Political Economy: An Institutional and Behavioral Approach

560 Pages·2020·9.704 MB·English

by  Christian A. Conrad

Christian A. Conrad
Political
Economy
An Institutional and Behavioral Approach
Political Economy
Christian A. Conrad
Political Economy
An Institutional and Behavioral Approach
ChristianA.Conrad
UniversityofAppliedSciences
Saarbrücken,Germany
ISBN978-3-658-30883-4 ISBN978-3-658-30884-1 (eBook)
https://doi.org/10.1007/978-3-658-30884-1
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Preface
This book is the culmination of my research stay at Georgetown University and the EC
CommissionandmytimeasanAssistantProfessorintheDepartmentofEconomicsatthe
UniversityofTübingen,Germany.Ihavealsoamassedmorethan12yearsofprofessional
experience in a large German bank, where I often worked with the management of
international companies as a business consultant. The time period of this experience
included the boom and crash at the beginning of the new millennium and the financial
crisis.Asaresult,Ihaveheldseminarsonpoliticaleconomyinthebachelor’sandmaster’s
degreeprogramsattheUniversityofAppliedScienceHTWinSaarbrücken.Thisteaching
experienceaswellasanextensiveliteraturestudyhasbeenincorporatedintothisbook.
Finally,IwouldliketothankMs.DanicaWebb(USA)forthetranslationofthemajor
part of this book and Prof. Starbatty, Prof. Hartherz, and the asset manager Dr. Markus
Stahlfortheirsupport.
Saarbrücken,Germany ChristianA.Conrad
May2020
v
Contents
1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 WeaknessesinEconomicsandEconomicEducation. . . . . . . . . . . . . . . . 5
2.1 CulturalandInstitutionalFactorsinEconomics. . . . . . . . . . . . . . . . . 5
2.2 EconomicsasaNaturalScience?. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 EthicsinEconomicEducation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 20
3 BasicsofPoliticalEconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.1 WhyPoliticalEconomy?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.2 ValueJudgementProblemsandConflictingGoals. . . . . . . . . . . . . . . 25
3.3 OptimumWelfareasaPoliticalEconomyGoal. . . . . . . . . . . . . . . . . 27
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 35
4 ModelingtheImageofMan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.1 TheClassicalViewofMan:HomoEconomicus. .. . . . .. . . . . .. . . . 38
4.2 FalselyUnderstoodEgoism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.3 BehaviorinGroups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
4.4 IndividualismVersusCollectivism. . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.5 FairnessasMotivation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.6 TheCulturalImpact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.7 EconomicBehaviorMotivation.. . . . . . . . . . . . . . . . .. . . . . . . . . . . 64
4.8 Emotions. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.9 HumanIntelligence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
4.10 FurtherDeviationsfromRationalBehavior. . . . . . . . . . . . . . . . . . . . 73
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 82
5 TheFunctioningofMarketandCompetition. . . . . . . . . . . . . . . . . . . . . . 91
5.1 EconomyandFreedom:AHistoricalOverview. . . . . . . . . . . . . . . . . 91
5.2 BasicConceptionsoftheMarket. . . . . . . . . . . . .. . . . . . . . . . . . . . . 97
vii
viii Contents
5.3 HowDoestheMarketEconomicSystemWork?. . . . . . . . . . . . . . . . 100
5.3.1 FunctionsofCompetition. . . . . . . . . . . . . . . . . . . . . . . . . . 101
5.3.2 AFree-MarketwithoutSocialRules?. . . . . . . . . . . . . . . . . 106
5.3.3 MoralGoalsandMarketEconomy. . . . . . . . . . . . . . . . . . . 108
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 116
6 TheoryofEconomicSystems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
6.1 TheoriesofJustice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
6.2 ConstitutionalEconomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
6.3 PartsofaMarketEconomicSystem. . . . . . . . . . . . . . . . . . . . . . . . . 128
6.4 InstitutionalEconomics:ElementsoftheEconomy. . . . . . . . . . . . . . 129
6.5 TheEconomicDivisionofLabor. . . . . . . . . . . . . . . . . . . . . . . . . . . 132
6.6 InstitutionalChallengesinSpecificGameSituations. . . . . . . . . . . . . . 140
6.6.1 TheEthicalPrisonerDilemma. . . . . . . . . . . . . . . . . . . . . . 140
6.6.2 GamesoftheGenderStruggleType. . . . . . . . . . . . . . . . . . 143
6.6.3 InsuranceorTrustGame. . . . . . . . . . . . . . . . . . . . . . . . . . 144
6.7 EthicalInstitutionsandOrganizations. . . . . . . . . . . . . . . . . . . . . . . . 146
6.8 IstheStateofLawSufficient?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
6.9 CentralAdministrationEconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . 151
6.10 Russia’sTransformationintoaMarketEconomywithaPoor
