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A Macroeconomics of Social Contracts A Macroeconomics of Social Contracts A thesis submitted in fulfilment of the requirement for the degree of Doctor of Philosophy of Cardiff University Thomas Wilkinson September 2013 Economics Section of Cardiff Business School Cardiff University i Declaration This work has not previously been accepted in substance for any degree and is not concurrently submitted in candidature for any degree. Signed . (candidate) Date . Statement 1 This thesis is being submitted in partial fulfilment of the requirements for the degree of PhD. Signed . (candidate) Date . Statement 2 This thesis is the result of my own independent work/investigation, except where oth- erwise stated. Other sources are acknowledged by explicit references. Signed . (candidate) Date . Statement 3 I hereby give consent for my thesis, if accepted, to be available for photocopying and for inter-library loan, and for the title and summary to be made available to outside organisations. Signed . (candidate) Date . ii Copyright c 2013 Thomas Wilkinson. Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation; with no Invariant Sections, no Front-Cover Texts, and no Back-Cover Texts. A copy of the license is included in the section entitled “GNU Free Documentation License”. A copy of this document in various transparent and opaque machine-readable formats and related software is available at https://drive.google.com/folderview?id= 0B05vI0R35YDqWTBVT1Q1WE01d3c&usp=sharing. iii Abstract This thesis sets out the case and foundations for a new way to think about, and model, Macroeconomics. This framework aims to describe the fluctuations and differing growths of economies, not in terms of the choice and exchange of Microeconomics, but rather in terms of the enforcement relationships that allow that exchange and other cooperation between people. It first establishes just why this is necessary, with a thor- ough methodological critique of the way Macroeconomics is done right now. It then presents computational models of two presumably competing kinds of enforcement re- lationship. The first of these is the third party supervision that we are most familiar with as enforcement from every day life, and which has received some of the longest running philosophical discussion. This hierarchical model reproduces economic fluc- tuations, through occasional collapses of large parts of the hierarchy. To assess the scientific merit of this model on the terms of conventional Macroeconomics, I develop a compatible hypothesis testing strategy. The second kind of enforcement considered is what would commonly be called peer pressure. For this I derive a preliminary result, that would allow further development of an overarching research program. iv Acknowledgements I would like to thank Prof. Huw Dixon, for his advice and oversight, and Prof. Patrick Minford, both for his advice and for many instructive debates. v Contents Abstract iii Acknowledgements iv Contents v List of Figures vi List of Tables vii 1 Past Failures and Future Possibilities 1 1.1 Introduction . .1 1.2 Motivation . .2 1.2.1 Perceived Failings of Anti-Recessionary Policy . .2 1.2.2 Perceived Failings of Development Policy . .4 1.2.3 Can Economics do better? . .7 1.3 Incentives, Institutions and Enforcement . .9 1.4 Answers to the question of Recessions . 13 Contents vi 1.4.1 The Keynesian Story . 13 1.4.2 The Neoclassical Story . 15 1.4.3 The Enforcement Story . 15 1.5 Answers to the question of divergent growth . 16 1.5.1 The Solow-Swan Story . 17 1.5.2 The Endogenous Growth Story . 18 1.5.3 The Enforcement Story . 18 1.6 How to Proceed? . 19 Bibliography 21 2 The Methodological Call for New Microfoundations 24 2.1 Introduction . 24 2.2 Why explicit methodology might matter . 25 2.2.1 Reductionism and Holism . 29 2.2.2 Friedman’s Instrumentalism as Holism . 32 2.3 DSGE as Reductionism . 