Volume IX Issue 1

Autumn 2015

1. The case for increasing returns I: ‘The Hicksian Getaway’ and ‘The Hirshleifer Rescue’

Frederic Jennings Jr..
The case for increasing returns is accepted by most heterodox economists. Yet allegiance to decreasing returns in orthodox circles still endures directly and in the form of substitution assumptions. In forty short years from 1928 to 1968, beliefs shifted from Pigou calling rising cost ‘inadmissible’ to Alchian deeming decreasing returns ‘a universally valid law’ until Kaldor revived the case for increasing returns in the 1970s. How did these shifts of view occur? After dapham opened the door and Pigou defined the orthodox stand, the 1930s debates swept through imperfect competition and many other issues into Keynesian disequilibrium theory. In 1939, ‘The Hicksian Getaway’ opened an Age of Denial leading to equilibrium theories based on substitution; then during the 1960s a second challenge to rising cost based on learning and technical change was defeated by ‘The Hirshleifer Bescue’ of decreasing returns and thus substitution in neoclassical theory. Why economists' substitution assumptions still hold sway is the focus of this study. First, the paper reviews ‘The Hicksian Getaway’ in its context and with respect to equilibrium models. Second, the paper analyzes and disproves ‘The Hirshleifer Bescue’ as an invalid argument based on a non-sequitur and thus simply asserted. Third, the case for increasing returns is developed into a theory of planning horizons supporting a generalized complementarity in economics. Some methodological implications are […]
Section: Articles

2. Economics in times of crisis. In search of a new paradigm in economic sciences

Joanna Dzionek-Kozlowska.
The relationship between the development of economics and economic performance is not reducible to any set of simple rules. Among the historians of economic thought there is even a handful of those who perceive the progress in economics mostly as an outcome of the attempts to solve the problems, inconsistencies and paradoxes within economic theory itself. Seen from this perspective, economic reality has minor (or no) importance. On the other hand, the endeavours to modify a mainstream approach are significantly greater in times of economic downturns. Seeing that economics is in such a state of ‘intellectual ferment’ nowadays, it is worth reconsidering the connection between economics and the economy. Thus the main aim of the paper is to analyse the current state of economic science in relation to the last economic slump. Although it is of course not possible to predict the future trajectories of economic theorising, taking into consideration the nature of the crisis the most feasible and potentially most fruitful areas are indicated.
Section: Articles

3. The welfare costs of rent-seeking: a methodologically individualist and subjectivist revision

Michael Makovi.
Gordon Tullock is acknowledged for being the first to recognize the true costs of rent-seeking as including not only the Harberger triangle but also the Tullock rectangle. This rectangle does not constitute merely a lossless transfer of wealth, but it causes a misallocation of resources as rent-seekers invest resources in lobbying. However, a close reading of Tullock’s writings shows that his arguments are formulated in a holistic fashion, speaking of what is efficient or inefficient for society. Rent-seeking is inefficient because it reduces societal welfare. But according to a methodologically individualist and subjectivist economics, such a claim is invalid. We must distinguish between positive economic fact and normative moral philosophy. We call for a reconstruction of utility and welfare economics based on methodological individualism and subjectivism with implications for the theories of monopoly and competition: practices which Neoclassical perfect-competition theory considers to be evidence of rent-seeking should instead be deemed as indications of genuine competition Political economy should be concerned with ascertaining which institutions will best enable individuals to pursue their individually subjective ends – or else economists should be explicit about their normative preferences and political philosophies.
Section: Articles

4. Economics of paternalism: the hidden costs of self-commanding strategies

Christophe Salvat.
The paper proposes an economic assessment of paternalism by comparing different alternative responses to dynamically inconsistent behaviors consecutive to hyperbolic discounting. Two main types of action are possible, self-commanding strategies and paternalism The first category includes personal rules and pre-commitment The second can be subcategorized between coercive and non-coercive forms of paternalism, which are respectively associated (although it is debatable) with legal paternalism and with ‘nudges’. Despite being self-inflicted, self-commanding strategies are actually not cost free and can result in a dramatic cutback of people’s freedom of choice. Likewise, legal paternalism can, on occasion, be less harmful than personal rules or pre-commitment; similarly, nudges can be more invasive and less effective than their proponents want us to believe. The aim of this paper is not to propose any standardized form of response to irrational behavior (whatever that may mean) but to argue, on the contrary, that every case should be individually appraised. Individual situations can be remedied by self-commanding strategies or by paternalistic policies, either in isolation or in combination.
Section: Articles

5. A criterion for realism, with an application to behavioral economic models

Gustavo Marqués ; Diego Weisman.
Many economists working within the framework of behavioral economics (BE) label the conventional way of modeling as unrealistic, and consider their own approach as more realistic than the standard practice. However, a criterion for realism is lacking in behavioral economics literature. This paper offers a simple criterion for predicating realism to economic models, and provides an illustration of such criterion at work on a particular BE model.
Section: Articles

6. Review of The Anthropocene and the Global Environmental Crisis: Rethinking modernity in a new epoch, edited by Clive Hamilton, Christophe Bonneuil and François Gemenne, Routledge, London, 2015, pbk, ISBN 978-1-138-821124-8, pp. 187+xi

Valentin Cojanu.
Section: Book reviews