Friday, June 20, 2014

On Some Psychological Foundations of Economic Institutions


I plan to write a paper on some psychological foundations of some economic institutions and give the outline below. This gives a first sketch of what I intend to cover. Suggestions are welcome.

Keywords: institutions, property, contracting, theory of the firm
Journal of Economic Literature Classification: A12, A14, B52, K11, K12 L2, M52, P14

We may say that what physics is to the natural sciences psychology is to the sciences of man.
Solomon Asch [3]
I intend to cover the following topics:

1The psychological basis of property rights

The theory of property rights seeks to explain different property right arrangements by their consequences, and the assumption that more productive systems of rights out-compete less efficient systems. The idea is that different property rights induce different incentive structures and different behavior and outcomes.
If we accept this argument we must presuppose that the assignment of property rights carries direct behavioral implications. These implications are typically neglected in the theory of property rights, as only instrumental aspects enter the argument while the indispensable behavioral basis of property rights to work is neglected.
Such direct behavioral implications can be brought about by enforcement through a third party, which shifts the problem to the third party. Yet in practice third-party enforcement is not practicable. I shall discuss this for an every-day transaction.
To outline the behavioral implications of property rights assignment, I shall discuss David Hume’s theory of property as sketched in [1] and comment on some empirical evidence that supports the view.
I shall maintain that without psychological underpinnings, property would have no behavioral effect and would thus be economically irrelevant.

2The psychological basis of contracting

In a similar vein, concluding a contract must entail behavioral consequences: it must affect attitudes and behavioral dispositions. Otherwise contracting would be economically irrelevant.
I conceive a contract as involving an exchange of promises in a quid-pro-quo manner: I promise something I would not otherwise do in exchange for your promise to behave in a way you would not otherwise do. Such contracting involves limited conflict, in contrast to so-called self-fulfilling contracts that involve no conflict. (I refer to such “contracts” as agreements). I shall enlarge on some psychological mechanisms that render contracting, understood in this sense, feasible.

3The psychological basis for the firm as an institution

Within a firm, the co-ordination of the division of labor firm is not achieved by the price mechanism, but rather by allocating social roles, duties, obedience, and authority. In order that such a system works, wages must be set in order to enable the mechanisms of roles. duties, obedience, and authority. This excludes wages as co-ordinating devices and emphasizes consistency of the firms dealings with its stake holders. The view expands on [2] and explains a number of problems in wage theory, such as the attenuation of incentives or wage compression within firms and contributes also to better understand problem of the boundary of the firm. 


[1] E. Schlicht: On Custom in the Economy. Clarendon Press, 1998. URL
[2] Ekkehart Schlicht: Consistency in Organization (updated), 2011. URL
[3] Solomon E. Asch: Social Psychology (Oxford science publications). Oxford University Press, 1987. URL

Saturday, March 15, 2014

Directed Technical Change and Capital Deepening: A Reconsideration of Kaldor’s Technical Progress Function

This note proposes a growth model that is derived from the standard Solow growth model by replacing the neoclassical production function with Kaldor’s technical progress function while maintaining a marginalist theory of factor prices in the spirit suggested by von Weizs├Ącker (1966). The hybrid model so obtained accounts for balanced growth in a way that appears less arbitrary than the Solow model, especially because it directly accounts for Harrod neutral technical change, without any need for further assumptions.

The most recent draft is here: