Wednesday, January 01, 2020

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.

Friday, August 23, 2019

Economists Insulting Me And Insulting Keynes

I happen to think the minimum wage in the United States should be raised. I'll go along with the consensus of $15 an hour.

I also happen to know that, even under ideal conditions, wages and employment cannot be explained by supply and demand.

Some economists, who I have no (other) reason to disrespect, seem to think my true statement about labor economics can be discredited by attacking my motivations. So they point out how, under (incoherent) neoclassical theory, higher minimum wages can be justified by, for example, the theory of monopsony. But my motivations are almost the opposite. I take the evidence that neoclassical economics is wrong about labor markets as a launching pad into the illogic of mainstream economics. (Is this the most recent meta-analysis on minimum wages?)

The attack, based on motive, is insulting. One might think a point of logic cannot be discarded by presuming that it was made because of a desired political conclusion. But enough about me. I want to talk about how John Maynard Keynes was attacked in a similar way.

Some may portray the Keynesian revolution as about policy. The point is to demonstrate that fiscal or monetary policy can be effective in the short run, while prices and quantities are adjusting to a long run equilibrium in which all markets, including the labor market, clear. But Keynes is clear that his book about is about theory, not policy:

"This book is chiefly addressed to my fellow economists. I hope that it will be intelligible to others. But its main purpose is to deal with difficult questions of theory, and only in the second place with the applications of this theory to practice." -- the first three sentences in (the preface to) The General Theory of Employment Interest and Money (Keynes, 1936).

And sticky prices is characteristic of the theory that he is rejecting:

"For the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on the rigidity the blame of maladjustment." -- Keynes, 1936: p. 257.

So, insofar as the Keynesian revolution was about, say, fiscal policy it was a counterrevolution against Keynes' ideas.

I realize that economics can have great practical effects, for good or ill. Some, perhaps, want to advocate policies which they deem good. Rather than trying to tilt at windmills, they may think it more worthwhile to show how one can argue for such policies within orthodox theory. I hope some who do this are not merely trying to ensure they retain access to levers of power. If one puts on a mask long enough, one risks becoming what one pretends to be. The understanding of capitalism is not advanced in any way at all. Suppose one thinks about policy with simple models. Then, when one has a conclusion, one bows to the orthodoxy and appends a superfluous shell of constrained maximization. (I haven't read the book in the link.) If this is typical among a population of mainstream economists, outsiders may wonder what is the point of all that mathematics and supposed science?

Saturday, August 17, 2019

Reswitching, Recurrence, And The Incoherence Of The Marginal Productivity Theory Of Distribution

Blair Fix argues that economists argue in a circle in putting forth the marginal productivity theory of distribution. I know that there is no such consistent theory anyways. It occurs to me that process recurrence, as well as the reswitching of techniques, can be used to demonstrate this inconsistency.

Suppose you completely know the technique being used in an economy to produce its output. And, which is even more impossible, you know all other possible techniques. I am thinking of a technique being specified with something like a Leontief input-output matrix, in physical terms. Assume, counterfactually, that all these techniques exhibit constant returns to scale. With these assumptions, you know the physical marginal product of each input into production, whether it is previously produced or not. (In my favorite way of specifying technology, marginal products are typically intervals, not derivatives.)

The reswitching of techniques shows that one cannot necessarily uniquely map from technology and the technique in use to the functional distribution of income. Wages, for example, are not determined by the marginal product of labor. With reswitching, the same technique is adopted for different (ranges of) wages, with other techniques being cost-minimizing in-between. For both ranges in which the technique is adopted, the same inputs are used in each industry, per unit output. Productivity and marginal products are the same, in physical terms. Yet the value of marginal products, in price terms, can be vastly different. How then can the price of factors of production be said to be determined by marginal productivity?

The same argument applies at the level of a single industry. Suppose the process in use to provide the output of an industry is known. Likewise, all other processes that may be used in that industry, at the given level of technology, is assumed known. With process recurrence, the process in use is adopted at different levels of wages, with other processes being cost-minimizing in-between. Once again, one can see that the prices of factor inputs are not determined by marginal productivity.

Process recurrence is more general than the reswitching of techniques. Reswitching implies recurrence, but recurrence can happen without reswitching. Arrigo Opocher and Ian Steedman have further generalized recurrence to individual coefficients of production. As I understand it, he amount of iron ore required as input per ton steel produced by the steel industry can recur without the whole process of production recurring in the steel industry.

Anyways, no competent economist nowadays accepts the marginal productivity theory of distribution. But many economists might teach incoherent nonsense to students, all the same.

