Welcome

I study economics as a hobby. My interests lie in Post Keynesianism, (Old) Institutionalism, and related paradigms. These seem to me to be approaches for understanding actually existing economies.

The emphasis on this blog, however, is mainly critical of neoclassical and mainstream economics. I have been alternating numerical counter-examples with less mathematical posts. In any case, I have been documenting demonstrations of errors in mainstream economics. My chief inspiration here is the Cambridge-Italian economist Piero Sraffa.

In general, this blog is abstract, and I think I steer clear of commenting on practical politics of the day.

I've also started posting recipes for my own purposes. When I just follow a recipe in a cookbook, I'll only post a reminder that I like the recipe.

Comments Policy: I'm quite lax on enforcing any comments policy. I prefer those who post as anonymous (that is, without logging in) to sign their posts at least with a pseudonym. This will make conversations easier to conduct.

Vienneau (2005) Is A Necessary Resource For Arguments About A Minimum Wage

Maybe, perhaps, that is a bit hyperbolic. But it has been known for at least half a century that, even in competitive markets, wages and employment cannot be explained by the interaction of well-behaved supply and demand curves for labor. If you do not want to read me, check out, for example, Garegnani (1970) or Opocher and Steedman (2015). Shove (1933) illustrates how far awareness of the difficulties go. White (2001) is a demonstration that I am not the only one to draw practical conclusions from the theory.

Cohort after cohort, generation after generation, in the supposedly best schools promulgate falsehoods, ignorance, and incoherent nonsense.

References

• Garegnani, Pierangelo. 1970. Heterogeneous capital, the production function and the theory of distribution. Review of Economic Studies 37(3): 407-436.
• Opocher, Arrigo and Ian Steedman. 2015. Full Industry Equilibrium: A Theory of the Industrial Long Run Cambridge: Cambridge University Press.
• Shove, G. F. 1933. Review of The Theory of Wages. Economic Journal (Sep.)
• Vienneau, Robert L. 2005. On labour demand and equilibria of the firm. Manchester School 73(5): 612-619.
• White, Graham. 2001. The poverty of conventional economic wisdom and the search for alternative economic and social policies Austrlian Review of Public Affairs

Neoclassical Economists Being Wrong

What is neoclassical economics? (This post draws on something I wrote on Usenet more than a decade ago.) I believe I might have introduced this list of three key assumptions, as noted by Roy Weintraub, into the wikipedia article on the topic:

• People have rational preferences between outcomes that can be identified and associated with values.
• Individuals maximize utility and firms maximize profits.
• People act independently on the basis of full and relevant information.

One should recognize that neoclassical economics is associated with mathematical formalism. So neoclassical economists speaking among the clergy would prefer the language of topology and the algebra of relations for stating their assumptions.

The point of neoclassical economics is to build a theory on those assumptions which emphasizes equilibrium, characterizes economics as the allocation of scarce resources, and justifies supply and demand reasoning. Neoclassical economists wanted to argue:

• Equilibrium prices are scarcity indices
• Marshall's principle of substitution is generally applicable

Neoclassical economists are unable to state assumptions that justify such reasoning. Weintraub's assumptions, suitably formalized, don't succeed. They do not succeed because one can construct examples with these assumptions in which the negation of neoclassical claims hold. I and others have done this. This is a matter of logic.

Just to show you that others characterize neoclassical economics in the same way as I do:

"The [Demand-and-Supply-based Equilibrium] theory visualizes the economy as an aggregate of atomistic individuals (producers and consumers) making their decisions autonomously, with no interference from the influence of 'externalities'. Relative prices and quantities are determined simultaneously in equilibrium as an outcome of the interplay of 'forces of demand and supply', generated by the optimizing behavior of individuals subject to their resource constraints. A certain symmetry characterizes the behaviour of producers and consumers. Each producer, given the technological possibilities, chooses the profit-maximizing activities and outputs, at the going prices; each consumer, given his budget constraints and scales of preferences, maximizes satisfaction at the going prices. It is through the operation of the 'fundamental' and 'universal' principle of substitution that individuals adjust their chosen quantities in response to the parametrically given prices...

