Microeconomics

Do economists live in a world of their own?

It is instructive to view the study of networks in economics as a shift in paradigm, in the sense of Kuhn (1962). This perspective helps us locate the innovation that networks bring to economics, appreciate different strands of the research, assess the current state of the subject and identify the challenges.

The ongoing explosion of the incomes of the richest households and the erosion of middle-class employment opportunities for most of the rest have become integrally related in the now-normal operation of the U.S. economy.

The tension between efficiency and equilibrium is a central feature of economic systems. In many contexts, social networks mediate this trade-off: an individual’s network position determines equilibrium play, and social relations allow coordination on an efficient norm.

A more realistic version of how people “maximize utility”

Our welfare depends not only on our actual consumption, but also on alternate choices wedid not make.

In recent decades, market values have crowded out non- market norms in almost every aspect of life—medicine, education, government, law, art, sports, even family life and personal relations. Without quite realizing it, we have drifted from having a market economy to being a market society. Is this where we want to be?

The Institute for New Economic Thinking joined the Centre for International Governance Innovation (CIGI) in holding its fifth Annual Conference from April 10 to April 12, 2014 in Toronto.

This research project introduces heterogeneous microeconomic behavior into a demand-driven stock flow consistent model to study the links between microeconomic financial fragility and macroeconomic instability.

Given the choice, would you accept to live in a society where happiness and prosperity is guaranteed for all on the condition that one single person be kept permanently unhappy? Is the well-being of thousands of people “worth” the sacrifice and suffering of a single innocent child? Such is the dilemma to which the inhabitants of the utopian city of Omelas are confronted in Ursula Le Guin’s philosophical short-story “The Ones Who Walk Away from Omelas”. In her parable, most people are ultimately able to come to terms with the atrocity. The few citizens who cannot end up walking away from the city — nobody knows where they go and they are never heard from again.

The Bank of England took the first step in putting the brakes on the surging property market as it scrapped the United Kingdom’s flagship initiative that encourages mortgage lending, introduced earlier this year by Treasury minster George Osborne.

Germany’s economic policies are under attack from all sides.

In our two papers, we analyze how changes in personal and functional (wages versus profits) income distribution interact to produce different macroeconomic outcomes in different countries. On the basis of a stock-flow consistent model calibrated for the United States, Germany, and China, simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and certain institutions (e.g. easy access to credit, privately financed education and health care systems).

“You are now leaving the world as you know it.”

World leaders who are gathering for the APEC summit next week had hoped to be signing the Trans-Pacific Partnership Agreement (TPP). The pact would bring together key Pacific-rim countries into a trading bloc that the United States hopes could counter China’s growing influence in the region.

Friedrich von Hayek described the economist’s task as demonstrating how little we really know about what we imagine we can design

Every nation faces the challenge of imagining what a good life means. Sound nutrition, shelter, health care, personal safety, social stability, security of savings, clean air and water, and the development of children are among the elements of what many envision as vital to a happy and healthy society.

We are coming up to the fifth anniversary of the Lehman crash in September 2008. How bad was it? Have we fixed the problems?

In introducing game theory (in chapters 7-9), MWG build upon the theory of rational choice by individual agents, developed previously in the book to attempt to analyze (describe, explain, and even predict?) the interactions of such agents as well as the outcomes to which they give rise. In previous chapters, MWG discuss interactions only in the form of the arms-length interactions of numerous firms and consumers in specific markets (e.g. under ‘perfect competition’, in chapters 3 and 5).

Axiomatic bargaining is presented in MWG in the context of welfare economics (Ch. 22), the aim being the formulation of reasonable criteria for dividing gains resulting from cooperative endeavors (the “joint surplus”). It is further presented as an application of cooperative game theory, in which an arbitrator distributes the joint surplus in a manner that reflects “fairly” the bargaining strength of the different agents (although we could conceive of a situation where the parties are bargaining without an external party). If bargaining fails, the outcome is the parties’ own fallback positions (the threat point, or status quo).

The recent debate about the reproducibility of the results published by Carmen Reinhart and Kenneth Rogoff offers a showcase for the importance of replication in empirical economics.

“Look! Up there in the sky! What is it? Is it a plane? Is it a bird?” No, it’s a distraction from the robbery that is taking place in broad daylight on the ground.

“Taking advantage of the opportunity offered by the structural adjustments of the global economy…”The decisions on the four modernisations taken at the Third Plenum represented a radical change in Chinese domesticdevelopment strategy.

Political meritocracy is the idea that a political system is designed with the aim of selecting political leaders with above average ability to make morally informed political judgments. That is, political meritocracy has two key components: (1) the political leaders have above average ability and virtue and (2) the selection mechanism is designed to choose such leaders.

At the heart of economics is a theory of action. It reflects views about how human beings make economic decisions and leads to an analysis of aggregate consequences.

Neoclassical economics has abolished the role of psychology in decision making by assuming that all individuals are rational optimizers with rational expectations about future events.

The Institute for New Economic Thinking held its annual plenary conference in Hong Kong from April 4-7, 2013 at the InterContinental Hotel in Kowloon. The event discussed Asia’s emergence in the global economy and other core issues.

