Knowledge that Transforms

In their recent book, Colander and Kupers (2014) argue that viewing the economy as a complex adaptive system should change the way in which we make economic policy. This would necessitate a paradigm shift. Economics has, over time, tried to produce a coherent model to underpin the dominant laissez-faire liberal approach. But we have never proved, in that model, that left to their own devices, the participants in an economy will self-organize into a satisfactory state. This is an assumption. Complex interactive systems with direct interaction between heterogeneous agents may show no tendency to self-equilibrate and will undergo endogenous crises. Economists should concentrate on the emergence of certain patterns. Colander and Kupers suggest that we may be able to nudge the system into “good” basins of attraction. A more radical view is that there are no fixed basins of attraction; these change with the evolution of the system and it is illusory to believe that we can choose good basins. We may be able to recognize and influence the emergence of certain states of the economy, but we are far from Leon Walras's dream of economics as a science like astrophysics.

You asked me to review this book for you, and try to digest what lessons it might hold for you. I can well understand why you delegated this exercise to me. You were, no doubt, already aware that Alex Cukierman (AC) is an eminent theoretician, who has been applying, currently fashionable, game theoretic modeling techniques to the study of monetary policy; and you may have had some concerns whether you would find the book user friendly. In the rest of this review, following both your instructions and my own inclinations, I shall concentrate primarily upon the lessons and light that his work provides for monetary issues in general, and for the conduct of Central Banking in particular. Neither you, nor I, have either the interest, or the mathematical competence, to assess how far this book represents an advance in the application, or technical procedures, of game theory as such. In that respect, the author will no doubt regard this as only a partial and one-sided review of his work. Nevertheless, AC hopes that you, and other practitioners, will read at least some part of the book, and he has gone to considerable lengths to try to structure the book into modules of differing levels of technical difficulty and abstraction, so that you will read the easy bits. Thus,

THE HIGH UNEMPLOYMENT RATE of American youth, especially of black youth, has been a source of deep concern for many years. This concern has given rise to a voluminous literature. The purpose of this essay is not so much to review this literature as to distill from it some important elements of agreement and to reflect on their implications. In the American economic literature, the term youth generally refers to people between the ages of 16 and 24, and teenage refers to people between the ages of 16 and 19. The age categories 16-19 and 20-24, which are frequently used in U.S. government statistics, include people with very different patterns of activities, for these ages cover almost the whole transition from school to work. In the Census of 1980, which gives data by single years of age, the percentage of males in the labor force, including the armed forces, rises steadily from 31.7 percent at age 16 to 89.0 percent at age 24, with the largest jump between the ages of 17 and 18. The measured unemployment rate drops steadily from 18.0 percent at age 16 to 9.3 percent at age 24. Clearly, youth is not a homogeneous population. Measures of employment and unemployment are derived from administrative statistics such as payroll data or unemployment insurance records, or from household surveys. Administrative data, however, are not reported by age, so, all statistical information on youth employment and unemployment is from surveys. These include the Decennial Census, the Current Population Survey, the National Longitudinal Survey of young men, and the special survey of young black men in inner cities done for the National Bureau of Economic Research. A person is employed who does any paid work during the survey week; a person is unemployed who does no paid work during the survey week and is looking for work or is on layoff from a job. These definitions apply to students as well as to others. A student who works part-time after school or on weekends is employed and one who is seeking such part-time work is unemployed; both are in the labor force. The fraction of unemployed youth who are enrolled in school is surprisingly high. For example, in January 1985, according to the Current Population Survey, 50.4 percent of unemployed teenagers were in school. A youth not in school may be employed, unemployed, or out of the labor force. Youth who are in school or working (or

AHEORY of public finance remains unsatisfactory unless it comprises both the revenue and expenditure sides of the fiscal process. The classical (RicardoMills-Edgeworth-Pigou) tradition of a taxation-only view neglected this axiom. Holding expenditures unproductive, or disregarding them altogether, the task was to arrange taxes so as to impose equal (or least total) sacrifice. As a theory of taxation, this approach collapsed with the old welfare economics; and as a theory of public finance, its exclusive concern with taxation bypassed the central problem of how to allocate resources for the provision of social goods. Subsequently, various attempts were made to combine the revenue and expenditure sides in a more satisfactory system. We shall note these briefly, and then consider how cost-benefit analysis fits into the picture.

