The Coasean analysis of lighthouse financing: myths and realities

In ‘The Lighthouse in Economics’ (Coase, R. H. Journalof Law and Economics, vol. 17, no. 2, 357–76, 1974), Coasereached the conclusion that in England there existed a relativelyefficient privately financed lighthouse system, which wouldrefute economists' traditional statements concerning the productionof public goods. The purpose of this paper is to challenge hisconclusion. We first show that, from a methodological and theoreticalperspective, ‘The Lighthouse’ is consistent with‘The Problem of Social Cost’ (Coase, R. H. Journalof Law and Economics, vol. 3, 1–44, 1960). Then, applyingCoase's own method (historical case studies), we attempt tore-examine the respective roles and efficiencies of privateinitiative and government.     

Dealing with the Duhem-Quine thesis in financial economics: can causal holism help?

Acceptance of the Duhem–Quine thesis implies a recognitionthat empirical tests of individual hypotheses are in fact testsof individual hypotheses in conjunction with the networks fromwhich those hypotheses are derived. This leads to a problemin the evaluation of disconfirming evidence: is it the individualhypothesis or the network that is refuted? This paper examineshow financial economists deal with this ‘joint-testing’problem in their empirical evaluation of the efficient marketshypothesis. Causal holists argue that the holistic testing theyespouse circumvents the difficulties surrounding joint-testingproblems. This paper assesses whether a causal holist approachcan resolve the ambiguity surrounding the evidence against theefficient markets hypothesis. It concludes that, without a resolutionof the ontological–epistemological tension in causal holismidentified by Fleetwood (Cambridge Journal of Economics, 2002,vol. 26, 27–45) and a clearer outline of the nature ofholistic testing, causal holism cannot help financial economistsdeal with the implications of the Duhem–Quine thesis forempirical testing.     

On Sraffa's Standard commodity: is its price invariant with respect to changes in income distribution?

In his 1960 book, Sraffa suggested using a composite commodity,which he called the ‘Standard commodity’, to solveRicardo's search for an invariable measure of value, i.e., astandard capable of isolating the price movements of any othercommodity induced by changes in income distribution. The absencein Sraffa's book of an explicit proof of the invariance propertyof this standard gave rise to many misunderstandings about itsmeaning and its role as an invariable measure of value. In orderto clear up these questions, Bellino (On Sraffa's Standard commodity,Cambridge Journal of Economics, vol. 28, 121–32, 2004)has proposed a ‘proper’ definition of an ‘invariablemeasure of value’, showing that Sraffa's Standard commoditydoes fulfil the requirements of this definition. He claims thatthe fulfilment of this property (but not the constancy of its‘nominal’ price) qualifies the Standard commodityas an invariable measure of value. In this paper, a proof ofthe invariance of the price of the Standard commodity with respectto changes in income distribution is given, and the equivalenceof this property with Bellino's definition of invariance isshown.     

The Evolution of Income-related Health Inequalities in Switzerland Over Time

This article presents new evidence on income-related healthinequality and its development over time in Switzerland. Weemploy the methods lined out in Van Doorslaer and Jones (2003,"Inequalities in self-reported health: validation of a new approachto measurement", Journal of Health Economics 22(1), 61–78)and Van Doorslaer and Koolman (2004, "Explaining the differencesin income-related health inequalities across European Countries",Health Economics 22(7), 609–628) measuring health usingan interval regression approach to compute concentration indicesand decomposing inequality into its determining factors. Nationallyrepresentative survey data for 1982, 1992, 1997, and 2002 areused to carry out the analysis. Looking at each of the fouryears separately the results indicates the usual positive relationshipbetween income and health, but the distribution is among theleast unequal in Europe. No clear trend emerges in the evolutionof the inequality indices over the two decades. A small butsignificant increase over the first 15 years is followed bystabilization if not a slight decrease in total income-relatedhealth inequality. The most important contributors to healthinequality are income, education and activity status, in particular,retirement. Regional differences including the widely varyinghealth care supply, in contrast, do not exert any systematicinfluence. (JEL codes: D32, I10, I12)     

David Gawen Champernowne, 1912-2000: in appreciation

David Champernowne, who died in August 2000 aged 88, was notdirectly associated with the Cambridge Journal of Economics,but his major contributions belong to and serve to extend theapproach to economics which the journal wishes to preserve andadvance. This short obituary article records the journal's appreciationof his life and work.     

