Advancing economic analysis beyond the equilibrium framework

Twentieth century economics was dominated by the development and refinement of the concept of economic equilibrium. While it is worthwhile to understand the properties of economic equilibrium, equilibrium concepts have dominated economic thought to the point that they have obscured some of the more important issues economists have always strived to understand. At least since Adam Smith’s time, economists have tried to understand the causes of prosperity, and how economic welfare can be enhanced, but these issues are best understood outside the equilibrium framework. The foundations provided by the Austrian school point toward ways that economic analysis can expand beyond the equilibrium framework.

Christian Economic Thought in The Netherlands

The objective of this paper is to provide an insight into the ethics in the works of Christian economists in The Netherlands. The paper starts with a brief review of some key texts by Dutch Christian economists representing faith-based organizations. The next section presents a summary of (Dutch) Christian ethics, distinguishing four approaches: motivation, values, institutions, and instrumentalism. The following section will discuss some recent scholarly texts by Dutch Christian economists. It will be shown that three of the four ethical approaches are represented in these writings. In a comparison of the texts, the faith-based civil society economic thought seems to remain closer to the Christian ethics tradition. The last section will explain this gap by showing how, in faith-based civil society, morality is largely understood as being part and parcel of the economy, whereas in the academic economic literature, morality is largely regarded as belonging to the private sphere.

Evolutionary economics and the case for a constitutional libertarian paternalism—a comment on Martin Binder, “should evolutionary economists embrace libertarian paternalism?”

In his article “Should evolutionary economists embrace libertarian paternalism?”(Journal of Evolutionary Economics 24(3), 2014, 515–539) Martin Binder discusses the pros and cons of “libertarian paternalism” (LP) from an explicitly evolutionary viewpoint, concluding that as a general rule, evolutionary economists should be cautious regarding this new and highly influential policy approach. In this comment I argue that Binder starts from an incomplete model of the institutional status quo and neglects an obvious alternative to the standard variant of LP, namely, a constitutionally constrained LP. Most of Binder’s objections do not apply with equal force to such a refined variant of LP.     

Convergence or divergence? The impact of technology on “why growth rates differ”

This paper presents an overview and assessment of the theoretical and empirical work on catch-up and growth, with particular emphasis on the impact of technology, and the consequences for developing countries. The point of departure is the neoclassical theory of economic growth, as laid out by Solow and others in the 1950s, and the applied work that followed (growth accounting). Then the contributions from economic historians and more heterodox economists, such as Schumpeter, Kaldor and others, are discussed, followed by an account of the most recent theoretical developments (new growth theory) and the empirical (econometric) work in this area.An earlier version of this paper was presented at the Joseph A. Schumpeter Society 1992 Conference, 19–22 August, Kyoto, Japan. I want to thank the commentator, Karl Heinrich Oppenländer, and the other participants at the session for comments and suggestions. The revision of the paper has also benefited from my recent work in this area, whether under single authorship (Fagerberg 1994) or together with Nick von Tunzelmann and Bart Verspagen (Fagerberg et al. 1994). I am grateful to Nick and Bart for allowing me to draw on our joint work.     

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.

Rethinking the Foundation of the Original Institutional Economics Policy and Reform Program: Reactions to Thomas C. Leonard’s “Illiberal Reformers”

John R. Commons, among other original institutional economists, argued for the interests of the common people against the power of vested interests in politics and business. Against this backdrop, a new book by Thomas C. Leonard contends that, in fact, these same economists were actually “illiberal” and only promoted the interests of certain groups, such as Anglo-Saxon men, and were against the progression of minority populations, women, or the disabled. But Leonard’s argument that these economists were “illiberal,” and that their entire reform program related to the role of government in the economy and the creation of the administrative state, is essentially defunct. As Leonard (2016 Leonard, Thomas C. Illiberal Reformers: Race, Eugenics and American Economics in the Progressive Era. Princeton, NJ: Princeton University Press, 2016. [Google Scholar], xiv) writes in the prologue, “expertise in the service of the administrative state, what progressives call social control, has survived the discredited notions once used to uphold it.” We respond to Leonard’s book by offering a direct critique of the arguments he makes. We argue that Leonard — at least partially — takes the founders’ view on these issues out of context, and that even where some of their views would be refused by today’s institutional economists, it does not mean that the entire reform project is rejected.     

