A New Principles of Economics: The Science of Markets

518 Pages·2022·7.224 MB·English

by  Carsten Herrmann-Pillath, Christian Hederer

A NEW PRINCIPLES OF
ECONOMICS
Despite the dynamic development of the discipline of economics, the ways in
which economics is taught and how it defines its basic principles have hardly
changed, resulting in economics being criticised for its inability to provide
relevant insights on global challenges. In response, this book defines new
principles of economics and seeks to establish economics as the science of
markets.
A New Principles of Economics provides an alternative conceptual framework
for the study of economics, integrating recent developments and research in both
economics and neighbouring social sciences. Adopting the structure of a standard
principles text, it separates the study of markets as mechanisms and markets in
their wider contexts. In doing so, a number of new perspectives are introduced,
including approaching the economy as part and parcel of the Earth system;
directly connecting the analysis of production with an analysis of technology
and thermodynamic principles; explicitly treating markets as forms of social
networks mediated by the institution of money; and reinstating the central role of
distribution in political economy analysis.
Drawing on the latest theories and research on the economy, and including
both the natural and social sciences, this text provides a holistic introduction
suitable for postgraduates and other advanced students.
Carsten Herrmann-Pillath is Professor of Economics and Permanent Fellow
at the Max Weber Centre for Advanced Cultural and Social Studies, University
of Erfurt, Germany.
Christian Hederer is Professor of Economics and International Economic
Policy at the Technical University of Applied Sciences Wildau, Germany.
To Sigrun, Emil, Hans, Luisa, Otto and Yolanda. CHP
To my father, in gratitude. CH
A NEW PRINCIPLES OF
ECONOMICS
The Science of Markets
Carsten Herrmann-Pillath
and Christian Hederer
Cover image: © Getty Images
First published 2023
by Routledge
4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2023 Carsten Herrmann-Pillath and Christian Hederer
The right of Carsten Herrmann-Pillath and Christian Hederer to be
identified as authors of this work has been asserted in accordance with
sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
ISBN: 978-0-367-55720-1 (hbk)
ISBN: 978-0-367-55719-5 (pbk)
ISBN: 978-1-003-09486-9 (ebk)
DOI: 10.4324/9781003094869
Typeset in Times New Roman
by Apex CoVantage, LLC
CONTENTS
Introduction 1
PART I
1 What are markets? 9
1. Introduction 9
2. Marketplaces 10
2.1. Marketplaces embody markets 10
2.2. Markets and market society 11
2.3. Markets, land, and labour 13
3. Market system 14
3.1. Market infrastructure and arbitrage 14
3.2. Markets and institutions 15
4. Markets: For good or bad? 17
5. Market economy versus capitalism 18
6. Conclusion 20
Major chapter insights 21
Notes 21
References 23
2 Economics as the science of markets 26
1. Introduction 26
2. What is science? The first-, second-, and third-person view 27
3. Economics, the economy, and markets 29
3.1. The economy as an object of science 29
3.2. Performativity and materiality of markets 31
4. Economic models as mechanistic explanations 33
5. Economic models triangulate cross-disciplinary data
and hypotheses 37
6. Economics is entangled with its object: Reflexivity 38
7. Conclusion 40
v
Contents Major chapter insights 41
Notes 42
References 43
3 Economics and values 48
1. Introduction 48
2. Freedom, values, and markets 49
2.1. Freedom of choosing preferences 49
2.2. Freedom and social interdependence 50
2.3. Freedom and rationality 51
2.4. Freedom and social justice 53
3. Efficiency 54
3.1. Efficiency as progress 54
3.2. Trade-offs: Efficiency versus values 55
4. Markets, economists, and values 58
5. Conclusion 59
Major chapter insights 59
Notes 60
References 61
PART II
4 Evolution, ecology, economy 67
1. Introduction 67
2. Physical principles of evolution 68
2.1. Economic niche, environment, Earth system 68
2.2. Thermodynamic principles of evolution 70
2.3. Metabolism and growth 74
3. Fundamentals of evolution 77
3.1. Selection, fitness, adaptation 77
3.2. The VSR mechanism and levels of selection 80
4. The evolutionary economy of living systems 82
