Qualms On Foreign Trade

"7.5. The idea that the opening of foreign trade bears a close resemblance to technical progress, in that in both cases additional processes of production are made available to the economy, is clearly expressed in Ricardo's Principles in the chapter 'On Foreign Trade'... Ricardo in fact compares the extension of trade to improvements in machinery, and, taking the real wage rate as given, investigates whether trade or improved machinery will have an impact on the general rate of profit. He concludes that if 'by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise,' whereas 'if the commodities obtained at a cheaper rate... be exclusively the commodities consumed by the rich, no alteration will take place in the rate of profits'...

7.6. In recent years the pure theory of trade has been reformulated, using a 'classical' approach to the theory of value and distribution and paying special attention to the fact that capital consists of produced means of production. A start was made by Parrinello (1970), followed by several contributions by Steedman, Metcalfe and Steedman, and Mainwaring... It was shown that several of the traditional trade theorems, derived within the Heckscher-Ohlin-Samuelson model, do not carry over to a framework with a positive rate of profit (interest) and produced inputs (capital goods). (As is well known, the Heckscher-Ohlin-Samuelson model of international trade assumes two countries producing the same two commodities by means of the same constant returns to scale technology, using the same two primary inputs, each of which is taken to be homogeneous across countries.) With a positive rate of interest that is uniform across countries some, though not all, of the standard theorems are undermined (including the 'factor price equalization theorem'), while with different rates of interest in different countries all standard theorems except the Rybczynski theorem turn out to be untenable. The 'gains' from trade for the single small open economy need not be positive. When in the Heckscher-Ohlin-Samuelson theory one of the two primary factors (land) is replaced by a factor called 'capital', the 'quantity' of which is represented in terms of a given total value of capital, then the theory is deprived of its logical coherence..." -- Heinz D. Kurz and Neri Salvadori, Theory of Production: A Long-Period Analysis, Cambridge University Press, 1995.

P.S. Some mainstream economists have recently expressed doubts about the empirical ability of the theory of comparative advantage and its use as a basis for policy. One can add Paul Krugman to the doubters.

Hoisted From Comments: Query On Foreign Trade

A reader asks:

"This is an unrelated discussion, but I was hoping that maybe you (or someone else reading this forum) could help me with a question that may also be of interest to you.

How does a standard neo-Walrasian CGE (computational general equilibrium) model predict economic losses from trade liberalisation?

I understand the logic behind the two goods and country case where welfare gains can be made through the elimination of trade barriers if there exists a comparative advantage (assuming the standard assumptions of perfect competition, constant returns to scale etc.), but how does the logic work with more than two countries and goods?

Is the answer simply that those countries which do not have a comparative advantage (in any or critical goods), experience welfare losses, because they are now importing more (due to lower prices abroad) and exporting less (trade is being diverted to other countries)?

Most (if not all) countries when getting the CGE treatment with full liberalisation scenarios, seem to make welfare gains. Is this because most countries have at least some comparative advantage in some goods, and the theory neglects any adjustment and transaction costs?

Some background on this question: I'm not an economist by trade, but rather study development studies, for which I'm writing a Master's Thesis. My strategy has been to use the Lakatosian methodological framework for studying the hardcore assumptions behind general equilibrium analysis. This has led me to study for example Keen's work, and Fabio Petri's (on the capital controversies) among others. Since I'm not concentrating on heuristics (and I'm not particularly mathematically inclined), I'm not familiar with all the implications of the standar neo-Walrasian theory (e.g. Arrow-Debreu) that the criticism, quite rightly it seems, is able to destroy by attacking its inconsistent or absurdly narrowed assumptions. To the standard unacquainted reader (for example my supervisor) it is however perhaps not only enough to attack the assumptions, but also be able to reduce the theory via its implications. I'm thinking that for a conclusion, I could write up a kind of characterisation of what the theory implies in the narrow sense and a wish list of what problems a perfect economic theory would be able to cover and account for as a contrast (perhaps a distant dream, but why not?)

Any ideas on the above would be appreciated.."

I don't know much about CGE models. I understand that commodities can be indexed in the Arrow-Debreu model on space, and this provides a theory of foreign trade. In the Arrow-Debreu model, the initial endowments of all commodities are taken as given data. This makes it a very short run theory. I was under the impression that the traditional argument about comparative advantage takes place in the Heckscher Ohlin Samuelson (HOS) model, which is a long run model.

Given the presence of produced capital goods and a positive interest rate, many supposed theorems in the HOS model are simply incorrect. In particular, trade according to the pattern of comparative advantage can move a country's Production Possibilities Frontier inward. Ian Steedman is a good author to read here. Perhaps your university library has a copy of the New Palgrave, and Steedman wrote the entry on "Foreign Trade". (I talked to Keen about these ideas before the publication of his book. He said that if he writes another edition, he might put in a chapter on foreign trade.)

I don't think comparative advantage explains the pattern of trade. A theory based on the Keynesian multiplier is another possibility. Literature here includes Luigi Pasinetti's Structural Economic Dynamics: A Theory of the Economic Consequences of Human Learning (Cambridge, 1993). Paul Davidson has proposed some reforms of the international monetary system. I have not read Ha-Joon Chang, neither his Bad Samaritans nor his Kicking Away the Ladder.

Two PDFs that I have downloaded from somewhere or other in the past year and have never got around to reading might be of interest. I am talking about Roberto Mangabeira Unger's Free Trade Reimagined and Robert Driskill's "Deconstructing the Argument for Free Trade".

Another body of literature that I have never explored is new trade theory, as presented by Paul Krugman. Given that comparative advantage fails to justify free trade, I don't see the point of that theory. As I understand it, new trade theory asserts incorrectly that comparative advantage would provide this justification if it were not for increasing returns or oligopoly or something. According to Barkley Rosser (in a 1996 book review in the Journal of Economic Behavior and Organization), Krugman claims more originality for his presentation than can be justified.

Anger Can Be Power

What I'm reading:

"The colonial world is a world cut in two. The dividing line, the frontiers are shown by barracks and police stations. In the colonies it is the policeman and the soldier who are the official, instituted go-betweens, the spokesmen of the settler and his rule of oppression. In capitalist societies the educational system, whether lay or clerical, the structure of moral reflexes handed down from father to son, the exemplary honesty of workers who are given a medal after fifty years of good and loyal service, and the affection which springs from harmonious relations and good behavior - all these aesthetic expressions of respect for the established order serve to create around the exploited person an atmosphere of submission and of inhibition which lightens the task of policing considerably. In the capitalist countries a multitude of moral teachers, counselors and 'bewilderers' seperate the exploited from those in power. In the colonial countries, on the contrary, the policeman and the soldier, by their immediate presence and their frequent and direct action maintain contact with the native and advise him by means of rifle butts and napalm not to budge. It is obvious here that the agents of government speak the language of pure force. The intermediary does not lighten the oppression, nor seek to hide the domination; he shows them up and puts them into practice with the clear conscience of an upholder of the peace; yet he is the bringer of violence into the home and into the mind of the native." -- Frantz Fanon, The Wretched of the Earth (1963).

Wages, Employment Not Determined By Supply And Demand

1.0 Introduction
One theme of this blog is that the introductory textbook model of the labor market is incorrect. Two recent papers make this point from the perspective of institutional economics.

