Philosophy of Economics

The fail-safe makes sure the fee is high enough to meet carbon emission reduction targets. The safeguard keeps the fee from getting any higher than needed. -/- One of the ways that we could account for the unpredictability of the price elasticity of demand for carbon would be to provide a fail-safe mechanism to ensure that we definitely stay on the carbon reduction schedule. If we keep Energy Innovation Act (HR 763) essentially as it is and scale up the annual (...) carbon fee increase by Number-of-Years-Behind-Schedule * 0.15. (shrink)

In this paper, I examine the decision-theoretic status of risk attitudes. I start by providing evidence showing that the risk attitude concepts do not play a major role in the axiomatic analysis of the classic models of decision-making under risk. This can be interpreted as reflecting the neutrality of these models between the possible risk attitudes. My central claim, however, is that such neutrality needs to be qualified and the axiomatic relevance of risk attitudes needs to be re-evaluated accordingly. Specifically, (...) I highlight the importance of the conditional variation and the strengthening of risk attitudes, and I explain why they establish the axiomatic significance of the risk attitude concepts. I also present several questions for future research regarding the strengthening of risk attitudes. (shrink)

We investigate the conflict between the ex ante and ex post criteria of social welfare in a new framework of individual and social decisions, which distinguishes between two sources of uncertainty, here interpreted as an objective and a subjective source respectively. This framework makes it possible to endow the individuals and society not only with ex ante and ex post preferences, as is usually done, but also with interim preferences of two kinds, and correspondingly, to introduce interim forms of the (...) Pareto principle. After characterizing the ex ante and ex post criteria, we present a first solution to their conflict that extends the former as much possible in the direction of the latter. Then, we present a second solution, which goes in the opposite direction, and is also maximally assertive. Both solutions translate the assumed Pareto conditions into weighted additive utility representations, and both attribute to the individuals common probability values on the objective source of uncertainty, and different probability values on the subjective source. We discuss these solutions in terms of two conceptual arguments, i.e., the by now classic spurious unanimity argument and a novel informational argument labelled complementary ignorance. The paper complies with the standard economic methodology of basing probability and utility representations on preference axioms, but for the sake of completeness, also considers a construal of objective uncertainty based on the assumption of an exogeneously given probability measure. JEL classification: D70; D81. (shrink)

This paper examines the preference-based approach to the identification of beliefs. It focuses on the main problem to which this approach is exposed, namely that of state-dependent utility. First, the problem is illustrated in full detail. Four types of state-dependent utility issues are distinguished. Second, a comprehensive strategy for identifying beliefs under state-dependent utility is presented and discussed. For the problem to be solved following this strategy, however, preferences need to extend beyond choices. We claim that this a necessary feature (...) of any complete solution to the problem of state-dependent utility. We also argue that this is the main conceptual lesson to draw from it. We show that this lesson is of interest to both economists and philosophers. (shrink)

This article reviews Herbert Simon's theory of bounded rationality, with a view of deemphasizing his "satisficing" model, and by contrast, of emphasizing his distinction between "procedural" and "substantive" rationality. The article also discusses a possible move from neo-classical economists to respond to Simon's criticisms, i.e., a reduction of bounded rationality to a special case of second-optimization, using Stigler's search theory. This move is eventually dismissed.

Economic pressures, mounting environmental, security and health requirements, are all critical factors that shape economic action. With regard to environmental protection, an economic entity acting as homo oeconomicus finds himself in a situation resembling a prisoner’s dilemma. Signposts for a possible resolution of this dilemma include an environmental management system, a system of environmental law based on the principles of environmental ethics, and a new conception of human nature.

We reexamine some of the classic problems connected with the use of cardinal utility functions in decision theory, and discuss Patrick Suppes's contributions to this field in light of a reinterpretation we propose for these problems. We analytically decompose the doctrine of ordinalism, which only accepts ordinal utility functions, and dis- tinguish between several doctrines of cardinalism, depending on what components of ordinalism they specifically reject. We identify Suppes's doctrine with the major deviation from ordinalism that conceives of utility functions (...) as representing preference di¤erences, while being non- etheless empirically related to choices. We highlight the originality, promises and limits of this choice-based cardinalism. (shrink)

Abstract: This paper examines Mark Blaug's position on the normative character of Paretian welfare economics: in general, and specifically with respect to his debate with Pieter Hennipman over this question during the 1990s. The paper also clarifies some of the confusions that emerged within the context of this debate, and closes by providing some additional arguments supporting Blaug's position that he himself did not provide.

