A reformulation of the theory of demand by compensated demand functions

We present a formal approach to consumer demand by compensated demand functions. In accordance with the integrability theory or with the theory of revealed preference, we do not require the existence of a utility function, but we do assume certain hypotheses concerning functions describing rational behavior. In view of their properties, these functions can be interpreted as compensated demand functions. According to traditional neoclassical consumer theory, Shephard's lemma and the symmetry and negative semidefiniteness of the Slutsky-Hicks matrix can be shown. We shall also see that a convex, continuous, and monotonic preference ordering, which is representable by income compensation functions, can be introduced. It can also be shown that the existence of a compensated equilibrium can be derived within this approach by compensated demand functions. In order to obtain the existence of a compensated equilibrium under less stringent conditions we finally generalize the axioms assuming that a compensated demand correspondence is given.     

A reformulation of the technological progress function

In its actual construction, the ordinary technological progress function is concluded to be theoretically defective, because, among other things, (1) it is not in keeping with the dynamic perspective in which technological change occurs, (2) it leaves unaccounted the nonlinearities involved in the learning process, and what is even more important, (3) it is not stochastically specified. Furthermore, it is unsuitable for long-term prediction from time-series data because it ignores a “limit of learning”, which is approached if not reached. Empirically also it is found to be grossly inadequate. A reformulation of the technological progress function is developed here by way of a solution to some of these problems and it is applied to a variety of cases. The role of availability of knowledge and complexity in engineering design process is also investigated in a preliminary way by means of two a priori hypotheses developed in the main body of the paper. Directions of further research are indicated.     

The economic fertility of industrial projects

The economic impact of two industrial projects was forecast using economic fertility analysis. The results of the analysis suggest that the implementation of projects such as those described here add to the resources of government, enabling them to move closer to realization of social objectives, whereas concurrent decreased government revenues and increased transfer payments based on short term political considerations are directly inflationary and represent a threat to longer term social stability. The two projects were a crude oil petrochemical plant, with an investment of $200 million, and a controlled environment agricultural plant, costing $20 million. Direct, indirect, and induced economic activity for each project were calculated, from which income and employment multipliers, and forward and backward linkages were derived. New government revenues, balance of trade effects, and new capital formation were also forecast. Employment in terms of man-years on construction and in jobs created by the operations, as well as consumer expenditures and personal savings, were other outputs of the analysis. Construction and operation phases of the two projects were more beneficial than an equivalent increase in transfer payments in the generation of longer term effects such as new capital formation, new government revenues, and import-export balance, but were less efficient than increased welfare payments in generating short term effects such as consumer expenditures and short term employment.     

A reformulation of the foundations of welfare economics

Neoclassical welfare economics takes an outcome-oriented approach that uses Pareto optimality as its benchmark for welfare maximization. When one looks at the remarkable improvements in economic welfare that have characterized market economies, most of those improvements in welfare have been due to economic progress that has introduced new and improved goods and services into the economy, and innovations in production methods that have brought costs down, leading to higher real incomes. Pareto optimality is only peripherally related to actual economic welfare, and no economist would argue that people are materially better off today than a century ago because the economy is closer to Pareto optimality. After analyzing the actual factors that lead to improvements in welfare, this paper suggests a reformulation of the foundations of welfare economics to replace the almost irrelevant outcome-oriented concept of Pareto optimality as the benchmark for evaluating welfare with a process-oriented benchmark based on factors that generate economic progress. The paper then explores some implications of this reformulation.

Money, endogenous fertility and economic growth

This paper analyzes the issue of money superneutrality through an intertemporal optimizing model of capital accumulation with endogenous fertility, i.e. endogenous population growth. Two elements of this setup invalidate money superneutrality: (i) a demand for fertility that depends on real money balances, and (ii) an inverse relation between capital–labor ratio and population growth. Higher monetary growth increases fertility, since it reduces its opportunity cost, and hence diminishes capital intensity, and per capita output. This reverse Tobin effect is matched by an increase in aggregate capital and output growth rates. In this framework, the optimal monetary growth rule is a “distorted Friedman rule”.     

Controllability and the theory of economic policy: A critical view

It is argued in this paper that the concept of controllability in spite of its intuitive appeal is of limited interest for the theory of economic policy. Controllability implies that a given target can be attained even if the number of instruments is less than the number of independent targets. But there is no guarantee that the economy will be able to stay there. Tirbergen's rule is concerned with the existence of a static equilibrium solution. The controllability concept is concerned with the existence of a dynamic path towards it. But it does not imply that controllability is a dynamic generalization of Tinbergen's rule.     

