Sunday, September 27, 2009

Recession, Beliefs and Multiple Equilibria

...individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’beliefs.

This is one of the researches which clearly show the relationship between social psychology and economic equilibria: Individuals experiencing recessions during the formative years(at the age of 18-25) believe that luck rather than effort is the most important driver of individual success, support more government redistribution, and have less confidence in institutions.

The following caught my eye: The role of economic beliefs determines the economic system and institutional outcomes; two countries with a similar starting position can converge to two very different equilibria, one based on luck and high taxes (the so-called French equilibrium) and one based on effort and low taxes (the so-called American equilibrium).

In Japan, we have long been discussing which way for the Japanese capitalist economy to take, the economy based on the Americanized market system or the one based on the Europeanized welfare-state economy. I had no idea which to take, of course, but I get to think that this is not a problem of which way we should take, but of what values we believe in and how we get to such beliefs. "American" equilibrium with laissez-faire policies and just-world beliefs or a "European" one with social welfare and a more pessimistic view about how just the world is... anyway we always have the possibility of multiple equilibria in our economy and it might be difficult to expect what equilibrium to be realized at last, but we always need to take it into account when we think about the effects of public policy on our economy.


Anonymous said...

It was certainly interesting for me to read this blog. Thanks for it. I like such themes and everything that is connected to this matter. I definitely want to read more on that blog soon.

Taro said...

Thank you very much for your interest. I am interested in multiple equilibria and I believe it is one of the solutions to some problems faced in the capitalist society. Moreover, it is a bridge between neoclassical economics and heterodox economics like Marx and Galbraith.