Wednesday, April 18, 2007

What Are Your Assumptions?

Neoclassical economic theory, correctly understood, imposes no restrictions on the direction of real Wicksell effects. Paul Samuelson's student Edwin Burmeister writes:
"Imposing some set of conditions on the technology T(.) should be sufficient to assure that the real Wicksell effect is always negative. Such conditions would be of interest - especially if they could be empirically tested - since they would validate the quantitative conclusions derived from the one-good models often used in macroeconomics without any theoretical justification for ignoring aggregation problems... Unfortunately, no set of such sufficient conditions is known, but the literature on capital aggregation suggests they would impose severe restrictions on the technology." -- Edwin Burmeister (1987). "Wicksell Effects", The New Palgrave: A Dictionary of Economics (edited by John Eatwell, Murray Milgate, and Peter Newman)
So, from the point of view of the M.I.T. side of the Cambridge Capital Controversy, economists should either (1) Develop economic theory compatible with real Wicksell effects going in any direction, or (2) Recognize that we don't know special-case assumptions that are consistent with methodological individualism and that restrict real Wicksell effects to be always negative.

2 comments:

Gabriel Mihalache said...

Extraordinary post!

Do you have a link for this or is it something you types from the Palgrave?

I wonder if the Hicks-Leontief condition for aggregating (consumer) goods are of any use... I'm mostly ignorant on capital issues. Not my thing.

Robert Vienneau said...

I have no link. Franklin Fisher's late 1960s and early 1970s work is what to read on aggregating capital. I don't of literature that connects that work back to Hicks and Leontief's 1930s work.