The developed economies of Europe, North America, and Japan are facing tremendous challenges related to indebtedness and stagnation. How will the developing economies of Asia respond to this challenge as they reorient their growth strategies to meet the rising aspirations oftheir people?

In “The Ambivalence of Scarcity” which is my contribution to L’Enfer des choses. René Girard et la logique de l’économie, written by Jean-Pierre Dupuy and originally published in French in 1978, I attempt to apply mimetic theory to modern economics and to economicphenomena, and also to explain why economic issues and economics as a discipline occupy such an important place in the modern world.

A striking feature of the neoclassical economic theory which has been dominant in Western universities in recent years is that it has had so little to say about innovation and innovation policy which is useful for policy-makers.

It would be nonsensical to blame economists for not foreseeing the crisis; even less for causing it. It was obvious there would be a crisis. It was impossible to foresee how it would start and evolve, and at what moment these events would occur.

The problem of value has always occupied a central place in economic thought and debate.

The Risk Society

In a previous post we queried whether the theory of the consumer as developed in the first three chapters of Mas-Colell, Whinston and Green (and indeed other comparable texts) provides anything by way of content beyond what is implied by the abstract description of consumers as agents who are maximizing something. [We did not discuss chapter four, on aggregation of demand, to which we may return later]. As we noted then, a comparable point can be made about the theory of the firm.

For nineteenthth century figures such as Bentham and Jevons, the concept of utility was associated with satisfaction or pleasure experienced.

Mathematics and the ‘Whiz Kids’

MWG introduces the theory of consumer behavior by presenting two distinct approaches to modeling consumer behavior, the preference-based approach (based upon unobservable preferences generating a utility function) and the choice-based approach (based upon observable choice behavior), and attempting to establish connections between the two.

In this post, I would like to explore the views of preferences and behavior outlined in MWG Ch.1, and specifically the view of rationality developed in this first chapter.

In this initial blog post we wish to situate microeconomics as a field of social enquiry.

The blog is intended for any student taking an advanced microeconomics course, any faculty member teaching such material, or indeed anyone interested in microeconomics and its role in the discipline.

A country that produces goods of high quality at a competitive price is likely to be rewarded for its ingenuity with a trade surplus. Small countries often achieve great development success through export-led growth. At the same time, the entire economic system must be balanced.

What has been learned now that the Euro zone’s fault lines have been revealed? Where are Europe and the Euro zone today?

The Institute joined the Centre for International Governance Innovation, and the Mercator Research Institute on Global Commons and Climate Change in hosting its third-annual plenary conference in Berlin from April 12-15, 2012.

With my remarks today on financial markets and the financial crisis, I do not make any claims to originality. Rather, they are intended as a reminder of certain circumstances that are already familiar to us, in one form or another.

The global economy is in turmoil. Societies are unstable and not anchored by faith in the system or social order.

The human brain relies on three devices for its decisions: emotion controls; addictive learning; and intellectual processing. Understanding the conditions under which the three devices are engaged is essential for conscious decision-making.

The crisis has exposed the failure of economic models to deal sensibly with endogenously generated crises propagating from the financial sectors to the real economy, and back again.

The theme of this session is very timely and controversial, on the ability of sovereign governments to supervise Large Complex Financial Institutions (LCFIs), now officially described as G-SIFIs, global systemically important financial institutions.

Many companies around the world have discovered they can benefit financially from integrating environmental, social and governance (ESG) targets in their daily operations and strategy.

This paper asks, how empirical evidence does or does not influence economic thinking and theory. In particular, which role do calibration, statistical inference, and structural change play?

This paper, which is prepared for the Inagural Conference of the Institute for New Economic Thinking in King’s College, Cambridge, 8-11 April 2010, questions the preeminence of theory over empirics in economics and argues that empirical econometrics needs to be given a more important and independent role in economic analysis, not only to have some confidence in the soundness of our empirical inferences, but to uncover empirical regularities that can serve as a basis for new economic thinking.

Many people regard the recent financial crisis as a painful addition to an already massive body of evidence that demonstrates the inadequacy of today’s economic models of “rational” markets.

The current economic and financial crisis, and it is both, has already imposed great costs on the global economy. Nor is there any guarantee that we have seen the worst and that recovery is now assured.

Economic theory has modeled itself on theoretical physics. It has sought to establish timelessly valid laws that govern economic behavior and can be used reversibly both to explain and to predict events.

The Institute for New Economic Thinking convened many of the world’s most distinguished economists, academics and thought leaders at its inaugural Conference at King’s College, University of Cambridge.

An autobiographical paper by William J. Baumol, in which he recounts his academic life and career.  The paper is a contribution to a series of recollections and reflections on the professional experiences of distinguished economists which the Banca Nazionale del Lavoro Quarterly Review (now PSL Quarterly Review) started in 1979.

Learn to read, understand, and evaluate professional discourse about the current operation of money markets at the level of the Financial Times.

The aim of the two-semester sequence is to explore a coherent alternative to neoclassical and post-Keynesian theory that does not rely in any way on concepts of utility maximization, rational choice, rational expectations, or perfect/imperfect competition.

Many thought the financial crash was a final blow to capitalsim. Why does it still reign supreme? Anatole Kaletsky outlines the shape of things to come.