t - v^t(^s)(v_t(¦^s)) Conditional distribution on ^t given ^s (wheres) - _t Periodt distributional strategy - Distributional strategy for all periods =(₁,₂,...,_t,...) - _t Transition process for agents' types - ( _t,^t,y)(P _t+1(, _t , ^t ,y)) Transition function associated with _t - u _t Utility function - V _t (, a, , ^t) Value function for each collection (, a, , ^t ) - W _t (, , ^t ) Value function given optimal action a - C() Consistency correspondence. Distributions consistent with and characteristics transition functions - B() Best response correspondence (which also satisfy consistency) - E Set of equilibrium distributional strategies - x _t=1 ( ^t , (x A)) - S Expanded state space for Markov construction - (, a, ) Value function for Markov construction - P( _t ^* , _t y)(P(, _t ^* , _t , _y )) Invariant characteristics transition function for Markov game We wish to acknowledge very helpful conversations with C. d'Aspremont, B. Lipman, A. McLennan and J-F. Mertens. The financial support of the SSHRCC and the ARC at Queen's University is gratefully acknowledged. This paper was begun while the first author visited CORE. The financial support of CORE and the excellent research environment is gratefully acknowledged. The usual disclaimer applies.     

Klassische Nationalökonomie gestern und heute

Ohne ZusammenfassungDieser Artikel ist dieungekürzte Fassung des Beitrages Klassische Nationalökonomie des Verfassers zum Staatslexikon (Band IV).     

Knowledge Questions: Hayek,Keynes and Beyond

This paper discusses the knowledge problem in terms of both the use and generation of knowledge. This is analyzed in the context of Hayek's failure to respond to the Keynes Challenge—the claim that markets fail to produce relevant knowledge—by suggesting that in the aftermath of The General Theory he was not well-positioned to address that problem. Ironically, his post-World War II work in cognitive psychology, The Sensory Order, offers a theory of the generation of knowledge which can provide a useful analogy for understanding the generation of market-level knowledge.     

International aspects of pollution control

Pollution is a by-product of production, is only gradually dissolved by the environment, and crosses national borders. The market outcome ignores the adverse effects of pollution and thus yields higher levels of output and pollution than would prevail under a supranational social planner which does care about pollution. In practice, governments often do not cooperate and this leads to outcomes of pollution and production in between the market outcomes and the outcomes under supra-national social planning. Absence of precommitment leads to lower emission charges, less cleaning-up activities and more pollution. Appropriate levels of emission charges under the various outcomes are a result of this analysis. Attention is also paid to investment in clean technology. The debate between optimists, who believe that higher production is compatible with sound environmental policy, and pessimists can be analysed in this way.Earlier versions of this paper were presented at the EAERE conference Environmental Cooperation and Policy in the Single European Market, Venice, Italy, 17–20 April, 1990, and the CentER conference Economics of the Environment, Tilburg, The Netherlands, 17–19 September, 1990. The paper has benefitted from the comments of the participants of these conferences, and particularly of the detailed comments of Henk Folmer and Ignazio Musu.     

Optimal new-product pricing in regulated industries

Intertemporal pricing issues faced by regulated monopolists in market settings characterized by high rates of innovation have received little attention in the regulatory economics literature. Most analyses of regulatory pricing have focused on monopolies characterized by a stable multiple-good product set. In a regulated industry characterized by technological change in the form of new products and services (such as telecommunications), optimal pricing decisions may also reflect intertemporal market and production factors. In this paper, two such intertemporal factors are modeled: learning curve effects on the firm's cost function, and customer demonstration effects on the demand side of the market. Inclusion of these factors leads to an intertemporal pricing rule that may conflict with the standard regulatory practice whereby each product or service must recoup its own resource costs period by period. Our results suggest that this regulatory practice can result in efficiency losses, since it results in a rate of technological diffusion that is too low.     

