Of clouds and clocks and Keynes: conceptions of reality and the growth of knowledge function of money ∗

In this paper, John Maynard Keynes' General theoryand the concept of money are given an evolutionary interpretation. This interpretation is based on Karl Popper's delightful essay ‘Of clouds and clocks: an approach to the problem of rationality and the freedom of man’. The essay presents two things: Popper's conception of indeterminism and his general theory of abstractions. Popper's general theory concerns the role of abstractions and rule-governed, hierarchical systems of abstractions in structuring an indeterministic and uncertain world. He applies his general theory to science.Popper maintains that science is an abstract, rule-governed, linguistic process that facilitates criticism as a way of learning about our world. Popper calls this the growth of knowledge function of science. Popper's general theory can be applied to Keynes' General theory. Following Popper, I argue for a conception of the economy as a rule-governed, monetary language of commerce that facilitates critically minded inquiry in the domain of ordinary economic transactions. A monetary system facilitates the growth of commonsense knowledge in the economy. I call this the growth of knowledge function of money. An awareness of indeterminism and a growth of knowledge like function of money seem to pervade Keynes' General theory.     

Money creation and credit multipliers ∗

The standard objections against the quantity theory of money, based on the instability of the velocity of money, are insufficient to discard this long-held monetary theory. The principal criticism of the theory rests on the determination of the money supply. The supply of money is a dependent variable, not an independent one. The demand for credit determines the quantity of money, or at the very least bankers and borrowers share the responsibility. Causality is thus reversed. It is necessary to abandon the concept of money multipliers, which are relics of the quantity theory of money. Bankers can, if they so desirerespond without limitto demands for credit. They are not tied by a fixed amount of pre-existing assets. The goal of the article is to outline an explanation of these statements and provide a vision of monetary theory that is different from that usually taught.     

Factor Uses and the Pattern of Specialization

We show that in the setting of multiple goods and factors, the factor proportions theory has the following prediction: across industries, the impacts of the endowment of a given factor on industry outputs have positive co‐variance with the relative uses of this factor. The intuition is that, on average, the industries that use a given factor heavily have positive output responses, following an increase in the endowment of this factor. This co‐variation condition is robust to Hicks neutral‐ and factor‐augmenting productivity differences, and constitutes a direct test of the production side of the factor proportions theory. We also show that the co‐variation condition finds empirical support. This is evidence that is consistent with the factor proportions theory.     

On the monetary nature of the interest rate in a Keynes–Schumpeter perspective

Abstract

Keynes, in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this article is twofold. The first objective is to point out the limits of the liquidity preference theory. The fundamental limitation of this theory is that it does not allow to realize the intent declared by Keynes in 1933 to elaborate a monetary theory of production The second objective is to present a more solid theory of the monetary nature of the interest rate. It will be shown that an essential element of this explanation is Schumpeter’s analysis of the role of bank money in a capitalist economy. In fact, this analysis represents a fundamental tool to explain the characteristics that, according to Keynes, distinguish a monetary economy from a real-exchange economy     

Roy Harrod and traditional theory

In 1926 and 1936 Sraff and Keynes attacked the methodological core of traditional economic theory by showing that the premises of partial equilibrium analysis were mutually inconsistent.

this paper aims to show that Harrod neglected Sraffa and Keynes's logical arguments, and only admitted that the tacit assumptions under discussion restricted the domain of validityof the theory to special cases: perfect competition and statics. He then proceeded to generalize the theory to imperfect competition and dynamics by applying the principles (but not the instruments) of traditional analysis. The definition of these domains thus aimede at rescuing as mush as possible from the orthodox approach.     

Harvesting to Extinction: Is It Socially Rational?

This paper presents a critique of the neoclassical view of the optimal use of renewable resources and offers an alternative view based on the method of classical thermodynamics. The presentation is forwarded via the issue of harvesting to extinction. Based on simple models, the traditional theory suggests that society would benefit from wiping out any renewable resource whose intrinsic growth rate, though positive, is smaller than the social rate of time preference. The latter is the rate society is using to discount its future benefits and costs. To bypass this ecologically implausible outcome, the simplistic assumptions have been modified in various ways. For example, either the costs or the benefits of harvesting have been made to depend on the stock of the resource as well as on the yield. The modifications offered make society less prone to wipe out resources intentionally, but they still disregard a more fundamental difficulty: The traditional theory is not consistent with the second law of thermodynamics; it describes a process that defies the second law, which no known system is able to be undergoing. No doubt, the theory should be challenged first and foremost on this ground, but none of the offered modifications is capable of annulling this inconsistency. A deeper change is needed because the social values of the resource as perceived by a society that behaves in manners consistent with the second law and as defined by the traditional theory necessarily differ. The paper identifies the socially consistent value and shows that harvesting to extinction is never optimal socially. Were society to follow the socially inconsistent value, it would always underestimate the importance of self-sustained resources. However, the unlikely refutability of the second law turns this possibility and the socially favored extinctions into arguable outcomes of an untenable theory rather than undesirable outcomes of a sound theory. Potentially growing renewable resources are wiped out in real life for various reasons, but when they are preyed to extinction, their unfortunate fate is an outcome of the dynamics of a socially unregulated system rather than a social objective coming to fruition. This revised version was published online in July 2006 with corrections to the Cover Date.     

