A simple note on herd behaviour

In his ‘Simple model of herd behaviour’, (Banerjee A (1992) A simple model of herd behaviour. Q J Econ CVII:797–817) shows that—in a sequential game—if the first two players have chosen the same action, player 3 and all subsequent players will ignore his/her own information and start a herd, an irreversible one. In this paper, we analyse the role played by the tie-breaking assumptions in reaching the equilibrium. We show that: players’ strategies are parameter dependent—an incorrect herd may be reversed; a correct herd is irreversible.

Social Market Economy: origins,meanings and interpretations

This paper investigates various possible meanings of ‘Social Market Economy’—60 years after its political initiation in Germany. We focus on the variety of intellectual sources that influenced the formation and interpretation of the concept in Germany during the first half of the last century. Our particular attention is on Müller-Armack’s definition of a rather dualistic concept of ‘social’ versus ‘market economy’ and the subtle differences it has with an original (Freiburg School) view of ordo-liberalism that lends itself more easily to a constitutional economics perspective.

The concept of choice: why and how innovative behaviour is not just stochastic

The goal of this paper is to highlight the importance of the concept of choice. To do so, a synopsis of the most important contributions to this topic—featuring an eclectic set of scholars across disciplines—is provided. As central to the argument, John von Neumann’s contributions, game theory and simulation techniques on von Neumann machines, are identified. Innovation (economic and theoretic) as the driving force behind human evolution seems to head for a new scientific paradigm based on von Neumann’s ideas.

Politics, selection and the public interest: Besley’s benevolent despot

This paper is an assessment of Besley’s attempt to orchestrate a rapprochement between public choice theory and conventional public economics—with its characteristic normative orientation towards public policy. In this paper, I first try to set the Besley enterprise in the context of earlier work—focussing on my own work with Buchanan (The Power to Tax and The Reason of Rules). I then direct attention to three aspects of the Besley enterprise: whether selecting for competence depends on having solved the motivation problem (either by incentive or selection means), how selection mechanisms might be supported institutionally and the possibility that selection processes might create incentives at the ‘dispositional’ level.

On the distribution of product price and quality

We investigate the structure of demand by focusing on the distribution of prices within narrowly-defined classes of goods. We observe considerable heterogeneity—products that are functionally similar but presumably of different ‘quality’ may sell at very different prices. We analyze distribution of prices for bottles of wine, used cars, houses in London and week-long holidays in Majorca, and observe in each case that the the resulting distribution is more skewed than the lognormal but less skewed than a Pareto distribution. We then present a theoretical model whereby products can distinguish themselves along multiple hedonic dimensions of ‘performance’, with these product attributes being random variables subject to multiplicative interactions. Variations of this model can reproduce a lognormal price distribution and a Pareto distribution as lower and upper bound benchmarks (respectively).

Building blocks in the economics of mandates

The paper constructs an asymmetric information model to investigate the efficiency and equity cases for government mandated benefits. A mandate can improve workers’ insurance, and may also redistribute in favour of more ‘deserving’ workers. The risk is that it may also reduce output. The more diverse are free market contracts—separating the various worker types—the more likely it is that such output effects will on balance serve to reduce welfare. It is shown that adverse effects can be reduced by restricting mandates to larger firms. An alternative to a mandate is direct government provision. We demonstrate that direct government provision has the advantage over mandates of preserving separations.

The evolution of IT innovations in Swedish organizations: a Darwinian critique of ‘Lamarckian’ institutional economics

Fundamental correspondence and analogies between the evolution of technological and biological innovations call for an ‘innovation Darwinian’, ‘universal Darwinian’ or ‘memetic’ approach to understanding technology innovation. Neo-institutional, in fact pseudo-Lamarckian evolutionary economic theory, represented by North, Nelson and Winter, Freeman and others, is criticized. Pseudo-Lamarckian (“by volition”) evolution is explained and analyzed on Darwinian grounds (as intentional and artificial selection), as is Schumpeter’s definitions of creative and imitative innovation. Data from a web survey among Swedish public and private organizations in 1999 are studied. Data show that Darwinian co-evolutionary interaction between producers and users or clients provide essential conditions and stronger influence on creative IT innovations than both ‘Lamarckian’ strategies and competition.

