We use a laboratory experiment to compare general equilibrium economies in which agents individually allocate their private goods among consumption, investment in production. and replenishing or refurbishing a depreciating public facility in a dynamic game with long-term investment opportunities. The public facility is financed either by voluntary anonymous contributions (VAC) or taxes. We find that rates of taxation chosen by majority vote remain at an intermediate level close to the finite-horizon optimum, and the experimental economies sustain public goods at levels between the finite- and infinite-horizon optima. This contrasts with a rapid decline of public goods under VAC. Both the payoff efficiency and production of private goods are higher when taxes are set endogenously instead of being fixed at the infinite-horizon optimum level externally. When taxes are adjusted to the respective finite-horizon optimum each period, production levels and efficiency remain as high as in the voting treatments at least in the latter half of the sessions. When subjects choose between VAC and taxation, 23 out of 24 majority votes favor taxation, demonstrating a clear preference for enforceable taxes to finance public goods in this setting.
Money is a mystery and financial institutions are often regarded as guardians and promoters of the mystery. These sketches are designed to help any reader interested in, but not technically trained in economics, understand markets, money, credit and the evolution of a mass market system set in the rich context of its political environment and society. We all want a good society. What is a good society is given by our joint vision, mutual respect and social concern but the implementation of the vision calls for the use and understanding of money, markets and finance. The efficient functioning of a dynamic economy calls for the presence of money and financial institutions. The great variety of financial institutions in any advanced economy requires an understanding of what the whole looks like. Verbal description provides an overarching view of the mixture of history, law, philosophy, custom, habit, and political structure that supplies the background for the functioning of the economy. This has been vividly illustrated by Adam Smith, his teacher the Reverend Francis Hutcheson and his close friend David Hume.
There are two different but highly allied themes covered here. The first explains the worth of economic theory and its importance while connecting it with the world of politics in which the economy dwells. The second is the application of economic thought to the operating problems of every society.
The first theme is covered in the first nine chapters. Chapters 1, 2, and 3 supply the rich context of history, society, polity and law in which every economy is embedded. These chapters require no symbols or technical depth to be understood. In contrast Chapters 4 to 9 offer a reasonably nontechnical exposition of some of the considerable development in formal economic theory pertaining to money and financial institutions as economics becomes more scientific, balancing quantitative measures with qualifications that help to explain what the numbers mean.
The second theme is developed in Chapters 10-13 where economic theory with all of its abstractions has to be connected with social and political reality before it can be of use. This calls for both and understanding of physical and social facts, and an appreciation of the role of moral sentiment. Chapters 13 and 14 consider some alternative scenarios that we face in the near future.
Money is a mystery and financial institutions are often regarded as guardians and promoters of the mystery. These sketches are designed to help an individual interested in, but not technically trained in economics, understand markets, money, credit and the evolution of a mass market system embedded in the rich context of its political environment and society.
The efficient functioning of a dynamic economy requires the presence of money and financial institutions. The great variety of financial institutions in any advanced economy requires that a synthetic approach is used to understand what the whole looks like. Verbal description provides an overarching view of the mixture of history, law, philosophy, social mores, and political structure that supplies the context for the functioning of the economy. This has been vividly illustrated by Adam Smith, his teacher the Reverend Francis Hutcheson and his close friend David Hume.
There are two different but highly allied themes in this single slim volume. Chapters 1, 2, and 3 supply the rich context of history, society, polity and law in which every economy is embedded. Chapters 12 and 13 sketch what might lie ahead given the current state of the world. These chapters require no symbols or technical depth. In contrast Chapters 4 to 11 offers a reasonably nontechnical exposition of some of the considerable development in formal economic theory pertaining to money and financial institutions as economics struggles towards emerging as a science, balancing quantitative measures with qualifications that help to explain what the numbers mean.
An adequate description of economic dynamics requires the introduction of a monetary system including default penalties and expectations in a society whose economy utilizes money and credit. This essay notes and discusses several of the factors involved in the use of money and credit in a process oriented economy. It links these observations with the general equilibrium treatment of the same underlying economy and formulates a government guidance game where the government sets several key parameters in a monetary economy sufficient to select a unique equilibrium. Low information and error correction are noted. The links to the first and second welfare theorems of GE are also considered as is the setting of the price level.
The 2 x 2 matrix game plays a central role in the teaching and exposition of game theory. It is also the source of much experimentation and research in political science, social psychology, biology and other disciplines. This brief paper is addressed to answering one intuitively simple question without going into the many subtle qualifications that are there. How efficient is the non-cooperative equilibrium? This is part of a series of several papers that address many of the qualifications concerning the uses of the 2 x 2 matrix games.
This essay is the third of three. The first is nontechnical and in part autobiograhpical describing the evolution of my approach to developing a microeconomic theory of money and.financial institutions. The second essay was devoted to a more formal sketch of a closed economic exchange system with no other externalities beyond money and markets. This essay builds on the existence of monetary exchange but also context, and active government with nonsymmetric information and many externaties indicate that the views of Keynes, Hayek and Schumpeter are all consistent with the next stages of complexity as the logic requires many different arrays of institutions to provide the necessary economic functions and adjust to the variety of socio-economic contexts.
This essay is the second of three. The first is nontechnical and in part autobiographical describing the evolution of my approach to developing a micro economic theory of money and financial institutions. This essay is devoted to a mathematical sketch of a closed economic exchange system with general equilibrium GE and rational expectations RE viewed game theoretically. It squeezes the last drop out of statics and an illusory dynamics in the form of the RE extension of GE with no other externalities beyond money and markets. The third essay builds on process models adding uncertainty,innovation, an active government, nonsymmetric information and other externaties that all lead away from a static equilibrium model to an evolving entity where competition involving finance and innovation is part of a dynamic non-equilibrium process.
In a previous essay, we developed a simple (in)efficiency measure for matrix games. We now address the difficulties encountered in assessing the usefulness and accuracy of such a measure.
We offer a detailed examination of a broad class of 2 × 2 matrix games as a first step toward considering measures of resource distribution and efficiency of outcomes. In the present essay, only noncooperative equilibria and entropic outcomes are considered, and a crude measure of efficiency employed. Other solution concepts and the formal construction of an efficiency index will be addressed in a companion paper.
We offer a detailed examination of a broad class of 2 x 2 matrix games as a first step toward considering measures of resource distribution and efficiency of outcomes. In the present essay, only noncooperative equilibria and entropic outcomes are considered, and a crude measure of efficiency employed. Other solution concepts and the formal construction of an efficiency index will be addressed in a companion paper.
This is a nontechnical retrospective paper on a game theoretic approach to the theory of money and financial institutions. The stress is on process models and the reconciliation of general equilibrium with Keynes and Schumpeter’s approaches to non-equilibrium dynamics.
This is a nontechnical retrospective paper on a game theoretic approach to the theory of money and financial institutions. The stress is on process models and the reconciliation of general equilibrium with Keynes and Schumpeter’s approaches to non-equilibrium dynamics.
The possibility of the presence of multiple equilibria in closed exchange and production-and-exchange economies is usually ignored in macroeconomic models even though they are important in real economies. We argue that default and bankruptcy laws serve to provide the conditions for uniqueness of an equilibrium. In this paper, we report experimental evidence on the effectiveness of this approach to resolving multiplicity: a society can assign default penalties on fiat money so that the economy selects one of the equilibria. The laboratory data show that the choice of default penalty takes the economy near the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies.