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Regret Theory: A Bold Alternative to the Alternatives
In their famous 1982 paper in this Journal, Loomes and Sugden introduced regret theory. Now, more than 30 years later, the case for the historical importance of this contribution can be made. Loomes, G. and Sugden, R. (1982). ‘Regret theory: an alternative theory of rational choice under uncertainty’, Economic Journal, vol. 92(368), pp. 805–24.
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Retrospectives
W. E. B. Du Bois (1868–1963) is best known as a sociologist, historian, and civil rights leader, but he is also increasingly appreciated as an economist. Du Bois's work in economics was primarily empirical, drawing heavily on the German Historical School of Economics and later on Karl Marx. However, during his early economic studies at Harvard University, Du Bois was interested in marginalism as a theoretical solution to the problem of wage determination. In this paper, I explore the marginalist wage theory developed by Du Bois in his unpublished 158-page 1891 manuscript, A Constructive Critique of Wage Theory. I show that Du Bois developed a wage theory that was at the frontier of marginalist analysis in 1891 and that anticipated important developments in marginal productivity theory and the theory of labor supply. While he did not reengage marginalism after his time in Berlin, Du Bois's work on wage theory reinforces recent recognition of his contributions to economics.
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Should We Reject the Natural Rate Hypothesis?
Fifty years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run trade-off between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. The paper reviews the arguments and the macro and micro evidence against each. It concludes that, in each case, the evidence is suggestive, but not conclusive. Policymakers should keep the natural rate hypothesis as their null hypothesis, but keep an open mind and put some weight on the alternatives.
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Refuting Samuelson’s capitulation on the re-switching of techniques in the Cambridge capital controversy
Paul A. Samuelson’s (1966) capitulation with his Austrian model during the so-called Cambridge controversy on the phenomenon of re-switching of techniques in capital theory had implications not only in pointing at the supposed internal contradiction of the marginal theory of production and distribution but also in the pursuit of vested interests in the academic and political world to this day. The present paper is aimed at demonstrating that Samuelson’s capitulation was logically groundless from the point of view of the economic theory of production by considering the interest rate in the role of the real price of capital goods instead of the stationary real rental prices as correctly suggested by Leon Walras, Knut Wicksell, John Hicks, and others. Because of the non-linear effects of the interest rate on relative input prices, the Sraffian re-switching of techniques noted in the range of the interest rate always disappears in the space of the corresponding real input prices in the stationary equilibrium.
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Price Theory
I argue that there exists a coherent and relevant tradition in economic thought that I label “price theory.” I define it as neoclassical microeconomic analysis that reduces rich and often incompletely specified models into “prices” (approximately) sufficient to characterize solutions to simple allocative problems. I illustrate this definition by highlighting distinctively price theoretic approaches to prominent research practices (diagrams and problems sets) and substantive research topics (e.g. selection markets and media slant). I trace the origins of price theory from the early nineteenth century through its segregation into the Chicago School in the last quarter of the twentieth. I argue that price theory plays a valuable complementary role to two traditions, “reductionism” and “empiricism,” with which I contrast it and show how this contribution of price theory has fueled a resurgence in this style of research in fields ranging from market design to international trade. Approximations critical to price theory are less formally developed than tools used in other methodological traditions, suggesting a research agenda to clarify the accuracy and range of validity of these methods.
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Endogenous Growth, Convexity of Damage and Climate Risk: How Nordhaus' Framework Supports Deep Cuts in Carbon Emissions
'To slow or not to slow' (Nordhaus, 1991) was the first economic appraisal of greenhouse gas emissions abatement and founded a large literature on a topic of worldwide importance. We offer our assessment of the original article and trace its legacy, in particular Nordhaus's later series of 'DICE' models. From this work, many have drawn the conclusion that an efficient global emissions abatement policy comprises modest and modestly increasing controls. We use DICE itself to provide an initial illustration that, if the analysis is extended to take more strongly into account three essential elements of the climate problem – the endogeneity of growth, the convexity of damage and climate risk – optimal policy comprises strong controls.
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Friedman's Presidential Address in the Evolution of Macroeconomic Thought
Milton Friedman's presidential address, “The Role of Monetary Policy,” which was delivered 50 years ago in December 1967 and published in the March 1968 issue of the American Economic Review, is unusual in the outsized role it has played. What explains the huge influence of this work, merely 17 pages in length? One factor is that Friedman addresses an important topic. Another is that it is written in simple, clear prose, making it an ideal addition to the reading lists of many courses. But what distinguishes Friedman's address is that it invites readers to reorient their thinking in a fundamental way. It was an invitation that, after hearing the arguments, many readers chose to accept. Indeed, it is no exaggeration to view Friedman's 1967 AEA presidential address as marking a turning point in the history of macroeconomic research. Our goal here is to assess this contribution, with the benefit of a half-century of hindsight. We discuss where macroeconomics was before the address, what insights Friedman offered, where researchers and central bankers stand today on these issues, and (most speculatively) where we may be heading in the future.
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The Austrian Episode
The Austrian school of economics was well within the mainstream of economic thought into the 1930s. By mid-twentieth century the Austrian school had established a distinct identity, partly because of methodological developments in mainstream economics, but moreso because of its policy conclusions. Austrian school was best known for its claim that rational economic calculation was not possible without markets and market prices, challenging the mainstream view that looked favorably on central economic planning. In addition, the Austrian business cycle theory challenged the Keynesian macroeconomics that dominated macroeconomic thought up through the mid-1970s. While there were methological differences between the Austrian school and the mainstream, these policy differences defined the Austrian episode. By the end of the twentieth century, the Austrian school had won the economic calculation debate, Keynesian macroeconomics had been displaced, and the methodological differences between the Austrian school and the mainstream had narrowed. The Austrian episode had passed. In the twenty-first century, the Austrian school’s ideas, still relevant, have been combined with complementary ideas from other heterodox traditions, diminishing the distinctive identity the Austrian school had in the second half of the twentieth century.
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Retrospectives
James Buchanan wrote \"An Economic Theory of Clubs\" and invented clubs to support a form of welfare economics in which there is no social welfare function (SWF) and individual utility functions cannot be \"read\" by external observers. Clubs were a means to allow the implementation of individualized prices for public goods and services and to allow each individual to pay exactly the amount he wants to pay. He developed this project to answer and counter Paul Samuelson's analysis of public goods, in which social welfare functions play a crucial role. Buchanan and Samuelson disagreed over the allocation of the costs of the public good to each individual. To Buchanan, it was by relying on individual's preferences. To Samuelson, by using a SWF. Buchanan's clubs are thus foreign and incompatible with the traditional Samuelson-style public economics in which they are used.
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