Separation of powers and the erosion of the ‘right to property’ in India

There has been a substantial erosion of the ‘right to property’ with respect to state takings in India, reflected in a progression of amendments to the Indian Constitution. Among other things, these amendments signify a violation of the doctrine of separation of powers. To study the implications of this on governance in relation to state takings, this paper juxtaposes a narration of events that describe the progressive erosion of the ‘right to property’ against a heuristic analytical structure that seeks to capture the costs of violating the doctrine of separation of powers. This analysis is then utilized to point to the social costs that characterize the state acquisitions (takings) regime in India.

Routines, genes and program-based behavior

It is argued that the ‘routines as genes’ and the ‘routines as skills’ analogies are misleading in several respects. Neither genes, nor skills, nor routines program behavior, if this is taken to involve, first, that they do so in a way that excludes conscious, deliberate choice and, second, that they determine behavior. On a proper understanding of ‘gene’, ‘skill’ and ‘routine’, conscious, deliberate choice is not ruled out when genes, skills or routines are operating. Once we shift from analogy to ontology, genes and skills appear as basic constituents of routines. Routines cannot exist unless specific genes and skills are in place in the individuals involved in the operation of the routines. Both genes and skills can be said to act unconsciously as ‘If ..., then ...’ programs. Even complete knowledge of genes and skills of the individuals involved would fall far short of predicting individual and firm behavior, however. What would still be missing, it is argued, is knowledge about organization, the specific ways in which genes, skills and individuals are connected with one another, and knowledge of context-dependence, what environmental stimuli activate specific chains of genes, skills and individuals.

Mises’ democracy–dictatorship equivalence theorem: A critique

Ludwig von Mises argues that public opinion, not the form of government, is the ultimate determinant of policy. The implication is that, holding public opinion constant, democracies and dictatorships will have the same policies—a result I call Mises’ Democracy–Dictatorship Equivalence Theorem. According to Mises, dictators have to comply with public opinion or else they will be overthrown. I argue that he seriously overestimates the power of revolution to discipline dictators. Mises was perceptive to note that, in practice, “dictatorially imposed” policies are often democratically sustainable, but he neglected several mechanisms—all more plausible than the threat of revolution—capable of explaining this fact.

Situational logic in social science inquiry: From economics to criminology

Karl R. Popper proposed that the method of explanation in economics, or situational logic, should become the general model for analyses across the social sciences. This article makes good Popper's proposal by extending situational logic to a social problem outside the traditional scope of economics: crime. Specifically, the discussion reviews models developed by economist Gary S. Becker and criminologist Ronald V. Clarke. Becker's ‘economic approach’ to crime incorporates essential features of situational logic. Clarke's ‘situational crime prevention’ offers an even better demonstration; it explicitly incorporates the ideas of piecemeal social engineering and unintended social repercussions. Popper took situational logic from Menger and the Austrians, making this emerging area of criminology an extension of Austrian economics.

How useful is generalized Darwinism as a framework to study competition and industrial evolution?

The role of Darwinist concepts in evolutionary economics has long been a contentious issue. The controversy has recently been rekindled by the proposal of a “Universal” or “generalized” Darwinism, which holds that the ontology of all evolutionary systems accords to the Darwinist scheme of variation, selection and inheritance. This paper focuses on the application of the generalized Darwinist framework to the analysis of markets and industries. It argues that selection and inheritance concepts narrowly construed after the biological example are of limited usefulness. As an alternative to the ‘top–down’ approach of Universal Darwinism, the development of ‘bottom–up’ theories is advocated.

Buchanan’s constitutional political economy: exchange vs. choice in economics and in politics

This article discusses the methodological foundations of Buchanan’s constitutional political economy. We argue that Buchanan is a constitutional economist because he is an economist or a political economist. In other words, Buchanan is a constitutional economist—he insists on the necessity of focusing on constitutions and to analyze the “rules of the social game”—because he defines economics as a science of exchange. Buchanan’s definition of economics is not only specific, it is also opposed to the definition of economics that other economists retain and, above all, opposed to the definition of economics that many public choice theorists use. The latter have, in effect, adopted the Robbins 1932 definition of economics as a science of choice that Buchanan criticizes and rejects. Buchanan’s constitutional economics can be a branch of public choice only under certain conditions.

