Constructivist and Ecological Rationality in Economics

When we leave our closet, and engage in the common affairs of life, (reason's) conclusions seem to vanish, like the phantoms of the night on the appearance of the morning; and 'tis difficult for us to retain even that conviction, which we had attained with difficulty (Hume, 1739/, p 507). we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed rules (of caring intervention to do visible 'good') of the small band or troop, or our families to the (extended order of cooperation through markets), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were to always apply the (noncooperative) rules of the extended order to our more intimate groupings, we would crush them. (Hayek, 1988, p 18). (Italics are his, parenthetical reductions are mine).behavioral economics; experimental economics

Gross domestic product and its components in recessions

The recent economic crisis – already deservedly labeled the ‘great recession’ – continues to plague the health of the economy as a whole and has motivated us to probe its characteristic features and compare it to the typical economic downturn. Events during the boom and crash have been sharply delineated, progressing from (1) an unprecedented housing price bubble from 1997 to 2006, (2) rapid house price decline beginning early in 2007, (3) freezing of credit markets in August 2007, (4) rapid declines in equities prices and economic output by the middle of 2008, and (5) deterioration of the financial system in 2008 and an aggressive and unprecedented Federal Reserve intervention in the fall of 2008. This sequence of events has provided a fresh perspective with which to examine past economic cycles, and, we believe, is likely to change how economists, policy makers, investors, and others think about monetary policy, housing cycles, and business cycles. We find that eleven of the most recent fourteen economic downturns in the U.S. – from the great depression that began in 1929 to the great recession starting in late 2007 – were led by declines in housing investment. In these eleven downturns, housing investment declined before any other major component of GDP and its total decline before and during the recession was larger in percentage terms than the decline in any other major sector. In the 1945 recession – one of the three recessions in which housing was not implicated – national defense expenditures fell while all major components of private expenditure rose. The other two – in 1937-38 and 2001 – resulted primarily from declines in non-residential fixed investment that preceded and exceeded declines in any other major component of GDP. Figure 1 shows the percentage of GDP contributed by housing expenditures over the past 81 years. Although housing is not a large component of GDP – which may explain its limited role in accounts of recessions – it is volatile, it has declined before almost every recession, it has rarely declined substantially without a recession following soon afterward, and the extent of its decline emerges as a good predictor of the depth and duration of the recession that follows.2 In addition to its role as a leading indicator, and its volatility over the business cycle, housing investment has recovered faster than any other sector of the economy in every recession since 1921, with the single exception of the 1980 recession, which lasted only 12 months.

FAIRNESS AND SHORT RUN PRICE ADJUSTMENT IN POSTED OFFER MARKETS

Questionnaire studies show that perceptions of fairness cause people to resist price increases following abrupt changes in conditions with no cost justification. We examine this hypothesis in posted-offer markets extending previous work. Consistent with the hypothesis, in the profit disclosure (fairness) treatment prices are initially below those in the cost and the no disclosure treatments. Over time prices converge in all treatments to the competitive surplus maximizing equilibrium. Fairness is thus interpreted as being a result of expectations that are not sustainable. Expectations adapt as the market converges to the predicted competitive equilibrium.

Recycling and Exhaustible Resources

A previous paper (Smith, 1972) dealt with the economics of extracting an exhaustible resource when there exists a high-cost inexhaustible substitute technology which must ultimately become economical to operate in conjunction with primary extraction. Solar energy as an alternative to the recovery of fossil fuels and the recycling of material resources such as iron or copper as an alternative to mining represent examples under these assumptions. However, in the case of recycling, the model did not allow for the possibility that recycled output, and therefore cost may depend upon the floating stock of recyclable material. This turns out to be a particularly interesting and appropriate case, whose development will be the objective of this note. For additional analyses of the problem of recycling, the reader is referred to Smith (1974) and D’Arge and Kogiku (1973)

Economics of Wilderness Resources

In the USA there has been an explosion in the numbers of visitors to 'wildernesses' such as the Grand Canyon and the High Sierra, which is causing considerable distress for naturalists and environmentalists interested in wilderness preservation, and for National Park and Forest Service administrators caught in the cross currents of political pressure to make public lands freely available for recreation, while attempting to maintain them in their natural state. Control theory and stationary general equilibrium theory are used to study a model of certain characteristics of public recreational resources, and several types of equilibrium are illustrated and compared. It is suggested that rationing, by deliberately increasing the cost of access to scenic resources, may be society's best option

The primitive hunter culture, Pleistocene extinction, and the rise of agriculture

The hypothesis that megafauna extinction some 10,000 years ago was due to "overkill" by Paleolithic hunters is examined using an economic model of a replenishable resource. The large herding animals that became extinct, such as mammoth, bison, camel, and mastodon, presented low hunting cost and high kill value. The absence of appropriation provided incentives for the wastage killing evident in some kill sites, while the slow growth, long lives, and long maturation of large animals increased their vulnerability to extinction. Free-access hunting is compared with socially optimal hunting and used to interpret the development of conservationist ethics, and controls, in more recent primitive cultures

Experimental Economics: Theory and Results

It is the premise of this paper that the study of the decision behavior of suitably motivated individuals and groups in laboratory or other socially isolated settings such as hospitals (Battalio, Kagel, et al., 1973) has important and significant application to the development and verification of theories of the economic system at large

Bidding and Auctioning Institutions: Experimental Results

Among the laboratory experimental studies of market price behavior, there are numerous experiments designed on the basis of various bidding and auctioning processes of allocation. The theme of this conference will serve as the organizing principle of this paper which presents a summary of several published and previously unpublished experiments in auction and sealed-bid market behavior

Experimental economics: Induced value theory

It is the premise of this paper that the study of the decision behavior of suitably motivated individuals and groups in lab- oratory or other socially isolated settings such as hospitals (R. Battalio, J. Kagel, et al., 1973) has important and significant application to the development and verification of theories of the economic system at large