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The Guidance of an Enterprise Economy$
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Martin Shubik and Eric Smith

Print publication date: 2016

Print ISBN-13: 9780262034630

Published to MIT Press Scholarship Online: May 2017

DOI: 10.7551/mitpress/9780262034630.001.0001

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Mathematical Institutional Economics and the Theory of Money and Financial Institutions

Mathematical Institutional Economics and the Theory of Money and Financial Institutions

(p.441) 11 Mathematical Institutional Economics and the Theory of Money and Financial Institutions
The Guidance of an Enterprise Economy

Martin Shubik

Eric Smith

The MIT Press

Chapter 11 raises the question of what is meant by our usage of “theory”. Different disciplines utilize the word theory differently. Furthermore model and theory appear on occasion to be used interchangeably. Aristotle contrasted theory to practice. Praxis is the Greek term for doing. Mathematical theory is deductive. The sensory or empirical content is implicit in the axioms. The logical consequences of the axioms provide theorems. A semantic view stresses the connection between the axioms and the abstraction of some aspect of reality. We stress that the natural preliminary step before dynamics is to construct process models based on general equilibrium. This can be done utilizing single simultaneous move games. This is sufficient to show the critical roles of money and financial institutions without even having to discuss complication in information and behaviour. The evolution of money and many financial institutions does not even call for the presence of exogenous uncertainty. A single random variable is sufficient to illustrate innovation. We develop a general modeling methodology leading to the construction of models as playable games. Staying with the one move structure leads to describing a manageable number of minimal institutions (below 100). When we consider more moves and information the number of logically feasible and plausible institutions becomes hyperastronomical and we are forced into considering not merely structure but many variants of behaviour even within the simple scope of rational expectations. This problem is taken up in Chapter 12.

Keywords:   Theory, Practice, playable games, behavior

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