Toward a General Theory of Credit and Money

Money is not a thing but a species of credit, and hence a social relation involving rights and obligations. It emerged as the most abstract species in the course of the general process of evolution of credit. Formulation of a theory of credit is, therefore, logically prior to any theory of money. A framework proposed along this line by Macleod, during the second half of the 19th century, has been neglected until now. Combined with Walras's numeraire and etalon concepts, this approach provides the foundation for a General Theory of Credit and Money, presented in this paper.     

Discrimination and the unemployment durations of white and black males

In this study we develop a model to decompose the longer unemployment duration of blacks into discriminatory and non-discriminatory components. By extending Becker's theory of discrimination to job-search theory, the discriminatory component is seen to be the result of two separate effects. First, a white treatment advantage shortens the unemployment duration of whites because they receive more frequent and higher wage offers than would prevail in the absence of discrimination for working alongside blacks. Second, a black treatment disadvantage lengthens the jobless spell of blacks because blacks receive lower wage offers than would prevail without discrimination as discriminating employers extract quasi-rents from their labour. We estimate our model using date from the CPS Displaced Workers Survey. The results show that 3.81 of the 4.58 weeks longer unemployment spell for blacks is due to discrimination, with 3.11 weeks resulting from the white treatment advantage, and 0.7 weeks emanating from the black treatment disadvantage.     

Games with Imperfectly Observable Commitment

[1]claims that, in models of commitment, “the first-mover advantage is eliminated when there is aslightamount of noise associated with the observation of the first-mover's selection.” We show that the validity of this claim depends crucially on the restriction to pure strategy equilibria. The game analyzed by Bagwell always has a mixed equilibrium that is close to the Stackelberg equilibrium when the noise is small. Furthermore, an equilibrium selection theory that combines elements from the theory of[7]with elements from the theory of [6], actually selects this “noisy Stackelberg equilibrium.”Journal of Economic LiteratureClassification Number: C72.     

China's indigenous innovation approach: the emergence of Chinese innovation theory?

Theory-driven and theory-based studies on innovation in China are relatively scarce. Most innovation studies about Chinese business are based on Chinese policy and government programmes and their results. This special issue of Technology Analysis and Strategic Management explores China's indigenous innovation strategy and suggests a research agenda that focuses on Chinese innovation theory building that incorporates China's efforts to move towards an innovation-based economy. Currently, China is developing its indigenous innovation capabilities (The Chinese term is 自主创新, pronounced zizhu chuangxin). We suggest that innovation studies of Chinese business could focus on these indigenous innovation ambitions. In addition to this, it could adopt, and be embedded in a Chinese theory of innovation instead of a traditional Western-centric theory of innovation. Our proposition is that to better understand Chinese indigenous innovation, a new paradigm of Chinese innovation should be developed. We therefore present a research agenda that can be a starting point for the development of such a theory, and present seven papers in this special issue that give content to this idea. Obviously no theory will have a monopoly on exploring Chinese innovation phenomena, but it is interesting to add a Chinese-centric view into the Western-centric scholarly view. We hope that will be one of the contributions of this special issue on innovation in China.     

Half empty, half full and why we can agree to disagree forever

Aumann [Aumann R., 1976. Agreeing to disagree. Annals of Statisitics 4, 1236–1239] derives his famous we cannot agree to disagree result under the assumption that people are expected utility (=EU) decision makers. Motivated by empirical evidence against EU theory, we study the possibility of agreeing to disagree within the framework of Choquet expected utility (=CEU) theory which generalizes EU theory by allowing for ambiguous beliefs. As our first main contribution, we show that people may well agree to disagree if their Bayesian updating of ambiguous beliefs is psychologically biased in our sense. Remarkably, this finding holds regardless of whether people with identical priors apply the same psychologically biased Bayesian update rule or not. As our second main contribution, we develop a formal model of Bayesian learning under ambiguity. As a key feature of our approach the posterior subjective beliefs do, in general, not converge to “true” probabilities which is in line with psychological evidence against converging learning behavior. This finding thus formally establishes that CEU decision makers may even agree to disagree in the long-run despite the fact that they always received the same information.     

A New Bargaining Set of an N-Person Game and Endogenous Coalition Formation

The two most fundamental questions in cooperative game theory are: When a game is played, what coalitions will be formed and what payoff vectors will be chosen? Few solution concepts or theories in the current literature provide satisfactory answers to both questions; answers are especially lacking for the first one. In this paper we introduce a new bargaining set, which is the first solution concept in cooperative game theory that provides answers to both fundamental questions endogenously. Journal of Economic Literature Classification Number: C71.     