2.0 The Impossibility of a Perfectly Competitive Labour Market
The abstract of the first paper under consideration states:

Using the institutional theory of transaction costs, I demonstrate that the assumptions of the competitive labour market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labour market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labour demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction costs and with zero transaction costs all labour is hired as independent contractors, implying that multi-person firms, the employment relationship and labour market disappear. With positive transaction costs, on the other hand, employment contracts are incomplete and the labour supply curve to the firm is upward sloping, again causing the labour demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price. -- Bruce E. Kaufman (2007). "The Impossibility of a Perfectly Competitive Labour Market", Cambridge Journal of Economics, V. 31: 775-787

Kaufman states that, "Institutional, post-Keynesian, radical and other heterodox economists have for many years expressed scepticism about the theoretical and empirical validity of the competitive model of labour markets." He cites the following literature:

• C. Kerr (1950). "Labour Markets: Their Character and Consequences", American Economic Review, V. 40 (May): 278-291
• G. Hodgson (1988). Economics and Institutions: A Manifesto for a Modern Institutional Economics, Philadelphia: University of Pennsylvania Press.
• D. Vickers (1996). "The Market: The Tyranny of a Theoretical Construct", in Employment, Economic Growth, and the Tyranny of the Market, (ed. by P. Aretis), Brookfield: Edward Elgar
• W. Streeck (2005). "The Sociology of Labour Markets and Trade Unions", in The Handbook of Economic Sociology (ed. by N. Smelser and R. Swedberg), 2nd edition, New York: Russel Sage
• S. Fleetwood (2006). "Rethinking Labour Markets: A Critical-Realist-Socioeconomic Perspective, Capital & Class, V. 107 (Summer): 59-89

As far as I can tell, none of these papers are about the Cambridge Capital Controversy, which is the basis of my favorite critique of the introductory textbook model of labor markets.

3.0 Professor Lester and the Neoclassicals
The abstract of the second paper follows:

"This article revisits what is remembered as the 'Marginalist Controversy' in light of its immediate context and object: the substantial late 1940s increase in the federal minimum wage. Richard Lester's critique of 'marginalist theory,' and its implication that the minimum wage would be detrimental to labor was founded upon empirical studies and surveys that supported an Institutionalist conception of the business firm, the labor market, and economic policy. His disputants, Fritz Machlup and George Stigler, countered his points on the basis of what they took to be 'economic theory'. By any measure, including those of their own intellectual allies, Machlup and Stigler faired poorly. Interestingly, they are collectively remembered as having been triumphant in this debate. The essay suggests that what triumphed was not their arguments but rather the Neoclassical school of economics that Stigler represented." -- Robert E. Prasch (2007). "Professor Lester and the Neoclassicals: The 'Marginalist Controversy' and the Postwar Academic Debate Over Minimum Wage Legislation: 1945-1950", Journal of Economic Issues, V. 41, N. 3 (September): 809-826."

I had not known that the context of the debate about full cost pricing included minimum wage policies. Prasch makes the point that neoclassicals often misrepresent their position as a defense of economic theory, instead of as of a specific theory. In addition to drawing on a specific school of thought, Institutionalist economics, Lester had survey data supporting his position that the typical firm does not operate in a region of increasing marginal cost. It is this sort of data, which has been repeatedly replicated, that Milton Friedman argued, in his famous paper on positive economics, should be ignored.

History Is A Nightmare From Which I Am Trying To Awake

Last year I bought my 12-year-old niece a novel. My sister-in-law says that as far as books goes, my niece likes memoirs and history, like The Diary of Anne Frank. I ended up buying my niece something other than a book. But I wonder what would be a good book to buy my niece.

I presented this to the salesperson at Barnes and Noble as, "Suggest a book like the Diary... about a girl growing up in troubled circumstances. She suggested Smashed: Story of a Drunken Girlhood. This does not seem a good answer to me. I haven't read Zailckas' book. From a review, I know she went to Syracuse University, and, for some reason, I think she may be a product of the Syracuse creative writing program. I have a vague impression that that program is quite good. The authors I associate with it write well about drunkenness and drugs.

I could always loan my niece a book from my collection. Perhaps my niece would like Eric Hobsbawm's The Age of Extremes: A History of the World, 1914-1991. I find the Russian names in Hope Against Hope confusing, even with the translator's or editor's appendix. Likewise, I think Antonio Gramsci's Letters from Prison is not understandable without quite a bit of knowledge of the historical setting. I seem to have mislaid my copy of Biko. I just bought The Mascot: Unraveling the Mystery of My Jewish Father's Nazi Boyhood and will not lend that away until I have read it.

I've loaned my copy of A Long Way Gone: Memoirs of a Boy Soldier to a young friend of mine. This was his choice in a selection I thought of after he told me about a somewhat autistic kid in his class: "He's even better at math than I am." I think I talked him out of The Curious Incident of the Dog in the Night Time by trying to explain the concept of a unreliable narrator. I don't seem to be able to sell Life As We Know It: A Father, A Family, And An Exceptional Child, including to my sister, who has children and a degree from University of Illinois at Urbana-Champaign.

A salesperson at Borders suggested Zlata's Diary: A Child's Life in Wartime Sarajevo. A librarian in Rome, NY, suggested Four Girls From Berlin: A Ture Story of a Friendship That Defied the Holocause and two novels: The Devil's Arithmetic and The Diary of Pelly D. Come to think of it, isn't the Speilberg film, The Empire of the Sun, based on a memoir?

Does anybody have any comments on any of the above books or any further suggestions?

Jeopardy!

The answer for 42-across in today's New York Times crossword puzzle is "Larry Summers". What do you think the clue should be? Will Shortz, the puzzle editor and an institution, is content with "Former president of Harvard". I think being former secretary of the treasury is more impressive, myself.

Rich Man Wanna Be King, And A King Ain't Satisfied 'Til He Rules Everything

I have a series of posts on the distribution of income, the distribution of wealth, income mobility, and related matters. I don't know Lane Kenworthy's work, but his blog, "Consider the Evidence", looks interesting. He describes himself as "a social scientist who studies causes and consequences of poverty, inequality, employment, mobility, economic growth, and social policy. [He] focus[es] mainly on the United States and other affluent countries."

More To Read

Apparently, Andrew Trigg has written a book Marxian Reproduction Schema: Money and Aggregate Demand in a Capitalist Economy (Routledge, 2006) on the topics of my post. He relates Marx's schemes for simple and expanded reproduction to Keynes' theory of effective demand, Kalecki's idea that capitalists "get what they spend", input-output analysis, and post-war growth models. At least a chapter discusses money and finance in this approach, including circuitist models. In my exposition, I put aside the labor theory of value. Trigg, on the other hand, discusses the transformation problem and whether or not a tendency exists for the rate of profit to decline.

I don't know if I'll purchase this book. Mike Beggs should be interested in it.

It's Never Enough Until Your Heart Stops Beating

Aaron Swartz quotes a paper by Louis Pascal posing a thought experiment. I wonder if many find this argument emotionally unsatisfying. It doesn't feel that one causes the starvation of others just by consuming one's income. And, although giving to charity may help a few, nothing is systematically changed.

But perhaps this is all self-justification. Aaron's argument reminds me of some of Blaise Pascal's mockery of the Jesuits. It is hard to approach how Pascal says they made morality all too easy to live up to:

"I mentioned, at the close of my last letter, that my good friend, the Jesuit, had promised to show me how the casuists reconcile the contrarieties between their opinions and the decisions of the popes, the councils, and the Scriptures. This promise he fulfilled at our last interview, of which I shall now give you an account.

'One of the methods,' resumed the monk, 'in which we reconcile these apparent contradictions, is by the interpretation of some phrase...'

'Take another instance: It is said in the Gospel, "Give alms of your superfluity." Several casuists, however, have contrived to discharge the wealthiest from the obligation of alms-giving. This may appear another paradox, but the matter is easily put to rights by giving such an interpretation to the word superfluity that it will seldom or never happen that any one is troubled with such an article. This feat has been accomplished by the learned Vasquez, in his Treatise on Alms, c. 4: "What men of the world lay up to improve their circumstances, or those of their relatives cannot be termed superfluity; and accordingly, such a thing as superfluity is seldom to be found among men of the world, not even excepting kings." Diana, too, who generally founds on our fathers, having quoted these words of Vasquez, justly concludes, "that as to the question whether the rich are bound to give alms of their superfluity, even though the affirmative were true, it will seldom or never happen to be obligatory in practice."'" -- Blaise Pascal, "Letter VI", Provincial Letters (trans. by Thomas M'Crie

(Letter XII is also on topic.)

