Understanding the culture of markets: A reflection

This essay examines Virgil Storr’s (2013) Understanding the Culture of Markets, particularly the relationship between cultures and constitutions and the particulars of the ideal-typical ‘spirit’ of capitalism. Culture cannot be viewed as a constitution, I argue, because of fundamental differences between the two types of guidance to conduct, both for the actors within them and the researchers studying them. I also consider possibly conflicting interpretations of the idea of the animating spirit(s) of a market in the context of Storr’s example of the economic culture of the Bahamas.     

The battle for the essence of entrepreneurship

Nicolai Foss and Peter Klein have penned a most remarkable book on the theory of the firm. They offer a rich analysis of the economic organization through the lenses of various approaches including Austrian economics and neo-institutional economics. Their work is a welcome addition to the field of entrepreneurship studies, as it focuses on the role of entrepreneurship within established organizations. While I embrace most of the authors’ conclusions, I disagree with a central piece of their analysis: The rejection of the Kirznerian framework. In establishing judgment as the fundamental explanans of the theory of entrepreneurship, Foss and Klein introduce the bias of seeing entrepreneurship as allocating resources in firms. Moreover, introducing the process of judgment does not offer new insights that cannot be obtained through Kirznerian discovery analysis. Fundamentally, the essence of entrepreneurship is at stake. And it is not a debate about semantics. It is my contention that Israel Kirzner offers a more fundamental theory of entrepreneurship — one that can be applied within and beyond the realm of the firm, and that helps us explain social change, market processes, development, and growth.     

Getting beyond neo-institutionalism: Virgil Storr’s culture of markets

Storr is a free trader in ideas, bringing back into economics meaning, long banished by behaviorist dogma. His elegant little book, though, is too kind to neo-institutionalists. The followers of Douglass North, repeating without much thought over and over, “Institutions matter,” mean to say that “Institutions are constraints like budget lines. They are not human conversations.” Since the conversational character of markets is Storr’s main point, he would do better to make common cause with “humanomics,” that is, an economics keeping its mathematics and statistics but entering, too, the human conversation since the Epic of Gilgamesh.     

Is market liberalism adaptive? Rethinking F. A. Hayek on moral evolution

Hayek’s social theory of evolution suggests that market liberal morality is adaptive for social groups. He justified the evolutionary superiority of market liberalism by asserting that groups operating under a market liberal morality would have a higher capacity to expand and reproduce than groups with alternative tribal moralities. Thus, market liberal groups would be favoured through cultural and genetic group selection. But in fact, market liberal morality reveals maladaptive tendencies and remains insufficiently powerful to create adaptive social groups. Hayek’s dismissal of moral tribalism in favour of market liberal morality is found to underestimate the importance of tribal goals in the evolutionary system.     

Heteroscedasticity of deviations in market bubble moments – how the goods and bads lead to the ugly

We conjecture that market bubbles may be the results of the interplay of Goods and Bads (toxic products) which develop through three interlocking moments – herding, swarming and stampeding, with deviations marked by heteroscedasticity. We use our stylized model of financial predation, the Consolidated Model of Financial Predation, and data we have accumulated through in-the-field eight-year research and the study of 30 years of U.S. market history in order to explore the foundations of market crises. We find that blind trust (or the positivity bias) and of the fear to miss out on an opportunity to enter/exit a market impacts the investors’ decisions to invest or retract. We show how markets are driven towards a make-or-break predatory dynamic that creates winners and losers due in part to weak regulations and identify a constant k that permeates market behaviours.     