Unionization and absenteeism

Until recently any labour economist doing empirical work on unionization was concerned almost exclusively with the effect of unionization on wages. But beginning with Freeman's 1976 analysis of the rich institutional structure of unions, economists have been considering the role of unions in, for example, increasing productivity, lowering quit rates, enhancing fringe benefits, reducing income inequality, improving working conditions, and affecting a variety of other attributes at the workplace. ^{1 1}It is not the purpose of this paper to provide an exhaustive bibliography on the ‘new view’ of unionization. Nevertheless, the interested reader may want to see Freeman (1976, 1978, 1980) and Brown and Medoff (1978). To date, however, no study has directly addressed a question that appears ripe for empirical analysis: Does unionization affect absenteeism?

This paper presents results from a study designed to answer that question. The first section presents a simple model of absenteeism. The second section discusses the five mechanisms through which unionization influences absenteeism. The third section describes the data and variable selection. Results from logit regressions are presented in the fourth section and the paper closes with a summary of the arguments and evidence.     

F. A. Hayek’s influence on Nobel Prize winners

F.A. Hayek’s broad research program has led some to conclude that his impact on economics has been minimal. This citation study examines the frequency of Nobel laureates cited by other laureates in the official Prize Lectures to understand how elite economists influence other elite economists. It finds that Hayek is the second most frequently mentioned laureate in the Prize Lectures, and he has the second most publication citations of the laureates. Hayek’s influence on the top tier of economists is substantial.

What are the ethics of welfare economics? And,are welfare economists utilitarians?

Four questions: (1) What is welfare economics? (2) Is it an ethical system?  (3) How do welfare economists differ from one another? And (4), how do they differ from other economic ethicists? Then utilitarianism is discussed. I was taught, and have inferred to others, that welfare economists are utilitarians. They are not. Welfare economics is an atypical form of welfare consequentialism: consequentialist in that whether an act or policy is right or wrong is a function of only its consequences—the adjective “welfare” because the only consequences that matter are the welfare (well-faring) consequences. Most welfare consequentialists are neither welfare economists nor utilitarians. And, most moral philosophers are not welfare consequentialists—neither are most normal folk.     

Corporate Lobbying, Regulatory Conduct and the Porter Hypothesis

Michael Porter, the influential Harvard management guru, has promoted the idea that compliance with stricter environmental regulations can afford secondary benefits to firms through improved product design, innovation, corporate morale and in other ways. Once these secondary benefits are factored, the net cost of compliance is argued to be lower than conventionally thought and may even be negative. Whilst environmental economists have rejected the Porter Hypothesis as being based on excessively optimistic expectations of the likely size of such secondary benefits the underlying ideas do enjoy significant credence in the business community. In the context of a lobbying model of regulatory policy-making we argue that the EPA should change the way it conducts regulatory policy to take account of Porter's views – even if it knows those views to be misguided. The model serves to illustrate the more general point that fashions in management thinking can be expected to impact the optimal conduct of regulatory policy.     

Are residual economic relationships normally distributed? Testing an assumption of neoclassical economics

In both theoretical and applied contexts, neoclassical economics typically assumes that residual economic relationships are mean-zero, finite-variance, normally distributed random variables. However, many have challenged this view, from various perspectives. The Austrian economists, specifically in the tradition of Mises and Rothbard, reject outright the effort to mathematically model human choices. This Austrian view is often derided as unscientific. However, some of the most mathematically sophisticated work in financial economics also rejects the orthodox bell curve. In this paper, we test Benoit Mandelbrot’s “stable Paretian” hypothesis on ten major macroeconomic data sets and reject the normal distribution in nine of them. We further argue that the stable Paretian hypothesis (and, more generally, the field of “chaos theory”) is far more compatible with the Austrian position than one might initially suspect.

Why should Austrian economists be pluralists?

Peter Boettke (2007) argues that economists need not act pluralistically in order for pluralism to thrive in the marketplace of economic ideas. From a market process perspective, Boettke sees intellectual diversity and openness as catallactic outputs, not inputs—emergent by-products of academic specialization and trade. To expect individual scholars to behave in a pluralistic manner is unnecessary and “completely inappropriate” since it detracts from their central task: “to commit themselves to an approach and pursue it doggedly, even in the face of great doubt and resistance by one’s peers” (Boettke 2007). This paper proposes a Smithian revision of Boettke’s position. The author argues that scholarly pluralism is best understood as a constitutional rule of academic life—a virtue ethic that promotes learning and intellectual freedom by mitigating tyranny and autarky in the republic of science. Drawing from the writings of Adam Smith, Friedrich Hayek, Deirdre McCloskey, Bruce Caldwell, James Buchanan, Don Lavoie, and Boettke himself, the author argues that scholarly pluralism has been, and continues to be, a necessary condition for the flourishing of Austrian economists as free, responsible, efficacious thinkers.     