EconomicSystem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
6.11 SocialMarketEconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 170
7 MarketFailure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
7.1 MarketFailureDuetoExternalEffects. . . . . . . . . . . . . . . . . . . . . . . 176
7.2 MarketFailureDuetoNon-exclusion,PublicGoods. . . . . . . . . . . . . 182
7.3 MarketFailureDuetothePrisoner’sDilemma. . . . . . . . . . . . . . . . . . 185
7.4 MarketFailureDuetoLackofRationality. . . . . . . . . . . . . . . . . . . . . 189
7.4.1 MeritoriousandDemeritoriousGoods. . . . . . . . . . . . . . . . 189
7.4.2 Risk-AverseorRisk-TakingBehavior. . . . . . . . . . . . . . . . . 191
7.4.3 Emotions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
7.5 MarketFailuresDuetoAsymmetricalInformation. . . . . . . . . . . . . . . 191
7.6 MarketFailureDuetoTransactionCosts. . . . . . . . . . . . . . . . . . . . . . 198
7.7 MarketFailureDuetoCorruption. . . . . . . . . . . . . . . . . . . . . . . . . . . 204
7.8 MarketFailureDuetoLackofMarketTransparency. . . . . . . . . . . . . 210
7.9 MarketFailureDuetoNaturalMonopolies. . . . . . . . . . . . . . . . . . . . 210
7.9.1 SpatialMonopoly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
7.9.2 NaturalMonopolyDuetoFallingUnitCosts.. . . . . .. . . . . 211
7.9.3 NaturalMonopolyonInternetandSoftware. . . . . . . . . . . . 214
7.9.4 IndivisibilityoftheFactorsofProduction. . . . . . . . . . . . . . 215
7.10 LaborMarket.. . . .. . . . .. . . . .. . . .. . . . .. . . . .. . . .. . . . .. . . . 219
Contents ix
7.10.1 HistoricalDevelopment. . . . . . . . . . . . . . . . . . . . . . . . . . . 220
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 224
8 PoliticalFailure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
8.1 TheNewPoliticalEconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
8.2 TheVoteMaximizationModelfromDowns. . . . . . . . . . . . . . . . . . . 230
8.3 InterestGroups(Lobbying). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
8.4 EconomicTheoryofBureaucracy. . . . . . . . . . . . . . . . . . . . . . . . . . . 233
8.5 VotingProcedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
8.5.1 UnanimityRule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
8.5.2 MajorityRules(AbsoluteorRelative,PluralityVoting). . . . 238
8.5.3 BordaRule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
8.6 PoliticalManipulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 244
9 CompetitionPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
9.1 TheTheoryofCompetitionPolicy:AnInternationalSynthesis. . . . . . 248
9.1.1 TheOrdoliberalistConceptfromWalterEucken. . . . . . . . . 249
9.1.2 TheWorkabilityConceptofIndustrialOrganizationand
theGermanConceptionofFunctionalCompetition:The
Pessimists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
9.1.3 TheAustrianSchool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
9.1.4 TheGermanConceptofFreeCompetition. . . . . . . . . . . . . 254
9.1.5 TheChicagoSchoolofAntitrustAnalysis. . . . . . . . . . . . . . 256
9.1.6 TheNeo-AustrianSchool. . . . . . . . . . . . . . . . . . . . . . . . . . 262
9.1.7 TheEuropeanSchoolinECCompetitionLaw. .. . . . .. . . . 264
9.1.8 ThePost-ChicagoSchool. . . . . . . . . . . . . . . . . . . . . . . . . . 264
9.1.9 AConceptofaNewNeo-OrdoliberalismasanEconomic
IdealforanInternationalSystemofCompetition
Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
9.2 Cartels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
9.2.1 Basics. . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . . .. . . . . 271
9.2.2 TypesofCartels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
9.2.3 CartelsasPrisoner’sDilemma. . . . . . . . . . . . . . . . . . . . . . 274
9.3 VerticalAgreements. . . .. . . . . . . . .. . . . . . . .. . . . . . . . .. . . . . . . 276
9.4 AbuseSupervisoryAuthority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
9.4.1 CriteriaforaCompetitiveAbuseofPower. . . . . . . . . . . . . 282
9.4.2 DumpingasanAbuseofaMarketDominatingPosition. . . 284
9.4.3 AbuseSupervisoryAuthorityattheInternationalLevel. . . . 286
9.5 MergerControls. .. . . .. . . .. . . . .. . . .. . . .. . . . .. . . .. . . . .. . . 286
9.6 InternationalCompetitionPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
9.6.1 InternationalMergerControls. . . .. . . . . . . . . . . . . . . . . . . 292
x Contents
9.6.2 TheRequirementsforanInternationalCompetition
Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294
9.6.3 SubsidiesandAnti-subsidyMeasures. . . . . . . . . . . . . . . . . 295
9.6.4 DumpingandAntidumpingMeasures. . . . . . . . . . . . . . . . . 298
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 321
10 IndustrialPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
10.1 ActiveShapingIndustrialPolicy:AboveAllResearchand
TechnologySubsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
