Knowledge and economic behaviour. A constructivist approach

The knowledge of human knowledge claims a place of its own in economics. Beyond the walls of our discipline, spectacular progress is taking place in the field of empirical research into human knowledge -the so-called “cognitive sciences”. In the light of such advances, the old and new classicals' axiom that nothing scientific can be said beyond the axioms of substantive rationality now looks very much like the protective belt of a degenerating programme. On the other hand, criticisms and alternative programmes will hardly be effective so long as their arguments are purely negative or are drawn from armchair introspection. In the present study I wish to outline a pattern of human knowledge emerging from cognitive research that may be called “constructivist”, and to point out the restrictions it sets on economic analysis. It is also my argument that such a pattern is consistent with the present non- or post-Walrasian trends in economic theory, and that it may provide them with firmer cognitive foundations.     

Economic Growth and (Re-)Distributive Policies in a Non-cooperative World

Many models show that redistribution is bad for growth. This paper argues that in a non-cooperative world optimizing, redistributing (“left-wing”) governments mimic non-redistributing (“right-wing”) policies for fear of capital loss if capital markets become highly integrated and the countries are technologically similar. “Left-right” competition leads to more redistribution and lower GDP growth than “left-left” competition. Efficiency differences allow for higher GDP growth and more redistribution than one's opponent. Irrespective of efficiency differences, however, “left-wing” governments have higher GDP growth when competing with other “left-wing” governments. The results may explain why one observes a positive correlation between redistribution and growth across countries, and why capital inflows and current account deficits may be good for relatively high growth.     

The time structure of production in the US, 2002–2009

The US time structure of production during the 2002 through 2009 business cycle is characterized empirically using industry-level input-output data. An industry’s total industry output requirement (TIOR) is proposed as a metric for “roundaboutness”. I find that the time structure of production lengthened following the Federal Reserve’s 2002 expansionary deviation from the Taylor rule and then contracted during the Great Recession. Value added growth in the most-roundabout of US industries accelerated relative to that of the least-roundabout industries. Heading into the Great Recession, value-added growth in the most-roundabout industries contracted early and turned negative in 2007 while value-added growth in the least-roundabout industries remained positive until 2009. The stylized facts of the time structure of production are consistent with Austrian Business Cycle Theory.     

On the growth and welfare effects of monopolistic distortions

The most fundamental proposition about growth and competition is that there is a tradeoff between static welfare and long-term growth. This paper reconsiders this basic proposition in an expanding variety endogenous growth model with competitive markets for “old” innovative products and for a traditional good. We shed light on some implications of monopolistic distortions which tend to be ignored by standard models. First, no growth may be better than some growth, since modest positive growth potentially requires sizeable static welfare losses. Second, the economy may converge to a steady state with zero growth, even though a locally saddle-point stable steady state with positive growth exists if the initial share of “cheap” competitive markets is sufficiently high, as this implies a relatively low demand for “expensive” innovative goods. Third, such a “no-growth trap” may happen in a world economy made up of several countries engaged in free trade with each other. The policy implications are that growth-enhancing policies may be misguided and that quick deregulation as well as quick trade liberalization can lead to stagnation in the long term.      

Does performance explain mutual fund flows in small markets? The case of Portugal

We study the performance reaction of investors in a specific small market context. Our sample includes all Portuguese open-end equity funds that invested in stocks issued by Portuguese companies in the period December 1993–June 2009. Instead of the convex flow–performance relationship usually documented for the US, we find an absence of reaction to past performance. We find no evidence to support the “smart money effect”, given that capital flows do not favour next period performance winners. We also document persistence of fund flows. Our results are consistent with the idea that large financial intermediaries have the capacity “to drive” their customers to funds with larger fees.     

Firms’ Compliance to Environmental Regulation: Is There Really a Paradox?

It has often been claimed that firms’ compliance to environmental regulations is higher than predicted by standard theory, a result labeled the “Harrington paradox” in the literature. Enforcement data from Norway presented here appears, at first glance, to confirm this “stylized fact”: firms are inspected less than once a year, detected violators are seldom fined, but still, serious violations seem relatively rare. However, at a closer look, the pattern seems less paradoxical: enforcement of minor violations is lax, but such violations do flourish; serious violations, on the other hand, are subject to credible threats of harsh punishment, and such violations are more uncommon. This seems quite consistent with predictions from standard theory. We argue that the empirical existence of the Harrington paradox is not well documented in the international literature. The claim that firms’ compliance with environmental regulations is generally higher than predicted by standard theory should thus be regarded as a hypothesis rather than an established fact.     

When economic growth is less than exponential

This paper argues that growth theory needs a more general notion of “regularity” than that of exponential growth. We suggest that paths along which the rate of decline of the growth rate is proportional to the growth rate itself deserve attention. This opens up for considering a richer set of parameter combinations than in standard growth models. Moreover, it avoids the usual oversimplistic dichotomy of either exponential growth or stagnation. Allowing zero population growth in three different growth models (the Jones R&D-based model, a learning-by-doing model, and an embodied technical change model) serves as illustration that a continuum of “regular” growth processes fill the whole range between exponential growth and complete stagnation.     