One can react in various ways to the raw need that prevails so much throughout the world. I don't think I am very charitable, but you would think otherwise based on the organizations that feel it is worth their while to send me solicitations. A friend of mine adopted several children and founded his own charity. I never asked him his motivation.

Simple and Expanded Reproduction

1.0 Introduction
This post presents a model in which a capitalist economy smoothly reproduces itself. The purpose of such a model is not to predict that capitalist economies will converge to some such path as illustrated in the model. Rather, the model provides a basis for the analysis of where things can go wrong.

This sort of model has a long history. My exposition is close to Marx (1956), with the difference that Marx sets out the conditions of simple and expanded production in terms of labor values, not in terms of prices of production. Rosa Luxemburg (1951) and Michal Kalecki (1969) used Marx's department break-down to develop a Keynes-like model of the long run and the short run. Shigeto Tsuru (1942) apparently exposed this model to english-speaking academics when few were looking at Marx's analysis. Joan Robinson (1962) drew on these ideas, among others, in her models of metallic ages. Goodwin's generalization (1949) of Keynes to a multisectorial model and Pasinetti's (1981, 1993) analyses of vertically integrated sectors also seem to me to bear family resemblances to this model. Doubtless, my references could be extended in many directions.

Table 1: Definition of Variables

Variable	Definition
	The person-years of labor hired per unit output (e.g., ton steel) in the first sector.
	The person-years of labor hired per unit output (e.g., bushel corn) in the second sector.
	The capital goods used up per unit output in the first (steel-producing) sector.
	The capital goods used up per unit output in the second (corn-producing) sector.
	The price of unit output in the first sector.
	The price of unit output in the second sector.
	The rate of profits.
	The savings rate out of profits.
	The wage, that is, the price of hiring a person-year.
	The number of units (tons steel) produced in the first sector.
	The number of units (bushels corn) produced in the second sector.

2.0 Two Departments
This model considers a capitalist economy with no government and no foreign trade. The outputs of this economy are grouped into two great departments. In the first department, capitalists direct workers to produce means of production (also known as capital goods) with the means of production in that department. In the second department, the workers are directed to produce means of consumption (also known as consumption goods) with the means of production in that department.

For ease of exposition, I make certain additional simplifying assumptions. The workers consume all of their wages. Only the capitalists save, and they save only in the case of expanded reproduction. All capital is circulating capital. That is, there is no fixed capital, such as long-lived machinery. In other words, all capital goods are totally used up each year in producing the yearly output. No technological innovations are introduced.

I think introducing technological innovations and fixed capital makes the possibility of smooth reproduction more incredible. A govenrment can be introduced as a third department, or perhaps by dividing government output among the two departments shown. Foreign trade introduces the possibility of correcting imbalances in domestic demand from outside the domestic economy. But then one could recast the model as of the world economy.

3.0 Prices
A necessary condition for smooth reproduction of a competitive capitalist economy is that the same rate of profit be made in all departments. Otherwise, some capitalists are finding that the expectations on which investments were made are being unfulfilled. They would want to have contracted some departments and expanded others. I also impose the condition that spot prices remain stationary. Equations 1 and 2 express these conditions:

(1)

(2)

I suppose one could put time indices on the prices in Equations 1 and 2, thereby defining a dynamic system for prices. Suppose distribution and the ratios of physical quantity flows remain unchanged year after year. Then the steady-state prices expressed in Equations 1 and 2 (without time indices) would be a limit point of the dynamic process so defined. It is this caveat, I think, that allows me to ignore that constant prices are, perhaps, not a necessary condition for smooth reproduction.

Table 2: Values of Outputs By Department and Distribution

Department	Capital	Wages	Profits
Capital Goods
Consumption Commodities

4.0 In Balance
4.1 Simple Reproduction
The economy is in simple reproduction when it is replicated on the same scale year after year. A necessary condition for an economy in simple reproduction is that the production of capital goods each year be equal to the capital goods used up each year. In the model shown here, the value of the capital goods used up each year must equal the value of the output of the first department:

(3)

Equation 3 can be simplified:

(4)

Equation 4 is easily summarized in words. It states that the value of capital goods demanded from the second department matches the demand for consumption goods from the first department. In a sense, Equation 4 is a generalization of Keynes' idea of effective demand. The condition that all workers looking for a job are able to find one at the going wage is a separate condition, not stated here. In a sense, this model generalizes Keynes' theory, in some sense, to the long-run.

An alternate method of deriving Equation 4 is available. Start from the equation of the value of total demand for consumption goods and the value of the output of the department producing consumption goods. This condition, when simplified, also yields Equation 4.

4.2 Expanded Reproduction
The economy experiences expanded reproduction when it consistently expands each year. In this case, the demand for capital goods from the second department includes the savings of the capitalists receiving profits from that department. Likewise, the demand for consumption goods from the first department excludes the savings of the capitalists in that department. Observing these qualifications, it is easy to mathematically express the condition that the demand for capital goods from the second department match the demand for consumption goods from the first department:

(5)

Or:

(6)

Focus on the left-hand side of Equation 6. Is it apparent that the rate of growth in expanded reproduction in this model is the product of the capitalists' saving propensity and the rate of profit? In other words, the rate of profit along a warranted growth path is the quotient of the rate of growth and the saving propensity of the capitalists. So this model points to a Post Keynesian theory of distribution.

5.0 Conclusion
In the model, capitalists independently decide on what department to enter, and how much to produce in that department. A collective result of those decisions is the total output of each department. For those decisions to be validated, the value of consumer goods demanded by workers and capitalists in the department producing capital goods must match the value of capital goods demanded by the capitalists in the department producing consumption goods.

The model is silent on how such an equality can come about. Supply and demand seems like an inadequate answer to me.

References

• Richard M. Goodwin (1949). "The Multiplier as Matrix", Economic Journal, V. 59, N. 236 (Dec.): 537-555
• M. Kalecki (1969). Theory of Economic Dynamics: An Essay on Cyclical and Long-Run Changes in Capitalist Economy, Second Edition, Augustus M. Kelly
• Rosa Luxemburg (1951). The Accumulation of Capital (Trans. by Agnes Schwarzschild), Yale University Press
• Karl Marx (1956). Capital, Volume 2, Progress Publishers
• Luigi L. Pasinetti (1981). Structural Change and Economic Growth: A Theoretical Essay on the Dynamics of the Wealth of Nations, Cambridge University Press
• Luigi L. Pasinetti (1993). Structural Economic Dynamics: A Theory of the Economic Consequences of Human Learning, Cambridge University Press
• Joan Robinson (1962). Essays in the Theory of Economic Growth, Macmillan
• Shigeto Tsuru (1942). "On Reproduction Schemes", Appendix A in Paul Sweezy's The Theory of Capitalist Development, Monthly Review Press [This reference I haven't read]

Judge Friedman's Advice To Pinochet Yourself

Naomi Klein makes available Milton Friedman's 21 April 1975 letter to mass murderer Augusto Pinochet.

Microeconomics Required By Implementation Of Federal Law

President Bush's Executive Order 13422, dated 18 January 2007, further amends President Clinton's EO 12866, of 4 October 1993. These EOs are part of a family of EOs. This family defines a process for performing and reviewing cost-benefit analyses before any Federal agency promulgates any new regulations. As I understand it, President Reagan set up the Office of Information and Regulatory Affairs (OIRA), within the Office of Management and Budget (OMB), to review and approve these analyses. Here's an excerpt from the amended EO:

Section 1. Statement of Regulatory Philosophy and Principles.