34 2.3.1 Equilibrium . 35 2.3.2 Absent Dynamics . 38 2.3.3 New Keynesian Equilibrium . 39 2.3.4 Undefined Aggregate Stochasticity . 40 2.3.5 Agents and Markets . 42 2.3.6 Failed Reductionism . 45 Contents vii 2.4 DSGE as Holism . 46 2.4.1 Forecasting . 48 2.4.2 Description . 49 2.4.3 Policy Evaluation . 51 2.4.4 Failed Holism . 52 2.5 Describing Methodology . 53 2.5.1 Kuhn’s Paradigms and Revolutions . 54 2.5.2 Lakatosian Scientific Research Programmes . 54 2.5.3 Limits of Post-Positivistic Descriptions . 56 2.6 Disciplining Methodology . 57 2.6.1 The Truth about Empirical Truth . 60 2.6.2 The Austrians’ A-Priorism . 64 2.6.3 Hypothesis Testing as an Incomplete Methodology . 65 2.6.4 Bayesianism as a Category Mistake . 69 2.6.5 Empiricism through Minimum Description Length . 72 2.7 Conclusions for Moving Macroeconomics Forward . 78 Bibliography 80 3 Macroeconomic Fluctuations from Hierarchical Enforcement Avalanches 89 3.1 Introduction . 89 3.2 Enforcement and hierarchies . 90 3.2.1 Why Enforcement? . 90 Contents viii 3.2.2 Existing Descriptions of Enforcement . 94 3.3 Network notation and existing models . 97 3.3.1 Static network formation . 103 3.3.2 Dynamic network formation . 110 3.4 A Hierarchical Enforcement Model . 120 3.4.1 Intuition for the model . 120 3.4.2 The formal model . 124 3.4.3 Robustness Check: Swapping Enforcers . 129 3.4.4 Sense Check: Small population model behaviour . 131 3.4.5 Reality Check: Complete Social Collapse . 133 3.5 Empirical Method . 134 3.5.1 Indirect Inference Testing . 135 3.5.2 Indirect Estimation through Simulated Annealing . 136 3.5.3 Fractional integration and Whittle estimation . 138 3.6 Empirical Performance of the Model . 140 3.6.1 Data . 140 3.6.2 Results . 142 3.6.3 Empirical Robustness Check . 146 3.7 Conclusions and extensions . 147 3.7.1 The other great question of economics . 148 3.7.2 Policy implications . 149 Contents ix 3.7.3 Robustness: the power of indirect inference for long memory processes . 152 Bibliography 153 3.A Simulation Codes . 158 3.A.1 The standard hierarchical enforcement model . 158 3.A.2 HierarchySim.java . 166 3.A.3 Utilities used in this simulation . 188 3.A.4 The alternative model for the robustness check . 256 4 The Power of Indirect Inference under Long Memory 265 4.1 Introduction . 265 4.1.1 Notation . 266 4.2 Indirect Inference and Testing . 266 4.3 Long Memory . 269 4.3.1 Fractional Integration . 271 4.3.2 AutoRegressive Fractionally Integrated Moving Average . 273 4.3.3 Estimators for Fractional Integration . 274 4.4 Theoretical Models . 277 4.4.1 Long memory model . 277 4.4.2 Short memory model . 279 4.5 Power of Indirect Inference Testing . 285 4.5.1 Short versus Long memory Auxiliary Models for a Long Memory Theoretical Model . 285 Contents x 4.5.2 For a Short Memory Theoretical Model . 287 4.6 Conclusions . 292 Bibliography 293 4.A Simulation Codes . 298 4.A.1 Auxiliary parameter distributions for simulated data . 298 4.A.2 Comparison of Wald distributions . 316 4.A.3 Estimation of the fractional difference parameter . 326 4.A.4 Utilities used in this testing . 327 5 Limits on the Formation of Small World Networks by Strategic Action 328 5.1 Introduction . 328 5.2 The small worlds property . 332 5.2.1 Terminology and notation . 332 5.2.2 The holistic literature on small worlds . 334 5.3 Existing models of strategic network formation . 335 5.3.1 Existing models . 335 5.4 The Model . 338 5.4.1 Trade . 338 5.4.2 The Agents . 340 5.4.3 The sequence of events . 342 5.5 Behaviour of the model . 343 5.5.1 Steady state behaviour . 344 Contents xi 5.5.2 Dynamic behaviour . 348 5.6 Conclusions and extensions . 349 5.6.1 This chapter . 349 5.6.2 This research program . 350 Bibliography 351 5.A Simulation Codes . 352 5.A.1 Standard Exchange Network Model . 352 5.A.2 Model version with full information . 386 5.A.3 Model with only random.
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