SCEPA Blog

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What is the “retirement wealth inequality machine?” The result of a failed retirement savings system, according to retirement expert and economist Teresa Ghilarducci in an interview with INET. In short, the retirement system in the United States is increasingly financialized - dependent on individual assets rather than social insurance - as pensions have given way to 401(k)s. The result? People are not able to save enough. Half of americans that are currently working have less than $5,000 saved for retirement, and otherwise would only have $12,000 per year to rely on from Social Security.

Over 90% of Americans do not have enough saved. As a result, they face the daunting choice of either experiencing downward mobility - and possibly deprivation - in their old age, or working later in life than anyone would hope or dream.

ReLab documents the status of older workers, including their state of employment and working conditions, as well as class, race, and gender divides. Half of older workers report having physically demanding jobs, and those without enough savings are forced to continue working with poor conditions and compensation.

Ghilarducci’s policy proposals to reform our failed retirement system are based in law, history, politics, and the ethics of human well-being. She adds retirement to the list of historically disputed territory that includes the weekend, the length of the working day, paid sick leave, and vacation days. She calls for universal, mandatory, and portable Guaranteed Retirement Accounts (GRAs) in addition to strengthening Social Security to ensure a dignified retirement for all.

Time’s Money Magazine features recent research led by ReLab Director Teresa Ghilarducci on the damaging effects of income shocks on retirement savings in, “Here's How Much a Job Loss Now Will Cost You by Retirement.”

Income shocks are pervasive, with 96 percent of Americans experiencing at least four in their working years. For example, a drop of 10 percent or more four times in your life can reduce retirement savings by $25,000 on average. This average is higher for low-income Americans, whereas wealthier Americans have healthy emergency funds to draw from. Ghilarducci challenges the notion that the retirement crisis is due to poor savings habits. Less privileged Americans have few options when unexpected hardship hits before retirement.

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New School Economics students Ingrid Harvold Kvangraven and Frutuoso Santana, along with others from INET’s Young Scholars Initiative, edited an e-book volume, “Conversations on Dependency Theory.” The book aims to revive interest in the theory and framework that focuses on history and social structures, in particular on colonialism and global inequalities. Through interviews with 13 distinguished scholars and professors across the globe, editors explore themes of the nature of capitalism, the key mechanisms of dependency between nations, and the “why” and “how” of delinking from dependency. Keeping with The New School’s tradition of critical thought, included are critiques of dependency theory and areas for further exploration.

On Tuesday, March 21, New School economist Willi Semmler presented, “A Macroeconomic Framework for Climate Investment,” at the United Nations (UN) Development Policy Seminar. The talk was chaired by Diana Alarcon, chief of the UN’s Development Strategy and Policy Analysis Unit.

The UN Development Policy Seminar brings together UN and academic experts to critically assess topics related to development. Professor Semmler was invited to discuss the macroeconomics of climate change and strategies for transitioning to low-carbon economies. Semmler’s work focuses on investment for adaptation and mitigation that can improve the environment, employment, and output. By considering national levels of development and demographics, Semmler shows how policy and institutions can lead the transition to a sustainable future.

Semmler leads SCEPA’s Economics of Climate Change Project. He is the Henry Arnhold Professor of International Cooperation and Development at The New School for Social Research and author of The Oxford Handbook of the Macroeconomics of Global Warming (2015).

annual report cover imageWe are excited to share SCEPA's 2016 Annual Report, which documents our work to pursue innovative solutions to the nation’s pressing economic questions by producing strategic research under academic standards. This past year, our economists engaged in debates surrounding the United Nation's Paris Agreement, the $15 minimum wage, and growth and inequality. In its first full year, the center’s Retirement Equity Lab (ReLab) impacted the national debate on reforming our failing retirement system. Research produced by the Lab was cited in materials supporting retirement reform legislation introduced in the U.S. Senate. We engaged with the community by sharing an economics course online and hosting events. Our largest event yet featured former Greek Finance Minister Yanis Varoufakis for his talk, "The Future of Capitalism." 

