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.     

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.     

The financial system and the Pasinetti theorem

Palley (Inside debt, aggregate demand, and the Cambridge theoryof distribution, Cambridge Journal of Economics, vol. 20, no.4, 465–74, 1996; Financial institutions and the Cambridgetheory of distribution, Cambridge Journal of Economics, vol.26, no. 2, 275–7, 2002) considers the Pasinetti theoremin the context of the credit money system where banks generatedebts endogenously, and claims that the theorem ceases to holdin such a system, being valid only in the loanable funds system.This paper traces the root of Palley's claim to his assumptionregarding the ownership of banks, sets out an alternative (morerealistic) ownership arrangement, and thereby restores the Pasinettitheorem unscathed in the credit money system (at least in thekind Palley must have considered). The paper, however, uncoversthe case where the theorem indeed collapses and discusses thereason for it: the hoarding of a non-interest-bearing asset.     

Driven to abstraction? Critical realism and the search for the 'inner connection' of social phenomena

This paper examines critically the method of abstraction offeredby critical realism. Our main argument is that critical realismfails to articulate the synthetic side to abstraction. For thisreason, the critical realist method is unable to capture the‘inner connection’ of social phenomena. We arguethat critical realism is prone to extend a method (partially)applicable to the local and specific level of analysis to thehistorical level. The paper develops a method of abstraction,‘systematic abstraction’, that is appropriate tothis historical level. We argue that systematic abstractionconstitutes a radical addition to critical realism, one whichchallenges the fundamental precepts of the critical realistapproach to abstraction.     

On some criticisms of critical realism in economics

Methodological comments on critical realism in economics haveproliferated over the past decade—typically focusing onTony Lawson's Economics and Reality and Reorienting Economics,which constitute the core of this project. In the present paperwe select a series of important, mostly very recent argumentsagainst critical realism in economics and assess their meritsand demerits.     

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.     

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.     

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)     

Economics as progress: the LSE approach to econometric modelling and critical realism as programmes for research

In the face of claims that economics is increasingly drivenmerely by fashion, this paper draws out certain similaritiesand differences between two self-consciously progressive anddevelopmental research programmes—namely the LSE approachto econometric modelling and critical realism in economics.The argument is that, while these two programmes of researchshare a common point of departure and possess many common elements,what at root distinguishes them is their adoption of opposingphilosophical orientations. The comparison enables both thenature of each programme, and the relevance of their commonconcerns, to be more easily appreciated and helps clarify thesort of evidence that would provide a basis for selecting oneproject over the other.     

On Sraffa's Standard commodity

The necessity of expressing the relative price of a commodityin terms of another commodity makes it impossible to distinguishthat part of any change that can be ascribed to the characteristicsof the commodity itself from the part of that change that isto be ascribed to the characteristics of the commodity of reference,i.e., the numéraire. Ricardo (1817) was the first topoint out this problem and the need to find an ‘invariablemeasure of value’, but he was not able to solve the problem.In 1960, Sraffa suggested using a bundle of commodities, thathe called ‘Standard commodity’, to accomplish thisfunction, claiming that it was a standard of value invariantwith respect to changes in the distribution of income. But inSraffa's book there is no explicit proof of this claim. Thisgave rise to many misunderstandings about the Standard commodityand its role as invariable measure of value. This paper proposesa proper definition of an ‘invariable measure of value’,and then proves that the Sraffa ‘Standard commodity’does fulfil the requirements of this definition.     

Sraffa's path to Production of Commodities by Means of Commodities. An interpretation

The present article provides a reconstruction of the path followedby Sraffa in the long journey (begun in the late 1920s) whichbrought him to his 1960 book. The starting point of Sraffa'sresearch was the formulation of his cost-price equations, whichsurprisingly enough appear to have been derived neither fromRicardo's theory of value, nor from Marx's ‘transformationof values into prices of production’, but rather fromMarx's reproduction schemes, published in volume II of Capital,to which Sraffa was almost certainly brought by his study ofMarx's interpretation of Physiocratic theory in volume I ofTheories of Surplus Value. The main device that Sraffa usedin his attempts to bring to light the existence of solutionsto his system and their properties, which basically meant buildinga consistent wage–profit–price relationship, wasthat of somehow cutting out the prices from this relationship.The paper shows that different routes were attempted by Sraffato achieve this end, and that the main influences on these attemptswere Ricardo and Marx, in particular Ricardo's corn-ratio theoryof profits, and the related conception of a maximum rate ofprofits. In the course of his research, Sraffa was helped bysome distinguished mathematicians, in particular Frank P. Ramseyand Abram S. Besicovitch. Of Ramsey's contribution there areimportant traces, but no more than traces, while ample recordsremain of the relationship between Sraffa and Besicovitch, andthey will play an important part in the story told in this paper.     

Did Partial Globalization Increase Inequality? The Case of the Latin American Periphery, 1950-2000

Inequality is an important threat to the globalization of theworld economy that we experience today. This contribution usesthe coefficient of height variation as a measure of inequality.This indicator covers not only wage recipients, but also theselfemployed, the unemployed, housewives, children, and othergroups who may not participate in a market economy, for theperiod 1950–79, for which income inequality data is mostlyunavailable or inconsistent. It turns out that within-countryinequality is higher in time periods of greater openness. Thisresult is confirmed for the time period 1950–2000, anda much broader model. (JEL I12, I32, N33)     

Some Cambridge reactions to The General Theory: David Champernowne and Joan Robinson on full employment

This essay analyses early reactions put forward by Cambridgeeconomists David Champernowne and Joan Robinson to J. M. Keynes'streatment of the labour market in The General Theory. Champernowne'sand Robinson's critical reactions represented attempts to fillthe gap of the determinants of changes in money-wages, whichthey both identified as a weak spot in the argument of the book.They rejected, albeit for different reasons, Keynes's notionof the point of full employment as an upper limit defined bythe equality between the real wage rate and the marginal disutilityof employment. Instead of Keynes's taxonomy of types of unemployment,Champernowne and Robinson introduced, respectively, the conceptsof ‘monetary employment’ and ‘monetary unemployment’,and of ‘critical levels’ of employment.