Hayek and the General Theory ∗

Abstract

Hayek did not review the General Theory, but he criticized it in Profits, Interest and Investment (1939 Hayek, F. A. 1939. “Profits, interest and investment”. In Profits, Interest and Investment, London: Routledge & Sons.  [Google Scholar]) and in part IV of The Pure Theory of Capital (1941 Hayek, F. A. 1941. The Pure Theory of Capital, Chicago: The University of Chicago Press.  [Google Scholar]). First, he showed that only exceptionally does greater consumption favour investment and employment. Second, he rejected Keynes's liquidity preference and maintained that only in an ‘extreme case’ might it be said that Keynes's theory of the rate of interest is valid. Although he correctly identified the gist of Keynes's theoretical innovation, his criticisms were already implicitly answered in the General Theory.     

Two Sides of the Same Coin: Re-examining Nepotism and Discrimination in a Segmented Society

Abstract

We report the results from a series of trust games designed to distinguish racial discrimination from racial nepotism, played with a sample of high school students in Cape Town, South Africa. In contrast to the original work in this regard by Fershtman et al. (2005 Fershtman, C., Gneezy, U. and Verboven, F. 2005. “Discrimination and Nepotism: the efficiency of the anonymity rule,”. Journal of Legal Studies, 34: 371–396. [Crossref], [Web of Science ®] , [Google Scholar]), we find considerably greater heterogeneity in the way that proposers respond to the revealed racial identity of their partner, with nepotism being a dominant behavior. However, while some proposers exhibit a nepotistic bias in their offers that favors in-group members on average, others exhibit a nepotistic strategy that favors out-group members. A consequence of this nepotism is that both efficiency and equity are reduced on average.     

Sustainability of external debt: further evidence from non-linear framework

This study investigates sustainability of external debt under a two-step non-linear framework. The first step uses a general linearity test proposed by Harvey and Leybourne (2007 Harvey, David I. and Leybourne, Stephen J. 2007. Testing for time series linearity. Econometric Journal, 10: 149–165. [Crossref], [Web of Science ®] , [Google Scholar]) to determine the linearity property of external debt. The second step applies a non-linear ADF unit root test proposed by Kapetanios, Shin, and Snell (2003 Kapetanios, G., Y. Shin, and A. Snell. 2003. Testing for a unit root in the nonlinear STAR. Journal of Econometrics 112: 359–79.  [Google Scholar]) on the non-liner processes and the linear ADF test on the linear processes to examine the sustainability of external debt. The analysis of 36 debt and 55 current account ratios identifies strong evidence of non-linearity and sustainability. The results indicate superior performance of the non-linear unit root test over the ADF test in determining the stationary property of the data.     

Linear and nonlinear Granger-causality between short-term and long-term interest rates during business cycles

This paper is about the causal relationship between short-term and long-term interest rates in the US and Canada. To that end, we apply a linear Granger causality test introduced by Toda and Yamamoto (1995 Toda, H. Y., and T. Yamamoto. 1995. “Statistical Inference in Vector Autoregressions with Possibly Integrated Processes.” Journal of Econometrics 66 (1–2): 225–250. doi:10.1016/0304-4076(94)01616-8.[Crossref], [Web of Science ®] , [Google Scholar]) and the nonlinear Granger causality test of Diks and Panchenko (2006 Diks, C., and V. Panchenko. 2006. “A New Statistic and Practical Guidelines for Nonparametric Granger Causality Testing.” Journal of Economic Dynamics and Control 30 (9–10): 1647–1669. doi:10.1016/j.jedc.2005.08.008.[Crossref], [Web of Science ®] , [Google Scholar]). By combining linear causality effects with the nonlinear ones, it is seen that the most common Granger causality direction between short-term and long-term interest rates is a bidirectional one. We also find that nonlinear Granger causality can be found where no linear causality had been uncovered. Moreover, our findings show that during recent business cycles, the federal funds rate (in the US) and the overnight rate (in Canada) still Granger-cause long-term interest rates significantly.     

