Coercion,contract and the limits of the market

It is a widely accepted principle of economics that if two or more adults voluntarily agree to a contract or an exchange that has no negative fall-out on others, then the government should not stop such a contract. This is often called the ‘principle of free contract’ (PFC). There is a body of writing in economics which upholds the PFC. Yet this ubiquitous principle is ill-defined and full of ambiguities. For instance, since it refers to voluntary choice, its proper use presumes an understanding of what is ‘voluntary’ and, therefore, also, of what is coercive. What is ironic is that, while philosophers and legal scholars have debated and analyzed these concepts and the validity of the principle of free contract, there is very little discussion of these in economics, even though so much of economics is founded on this principle. This has caused a lot of policy confusion. The aim of this paper is to construct general rules for when we may violate the PFC. The argument is constructed within the Paretian framework. Hence, the violation of the PFC is not justified by appeal to deontological ethics or non-welfarist criteria. This is not an easy task since the principle of free contract is often viewed as a rule that is a derivative of the Pareto principle.     

Rational Choice Theory or Pretense? The Claims,Equivalences, and Analogies of the “Economic Approach to Human Behavior”

The article argues and demonstrates that classical–neoclassical economics generally does not pretend or claim that its principles apply to domains beyond the economy, specifically wealth, and does not equate the economic and the noneconomic, and the rational and the nonrational. By contrast, the “economic approach to human behavior” or “rational choice theory” precisely does this to legitimize itself by invoking classical–neoclassical economics as supreme authority and its representatives as venerable precursors. The article reveals the economic approach to human behavior as a set of grand theoretical and methodological claims, equivalences, and analogies from the standpoint of conventional economics itself, as well as sociology and other social sciences. It identifies and examines certain indicative instances of such tendencies. The article aims to contribute to understanding better the relations—or rather lack thereof—between conventional economics and contemporary economic and sociological rational choice theory. The economic approach to human behavior is not new, even outside the market sector. The rational choice model provides the most promising basis presently available for a unified approach to the analysis of the social world by scholars from different social sciences. — Gary Becker With respect to those parts of human conduct of which wealth is not even the principal object, to these political economy does not pretend that its conclusions are applicable. — John S. Mill But economy does not treat of all human motives. There are motives nearly always present with us, arising from conscience, compassion, or from some moral or religious source, which economy cannot and does not pretend to treat. These will remain to us as outstanding and disturbing forces; they must be treated, if at all, by other appropriate branches of knowledge. — William Jevons A science, therefore, based on the hypothesis (of universal rationality) would yield a general form of the social phenomenon having little or no contact with reality … — Vilfredo Pareto     

Pareto's compensation principle

Pareto is sometimes credited with an early formulation of the ill-fated Hicks or Kaldor principles of hypothetical compensation. The basis for this claim is Pareto's 1894 article “Il massimo di utilità dato dalla libera concorrenza.” However in that paper Pareto argued to the contrary, that in the formulation of economic policy compensation should be a consideration only if it is carried out. Our purpose is to document this claim. Received: 2 October 1997/Accepted: 16 March 1998     

Implications of behavioural economics for financial literacy and public policy

This paper summarizes and highlights different methodological approaches to behavioural economics in the context of the conventional economic wisdom and the implications of these different methodological approaches for financial literacy, related institutional change, and public policy. Conventional economics predicts no substantive improvement from improvements to financial literacy. The errors and biases approach to behavioural economics suggests limited improvements to decision making from financial education as errors and biases are largely hardwired in the brain. Government and expert intervention affecting individual choice behaviour is recommended. The evidence suggests that the bounded rationality approach to behavioural economics, with its focus on smart decision makers and the importance institutional and environment constraints on decision making, is the most promising lense through which to analyse financial decision making. From this perspective, financial decision making can be improved by providing decision makers with better quality information presented in a non-complex fashion, an institutional environment conducive to good decisions, an incentive structure that internalize externalities involved in financial decision making, and financial education that will facilitate making the best use of the information at hand within a specific decision-making environment.     

Decision interactions of the monetary and fiscal authorities in the choice of policy mix

Abstract

This article presents an analysis of the states of equilibrium and Pareto optimality of the solutions in the monetary-fiscal games between the fiscal and monetary authorities each having either two or three qualitatively different strategies: expansive, neutral and restrictive. Two sets of assumptions about the influence, exerted by the instruments of the monetary policy (real interest rate) and by those of the fiscal policy (budgetary deficit related to the GDP), on the state of economy (rate of economic growth and inflation) are considered. The results obtained indicate that, along with the case of the prisoner's dilemma, to which the discussion in the major publications on the subject is limited, other situations may also occur, where the independent decisions of the central bank and the government do not necessarily lead to the choice of a Pareto non-optimal solution.     

