Big Players and the Economic Theory of

Investment and all other economic actions depend on 'subjective' expectations. The problem is how to construct a theory of expectations that assumes people interpret their situations in unpredictable ways. Building on the evolutionary economics of F.A.Hayek, Koppl gives us such a theory. This includes a theory of 'Big Players', demonstrating that discretionary policy interventions create ignorance and uncertainty. The volume uses innovative methods to address many vital problems in economic theory, and connects with many other schools of economics including New Institutional Economics, Constitutional Economics and Post Walsarian Economics.

Roger Koppl is at Fairleigh Dickinson University, New Jersey.

List of Figures

ix

List of Tables

x

Preface

xi

Acknowledgments

xiv

Part I Introduction

Introduction and Summary

3

(22)

Expectations and economic theory

3

(5)

The role of expectations in economics as a social science

8

(3)

Outline of the theory

11

(14)

Part II Methodology

The Misesian Context

25

(15)

Introduction

25

(1)

The methodology of Ludwig von Mises

26

(12)

Schutz and Hayek

38

(2)

Schutz

40

(16)

Hayek

56

(17)

Part III Theory

Language Games and Economic Theory

73

(23)

Introduction

73

(1)

Language games

74

(9)

The economy as a network of language games

83

(4)

Coordination does not require common rules

87

(5)

Natural selection of language games

92

(4)

Expectations

96

(24)

Introduction

96

(1)

Entrepreneurship

96

(10)

Cognitive expectations

106

(7)

Acognitive expectations

113

(2)

Hayekian expectations

115

(3)

Correlating cognitive and acognitive expectations

118

(2)

Big Players

120

(21)

The general theory of Big Players

120

(3)

Modeling Big Players

123

(5)

Big Players in asset markets

128

(3)

Modeling asset prices in the presence of Big Players

131

(4)

Herding and contra-herding as error duration

135

(6)

Part IV Applications

Big Players in Czarist Russia

141

(23)

The policies of Bunge and Vyshnegradsky

141

(6)

The ruble and GARCH

147

(7)

R/S analysis

154

(10)

The Angular Distribution of Asset Returns in Delay Space

164

(20)

The compass rose

166

(2)

Hypothesis testing with theta histograms

168

(6)

A simple simulation of X-skewing

174

(3)

Big Players induce X-skewing

177

(7)

Herding in Money Demand

184

(20)

Money demand and the theory of Big Players

184

(3)

The Federal Reserve as a Big Player

187

(6)

Discussion and conclusion

193

(2)

Coda

How this book relates to the emerging new orthodoxy in economics

195

(4)

Some suggestions for further work

199

(5)

Appendixes

204

(14)

1 What is Verstehen?

204

(4)

2 What did Wittgenstein really mean?

208

(2)

3 An elementary set-theoretic model of language games

210

(2)

4 Notes on reflexivity

212

(6)

Notes

218

(5)

Bibliography

223

(14)

Name Index

237

(4)

Subject Index

241

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Big Players and the Economic Theory of Expectations

Summary

Author Biography

Table of Contents

Supplemental Materials