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Behavioral economic aspects of socio-economic equilibrium in the World Economy

Автор Доклада: 
Shamborovskyi G.
Награда: 
Behavioral economic aspects of socio-economic equilibrium in the World Economy

УДК 330.36.01

Behavioral economic aspects of socio-economic equilibrium in the World Economy

Dr. Grygorii Shamborovskyi

Ivan Franko National University of Lviv

 

Behavioral economics uses evidence from economics, psychology and other disciplines to explain decision making, human rationality, willpower and self-interest of individuals and groups. This paper attempts to bring some central insights from behavioral economics into the general economic equilibrium theory and welfare theory. The aim is not to assess the impact of particular contributions or describe and interpret specific approaches. Rather, the goal is to provide general ideas based on the marginal utility theory. This article argues for a new psycho-economical understanding of changes of social-economic welfare during economic crisis.

Key words: Business cycles, Socio-economic behavior, Welfare, Development, European integration, Globalization, Marginalism, General economic equilibrium models.

JEL: C68, D03, D58, D60, D63, F15.

Introduction

Civilization progress is based on desires to satisfy the material-spiritual demands with maximum level of the utility. Experience showed that liberalization of the world economic system can lead to a high stage of economic development and standard of living. People around the world are exchanging information and produce goods with least costs. Most of economics theories examine reality through individual needs and maximization of the utility. The rational and egoistic “homo economicus” pushes on civilisation progress and creates incredible ideas and innovations. The engines of economic civilization are our materialistic desires and competition. But why humanity still meets the same problem of non-stable socio-economic development and cannot reach equilibrium? The answer can be that we are not only economical individuals but social persons too. Capital glut is not the only cause of business cycles. A point is that human nature has social and emotional needs also. Our development is unstable because of the same reason. The individual decisions, which we are making, strongly depend on attitudes towards society and emotional state. Economic behavior is often directed by powerful emotion stimuli for which there is a clear biological need. The problem is more difficult when world economic systems go to the crisis. In this case no classical or modern economic theory can exactly explain in which way to avoid decline of the standard of living and keep socio-economic equilibrium on the safe level.

Methodological approaches into economic welfare theories

In modern literature the question of welfare occupies a special place because it is the subject of research in economics, sociology, and psychology. Separate parts engaged in medicine and culture.

When it comes to welfare and enjoyment of life – people in less developed countries answers this question differently than the representatives of developed economies. So far, in many countries there is no electricity, and most of its population suffers from diseases and survives through humanitarian assistance. Citizens of developed countries are concerned about personal careers, training, material and spiritual enrichment, which is quite natural as they are on the highest level of needs hierarchy. People are increasingly aware of the fact that well-being is always more than the utility maximization of consumption of goods and services.

Different systems of material and spiritual values form its quantitative and qualitative characteristics. Such strategic conceptions as: “Sustainable development” – UN recommendations and the state strategy of the USA from the late 80 years , “Catch-up Development” – USSR in 60-70 years, “Asian tigers Development” – the new industrial countries in the second half of 20 century., “Reform Development” – political and economic reforms in post-socialistic countries in 1990, “Balanced Development” of China, “Development Solidarity” in the European Community have made substantial adjustments to the ideological and ethical conceptions of welfare, created and often distorted system of economic and social values in the end XX – the beginning XXI century. Providing for the acceleration of economic development rich countries stimulate consumption and excessive exploitation of natural resources which creates a new disease, destroy the environment, increase and cause global conflicts.

Now the global problem of regional development is actualized through globalization of economic relations. As it turned out, humanity is incapable of creation and implementation an effective management mechanism for globalized economy – the current system does not work consistently and instability of world currencies always leads to economic and social imbalances.

J. Tinbergen cosmopolitan idea about free trade in the whole world market seems weak because of personal interests of its members and “market failures”. One should study the question of efficiency and equity capital placement and productive forces in the modern world. In light of the recent crisis consequences the global economic power of Asia, including the Russian Federation and the People’s Republic of China appeared and leading to the reorientation of foreign trade and directly affect the socio-economic balance in different regions of the world.