Game theory and global environmental policy

Economists interpret global environmental quality to be a pure public good. Each country should contribute to its provision. However, this is hard to achieve because each government is tempted to take a free ride on the other governments’ efforts. Not only has this dilemma been analysed with game theoretical methods but game theory has also been used to think about how to make amends. This paper reviews the game theoretical discussion on how international policy frameworks may be designed to improve the chances for international cooperation. It is also shown that the evaluation of alternative environmental policy instruments deviates from the standard environmental economics model if applied to the international arena. For the benefit of an interdisciplinary readership, the evolution of the debate on global environmental policy is related to the recent history of economic thought. This history is taken to be materialised in the writings of economics’ Nobel Prize laureates.     

Consequences, opportunities, and procedures

This paper reflects on consequentialism which underlies the traditional normative economics. It asserts that the informational basis of normative economics should be expanded so that the intrinsic value of social choice procedures should be properly taken into account along with the value of their consequences. Three examples – the problem of fair cake division, the role of competition in the promotion of economic welfare, and bilateral trade restrictions – are invoked to pinpoint the services rendered by procedural considerations in making social welfare judgements. The Pareto libertarian paradox is also re-examined within the extended framework incorporating procedural considerations along with consequential considerations. Received: 25 March 1997 / Accepted: 8 July 1997     

BELIEVING IN ECONOMIC THEORIES: SEX, LIES, EVIDENCE, TRUST, AND IDEOLOGY

Political economics views heterogeneity of political preferences largely as a reflection of heterogeneity in valuations of known policy outcomes. Voters, however, may be uncertain about policy outcomes, in part, because of uncertainty about how the economic world actually works. Heterogeneity of people's beliefs about how well economic theories predict outcomes could then affect policy through democratic institutions. Using a combination of experimental and survey techniques drawn from economics and social and political psychology, we examine several potential sources of heterogeneity in beliefs about the predictive content of supply and demand theory, with a particular focus on the role of ideology. ( JEL A110, A130, C420, C900)     

Economics,psychotherapy and politics

The paper explores the application of ideas derived from psychotherapy to questions of economic and social policy. It is argued that disputes concerning human nature underlie many debates on economic theory. Class is reviewed from internal and emotional perspectives. Psychological obstacles to the achievement of economic inequality are explored and ways of overcoming them critically discussed. Particular attention is paid to the operation of economic sadism in the behaviour of individuals and societies. A range of possible gender differences in relation to money is reviewed. Inherited wealth is explored from the perspective of ‘therapy thinking’. The paper proposes that we reconsider what is deemed to be realistic and what is deemed to be (hopelessly) idealistic in thinking about economics. The paper concludes by proposing a deeper discussion of the problematic of sacrifice in connection with sustainable economics.     

Behavioral economics has two ‘souls’: Do they both depart from economic rationality?

In this paper, I argue that behavioral economics, far from being a monolithic theory, consists of two different ‘souls’ and that a fundamental asymmetry exists between them, with regard to the nature of the departures from the economics’ ‘canonical model’ they focus on. While a first class of departures deals with the major cognitive limitations and systematic biases in decision-making affecting economic behavior, a second research area investigates deviations from the classic assumption that economic agents are systematically driven by the pursuit of material self-interest. Even though on methodological grounds the two research areas share a broadly inductive approach – as they both aim at incorporating the major results obtained through several empirical methods (in particular, via experimental work) into formal economic analysis –, I claim that rather different methodological conclusions and regulatory and policy implications can be drawn, depending on the cognitive or social nature of the departures from the standard economic model under study.     

What is responsible for the “Paretian epidemic”?

This paper shows that results similar to the Paretian Epidemic of Sen (1976) can be proved with the Pareto principle replaced by weaker conditions. The Pareto principle can be factored into a monotonicity component and a non-imposition component. Our results show that it is the non-imposition component which is responsible for the epidemic.I would like to thank the referee and editor of this journal for helpful comments.     

Perestroyka and the problems of social‐differentiation

The following article traces the way in which the communist party in the ex‐Soviet Union came progressively to betray the principle of social justice that was the driving force behind the October Revolution. The gradual erosion of the social policy of the country has created a diverse and complex social stratification structure which is bound to worsen with the introduction of economic reforms. The author argues that unless the process of economic transformation is corrected by a strong social policy, not only is economic reform likely to be impeded, but the political stability of the country is also likely to deteriorate.     

Economic man and selfish genes: the implications of group selection for economic valuation and policy

A basic tenet of socio-economics is that economic behavior is shaped by social bonds and cultural context. A relevant controversy in evolutionary biology is group selection and the related issue of altruistic behavior, that is, behavior neutral or detrimental to the individual but positive for the survival of the group. In this paper we examine the parallel controversies surrounding “economic man” and “selfish genes” with particular emphasis on the policy implications of group selection. We argue for the replacement of standard welfare economics with models of human behavior in the spirit of “consilience” between economic theory and the best available science from other relevant disciplines.     