Impatience and Inconsistency in Intertemporal Choice: An Experimental Analysis

In this article the experiment carried out by Takahashi et al. [2009 Takahashi, T., T. Hadzibeganovic, S. A. Cannas, T. Makino, H. Fukui, and S. Kitayama. “Cultural Neuroeconomics of Intertemporal Choice.” Neuroendocrinology Letters, 30, (2009), pp. 185–191.[PubMed], [Web of Science ®] , [Google Scholar]] is replicated to analyze the influence of culture, gender, origin (urban or rural), and socioeconomic level on the impulsivity and consistency of decision-making processes concerning monetary gains and losses. The results indicate that Spanish students show inconsistency, and more impulsivity over gains (i.e., more impatience, as they discount delayed outcomes more rapidly) than do Japanese and American students. Additionally, participants from urban areas show more impatience over gains than do participants from rural ones, women are more impatient than men are over losses, and participants of different socioeconomic levels show differences in their impulsivity parameters.     

What Explains Herd Behavior in the Chinese Stock Market?

This article examines the causes of herd behavior in the Chinese stock market. Using the nonlinear model of Chang, Cheng, and Khorana [2000 Chang, E. C., J. W. Cheng, and A. Khorana. “An Examination of Herd Behavior in Equity Markets: An International Perspective.” Journal of Banking and Finance, 24, (2000), pp. 1651–1679.[Crossref], [Web of Science ®] , [Google Scholar]], the authors of this article find robust evidence of herding in both the up and down markets. They contribute to the existing literature by exploring the underlying reasons for herding in China. It is shown that analyst recommendation, short-term investor horizon, and risk are the principal causes of herding. However, the authors cannot find evidence that relates herding to firm size, nor can they detect significant differences in herding between state-owned enterprises and non–state-owned enterprises.     

Stock Price Reaction to News: The Joint Effect of Tone and Attention on Momentum

The authors find that the market's underreaction to good news is a driver of Gutierrez and Kelly's [2008 Gutierrez, R. and E. K. Kelly. “The Long-lasting Momentum in Stock Returns.” The Journal of Finance, 63, (2008), pp. 415–447.[Crossref], [Web of Science ®] , [Google Scholar]] weekly momentum returns. By employing a dataset of 10.1 million news items in 4 regions (the U.S., Europe, Japan, and Asia Pacific), they find that stocks having important and positive news exhibit stronger return continuation. The study findings suggest that investors in international markets have similar underreaction to the same news characteristics.     

Investor Attention and Global Stock Returns

The author constructs a direct measure of investor attention toward global benchmark indices using Google search volume and empirically examines its impact on stock returns. The author documents a significant decrease in index returns following an increase in investor attention. This result is consistent with the investor recognition hypothesis (Merton [1987 Merton, R. “A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42, (1987), pp. 483–510.[Crossref], [Web of Science ®] , [Google Scholar]]) and the finding of no-media premium in the United States (Fang and Peress [2009 Fang, L., and J. Peress. “Media Coverage and the Cross-section of Stock Returns.” Journal of Finance 64, (2009), pp. 2023–2052.[Crossref], [Web of Science ®] , [Google Scholar]]). Additional tests suggest that the attention effect may be attributable to local and U.S. investors. Finally, such negative effect of attention is found to be strengthened (weaken) in the market with positive (negative) sentiments.     

Behavioral Timing,Valuation and Postissue Performance of UK Initial Public Offerings

Using a sample of 1,926 UK initial public offerings (IPOs) launched from 1987 to 2007, this study introduces a new angle on testing the behavioral timing hypothesis in the context of UK IPOs via investigating relationships between the magnitude of IPOs misvaluation and postissue stock price and operating performance. IPO misvaluation is measured using (i) an intrinsic value of the firm estimated using residual income valuation model and (ii) intensity of IPO issuance activity. The findings show that stock price and operating underperformance in the postissue are directly linked to the degree of IPOs' misvaluation. Specifically, the stock price and operating performance are found to be significantly and robustly different between hot markets IPOs and cold market IPOs 3 years postissue. We also show that overvalued IPOs have lower long-run stock returns, but outperforming operating performance, than undervalued IPOs do. Our findings are broadly consistent with the behavioral explanations of the poor stock price and operating performance, supporting the U.S. results of Purnanandam and Swaminathan [2004 Purnanandam, A. and B. Swaminathan. “Are IPOs Really Underpriced?” Review of Financial Studies, 17, (2004), pp. 811–848.[Crossref], [Web of Science ®] , [Google Scholar]] and Loughran and Ritter [2000 Loughran, T. and J. Ritter. “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55, (2000), pp. 361–389.[Crossref], [Web of Science ®] , [Google Scholar]].     

