Ergodic Versus Uncertain Financial Processes - Part II
14:47, január 10, 2018.
Part II: Neoclassical and Institutional Economics
Doctor of the Hungarian Academy of Sciences, Professor Emeritus,
Corvinus University of Budapest
Published in: Public Finance Quarterly 2017/4. (p. 478-501.)
Summary: The science of economics should focus its research on increasing the prosperity and well-being of mankind, wherein priority should be given to the achievement of an equilibrium, the distribution of income, and the understanding of the future. Its objectives include the development of proposals for economic policy to facilitate the harmonious development of both society and the economy. Debated between mercantilists and physiocrats as early as the 17–18th centuries, the role of the market and the government remains questionable to this day. Classical economists relied on a fatalistic intuition in explaining the role of the market, arguing that market mechanisms would automatically create an equilibrium in the long term, regardless of the initial conditions. In the 19th century, Boltzmann put forward a similar principle in thermodynamics: the ergodic hypothesis. In the first part of this article, I reported the research findings that I had made in the project Ergodicity in the theory of finance. Part II offers an analysis of the emergence of neoclassical and institutional economics, their schools, and their differences in addressing ergodicity. Neoclassical economists expanded their unrealistic assumptions further, Samuelson being the first to incorporate the ergodic hypothesis into his model, followed by Black and Scholes, and finally Lucas and Sargent, denying the role of the government. They were opposed by institutional economists, headed by Keynes, who denied that the future would be a shadow of present and past data, arguing that as financial processes were inhomogeneous and their forecasts were uncertain, the government played a significant role. My analyses modernise and complement the Samuelson–Nordhaus family tree of economics. I analyse the citation counts of Nobel Prize laureates in neoclassical and institutional economics based on calculations using a modified Bass model, and compare their counts to those of the main classics. Finally, in reference to Piketty’s analyses, I propose the reintegration of the economy and ethics both in research on theoretical economics and in socio-economic practice. Moreover, I propose the development of a new theory on income distribution that follows changes in property rights.
Keywords: ergodic hypothesis, fatalistic intuition, ergodic stochastic financial processes, neoclassical economics, institutional economics
JEL codes: A1, C1, E2, E5, E6, G1, N0