Presidential Address: Mathematics in economics and econometrics

Abstract The paper discusses the choices of mathematical approaches in economics and econometrics, in particular, approaches that either (a) aim for a sharp result or (b) use the least restrictive assumptions. It is argued that, while the choice (a) often necessitates strong mathematical assumptions, choice (b) may lead to only partial identification and may require using less familiar mathematical techniques. This is discussed in the context of the problem of defining a probability density: existence may fail in function spaces; even after imposing assumptions that ensure existence, the problem is not well posed. A density function may not exist for economic variables as a consequence of institutional rigidity such as an income supplement. The apparatus of generalized functions provides the general solution to identification and well‐posedness of density, but at the cost of less sharp results and greater mathematical complexity.     

Sen after Putnam

Modern classical economic theory, originally austere and minimalist (as in Sraffa and Neumann), has entered a second, more enriched phase. Inspired by Adam Smith, Amartya Sen has drawn out the moral implications of formal classical models. But Sen remains open to neoclassical attack on the grounds that science must be value free. In his book The Collapse of the Fact/Value Dichotomy and Other Essays , Hilary Putnam rebuts the view that "fact is fact and value is value and never the twain shall meet". This paper explores consequences of this argument for classical theory. It explains the nature and significance of the entanglement of facts, analysis and values; and the impact of this entanglement on the concept of rationality, on capability theory, on the relationship between human needs and Sraffa basics, on Pasinetti's transformational growth, and on Sen's analysis of the disabled and most wretched. Supporting Sen's approach to human development, it opens the possibility of an enriched classical analysis, which can absorb Martha Nussbaum's analysis of tragedy using a logically and morally coherent political economy.     

Learning in expectation formation with applications to cattle and beef exports

The paper briefly considers problems associated with rational expectations and formulates a more general model which allows for situations where economic agents do not immediately arrive at a fully rational solution. It incorporates a learning mechanism whereby agents can provisionally adopt hypothetically-derived expectations as a basis for comparison with the actual outturns. Utilizing the resultant past expectational errors as indicators of the likelihood of prospective future outcomes, agents make explicit allowance a rational solution. Thus, in situations where complete information is not freely available, rationality would be approximated over time by means of a dynamic learning process which is founded on a firm empirical approach. This essential empiricism requires that the problem be examined on the basis of direct observation of applied situations. Therefore the method is implemented and analysed with reference to Irish foreign trade in fat cattle, carcase and processed beef. Simultaneous equation models are specified for each of these markets and are tested econometrically for the period 1974–83. The results obtained indicate that the originally-derived estimates of rational expectations did not prove significant, while learning expectations overall mostly did so. In particular the expectational errors were highly significant where the markets were most volatile, i.e. in those for fat cattle and carcase beef.     

Neo‐Marshellian Equilibrium versus Schumpeterian Creative Destruction: Its Impact on Business Research and Economic Policy

A cold war exists in faculties of business and economics. It is fought between the neo‐Marshellians that advocate the elegant simplifying assumption of equilibrium and the Schumpeterians that believe that economic growth is driven by the recognition of new opportunities and the capture of associated benefits through innovation. This fundamental disagreement is referred to as a cold war because the battles are fought indirectly with discussions of wealth transfer (instead of wealth creation), big firms versus small firms (instead of innovative firms versus noninnovative), and stability and managed earnings versus Sarbanes–Oxley and full disclosure. This note points out that this conflict does in fact exist and then provides a review of the literature and support for the Schumpeterian position as it relates to small business and associated economic policy. The literature is provided by one of the pioneers in this field, Professor Bruce Kirchhoff, as his last direct contribution to the field that he championed for decades.     

Canadian wage controls in an eclectic model of wage determination

Using a model of wage determination that allows for wage inertia, price expectational and price catch-up influences and quarterly data on annual wage change in new major Canadian settlements for 1967–1987, this paper shows that the Anti-Inflation Board (AIB) wage control programme has a much larger wage restraining influence than is estimated in previous studies. In contrast, the Six and Five wage control programme exerts only a modest restraining influence. Both results are of special interest because the wage determination model used here allows for not only the direct effect of wage controls, but also the indirect wage restraining effect of controls operating through lagged wage changes. We would like to thank two anonymous referees and the editor of this Journal for helpful comments on the work reported in this paper. We also want to acknowledge with thanks the very able research assistance provided by James Chu, Ann Holmes, and Graham Voss and the financial assistance provided by Career Access and Challenge grants from Employment and Immigration Canada and University of Victoria Faculty Research Grants.     

Managing through contracts: the employment effects of compulsory competitive tendering in Australian local government

This article brings new evidence to bear on the employment and human resource effects of competitve tendering and contracting. Drawing on a database of over two hundred workplace agreements, the article examines the impact of compulsory competitive tendering on employees’ pay and employment arrangements in the Australian local government sector. The findings are contextualised in the light of evidence on the outcomes of a similar contracting regime in Britain.     

Mergers,acquisitions, and the pruning of managerial deadwood

This research investigates the role that mergers and acquisitions may play in the disciplining of entrenched and inefficient managers. The relationship between a company's performance history and its subsequent top management turnover is assessed for a sample of target companies, their parents, and a control group of companies not involved in merger and acquisition activity. The results reveal that target company top management turnover is higher than ‘normal’ in the 2 years immediately following a merger or acquisition, but there is no relationship between previous target company performance and its subsequent top management turnover. Further analyses indicate that first-year target company turnover rates are associated with a history of relatively poor parent company performance, while second-year turnover rates are associated with a history of relatively good parent company performance.