Endogenous structural change and crisis in a multiple time-scales growth model

The slow and endogenous twist of economic macro-structure makes up an important evolutionary feature of capitalist economies, and may be at the root of structural crisis. In this line, a Goodwinian growth model with increasing returns and profit-sharing that tries to picture a simple scenario of the seventies crisis is considered. It is shown that the exhaustion of the Kaldor-Verdoorn “productivity law” can entail, in a nonlinear framework, a “catastrophic” bifurcation from a “high” to a “low” growth path. Slow/fast dynamical systems then allow one to formalize a multiple time-scales dynamics where the growth path is shaped by the structural framework in which it takes place, but has also a long -un feedback. Structural change and crisis appear as long term and endogenous outcomes.     

Rationality,constitutions, and the ethics of rules

It seems clear that individuals stand to mutually benefit, in a wide variety of situations, from structuring their interactions in terms of constitutional practices. But a commitment to treat the rules defining such practices as setting real constraints on choice—a commitment to what could be characterized as an “ethics of rules”—is hard to reconcile with the standard, consequentialist theory of rational choice, which requires, in effect, that individuals regard any rule as providing no more than a “maxim” for choice. Such a theory of rational choice, then, constrains individuals to settle for a second best outcome in which choice is aligned with practice rules by means of strategies of precommitment and threats. The outcome is second best because such methods yield only partial alignment, and involve the expenditure of scarce resources, as well as a sacrifice of flexibility and freedom. To say this, however, is to identify the corresponding theory of rational choice as havingconsequentially unacceptable implications. A modified theory of choice is presented, which is still consequentially oriented, but which assesses consequences in a more holistic manner. It is then argued that this modified theory can provide a rational choice grounding for the needed “ethics of rules.” The author would like to thank three anonymous referees for their very helpful comments and suggestions.     

FDI and environmental regulation: pollution haven or a race to the top?

Increasing foreign direct investment (FDI) flows accompanied with globalization have raised the concern of a “race to the bottom” phenomenon in environmental protection. This is because footloose investors of “dirty” industries tend to relocate to “pollution havens” of the developing world. However when pollutant is transboundary (as in the case of greenhouse gases), the source country’s incentive to relocate and the recipient country’s willingness to host such industries are not straightforward. This article studies the relationship between FDI and environmental regulation using a North–South market share game model in a two-country setting, when pollution is transboundary. Contrary to the pollution haven hypothesis, our model shows that if market sizes of the two countries are small, FDI will raise the emission standard of the host country, resulting in a “race-to-the-top” phenomenon; but if market sizes are large enough, FDI will not change the emission standard of the South (from its laxest form), a finding that is consistent with the “regulatory chill” argument. Equilibrium FDI is contingent on the fixed cost of FDI, as the traditional proximity–concentration tradeoff theory predicts.     

Embedded economics: The irrelevance of Christian fictive domestic economy

When reading the New Testament, the modern historically-minded interpreter would do well to keep in view that early Christian traditions emerged in the advanced agrarian societies of the first-century, eastern Mediterranean. In these societies, kinship and political institutions, roles, and norms determined economic and religious institutional behavior. That is, religious and economic structures were always embedded in either the kin group or the political group. Hence, to understand the “economic” assumptions and behaviors described in the New Testament, the interpreter must develop scenarios that fit the document’s historical and social context; the alternative is a necessarily anachronistic and ethnocentric reading. This essay articulates some basic perspectives entailed in historically and culturally sensitive interpretations of Old Testament and New Testament passages dealing with “economics”. The methodology employed here is a broadly based “social scientific criticism,” focusing on reading theory and cultural anthropology.     

What is the Best Distribution for Pollution Abatement Efforts? Information for Optimizing the WFD Programs of Measures

The Water Framework Directive (WFD) has mobilized economic theory in order to encourage E.U. Member States to reach desirable environmental water pollution levels by conciliating economic and ecological interests. For this purpose, a stringent standard (“good status”) has been set. Nevertheless, it will be possible to relax this standard if it appears that total abatement costs required for reaching this “good status” exceed expected environmental benefits. This ambitious policy updates the issue of the abatement costs and environmental benefits assessment. Concerning the costs, a full discrimination of the abatement effort minimizes the total cost when the impact of polluters changes spatially, while a uniform effort can reach a pollution target in flexible ways. In this case, the increase of the degree of discrimination of the abatement effort is required only if it generates significant positive economies. Our theoretical and empirical results have shown that the discrimination advantage becomes insignificant for either very demanding or very little demanding ecological standards and varies according to the polluters’ profile. In the case of “intermediate” standards, efficiency gains become negligible with a restricted number of effort “levels”.     