I am grateful for comments received from William Brock, M. D. Godfrey, K. P. Heiss, J. Laderman, E. Marchi, C. F. Morgenstern, A. Schotter, G. Schwodiauer, G. L. Thompson, and Kan Young. Special thanks are due to Mark Perlman and an anonymous referee. All are, of course, absolved of any responsibility for any of the contents of this paper. Support of this work in part by the Office of Naval Research through a grant to New York University is gratefully acknowledged.

The objective in this paper is to survey the literature in transportation economics, exploring two basic themes; first, the conceptual developments in the analysis of supply and demand, which recognizes noteworthy aggregation biases in the empirical work on aggregate data and indicate that a correct analysis of the issues should take place at a highly disaggregated level; second, the use of these conceptual developments to evaluate efficiency aspects of transportation pricing, investment, and the impact of government regulation on resource allocation and distribution in the transportation sector. It is important to acknowledge that the survey is based on research throughout the world but our institutional perspective and, to some extent, the topics that are covered is based largely on the U.S. experience. (Author)

Adam Smith, David Ricardo, Thomas Robert Malthus, and John Stuart Mill shared in common essentially one dynamic model of equilibrium, growth, and distribution. When the limitation of land and natural resources is added to the model of Karl Marx, he also ends up with this same canonical classical model. In its present version the model is stripped down to its minimal essentials. For brevity I employ modern mathematical tools, but only to characterize in modern terms the relations that were actually common to all these writers. The reader should of course be warned that any simple codification of the classical economists' discursive writings must be an oversimplification: in some of their passages they qualify what they have written elsewhere; in some they provide negations and contradictions. Not a few of the stereotypes about the classical writers are, to paraphrase Voltaire, myths agreedupon by later commentators-distortions that both improve and libel the originals. The relevant object of study for a modern scholar is the corpus of original texts and the commentaries on them, the latter not being genuinely of less interest than the former once we have succeeded in telling them apart. To the fascinating question of whether classical political economy does, or can be made to, offer an alternative paradigm --in the sense of Thomas Kuhn [11, 1962]-to modern mainstream economics, the present investigation provides an instructive answer. So to speak, within every classical economist there is to be discerned a modern economist trying to be born. A Ricardo or Mill did not so much replace supply and demand by quite different mechanisms but rather sought to be able to say something significant and limiting about their properties, quite in the same way that we moderns endeavor to do. I describe and analyze here the basic classical model in its essential form.

NO WORLD CENTRAL BANK issues a separate currency for commerce across national boundaries. Instead, a system of national monies works more or less well in providing a medium of exchange and unit of account for current international transactions, as well as a store of value and standard of deferred payment for longer-term borrowing and lending. How do national governments and banking institutions interact to provide international money for merchants and investors? By necessity, this monetary interaction changes with time, place, political circumstances, and financial technology. To better understand its historical evolution, let us follow Robert Mundell and distinguish between a monetary system and a monetary order:

This paper studies the historical roots of the relationship between economics and psychology, and places recurring controversies between these disciplines in the context of the relationship between economics and the other human sciences, especially sociology. We focus on the formative years of contemporary economics, the early twentieth century, when psychologists and institutionalist economists attacked the unscientific nature of economics. Economists responded by (mistakenly) renouncing verstehen and claiming adherence to behaviorism, rather than by actually addressing the institutionalist critique. Behaviorist economics declared independence from psychology, and by analogy, from the other human sciences. Our illusion of independence continues to this day.