SCEPA is committed to engaging in the issues that affect Americans’ economic well-being and support a better future. We are grateful for the generosity of our supporters and partners in these efforts and look forward to sharing our progress as we move forward next year and beyond.

Today’s New York Times summarizes Republican legislation to replace Obamacare as “cut[ting] back on financial assistance for relatively low-income insurance shoppers [while] offer[ing] new financial benefits for the upper-middle class and the rich.”

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This description supports Harvard Professor Theda Skocpol’s assertion that ObamaCare and other U.S. health insurance programs are “at the heart of the politics of inequality.” In a presentation at The New School on February 6th titled, “Democrats, Republicans and the Explosive Politics of Health Insurance,” Skocpol argued that the Affordable Care Act (ACA) is the largest redistributive policy in recent history.

While the United States suffers from rapidly rising healthcare costs and a large and disproportionately poor uninsured population, the ACA reduced health care cost inflation by 2 percentage points (from 4% in 2010 to less than 2% in 2015) and decreased the level of those without health insurance by 7 percentage points (from 18% in 2013 to 11% in 2016).

Despite these positive outcomes, public consensus regarding the ACA is divided. The Kaiser Family Foundation Health Tracking Poll, conducted one week after Trump won office, found that 48% of people support repealing the ACA while 47% are opposed. However, some components of the ACA have majority support. More than 65% said that lowering health care costs should be a top priority for the new administration.

As for politics, Skocpol notes that Republican efforts are supported by a strong wave of conservative lobby groups, think tanks and activists while Democrats suffer from a lack of consistent and assertive mobilization in support of the ACA.

What will happen? Skocpol ended her remarks by saying, “Quiet evisceration will happen, even if overt total repeal does not.” However, in a sign of hope, she urged her fellow professors and members of think tanks and activists to express the urgency and importance of keeping healthcare affordable and accessible for all.

On December 8, a month after the election, President-Elect Donald Trump used Twitter to attack a white male steelworker - a representative of the voting block that tipped the election in his favor. For his part, Chuck Jones, president of United Steelworkers Local 1999 in Indianapolis, started the fight by calling the President-elect a liar. Jones claimed that only 800 Carrier heating and air conditioning jobs would not be moving to Mexico, rather than the “more than 1,000 jobs” Trump claimed to save.

Notably, President-elect Trump blamed unions for manufacturing job losses. In the 1970s, unions were blamed for being uncompetitive, and unions fell over themselves to negotiate concessions. But most research showed the concessions mostly raised profits and made it cheaper for companies to close down and move jobs. So the jobs left faster. Smashing unions didn’t work. In Ohio, for instance, workers couldn’t compete with Chinese labor markets.

So what to do? How to keep good paying jobs in the United States?

The Carrier deal lifts up the one question taxpayers and voters have to answer. How much should a president, governor, or mayor pay to keep a job in the United States?

Vice President-elect Mike Pence, the current Governor of Indiana, gave Carrier $7 million in tax breaks from Indiana taxpayers. That is under $9000 per job. But the total cost to Indiana could run well beyond $7 million should the Carrier deal replicate previous practices of hiding the full costs of such agreements in various state accounts and budgets. But transparency issues aside, is it economically worthwhile for states to offer tax breaks as an incentive for companies to remain in-state, and at least preserve the incomes of a portion of their work force?

A consensus among economists from a variety of perspectives holds that subsidizing individual firms is wasteful, doesn’t boost long-term prosperity, and creates “economic war among the states.” In 1994, economists at the Federal Reserve Bank of Minneapolis argued against the practice because state tax incentives drain public budgets, create unhealthy competition to move businesses from one location to another, and ignore the economic fundamentals that determine optimal business location. The conventional economic view is that states and cities can compete by offering lower overall taxes and regulations, and other advantages such as lower crime rates, more effective transportation, and a better-educated labor force.