We introduce a “reason-based” framework for explaining and predicting individual choices. It captures the idea that a decision-maker focuses on some but not all properties of the options and chooses an option whose motivationally salient properties he/she most prefers. Reason-based explanations allow us to distinguish between two kinds of context-dependent choice: the motivationally salient properties may (i) vary across choice contexts, and (ii) include not only “intrinsic” properties of the options, but also “context-related” properties. Our framework can accommodate boundedly rational (...) and sophisticatedly rational choice. Since properties can be recombined in new ways, it also offers resources for predicting choices in unobserved contexts. (shrink)

The paper applies confirmation theory to a famous statement of economics, the law of demand, which says that ceteris paribus, prices and quantities demanded change in opposite directions. Today's economists do not accept the law unless definite restrictions hold, and have shown little interest in deciding whether or not these restrictions were satisfied empirically. However, Hildenbrand (1994) has provided a new derivation of the law of aggregate demand and used this theoretical advance to devise a test that may be the (...) first rigorous one ever performed on the law. The paper accounts for Hildenbrand's and, in less detail, his predecessors' contributions within the philosophical framework of Hempel (1965) and Glymour (1980). Its salient result is that economists have accepted the "consequence condition", and rejected the "converse consequence condition", and thus implicitly adhered to a Hempelian- Glymourian view of confirmation and testability. (shrink)

This article critically discusses the concept of economic rationality, arguing that it is too narrow and specific to encompass the full concept of practical rationality. Economic rationality is identified here with the use of the optimizing model of decision, as well as of expected utility apparatus to deal with uncertainty. To argue that practical rationality is broader than economic rationality, the article claims that practical rationality includes bounded rationality as a particular case, and that bounded rationality cannot be reduced to (...) economic rationality as defined here. (shrink)

In recent years, the project of providing microeconomic foundations for macroeconomics has taken on new urgency. Some philosophers and economists have challenged the project, both for the way economists actually approach microfoundations and for more general anti-reductionist reasons. Reductionists and anti-reductionists alike, however, have taken it to be trivial that the macroeconomic facts are exhaustively determined by microeconomic ones. In this paper, I challenge this supposed triviality. I argue that macroeconomic properties do not even globally supervene on microeconomic ones. This (...) is simply a consequence of the difference in the explanatory goals of the respective fields, which implicitly carve out the microeconomic property set in such a way that it underdetermines macroeconomic properties. It means, however, that microeconomics-based foundations for macroeconomics are inadequate in principle. (shrink)

Minimum wages are usually assumed to be inefficient as they prevent the full exploitation of mutual gains from trade. Yet advocates of wage regulation policies have repeatedly claimed that this loss in market efficiency can be justified by the pursuit of ethical goals. Policy makers, it is argued, should not focus on efficiency alone. Rather, they should try to find an adequate balance between efficiency and equity targets. This idea is based on a two-worlds-paradigm that sees ethics and economics as (...) two inherently conflicting ways of thinking. We, however, believe that this view of the relationship between ethics and economics is fundamentally flawed and blurs our understanding of how an ethically responsible regulation of the labour market should be conducted. In drawing on an economic-ethical approach that resolves the antinomy between efficiency and equity, we show that ethics and economics are, in fact, two sides of the same coin and that minimum wage legislation can only be ethically responsible, if it is at the same time economically efficient. In other words, we can have our cake and eat it too. On the basis of our approach, we develop two simple game theoretical models for different types of labour markets and derive policy implications from an economic-ethical viewpoint. We suggest that under the assumption of perfectly competitive labour markets a tax-funded wage subsidy is preferable over minimum wages, as it makes everyone better off. If, however, employers have monopsony power in the wage setting process, the minimum wage is justifiable under certain conditions. (shrink)