A critical realist interpretation of evolutionary growth theorising

The paper discusses a critical realist interpretation of evolutionarygrowth theorising by focusing on some of its basic characteristics.The evolutionary ontology is complex, differentiated, structured,systemic, open, ever-changing and radically uncertain. Its methodologytends to be increasingly based on ‘appreciative’theorising, retroductive explanations and interdisciplinaryanalysis. After discussing these features, the paper suggeststhat critical realism may indeed constitute an important philosophicaland methodological foundation for the future development ofevolutionary theories of economic growth.     

Normative judgments and spontaneous order: The contractarian element in Hayek's thought

This paper explores the apparent tension between Hayek's moral skepticism and his role as a defender of liberal institutions. It looks at Hayek's concept of spontaneous order, and asks whether there are any grounds for claiming that spontaneous orders have moral value. The argument from group selection is considered but rejected. Hayek is interpreted as putting most weight on arguments which show, for specific orders (such as the market and common law) that their rules assist each individual in the pursuit of his or her ends, whatever those ends may be. It is suggested that this form of argument is contractarian in character. However, Hayek's contractarianism is distinctive in that it looks for agreement among individuals within an ongoing social order, rather than among rational agents who stand outside any particular society. This paper was written while I was a Visiting Scholar at the Social Philosophy and Policy Center, Bowling Green State University; I am very grateful for the Center's support. An early version was presented at the Friedrich August von Hayek Memorial Symposium in Freiburg, in June 1993. In revising the paper, I have benefited from the comments of the participants at that symposium.     

The notion of private information in a modern perspective: a reappraisal of Hayek's contribution

Hayek's critical attitude towards Walrasian modelling was based on informational considerations. In his view, a meaningful notion of equilbrium has to deal with the consistency of agents' plans which information is dispersed throughout the economy. He emphasized that only in this context could the role of market prices as aggregators of information be correctly analysed. Recent developments in general equilbrium theory with rational expectations have taken up the issue formally. In this paper, Haek's main ideas about the competiitive mechanism are compared with these recent results. It is argued that Hayek's notion of private information is different from that used in modern equilibrium theory, not only because of its dynamic content, as many critics observed ex post, as is usually in a general equilibrium framework. This issue of whether modern notions of private information, namel that used in conract theory, are good substitutes for Hayek' notion of personal knowledge is also examined in detail. From this analysis, it is possible to conclude that Hayek's notion of equilibrium neither entails Pareto optimality prperties nor full informational efficiency.     

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.     

From The Sensory Order to the Liberal Order: Hayek's Non-rationalist Liberalism

Hayek's arguments for a constitutionally constrainted government are consistent with, and to some extent rest upon, his work in theoretical psychology. By exploring his view of the mind in The Sensory Order, we can see the psychological and epistemological underpinnings of Hayek's belief in the mind's limits and the indispensibility of spontaneously emergent social institutions. The Austrian view of microeconomic coordination is a logical outgrowth of Hayek's theory of mind. Constraints on government are necessary not because self-interest leads rational government actors into temptation, but because even altruistically-motivated actors are epistemically unable to intervene effectively in spontaneously emergent institutions.     

Hayek's Implicit Economics: Rules and the Problem of Order

The Review of Austrian Economics -     

Economics as mechanism: The mind as machine in Hayek's sensory order

InThe Sensory Order, Friedrich A. Hayek describes the human mind as an apparatus of classification that evolves through experience and that reaches decisions by modeling the alternative courses of action that are available to it. Hayek's mechanistic conception of mind argues aginst the possibility of central planning and against the cogency of any rule that denigrates subjective decision making by employers or other economic agents. As implied by Gödel's proof, no brain, human or mechanical, can ever be sufficiently complex to explain itself. There will therefore always be certain knowledge and rules that cannot be articulated to the satisfaction of a central planner or tribunal.     

The critical realist conception of open and closed systems

The critical realist (CR) conception of open and closed (O&C) systems is not about systems: it is about (ir)regularities in the flux of events and states of affairs. It has recently been criticised on the grounds that critical realists (CRs) should take on board ideas about the general nature of systems; recognise that genuinely open social systems would be impossible; avoid polarities or dualisms where either there are event regularities and open systems, or there are no event regularities and closed systems and accept partial regularities and partially open systems; and understand that orthodox economics is not based upon event regularities, laws or Humean empiricism. The objective of this paper is to ‘take stock’ of these recent criticisms.     

Doing without money: a critical assessment of Woodford's analysis

Woodford employs an inter-temporal general equilibrium modelto examine the properties of the monetary system as it evolvesfrom the use of a physical medium of exchange to an electronicmedium. He presents a structure in which cash as a means ofpayment can be made to vanish at the limit, but where he claimsthe price level remains determinate. It is shown that Woodford'sanalysis involves fundamental but still widespread conceptualand methodological errors. His general equilibrium model doesnot map into the world of electronic money, and his analysishas no implications for the art of central banking.     