Further, the notion of 'change' in the DSE theory gets restrictively predetermined by the theory in the following ways. First, all changes in quantities within the system are seen as the outcome of the ever-active principle of substitution. Thus the changes are primarily in relative quantities involving allocational variations. The role of prices as a scarce-resource allocator, given the resources, dominates the theory as contrasted with the resource-creational role of prices in classical theory... Secondly, all changes are explained as induced by changes in relative prices and operate through the decisions of individuals who are only 'quantity adjusters'; that is, all influences affecting quantities have to be necessarily mediated through relative prices or changes on the market and are outcomes of the atomistic responses of individuals. The relative prices acquire the all-powerful role of resource-allocation and the 'market' becomes the 'arena' of action." -- Krishna Bharadwaj (1989).

Here are a couple of examples of the incorrect reasoning to which I object:

"It is indeed the great contribution of the Pure Logic of Choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or 'values' or 'marginal rates of substitution'), that is, by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure...

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of a plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin has arisen, or that one of the sources of tin has been eliminated. It does not matter for our purpose and it is significant that it does not matter which of these two causes has made tin more scarce. All that the users of tin now need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply... The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity ­ or rather the local prices are connected in a manner determined by the cost of transport, etc. - brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process." -- F. A. Hayek (1945).

"Let us then suppose that... there is a strike on the part of one group of workers, say the plasterers, or that there is some other disturbance to the supply of plasterers' labour... The rise in plasterers' wages would be checked if it were possible either to avoid the use of plaster, or to get the work done tolerably well and at a moderate price by people outside the plasterers' trade: the tyranny, which one factor of production of a commodity might in some cases exercise over the other factors through the action of derived demand, is tempered by the principle of substitution." -- Alfred Marshall (1920).

Hayek and Marshall were writing before it was known that the assumptions of neoclassical economics could not justify their reasoning.

Here is an ignorant or dishonest neoclassical economist perpetuating ignorance to another generation:

"Suppose the number of carpenters suddenly increases, due to the immigration of thousands of new carpenters from Mexico. Both before and after the change, carpenters receive their marginal revenue product... But the wage after the migration is lower than the wage before. Since the supply of carpenters is higher than before, the equilibrium wage is lower.

...an increase in the supply of an input I own drives down its price (and marginal revenue product) and so decreases my income. The same is true for an increase in the supply of an input that is a close substitute for an input I own. If I happen to own an oil well, I will regard someone else's discovery of a new field of natural gas--or a process for producing power by thermonuclear fusion--as bad news." -- David D. Friedman (1990).

David cannot state his assumptions. Here is a quote from a refereed paper:

"This note considers a linear programming (LP) formulation of the theory of the firm. A neoclassical non-increasing labour demand function is derived from the solution of the LP. It is argued that only a small number of points on this curve, one or two in the examples provided, are equilibria of the firm. Equilibria are characterized by decisions of the managers of the firms that allow the same decisions to be made in successive periods. Hence, one can explain the quantity of labour that firms desire to hire either by a traditional neoclassical labour demand function or by an analysis of equilibria of the firm, but generally not both. Explaining wages and employment by well-behaved supply and demand functions for labour is of doubtful logic." -- R. L. Vienneau (2005).

References

• Krishna Bharadwaj. 1989. Themes in Value and Distribution: Classical Theory Reappraised London: Unwin-Hyman.
• David D. Friedman. 1990. Price Theory: An Intermediate Text 2nd Edition.
• F. A. Hayek. 1945. "The use of knowledge in society. American Economic Review 35 (5): 519-530.
• Alfred Marshall. 1920. Principles of Economics: An Introductory Volume 8th edition.
• E. Roy Weintraub. 2007. Neoclassical economics. The Concise Encyclopedia of Economics.
• Robert L. Vienneau. 2005. On labour demand and equilibria of the Firm. Manchester School 73 (5): 612-619.

Elsewhere

• A start (see links on the left) of advice to a student interested in how to introduce an evolutionary approach into economics.
• A podcast severely critical of mainstream economics.
• A substack post of an avowed creed for neoliberals. I don't think the author has studied the scholarly literature on the topic.

These links do not present a hopeful picture.