Environmental tax policy in a model of growth cycles

Summary. The purpose of this paper is to consider environmental taxation which would control emissions of firms in a model of growth cycles. In the model presented below, the economy may experience two phases of growth and environmental quality: “the no-innovation growth regime” and “the innovation-led growth regime”. Aggregate capital and environmental quality remain constant in the no-innovation growth regime, while they perpetually increase in the innovation-led growth regime. The paper shows that the tax plays a key role in determining whether the economy stably converges to one of the two regimes or fluctuates permanently between them. It also shows that there is a critical level of the tax and that the economy obtains higher growth rates of capital and environmental quality by raising (or reducing) the tax if the initial tax is below (or above) the critical level. Received: April 2, 2001; revised version: March 21, 2002 RID="*" ID="*" This research reported here was conducted within the research project “Project on Intergenerational Equity” at Institute of Economic Research, Hitotsubashi University. I am deeply grateful to an anonymous referee for his or her insightful comments, which greatly improved the paper. I also thank Hiroshi Honda, Yasuo Maeda, Yuji Nakayama, and participants in workshops at Hitotsubashi University, Kyoto University, Nagoya University, Osaka University, University of Tsukuba, Yokohama National University, and University of Tokyo for their valuable comments and suggestions. Any remaining errors are mine.     

Credence Goods,Efficient Labelling Policies,and Regulatory Enforcement

We analyse the optimality of information revelation of hidden attributes of “credence goods” via alternative labelling procedures. When consumers are heterogeneous in their willingness to pay for the hidden attribute, producers can either self-label their products, or have them certified by a third party. The government can impose self or third party labelling requirements on either the “green” or the “brown” producers. Our benchmark model develops a condition that links the optimal imposition of third party labelling to the relative market share of each type of the good under complete information. We extend our analysis to incorporate asymmetric information and cheating by the producers. When corrupt producers can affix spurious labels, the government needs to supplement the labelling policy with costly monitoring activities. We find that mandatory self-labelling schemes generally dominate mandatory third party labelling, unless the “market share effect” greatly exceeds the “incentive-to-cheat effect”.      

Cheap home goods and persistent inequality

There exists a large literature which shows that public education is favorable for growth because it increases the level of human capital and at the same time it tends to produce a more even income distribution. More egalitarian societies are also associated with less social conflicts, and individuals have a lower tendency to report themselves happy when inequality is high. Therefore, it is important to study the reasons why the elite opposes the development of a strong public education system. It might be that education is related to social status and a strong public education system might threaten the elite’s political power. We show that one aspect of social status is the specialization of skilled workers in high-paid jobs and the abundance of unskilled workers in the production of cheap “home goods” in the market, such as painting and cleaning a house, babysitting, and/or cooking. We emphasize the role of general equilibrium price adjustments to show that depending on the level of inequality, the elite might prefer an economy with a positive and “high” cost of education than an economy where skills are freely provided. We show that this result goes through even if the skilled wage is not directly affected by the ratio of skilled to unskilled workers. We also provide empirical evidence consistent with our theory.     

Agreeing on generalized Darwinism: a response to Geoffrey Hodgson and Thorbj?rn Knudsen

I thank Geoffrey Hodgson and Thorbj?rn Knudsen for their thought-provoking response to my latest generalization of Darwinism, and welcome their proposal to cooperate, after many years of our independent searches. I agree with them that our searches contain more similarities than both they and I had previously seen, but consider our remaining differences—especially in the terms employed and in the definitions of the terms we both employ, including “information,” “instructions,” “programs,” and “Lamarckism”—more important than they do. Their response also exaggerates or distorts some of my arguments. All this needs to be clarified before our cooperation can start.     

Theory,history, and the great recession

This paper honors Don Lavoie’s work on the relationship between theory and history in Austrian economics by using the current recession as an example of many of the ideas found in his paper on the “Interpretive Dimension of Economics.” More specifically, I start from the premise that all history comes from theory because it is theory that guides what we count as “facts” or “data.” From Menger onward, a core element of the Austrian approach has been to see the purpose of theory as rendering human action and its unintended consequences intelligible. We do that by telling historical narratives where theory is the logical glue that holds the story together. I look at the Austrian story of the Great Recession in light of these ideas. What the Great Recession demonstrates is that the core theoretical elements of Austrian business cycle theory are narrower than we might think, but that consciously recognizing the contingent elements gives the theory additional flexibility to explain more of various real-world crises when augmented by additional ideal typifications properly used.     

FDI and growth in transition economies: Does the mode of transition make a difference?

The countries of Central and Eastern Europe are a unique group of countries. In the process of transformation to market economies, some of them adopted the “shock therapy” while others the “gradualism” mode. Foreign Direct Investment (FDI) plays an important role in economic growth through the addition of physical capital, technological know-how, management skill and marketing network. This paper empirically demonstrates that the mode of transformation definitely affects the effectiveness of FDI in promoting growth. (JEL: P3, P33)