Duality of welfare and profit maximization

Many economists are aware that the conditions for the efficiency and monopolization in a partial equilibrium framework are the extremes of the Ramsey–Boiteux formula when the Lagrange multiplier for the budget varies. We formalize the duality existing between the welfarist and monopolist constrained maximization programs by proving the following “folk theorem”:      

Is precise econometrics an illusion?1

Abstract

Many empirical economists say that the teaching of econometrics is unbalanced, and students are not well-prepared for the serious problems they will encounter with real data. Here, the author considers the problem of noisy data, which is present in most econometric studies, but receives far too little attention. Most econometric studies are done in a world of low signal-to-noise ratios, and educated common sense suggests that we cannot expect precise results in such an environment. Sensitivity analysis shows that the apparent precision of reported econometric results is generally an illusion, because it is highly dependent on error term independence assumptions.^1,2     

On the location of public bads: strategy-proofness under two-dimensional single-dipped preferences

In a model with finitely many agents who have single-dipped Euclidean preferences on a polytope in the Euclidean plane, a rule assigns to each profile of reported dips a point of the polytope. A point $x$ of the polytope is called single-best if there is a point $y$ of the polytope such that $x$ is the unique point of the polytope at maximal distance from $y$ . It is proved that if the polytope does not have either exactly two single-best points or exactly four single-best points which form the vertices of a rectangle, then any Pareto optimal and strategy-proof rule is dictatorial. If the polytope has exactly two single-best points, then there are non-dictatorial strategy-proof and Pareto optimal rules, which can be described by committee voting (simple games) between the two single-best points. This also holds if there are exactly four single-best points which form the vertices of a rectangle, but in that case, we limit ourselves to describing an example of such a rule. The framework under consideration models situations where public bads such as garbage dumping grounds or nuclear plants have to be located within a confined region.     

Austrian theories of entrepreneurship: Insights from complexity theory

This paper examines various Austrian theories of entrepreneurship through the lens of complexity theory, more specifically via the concept of a dancing fitness landscape. Problems in many fields (including economics) can be characterized as attempting to find the highest peak on a fitness landscape (which corresponds to an efficient or optimal resource allocation). A rugged fitness landscape is one characterized by many peaks and troughs, while a dancing fitness landscape is one where the peaks and troughs change over time due either to exogenous or endogenous activity. I argue that several key disagreements among Austrian economists can be better understood through the metaphor of a fitness landscape. The implications of this insight for various branches of Austrian economics are also considered. This study is timely as radical Austrian views are starting to percolate into business schools leading to increased debate among management scholars about the precise nature of the entrepreneurial process (Chiles et al. 2007; Sarasvathy and Dew 2008; Alvarez et al. 2010).     

Determinants of technical change: Empirical evidence from Switzerland

The purpose of this paper is to analyse both theoretically and empirically those factors which underlay the—empirically observable—inter-industry differences in technical progress. At the theoretical level economists agree more and more that technical progress can be explained at the industry level ey the following three factors: 1. the technological opportunities, 2. the appropriability conditions, meaning the ability to capture and protect the results of technical innovations, and 3. the market demand conditions.The basic theoretical model was tested with the help of two sets of Swiss data. One set was made available by Swiss Federal Office of Statistics and consists of quantitative information on R&D expenditures, R&D personnel, total employment and sales figures for 124 (4-digit SIC) industries for the year 1986. The second set was derived from a survey I carried out in the summer of 1988. 940 industry experts were approached: 358 of them, or 38 percent, covering 127 industries, completed the questionnaire. The items on the questionnaire were related to the two supply-side determinants of technical progress—items 1. and 2. above. For the empirical specification of the theoretical model, technical progress (as the dependent variable) was measured by three indicators: an output indicator, representing the introduction rate of innovations since 1970; two input indicators, share of R&D expenditures in sales and share of R&D personnel in total employment. All data were aggregated at the industry level (4-digit SIC). Three equations were estimated individually, using the OLS, GLS and Tobit methods.     

The rise and fall of monopolistic competition revolution

The widespread idea among economists is that monopolistic or imperfect competition is a set of realistic models that were invented in the 1930s and their purpose was to fill the gap between the polar and, at the same time, hypothetical models of perfect competition and pure monopoly. The main argument of this paper is that the monopolistic competition revolution set in motion a reaction—partly driven by methodological considerations, partly ideological—that ultimately led to the restoration of perfect competition, as the benchmark for evaluating market outcomes. In the end, monopolistic competition eclipsed, and perfect competition from the fridges of economic analysis that was up until the 1920s was placed to the very core of microeconomic model-building.