Tuesday, August 06, 2019

Structural Economic Dynamics And Reswitching In A One-Good Model

This post, as suggested, extends this one-good example. I assume a constant returns-to-scale technology, as specified in Tables 1 and 2. Labor is advanced to the capitalists, and wages are paid out of the surplus at the end of the year (period of production). The capitalists (incorrectly) expect the technology in existence at the start of the year to continue to exist. I assume prices of (re)production prevail.

Table 1: Inputs for The Technology
InputProcess
(I)(II)(III)
Labor30 eσ0,1(1 - t)180 eσ0,2(1 - t)(39/2) eσ0,3(1 - t)
New Widgets100
One-Year Old Widgets010
Two-Year Old Widgets001

Table 2: Outputs for The Technology
OutputProcess
(I)(II)(III)
New Widgets3 eσ1,1(t - 1)(7/4) eσ1,2(t - 1)(237/20) eσ1,3(t - 1)
One-Year Old Widgets100
Two-Year Old Widgets010

Only a newly produced widget is a consumer good. Old widgets can be used in production for two more years. The economic lifetime of a widget (machine) may be less than its physical life. Free disposal is assumed. I define techniques:

  • Alpha: The widget is discarded after one year.
  • Beta: The widget is discarded after two years.
  • Gamma: The widget is discarded after three years.

The specification of technology allows for productivity to increase in each process, both because labor is saved and because more output is produced with a unit input of widgets. Figure 1 shows one of my pattern diagrams, in which the specification of increased productivity results from reducing the parameter space to three dimensions.

I identify two of my patterns in this diagram, a pattern over the wage axis and a reswitching pattern. In Region 2, reswitching occurs. Around the switch point at the lower rate of profits, a higher rate of profits is associated with a truncation of the economic life of a machine to one years. This logical possibility contradicts Austrian capital theory, in which a scarcity of capital results in a higher rate of profits and a longer period of production. In circulating capital models, the switch point at the lowest rate of profits is 'non-perverse', unlike here. I thing Ian Steedman made the same observation decades ago.

Tuesday, July 30, 2019

Structural Economic Dynamics, Markups, Real Wicksell Effects, And The Reverse Substitution Of Labor

I am being published in Structural Change and Economic Dynamics. Currently, this link is without my corrections to proofs, I guess.

Research highlights:

  • Technical progress and variations in industry markups can change characteristics of the labor markets.
  • A numeric example illustrates the theory of the choice of technique.
  • In the example, switch points are created and destroyed with varying coefficients of production and varying markups.
  • Around some switch points, higher wages are associated with greater employment, given the level of net or gross output
  • Graphical displays are provided for visualizing these results.

Abstract: This article presents an example in which perturbations in relative markups and technical progress result in variations in characteristics of the labor market. Around a switch point with a positive real Wicksell effect, a higher wage is associated with firms wanting to employ more labor per unit output of net product. Around a switch point with a reverse substitution of labor, firms in a particular industry want to hire more labor per unit output of gross product. Technical progress and variations in markups can bring about and take away circumstances favorable for workers wanting to press claims for higher wages. This article presents specific fluke switch points in which variations in technology and markups change these circumstances, as well as novel diagrams for visualizing the effects of such variations.

Tuesday, July 23, 2019

No Such Thing As The Natural Rate Of Unemployment

I know that the idea of a "natural rate" of unemployment or a non-accelerating inflation rate of unemployment (NAIRU) makes no sense. I cite, for example, James Galbraith's 1998 book, Created Unequal: The Crisis in American Pay. I think Colin Rogers' 1989 book is related.

Jared Bernstein gives the idea of a natural rate of unemployment at the first of four examples of ideas that [mainstream] economists have gotten wrong for decades. This is not the first example of a case where Post Keynesians (and only Post Keynesians(?)) could explain an empirical phenomenon decades in advance.

Friday, July 19, 2019

Harrod-Neutral Technical Progress and Fluke Switch Points

Figure 1: A Pattern Diagram

I have put up a working paper with the post title.

Abstract: This article considers Harrod-neutral technical progress in the context of an analysis of the choice of technique. In a model of the production of commodities by means of commodities, neutral technical change is compatible with the reswitching of techniques, capital reversing, process recurrence, and the reverse substitution of labor. A taxonomy of fluke switch points is applied to an example, illustrating how these phenomena can arise and vanish in the course of neutral technical progress.

I get various fluke switch points, as is typical of my examples. By assuming Harrod-neutral technical change, I end up with the structure in Figure 2, in one slice of the parameter space.

Figure 2: A Two-Dimensional Pattern Diagram