Many economists argue against giving particular firms tax breaks because most go to big firms. Big firms often exploit their economic position to capture “rents” of various sorts, including tax and regulatory advantages not available to smaller businesses. And subsidy policies are often allied with calls for lower overall taxes and broader attacks on minimum wages, unions, and other labor policies. Their combined effect is to depress incomes.

Instead, the economy could be boosted more by strengthening public sector and labor bargaining power and tying tax breaks to clear, measurable benefits that, if not met, can result in those tax breaks being recaptured, or “clawed back.”

The only major economists who have argued for firm-specific tax breaks are Michael Greenstone and Enrico Moretti, who found that winners of inter-state competition to host industry can see increases in related property values without significant overall revenue loss. But their research covers the construction of new plants rather than subsidies to existing ones, and the dominant finding is that plant-specific subsidies—such as those to Carrier—are inefficient rents captured by healthy, large firms, with little benefit flowing to employees.

Some analyses go further, finding that state subsidies increase inequality by strengthening anti-union, anti-regulation, “low-road” employers relative to other companies.

Economists are likely to offer a more nuanced and contextual view of the agreement and the issues it raises than the President-elect did at his Carrier event. While around 800 Carrier jobs in Indiana jobs will now be retained, over a thousand more will still move to Mexico, despite a large, non-transparent tax giveaway that will cost Indiana taxpayers millions of dollars. And economists of all stripes concur that such giveaways are bad policy that will do little to help the state’s industrial workers, while eating into public budgets needed for investments in infrastructure and education, which are essential in the longer-term recipe for healthy, equitable growth.

By Rick McGahey, former assistant secretary of labor, and Teresa Ghilarducci, economics professor at The New School for Social Research. Originally appeared in the Huffington Post.

Institutions embody the “rules of the game in a society,” according to Nobel Laureate Douglas North. These humanly devised constraints shape people’s interactions – political, social and economic – and establish a stable social structure. But what if the rules are deeply unequal, devised largely by the powerful? And is stability which entrenches inequality even desirable?

Noted economist Bina Agarwal’s lecture on October 25th, 2016 demonstrated how women face deep inequalities in rules and norms, which, in turn, create severe inequalities in their access to both private and public property. Based on her research, she challenged standard economic analysis to show how these inequalities undermine both economic efficiency and social justice. She also outlined pathways to change, such as by enhancing women’s bargaining power in multiple arenas: the family, community, markets, and state.

Agarwal is an award-winning author whose three volume compendium, “Gender Challenges,” unravels the nature of gender inequality in multiple institutions: those governing agriculture, property, and the environment. She is professor of development economics and environment at the University of Manchester, UK. Prior to this, she was director and professor of economics at the Institute of Economic Growth at Delhi University.

 

The Robert Heilbroner Memorial Lecture on the Future of Capitalism:

The Heilbroner lecture honors the work of Robert Heilbroner, who was both a student and a professor in the economics department of The New School for Social Research. This event is dedicated to understanding questions of economic justice and how the profit-seeking activities of private firms might also serve broader social goals. To use Heilbroner’s words, “capitalism’s uniqueness in history lies in its continuously self-generated change, but it is this very dynamism that is the system’s chief enemy.”

The event is free and open to the public.

Aleksandr Gevorkyan, assistant professor of economics at St. John’s University and New School PhD graduate, and New School economics student Ingrid Harvold Kvangraven published an article in the Review of Development Economics, “Assessing Recent Determinants of Borrowing Costs in Sub-Saharan Africa.”

Screen Shot 2016 10 18 at 4.21.53 PMThe article describes how, over the past decade, Sub-Saharan African countries’ ability to draw on new debt in international capital markets has become a central characteristic of their development experience. Yet, the determinants of the borrowing costs are driven by external factors where investor perception plays a key role. This raises concerns over the sustainability of the current development model.

Unfortunately, there is little to be done in the short run. Dealing with Sub-Saharan countries’ recurring debt crises will require “tackling the debt problem at its root.” Since that includes their lack of a diversified economic structure and subsequent lack of competitiveness on the international market, that’s no small task.

Book Draws Praise from Two Former Chairmen of White House Council on Economic Advisors

Screen Shot 2016 09 30 at 12.06.33 PMEconomist Teresa Ghilarducci, one of the nation’s leading experts on retirement security, and Blackstone President Hamilton “Tony” James today announced the publication of their co-authored book, Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans, at a reception hosted by Michael Bloomberg. The book outlines a deficit-neutral proposal to ensure that all workers can save enough to retire through mandated, individually-owned, and effectively-invested Guaranteed Retirement Accounts. Left unaddressed, the authors emphasize, the strain of a newly poor population of senior citizens would devastate federal, state, and local budgets for decades to come.

Key components of their visionary plan include:

  1. Universal coverage: Every American worker would have their own Guaranteed Retirement Account, ensuring consistent retirement savings throughout their career.
  2. Individually owned, effectively invested: Unlike Social Security, workers keep ownership of their assets through transparent individual accounts. As with traditional pension plans, their assets will be pooled and invested in long-term, strategies that generate higher returns than current 401(k) plans.
  3. Deficit-neutral and costless for families at or below median income: The plan redeploys current tax subsidies more evenly across the income distribution, and uses existing Federal payment infrastructure, avoiding a negative impact on the budget.
  4. Guaranteed lifetime income: Upon retiring, savings will be returned through life-long payments, guaranteeing a continuous standard of living as long as retirees live.
  5. Bipartisan appeal: This model keeps accounts under personal control, distributing savings based on the amount invested, not based on income, and without impacting the budget or raising taxes.

The publication of the book coincides with the launch of a website dedicated to the plan and its promotion, rescuingretirement.org, and a social campaign driven by the hashtag #fixretirement on Twitter and Facebook.

“This book should be required reading for everyone concerned with how Americans will fund their retirements and makes a compelling case that it should include us all. It is an important conversation starter in an area that will only get more relevant in the years to come,” said Austan Goolsbee, Former Chairman, White House Council of Economic Advisers.

“At a moment when America's retirees are caught in the middle of a political tug-of-war, James and Ghilarducci offer a new way forward. Rescuing Retirement proposes a provocative yet practical solution to America's pending retirement crisis,” said Alan Krueger, Professor of Economics, Princeton University and Former Chairman, White House Council of Economic Advisers.

“Our retirement system is broken – if we do not take action, America will face rates of poverty among senior citizens not seen since the Great Depression,” said Teresa Ghilarducci. “Our Retirement Savings Plan is a pragmatic solution that includes no new taxes, will not increase the deficit, and intelligently integrates into existing infrastructure to address this massive issue that cuts across all demographics.”

Said Hamilton “Tony” James, President and Chief Operating Officer of Blackstone: “If the country acts now, we can solve this problem, and solve it relatively painlessly for everyone. Our plan is a simple, sustainable, low-cost and politically viable proposal to enable workers to save and invest more effectively to secure their retirement.”

“Clear, thoughtful, and engaging. This book is a must-read for future retirees, policymakers, and anyone concerned with our nation's future,” said Christian Weller, Senior Fellow, Center for American Progress.

“We may have philosophical differences, but the plan put forth by Teresa and Tony provides a bold, refreshing approach to modernizing America's retirement infrastructure,” said Bill Jansien, CEO, StoneHedge Global Partners and member, Federal Retirement Thrift Investment Board.

The publication of this book follows the authors’ March 2016 white paper published by the Schwartz Center for Economic Policy Analysis (SCEPA) at the New School, “A Comprehensive Plan to Confront the Retirement Savings Crisis,” and their January 2016 New York Times op-ed, “A Smarter Plan to Make Retirement Savings Last,” in which they wrote, “Our plan would guarantee millions of Americans safe and secure retirements that would benefit them, their families, and the nation’s economy.”

