Under-productivity bias

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Chapter 10 in On the Methodology of Financial Economics, 2023, pp 246-249 from Edward Elgar Publishing

Abstract: This chapter discusses a concept from introductory financial economics courses (i.e., the law of diminishing marginal productivity) to show that the methodology of mainstream financial economics ignores it (i.e., repeated applications of the only methodology lead to diminishing marginal productivity). That is, although financial economists teach this concept in their introductory financial economics courses, the methodology that they employ in their research ignores that same concept, i.e., it is biased toward diminishing marginal productivity. This chapter suggests a multi-paradigmatic approach as a way to overcome such under-productivity bias. In other words, this chapter discusses one of the benefits of the multi-paradigmatic approach - which is advocated in this book - as it not only avoids the negative effects of the law of diminishing marginal productivity, but also benefits from the positive effects of the returns to scale. The multi-paradigmatic approach emphasizes that various paradigms can be regarded as inputs used in the production of knowledge. When scientific research is performed based on only one paradigm, while other paradigms are ignored, and therefore are held constant (as in the case of the methodology of mainstream financial economics), then the production of knowledge is subject to the law of diminishing productivity. However, when scientific research is performed based on multiple paradigms (as in the case of a multi-paradigmatic approach), then not only the law of diminishing marginal productivity is avoided, but also return to scale is enjoyed.

Keywords: Economics and Finance; Law - Academic (search for similar items in EconPapers)
Date: 2023
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