Political Economy: An Institutional and Behavioral Approach

Preface
Contents
Abbreviations
List of Figures
Chapter 1: Introduction
Chapter 2: Weaknesses in Economics and Economic Education
What Follows Why?
2.1 Cultural and Institutional Factors in Economics
2.2 Economics as a Natural Science?
2.3 Ethics in Economic Education
Conclusion
References
Chapter 3: Basics of Political Economy
What Follows Why?
3.1 Why Political Economy?
3.2 Value Judgement Problems and Conflicting Goals
Groupwork: Goals for Modern Democracies
3.3 Optimum Welfare as a Political Economy Goal
Conclusion
References
Chapter 4: Modeling the Image of Man
What Follows Why?
4.1 The Classical View of Man: Homo Economicus
4.2 Falsely Understood Egoism
4.3 Behavior in Groups
4.4 Individualism Versus Collectivism
4.5 Fairness as Motivation
4.6 The Cultural Impact
4.7 Economic Behavior Motivation
4.8 Emotions
4.9 Human Intelligence
4.10 Further Deviations from Rational Behavior
Conclusion and Summary
References
Chapter 5: The Functioning of Market and Competition
What Follows Why?
5.1 Economy and Freedom: A Historical Overview
Conclusion and Summary
5.2 Basic Conceptions of the Market
5.3 How Does the Market Economic System Work?
5.3.1 Functions of Competition
5.3.2 A Free-Market without Social Rules?
5.3.3 Moral Goals and Market Economy
Conclusion
Exercises
References
Chapter 6: Theory of Economic Systems
What Follows Why?
6.1 Theories of Justice
Conclusion
6.2 Constitutional Economics
6.3 Parts of a Market Economic System
6.4 Institutional Economics: Elements of the Economy
6.5 The Economic Division of Labor
Conclusion
6.6 Institutional Challenges in Specific Game Situations
6.6.1 The Ethical Prisoner Dilemma
6.6.2 Games of the Gender Struggle Type
6.6.3 Insurance or Trust Game
6.7 Ethical Institutions and Organizations
6.8 Is the State of Law Sufficient?
Conclusion
6.9 Central Administration Economy
6.10 Russia´s Transformation into a Market Economy with a Poor Economic System
Conclusion
6.11 Social Market Economy
Conclusion
References
Chapter 7: Market Failure
What Follows Why?
7.1 Market Failure Due to External Effects
Conclusion
Exercises
7.2 Market Failure Due to Non-exclusion, Public Goods
Summary
7.3 Market Failure Due to the Prisoner´s Dilemma
Conclusion
Exercises
7.4 Market Failure Due to Lack of Rationality
7.4.1 Meritorious and Demeritorious Goods
7.4.2 Risk-Averse or Risk-Taking Behavior
7.4.3 Emotions
7.5 Market Failures Due to Asymmetrical Information
Conclusion
7.6 Market Failure Due to Transaction Costs
Conclusion: Missing Rationality and Asymmetric Information
7.7 Market Failure Due to Corruption
Conclusion
7.8 Market Failure Due to Lack of Market Transparency
7.9 Market Failure Due to Natural Monopolies
7.9.1 Spatial Monopoly
7.9.2 Natural Monopoly Due to Falling Unit Costs
Conclusion
7.9.3 Natural Monopoly on Internet and Software
7.9.4 Indivisibility of the Factors of Production
Conclusion
7.10 Labor Market
What Follows Why?
7.10.1 Historical Development
Conclusion
References
Chapter 8: Political Failure
What Follows Why?
8.1 The New Political Economy
8.2 The Vote Maximization Model from Downs
Conclusion
8.3 Interest Groups (Lobbying)
8.4 Economic Theory of Bureaucracy
Conclusion
8.5 Voting Procedures
8.5.1 Unanimity Rule
8.5.2 Majority Rules (Absolute or Relative, Plurality Voting)
8.5.3 Borda Rule
Conclusion
8.6 Political Manipulations
Conclusion
References
Chapter 9: Competition Policy
What Follows Why?