New School Economics Professor Sanjay Reddy is offering a free online course in microeconomics in collaboration with the Institute for New Economic Thinking (INET). Titled, "Advanced Microeconomics for the Critical Mind," the class will transcend the narrow and technical nature of modern microeconomics to present a holistic survey of the discipline. Professor Reddy will engage students in a wide range of topics to help them better understand the foundations and implications of modern microeconomic theory. You can watch a preview of the course material.

Professor Reddy received his PhD from Harvard University in 2000. His research focuses on development economics, international economics, and economic philosophy. Teaching Assistant Raphaele Chappe received her LLM from New York University and came to The New School after eight years as an attorney in the financial services industry.

Classes begin October 3rd. The course is free and registration is open to anyone interested.

HowellSCEPA Economist David Howell has an article in The American Prospect magazine featuring his research with New School doctoral student Kea Fielder and CUNY Professor Stephanie Luce.

The article argues for reframing the minimum wage debate. Instead of worrying about losing low-paying, high turnover jobs, the focus should be on creating jobs with living wages.

Howell leads SCEPA’s Growth and Jobs project, funded by the Washington Center for Equitable Growth, where he seeks to answer the question “what happened to shared growth?” Since the 1980s, U.S. economic growth failed to produce enough jobs, especially “decent jobs.” To understand wage inequality and unshared productivity growth in the United States, Howell focuses on how institutions affect labor market outcomes. His work compares the United States with Canada, Australia, Germany, and France to understand how the distribution and growth of decent jobs compare by economic sector across countries.

Financial DeepeningNew School Economics PhD Aleksandr Gevorkyan has a new book, co-edited with Otaviano Canuto, titled “Financial Deepening and Post-Crisis Development in Emerging Markets Current Perils and Future Dawns

The book focuses on how small and often overlooked developing economies can achieve sustainable development as they join global financial markets. It features contributions by several current and former NSSR Econ Dept students:

  1. Chapter 1: Emerging Markets and the Post-2008 World
    by Aleksandr V. Gevorkyan and Otaviano Canuto
  2. Chapter 3: Interest Rates, Terms of Trade, and Currency Crises: Are We on the Verge of a New Crisis in the Periphery?
    by Nathaniel Cline and Matías Vernengo
  3. Chapter 9: Determinants of Nonperforming Loans in Guyana
    by Tarron Khemraj and Sukrishnalall Pasha
  4. Chapter 10: Financial Flows and Productivity in Eastern Europe: Implications for Growth and Policy
    by Lucas Bernard and Unurjargal Nyambuu
  5. Chapter 11: The Changing Character of Financial Flows to Sub-Saharan Africa
    by Ingrid Harvold Kvangraven

 MG 2813SCEPA is proud to congratulate New School Economics PhD Heather Boushey on her appointment as chief economist of Hillary Clinton’s transition team, formally called the Clinton-Kaine Transition Project.

Boushey serves as executive director and chief economist of the Washington Center for Equitable Growth and a senior fellow at the Center for American Progress. Previously, she worked at the Joint Economic Committee, the Center for Economic and Policy Research, and the Economic Policy Institute.

Her recent book, “Finding Time: The Economics of Work-Life Conflict,” reflects her research focus on inequality, women, and social policy. The book presents a history of how the social and political environment has shaped the complicated economic lives of families. In response, she lays out policy proposals necessary for Americans to find the time they need and businesses to attract productive workers. Boushey presented her findings at The New School as SCEPA’s 2016 annual Schwartz lecturer. She also joined us in 2014 to give a powerful response to Thomas Piketty’s presentation of his book, “Capital in the Twenty-First Century.”

Boushey received her PhD in Economics from The New School for Social Research in 1998. Working with Economics Professor Anwar Shaikh,her dissertation was titled, "The Social Structures of Insulation: The Relationship Among Unemployment, Discrimination and Social Policy."

SCEPA’s Retirement Equity Lab (ReLab) released three new policy briefs, funded by the National Endowment for Financial Education (NEFE), documenting the systemic failure of the current retirement savings system, even for those who use it as intended.

