Table of contents(18 chapters)
This paper is a keynote address prepared for a conference on “Entangled Political Economy” sponsored by the Wirth Institute. In keeping with the conventions of such an address, I look both backward and forward, while placing more emphasis on looking forward. In looking backward, I compare and contrast two orientations toward political economy: additive and entangled. In looking forward, I explore some of the analytical challenges that confront efforts to pursue a vision of entangled political economy. While these challenges are substantive in character, those efforts necessarily rest on methodological presumptions. Accordingly, the paper opens by reviewing some of those methodological presumptions before turning to the substantive articulations and challenges.
Entangled Political Economy, the idea that the economy and the polity are a nexus of interrelations often with unplanned outcomes, is close to the concept of economics that Adam Smith presents, a concept which was not shaped by strict discipline barriers. I show that Adam Smith analyzes the nature and causes of the wealth of nations by analyzing the interaction of the economy with politics, ethics, and the law. In particular, Smith presents each of these systems as a network of relations with all the other systems: the economy is entangled not just with the polity, but also with other systems of behavior such as the law and morality. Adam Smith may help expand the horizons of the entangled political economy analysis and the explanatory powers of economics.
My contribution deals with the link between Wagner’s entangled political economy and Carl Menger’s economic thought. It is mainly based on what Wagner himself has called “neo-Mengerianism”: a new approach that considers economics as a discipline focused on the network-based interrelations among phenomena (based on human decisions) and political economy as embedded in a social framework no longer neutral from a political point of view.
Political economies evolve institutionally and technologically over time. This means that to understand evolutionary political economy one must understand the nature of the evolutionary process in its full complexity. From the time of Darwin and Spencer natural selection has been seen as the foundation of evolution. This view has remained even as views of how evolution operates more broadly have changed. An issue that some have viewed as an aspect of evolution that natural selection may not fully explain is that of emergence of higher order structures, with this aspect having been associated with the idea of emergence. In recent decades it has been argued that self-organization dynamics may explain such emergence, with this being argued to be constrained, if not overshadowed, by natural selection. Just as the balance between these aspects is debated within organic evolutionary theory, it also arises in the evolution of political economy, as between such examples of self-organizing emergence as the Mengerian analysis of the appearance of commodity money in primitive societies and the natural selection that operates in the competition between firms in markets.
The recurring implementation and continuous maintenance of price controls implies a deep incongruence between public policy and economic common sense. Yet, economists do not tire of concluding their papers with policy recommendations as if oblivious to the ineffectiveness of their efforts. By assuming that policy is an object of choice, economists have no alternative but to naively hope for a decision-maker sensitive to economic logic. An alternative approach is to think of policy, not as an object of choice but as an outcome of a competitive process. From this perspective, the often-lamented disregard for economic principles is not a characteristic of a deficient policymaker, but a systemic quality of institutional arrangements. I illustrate my argument with the analysis of the implementation of rigid prices for reimbursed pharmaceuticals in Poland.
Making law in America is not a simple task. It can be legislated by Congress, enforced by the executive, interpreted by the courts, and augmented by a massive body of rules created by administrative agencies such as the Securities and Exchange Commission (SEC). The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) (Dodd-Frank was passed) with an eye to preventing future financial crises. Four years later, many details of Dodd-Frank have yet to be finalized as the SEC is still in the process of developing the regulations that the legislation required them to create. Even once the regulations are finalized by the SEC, the regulations will be challenged by various parties in the courts. The regulations will be either upheld or rejected. Those that are upheld will then face numerous challenges when applied in specific cases, while those rejected will have to be redone all over again. The process of developing these regulations is cumbersome and attracts many of the special interests that were present in the legislative phase of Dodd-Frank and who will also be present in the litigation phases of testing Dodd-Frank in the courts. This paper focuses on the requirement that investment advisors and broker-dealers be deemed as owing fiduciary duties to their clients as a case study for the entangled political economy theory. The paper shows how the development of a simple rule such as whether these fiduciary duties should be owed or not requires years of back and forth between the legislative, executive, administrative, and judicial branches.
It has often been alleged that the financial markets, with all their speculative excesses, wastefully absorb resources that could be better employed in the real economy. Fritz Machlup, originally a student of Ludwig von Mises, dealt with that charge in the aftermath of the 1929 crash. His defense of the stock market remains germane to our time. In it, he argues that the stock exchange offers an important alternative mechanism of allocating savings to investment, while generally being a way station through which money travels on its way to the real economy either to finance capital projects or to be spent on consumer goods. To the extent the stock market ever absorbs capital, it is only during stock market booms. Yet these are generated by the uncertain course of central bank monetary expansion. Bull and bear markets cycles are, at bottom, politically driven events.
