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CALEIRO,
 
A.
 
(2007)
 
What
 
does
 
economics
 
assume
 
about
 
people’s
 
knowledge?
 
Who
 
knows?.
 
In,
 
V.
 
Trindade,
 
N.
 
Trindade
 
&
 
A.A.
 
Candeias
 
(Orgs.).
 
 A
 
Unicidade
 
do
 
Conhecimento.
 
Évora
:
 
Universidade
 
de
 
Évora.
 
______________________________________________________________________
2
 
More recently, the viewpoint of Economics has changed by focusing on thecharacteristics (e.g. knowledge) of individuals, that may interact in sub‐sets of society. From this point of view is clearly relevant, given the close connection withthe assumed level of knowledge, to distinguish the adaptive behaviour (i.e. the onewhere the knowledge, not even about the past, is fully exploited) from the rationalone (i.e. the one where all the knowledge, even about the future, is optimallyexploited). All these matters are to be analysed in section 4 of our paper.In our opinion, quite recent developments in the Economics of Knowledge, i.e.the so‐called learning models, have been considered as more realistic approachesto model the process by which individuals acquire knowledge, for instance fromother individuals that are, themselves, acquiring knowledge. In fact, these modelsalso allow to make the distinction between the full rational behaviour (i.e. the onewhere all the available knowledge is subject to an optimal use), from the boundedrationality behaviour by people, which prefer to adopt a satisficing approach, evenin what concerns the use of knowledge. These issues are subject to a succinct analysis in section 5 of our paper, which, in conjunction to section 4, can be seen asthe bulk part of our analysis.2
2.
 
F
ROM THE REPRESENTATIVE AGENT HYPOTHESIS TOTHE NON
-
REPRESENTATIVE AGENT SOLUTION BASEDUPON KNOWLEDGE
 
In what concerns the level of knowledge by people, an influential approach inEconomics started considering it as being represented by the one characterising acertain individual. The representative agent hypothesis is based upon a rational –in the sense of maximizing the (expected) utility – behaviour of the representativeindividual, from which are derived the aggregate counterparts. In doing so, it isassumed that the representative agent knows the microeconomic equations fromwhich the aggregate counterparts are derived. Given that aggregation issues seemto be ignored, Kirman (1992) proposed that the heterogeneity of agents should not be reduced to that analytical convenience. In fact, given the preferences andconstraints of an individual, it is quite simple to model the behaviour of thisindividual – under the usual, but not innocuous, hypotheses. To model thebehaviour of a group of people is obviously more difficult, in particular whenindividuals interact and, notably, when they are not all alike.Plainly, in the case of representative agent models, the aggregation of the levelof knowledge, assumed to be a characteristic of the representative individual,would not add to the level of knowledge that an agent, such as the Government,assumed also to be a representative agent (of society’s interests), should considerwhen taking decisions, that are supposed to be the best from the point of view of the set of individuals constituting the society.
2
Trying to escape from the trap of 
 formalism
we leave for annexes the (mathematical) formalizations of thearguments presented in each section. These formalizations appear immediately after a brief conclusion.
 
CALEIRO,
 
A.
 
(2007)
 
What
 
does
 
economics
 
assume
 
about
 
people’s
 
knowledge?
 
Who
 
knows?.
 
In,
 
V.
 
Trindade,
 
N.
 
Trindade
 
&
 
A.A.
 
Candeias
 
(Orgs.).
 
 A
 
Unicidade
 
do
 
Conhecimento.
 
Évora
:
 
Universidade
 
de
 
Évora.
 
______________________________________________________________________
3
 
In the particular case of the government, as an agent taking decisions on thebehalf of society, there is, in fact, a matter of knowledge that makes it distinct fromthe rest of the people (even from the electorate that has elected it). As is well‐known, elections can be seen as one of the – if not the – oldest ways of delegatingdecision power. Voters, through an electoral process, elect an agent who issupposed to take decisions, for instance implementing economic policies, whichare the best for society. These decisions are supposed to be even better than thosethat would be taken by voters themselves. This traditional vision derives from theconsideration that the government should essentially be an agent that can, andindeed should, have a more distant time horizon than voters or society do. Notably,this means that, when the electorate votes on a government which hasimplemented policies that have generated pleasurable outcomes and this is viewedas a bad phenomenon, it is because voters possess a shorter‐sight view of theeconomy. In the limiting case, if voters are viewed as agents with the same timehorizon as the government, then a positive election result should be viewed asexactly what the society wants, if we consider the electorate as representative of society. In any case, the voters’ objective should be to make the government choosepolicies that are optimal from the society’s point of view. Notwithstanding, thiswould require some knowledge by voters about the level of knowledge needed toforce the incumbent not to behave as opportunistic, i.e. when creating an electoralcycle by exploiting the lack of knowledge by the electorate.In reality, an electoral cycle created by governments is a phenomenon that seems to characterise, at least in some particular occasions and/or circumstances,the democratic economies. As it is generally accepted, the short‐run electorally‐induced fluctuations prejudice the long‐run welfare. Since the very first studies onthe matter, some authors offered suggestions as to what should be done against this electorally‐induced instability. For some authors, ever since the seminal paperof Nordhaus (1975), a good alternative to the obvious proposal to increase theelectoral period length is to consider that voters abandon a passive and naivebehaviour and, instead, are willing to learn about government’s intentions.In the limit, the acquisition of knowledge through learning makes it possible totake strategic decisions. For instance, strategic voting, ever since studied byMacRae (1977), may, in fact, make the electorally‐motivated government to choosesocially‐optimal economic policies. This can be done by strategically changing therelative importance of objectives
on
 
the
 
election
 
day 
.
3
For that to happen, it isenough that voting decisions
do
 
not 
reflect (in the correct way) the socialimportance of the economic variables. In other words, from the society’s point of view, a non‐representative behaviour of voters may induce the government tobehave as a representative agent of the society’s interests. This would then meanthat the government, assumed to know as much as the electorate, whose interestsare pursued by governmental decisions, would then take decisions that are the
3
Note that as, for instance in Nordhaus (1975), the aggregate voting function is considered as the appropriatesocial welfare function. In fact, the assumption that the objective function reflects both the government’s andthe society’s preferences has been present in most of the relevant literature.
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