Effective supply failures and structural adjustment: a real-financial model with reference to India

Using a multiperiod real–financial CGE model, this paperidentifies the impact of budgetary policy on credit supply asa possible factor limiting the effectiveness of structural adjustmentprogrammes. Focusing on credit rather than money, and explicitlyanalysing the relation between the budget and the credit creationprocess, the model goes beyond earlier modelling approachesby (1) incorporating credit rationing, (2) recognising the dualrole of credit for working capital and investment, and (3) allowingfor endogenous switches between credit-constrained, capacity-constrainedand demand-constrained regimes. With this approach, the relationbetween money, output and prices, and issues of crowding inversus crowding out, are solved endogenously rather than assumeda priori.     

Random biographical notes

These notes, written in 1965 for Tadeusz Kowalik, provide anapt introduction to this issue of the Cambridge Journal of Economicswhich is dedicated to the memory of Maurice Dobb, for they revealthe political commitment and humanity of a modest but essentiallycourageous man. The essays which follow examine a variety ofaspects of the wide range of Maurice Dobb's contributions toeconomic knowledge. All display a spirit of constructive criticismwhich is appropriate in approaching the work of such a majorfigure.     

An Economic Definition of the Middle Class

The concept of a middle class is prevalent in both common parlance and the social sciences; concern is frequently expressed that the middle class is shrinking, and politicians often position themselves as champions of the middle class. Yet the phrase “middle class” is extremely ambiguous; no consensus exists on either the upper bound or the lower bound separating the middle class from other classes. The present paper employs the government’s official poverty line as the demarcation between the poor and the middle class, and develops an equivalent distinction to separate the middle class from the wealthy. Based on the new definition, the paper provides some rough empirical estimates of the size of the American middle class over the 1989–2004 period.

The Politics of Shadow Money: Security Structures,Money Creation and Unconventional Central Banking

ABSTRACT

For the first time in the history of central banks, the Federal Reserve has been pursuing monetary policies which allow shadow banks to access its reserves. The paper examines these policies in an analysis based on the concept of security structure. The aim is to facilitate a better understanding of complex institutional arrangements which convert credit claims into money or enable them to simulate the money-form. As the financial crisis reached its peak in September 2008, the Fed was not able to contain the impact precisely because the security structure existing between banks and the Fed did not extend to the shadow banking system, which had meanwhile become thebackbone of the global financial system. To address this situation, the Fed initiated new security structures that were designed to also give players in the shadow banking system access to liquidity and collateral. The concept ‘security structure’ serves as an analytical tool to explore dynamic forms of safety and liquidity generation and to distinguish between credit expansion and money creation. It also helps to differentiate between three qualitatively different stages of security: central bank money, quasi-money and shadow money. In this way, it foregrounds the politics of (shadow) money creation.     

Financial institutions and the Cambridge theory of distribution

This paper shows how the Cambridge theory of distribution isaffected by the nature of financial intermediation. When creditmarkets are akin to loanable funds markets in which lenderstransfer resources to borrowers, the Cambridge theory holdsand steady-state income distribution is independent of workers'saving behaviour. However, when credit markets embody endogenouslygenerated bank money, the Cambridge theory does not hold. Financialinstitutions and endogenous money therefore matter for long-runsteady-state outcomes, just as they do for short-run macroeconomicoutcomes.     