Decreasing fertility,economic growth and the intergenerational wage gap

Persistent low fertility rates lead to lower population growth rates and eventually also to decreasing population sizes in most industrialized countries. There are fears that this demographic development is associated with declines in per capita GDP and possibly also increasing inequality of the wage distribution. We investigate whether this is true in the context of neoclassical growth models, augmented with endogenous fertility decisions and endogenous educational decisions. Furthermore we allow for imperfect substitutability across workers of different age in the production process and learning by doing effects as well as human capital depreciation. In particular, we assess the intergenerational wage redistribution effects which follow after a demographic change to persistent low fertility rates.     

Human capital accumulation, fertility and economic development

We examine the development paths of an economy by incorporating the trade-off between the quality and quantity of children and the substitutability between the educational effect within the family and the education paid for by the parent. There is a threshold wage rate, above which individuals begin to invest in the human capital of their children, while reducing the number of children. At this point, the economy shifts from an exogenous growth phase to an endogenous growth phase. It is also shown that the aggregate saving rate is positively correlated with the youth dependency ratio in the development process.     

Immigration, fertility, and human capital: A model of economic decline of the West

I show how the influences of unskilled immigration, differential fertility between immigrants and the local indigenous population, and incentives for investment in human capital combine to predict the decline of the West. In particular, indigenous low-skilled workers lose from unskilled immigration even if the indigenous low-skilled workers do not finance redistribution, do not compete with immigrants in the labor market, and do not compete with immigrants for publicly financed income transfers. For the economy at large, high-fertility unskilled immigrants and a low-fertility indigenous population result in economic decline through reduced human capital accumulation and reduced growth of per-capita output.     

A theory of economic development and dynamics of Chinese economy

This paper constructs a theoretical model which captures the recent slowing-down of Chinese economy. In contrast with the previous literature which largely confines its focus on the resource misallocation between inefficient state-owned enterprises (SOEs) and more efficient private firms under a closed economy setting, this paper re-examines the dynamics of the growth of Chinese economy from the perspective of an open economy. In particular, this paper incorporates heterogeneous outputs and relative prices into the model, where private firms are assumed to be the major exporters and the remaining large SOEs create increasing import demand from the home country. By adding downward sloping world demand curve, our paper predicts a turning point during the transition process, as the falling relative price for exports starts to constrain and eventually slow down the growth; SOEs begin to co-exist with private firms in the economy before it is fully transformed. Our paper provides a theoretical foundation in terms of understanding the current dynamics and institutional change of Chinese economy. Additionally, this paper also provides quantitative evidence on the effects of financial development during the China's economic transition process.     

Adam Smith's theory of economic history and economic development

Abstract

The aim of the paper is to show that Smith has a theory of economic history grounded in a politico-economic modeling (as well as a sort of economic theoretical modeling). In terms of the politico-economic approach, in the Wealth of Nations (Book III.ii–iv) Smith tried to offer a systematic account of economic development from feudalism to capitalism in Europe. These lead to suggest that the seeming internal inconsistency between the natural and the actual courses of progress in Book III may be resolved, and that Smith may be treated as a precursor of Douglass North, who stressed an inextricable link between the polity and the economy in economic history.     

A simple economic theory of skill accumulation and schooling decisions

We propose a model of schooling that can account for the observed heterogeneity in workers' productivity and educational attainment. Identical unskilled agents can get a degree at a cost, but becoming skilled entails an additional unobservable effort cost. Individual labor can then be used as an input in pairwise production matches. Two factors affect students' desire to build human capital: degrees imperfectly signal productivity, and contract imperfections generate holdup problems. Multiple stationary equilibria exist, some of which are market failures characterized by a largely educated workforce of low average skill. Policy implications are explored.     

Schumpeter and the theory of capitalist economic development

This paper gives a centenary appreciation of the contributions to economic thought of Joseph A. Schumpeter, with special focus on his work, The Theory of Economic Development (TED) it proceeds, first, by providing (in section 1) an overview of Schumpeter's life and works; second, by giving an interpretative exposition of the main themes of TED (in section 2) and Schumpeter's broader ‘economic sociology’ (in section 3) in terms of the place of these ideas in the history of economic thought; third, by examining the reception to TED and the impact of it and Schumpeter's dynamic methodology on the discipline (in section 4).