  1. 401(k) Plans: A Failed Experiment
    The financial wealth of individuals who participate in a 401(k) plan and are nearing retirement age (55 to 64) falls far short of the levels necessary to maintain their standard of living in retirement. This is true for households at all income levels.
  2. Household Economic Shocks Increase Retirement Wealth Inequality
    Low-income households are both more likely to experience shocks - such as job loss or ill-health - and also more likely to make early withdrawals from their retirement accounts in response. As a result, pre-retirement withdrawals exacerbate retirement inequality by increasing the likelihood that low-income workers will not have adequate income in retirement. Read Money Magazine’s coverage of this paper by Dan Kadlec, “How to Overcome ‘Income Shocks’ that Wreck Retirement Security.”
  3. Policies to Reduce Retirement Plan Leakages
    If households are permitted to use retirement savings to buffer pre-retirement shocks, the system will fail to achieve its goal of financing post-retirement consumption. But in a voluntary system, a prohibition on pre-retirement withdrawals may discourage participation. A prohibition on pre-retirement withdrawals should therefore be accompanied by a contribution mandate.

Taken together, these briefs identify the need for a change in retirement policy. The Guaranteed Retirement Account (GRA) is an example of a comprehensive policy proposal that is both mandatory and prohibits pre-retirement withdrawals. This plan would create federal retirement accounts that guarantee principal and an annual rate of return and provide annuities as an add on to Social Security.

SCEPA and INET are proud to present an online, semester-long economics class - advanced microeconomics - taught by Duncan Foley, the Leo Model Professor of Economics at The New School. The series includes videos of 14 class lectures, including Professor Foley's presentations and discussions with students. 

Class 01 Preliminaries. The first lecture consists of technical topics essential to the rest of the course, including philosophy of social science, Bayesian and Information theory.

At the beginning of the course, the philosophy of social science in correspondence to its deviation from the natural science is debated, focusing on if science should address people in a different way than animals. Moreover, the subjects of the meaning of frequency and probability are examined. Afterwards, an overview of the Bayesian Theory is discussed, complementary to its limitations reaching reality and how this view is linked to the econometric theory, which is based on the former. The first lecture ends raising the topic of elementary information theory (Shannon’s entropy) within a historical framework.

Advanced Microeconomics: Information and Behavior in Political Economy | Lecture 01 Introduction | Duncan Foley | Leo Model Professor of Economics at the New School for Social Research | Spring 2016

SCEPA and INET are proud to present an online, semester-long economics class - advanced microeconomics - taught by Duncan Foley, the Leo Model Professor of Economics at The New School. The series includes videos of 14 class lectures, including Professor Foley's presentations and discussions with students. 

Class 02 Entropy-constrained behavior. The central point of discussion in the second lecture is the basic economic framework of human behavior developed based on the entropy-constrained theory and its advantages over the marginal utility theory of economics.

The lecture begins pointing out the significant impact of the entropy theory on a variety of scientific fields. Moving on, the focus shifts to the economic approach and the audience is presented with two examples of the behavior model. In the first case an individual maximizes her pay-off function through a single choice, whereas, in the second case the payoff maximization occurs via a set of mixed actions. Afterwards, the utilitarian theory is contrasted to the mainstream marginal utility theory. The former advocates that the welfare is comparable among individuals, in contrast to the latter which argues that the interpersonal comparisons of welfare are impossible due to the inherently subjective aspects of welfare. This legitimizes taxation of the richest people, in case that people approximately have the same temperature. The second class ends with some simple examples and applications of this theory.

Advanced Microeconomics: Information and Behavior in Political Economy | Lecture 02 Entropy Constrained Behavior | Duncan Foley | Leo Model Professor of Economics at the New School for Social Research | Spring 2016

SCEPA and INET are proud to present an online, semester-long economics class - advanced microeconomics - taught by Duncan Foley, the Leo Model Professor of Economics at The New School. The series includes videos of 14 class lectures, including Professor Foley's presentations and discussions with students.