10.2 TheAwardingofResearchandTechnologySubsidies. . . . . . . . . . . . 328
10.3 AreResearchandTechnologySubsidiesofNationalAdvantage?. . . . 332
10.4 ReactiveIndustrialpolicywiththeHelpofMaintenanceSubsidies. . . 338
10.5 ExplanationsforSubsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
10.5.1 TheBehaviorofPolicyMakers. . . . . . . . . . . . . . . . . . . . . 340
10.5.2 ASubsidy-FreeMarketasaPublicGood. . . . . . . . . . . . . . 341
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 344
11 MonetaryPolicyandtheEuropeanCentralBank. . . . . . . . . . . . . . . . . . 347
11.1 Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
11.1.1 WhatIsInflation?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
11.1.2 DisadvantagesofInflation. . . . . . . . . . . . . . . . . . . . . . . . . 350
11.2 AdvantagesofaSingleEuropeanCurrencyArea. . . . . . . . . . . . . . . . 354
11.3 TheFoundingoftheEuropeanCentralBank. . . . . . . . . . . . . . . . . . . 355
11.4 TheNationalBudgetPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
11.5 ProblemsofaUniformInterestRatePolicy. . . . . . . . . . . . . . . . . . . . 359
11.6 TheLackofPoliticalandEconomicUnificationofEurope. . . . . . . . . 361
11.7 OrgansoftheECB. . . . . . . .. . . . . . . . . . .. . . . . . . . . .. . . . . . . . . 362
11.8 FundamentalsoftheMonetaryPolicyoftheEuropean
CentralBank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
11.8.1 PoliticalIndependence. . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
11.8.2 GoalsoftheECB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366
11.8.3 TheMoneyCreationProcess. . . . . . . . . . . . . . . . . . . . . . . 367
11.8.4 ProcessofFinancialIntermediationbyCommercialBanks. . 371
11.8.5 TheMonetaryPolicyInstrumentsoftheECB. . . . . . . . . . . 373
11.8.6 QuantitativeEasing,theNewMonetaryPolicyon
theCapitalMarket. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 381
12 BusinessCyclesPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383
12.1 TheBusinessCyclesPhenomenon. . . . . . . . . . . . . . . . . . . . . . . . . . 383
12.2 ReasonsforEconomicFluctuationsfromtheEconomicTheory
andPoliticalEconomyConclusions. . .. . . . . .. . . . . .. . . . . .. . . . . 385
Contents xi
12.2.1 DynamicKeynesianApproaches:TheHicks’s
Super-multiplier. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385
12.2.2 NeoliberalVersusKeynesian:ASynthesis. . . . . . . . . . . . . 389
12.2.3 TechnicalProgress:TheSchumpeterBusinessCycle. . . . . . 391
12.2.4 OverinvestmentTheories. . . . . . . . . . . . . . . . . . . . . . . . . . 393
12.2.5 DistributionStrugglestoExplainEconomicFluctuations:
TheGOODWINModel. . . . . . . . . . . . . . . . . . . . . . . . . . . 395
12.2.6 PoliticalEconomicCycles:ThePoliticalEconomicModel
ofNordhaus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
12.2.7 MonetaryPolicyasaReasonforBusinessCycles. . . . . . . . 402
12.2.8 SpeculativeBubblesasaBusinessCycleTrigger. . . . . . . . . 427
12.2.9 ShocksandPriceRigiditiesintheNewKeynesian
Macroeconomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437
12.2.10 PriceAdjustmentCostsandInformationAsymmetries
intheNewKeynesianMacroeconomics. . . . . . . . . . . . . . . 439
12.2.11 AdaptiveExpectationinMonetaristTheories.. . . .. . . .. . . 441
12.2.12 ExogenousChangeofPoliticalVariables:TheNew
ClassicalMacroeconomics. . . . . . . . . . . . . . . . . . . . . . . . . 442
12.2.13 DeterminantsofGrowthasEconomicFactors:TheNew
GrowthTheory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446
12.3 ConclusionDeterminantsoftheBusinessCycle. . . . . . . . . . . . . . . . . 447
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 452
13 InternationalFinancialMarkets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461
13.1 TheFinancialCrisisandtheReformstoStabilizetheFinancial
Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462
13.1.1 TheSubprimeCrisis,theBiggestFinancialCrisisAfter
1929. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462
13.1.2 SomeCausesoftheFinancialCrisis. . . . . . . . . . . . . . . . . . 470
13.1.3 TheReformsoftheInternationalFinancialMarketOrder. . . 487
13.2 SpeculationintheInternationalFinancialMarkets. . . . . . . . . . . . . . . 496
13.2.1 WhatEmpiricalEvidenceDoWeHaveAbout
SpeculationInfluencingMarkets?. . . . . . . . . . . . . . . . . . . . 497
13.2.2 CritiqueofMethodology. . . . . . . . . . . . . . . . . . . . . . . . . . 500
13.2.3 TheLogicofSpeculation. . . . . . . . . . . . . . . . . . . . . . . . . . 503
13.2.4 PriceDistortionsandPriceManipulation. . .. . . . . . .. . . . . 505
13.2.5 IrrationalityandBubbleCreation?. . . . . . . . . . . . . . . . . . . 506
13.2.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
13.3 SummaryandReformProposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . 508
References. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . 508