What role does government play in determining the medium of exchange? Economists weighing in on the issue have typically espoused one of two views. State theorists credit government with the emergence and continued acceptance of commonly accepted media of exchange. In contrast, spontaneous order theorists find little need for government, maintaining that money emerges and continues to circulate as a result of a decentralized market process. History suggests a more subtle theory is required. We provide a generalized theory of the emergence and perpetuation of money, informed by both approaches and consistent with recent theoretical and empirical advances in the literature.
It is well known that a player in a non-cooperative game can benefit by publicly restricting his possible moves before play begins. We show that, more generally, a player may benefit by publicly committing to pay an external party an amount that is contingent on the game’s outcome. We explore what happens when external parties – who we call “game miners” – discover this fact and seek to profit from it by entering an outcome-contingent contract with the players. We analyze various structured bargaining games among such miner(s) and players that determine such an outcome-contingent contract before the start of the original game. These bargaining games include playing the players against one another as in the original game, as well as allowing the players to pay the miner(s) for exclusivity and first-mover advantage. We establish restrictions on the strategic settings in which a game miner can profit and bounds on the game miner’s profit. We also find that game miners can lead to both efficient and inefficient equilibria.
Economic models based on simple rules can result in complex and unpredictable deterministic dynamics with emergent features similar to those of actual economies. I present several such models ranging from cellular automaton and register machines to quantum computation. The additional benefit of such models is displayed by extending them to model political entanglement to determine the impact of allowing majority redistributive voting. In general, the insights obtained from simulating the computations of simple rules can serve as an additional way to study economics, complementing equilibrium, literary, experimental, and empirical approaches. I culminate by presenting a minimal model of economic complexity that generates complex economic growth and diminishing poverty without any parameter fitting, and which, when modified to incorporate political entanglement, generates volatile stagnation and greater poverty.
Rice’s Theorem is a notorious stumbling block in Computer Science. We review some previous work of us that shows that we can extend Rice’s result to large segments of everyday mathematics, so that similar stumbling blocks appear in many areas of mathematics, as well as applied areas such as mathematical economics; one of its applications (Koppl’s conjecture) is discussed in some detail. Note: this paper has been written in an informal style.
Contemporary Anglo-American economics, which I admire, faces two major obstacles. First, in its drive at least since Milton Freedman to be a positive science free of normative issues, it ignores its own current intellectual foundations buried at the heart of its analysis of the “advantages of trade”: Fairness. Second, the major driver of economic growth in the past 50,000 years has been the explosion of goods and production capacities from perhaps 1,000 to 10,000 long ago, to perhaps 10 billion goods and production capacities today. Economics, lacking a theory for this explosion, deals with this explosion by ignoring it and treating it as “exogenous” to its theory.
The “Edgeworth Box” carries the heart of advantages of trade, demonstrating for properly curved isoutility curves a region where you and I are better-off trading some of my apples for some of your pears. The ratio of these in trade constitutes price. But spanning the region of advantages of trade is the famous CONTRACT CURVE, where we have exhausted all the advantages of trade. Different points on the curve correspond to different prices. But the Contract Curve is Pareto Optimal, motion on the curve can only make one of us better-off at the expense of the other. Critically, economics has NO THEORY for where we end up on the Contract Curve. Nor, since different points on the curve correspond to different prices, can PRICE settle the issue.
Using the Ultimatum Game I will show that FAIRNESS typically drives where we settle on the Contract Curve, as long as we do not have to trade with one another. Thus ethics enters economics at its foundation, yet cannot be mathematized, so is ignored in Freedman’s name of a positive science.
Perhaps more important, unlike physics, no laws entail the evolution of either the biosphere or the “econosphere.” There are no laws of motion whose integration would entail that evolution. Lacking an entailing theory of the growth of the economy in diversity, often of new goods and production capacities, economists ignore the most important feature of economic growth, wrongly treating it as “exogenous.”
The failures above are likely to play major roles in the lapse to mere greed in our major financial institutions, and in our inadequate capacities to help drive growth in much of the poverty-struck world.
- Publication date
- Book series
- Advances in Austrian Economics
- Series copyright holder
- Emerald Publishing Limited
- Book series ISSN