Augmented serial rules for an excludable public good

Summary. We present a new class of rules named augmented serial rules for the provision of an excludable public good. First, we characterize this class by the four axioms of strategy-proofness, envy-freeness, access independence, and nonbossiness. Second, we identify two important subclasses by imposing an additional axiom: (i) anonymous augmented serial rules by anonymity, and (ii) Moulins serial rule by individual rationality.Received: 31 December 2002, Revised: 9 June 2004, JEL Classification Numbers: D71, D82, H41.This paper is a substantial revision of Serial cost sharing with simple games. I would like to thank Hervé Moulin, Yoshikatsu Tatamitani, an associate editor, and three anonymous referees for helpful suggestions and detailed comments. This research was partially supported by the Ministry of Education, Culture, Sports, Science, and Technology in Japan (Grant-in-Aid for 21st Century COE Program Microstructure and Mechanism Design in Financial Markets).     

The Regulation of Private Schools Serving Low-Income Families in Andhra Pradesh,India

This paper sets out some findings of a research project carried out in private unaided schools in low-income areas of Hyderabad, India. The part of the research project documented here was designed to examine the question: Is the regulatory regime conducive to entrepreneurial action and market discovery with particular reference to the low-income schools in Hyderabad. This paper is narrowly focused, setting out the results of pattern matching empirical data with the Austrian economic concepts of entrepreneurship, rivalry, and market discovery. The research discovered that two regulatory regimes exist, one that is set out on paper in the Education Acts and associated rules, and another that operates in practice. That is, there is a combination of regulations on paper and regulations existing in an extra-legal sector. Generally it was found that the regulations in practice are consistent with market principles. Conversely the regulations set out on paper are not conducive to entrepreneurial innovation and market discovery. Recommendations for potential policy initiatives include the possibility of legitimising the extra-legal sector by introducing self-regulation possibly via self-evaluation systems for the private unaided schools.     

Friedrich Hayek's Theory of Spontaneous Order: Two Problems

The paper finds Hayek's basic building block, the natural/artificialcontrast, to be illuminating. But the manner in which Hayek classifiesentities according to the contrast generates two major problemsin his socio-economic theory. First, Hayek's concept designconfuses the technical construction of, e.g., a chair with thedeliberate organization of division of labor within the firm.Second, Hayek's notion spontaneous order fails to note twokinds of natural order — firms and markets.     

Measuring shock persistence in Austrian unemployment: A note

Zusammenfassung Die Arbeit untersucht unter Verwendung von Techniken der Zeitreihenanalyse Persistenzeigenschaften der Arbeitslosenrate in Österreich. Dabei zeigt sich, daß Schocks in der Arbeitslosenrate langfristig erhalten bleiben, sodaß — lose formuliert — gute und schlechte Arbeitsmarktgleichgewichte in Abhängigkeit von der Geschichte des Prozesses existieren dürften.

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We would like to thank A. Jäger and R. Kunst for helpful comments.     

Measuring the severity of unemployment

A social-welfare (illfare) function framework is applied to compare two demographic groups as to the severity of their unemployment experience. This is based on the assumption that for each individual the disutility of unemployment is an increasing and convex function of spell length. The very concept of spell length and its distribution, however, is not unambiguous. In contrast to previous literature which focuses exclusively on the interrupted spell length in a stock of unemployed, we stress the usefulness of the concept of complete spell length in a cohort of unemployed. We establish an equivalence relationship between second-degree dominance in the cohort and first-degree dominance in the stock. For specific illfare functions the disutilityU(x) when applied to the cohort and the disutilityU(x) when applied to the stock will produce the same value of aggregate welfare (illfare).     

Estimation of the value of the marginal product of emission in a country where emissions output is regulated — an empirical study

Emissions resulting from the production process can be characterized as use of the elimination and disposal services of the ecological system. Hence, they are use of natural resources and thus an input to production. The present paper discusses an approach to evaluate the returns of these kind of services as a production factor.First, four main types of industrial emission are chosen —SO ₂,CO ₂,NO _xandparticulate matter — and integrated in a Cobb-Douglas production function. With this approach, the production elasticities and the marginal product of these types of emission can be estimated.Based on these results and assuming that marginal product equals price, the demand curve for emission is estimated. With this demand curve the consequences of different kinds of environmental policy are considered. Under further assumptions of optimal behaviour it can be shown that the demand curve for emission is equal to the curve of marginal costs of avoidance (MCA). Thus, the estimates of the demand curves can be considered as estimates of the MCA-curves. Furthermore the price elasticities of these four types of emission are estimated with this approach. The method used in the paper is suggested for calibration of CGE models.     