Update 13 February 2021:

• Some obituaries of Michael Perelman.
• David Pakman on socialism, social democracy, and its difference with democratic socialism. I do not think I have been consistent on the distinction. According to his Wikipedia entry, Pakman studied economics and communications as an undergrad at UMass Amherst.
• Recent talks by Steve Keen. Sometime in the 1980s, I too discovered if I wanted to learn about economic theory, I would be better off in a library than reading mainstream textbooks.

Greg Mankiw Should Try To Make A Honest Living

A Discussion On The Best (or Worst) Of Mankiw

Peter Bofinger has expanded a series of tweets to point out some stuff that is just wrong in Mankiw's introductory textbook. The video above is a virtual panel discussion in which Mankiw graciously pretends to respond to Bofinger. Rüdiger Bachmann and Anna Reisch also participate. I do not know the host, Thomas Fricke. Questions from the audience are fielded towards the end. I concentrate on Sascha Buetzer (1:07:45) below. Other questions are from Janina Urban (1:18:41) and Thomas Kopp (1:21:29). I am probably missing something.

I wonder whether Anna Reisch knows about Adolph Lowe's political economics. I know of this through his 1965 book On Economic Knowledge. I gather Lowe thought it was the task of economists to say whether a given end state is internally consistent and to explain how it could be reached.

I want to point out some hypocrisy from Mankiw. He does not even bother arguing that Bofinger has pointed out confusion and nonsense in his textbook. He says that he sees his job as presenting the consensus of mainstream economics, not his own theories. He tries to minimize the imposition of his own idiosyncrasies. Now Buetzer is, if I hear correctly, the senior advisor to the German director to the International Monetary Fund (IMF). Buetzer offers the difficult proposition that "textbooks should strive to be factually correct." And one of his points is that, "all modern empirical evidence ... point to ... there is no equity-efficiency tradeoff from moderate levels of redistribution, but rather the opposite." This is the "mainstream in mainstream institutions". Does Mankiw say he will then update his textbook in the next edition to reflect the mainstream view? Of course not. He starts presenting his own idiosyncratic reasons for rejecting empirical evidence.

Economists should strive not to teach falsehoods and nonsense and not to promote the teaching of falsehoods and nonsense. Maybe Mankiw is correct that if he discarded from his textbooks stuff that is, at best, just wrong, his textbooks would not sell as well. That is no justification for retaining balderdash. Although Mankiw may disagree, he is not entitled to an income from textbooks.

On The Empirical Verification Of The Cambridge Capital Controversy

1.0 Introduction

My consistent position is that Sraffa and his followers, besides recovering an alternate approach to value and distribution found in classical economics and Marx, demonstrated the logical invalidity of marginalist economics. Empirical results are irrelevant to questions of logical validity.

Wage curves, as constructed from input-output matrices, are rational functions with the numerator and denominator both being some high order polynomial functions. I would have liked to see some more wobbles in those constructed empirically and more examples of reswitching and capital-reversing. Nevertheless, the finding that frontiers are close to linear functions, with only a few switch points, is not consistent with an emphasis on widespread marginal adjustments. It is more consistent with Marx's theory of value and Joan Robinson's understanding of technical change, in which the question of the choice of technique at a given moment in time is, at most, a secondary concern. Schefold's recent work (Schefold 2013, Schefold 2016, Götz and Schefold 2020) with random matrices is of interest here for trying to explain the empirical posts.

I have written about empirical results before. In this post I concentrate on Zambelli (2018) as the most recent, most extensive empirical examination of input-output matrices. See also the comments on Zambelli's work in Götz and Schefold (2020).

2.0 Progress in Empirical Research Work

Increased computer power and more complete consistent national income and product accounts (NIPAs) has supported empirical research. If I recall correctly, Ochoa (1987) looks at wage curves as based on input-output matrices from different times. He looks for pairs that intersect more than onec.

In looking at such a pair, however, many more wage curves are available. One can construct input-output matrices, with one process for each industry, where the processes are not all from one matrix but combine processes among industries from the different matrices. Han and Schefold (2006) take this approach.

But this is not all. One need not limit oneself with processes from pairs of wage curves. One should look at the full range of techniques, where the process for each industry might be from any input-output matrix in your database. Zambelli (2018), in following this approach, uses an algorithm that he and his colleagues cleverly constructed to select the wage curves on the frontier, thereby keeping the combinatorial explosion in this approach somewhat under control.

