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".