THE PLACE OF ECONOMIC HISTORY IN THE DISCIPLINE OF ECONOMICS

Despite the dominance of the field of economic history by trained economists who use the tools of economics, the output and services of economic historians are declining in demand. The explanation advanced in this address is that economic historians have not proved their value to economics. To play an essential role in economics, we must broaden the questions we ask and concommittently devise a set of theoretical tools to provide meaningful and testable theories about the structure and performance of economies over time. This address suggests the direction that such theory should take in order to make the field an indispensable part of the discipline of economics.     

Interfacing Economics with Social Work Education

This paper explores the interface between economics and social work education in terms of the social worker generalist, administrator, and teacher suggesting what areas of economics should be emphasized and a basic set of readings. It also spells out three alternatives for implementing the interface.

The generalist needs basic knowledge of the functioning of the labor markets, employment policy, insurance, and subsidies as well as an understanding of economic decision making as it relates to setting priorities and budgeting. The planner-administrator needs economic analysis skills. It is suggested that doctoral students concentrate in a field related to human resources or public finance.     

The psychology and behavioural economics of poverty

The paper provides an overview and assessment of an emerging literature on the psychology and behavioural economics of poverty. We particularly highlight poverty experiences, role of neighbourhoods, poverty dynamics and transmission, child poverty and disability and personal finance. In addition we consider psychology and policy responses by looking and autonomy and empowerment, and poverty reduction programs. Our central thesis is that the detailed knowledge of individual experiences, cognitions and social factors in psychology and related social science complements the traditional economic emphasis on structural factors and policy instruments in a way that is exemplified by emerging work in behavioural economics. We conclude it is increasingly recognised that poverty reduction policies which are informed by behavioural insights may, as a result, be more effective.     

Trade-off between equity and efficiency in a general economy with indivisible goods

In most of the recent literature on fair allocation in economies with indivisible goods and a single infinitely divisible good, it is assumed that each agent can consume at most one indivisible good. In this paper, we show that if this assumption is dropped, there do not necessarily exist envy-free and Pareto efficient allocations. However, envy-free allocations still exist and so do Pareto efficient allocations. Hence, a trade-off between equity and efficiency arises.     

THE INFLUENCE OF ECONOMICS ON ANTITRUST LAW

Economists today play prominent roles in formulating antitrust policy and litigating antitrust cases. This paper explains why economics influences antitrust law and describes how economic theories enter and shape the antitrust system. Antitrust policy and doctrine change over time in response to developments in economic theory, and the decentralization of the antitrust adjudication system and the wide latitude accorded judges in interpreting antitrust statutes ensure that legal rules will reflect advances in the economic literature concerning the appropriate content of standards governing business conduct.     

TEACHING TOOLS: SHOULD WE TEACH MICROECONOMIC PRINCIPLES BEFORE MACROECONOMIC PRINCIPLES?

No consensus exists about the optimal sequencing of economics principles courses. We show that most top-ranked economics departments either do not specify an ordering or require microeconomics first, while most textbooks present macroeconomics before microeconomics. Using a national economic education database, we find that students learn more in principles of microeconomics after taking a course in macroeconomics. However, students do not learn more in principles of macroeconomics after taking a course in microeconomics. This implies that, ceteris paribus, principles of macroeconomics should be taught before principles of microeconomics for optimal student learning.     

George Katona: A founding father of old behavioral economics

Assuming the division of behavioral economics into old and new, the paper begins to argue that old behavioral economics began with the works of two giants – George Katuna and Herbert Simon during the 1950s and early 1960s. The contributors of Herbert Simon are well established, thanks to the popularity of bounded rationality and satisficing, and his being award Noble Prize in economics. However, economists are much less familiar with the contributions of George Katona that can be viewed as the father of behavioral economics. Furthermore, the author argues that Katona was also misunderstood by various economists when he was attempting to create a psychologically based economics that rejected the mechanistic psychology of neoclassical economics and introducing the survey method to economic research that he had been using in his experimental psychology research previously. He also had influenced various economists during their debates in the 1950s without given the credit for. Many historians of behavioral economics limit Katona's contributions to the start of behavioral economics only to his contributions to macroeconomics. However, the paper demonstrates that Katona's behavioral economics included his contributions to macroeconomics (bringing realism to Keynesian consumption function and consumption behavior), micro-economics (business behavior, the rationality assumption, etc.), public finance and economic policy, and his introduction of the survey method. To demonstrate these contributions, the author argues that Katona attempted to bring realism to economic analysis – through psychological concepts – beginning with his early days of research in Germany which coincided with German hyper inflation- and continued whether working at New school for Social Research, Chicago University's Cowles Commission, the U.S. Department of Agriculture, or the University of Michigan's Survey Research Center. The author also argues that Katona's contributions went through stages, depending upon what economic problem persisted at the time, what advertises he was facing, and what institution/organization he was associated with.