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A b) Consider the articles on behavioral economics at http://myweb.liu.edu/~uroy/eco54/histlist/behav-econ/index.html. Summarizethe main thrust of some of these articles. Based on these articles, what's your opinion of behavioral economics? Do you think behavioral economics represents a return to Veblen's ideas?
In many respects it can be agreed that behavioral economics has much in common with Veblen's theories. Behavioral economists agree with Veblen that in most cases humans act illogically, because they are driven by instincts rather than by pure reason.
Thorstein Veblen stated that economic processes are mainly affected by evolution, social relations, political situation and other factors which are more global than circulation of money and accumulation of wealth. His ideas of social relations domination in economics have much in common with ideas of behavioral economists, who state that economy is much affected by psychological factor, or behavior of social groups.
It's proved by a number of applied researches held today. For example people who got data about utility bills of their neighbors become more economic, saving electricity and water. In many respects after people are provided information about economies of their neighbors, they plan budget in different way, trying to save more. it's explained by psychology of people, by their desire "not be worse than others," as in many respects income of them and their neighbors are alike. Also findings of behavioral psychologists allowed better exploration of market relations and factors which influence demand and changing character of stock market.
4. (a) to what extent has economics benefited from the application of mathematical methods in the analysis of economic issues? (Hint: See chapter 11 of the ordinary business of life by Roger Backhouse.)
Use of mathematical methods in economics allows solving a number of complicated and problems. Mathematics is widely used in such fields of finance as planning, decision making, forecasting and risk evaluation. It can be said that mathematics is the main tool of economics as it allows presenting data and making certain kind of conclusion from any economic situation. In a general scope economics knowledge can not be applied to any business related issue without application of mathematics.
Mathematical methods of decision making and game theory applications allow to evaluate risks of complex economic systems, build multi-factor models which prevent economic system from different sorts of risks. Such methods are used by government agencies in order to create balanced budgets, reduce risks of inflation, prices growth, unemployment, etc.
Methods of economical planning are widely used for forecasting of future sales on the base of data collected from the past. Methods of planning which use applied linear programming allow building economical models which can predict future behavior of prices, efficiency of industrial production, etc.
Among the most important mathematics application to economics is application of statistical methods, which play fundamental role in economics, as they allow organizing economic data for its future utilization.
We can state that without using mathematical methods for solving economic issues, we would base our solutions on pure intuition and guesses rather than on rational and logical observations.
A b) Comment on Paul Krugman's article "Two Cheers for Formalism" which is available at his web page http://web.mit.edu/krugman/www/.
Paul Krugman writes about modern perception of formalism in economics in his article "Two Cheers for Formalism." Formalism is often criticized for building economics on pure mathematics. The major critics comes from non-economists mainly politicians and journalists, yet some economists also question the need of formalization.
The main problem is that those who attack formalism in economics don't have any fundamental economics knowledge and don't understand mathematics of economics correctly, also because of lack of knowledge. Lack of understanding of economics concepts and math, which supports those concepts, leads to criticism over modern economic policies and economic theories which justify them. It mainly refers to globalization, which created a lot of protests both inside of the U.S.A. And in developing countries. Krugman perfectly well explains the meaning of equation that sum of a nation's capital account and current account is zero and how this equation explains bankruptcy of anti-globalization theory that relocation of production into developing countries leads to unemployment and weakening economy of developed countries, while it also changes little in the developing countries. Krugman makes it clear that a lot of people hate economists, because in majority those people are prisoners of their own illusions about "correct economy" and "right economic policies," which in reality are nothing by populist products of public opinion manipulations.
Krugman makes it clear that true economists use mathematics for checking relevancy of their own ideas, as a method to find true solution in required cases. Krugman states that inability of economists to write articles in popular science language, which would be understandable for non-economists creates main obstacle for understanding economics today.
Backhouse, Roger the ordinary business of life
Krugman, Paul Two cheers for Formalism available at http://web.mit.edu/krugman/www/formal.html
Whalen, Charles J. Putting a Human Face on Economics Business week online 2001 available at http://myweb.liu.edu/~uroy/eco54/histlist/behav-econ/behav-finance.htm
Diop, Julie Explaining the Irrational Technology Review, November 2002
The Economist Behaviourists at the gates, 2003 available at http://myweb.liu.edu/~uroy/eco54/histlist/behav-econ/behavrists.htm
Dugger, William M. Veblen's Radical Theory of Social Evolution Journal of Economic Issues
Knoedler, Janet T. Veblen and Technical Efficiency Journal of Economic Issues
Hodgson, Geoffrey M. The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism Routledge, 2004
Kasper, Sherryl the Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers Cheltenham, 2002
Skidelsky, Robert John Maynard Keynes: The Economist as Saviour 1920-1937, Papermac, 1994
Yergin, Daniel the Commanding Heights: The Battle for the World Economy Simon & Schuster, 1998
Beaudreau, Bernard C. The Economic Consequences of Mr. Keynes: How the Second Industrial Revolution iUniverse, 2006
History of Economic Thought[continue]
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