Macroprudential consolidation policy in interbank networks

Can consolidation policy be made consistent with macro-prudential supervision? In this study, we seek to provide new insights on this key-question using a network approach. We study how the resilience of a banking network evolves as we shock an initially homogenous competitive market with a sequence of M&A activities that significantly alter the topology of the network. We study how different M&A treatments impact the structural vulnerabilities that can propagate through the system and we show that the severity of contagion and default dynamics depends on the chosen treatment. The desirability of alternative competitive settings (such as a hub-centered market or a more concentrated and yet symmetric market) are assessed against a homogenous benchmark case. We show that the choice depends crucially on the size of the interbank market and the level of bank capitalization. The existence of a large highly connected hub is beneficial in a capitalized network with a well-developed interbank market, but it can significantly weaken the system’s resilience in a poorly capitalized market. Antitrust and competition authorities should adopt a state-contingent approach to M&A activities according to the market conditions in which banks operate.     

Entrepreneurship: Catallactic and constitutional perspectives

The most important distinction between Virginia political economy (VPE) and the other branches of public choice scholarship is a close affinity of the former to Austrian economics. Contributions in both the Virginia and the Vienna (Austrian) traditions have emphasized this connection and highlighted the analytical and ideological interdependencies of the two schools. This paper argues that an application of the Austrian theory of political entrepreneurship to the VPE framework can provide important insights regarding the direction of political change. Kirzner’s theory of entrepreneurship explains that coordination of individual action is possible where price signals provide information. When price signals are absent the entrepreneurial process breaks down. There is common ground between Kirznerian entrepreneurship and Buchanan’s creative action. Scholars at the intersection of the Virginia and the Vienna traditions can use this common ground to make pattern predictions regarding the direction of political change.     

The place of Austrian economics in contemporary entrepreneurship research

We review the place of Austrian economics in contemporary entrepreneurship and management research, focusing on the contributions of Israel Kirzner. We show that Kirzner’s central concept of entrepreneurial discovery has been vastly influential in theoretical and applied work on entrepreneurship, even though Kirzner’s larger research program has not been well understood. We also describe and assess a number of methodological, ontological, and cognitive critiques of the opportunity-discovery approach and review the most important alternatives, including the judgment-based view associated with Knight (1921) and more recent contributors. We conclude that the entrepreneurship and management literatures provide a useful example of how Austrian economics—Kirznerian economics in particular—can play an important role in shaping mainstream discussions, debates, and research programs in the social sciences.     

MEASURING THE ECONOMIC VALUE OF VOLUNTEER WORK GLOBALLY: CONCEPTS,ESTIMATES, AND A ROADMAP TO THE FUTURE

ABSTRACT: This article explores alternative approaches for measuring the economic value of volunteer work, develops a methodology for producing global estimates of this value using existing data sources, and identifies a new data source that promises to yield significantly improved data on which to base such estimates in the future at both the global and national levels. Both volunteering through organizations and directly for individuals are considered. Different approaches to valuation, including the replacement cost, opportunity cost, and social benefits approaches and both observed and reported market proxies, are examined. Based on a number of criteria, the replacement cost method using observed market wages is recommended. Using this method, the article estimates that ‘volunteerland,’ if it were its own country, would have the second largest adult population of any country in the world, and would be the world's seventh largest economy. The article concludes by discussing a new International Labour Organization Manual on the Measurement of Volunteer Work that adopts the basic method for defining and valuing volunteer work outlined here and promises to generate a much more robust and coherent body of data on volunteer work than has ever been available both globally and nationally.     

Information and transparency in wholesale electricity markets: evidence from Alberta

We examine the role of information transparency in Alberta’s wholesale electricity market. Using data on firms’ bidding behavior, we analyze whether firms utilize information revealed in near real-time through the Historical Trading Report (HTR), which is released 10 min after each hour and contains a complete (de-identified) list of every firms’ bids into the wholesale market from the previous hour. We demonstrate that firms are often able to identify the offers of specific rivals by offer patterns adopted by those firms. For one of these firms, these patterns are associated with higher offer prices. This is consistent with allegations by Alberta’s Market Surveillance Administrator that firms may be utilizing unique bidding patterns to reveal their identities to their rivals to elevate market prices. We show that certain firms respond to rival offer changes with a lag consistent with responding to information revealed through the HTR, and that they respond differently to different firms, suggesting that they are able to infer identification.     

Hotelling’s webshop

We extend Hotelling’s model of spatial competition by adding an outside good, provided by a webshop. Unlike the commonly used reservation price, the price of the webshop is endogenous. We establish that a Nash equilibrium exists if the outside good is not too different from the goods sold by the bricks-and-mortar shops. Equilibrium prices positively depend on transport costs, which would not be the case for an exogenous reservation price. If the webshop serves an alternative market as well, the price of that market is partly imported into the local market. The bricks-and-mortar shops compete only with the the webshop. The lower the webshop’s delivery costs are relative to the transport cost parameter, the wider the feasible range for locations of the bricks-and-mortar shops.     

Commodity market stabilisation and ‘North-South’ income transfers: An empirical investigation

Commodity stabilisation agreements have often been suggested as a means of stabilising producers' revenues and redistrubuting productive resources to less developed economies (from ‘North’ to ‘South’). But no empirical estimates of how much may be expected from such agreements, nor of what they would cost to operate, have appeared. This paper examines, in the context of one market, how far prices can be stabilised by buffer stock interventions. the costs of that stabilisation, and whether any redistribution would be achieved. We find pure stabilisation leads to transfers away from the South, and that supply restrictions which force redistribution are extremely expensive. However, it is relatively cheap to protect producers on the South against the uncertainty of future revenues.     

Issuing bonds,shares or staying private? Determinants of going public in an emerging economy

The Warsaw Stock Exchange is one of Europe’s largest exchanges by the number of initial public offerings. In this study, we use a large data-set to explore firms’ decisions to issue equity on the main or alternative market, and debt on the bond market. We observe that, in general, larger, more profitable firms are more likely to go public, although in contrast to developed economies these firms tend to be younger. Moreover, we find that current market valuation positively affects the decision to go public on the main market, and we establish that highly leveraged companies are more likely to issue either shares on the alternative market or bonds. At the same time, however, we observe that firms issuing shares on the alternative market are most likely to manipulate their profitability prior to going public.     

The price of the market: pursuit of self-interest as annihilation of self

The paper criticizes the view that the market provides for the well-being of individuals by offering the widest field for the pursuit of self-interest. It argues, first, that this view is disastrously mistaken because it misunderstands what individuals are, but, second, that proponents of this view??notably Adam Smith in The Wealth of Nations and the neoclassical economists??actually show the opposite of what they claim: that is, they show that pursuit of self-interest in the market is the annihilation of self. Thus, the proponents of the view show that it is untenable and at least point toward the terms necessary for a more adequate alternative. The paper then asks whether the market must be like this, first, through considering a line of thought on the possibility of a non-predatory market that runs from Aristotle, through the Italian Civil Happiness school, to modern socialist writers. Second, it offers an alternative view of the individual, according to which individuality is in part constituted through substantial relations with other individuals, a version of which can be found in Smith??s Theory of Moral Sentiments and Lectures on Jurisprudence. On the basis of these two discussions, a market order that sustains rather than destroys individuals can be imagined. However, this order would have lost many central characteristics of the capitalist market order.     

Property rights,entrepreneurship and coordination

The notion of plan coordination enjoys a central place in the analysis of institutions and competitive market processes. The conventional wisdom is that institutions and policies vary in the extent to which they promote competition and how quickly and completely they bring individuals’ plans into closer coordination with one another. Kirzner has provided the most fully elaborated statement on the use of coordination as a positive analytical device for explaining market dynamics and as a normative criterion for evaluating economic policies. We identify the core propositions in his analysis that elucidate how economic coordination depends upon that most fundamental of market institutions – the system of private property rights. We also probe into Kirzner's claims about inherent limitations in our ability to compare the coordinative potential of alternative property rights systems. We unpack the consequences of these core propositions using the economic theory of property rights. We also examine Kirzner's assertion that dynamic competition – including Schumpeterian innovation – is necessarily coordinative in its market effects. We find that his argument rests on the implicit assumption that property rights remain constant during the process of market adjustment. We provide a case study of the advent of commercial aviation as a potential counterexample to his claims.     