Class 03 Applications of the entropy-constrained behavior model. The biggest part of third lecture dedicated to answering students questions essential to the topic and for the rest we are presented with applicable examples of the behavior model. This lecture provides fundamental information to anyone who wishes to comprehend the ideas that are discussed in previous lectures in greater depth.

At the beginning, the audience is presented with a detailed review of the entropy constrained behavior model, emphasizing on the description of the behavior temperature. Many important points are clarified, such as if the behavior temperature of people tends to be the same or if a fluctuation in behavior temperature changes the utility function, as well as how much will one’s behavior temperature would be affected if a tiger would appear in front of them! Moreover, in this lecture Gibbs distribution is examined more thoroughly. Afterwards, a definition of the expected utility theory is presented by using Von Neumann and Morgenstern’s lottery paradigm. Duncan Luce and Patrick Suppes attempt to experimentally prove the main point of the expected utility theory. However, the experiment did not show the sharp-step function behavior predicted by the expected utility theory. Thus, their experiment seems more precise with the use of the entropy behavior theory, where a choice with a greater payoff is just more plausible to occur. Additionally, some more mathematical applications are explained. In the end, the conversation zooms in the Gaussian method of analysis, which he uses in order to describe his foundation of normal distribution. The third lecture ends raising the question if the Gaussian method in astronomy works as well in social science.

Advanced Microeconomics: Information and Behavior in Political Economy | Lecture 03 Applications of the Entropy Constrained Behavior Model | Duncan Foley | Leo Model Professor of Economics at the New School for Social Research | Spring 2016

SCEPA and INET are proud to present an online, semester-long economics class - advanced microeconomics - taught by Duncan Foley, the Leo Model Professor of Economics at The New School. The series includes videos of 14 class lectures, including Professor Foley's presentations and discussions with students. 

Class 04 Social Interaction (Part Α). The fourth class consists of a review of the entropy constrained behavior model, the completion of the expected utility theory and an introduction to the Social Interaction behavior.

The fourth lecture begins with a brief summary of the entropy-constrained behavior model and moves on to re-examining the expected utility function via Von Neumann and Morgenstern’s lottery example. Additionally, two more applications of the entropy-constrained theory are analyzed and visualized graphically. One is able to comprehend the weakness of the econometric models via this analysis. The econometric models ignore the constraints of real life and assume an asymmetry in error deviations, which cannot always lead to accurate results. The lecture ends with the explanation of the basic ground of the social interaction of the models and how this framework could be introduced in economics, something that until now has not been resolved by the mainstream utility theory.

Advanced Microeconomics: Information and Behavior in Political Economy | Lecture 04 Social Interaction (Part A) | Duncan Foley | Leo Model Professor of Economics at the New School for Social Research | Spring 2016

SCEPA and INET are proud to present an online, semester-long economics class - advanced microeconomics - taught by Duncan Foley, the Leo Model Professor of Economics at The New School. The series includes videos of 14 class lectures, including Professor Foley's presentations and discussions with students. 

Class 05 Social Interactions (Part Β). The fifth class studies the functionality of the canonical social interaction model and examines a major topic in Political Economics – The Tragedy of the commons.

The fifth lecture begins with an analytical presentation of the canonical social interaction model. The model integrates social interaction into economics and answers the question of what would happen in a social coordination case, in which all people gathered together and decided what to do. The subject of what is the best response for each individual in a variety of cases is also examined. After the theoretical analysis, the lecture focuses on the mathematical framework of the model and an accurate graphical visualization is given by presenting on what extent the certain parameters can affect the model’s fluctuation. Through this approach, they are able to explain in which cases there is a strategic complementarity between agents and in which cases there is not. Prisoner’s dilemma is just a subset of this theory. In the last part of the class, the major topic of the Tragedy of Commons in Political Economy is discussed as an example that integrates this model into real life.

Advanced Microeconomics: Information and Behavior in Political Economy | Lecture 05 Social Interaction (Part Β) | Duncan Foley | Leo Model Professor of Economics at the New School for Social Research | Spring 2016