Wednesday, December 31, 2014
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.
Friday, November 21, 2014
|Figure 1: Chapuchin Monkeys, Our Cousins|
What do we think about generalizations, validated partly with experiments with non-human animals, for economics?
Nicholas Georgescu-Roegen is an economist widely admired by heterodox economists. He quit the American Economic Association in response to their flagship publication, the American Economic Review, publishing articles on, if I recall correctly, pigeons. Researchers were trying to demonstrate that properly trained pigeons had downward-sloping demand curves. I gather they wanted to show income effects and substitution effects, as well, with these laboratory experiments.
On the other hand, are we not supportive of behavioral economists undermining utility theory? I am thinking of controlled experiments that demonstrate people do not conform to the axioms of preference theory. And some of these experiments, as illustrated in the YouTube video linked above, extend beyond humans.
I have a suggestion to resolve such a tension. One might want to treat investigations of humans as a naturalistic enterprise. If so, one would not want to impose an a priori boundary on the different constituents of minds. Whether some species of animals has some sense of self, expectations of the future, primitive languages, or what not should be found by empirical investigation. On the other hand, activities that depend on the existence of social institutions cannot be expected to be found in animals not embedded in any society. And demand curves, if they were to exist, would only arise in specific market institutions.Reference
- Philip Mirowski (1994). The realms of the Natural, in Natural Images in Economic Thought (ed. by P. Mirowski), Cambridge University Press.
Thursday, November 06, 2014
I have a new paper available on the Social Science Research Network:
Title: Income Distribution And A Simple Labor Theory Of Value: Empirical Results From Comprehensive International Data
Abstract: This paper presents the results of an empirical exploration, with data from countries worldwide, of Sraffian, Marxian, and classical political economy. Income distribution, as associated with systems of prices of production, fails to describe many economies. Economies in most countries or regions lie near their wage-rate of profits frontier, when the frontier is drawn with a numeraire in proportions of observed final demands. Labor values predict market prices better than prices of production do. Labor values also predict market prices better than they predict prices of production. In short, a simple labor theory of value is a surprisingly accurate price theory for economies around the world.
Saturday, November 01, 2014
Neoliberalism is a political project to remake the world into an unrealizable utopia. Neoclassical economics is a supposedly scientific effort to explain the world by its deviations from an unrealizable utopia. And they are both about how the world deviates from that utopia. This post is about this resemblance, not the differences, between neoliberalism and neoclassical economics.
This utopia consists of a society organized around markets1. These markets require government to define property rights and enforce contract law. But, in the utopia, they are not to be embedded in a broader institutional setting that prevents their supposedly free adjustment. Examples of government-imposed inference with such self-regulation include minimum wages, rent control, laws against price-gouging, usury laws, subsidies for farmers to limit the size of harvests so as to maintain their income, payments to the able-bodied unemployed2, and so on. Polanyi's claim is that such so-called interventions are bound to arise. The ideal which those enacting such laws were reacting against is unachievable, anyways. In the ideal, land, labor, and capital are treated as if they are only commodities. But land is the natural setting in which the economy takes place, and labor and capital involve social relations that cannot be reduced only to market relationships.
Both neoliberals and neoclassical economists often recognize their utopia must be constructed3, that it, will not emerge naturally, in some sense. The solution for problems with markets is said to be to construct more markets. I think about the tragedy of the commons, the theory of externalities4, 5, and the emphasis in neoclassical welfare theory on Pareto optimality. A paradigmatic policy recommendation, for both neoliberals and neoclassical economics, is the establishment of markets for pollution permits.Footnotes
- I have been reading Block and Somers (2014), and I read Polanyi (1944) more than a decade ago.
- Block and Somers approvingly cite revisionist history from Mark Blaug in the 1960s that challenged centuries-long interpretations of English Poor Laws, especially the Speedhamland system. I know Blaug through his (multi-edition) history of economics and his misrepresentations of Sraffians and the Cambridge Capital Controversy. So I was glad to see a cite where he seems to be correct.
- This emphasis on the need for government to construct markets, to my mind, is a distinctive difference between classical liberals and sophisticated neoliberals.
- Some mainstream economists defend themselves from critics by asserting that the critics attack a strawperson. Economists do not believe, they say, that markets are perfect. And they'll ask why are the critics not aware of the frequent teaching about externalities. This objection seems to me to be beside the point if neoclassical economists react, as many do, the existence of an externality by calling for policy for internalizing the externality (or, at least, imitating the result of such policies).
- If one accepted neoclassical economics as a positive science, how could one call for any policy conclusion without an explicit statement of normative values at some low level of abstration?
- Fred Block and Margaret R. Somers (2014). The Power of Market Fundamentalism: Karl Polanyi's CritiqueHarvard University Press.
- Karl Polanyi (1944). The Great Transformation: The Political and Economic Origins of Our Time.
Friday, October 31, 2014
I have been influenced by Lee's work on markup pricing (also known as full-cost pricing), the history of heterodox economics, and the suppression of heterodox economics by the mainstream through bullying and bureaucratic measures. I think highly of Lee's 2004 paper (written in collaboration with Steve Keen), "The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory". I can only find one blog post of mine referencing this paper. Lee promoted pluralism in economics.
Friday, October 24, 2014
I was surprised at how many reviews of Thomas Piketty's Capital in the 21st Century draw on the Cambridge Capital Controversy to argue that Piketty's theoretical framework is grossly inadequate.
- James K. Galbraith's Spring 2014 review in Dissent.
- Dean Baker last May.
- October 2014 special issue of the Real-World Economics Review.
- Tony Aspromourgos's Thomas Piketty, the future of capitalism and the theory of distribution: a review essay (October 2014) (H/T: David Fields).