A theory of classification and evolution of technologies within a Generalised Darwinism

This paper here proposes a theory of classification and evolution of technology based on taxonomic characteristic of interaction between technologies that is an under-studied field of research in economics of technical change and management of technology. The proposed classification of technologies, in a broad analogy with evolutionary ecology of parasites, within a theoretical framework of Generalised Darwinism, is: (1) parasitic technologies, (2) commensal technologies, (3) mutualistic technologies, (4) symbiotic technologies. This theory here suggests the property of mutual benefaction from interaction between different technologies and the theorem of not independence of any technology to explain and predict characteristics and evolutionary pathways of technologies over time. Overall, then, this study may be useful for bringing a new perspective in economics of innovation to categorise and analyse the interaction between technologies that can be a ground work for development of more sophisticated concepts to explain and predict the evolution of technology and generalise aspects of technological change in human society.     

The contemporary money-supply paradigm: Friedman and Patinkin

The contemporary money-supply paradigm is summarized in the expression M = mB. Friedman and Patinkin formulate money-supply models of that genre. This paper shows that their two models are identical. The underlying bases (i.e., the view of the role of economic theory) on which each is formulated are different, and this provides part of the explanation of why the same formal result has gone unrecognized.     

Choice, preference and rationalizability in pareto’s theory of economic behavior

Pareto initiated the shift of economic theory from utility/preference to choice in order to fill a gap between theoretical and empirical economics. His suggestions for an empirically-oriented theory of choice were to be developed decades later in the literature on revealed preference and on the conditions of equivalence between preference-based and choice-based axiomatic structures. In the process, however, substantial departures from Pareto’s implicit design of the situation of choice were introduced. In this paper, the conditions for the rationalizability of choice are re-defined so that they fit the type of situation that Pareto had in mind. The result is that the main consistency axioms of standard choice theory have to give way to a different combination of axioms that concern decisiveness as well as consistency. (JEL:B13, D01, D11).     

Rationality,constitutions, and the ethics of rules

It seems clear that individuals stand to mutually benefit, in a wide variety of situations, from structuring their interactions in terms of constitutional practices. But a commitment to treat the rules defining such practices as setting real constraints on choice—a commitment to what could be characterized as an “ethics of rules”—is hard to reconcile with the standard, consequentialist theory of rational choice, which requires, in effect, that individuals regard any rule as providing no more than a “maxim” for choice. Such a theory of rational choice, then, constrains individuals to settle for a second best outcome in which choice is aligned with practice rules by means of strategies of precommitment and threats. The outcome is second best because such methods yield only partial alignment, and involve the expenditure of scarce resources, as well as a sacrifice of flexibility and freedom. To say this, however, is to identify the corresponding theory of rational choice as havingconsequentially unacceptable implications. A modified theory of choice is presented, which is still consequentially oriented, but which assesses consequences in a more holistic manner. It is then argued that this modified theory can provide a rational choice grounding for the needed “ethics of rules.” The author would like to thank three anonymous referees for their very helpful comments and suggestions.     

Civilisation as Paradigm: An Inquiry into the Hermeneutics of Conflict

This article examines Samuel Huntington's claims that his civilisational theory rises to the level of paradigm and is not merely social science theory. This claim is examined in light of Huntington's focus on Islamic civilisation and its relationship to the ongoing war on terror. The specific manifestations of Islam that have been relevant to this war are placed within the context of what Jeffrey Herf refers to as reactionary modernism, which views violent reactions to modernity as alternative expressions of modernity. While Islam has civilisational characteristics, as Huntington suggests, the violence that gives rise to terror is a result of time- and region-specific reactionary modern variables, and is not inherent in Islam itself. Second, though civilisation-as-social science might shed light on policy options to deal with the problem of terror, civilisational theory is not equipped to supersede the interest-orientation of realism.     

Endogenous Money,Fiscal Policy,Interest Rates and the Exchange Rate Regime: A Comment on Palley,Tymoigne and Wray

One of the main collective contributions of the various heterodox schools of monetary thought, such as circuit theory, Post Keynesian theory, modern money theory (MMT) and others, has been to stress the importance of the endogeneity of money via bank credit creation. It is necessary to stress the notion of a collective contribution because of the various claims and counter-claims to academic priority made in the literature. The recent exchange between T.I. Palley and E. Tymoigne and L.R. Wray in this journal provides a clear example of this. This response examines the differences between these writers in some detail.     

Hayek,Mach, and the re-ordering of mind

This paper argues that Friedrich A. v. Hayek's theory of mind and the relation between mental and physical events, most systematically presented in his 1952 book, The Sensory Order, is indebted to Ernst Mach's theory, and, in particular, to his Analysis of Sensations, above and beyond what Hayek himself along with multiple admirers of his work ever cared to admit. By highlighting a number of important similarities between Mach's and Hayek's theories of the psychical/phenomenal and physical world/order, the paper aims to show that key aspects of Hayek's theory of mind can be traced to Mach's theoretical foundations. The paper further argues that some of the criticisms Hayek levels against Mach concern nonessential points, arise from the uncritical acceptance of common misinterpretations of Mach's theory, or are plainly wrong.