Adjustment of production and consumption is task that should execute the economic system. First was started talking loudly about it after economic crises in 1825 in England, which was thoroughly examined by the prominent Ukrainian economist and philosopher, M.Tuhan-Baranovsky. He first formulated the basic laws of the theory of investment cycles and predicted the formation of cartels of iron, engineering and mining industry in Europe, which later became multinational corporations [1, 2].

Great contribution to the study of the theory of economic equilibrium did economists and mathematicians of the Lausanne School (L. Walras, V. Pareto, F. Edgeworth, L. Winiarski), proposing to explore the economic relationships based on partial and general equilibrium markets. Walras’ assumptions about uniform pricing, provided fixation levels of consumption at the level of stock and potential output of manufactured products, has enabled to predict it change [3]. Mathematical tools allowed Paretto evaluate various income market players finding as a criterion of optimality, and today that is relevant [4]. Other, no less known, representatives of marginalism of the Vienna school (K. Menger, L. von Mises, Nobel laureate F. von Hayek) skeptically came to use the behavior of consumers and producers in functional analysis studies, which at this time was virtually impossible because of lack of respective computers. They paid more attention to the psychological features of decision-making of market participants in conditions of perfect competition and on the basis of rational consumer behavior research traced the features of the individual economic decisions.

The first person who managed to bring two parts of marginalism together was V. Leontief, who convincingly confirmed the possibility of modeling the economic balance, but noted that “in no other field of practical research a huge and complex statistical mechanism is available with such low-value results” [5, P.5]. His disciple, and the Nobel Prize winner, V. Smith continued working on the bedrock of the Austrian School of psychology and formulated the basic principles of modern behavioral economics [6].

Empirical tools for general equilibrium analysis

Contemporary empirical studies of the effects of the liberalization of foreign trade of integrated groups are based on the Computable General Equilibrium models (CGE models) and Computable Partial Equilibrium models (CPE models), and the grav­ity model of trade as well as econometric analyses where the advantage of the output result over the deviation result means the benefit for a particular country. Among the large number of studies concerning the potential socio-economic effects of the liberalization of foreign trade two models are based on the method of economic equilib­rium are used more often nowadays, namely the Computable General Equilibrium model (CGE model) and Computable Partial Equilibrium model (CPE model). The major difference between these two models lies in the fact that the GCE model analyzes all production sectors, as well as labor force and capital sectors. CPE models take into account the equilibrium between the input demand and output supply for particular types of products. CGE models can be strongly aggregated or, in other words, they can comprise a few sectors and other types of production. Unlike CPE models that are adequate for the good that is studied in stable macroeconomic conditions, CGE models allow one to evaluate different variants of policy (including prices) in different macroeconomic conditions. CPE models do not take into account the factors com­prised by the general equilibrium theory.

There are plentiful specialist literatures dealing with the studies. There are numerous states and organizations that have immense experience in such research, namely the USA, Holland, Australia, Germany, France, international organizations such as the OECD, The International Institute for Applied Systems Analysis (in Austria) and others. Out of numerous studies in the field it is necessary to mention those that are crucial for the establishment of a methodology of research into the influence of integration on the development of national economies, especially those based on the CGE model. This model is very popular in many countries. The Economic Research Service at the US Department of Agriculture designed a 10-sector model of the general policy of equi­librium of the state as well as a 30-sector model of the US agrarian policy. ORANI: a Multisectoral Model of The Australian Economy needs to be mentioned here as well. It has been designed at the University of Melbourne in Australia and it is supported by several state agencies. The model has some particular characteristics that distinguish it from other computable general equilibrium models. The first feature that distinguishes ORANI from other CGE models is its size. In comparison with other CGE models ORANI comprised 113 sectors of production, 115 categories of products of national economy and the same number of imported goods, 9 categories of means of production as well as 7 types of arable land. The model was designed at a time when there were no effective programs that would deal with such tasks and therefore, it was overloaded with a huge database whose parameters were impossible to evaluate. The authors of the model themselves pointed to this drawback. However, the experience gained from employing this model was used to develop the biggest contemporary model dealing with foreign trade, namely CTAP (Global Trade Analysis Project).