Ideally, one would like internationally consistent classifications of industries in make and use tables and Leontief input-output matrices that include joint production. If the latter is not available, which it usually not, one needs consistent approximations for single-production. Since make and use tables, and the resulting Leontief input-output tables are typically price data, one needs price indices for industries or commodities. At what level of aggregation do some industries only appear in some tables? Many more questions arise here that are probably beyond me.

3.0 'Perverse' Phenomena

What supposedly 'perverse' phenomena should one look for in techniques formed out of empirical input-output matrices? I suggest instances of the reswitching of techniques, capital reversing, the reverse substition of labor, and the recurrence of processes in individual industries would be of interest. Reswitching on the frontier is sufficient, but not necessary for the occurrence of positive real Wicksell effects. I, like many others, define capital reversing (also known as reverse capital deepening) as equivalent to positive real Wicksell effects. Zambelli (2018), on the other hand, defines capital reversing to arise with positive real or price Wicksell effects.

I tend, in pointing out the invalidity of marginalist economics, to de-emphasize any concern with the direction of price Wicksell effects. As I understand it, the direction of price Wicksell effects is dependent on the selection of the numeraire. Also, I am aware of Burmeister's championing of Champernowne's chain index for capital. On the other hand, Baldone (1984) suggest this defense of mainstream economics fails. Fratini (2010) has an example with a continuous variation of techniques along the wage frontier and in which negative price Wicksell effects swamp positive real Wicksell effects, which I guess is a propos here.

4.0 Wage Frontiers and Aggregate Production Functions

I have been talking about wage frontiers and wage curves above. One can construct the aggregate production 'function', given the analysis of the choice of technique. In this analysis, one takes net output as of a given physical composition. It is convenient to take net output as the numeraire. The composition of capital goods varies at switch points, and their prices vary between switch points. At one point, though, Zambelli considers variations in the composition of capital goods between switch points, as I understand it. I relegate an explanation of what he is doing here to an appendix.

5.0 Conclusion

Zambelli (2018) is impressive empirical work. The failure of so-called neoclassical theory in 60 percent of the cases examined, as I understand it results, from a concentration on price Wicksell effects, which would not disconcert, for example, Burmeister. I also have difficulties with how Burmeister relates the aggregate production function to a problem of minimizing the value of aggregate capital.

Appendix: The Construction of a Microeconomic Production Function

I illustrate the construction of a production funcition as the solution of a maximization problem. A more general presentation would start with netput vectors and assume convexity. I briefly glanced at the appendix to chapter VI in Pasinetti (1977) in writing this.

For concreteness, suppose the managers of a firm have given quantities, x₁, x₂, and x₃, of three resources and know of four fixed-coefficient processes for producing a single commodity. The coefficicients of production for these four processes are:

(a_.j)^T = (a_{1, j}, a_{2, j}, a_{3, j}), j = 1, 2, 3, 4.

Let q_i, i = 1, 2, 3, 4, be the decision variables denoting how much output is produced with each process. Consider the linear following linear program (LP). Maximize output y:

y = q₁ + q₂ + q₃ + q₄

such that:

a_{1, 1} q₁ + a_{1, 2} q₂ + a_{1, 3} q₃ + a_{1, 4} q₄ ≤ x₁

a_{2, 1} q₁ + a_{2, 2} q₂ + a_{2, 3} q₃ + a_{2, 4} q₄ ≤ x₂

a_{3, 1} q₁ + a_{3, 2} q₂ + a_{3, 3} q₃ + a_{3, 4} q₄ ≤ x₃

q_i ≥ 0, i = 1, 2, 3, 4 = 1, 2, 3, 4.

The constraints express the condition that no more of a resource (also known as a factor of production) can be used than is given. Every process must be operated at a non-negative level. Let f express the solution of this LP as a function of factors of production:

y = f(x₁, x₂, x₃)

This is a discrete version of the production function for a given commodity. It has properties commonly assumed in marginalist economics. It exhibits constant returns to scale (CRS) and non-increasing marginal products. If one wanted to construct a production function differentiable everywhere, one could assume an uncountably infinite set of production processes.