Signaling without a common prior: Results on experimental equilibrium selection

The common prior assumption is pervasive in game-theoretic models with incomplete information. This paper investigates experimentally the importance of inducing a correct common prior in a two-person signaling game. Equilibrium selection arguments predict that different equilibria may be selected depending on whether the common prior is induced or not. Indeed, for a specific probability distribution of the sender?s type, the long-run behavior without an induced common prior is shown to be different from the long-run behavior when a common prior is induced, while for other distributions long-run behavior is similar under both regimes. We also present a learning model that allows players to learn about the other players? strategies and the prior distribution of the sender?s type. We show that this learning model accurately accounts for all main features of the data.     

Nash equilibrium without mutual knowledge of rationality

Summary. In a Nash equilibrium, players' rationality is mutual knowledge. However, both intuition and experimental evidence suggest that players do not know for sure the rationality of opponents. This paper proposes a new equilibrium concept, cautious equilibrium, that generalizes Nash equilibrium in terms of preferences in two person strategic games. In a cautious equilibrium, players do not necessarily know the rationality of opponents, but they view rationality as infinitely more likely than irrationality. For suitable models of preference, cautious equilibrium predicts that a player might take a “cautious” strategy that is not a best response in any Nash equilibrium. Received: January 28, 1998; revised version October 2, 1998     

From equilibrium to disequilibrium: the genesis of Don Patinkin's interpretation of the Keynesian theory

This paper explains the reasons that led Don Patinkin to interpret the Keynesian theory in a disequilibrium perspective. We claim that the author adopted this position because he believed that the assumption of wage rigidity misrepresented the concept of involuntary unemployment and that, consequently, it had to be rejected. It is shown that this conclusion resulted from the confrontation of Patinkin, during the writing of his Ph.D. thesis, with the interpretations of the Keynesian theory argued respectively by Lange, Klein and Modigliani.     

A dynamic homotopy interpretation of the logistic quantal response equilibrium correspondence

This paper uses properties of the logistic quantal response equilibrium correspondence to compute Nash equilibria in finite games. It is shown that branches of the correspondence may be numerically traversed efficiently and securely. The method can be implemented on a multicomputer, allowing for application to large games. The path followed by the method has an interpretation analogous to that of Harsanyi and Selten's Tracing Proecdure. As an application, it is shown that the principal branch of any quantal response equilibrium correspondence satisfying a monotonicity property converges to the risk-dominant equilibrium in 2 × 2 games.     

Cournot equilibrium without apology: Existence and the Cournot inverse demand function

In a multi-commodity framework with absence of wealth effects, we prove the existence of equilibrium for Cournot oligopoly, and that the concept is completely non-ambiguous. We also obtain a uniquely defined endogenous inverse demand function, depending only on the competitive sector.     

General equilibrium with differentiated commodities: the linear activity model without joint production

Summary In this paper the existence of a general equilibrium with differentiated commodities is proved for the classical case of a production set with constant returns, spanned by elementary activities without joint production, and with a finite set of primary factors. This framework allows to proceed without strong assumptions concerning substitution possibilities, which are typical in general equilibrium theory with differentiated commodities, but which at least with respect to production are not adequate to the problem. Moreover, in our model general consumption sets are allowed. Thus true intermediate products are not excluded. Furthermore the possibility of survival without trade is not assumed.I am indebted to E. Dierker, M. Hellwig, K.J. Koch, A. Mas-Colell, M. Nermuth, W. Neudeck, and to an anonymous referee for comments and suggestions. Of course, I am responsible for any shortcomings. Finally, support by the Deutsche Forschungsgemeinschaft through SFB 303 is gratefully acknowledged.     

Sentimental fools: a critique of Amartya Sen’s notion of commitment

Commitment is problematic because one sometimes pursues it against one’s interest. To solve it, the paper proposes a distinction between ‘non-binding’ and ‘binding’ commitments. Non-binding commitment is about ambition, such as becoming a great chef, which bolsters welfare in the pecuniary sense as well as self-respect. In contrast, ‘binding commitment’ is about honesty. While it diminishes welfare, it augments self-integrity. The neoclassical view reduces both commitments to interest, while the multiple-self approach separates both commitments from interest. The separation permits the confusion of sentimental fools, who enter commitments without regard to interest, with rational sentimentalists, who take interest into consideration.     

Carbon leakages: a general equilibrium view

The effectiveness of unilateral action to curb carbon emissions has been dismissed because of possible “carbon leakages”, this referring to the rise of emissions in non-participating countries. This paper offers a general equilibrium (GE) exploration of the key mechanisms and factors underlying the size of carbon leakages. We developed a two-region, two-goods simplified GE framework, incorporating three types of fossil fuels (coal, oil and low-carbon energy), international trade and capital mobility. The model was designed to make tractable extensive multidimensional sensitivity analysis. The results suggest that the coal supply elasticity plays a critical role, while substitution elasticities between traded goods and international capital mobility appear relatively less influential. The shape of the production function also matters for the size of the leakages. Confirming the results obtained with large computable GE models, for a wide range of parameters’ values, carbon leakages appear to be small. Therefore, the argument that unilateral carbon abatement action taken by a large group of countries (such as the Annex 1 group) is flawed by significant carbon leakages is not supported by our sensitivity analysis. The likelihood of small leakages favours in fact the formation of a worldwide coalition to stabilise climate change.