4.1. Evolving synergy in ecosystems and the human economy 82
4.2. Cultural evolution, institutions, and human ultra-sociality 84
5. Conclusion 88
Major chapter insights 89
Notes 89
References 92
5 Specialisation and cooperation 99
1. Introduction 99
2. Specialisation and exchange: Gains and limitations 100
2.1. Comparative advantage 100
2.2. The specialisation dilemma 102
vi
3. Strategic interaction and power 104 Contents
3.1. The archetypes 104
3.2. Power and forced specialization 108
4. Externalities and the efficiency of specialisation 111
5. Conclusion 115
Major chapter insights 116
Notes 117
References 119
6 Production and technological evolution 123
1. Introduction 123
2. Production in the technosphere 124
2.1. The technosphere 124
2.2. Production and consumption in the ecological dimension 126
3. Specialisation and technology 129
3.1. Engineering versus economic approaches to production 129
3.2. Production and use of technology 132
3.3. Technological evolution 135
4. Firms, technology, and specialisation 138
4.1. The firm as organisational form of specialisation 138
4.2. Technology and power in firms 140
5. Conclusion 142
Major chapter insights 143
Notes 143
References 146
PART III
7 The economic agent 153
1. Introduction 153
2. Reframing rationality in economics 154
3. Brain, reason, and human sociality 155
3.1. The nature of the brain: Predictive and social 155
3.2. Reason and rationality 158
3.3. Emotions 160
4. The economic agent 161
4.1. Agency and agential power 161
4.2 Identity 163
4.3. Performativity 165
5. Mechanisms of choice and valuation 166
5.1. Imitation and learning 166
5.2. Wanting, liking, and happiness 168
5.3. Creativity and entrepreneurial action 169
6. Conclusion 171
vii
Contents Major chapter insights 172
Notes 173
References 177
8 Networks and social interaction 185
1. Introduction 185
2. A short primer of network analysis 186
2.1. Fundamental types of network configurations
in the context of markets 186
2.2. Dimensions of networks 190
3. Network structure and dynamics 194
3.1. Network structure and agential power 194
3.2. Social capital 197
3.3. Boundaries in networks: In-group/out-group 201
3.4. Network dynamics and frequency-dependent
mechanisms 203
4. Conclusion 207
Major chapter insights 208
Notes 209
References 211
9 Institutions 216
1. Introduction 216
2. Following an institution 217
2.1. Cognitive mechanisms of institutionalisation 217
2.2. Institutions and emotions 220
3. Performing institutions 221
3.1. Performative mechanisms in two dimensions 221
3.2. Path dependency of institutional evolution 224
4. The cost of institutions 226
4.1. The basic setup 226
4.2. Economic transaction costs 227
4.3. Political transaction costs 229
4.4. Political transaction costs on the constitutional level
and the social contract 231
5. Power and institutions 232
5.1. Institutions and endogenous agential power 232
5.2. Institutions and violence 233
5.3. Evaluating institutions 235
6. Conclusion 236
Major chapter insights 237
Notes 238
References 240
viii
10 Money and value 246 Contents
1. Introduction 246
2. Performing money 247
2.1. The institution of money 247
2.2. Money, prices, and arbitrage 250
3. The psychology of money: Anchoring the performativity
of monetary institutions 253
3.1. Agential power and the value of money 253
3.2. Cognition and money emotions 254
4. Money, arbitrage, and the objectivisation of subjective value 256
4.1. Objectification of value as performative rationalisation
of choice 257
4.2. Entrepreneurial rent and exchange value 261
4.3. Money as form of social capital 262
5. Conclusion 264
Major chapter insights 264
Notes 265
References 267
11 Markets evolving 272
1. Introduction 272
2. Characteristics of markets: A reprise 273
2.1. Elements of markets 273
2.2. A simple map of a market 275
3. The evolutionary market process: Competition, endogenous
niche formation, and growth 277
4. Money, prices, and market states 280
4.1. Entrepreneurship and pricing under the shadow of the
specialisation dilemma 280
4.2. Beyond equilibrium: Prices, market clearing, and
market states 282
5. Entrepreneurs and firms as market makers 284
6. Markets and institutions 288
7. Conclusion 290
Major chapter insights 290
Notes 291
References 293
PART IV
12 Money and finance 301
1. Introduction 301
2. Private and sovereign money 302
ix