9.1 The Theory of Competition Policy: An International Synthesis
9.1.1 The Ordoliberalist Concept from Walter Eucken
9.1.2 The Workability Concept of Industrial Organization and the German Conception of Functional Competition: The Pessimists
9.1.3 The Austrian School
9.1.4 The German Concept of Free Competition
9.1.5 The Chicago School of Antitrust Analysis
Conclusion
9.1.6 The Neo-Austrian School
9.1.7 The European School in EC Competition Law
9.1.8 The Post-Chicago School
9.1.9 A Concept of a New Neo-Ordoliberalism as an Economic Ideal for an International System of Competition Regulations
Conclusion
9.2 Cartels
9.2.1 Basics
9.2.2 Types of Cartels
9.2.3 Cartels as Prisoner´s Dilemma
9.3 Vertical Agreements
Conclusion
Summary
9.4 Abuse Supervisory Authority
9.4.1 Criteria for a Competitive Abuse of Power
9.4.2 Dumping as an Abuse of a Market Dominating Position
9.4.3 Abuse Supervisory Authority at the International Level
9.5 Merger Controls
Conclusion
Summary
9.6 International Competition Policy
9.6.1 International Merger Controls
Conclusion
9.6.2 The Requirements for an International Competition Authority
9.6.3 Subsidies and Anti-subsidy Measures
9.6.4 Dumping and Antidumping Measures
9.6.4.1 The Procedure for Antidumping Measures
9.6.4.2 Biases of the Injury Analysis
9.6.4.3 Additional Advantages of Antidumping-Complaints
9.6.4.4 The Effects of Dumping
Selling Below Production Costs
Selling Below the Price on the Home Market
The Criterion of Cost as the Measure of Judgment for Dumping
Damage Analysis
9.6.4.5 Consideration of the Effect of Competition Within the Anti-dumping Proceedings
9.6.4.6 Anti-dumping Measures as Violations of Competition
Conclusion
References
Chapter 10: Industrial Policy
What Follows Why?
10.1 Active Shaping Industrial Policy: Above All Research and Technology Subsidies
Conclusion
10.2 The Awarding of Research and Technology Subsidies
10.3 Are Research and Technology Subsidies of National Advantage?
Summary of the Assessment of Applied Research
Conclusion
10.4 Reactive Industrial policy with the Help of Maintenance Subsidies
Conclusion
Summary: Advantages and Disadvantages of Reactive Industrial Policy Advantages
10.5 Explanations for Subsidies
10.5.1 The Behavior of Policy Makers
10.5.2 A Subsidy-Free Market as a Public Good
Summary
References
Chapter 11: Monetary Policy and the European Central Bank
What Follows Why?
11.1 Inflation
11.1.1 What Is Inflation?
11.1.2 Disadvantages of Inflation
Conclusion
Exercises
11.2 Advantages of a Single European Currency Area
11.3 The Founding of the European Central Bank
11.4 The National Budget Policy
11.5 Problems of a Uniform Interest Rate Policy
11.6 The Lack of Political and Economic Unification of Europe
Conclusion
11.7 Organs of the ECB
11.8 Fundamentals of the Monetary Policy of the European Central Bank
11.8.1 Political Independence
11.8.2 Goals of the ECB
11.8.3 The Money Creation Process
11.8.4 Process of Financial Intermediation by Commercial Banks
11.8.5 The Monetary Policy Instruments of the ECB
Conclusion
Exercises
11.8.6 Quantitative Easing, the New Monetary Policy on the Capital Market
Conclusion
References
Chapter 12: Business Cycles Policy
What Follows Why?