Anchoring-Adjusted Capital Asset Pricing Model

What happens when the capital asset pricing model is adjusted for the anchoring and adjustment heuristic of Tversky and Kahneman [1974 Tversky, A., and D. Kahneman. “Judgment Under Uncertainty: Heuristics and Biases.” Science, 185, (1974), pp. 1124–1131.[Crossref], [PubMed], [Web of Science ®] , [Google Scholar]]? The surprising finding is that adjusting the capital asset pricing model for anchoring provides a plausible unified framework for understanding almost all of the key asset pricing anomalies. The anomalies captured in the theoretical framework include the well-known size and value effects, high alpha of low beta stocks, accruals, low volatility anomaly, momentum effect, stock splits, and reverse stock splits. The market equity premium is also larger with anchoring. This suggests that the anchoring-adjusted capital asset pricing model may provide the needed unifying structure to behavioral finance.     

Explaining the Delayed Effect of Monetary Policy: The Role of Inventories and Factor-hoarding

This paper proposes a new model accounting for the delayed effect of monetary policy shocks on output. The key feature of the model is to distinguish a variety of margins (i.e., inventory adjustments, hours per worker, efforts and employments) on which firms adjust output in response to macroeconomic shock. When these multiple margins are properly introduced to an otherwise standard modern monetary business cycles model, the interplay between inventory adjustments and the one-period lag in adjusting employment can produce the hump-shaped response of output to monetary shock. Given the weak evidence on habit formation at household level found in Dynan (2000) Dynan, K. (2000). Habit formation in consumer preferences: evidence from panel data. American Economic Review, 90 (3), 391–406. doi: 10.1257/aer.90.3.391[Crossref], [Web of Science ®] , [Google Scholar] and Flavin and Nakagawa (2008) Flavin, M., &; Nakagawa, S. (2008). A model of housing in the presence of adjustment costs: a structural interpretation of habit persistence. American Economic Review, 98, 474–495. doi: 10.1257/aer.98.1.474[Crossref], [Web of Science ®] , [Google Scholar], therefore, this paper provides an alternative explanation for the delayed effect of monetary policy without relying on the habit formation.     

The J-Curve phenomenon in European transition economies: A nonlinear ARDL approach

This article examines the J-curve phenomenon for 16 European transition economies. While previous studies assume a linear relationship between the exchange rate and the trade balance, this paper allows for nonlinearity. Following Bahmani-Oskooee and Fariditavana (2015 Bahmani-Oskooee, M., and H. Fariditavana. 2015. “Nonlinear ARDL Approach, Asymmetric Effects and the J-curve.” Journal of Economic Studies 42 (3): 519–530. doi:10.1108/JES-03-2015-0042.[Crossref], [Web of Science ®] , [Google Scholar], 2016 Bahmani-Oskooee, M., and H. Fariditavana. 2016. “Nonlinear ARDL Approach and the J-curve Phenomenon.” Open Economies Review 27 (1): 51–70. doi:10.1007/s11079-015-9369-5.[Crossref], [Web of Science ®] , [Google Scholar]), the empirical method used is the nonlinear cointegrating autoregressive distributed lag (NARDL) model of Shin et al. (2013 Shin, Y., B. Yu, and M. J. Greenwood-Nimmo. 2013. “Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework.” In Festschrift in Honor of Peter Schmidt, edited by William C. Horrace and Robin C. Sickles. New York, NY: Springer Science and Business Media. [Google Scholar]) in which short-run and long-run nonlinearities are introduced via positive (appreciation) and negative (depreciation) partial sum decompositions of the real exchange rate. We argue that the lack of support for the J-curve phenomenon could be due to the linearity assumption. This issue is examined by utilizing the linear and the NARDL models. Using the linear autoregressive distributed lag (ARDL) model, we are unable to find support for the J-curve phenomenon in any case. However, when the NARDL model is used, we are able to find evidence for the J-curve in 12 out of the 16 countries. This suggests that allowing for nonlinearity in the adjustment process is important when studying the J-curve phenomenon.     