Credit creation under multiple banking regulations: The impact of balance sheet diversity on money supply

Since the recent financial crisis along with more concentration of banking supervision, we have stepped into a new regulatory regime where multiple regulations are at play simultaneously. In this paper, we study the collective impacts of multiple regulations on credit creation in a heterogeneous banking system. Each single regulation imposes a constraint on credit creation for each bank, while with multiple regulations, only the most stringent one plays the determinant role on money supply. For the homogeneous banking system with identical balance sheets, they share the same binding regulation. In contrast, for the heterogeneous banking system with diverse balance sheets, the binding regulation for each bank may be different from other's. Those banks, who are bound by different regulatory constraints from homogeneous banks, would bring about an overall reduction in money supply, because those binding regulations impose a lower capacity (compared with the one in the case of homogeneous banks) for the banks to extend their balance sheets in this condition. We put forward an agent-based model of commercial banks integrated with two processes: credit creation and fund transfer, to demonstrate the reduction effect. The results facilitate the understandings of the transmission mechanism of monetary policy via banks and its interaction with prudential regulations.     

Perceived trustworthiness and inter-firm governance: empirical evidence from the UK printing industry

The paper describes six representative theoretical positionsregarding the impact of trustworthiness on the organisationof inter-firm relations. The positions are then assessed onthe basis of a survey of 184 buyer–supplier relationshipsin the UK printing industry. The widely accepted transactioncost argument for trust as a parameter reducing hierarchy isdismissed. Instead, the so-called triadic forces argument basedon Bradach, J. L. and Eccles, R. G. (1989. Price, authorityand trust: from ideal types to plural forms, Annual Review ofSociology, vol. 15, 96–118) receives the strongest support.Market, hierarchy and trust represent alternative mechanismsthat can be combined in a variety of ways. This pluralisticmodel is enriched further by the acknowledgement of variableroles for contracts and a sceptic stance regarding rationalityin practice.     

非对称信息条件下信贷市场分析

随着市场机制的建立和金融体制改革的深入,企业与银行之间的借贷关系日益复杂,银行对企业的放贷面临新的挑战。企业为了获得贷款想方设法隐瞒自己信息,银行为了避免损失,极力加强监管力度。由于商业银行(放款者)与企业(贷款者)之间存在着信息不对称性,所以它直接影响银行的贷款风险决策。     

On not doing due diligence: Bagus and Howden on free banking

In their recent article in the Quarterly Journal of Austrian Economics, Bagus and Howden (2010) present “quibbles” with fractional-reserve free banking. Specifically, they raise what they call “unaddressed issues” in this system, with a particular emphasis on Selgin (1988). We deem their arguments to be more substantial than “quibbles” and see them as part of a longstanding debate about fundamental aspects of monetary theory. We respond to their objections and attempt to specify how debate between the two sides might proceed more productively.     

The Cambridge School of Keynesian Economics

There have been strong ties between the Cambridge Journal ofEconomics (CJE) and the Cambridge School of Keynesian Economics,from the very beginning. In this paper, the author investigatesthe environment that saw the birth of the CJE at Cambridge (UK),in 1977, and the relationship that linked it to the direct pupilsof Keynes. A critical question is explicitly examined: why didn'tthe ‘Keynesian revolution’ succeed in becoming apermanent winning paradigm? Some behavioural mistakes of themembers of the Keynesian School may explain this lack of success,but only to a certain extent. In any case, there were and therestill are remedies too. But what we are inheriting is a uniqueset of analytical building blocks (the paper lists eight ofthem) that makes this School of economics a viable (and in somedirections definitely superior) alternative to mainstream economics.Admittedly, there is some important work still to be done. Thepaper highlights the need for a two-stage approach, addressingpure theory and extensive institutional analysis. It is arguedthat a combination of the two would strengthen the coherenceof the theoretical foundations, and at the same time would providea fruitful extension of economic analysis to empirical, institutionaland economic dynamics investigations.     

A note on the theory and measurement of trust in explaining differences in economic growth

This paper takes issue with the trend to attribute differencesin economic growth rates to differences in interpersonal trust.I discuss the World Values Survey (WVS) measure that is usedto operationalise trust at the macro level. I hypothesise thatthere is a mismatch between the theoretical argument and theempirical operationalisation of trust. Instead of measuringtrust, the WVS measure may instead proxy the well-functioningof institutions. I provide circumstantial evidence for thisthesis by a principal components analysis of trust and institutionsand a robustness test of Zak and Knack's (2001. Trust and growth,Economic Journal, vol. 111, 295–321) seminal study ontrust and economic growth.