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Über dieses Buch

After the most recent financial crisis it has become clear that there exists a crisis also in economics as a science. The prevailing paradigms have failed to anticipate and to understand the financial crisis. New approaches are therefore needed. Of particular interest should be approaches that combine insights from those parts of economics that are largely neglected by the mainstream. Hendrik Hagedorn presents a model that synthesizes elements of Austrian, post-Keynesian, and evolutionary economics. Thus, an economic paradigm is developed that challenges neoclassical economics as a whole.

Inhaltsverzeichnis

Frontmatter

1. Introduction

Abstract
Although Austrian economics has many fervent followers, its relative popularity within the science of economics is limited. Neoclassical economics, with its DSGE modeling, is far more visible to not just the general public but also amongst those educating future economists. This single focus has not gone without debate and the discussion was renewed after the most recent financial crisis (Hicks, 1981; Solow, 2008; Caballero, 2010). Without doubt, limiting economic research to only one methodological standard prevents the scientific community from incorporating the insights of those fields of economics that have developed independent of this standard (Caballero, 2010). Therefore, some of the main themes that were elaborated by Austrian scholars, such as the theory of capital, the theory of entrepreneurship, and the theory of the money-driven business cycle, have not or only to a small extent be accommodated by neoclassical economics.
Hendrik Hagedorn

2. The setup of the model

Abstract
All economic activity in the model is borne by decentralized actions of agents. These agents are categorized as households, firms, and banks each assuming the following economic functions. The households buy and consume goods, make investments, and provide labor to firms. The firms, on the other hand, hire labor and purchase capital goods in order to produce and sell goods. The banks, finally, act as the financial intermediaries between households and firms. That is, they manage transactions between non-bank agents, they offer saving contracts to households and loan contracts to firms, and they facilitate purchases of equity (Figure 2.1).
Hendrik Hagedorn

3. Household behavior

Abstract
Every action that a household performs concerns the acquisition of a good. In this context not only the different consumer goods, but also money, equity shares, and receivable amounts of money are considered as goods. The receivable amounts are further categorized according to the time horizon by which they are to be received. For each time horizon they are considered a different type of good. All these types of goods are valued separately and according to the law of diminishing marginal utility. Thus, as the quantity of a certain good that a household possesses increases, his valuation of an additional unit of the good decreases. At the beginning of a time period the number of consumption goods in the possession of households is zero, since the households fully consume consumption goods at the end of each time period. Equity shares and savings contracts, in contrast, are accumulated by the households until they are redeemed or expired.
Hendrik Hagedorn

4. Firm behavior

Abstract
The objective of firms is to maximize profits while avoiding illiquidity. Hence, unlike households, the firms in this model do not act on the basis of a preference set but instead strive to position themselves optimally within a system of constraints. The physical constraints that each firm has to respect are given by the production function. This function prescribes that output is the result of the combination of input factors and that only capital investments can increase a firm’s productivity. Furthermore, the balance sheet of a firm and the corresponding accounting rules represent the financial constraints. The most relevant magnitude in this context is a firm’s liquidity position. Finally, the economic constraints that a firm is confronted with are the factor prices and the demand for its products that it finds in the markets.
Hendrik Hagedorn

5. Bank behavior

Abstract
The banks in the model, just like the firms, operate with a profit motive. In the pursuit of profit the banks serve as the financial intermediaries between households and firms, i.e. they convert time deposits into loans. Moreover, the banks offer payment services to their customers, which are provided free of charge. The liquidity management of commercial banks distinguishes between three categories of funds that are used for separate purposes. The sight deposits of the customers are only used for the ongoing payments of the depositors.
Hendrik Hagedorn

6. The functioning of the model

Abstract
The essence of this model is that the agents have certain reaction functions that enable them to effectively pursue their pre-defined goals. The agents achieve these goals through action and through interaction with other agents. In their actions, agents create and respond to markets. And while no agent is able to upturn an entire market each action nonetheless has an effect on the structure of that market.
Hendrik Hagedorn

7. Results

Abstract
Technically, the model outlined above is a system of non-linear and stochastic recurrence relations. The number of degrees of freedom of this system is very large not only due to the numerous recurrence relations that describe the behavior of each agent, but also due to the fact that they are implemented by multitude of agents and coupled by a considerable number of markets. In the following, the solution to this system of equations is established through numerical simulation. A numerical simulation is not a general proof of stability and each simulation is only valid for one set of parameters and a set of initial conditions. Experiments show though that the model is stable for a wide range of parameters and initial conditions.
Hendrik Hagedorn

8. Considerations about interest rates

Abstract
The results of the preceding chapters can be summarized as follows. If the savings of the households are insufficient to enable firms to accumulate capital to the point where the technology frontier is reached then the interest rates on loans are bid up to a level that is determined by the relation between the marginal productivities of labor and capital. At the other extreme, if credit is overly abundant then the economy attains its technological limit and the interest rates on loans approach a level that is determined by the time preference of the households and the mark-up requirements of banks. In that case labor is the limiting factor for output and wages are bid up to the point where Equation (6.2) becomes binding. Independent thereof, the interest rates on savings always adjust to the time preference of the households. It shall be emphasized that none of these outcomes is assumed. They are rather the results of a consistent modeling of price formation as a market process.
Hendrik Hagedorn

9. Further aspects

Abstract
The model proposed in this work is rooted in the principles of accounting. On the one hand, the accounting system serves as structuring device. The fact money is conserved in transactions contains the model and it makes it intelligible from a macroeconomic perspective. In this regard the model is closely related to the flow-of-funds literature, which is mostly of post-Keynesian origin (Dawson, 1996; Godley and Lavoie, 2007). On the other hand, accounting principles apply in this model not only at the macroeconomic level, but also at the microeconomic level. The accounting practices motivate and guide the actions of agents and those actions find reflection in their balance sheets. The agent-based approach thus introduces microfoundations into a flow-of-funds model, a technique pioneered by Pascal Seppecher (2011).
Hendrik Hagedorn

Backmatter

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