(b) The Principles of Regulation.

(1) Each agency shall identify in writing the specific market failure (such as externalities, market power, lack of information) or other specific problem that it intends to address (including, where applicable, the failures of public institutions) that warrant new agency action, as well as assess the significance of that problem, to enable assessment of whether any new regulation is warranted.

Greg Mankiw, Ignorant or Dishonest?

Why choose?

"The model also maintains the neoclassical conclusion that, given ability, people are paid the value of their marginal product. That is, people are paid what they contribute to society." -- Greg Mankiw

Alessandro, Tell Us What You Really Think

Alessandro Roncaglia's The Wealth of Ideas: A History of Economic Thought (Cambridge University Press, 2005) is a work of massive scholarship in the history of economic thought. Roncaglia's assessments are often quite harsh. Here are several examples, which could easily be expanded:

"This [the 'new view'] is an interpretation clearly grounded on the neo-classical theoretical approach, attribution of which to Ricardo implies a thoroughly distorted reading of his writings." (p. 184)

"It is to be stressed that, despite the references to the methodology of general economic equilibrium, quite often the models used to analyze the various cases of asymmetry or imperfect information fall in the category of partial equilibriums. Indeed, without simplifications it is practically impossible to extract meaningful results from the analysis. Use of extremely simplified models in order to deal with specific issues, with recourse to ad hoc assumptions, has indeed been the most common path for research in the past twenty years. Often it is maintained that this provides rigorous microfoundations for the treatment of concrete issues, originally dealt with in conceptual frameworks different from that of general economic equilibrium theory. The outcome, however, is quite different: the attempt to avoid absolute indefiniteness of results imposes opportunistic choices. The most often adopted paths are those of return to partial equilibrium analysis, or to the assumption of a one-commodity world: either analytical rigor or realism is sacrificed. The conclusion is that, despite the efforts expended on it, the research stream of general economic equilibrium did not overcome its basic limits (from the assumptions of convexity recalled above, to the difficulty of excluding multiple equilibriums or instability of equilibrium): it thus remained an abstract exercise, an end in itself, devoid of any utility for understanding the economic systems in which we live. Indeed, reference to the general economic equilibrium approach is often used deviously, on the one hand as a rhetorical trick to enhance the value of models with a low theoretical content, on the other as Caudine Forks for students of advanced economics courses." (p. 474)

"Success of this line of research [new Keynesian economics] is quite difficult to understand: in order to reproduce the notable results of Keynesian analysis within the neoclassical tradition, ad hoc assumptions are introduced, often rather implausible ones, on the sandy theoretical foundations of one-commodity and/or partial equilibrium models with their inverse relationship between real wages and unemployment." (p. 484)

"We thus have, on the one hand, 'lowbrow' economic analyses, which make indiscrimate use of analytical tools whose theoretical foundations have come in for destructive criticism (for instance, the inverse relation between wage rate and employment in macroeconomics) but which pretend to provide 'scientific' economic policy advice on such flimsy foundations. Frequently, policies tricked out in scientific guise actually derive from a priori opinions and may arouse reasonable perplexity on the grounds of plain common sense, while recourse to unnecessarily complex theoretical apparatus is essentially for rhetorical effect. On the other hand, we have 'highbrow' theories, sophisticated exercises within axiomatic schemes based on processes of abstraction that are never subjected to critical scrutiny. The element of pure intellectual challenge is dominant here, but there is a significant cost in terms of lost heuristic power and hence of a meaner market share for economic science in the political and cultural debate." (p. 508)

Obviously, my choice of these examples reflects my interests.

"Undergraduate Economics is a Joke"

I'm not sure what this site is. Maybe it is put up by one of David Colander's undergraduate students. But this appears to be a chapter from Colander, Holt, and Rosser (2004), consisting of an interview with Herbert Gintis. (I also provide, in references an Colander, Holt, and Rosser response to reactions to that book.)

Herb moved to the University of Massachusetts at Amherst as part of one of those McCarthyite purges they keep on performing in the Harvard economics department. This one was in the early 1970s. Gintis no longer considers himself an heterodox economist. You might consider him a representative of mainstream economics at UMass. This identification can be seen to have generated some prickly comments here and there. But Gintis has a point, given that his interests have evolved to include principal agent problems, asymmetric information, behavioral economics, experimental economics, and evolutionary game theory.

Anyway, here's what a defender of the mainstream has to say about how economics is taught:

"You can’t write all economists off as ideologues, because they’re not. They’re open to new ideas. However, there’s still this incredible tension in what we teach. I am so displeased at the way undergraduate and even graduate economics is taught. Undergraduate economics is a joke--macro is okay but micro is a joke, because they teach this stuff that you know is not true. They know the general equilibrium model is not true. The model has no good stability properties, it doesn’t predict anything interesting, but they teach it. The production theory that is taught is also a joke. They use this old Marshallian production with LRACs and MRACs to determine firm size. This doesn’t determine firm size, it determines plant size. Totally different things determine firm size. So why do we teach undergraduates this? Why do you teach income and substitution effects and Giffen goods, when there are so many interesting things to discuss? So I am so upset by what they teach. I am retiring from UMass this year (Sam is, too), so I won’t have to deal with this anomaly any more.

If this were physics or astronomy, when they get new ideas at the forefront, they immediately teach them, but in economics they teach the stuff that even thirty years ago, people didn’t believe. My view is that economists should not be so tolerant of teaching out-of-date ideas. Micro is a total disaster. So I think there’s still a tension, and that there will be one for a long time. I guess sometimes people treat Sam, me, and all these people who do behavioral work, like they treat the dentist, it hurts but you should go do it." -- Herbert Gintis

Happy thanksgiving.

References

• Colander, D., R. P. F. Holt, and J. B. Rosser, Jr. (2004). The Changing Face of Economics: Conversations with Cutting Edge Economists, University of Michigan Press.
• Colander, D., R. P. F. Holt, and J. B. Rosser, Jr. (2007). "Live and Dead Issues in the Methodology of Economics", (June)

Othering

Dani Rodrik writes:

"...the University of Massachusetts Amherst ... department of economics ... is well known as the hangout of left-wing critics of economics and economic policy..."

Notice Rodrik doesn't write that they are critics of "neoclassical economics" (or "orthodox economics" or " mainstream economics"). Don't they do economics of some sort at Massachusetts? Don't they make suggestions for economic policy? Can a mainstream economist even acknowledge the existence of heterodox economists?

I've seen comments like Rodrik's before. I am skeptical of the whole notion of "anti-economics". A serious scholar would acknowledge the existence of divisions in his field, not pretend some with a different approach are merely outsiders or critics.

(I do know that, like Notre Dame, UMass has a good lacrosse program.)

Myerson Not A Historian

Philip Mirowski has been quite critical of an essay by Roger Myerson:

"Some of the most bizarre and outlandish statements about the history of economics have recently been made about the role and accomplishments of the Nash equilibrium concept in game theory. Much of this cynosure is due to the fact that a broad regiment of economic theorists have recently sought to write von Neumann out of the history of game theory to the maximum extent possible, striving to supplant his legacy with the work of John Forbes Nash...
At the end of the twentieth century, this quest to doctor the record with regard to Nash and his equilibrium has attained the status of a public relations campaign with ... a commissioned survey in the Journal of Economic Literature (Myerson, 1999). Although this is not a treatise on the contemporary sociology of the economics profession, a small caveat needs to be inserted here about this unusual effusion of infotainment concerning what must seem, to even the most avid follower of economics, a topic of rather arid compass appealing to only the most limited circle of cognoscenti. Incongruity turns into downright incredulity when one learns ... that the commissioned JEL survey was never vetted by any historian familiar with the relevant events, and consequently the only 'history' to grace the text appears as a word in its title. The reader should approach these texts forewarned that John Nash and his equilibrium, through no effort of his own, have become the object of a vast ceremonial purification exercise." -- Philip Mirowski, Machine Dreams: Economics Becomes a Cyborg Science. Cambridge University Press, 2002: pp. 332-333

And again:

"...the account in Myerson, 1999 of how von Neumann 'failed' has absolutely no relationship to the historical record. The idea that Nash possessed acute insights into human psychology and institutions that von Neumann somehow missed would be ludicrous were it not persistently found in conjunction with the obvious motivation to rewrite von Neumann out of history." -- ibid, p. 347

For example, one would never know from Myerson that Morgenstern and von Neumann analyzed non constant sum games:

"In 1928 and again in his 1944 book with Morgenstern, von Neumann tried to justify this cardinal utility assumption by identifying all payoffs with monetary transfer payments, which led him to the restriction that payoff is transferable and all games are zero-sum...