The profitability of financial analysts’ recommendations: evidence from an emerging market

This article aims at measuring recommendation value on the Tunisian market and uses a hand-collected database of 6646 recommendations (2005–2009). We apply the methodology of calendar–time portfolio analysis. This consists of simulating a portfolio that would include stocks depending on the recommendations issued by financial analysts. In order to measure abnormal (or ‘excess’) returns, the raw return of the portfolio is then compared to the evolution of the stock index and to the prediction of the Capital Asset-Pricing Model. Some of the portfolios we build earn a positive significant excess risk-adjusted return of 1.19% per month. Beyond the results that are in line with the literature, we provide two original results. First, ‘sell’ signals are informative, whereas ‘buy’ signals are not. We suggest that it is related to large (small) firms having more ‘buy’ (‘sell’) recommendations and to the direction of the market trend over the period. Second, the fact that recommendation levels have more impact than recommendation changes is explained by the specific informational context on that market, which is that recommendations are systematically disclosed each month, whereas on other markets, recommendations are produced only when the analyst has some new information to disclose.     

Estimating the effect of monopsony power on elasticity estimates

Love and Shumway (1994) developed a nonparametric deterministic test for monopsony market power using a normalized quadratic restricted cost function with one input for which the firm has potential market power. This research examines monopsony power using Lau’s Hessian identity relationships based on the empirical properties of duality theory. Lau’s Hessian identity shows the Hessian matrices are equal under pure competition using an unrestricted profit function, restricted profit function and production function approach. We examine how market power changes in the monopsony case using Lau’s Hessian identity relationships. Results show that there is a difference between the unrestricted and restricted profit function results under monopsony power. The important implication is that if an input or output is potentially in a market subject to market power, that input or output should be modelled as a fixed input or output to correctly recover the underlying technology.     

Research collaboration and behavioural additionality: A New Zealand case study

Generating the greatest benefit from public research programmes is a major aim for industry managers and policy administrators alike. However, how to measure whether benefit has occurred createsf a considerable dilemma for managers and policy-makers. One approach centres upon the concept of ‘additionality’ or ‘what difference the policy has made’. Traditional ‘input additionality’ measures of subsequent research and development activity, for example, neither incorporate all impacts nor give adequate signals about adequate signals about aspects of ‘output additionality’, such as the impact on increased competitiveness at the level of the firm, or national competitiveness, the ultimate goal for the majority of research policies. An intermediate form of impact, ‘behavioural additionality’, centred upon changes in a firm's subsequent managerial behaviour, is considered to provide an alternative, yet compelling perspective on the impact of public support on the conduct of research. This study outlines empirical eveidence found for the various forms of additionality in a New Zealand collaborative research programme. It discusses how managers and policy administrators can exploit the occrrence of behavioural additionality to maximize the impact of a research policy, on the basis that modified behaviour is likely to strengthen a policy' latent abilityto influence the creation of output additionality. In such circumstances, the study suggests that managers and policy-makers should be identifying those interventions that lead to sustained improvements in mangerial practice, and in competitiveness, and should be managing their diffusion within firms and throughout industries.     

Vision,Value, and Pluralism: A Comment on Analytical Political Economy

The choice of value theory reflects one’s vision of how markets function within a capitalist market economy. This choice is crucial for understanding how pluralism will play a part in prompting a paradigm shift within the discipline of economics. What is lacking in recent discussions of pluralism is how the various theories of value and distribution relate to each other. Uniting heterodox economists in this way will support the development of criteria for teaching and research, both of which facilitate a paradigm shift. A consensus would avoid the methodological issues associated with analytical political economy which advocates mathematical modeling and applications for unifying the schools of thought.

This article suggests a way to relate the theories of value and distribution, as reflective of the differences in vision of how markets function within a capitalist market economy and discusses a few of the challenges for creating a consensus.