The standard GTAP model designed by T. Hertel and M. Tsigas in 1997 is a static computable general equilibrium model where interregional relations are defined by patterns of bilateral trade [7]. In this model the prices are determined under conditions of perfect competition and the consumer products differ according to the region. Re­gional diversification of consumer products allows the model to analyze internal trade. In order to obtain empirical results GTAP was adapted to work under GEMPACK software (General Equilibrium Modelling PACKage) designed by the Center of Policy Studies (CoPS) at Monash University in Autralia [8]. The GTAP model has an aggre­gated database of countries and economic sectors created by GTAPAgg. It also makes use of the simulations program RunGTAP. The most recent version of the database GTAPAgg contains data about 87 regions and 57 sectors of economy.

The basic elements of the model were determined according to the equilibrium index­es between consumption (including individual demand, investment needs, state demand) and production.

Apart from determining the equilibrium between consumption and production there are two other important elements of the GTAP model, namely international trade and economic welfare [more details 9].

Integrated psycho-economical model of Socio-Economic Welfare of European integration

To understand economic behavior we need to use appreciate theoretical and practical aspects of individual and social human behavior in the economic environment. People show very different kinds of economic behavior; they also live in very different economic environments.

The economic models do not usually predict the behavior of individuals. Most of them are built up from these assumptions; it predicts the behavior of large groups of individuals. Using this approach enables us to pay attention on the European Union, because European economic integration is the most progressive socio-economic model of the creation of Welfare State and its members have similar psycho-economical behavior.

The proposed model of Socio-Economic Welfare of European integration combines socio-economic insights as well as socio-biological and evolutionary-psychological findings (see the scheme below). Human behavior is regarded as the result of three constituting components: cultural shaping (cultural artifacts, education, socialization, and enculturation), genetic predisposition (pattern recognition based on instincts, needs, drives, etc.), and situational correctives. That is why it is so important to work out some general approaches to a new understanding of the European integration in the conditions of economic crisis. The signals of economic behaviour are saving, consuming, and investment. We can evaluate how these economic decisions compare with personality motivation.

Socio-Economic Welfare of European integration

Socio-Economic Welfare of European integration

 

Conclusion

Our personality may be crucial to our socio-economic behavior, our motivation or personal experience may affect how we spend or save, our social context may determine the extent to which we gamble or give, and genetic state may influence our spending priorities. We must realize that both human behavior and the economic environment are dynamic, changing and interacting with each other over the time. Now modern socio-economic researches should include Human behavior approaches to solving problems of socio-economic equilibrium.

Economy is a social creation, and that economic behavior, no matter how impersonal it may seem, is always connected with social behavior. But this connection is not so common. It depends on individual attitude to different values of life in different conditions. Moreover, disbalance of economic and social needs can lead to shocks and conflict in the society. Socio-economic welfare strongly depends on consensus of human behavior. The concept of value is crucial to economics and therefore to psychology. I believe that the bridge between our individual and social nature can be economic psychology.

 

Reference:

  1. Туган-Барановский М.И. Периодические промышленные кризисы. – М.: Наука. РОССПЭН, 1997. – 574 с

  2. Tougan-Baranowsky, Michel. Les Crises industrielles en Angleterre. – Paris: M. Giard & E. Briere, 1913. – 476 p.

  3. Pareto V. Manual of political economy / Translated by Ann S. Schwier. Ed. by A. S. Schwier, A. N. Page. – N.Y.: Kelley, 1971. – 504 p.

  4. Donald A. W. Walras’s market models. – Cambridge, N. Y.: CUP, 1996. - 459 p.

  5. Tvede L. The psychology of finance / 2nd ed. – Chichester, N. Y.: Wiley, 1999. – 296 p.

  6. Smith, V. L. Rationality in economics: constructivist and ecological forms. – Cambridge, N. Y.: CUP, 2008. – 364 p.

  7. Hertel T., Tsigas M. Structure of GTAP // Global Trade Analysis: Modeling and application / Ed. by T.Hertel. – Cambridge: CUP, 1997. – 403 p.

  8. Harrison J., Pearson K. An Introduction to GEMPACK, GEMPACK Document No.1. – Clayton: Monash University, 2000. – 234 p.

  9. Шамборовський Г.О. Соціально-економічна ефективність європейської економічної інтеграції: Монографія / ЛНУ ім. Івана Франка. – Львів: РАСТР-7, 2008. – 211с.

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