In 1947 (in their book's second edition), von Neumann and Morgenstern published their third great contribution to game theory: the axiomatic derivation of expected-utility maximization from a substitution argument. This new justification for measurable utility should have prompted them to consider dropping their restrictive assumption that payoffs must be transferable and zero-sum in all games, but they did not." -- Roger B. Myerson (1999). "Nash Equilibrium and the History of Economic Theory", Journal of Economic Literature, V. 37, N. 3 (Sep.): 1067-1082

What Can A Poor Boy Do Except To Sing For A Rock N Roll Band?

"Now Nixon was realigning the party. 'States' rights' and 'law and order,' two thinly veiled appeals to racism, were mainstays of his campaign. States' rights, from the time of Calhoun, meant not letting the federal government interfere with the denial of black rights in southern states. 'Law and order' had become a big issue because it meant using Daley-type police tactics against not only antiwar demonstrators, but black rioters as well." -- Mark Kurlansky (2004). 1968: The Year That Rocked The World, Ballantine Books, p. 361

"Shirley Chisholm was elected the first black woman member of the House. Blacks gained seventy offices in the South, including the first black legislators in the twentieth century in Florida and North Carolina and three additional seats in Georgia. But Nixon won a clear majority of southern white votes. The strategy that undid Abe Fortas also elected Nixon, and it became the strategy of the Republican Party. The Republicans get the racist vote and the Democrats get the black vote, and it turns out in America there are more racist voters than black ones. No Democrat since John F. Kennedy has won a majority of white southern votes.

This is not to say that all white southern voters are racist, but it is clear what votes the Republicans pursue in the South. Every Republican candidate now talks of states' rights. In 1980 Ronald Reagan kicked off his presidental campaign in an obscure, backwater rural Mississippi town. The only thing this town was known for in the outside world was the 1964 murder of Chaney, Goodman, and Schwerner. But the Republican candidate never mentioned the martyred SNCC workers. What did he talk about in Philadelphia, Mississippi, to launch his campaign? States' rights." -- ibid. p. 365

Shrillness In The Defense of Liberty: Two Reviews

Michael Tomasky and Peter Beinart review Paul Krugman's new book, The Conscience of a Liberal, in the New York Review of Books and the New York Times, respectively. I am unsure if I want to buy this book. I've read Krugman's columns fairly often, and the difference in performance between the post-war "Golden Age" and the world after the fall in the Bretton Woods system is an old story to me.

Please Remember Victor Jara, In the Santiago Stadium

As the title suggests, history gives us plenty of stories of people, when put to the test, of being more heroic than anybody should be expected to be. But I am telling the story, I am sorry to say, of somebody willingly signing up to be a zero.

Apparently, in 1981, Hayek visited Chile. Given the context, I cannot read this interchange in an interview as an abstract discussion:

Lucia Santa-Cruz: "There is reference in your work to the apparent paradox of dictatorships that may be more liberal than a totalitarian democracy. But it is also true that dictatorships have other characteristics which contradict freedom, even if it is understood negatively as you do."

Hayek: "Evidently dictatorships pose grave dangers. But a dictatorship may limit itself (se puede autolimitar) and if self-limited it may be more liberal in its policies than a democratic assembly that knows of no limitations. I must admit that it is not very probable that this may happen, but even so, in a given moment, it may be the only hope. Not a sure hope because it may always depend on the good will of an individual and one can trust in very few individuals. But if it is the only opportunity in a given moment, it may be the best solution in spite of all. But only if the dictatorial government visibly leads to a limited democracy."
-- El Mercurio, (not my translation) Sunday, 19 April 1981

In the same interview, Hayek said:

Hayek: "Democracy has a task which I call 'hygienic', for it assures that political processes are conducted in a sanitary fashion. It is not an end in itself. It is a rule of procedure whose aim is to promote freedom. But in no way can it be seen in the same rank as freedom. Freedom requires democracy, but I would prefer temporarily to sacrifice, I repeat temporarily, democracy, before having to do without freedom, even if temporarily." -- ibid.

Furthermore, Hayek gave various presentations to various conferences. Apparently, in a chat with Jaime Guzman, Hayek said, "Pinochet is an honorable general."

IMF and World Bank Blogs

The economic counsellor and director of research department at the IMF has a blog. I've added his blog to my blogroll. Apparently, the World Bank has a number of blogs. I added the one for their Poverty and Growth Program to my blogroll. The IMF and the World Bank are the subject of one of the few political protests I've attended in the last decade.

Yeager Mistaken

Just when I planned on putting aside Austrian economics until receiving referee reports...

The Ludwig von Mises Institute has made Time, Uncertainty, and Disequilibrium: Exploration of Austrian Themes available. These 1979 proceedings were edited by Mario J. Rizzo. The conference at which these papers were presented was held at New York University on 7 January 1978.

For some reason, Austrian economists take Leland B. Yeager as having an authoritative response to the Cambridge Capital Controversy. So I reference his 1976 Economic Inquiry article in my recent refutation of Austrian Business Cycle Theory. These proceedings have an article by Yeager, "Capital Paradoxes and the Concept of Waiting", that I have not previously had access to. Also, Roger Garrison responds with a comment.

Yeager's supposed resolution to the CCC is, roughly, to take interest as the price of waiting, defined as "the tying-up of value over time". Since value is part of its definition, the amount of waiting embodied in a technique cannot be measured by the physical characteristics of a technique. The amount of waiting embodied in a technique can then be expected to vary with prices and interest rates. Thus, reswitching does not seem paradoxical to Yeager.

Yeager acknowledges that he has not resolved the puzzle of "perverse" switches. Presumably, a lower interest rate is associated with the adoption of a technique embodying relatively more waiting. Yet around a perverse switch point, a lower interest rate is associated with the adoption of technique that produces less consumption per worker. How can this be? If laborers work with more waiting - a factor of production - shouldn't they get more output?

Anyways, this incorrect claim shows that Yeager had not fully absorbed the lessons of the CCC:

"The demand for waiting, as for labor and land-use, derives from the factor's capacity to contribute to output - ultimately, output of consumer goods and services - and from consumers' demand for that output. The relative strengths of consumer demands for goods embodying relatively large amounts of particular factors affect producer demands for those factors and so affect their prices. A decline in consumer demand for a highly waiting-intensive good tends to lower the rate of interest." - Leland Yeager

The last statement is without foundation.

Which Side Are You On, Bob?