12.1 The Business Cycles Phenomenon
12.2 Reasons for Economic Fluctuations from the Economic Theory and Political Economy Conclusions
12.2.1 Dynamic Keynesian Approaches: The Hicks´s Super-multiplier
Conclusion
12.2.2 Neoliberal Versus Keynesian: A Synthesis
12.2.3 Technical Progress: The Schumpeter Business Cycle
12.2.4 Overinvestment Theories
12.2.5 Distribution Struggles to Explain Economic Fluctuations: The GOODWIN Model
Conclusion
12.2.6 Political Economic Cycles: The Political Economic Model of Nordhaus
12.2.7 Monetary Policy as a Reason for Business Cycles
12.2.7.1 The Interest Rate Theorem of Knut Wicksell
12.2.7.2 The Perverse Elasticity of Credit Supply of Hayek
Conclusion
12.2.7.3 The Effects on Investment Behavior of Zero Interest Rate Policy, Evidence from a Roulette Experiment
Conclusion
12.2.7.4 Case Study: The US Monetary Policy in the Field of Tension of the Stock Market Development
12.2.7.5 Review of Monetary Policy Objectives
Conclusion
12.2.8 Speculative Bubbles as a Business Cycle Trigger
12.2.8.1 The Efficient Market Hypothesis
12.2.8.2 Review of the Efficient Market Hypothesis
12.2.8.3 Noise Trading Approaches
12.2.8.4 The New Behavioral Finance
Conclusion and Summary of the Psychological Economic Determinants
12.2.9 Shocks and Price Rigidities in the New Keynesian Macroeconomics
12.2.10 Price Adjustment Costs and Information Asymmetries in the New Keynesian Macroeconomics
12.2.11 Adaptive Expectation in Monetarist Theories
12.2.12 Exogenous Change of Political Variables: The New Classical Macroeconomics
12.2.13 Determinants of Growth as Economic Factors: The New Growth Theory
12.3 Conclusion Determinants of the Business Cycle
Summary: Determinants of the Business Cycle
Exercises
References
Chapter 13: International Financial Markets
What Follows Why?
13.1 The Financial Crisis and the Reforms to Stabilize the Financial Markets
13.1.1 The Subprime Crisis, the Biggest Financial Crisis After 1929
13.1.2 Some Causes of the Financial Crisis
13.1.2.1 Technical Mistakes
13.1.2.2 Exaggerated Belief in Figures
13.1.2.3 Missing Moral Values
13.1.2.4 The Importance of Risk Adequate Compensation
Conclusion
Summary
13.1.3 The Reforms of the International Financial Market Order
13.1.3.1 Risk and Non-transparency in Derivatives
13.1.3.2 Weaknesses of Risk Indicators and Pricing Methods
13.1.3.3 Introduction of a Separation System
13.1.3.4 The Trade-Off Between Yield and Risk and Unilaterally Constructed Incentive Schemes
13.1.3.5 Fair Value Loan Valuation
13.1.3.6 Conclusion
13.2 Speculation in the International Financial Markets
What Follows Why?
13.2.1 What Empirical Evidence Do We Have About Speculation Influencing Markets?
13.2.2 Critique of Methodology
13.2.3 The Logic of Speculation
13.2.4 Price Distortions and Price Manipulation
13.2.5 Irrationality and Bubble Creation?
13.2.6 Conclusion
13.3 Summary and Reform Proposals
References
Chapter 14: Foreign Trade
What Follows Why?
14.1 Reasons for Foreign Trade
14.1.1 Absolute Cost Differences
14.1.2 Relative Cost Differences
14.1.3 Different Equipment of Production Factors as a Cause of Foreign Trade
14.1.3.1 Mobile Production Factors
14.1.4 The Rybczynski Theorem
14.1.5 Immobile Factors of Production: The Heckscher-Ohlin Theorem or the Factor Proportion Theorem
14.1.6 The Leontief Paradox and Neofactor Proportion Theorem
14.1.7 Product Life Cycle Hypothesis or Theory of the Technological Gap Trade
14.1.8 Foreign Trade Due to Specialization
14.1.9 Conclusion
14.2 The Balance of Payments
Exercises
14.3 Exchange Rates
14.3.1 Interest Rate Parity
14.3.2 Purchasing Power Parity Theory
14.3.3 The Real Exchange Rate as an Indicator of Competitiveness
Exercises
14.4 Economic Policy in the Open Economy
14.4.1 Effect Chains of External Transactions
14.4.2 Expansive Monetary Policy in the Open Economy
14.4.3 Debt-Financed Expansionary Fiscal Policy in the Open Economy
Conclusion
Conclusion
References
Chapter 15: Solutions to the Exercises
Index