On the Power and Weakness of Rational Expectations: Logical Fallacies, Periodic Bubbles and Business Cycles

A popular interpretation of the Rational Expectations/Efficient Markets hypothesis states that, if the hypothesis holds, then market valuations must follow a random walk. This postulate has frequently been criticized on the basis of empirical evidence. Yet the assertion itself incurs what we could call 'fallacy of probability diffusion symmetry': although market efficiency does indeed imply that the mean (i.e. expected) path must be a random walk, if the probability diffusion process is asymmetric then the observed path will most closely resemble not the mean but the median, which does not necessarily follow a random walk. To illustrate the implications, this paper develops an efficient markets model where the median path of Tobin's q ratio displays regular cycles of bubbles and crashes reflecting an agency problem between investors and producers. The model is tested against US market data, with results suggesting that such a regular cycle does indeed exist and is statistically significant. The aggregate production function in Gracia (Uncertainty and Capacity Constraints: Reconsidering the Aggregate Production Function, 2011) is then put forward to show how financial fluctuations can drive the business cycle by periodically impacting aggregate productivity and, as a consequence, GDP growth

The Foreign Economic Effect of the U.S. War on Drugs

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Uncovering the Costs of the Iraq War

Fred Foldvary reviews the recent book by Joseph Stiglitz and Linda Bilmes, The Three Trillion Dollar War: The True Cost of the Iraq Conflict. Foldvary commends the book for its assembly of both the budgeted and implicit costs of the war, and its analysis of the economic impact of the war. The review posits that the better knowledge and accounting of the war costs as provided by this work will aid in establishing a more coherent dialog on policy for dealing with this and future conflicts abroad.war,Iraq,federal deficit,governmental accounting,governmental expenditures

Geo-Rent: A Plea to Public Economists

This paper presents an analysis of what is termed “geo-rent,†what the plot-devoid-of-improvements would rent for in an auction. Most of the public finance literature and current thought has disvalued and misunderstood the actual and potential role of land and its rent for public revenue. The qualities of land value that make it a superior source of revenue—having little or no deadweight loss, and capitalizing civic infrastructure and services—are recognized but compartmentalized, ignored in the broader policy discussions. That the “producer surplus†is in reality mostly land rent is little recognized. The “Henry George Theorem†that rent can optimally equal the cost of public goods is not applied to policy issues. Public finance theorists and economists generally presume that land rent is an insignificant portion of national income, whereas studies have estimated that a substantial portion of government revenue could be obtained from geo-rent. The shunting aside and disparagement of public revenue from geo-rent has distorted economic analysis and contributes to iatrogenic economy-hampering fiscal policy. The paper proposes a broader and more integrated public economics which recognizes the fundamental role of land in economies and fully incorporates the analysis of public revenue from land rent.Henry George,land,private communities,public economics,public finance,rent,taxation

Marginalists Who Confronted Land

Although the neoclassical turn in economics demoted land as a factor, important economists of neoclassical thinking, from neoclassical predecessors such Hermann-Heinrich Gossen through figures such as Leon Walras, did view land as a distinct factor of production. Walras, in particular, favored the use of land rent for public revenue. This paper examines the treatment of land by several neoclassical and Austrian economists and shows how, although the neoclassical school today has managed to bury land, some of the key figures who founded these schools did confront land as a factor. The burial of land is thus not inherent in neoclassical economics, but is a historical development that can be reversed. Copyright 2008 American Journal of Economics and Sociology, Inc..

Efficiency, Accountability, and Private Government: The Impact of Residential Community Associations on Residential Property Values

This study evaluates the impact of residential community associations (RCAs) on RCA property values by testing competing theoretical expectations about the efficiency and accountability of RCAs with empirical evidence. Copyright (c) 2004 by the Southwestern Social Science Association.

The Concept of Care in Institutional and Feminist Economics and Its Impact on Public Policy

Economic activity takes place within an institutional framework. The economy, like society, represents a complex of institutions, ranging from the smallest, such as the family, to the largest and most comprehensive, the state (Chavance 2009). Institutional economics offers a broad perspective that brings forward the concept of gender, since gender is a fundamental organizing principle of institutions (Jacobsen 2003). A focus on social provisioning, typical for both feminist as well as institutional economists, leads to a broader understanding of economic activity. This broader approach includes activities like caring and care labor that cannot be entirely understood in terms of individual choices. In this paper, I explore the relationships between care and the economy from the perspective of neoclassical, institutional, and feminist economic theory. Economic theories are a basis for public policies that have a major impact on people’s lives. I argue that changing the dominating economic perspective into feminist-institutional one would improve the situation of care providers, who would, in turn, contribute to the development of society and the economy