"My impression is that the best and brightest in the profession proceed as if economics is the physics of society. There is a single universally valid model of the world. It only needs to be applied. You could drop a modern economist from a time machine - a helicopter, maybe, like the one that drops the money - at any time, in any place, along with his or her personal computer; he or she could set up in business without even bothering to ask what time and which place. In a little while, the up-to-date economist will have maximized a familiar-looking present-value integral, made a few familiar log-linear approximations, and run the obligatory familiar regression. The familiar coefficients will be poorly determined, but about one-twentieth of them will be significant at the 5 percent level, and the other nineteen do not have to be published. With a little judicious selection here and there, it will turn out that the data are just barely consistent with your thesis advisor's hypothesis that money is neutral (or nonneutral, take your choice) everywhere and always, modulo an information asymmetry, any old information asymmetry, don't worry, you'll think of one." -- Robert M. Solow (1985). "Economic History and Economics", American Economic Review, V. 75, N. 2 (May): 328-331

Paul Davidson, Overoptimistic

"The best way to evaluate any economic theory is to consider the theorist as a magician. Theorists rarely make logical errors in moving from axioms to conclusions, any more than professional prestidigitators drop the deck of cards while performing a card trick. Today's economic theorists are proficient at creating the illusion of pulling policy conclusion rabbits out of their black hat mathematical model of the economy. The more surprising the policy rabbits pulled from the hat, the greater the audience enjoyment of the economist's performance, and the greater the applause and rewards." -- Paul Davidson (2007). John Maynard Keynes, Palgrave Macmillan, p. 26.

This book should be added to your reading list if you are interested in Keynes' General Theory and are not informed of Davidson's views on Keynes. I wish Davidson had chosen a title that distinguishes his book from Hyman Minsky's of the same name.

Some Capital-Theoretic Fallacies of Austrian Economics

I have rewritten my demonstration of some errors in Austrian business cycle theory. In addition to making this article available on the Social Science Research Network, I have submitted it to some journal.

Invisible Hands Ere Adam Dug

I don't know that these usages have anything to do with Adam Smith. I don't even vouch for the translation from the seventeenth century french:

"How are you to get at a person who talks in this way, father? On what quarter will you assail me, since neither my words nor my writing afford the slighest handle to your accusations, and the obscurity in which my person is enveloped forms my protection against your threatenings? You feel yourselves smitten by an invisible hand - a hand, however, which makes your delinquencies visible to all the earth; and in vain do you endeavor to attack me in the person of those with whom you suppose me to be associated." -- Blaise Pascal, Provincal Letters, Letter XVII

"Be innocent of the knowledge, dearest chuck,
Till thou applaud the deed. Come, seeling night,
Scarf up the tender eye of pitiful day;
And with thy bloody and invisible hand
Cancel and tear to pieces that great bond
Which keeps me pale! Light thickens; and the crow
Makes wing to the rooky wood;
Good things of day begin to droop and drowse;
While night's black agents to their preys do rouse.
Thou marvell'st at my words: but hold thee still;
Things bad begun make strong themselves by ill.
So, prithee, go with me." -- William Shakespeare, Macbeth, Act 3, Scene 2

Liberal Anti-Marxism Annoying

Apparently young American liberals still feel obligated to take ignorant cold war stands. Here's Ezra Klein, in a post positioning himself as more reasonable than either extreme:

"Any Marxist will tell you that 'real' Marxism was never tried. That said, just about every time something called Marxism was tried, it traveled down much the same course, and failed in much the same way. "

Perhaps, I'm not the one to comment, since I neither consider myself to be a Marxist nor do I disagree with Klein's take on American conservatives.

It is simply untrue that "every time something called 'Marxism' was tried", it failed. Eduard Bernstein was called a Marxist "revisionist" - this was not a compliment by the communists. Bernstein's argument was important in the development of the Second International's line. And this version of Marxism is still being implemented in western Europe.

I also wonder what it means to "try" Marxism. The last of Marx's theses on Feuerbach is, famously:

"The philosophers have only interpreted the world differently, the point is, to change it."

The world still needs transforming. One finds few formulae in Marx, however, for what to do after the revolution*. Marx's longest work is more about analysis of existing society than unfounded designs of some far-distant future society. In the afterword to the second German edition, Marx notes that in Capital he is not "writing recipes (Comtist ones?) for the cookshops of the future." Perhaps some of Marx's analysis is still worth retaining.

Here's one part of Marx's analysis to consider:

"The general conclusion at which I arrived and which, once reached, became the guiding principle of my studies can be summarized as follows. In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness. At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or - this merely expresses the same thing in legal terms - with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure." -- Karl Marx, Preface to A Contribution to the Critique of Political Economy

I do not see how the horrors of Stalinism or the 1989 collapse of "actually existing socialism" can invalidate the above general conclusion. In fact, that collapse would rather seem to illustrate Marx's conclusion.

* Caveat: Marx is probably most explicit on the design of post-revolutionary society in The Civil War in France and in the Critique of the Gotha Programme. It is in the latter, that Marx's makes his distinction between post-revolutionary socialism, in which laborers receive their proceeds in proportion to their contribution, and "the higher phase of communist society", in which

"society [can] inscribe on its banners: 'From each according to his ability, to each according to his needs!'".

Lenin draws on this distinction in his State and Revolution and in his attacks on the "renegade" Kautsky.

Vocabulary Word: Mumpsimus

Joan Robinson had lots to say about the Cambridge Capital Controversy. I find this remark to be amusing:

"I was delighted to find in a dictionary the word mumpsimus, which means stubborn persistence in an error that has been exposed" -- Joan Robinson

Laissez-Faire "Never Based On Solid Empirical And Theoretical Foundations"

"Friedman and the other shock therapists were also guilty of oversimplification, basing their belief in the perfection of market economies on models that assumed perfect information, perfect competition, perfect risk markets. Indeed, the case against these policies is even stronger... They were never based on solid empirical and theoretical foundations, and even as many of these policies were being pushed, academic economists were explaining the limitations of markets — for instance, whenever information is imperfect, which is to say always." -- Joseph Stiglitz, "Bleakonomics", New York Times, 30 September 2007

I've quoted Saari and Samuelson each saying the same.

Tyler Cowen: Slave To The Rhythm Of Power

Tyler Cowen purports to analyze why the pay of CEOs has increased so much.

"It is useless to ask what is the source of natural inequality, because that question is answered by the simple definition of the word. Again, it is still more useless to inquire whether there is any essential connection between the two inequalities; for this would be only asking, in other words, whether those who command are necessarily better than those who obey, and if strength of body or of mind, wisdom or virtue are always found in particular individuals, in proportion to their power or wealth: a question fit perhaps to be discussed by slaves in the hearing of their masters, but highly unbecoming to reasonable and free men in search of the truth." -- Jean Jacques Rousseau, A Dissertation on the Origin and Foundation of the Inequality of Mankind (Trans. by G. D. H. Cole)

Of course, CEOs cannot receive their pay except through services provided to them by a society existing beforehand:

"The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were, perhaps, very much alike, and neither their parents nor playfellows could perceive any remarkable difference. About that age, or soon after, they come to be employed in very different occupations. The difference of talents comes then to be taken notice of, and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance. But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted. All must have had the same duties to perform, and the same work to do, and there could have been no such difference of employment as could alone give occasion to any great difference of talents.

As it is this disposition which forms that difference of talents, so remarkable among men of different professions, so it is this same disposition which renders that difference useful. Many tribes of animals acknowledged to be all of the same species, derive from nature a much more remarkable distinction of genious, than what, antecedent to custom and education, appears to take place among men. By nature a philosopher is not in genius and disposition half so different from a porter, as a mastiff is from a greyhound, or a greyhound from a spaniel, or this last from a shepherd's dog." -- Adam Smith, Wealth of Nations

General Equilibrium: Same As It Ever Was

Some mainstream economists (e.g., Bliss and Hahn) responded to the Cambridge Capital Controversy by taking their stand on the Arrow-Debreu very short run model of intertemporal General Equilibrium. They claimed that this model is logically consistent, and it is unaffected by Sraffa effects. I think the latter proposition, at least, is debatable.