- Javier Lopez Bernardo, Felix Lopez Martinez, and Engelbert Stockhammer's A Post-Keynesian Response to Piketty's 'Fundamental Contradiction of Capitalism' (October 2014) (H/T Lars P. Syll). This response brings up, in addition to the CCC, the Post Keynesian theory of distribution.
I like this Aspromourgos quote:
However classical the questions Piketty addresses, when he turns to explain the determination of r he has recourse to the conventional, post-classical marginal productivity theory of distribution: diminishing marginal capital productivity is 'natural' and 'obvious' (212–16). (He is much less willing to have recourse to time preference: 358–61; cf. 399–400.) The logical critique of capital aggregates – applied either at the macro or micro level – as supposed independent explanatory variables in the theory of profit rates, first coherently stated by Piero Sraffa (1960, pp. 81–7; see also Kurz and Salvadori 1995, pp. 427–67), is nowhere acknowledged or addressed. That such a relatively well-read economist as Piketty can so unhesitatingly apply this bankrupt approach, is testament to how completely a valid body of critical theoretical analysis can be submerged and forgotten in social science (a phenomenon for the sociologists of knowledge to contemplate). This is so, notwithstanding that Piketty offers a brief interpretation of the 'Cambridge' capital debates, making them turn upon the issues of whether there is substitutability in production (and associated flexibility of capital-output ratios), and whether or not 'growth is always perfectly balanced [i.e., full-employment growth]' (230–32). In fact, the participants on both sides of those debates were concerned with production systems in which substitution and capital-output variability occurred; and continuous full-employment growth was not entailed by recourse to orthodox, marginalist production functions, a point perfectly understood by the participants on both sides. -- Tony Aspromourgos
Update (27 October 2014): Added the Bernardo, Martinez, and Stockhammer reference.
Friday, October 17, 2014
This post presents a model of distribution that Luigi Pasinetti developed. It is one of a family of models. Other important models in this family were developed by Richard Kahn, Nicholas Kaldor, and Joan Robinson. These models have been extended in various ways and presented in textbooks. One can see this family as having extended work by Roy Harrod, and as being related to the work of Michal Kalecki and even of Karl Marx.2.0 The Model
Consider a simple closed economy with no government. All income is paid out in the form of either wages or profits:
Y = W + P,
where W is total wages, P is total profits, and Y is national income. Total savings is composed of savings by workers and by capitalists, where capitalists are a class whose members receive income only from profits:
S = Sw + Sc
S is total savings. Sw is workers' savings, and Sc is capitalist savings. Profits are also split into two parts:
P = Pw + Pc,
where Pw is returns on the capital owned by the workers, and Pc is the return on the capital owned by the capitalists. The behavior assumption is made that both workers and capitalists save a (different) constant proportion of their income:
Sc = sc Pc
Sw = sw (W + Pw)
sc is the capitalists' (marginal and average) propensity to save. sw is the workers' (marginal and average) propensity to save. The propensities to save are assumed to lie between zero and one and to be in the following order:
0 ≤ sw < sc ≤ 1
Workers' savings are assumed to be insufficient to fund all the investment occurring along a steady-state growth path.
The value of the capital stock is divided up into that owned by the workers and by the capitalists:
K = Kw + Kc,
where K is the value of the capital stock, Kw is the value of the capital stock owned by the workers, and Kc is the value of the capital stock owned by the capitalists2.2 Steady State Equilibrium Conditions
Along a steady-state growth path, in this model, all capital earns the same rate of profits, r:
r = P/K = Pc/Kc = Pw/Kw
It follows from the above set of equations that the ratio of the profits received from the workers to the profits received by the capitalists is equal to the ratio of the value of capital that each class owns:
Pw/Pc = Kw/Kc
Likewise, one can find the ratio of total profits to the profits obtained by the capitalists:
P/Pc = K/Kc
The analysis is restricted to steady-state growth paths where the value of the capitalists' capital and the value of the workers' capital is growing at the same rate:
S/K = Sc/Kc = Sw/Kw
The ratio of profits to savings is the same for the economy as a whole and for workers:
P/S = (P/K)/(S/K) = (Pc/Kc)/(Sc/Kc) = Pc/Sc
Or, after a similar logical deduction for workers:
P/S = Pc/Sc = Pw/Sw
Along a steady-state growth path, planned investment, I equals savings:
I = S2.3 Deduction of the Cambridge Equation
The following is a series of algebraic substitutions based on the above:
P/I = P/S = Pc/Sc = Pc/(sc Pc) = 1/sc
P = (1/sc) I
The share of profits in national income is determined by the savings propensity of the capitalists and the ratio of investment to national income:
(P/Y) = (1/sc) (I/Y)
Recall that the rate of profits is the ratio of profits to the value of capital:
r = P/K = (1/sc) (I/K)
Recognizing that I/K is the rate of growth, g, one obtains the famous Cambridge equation:
r = g/sc
As long as the capitalists consume at least some of their income, the rate of profits is greater than the rate of growth along a steady-state growth path. And along such a path the share of income going to profits will be constant.3.0 Discussion
If one assumes given investment decisions, the Cambridge Equation tells us what rate of profit is compatible with a steady state growth path in which the expectations underlying those investment decisions are satisfied.
Consider two steady states in which the same rate of growth is being obtained. Suppose that along one path workers have a higher propensity to save. Within broad limits, this greater willingness to save among workers has no effect on determining either the share of profits in income or the rate of profits. Only the capitalists' saving propensity matters for the steady state rate of profits, given the rate of growth. Would a capitalist economy have a tendency to approach such a growth path, given a sufficient length of time? I think such stability would entail the evolution of institutions, conventions, the labor force, and what is seen as common sense, including among dominant political parties.
The above model might have some relevance to current political economy discussions elsewhere.