I might as well write down the dual problem. It is to choose factor prices w₁, w₂, w₃ to minimize:

w₁ x₁ + p₂ x₂ + p₃ x₃

such that:

a_{1, 1} w₁ + a_{2, 1} w₂ + a_{3, 1} w₃ ≥ 1

a_{1, 2} w₁ + a_{2, 2} w₂ + a_{3, 2} w₃ ≥ 1

a_{1, 3} w₁ + a_{2, 3} w₂ + a_{3, 3} w₃ ≥ 1

a_{1, 4} w₁ + a_{2, 4} w₂ + a_{3, 4} w₃ ≥ 1

w₁ ≥ 0, w₂ ≥ 0, w₃ ≥ 0

For a solution of these two LPs, the values of their objective functions are equal. Factor prices are such that output is completely distributed among the owners of the resources whose services are used in producing the given commodity. If a constraint in the dual is met with inequality, the corresponding decision variable in the primal LP is set to zero. That process is not operated. If a constraint in the primal LP is met with an inequality, that resource is in excess supply and its price is zero. Even though you see no derivatives above, this is an exposition of an aspect of the theory of marginal productivity.

All the parameters and variables in the primal LP are in physical units (for example, bushels, tons, person-years). It does not make much sense to me in an aggregate production function, with output and arguments in price terms, to maximize the value of output for a given value of capital or to minimize the value of capital for a given value of output. Nevertheless, that is what Zambelli does in Section 5.3 of his paper. I suppose he wanted to present a comprehensive empirical exploration of aggregate neoclassical theory, taking its illogic as given.

References

• Baldone, Salvatore. 1984. From surrogate to pseudo production functions. Cambridge Journal of Economics 8: 271-288.
• Burmeister, E. 1980. Capital Theory and Dynamics. Cambridge: Cambridge University Press
• Fratini, Saverio M. 2010. Reswitching and decreasing demand for capital. Metroeconomica 61 (4): 676-682.
• Han, Zonghie and Bertram Schefold. 2006. An empirical investigation of paradoxes: reswitching and reverse capital deepening in capital theory. Cambridge Journal of Economics 30: 737-765.
• Kersting, Götz and Bertram Schefold. 2020. Best techniques leave little room for substitution: a new critique of the production function. Centro Sraffa Working Paper n. 47.
• Ochoa, E. M. 1987. Is reswitching empirically relevant? US wage-profit-rate frontiers, 1947-1972. Economic Forum 16: 45-67.
• Pasinetti, Luigi L. 1977. Lectures on the Theory of Production New York: Columbia University Press.
• Schefold Bertram. 2013. Approximate surrogate production functions. Cambridge Journal of Economics 37 (5): 1161-1184.
• Schefold Bertram. 2016. Profits equal surplus value on average and the significance of this result for the Marxian theory of accumulation.. Cambridge Journal of Economics 40 (1): 165-199.
• Zambelli, Stefano. 2018. The aggregate production function is NOT neoclassical. Cambridge Journal of Economics 42: 383-426.

Books To Make You More Muddled

I have not read all of these, and you might think I am being unfair with this post title. If you want critiques of post modernism, try the Amin and Eagleton referenced at the end of this post. Sokal, after the cited book, participated in interesting colloquia with those who were scholars of what he was attacking and mocking. If you want to see how little I know about this area, you can look at my posts on Gramsci, Foucault, Wittgenstein, or Zizek.

• Gellner, Ernest. 1959. Words and Things: A Critical Account of Linguistic Philosophy and a Study in Ideology. London: Gollantz.
• Gross, Paul R. and Norman Levitt. 1998. Higher Superstition: The Academic Left and its Quarrels with Science. Baltimore: John Hopkins Press.
• Hicks, Stephen R. C. 2004. Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault. New Berlin: Scholarly Publishing.
• Pluckrose, Helen and James A. Lindsay. 2020. Cynical Theories: How Activist Scholarship Made Everything about Race, Gender, and Identity - and Why This Harms Everybody. Pitchstone Publishing.
• Sokal, Alan and Jean Bricmont. 1998. Fashionable Nonsense: Postmodern Intellectuals Abuse of Science. New York: Picador USA.