Be that as it may, perhaps the Sonnenschein-Mantel-Debreu results show that the Arrow-Debreu model has no empirical implications. That is, the theory imposes no restrictions on the directions of aggregate movements in prices and quantities in response to changes in the data. Kenneth Arrow, Alan Kirman, D. Saari, and S. Abu Turab Rizvi are some who have advanced this claim.

Some have challenged my understanding on this claim, pointing out some work done by Donald Brown and others. S. Abu Turab Rizvi has recently reviewed this recent work ("The Sonnenschein-Mantel-Debreu Results after Thirty Years", History of Political Economy, V. 38 (Annual Supplement): 228-245). He concludes that:

"...Brown and Matzkin do provide a restriction that can conceivably be refuted... Despite this ..., if the only data ... are at the aggregate level, general equilibrium theory does not generate refutable restrictions... [T]he Brown-Matzkin results require individual-level ... vectors.

Matters are even clearer on qualitative features ... such as local uniqueness, stability, and comparative statics. The equilibrium manifold approach ... does not allow us to refute statements on these features... [W]e cannot test to see if an economy is poorly behaved... [T]he intuition that general equilibrium theory is devoid of meaningfully general results remain true..."

I continue to remain puzzled about what mainstream economists take the content of price theory to be.

Facts Are Getting The Best Of Them

Paul's done this sort of amusing thing before:

"Now as they survey the wreckage of their cause, conservatives may ask themselves: 'Well, how did we get here?' They may tell themselves: 'This is not my beautiful Right.' They may ask theselves" 'My God, what have we done?'" -- Paul Krugman (2007). "Same Old Party", New York Times (8 Oct): A19

Heterodoxy Again And Other Links

• Inside Higher Ed has an article about heterodox economics. Some of those quoted and others have commented.
• A blogger is hosting a reading group for Keynes' General Theory
• I've thought Matt Yglesias could not accept that his Econ 10 teacher at Harvard is a propagandist, not a scholar. (I'm aware that Matt Y.'s study involved quite a bit of philosophy.) So I am amused to read him writing:

"Have I ever mentioned that philosophers tend to think that economics is vacuous? Which isn't to say that you shouldn't listen to economists. These days, they tend to know a lot of math, and math is a very useful thing."

• Update (8 Oct):Scientific American has a short article in the July 2007 issue on neuronomics and the empirical falsity of economic man.
• This post on Post Autistic Economics is interesting for the comment from Bertil, a "French PhD candidate in economics"
• The Colander, Holt, and Rosser paper, "Live and Dead Issues in the Methodology of Economics" comments on how they see the different distinctions between mainstream and nonmainstream and orthodox and heterodox economics

One, Two, Three, Many Economics?

Marc Lavoie's article "Do Heterodox Theories Have Anything in Common? A Post-Keynesian Point of View" (Intervention, V. 3, N. 1 (2006): 87-112) is a contribution to an ongoing discussion. The first paragraph of this article mentions "Marxist economists, Sraffians..., structuralists..., institutionalists, regulationists, social or humanist economists, anti-utilitarists, behaviorists, economists of conventions, Schumpeterians (or evolutionary economists), circuitists, and feminist economists." But the focus seems to be on Post-Keynesians and the supposed split between fundamentalist Keynesians, Kaleckians, and Sraffians.

The label of fundamentalism as a type of Keynesians goes back at least to Alan Coddington. Keynesians of this type emphasize Chapter 12 of The General Theory and decision-making under radical uncertainty. Exemplars include Joan Robinson and Paul Davidson. One useful contrast is with "hydraulic" or "bastard Keynesians", such as exemplified by J. R. Hicks' IS/LM model under mainstream interpretations.

The perception of splits within Post Keynesianism also goes back to the late 1970s or early 1980s, with, for example, arguments between Joan Robinson and Pierangelo Garegnani. Robinson argued that Sraffianism, as a constructive theory for analyzing economies de-emphasized uncertainty too much, with its emphases on a long-period method. Garegnani has argued something like an emphasis on fundamental uncertainty cedes too much to the neo-classical (or mainstream) belief that labor markets tend to clear in the long-run and that Keynes offered a theory only applicable to the short-run. Paul Davidson extends and embraces Robinson's view that Sraffians cannot be part of an useful Post Keynesianism. Followers of Kalecki have gone their own way. At one point, Steedman, however, attacked some followers of Kalecki for missing the influence of distribution on relative prices. This influence needs to be accounted for in Kalecki's markup pricing. Harcourt has written of a "hourses for courses" approach and questioned whether Post Keynesianism could or should be one school of thought.

I think the Joan Robinson viewpoint is not too relevant to my usage of Sraffa's book as an internal critique of neoclassical theory. It is relevant if one tries to extend Sraffa to understand actual economies.

Lavoie finds some unifying elements in the views of Post Keynesians and others on rationality, price theory, growth theory, and the relationship between real and monetary analyses.

Invasion of the Name Snatchers: Supply-Side Economics

I steal half the title from James Galbraith. Italy is a foreign country, and, besides, Paolo Sylos Labini is dead:

"At the beginning of the sixties some issues that were to become the themes of supply-side economics were passionately discussed by a few Italian economists: Saraceno, Sylos Labini, Fuà, Caffè, Napoleoni and myself. The Italian economy was clearly incapable of assuring adequate growth of the various sectors and of all regions. There were sectors (such as agriculture) lagging behind, whereas the take-off of some regions (the South in particular) was hampered by structural conditions and chronic ineffiencies characterised other sectors (in Fuà's and Sylos' contributions attention was brought to the tertiary sector). It was our condition that an active economic policy, aiming at producing some specific structural changes, could help growth, facilitate the take-off in the South and reduce the divergence between the growth of private consumption and the expansion of social services. Such a conviction had some important implications for economic theory. It offered stimuli and arguments to go beyond the demand approach of both Keynesian and monetarist economists. The supply-side theories developed in the United States have perceived such a need only in a partial and distorted way, essentially by concentrating on fiscal problems. In the sixties we were convinced instead that to overcome the limitations of the demand approach - institutionalised in current macroeconomic theories - a coherent general strategy of economic policy should be devised such that conditions accounting for the efficiency of the whole system could be positively changed. Such a general strategy can be labelled as (indicative) planning. Planning is not to be conceived as an alternative to the market. Indicative planning can make market more efficient; in its turn, the efficiency of the private economy allows for more advanced goals to be pursued by planning.

The events of the sixties and seventies appear to have invalidated our view on the need for indicative planning..." -- Siro Lombardini (1993). "Foreword", in Market and Institutions in Economic Development: Essays in Honour of Paolo Sylos Labini (edited by Salvatore Biasco, Alessandro Roncaglia, and Michele Salvati), St. Martin's Press

Re-reading the above, I see that Lombardini doesn't say that this group of economists actually used the label "supply-side economics".

Chaotic Cobwebs (Part 1 1/2)

5.0 Return to a Special Case

This post continues the examination of a cobweb cycle with a non-linear demand curve. In this part, I talk again about the special case examined in Section 3 of that previous post. In that case, the parameters b and e of the model are zero. Furthermore, I continue to assume c is 3/5 and d is 21/20. Figure 6 shows attracting limiting behavior for a whole range of the parameter a. The abscissa in this graph is a, with a set to unity at the right edge. The ordinate is the limiting values of the normalized quantity, Q(t). As I point out towards the right, a two-period cycle shows up on the graph as a plot of two values of the ordinate for the value of a for which that cycle is generated. One can see the period-doubling scenario leading to chaos as one moves to the left on the graph. By the way, this figure is a fractal, repeating on an infinite number of scales. It has both qualitative and quantitative universal features for a certain family of one-dimensional maps (for example, characterized by the Feigenbaum constant).