Understanding the microenterprise sector to design a tailor-made microfinance policy for Cape Verde

Two of the central challenges faced by Cape Verde at the present are the high level of unemployment and the increasing proportion of the population living in (relative) poverty. Microenterprise development can be an effective means of addressing both problems in a developing country like Cape Verde, where microenterprises account for about 50% of employment. In this paper we provide a detailed profile of Cape Verdean microenterprises and microentrepreneurs and investigate the relationship between their characteristics and the resort to outside seed capital. We find a cluster of factors—the microentrepreneur’s age, gender, level of education and reason for being self-employed—which influence significantly the probability of being in need for external start-up capital. The policy implications of these findings for the design of a specific microfinance program for Cape Verde are discussed.

Entrepreneurial culture,regional innovativeness and economic growth

In this paper, we empirically study the relationship between entrepreneurial culture and economic growth. Based on a micro based comparison of entrepreneurs and non-entrepreneurs, we develop a measure reflecting entrepreneurial attitude at the regional level. We subsequently relate this newly developed variable, ‘entrepreneurial culture,’ to innovativeness and economic growth in 54 European regions. Extensive robustness analysis suggests that differences in economic growth in Europe can be explained by differences in entrepreneurial culture, albeit mostly in an indirect way.

Complexity of economic structures and emergent properties

This concept revolves around differences of embeddedness of organizations in the macro patterns of routines (economic policy regimes), which in turn may differentially provide them–and the system as a whole–with ‘procedural rationality’ in dealing with identified problems in their relevant complex environment. Regularities of interdependence are specified between different regime patterns and the variety of coordination routines between and inside micro organizations. Corresponding regularities are also observed for internal governance routines of organizations, which in turn determine the behavioral adaptation by self-organization that may be rationally in a local perspective, but–contingent on the organization’s embeddedness in the coordination structure–not necessarily so in a comprehensive one.

Underpricing of Initial Public Offerings: The Case of Portugal

This paper analyzes the initial public offering (IPO) underpricing phenomenon in Portugal. We show that the ‘hot issue’ market of 1987, coinciding with a speculative bubble in the stock market, is well explained by investor sentiment theories and that the issuing firms seized a ‘window of opportunity’ provided by excessive demand to offer and list their shares. In IPOs prior to the 1987 crash, underpricing is very high while there is a strong reversion to fundamentals in the long run. In the period 1988–2004, we find lower IPO underpricing and overall no evidence of long-run underperformance of IPO firms. Bookbuilding IPOs are more underpriced than other price setting systems IPOs, and firms with seasoned public offerings show abnormal returns in the long run.

An evolutionary perspective on health innovation systems

This paper elaborates on the general properties of medical innovation processes. It begins with a critical review of different perspectives and methods of investigation used in various streams of research that have previously analysed technical change in the health sector. After profiling and discussing their characteristics, the paper proposes an evolutionary approach to change in medicine constructed around the notion of a ‘Health Innovation System’. Health innovation, it is argued, consists of complex bundles of new medical technologies and clinical services emerging from a highly distributed competence base. Health Innovation Systems are driven by the combination of (1) institutionally-bound interactions among agents (‘gateways’ of innovation) and (2) history-dependent trajectories of change (‘pathways’ of innovation) whose developments emerge from and feed back into the structure of the system through organised transfers of knowledge between research and clinical practice. After drawing examples from recent empirical work on clinical research in specific disease areas, the paper concludes by identifying implications for further research.

The Austrian roots of the economics of institutions

This paper presents an analysis of the way the Austrian theory of institutions evolved from Menger’s main works. It also tries to advance the idea that the economics of institutions, when it deals with the emergence and evolution of rules and norms from interacting individuals, is inspired by Menger’s work and more generally by the Austrian analysis of the emergence and evolution of institutions. Recent works in the economics of institutions build on this earlier Austrian work to make it more formalized and testable.

Origins of Menger’s thought in French liberal economists

Carl Menger, who became regarded as the founder of the Austrian School, did not only confront the German Historical School and criticize British Classical Political Economy, he also read the French Liberal economists. The link between Say and Menger has already been asserted, but on an intuitive basis. It seemed necessary to give substantial proof of its true extent, as well as to document it with proper archival work—that is done in the present article. Menger’s reading of other French authors: Count Pellegrino Rossi, who succeeded Say at the Collège de France, Michel Chevalier, a major name of the French Industrialization, Frédéric Bastiat, the famous defender of free-trade, is less known. It is also documented here, bringing to light first-hand material, mainly from the Menger Collection located in Japan, and the Perkins Library at Duke University. Thus are acknowledged the origins of Menger’s thought in French liberal economists.