Exchange rates and perfect competition

The purpose of this note is to demonstrate that the commonly held belief that incomplete and perverse pass-through are incompatible with perfect competition is wrong! To this end, we consider two types of firms both operating in two countries. The demand sides of the markets of the two countries are separated and each type of firm produces its good in one of these countries. We study the effect of an exchange-rate change on the competitive equilibrium prices in each country. When producing for the foreign market causes the same costs as producing for the home market then the law of one price holds and an exchange-rate change is completely offset by price changes. Furthermore, when cost functions neither exhibit economies nor diseconomies of scope between producing for the home and producing for the foreign market then prices move in the right directions in response to an exchange-rate change. However, with general cost structures, even in this simple perfectly competitive model, perverse directions of price changes can result from an exchange-rate change.     

From Democratic Dualism to Political Realism: Transforming the Constitution

In the latest volume of Bruce Ackerman's We the People, he sets out to demonstrate that the Constitution has been legitimately amended by unconventional means, or by mechanisms other than the Article V amendment process. In making this argument, Ackerman offers a rich constitutional history of the Founding period, the Reconstruction era, and the New Deal. He successfully demonstrates that unconventional methods were used to alter accepted constitutional meaning and government practices during these periods. Unfortunately, Ackerman does not provide an adequate theory that can demonstrate the legal significance of these historical events for future constitutional practice. Moreover, his effort to legitimate the New Deal's constitutional revolution undermines his own normative theory of dualist democracy and seems to embrace a standard Legal Realist analysis that the Constitution simply is whatever powerful government officials declare it to mean.     

Fully endogenous mechanism selection on finite outcome sets

Summary This paper defines a choice process over social outcomes in which agents choose the institutional rules ormechanisms themselves without outside interference. Truly endogenizing the mechanism selection process in this way, however, involves facing an infinite regress problem in which outcomes are chosen by games which are themselves chosen by games, ad infinitum. This paper allows the possibility of such an infinite regress which we callfully endogenous mechanism selection.We introduce the notion ofFree Choice which restricts the class of mechanisms in the regress to those which prevent agents from being locked in to an equilibrium outcome by the actions of others. Under this condition, the infinite regress is shown to get truncated with the number of selection iterations endogenously determined. It turns out that the outcomes resulting from a Free Choice-constrained regress are (Weakly) Pareto optimal; in particular, these outcomes solve a weighted Rawlsian Maxmin criterion. We also show that these outcomes are invariant to the equilibrium concept used to evaluate games in the regress.This paper is based on the author's dissertation from the University of Minnesota (November, 1989).I am very grateful for the guidance, advice, and encouragement from my advisor, Marcel K. Richter, and for the many helpful suggestions from David Levine. I have also benefited from conversations with Nabil Al-Najjar, Gerhard Glomm, Leonid Hurwicz, James Jordan, Ramon Marimon, Andrew McClennan, Ariel Rubinstein, and William Thomson.     

Stock market cycles and stock market development in Spain

In this paper we use Spanish stock market data to identify the bull and bear phases of the market and to analyze its characteristics during the period 1941-2002. We compare these characteristics with those of the US and of two other European countries (Germany and the UK). Our sample is divided in two subperiods in order to account for differences induced by the process of development undergone by Spanish capital markets in the late 1980s and early 1990s. We find that the Spanish stock market has become increasingly more similar to those of the more developed countries, although some differences still persist. Additionally, we show that concordance of the Spanish stock market with other developed markets has increased quite significantly.JEL Classification: C22, G15An earlier version of the paper circulated under the title Bulls and bears: lessons from some European countries. Comments from seminar participants at the Universidad de Navarra, at the IX Meeting of the Spanish Finance Association (Pamplona 2001) and at the Royal Econonomic Society Conference (Warwick 2002) are gratefully acknowledged. We are very grateful to J.M. Campa, G. Llorente and two anonymous referees for helpful comments and suggestions. We also thank D. Garcia and the Research Department of the Madrid Stock Exchange for generously providing the data of the Spanish case. Financial assistance from the Spanish Ministry of Science and Technology (SEC2002-01839) is gratefully acknowledged. The usual disclaimer applies.