Figure 6: Structural Dynamics of a Special Case

6.0 An Economically Relevant Special Case

The case above has both demand and supply functions through the origin in the quantity-price space. I want to consider a case in which the demand curves intersects the price axis at a strictly positive price and slopes downward in the first quadrant. Accordingly, consider the case where a is unity, b is 781/960, c is 3/5, d is 1/2, and e is zero. (I put aside questions of whether adaptive expectations make sense here or whether a partial equilibrium framework with monotonic supply and demand curves is justified - see implications of the Sonnenschein-Debreu-Mantel theorem.)

Figure 7 shows how the price and quantity evolve for selected initial values. The red line suggests the point equilibriating of supply and demand is unstable. It will never be observed in this model. Instead, the red line evolves to a two-period limit cycle. The blue line shows that points outside that cycle will evolve inward to that cycle. As a matter of fact, I chose parameter values such that Figures 2 and 3 in Section 3 of the previous post show the behavior of the normalized quantity for this case.

Figure 7: Temporal Dynamics with All Positive Prices and Quantities

I don't see that one can find positive parameters values such that period doubling can lead to chaos in this model with price and quantity remaining positive throughout. Although I am not sure of this, I am willing to accept that the maximum of the quadratic function in Equation 4 (see previous post) must be strictly positive for chaos to arise in the first quadrant. I don't understand what Richard Goodwin graphs in Figures 2.4 and 2.5 of his book. Perhaps he is considering a cubic demand curve or some other higher polynomials for supply and demand.

Update (28 Sep.): A Google search on "cobweb", "chaos", and "economics" shows lots of literature, mostly behind paywalls. I notice particularly work by Barkley Rosser, Jr. and in the Journal of Economic Behavior and Organization, which he edits. So I have reading I could do.

Writing Down Von Neumann's Contributions to Game Theory

Today's New York Times, in the science section, contains an ad for the "Von Neumann Memorial Lectures". This reminded me that, several years ago in the Times, Hal Varian misrepresented Von Neumann's treatment of game theory:

"Modern game theory was developed by the great mathematician John Von Neumann in the mid-1940s. His goal was to understand the general logic of strategic interaction, from military battles to price wars.

Von Neumann, working with the economist Oscar Morgenstern, established a general way to represent games mathematically and offered a systematic treatment of games in which the players' interests were diametrically opposed. Games of this sort - zero-sum games - are common in sporting events and parlor games.

But most games of interest to economists are non-zero sum. When one person engages in voluntary trade with another, both are typically made better off. Although von Neumann and Morgenstern tried to analyze games of this sort, their analysis was not as satisfactory as that of zero-sum games. Furthermore, the tools they used to analyze these two classes of games were completely different.

Mr. Nash came up with a much better way to look at non-zero-sum games. His method also had the advantage that it was equivalent to the von Neumann-Morgenstern analysis if the game happened to be zero sum." -- Hal R. Varian (2002).

I find it hard to read this as saying anything other than:

• Nash generalized the Von Neumann and Morgenstern (VNM) solution to zero-sum games to a solution (the Nash solution) applying to both zero-sum and non-zero-sum games.
• Although VNM had a solution for non-zero-sum games, it was not a generalization of their solution for zero-sum games.

Both claims are false.

Varian's statement only makes sense if one pretends The Theory of Games and Economic Behavior (TGEB) is missing the almost 300 pages on zero-sum n-person games. Under this pretense, the only zero-sum games treated in TGEB would be two-person games. The Nash equilibrium is, in some sense, a generalization of the VNM minimax treatment of two-person zero sum games. And the TGEB treatment of coalitions in non-zero sum games is something else.

VMN do decompose their treatment of games into two phases, but not based on whether or not a game is zero sum. They decompose their treatment into zero-sum two-person games and all other games (All quotations of numbered paragraphs are of the third edition of TGEB):

"66.1.2. Our theory of games divides clearly into two distinct phases: The first one comprising the treatment of the zero-sum two-person game and leading to the definition of its value, the second one dealing with the zero-sum n-person game, based on the characteristic function, as defined with the help of the values of the two-person games."

The TGEB solution of n-person zero-sum games is, in some sense, a generalization of the TGEB minimax solution of zero-sum two person games. One can form two "collective persons" for the n-person game, where each "person" is one of two coalitions:

"25.1.2. Suppose then that we have a game Gamma of n players... Without yet making any predictions or assumptions about the course a play of this game is likely to take, we observe this: if we group the players into two parties, and treat each party as an absolute coalition - i.e. if we assume full cooperation within each party - then a zero-sum two-person game results..."

In the TGEB treatment, a coalition can pool their winnings and then redistribute them to the players in the coalition. VMN define a solution to a game as a set of imputations of payouts to the players. The definition of the set of imputations is concerned with why a player would chose to be in one coalition or the other, and why the remaining members of the winning coalition would chose to woo a player or not.

To help fix intuition, VMN define an interesting zero-sum three person game, the Majority Game:

"21.1...Each player, by a personal move, chooses the number of one of the two other players. Each one makes his choice uninformed about the choices of the two other players.

After this the payments will be made as follows: if two players have chosen each other's numbers we say that they form a couple. Clearly there will be precisely one couple, or none at all. If there is precisely one couple, then the two players who belong to it get one-half unit each, while the third (excluded) player correspondingly loses one unit. If there is no couple, then no one gets anything."

The TGEB analysis of a generalization of the Majority Game is indeterminate in two senses:

• An uncountably infinite number of solution sets of imputations exist (some of which VMN describe as analogous to discrimination).
• In the most obvious solution, { (1/2, 1/2, -1), (1/2, -1, 1/2), (-1, 1/2, 1/2) }, how much a player gets and whether or not he is in the winning two-person coalition is indeterminate (which of the three imputations is realized is unspecified)

VNM generalize their treatment of zero-sum games to non-zero sum games by introducing a powerless dummy:

"56.2.1. ...any given general [not necessarily zero-sum] game can be re-interpreted as a zero-sum game...Our procedure will be to interpret an n-person general game as an n+1-person zero-sum game."

Contrary to Varian, the TGEB treatment of non-zero sum games is a generalization of the TGEB treatment of zero sum games. The VNM solution has come to be known as a solution to cooperative games. (If one sets aside his analysis of bargaining, Nash treats non-cooperative games.) Trivially, only one set of imputations is a solution to a zero-sum two-person game. There is only one imputation in that set, and that imputation is equivalent to the minimax solution.

TGEB has lots of interesting asides and suggestions that relate to later ideas. For example, VNM suggest an alternative treatment in which an external enforcement mechanism for (contracts between players in) cooperative games is not needed. In this alternative treatment of iterative play, cooperation emerges spontaneously:

"21.2.3. If our theory were applied as a statistical analysis of a long series of plays of the same game - and not as the analysis of one isolated play - an alternative interpretation would suggest itself. We should then view agreements and all forms of cooperation as establishing themselves by repetition in such a long series of plays.

It would not be impossible to derive a mechanism of enforcement from the player's desire to maintain his record and to be able to rely on the record of his partner. However, we prefer to view our theory as applying to an individual play. But these considerations, nevertheless, possess a certain significance in a virtual sense. The situation is similar to the one which we encountered in the analysis of the (mixed) strategies of a zero-sum two-person game..."

I don't think this idea works for all cooperative games. But one can see here some ideas of evolutionary game theory.

I read TGEB, particularly the first chapter, as hostile to neoclassical economics. VNM disparage the idea that a model of Robinson Crusoe can tell us much about social phenomena. And they cast doubt on the idea that imitating the mathematical methods used in physics will bring much progress in economics.

References

• Hal R. Varian (2002). "Economic Scene; You've Seen the Movie. Now Just Exactly What was It that John Nash had on his Beautiful Mind", New York Times, 11 April.
• John Von Neumann and Oscar Morgenstern (1953). Theory of Games and Economic Behavior, Third Edition, Princeton University Press.