A Simple Model of Entrepreneurship for Principles of Economics Courses

The critical roles of entrepreneurs in creating, operating, and destroying markets, as well as their importance in driving long-term economic growth are still generally either absent from principles of economics texts or relegated to later chapters. The primary difficulties in explaining entrepreneurship at the principles level are the lack of a universally accepted definition, a plausible explanation of the demand for entrepreneurship, and a diagram that summarizes the impact of entrepreneurship on market equilibrium and growth—a definition, a story, and a picture. This article discusses how the notion of the stationary state associated with Schumpeter (1911 Schumpeter, J. A. 1911/1983. Theory of economic development., Cambridge, MA: Harvard University Press.  [Google Scholar]/1983), Knight (1921 Knight, F. H. 1921/1971. Risk, uncertainty and profit, Chicago: University of Chicago Press. [Crossref] , [Google Scholar]/1971), and Weber (1930 Weber, M. 1930/2002. The Protestant ethic and the spirit of capitalism, New York: Scribner's.  [Google Scholar]/2002) can provide a framework for integrating the entrepreneur into the early part of principles of economics courses.     

Multiple product qualities in monopoly: Sailing the RMS Titanic into the economics classroom

In this pedagogical contribution the authors extend the traditional three-class tariff employed in the French passenger railway system with the more resonant story of the service quality variations associated with the three passenger classes of the ill-fated RMS Titanic. In doing so, they provide economics instructors with an opportunity to integrate the well-known motion picture Titanic (Cameron and Landau 1997 Cameron, J., and J. Landau. 1997. Titanic. Los Angeles: 20th Century Fox, Paramount Pictures, and Lightstorm Entertainment. [Google Scholar]) into the teaching of economics. This article provides instructors with resources that can be used to link historical and modern travel examples of price discrimination in order for students to reach a “deeper understanding of course concepts” (Salemi 2002 Salemi, M. K. 2002. An illustrated case for active learning. Southern Economic Journal 68 (3): 721–31.[Crossref], [Web of Science ®] , [Google Scholar], 725).     

Economic class and the distribution of income: a time-series analysis of the UK economy, 1955–2010

This paper contributes to our understanding of the determinants and dynamics of surplus-value using quarterly UK data, 1955–2010, and the Johansen (1988 Johansen, S. 1988. Statistical analysis of cointegrated vectors. Journal of Economic Dynamic and Control, 12: 231–54. [Crossref], [Web of Science ®] , [Google Scholar], 1991 Johansen, S. 1991. Estimation and hypothesis of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59: 1551–80. [Crossref], [Web of Science ®] , [Google Scholar]) cointegration and vector error correction model (VECM). A model is introduced to define this Marxian concept, before we explain distribution, paying attention to three forces that are traditionally seen as drivers of power in this struggle: (i) working class militancy; (ii) the size of the ‘reserve army’ of the unemployed; and (iii) political party. Our results demonstrate the ongoing relevance of Marxian economics in providing an alternative, robust and significant explanation of distribution in the post-war UK economy.     

Hidden links in the warranted rate of growth: the supermultiplier way out

Post Keynesian models consider growth to be demand-led – a logical consequence of Keynes's principle of effective demand. After Harrod's seminal paper in 1939 Harrod, R. F. 1939. An essay in dynamic theory. Economic journal, 49, 14–33.[Crossref], [Web of Science ®] , [Google Scholar] they try to unearth the hidden variables that might allow the adaptation of the warranted rate, determined from the supply side, to demand-growth expectations that supposedly have an autonomous source. The purpose of this paper is to show that an investment function based on the accelerator and integrated in a supermultiplier is able to shape the warranted rate in consonance with the autonomous trend. The supermultiplier reveals itself as a stable and stabilising mechanism when demand is split into permanent and transient. Hopefully the paper will build bridges with other Keynesian, Kaleckian and Sraffian strands that have so far dismissed the supermultiplier solution because of its apparently inherent instability.     

The Role of Monetary Policy in the New Keynesian Model: Evidence from Vietnam

This paper re-designs the New Keynesian model developed by Ireland (2004 Ireland, P. N. (2004). Technology shocks in the New Keynesian model. The Review of Economics and Statistics, 86(4), 923–936. doi: 10.1162/0034653043125158[Crossref], [Web of Science ®] , [Google Scholar]) and then uses the Vietnamese data from January 1995 to December 2012 to estimate the model's parameters. The empirical results show that the State Bank of Vietnam had been more aggressive as well as more responsive to aggregate fluctuations in the period before August 2000 than in the latter period. Thus, this change in the policy stance could be a potential reason for the declining importance of monetary policy in generating movements in output growth, inflation, interest rate, and the output gap across the subsamples. Another notable finding is the dominant role of the cost-push shock in explaining fluctuations in inflation, interest rate, and the output gap, leading to a policy implication that more attention should be devoted to developing substitute and complement industries so as to mitigate negative effects of the cost-push shocks by reducing the degree of dependence on imports.     

Interrelationships among banks,stock markets and economic growth: an empirical investigation

This article utilizes a simultaneous equations model to study the relationships among economic growth, banking and stock market development. In contrast to conventional instrumental variable approach, we implement the analysis via the methodology of identification through heteroscedasticity. Using Beck and Levine (2004 Beck, T. and Levine, R. (2004) Stock markets, banks and growth:panel evidence, Journal of Banking and Finance, 28, 423–42.[Crossref], [Web of Science ®] , [Google Scholar]) dataset, we find that each of the three variables interacts in important ways. While both are conducive to economic growth, banking development matters more for growth in low-income countries and stock market development is more favourable to growth in high-income or low-inflation ones. The data also reveal coexistence of a positive effect of banking development on stock market development and a negative effect of stock market development on banking development. Besides, the feedback effects of growth on both banking and stock market development are found.     

The strength of R&D network ties in high-tech sectors – a multi-dimensional analysis of the effects of tie strength on innovation performance

We study the effect of the tie strength of inter-firm R&;D partnerships on the innovation performance of companies in four high-tech sectors (pharmaceuticals, computers, semi-conductors and telecom). Returning to Granovetter's (1973 Granovetter, M. S. 1973. The strength of weak ties. American Journal of Sociology, 78: 1360–80. [Crossref], [Web of Science ®] , [Google Scholar]) seminal contribution, tie strength is analysed through a broad multi-dimensional perspective. We find that inter-firm R&;D network ties that are stronger in terms of their extent (measured by the length and multitude of R&;D partnerships) and weaker in terms of their depth (the degree of cooperation and the similarity of ties of companies) improve the innovation performance of companies. Interestingly, we find strong support for the role of these R&;D ties in the context of the run-of-the-mill innovation performance of companies. However, there is no support for this effect on significant innovations of companies.     

Value Functions for Prospect Theory Investors: An Empirical Evaluation for U.S. Style Portfolios

The main aim of this article is to provide a general behavioral analysis that proposes a series of different value functions for prospect theory (PT) investors incorporated into behavioral reward-risk models that are finally solved so as to provide some specific optimal solutions. To do this, general behavioral reward-risk models, which contain all the basic elements of the PT, are first set up. Two reward and risk measures, the upper partial moment and the lower partial moment, are subsequently used to create the various value functions. The technical difficulties arising during the behavioral maximization process are overpassed by adapting the Rubinstein [1982 Rubinstein, R. Y. “Generating Random Vectors Uniformly Distributed Inside and On the Surface of Different Regions.” European Journal of Operational Research, 10, (1982), pp. 205–209.[Crossref], [Web of Science ®] , [Google Scholar]] algorithm. The results show that agents differentiate their behavior according to their type of preferences (S-shaped, reverse S-shaped, kinked convex, and kinked concave value function) but they seem to always prefer small capitalization and high positively skewed value stock portfolios. Probability distortion also affects the optimal solutions of the problem, independently of the employing weighting functional form; when subjective probabilities are employed the optimal weights of the most risky positively skewed assets seem to increase. Probability distortion has an additional important effect on optimal perspective values of the problem driving to a significant increase.