Sunday, July 29, 2007

Influence Of Tastes On Prices

1.0 Introduction

This post illustrates why the non-substitution theorem includes an assumption of no joint production. I have previously gone a little into the the theory of joint production in an analysis of depreciation. I have also previously illustrated the non-substitution theorem with an example in which the theorem's assumptions are met (part 1, part 2, Kurz and Salvadori on the theorem).

2.0 The Technology

Consider three islands, Alpha, Beta, and Gamma. A competitive capitalist economy exists on each island. These islands are identical in some respects and differ in others. The point is to understand how differences in tastes can be related to other differences, particularly in prices.

All three islands have the same Constant Returns to Scale technology available. They also exhibit the same rate of profits, and have fully adapted production to their conditions. The technology consists of processes to produce rye and wheat, where workers use inputs of rye and wheat to produce rye and wheat available at the end of the time period associated with each process. This time is a year. That is, each production process requires a year to complete. Each process fully uses up their inputs in producing their outputs.

The processes here exhibit joint production. A process is an example of joint production when its output consists of more than one good. The production of wool and mutton is a well-known example. With joint production, there is room in the economy for processes producing the same set of outputs in different proportions, as in this example. Table 1 shows processes, some subset of which are chosen by the firms at the ruling prices in this example. I think a better example might fully specify a larger technology from which to chose processes.
Table 1: The Technique of Production
Inputs Hired
At Start
Of Year
Predominately
Rye
Process
Predominately
Wheat
Process
Labor1 Person-Year1 Person-Year
Rye1/8 Bushel3/8 Bushel
Wheat1/16 Bushel1/16 Bushel
Outputs1 Bushel Rye
& 1/2 Bushel Wheat
1/2 Bushel Rye
& 1 Bushel Wheat
Notice that the net output of the predominately rye process, for an unit level of operation, consists of 7/8 bushel rye and 7/16 bushel wheat. The net output of the predominately wheat process consists of 1/8 bushel rye and 15/16 bushel wheat. Linear combinations, in which each process is operated at some non-negative level, can produce only some ratios of rye and wheat. Hence, these processes cannot meet all possible requirements for use, where such requirements include both consumption needs and requirements for growth. If no process exhibits joint production, any ratio of outputs can be be met by some line combination of processes. This contrast in joint production leads to requirements for use being able to influence which goods are commodities, that is, positively priced.

3.0 Quantity Flows

The employed labor force grows at a rate of 100% on each island. Each island differs, however, in the mix of outputs that they produce.

The population on Alpha wants to eat only rye. They do not and will not consume wheat. Table 2 shows the quantity flows per employed laborer on Alpha. Notice that the commodity inputs purchased at the start of the year total 1/8 bushel rye and 1/16 bushel wheat. Since the rate of growth is 100%, 1/4 bushel rye and 1/8 bushel wheat will be needed for inputs into production in the following year. This leaves 3/4 bushels rye available for consumption at the end of the year per employed worker. There is also an excess output of 3/8 bushels wheat per worker, freely disposed of each year.
Table 2: Quantity Flows On Alpha Island Per Worker
Inputs Rye Process
Labor1 Person-Year
Rye1/8 Bushels Rye
Wheat1/16 Bushels Wheat
Outputs1 Bushel Rye
& 1/2 Bushel Wheat
GROSS OUTPUTS PER WORKER: (1 Bushel Rye, 1/2 Bushel Wheat)
CAPITAL PER WORKER: (1/8 Bushel Rye, 1/16 Bushel Wheat)
CONSUMPTION PER WORKER: 3/4 Bushel Rye
A linear combination of the two processes that exactly satisfies requirements for use arising for 100% growth on the Alpha island operates the predominately wheat-producing process at a negative level. This makes no economic sense. No other possibility arises other than that shown in Table 2.

The Beta population eats only wheat. Table 3 shows the quantity flows on Beta. Here the same sort of calculations reveal that Beta has 3/4 bushel wheat available for consumption at the end of the year, per employed worker.
Table 3: Quantity Flows On Beta Island Per Worker
Inputs Rye ProcessWheat Process
Labor1/4 Person-Year3/4 Person-Year
Rye1/32 Bushels Rye9/32 Bushels Rye
Wheat1/64 Bushels Wheat3/64 Bushels Wheat
Outputs1/4 Bushel Rye
& 1/8 Bushel Wheat
3/8 Bushel Rye
& 3/4 Bushel Wheat
GROSS OUTPUTS PER WORKER: (5/8 Bushel Rye, 7/8 Bushel Wheat)
CAPITAL PER WORKER: (5/16 Bushel Rye, 1/16 Bushel Wheat)
CONSUMPTION PER WORKER: 3/4 Bushel Wheat
Gamma's quantity flows, shown in Table 4, are one possible intermediate case. Gamma has 9/14 bushel rye and 3/7 bushel wheat available for consumption at the end of the year per employed worker.
Table 4: Quantity Flows On Gamma Island Per Worker
Inputs Rye ProcessWheat Process
Labor25/28 Person-Year3/28 Person-Year
Rye25/224 Bushels Rye9/224 Bushels Rye
Wheat25/448 Bushels Wheat3/448 Bushels Wheat
Outputs25/28 Bushel Rye
& 25/56 Bushel Wheat
3/56 Bushel Rye
& 3/28 Bushel Wheat
GROSS OUTPUTS PER WORKER: (53/56 Bushel Rye, 31/56 Bushel Wheat)
CAPITAL PER WORKER: (17/56 Bushel Rye, 1/8 Bushel Wheat)
CONSUMPTION PER WORKER: (9/14 Bushel Rye, 3/7 Bushel Wheat)


4.0 Price System

Since these economies have adapted to their requirements for use, stationary prices prevail. Assume a rate of profits of 100%, identical across all three islands. Also assume the wage is paid at the end of the year.

4.1 Prices on Alpha

Recall that there is excess production of wheat on Alpha. "If there is excess production of [wheat], [wheat] becomes a free good" (J. Von Neumann, "A Model of General Economic Equilibrium," Review of Economic Studies, 1945-1946: 1-9). Asuming the wage is paid at the end of the year, the price system given by Equation 1 will be satisfied:
(1)
where w is the wage and r is the rate of profits. I have implicitly assumed in the above equation that the price of a bushel rye is $1. The wage can be ound in terms of the rate of profits:
(2)
Since the rate of profits is 100%, the wage on Alpha is 3/4 bushel rye per person-year.

4.2 Prices on Beta and Gamma

The price system given by Equations 3 and 4 will be satisfied on Beta and Gamma:
(3)

(4)
where p is the price of a bushel wheat. The wage can be found in terms of the rate of profits:
(5)
The price of wheat, in terms of the rate of profits, is given by Equation 6:
(6)
Given a rate of profits of 100%, the wage on Beta and Gamma is 3/2 bushel rye per person-year, and the price of a bushel wheat is 2 bushels rye.

5.0 Conclusions

Under the conditions satisfied by this example, in which the economies on different islands are fully adapted to tastes, the prices shown in Table 5 prevail. Differences in tastes between Beta and Gamma are associated with unchanged prices, even in this context. Different tastes on Alpha, however, are associated with a difference in which goods have positive prices and a consequent difference in the wage.
Table 5: Summary of Prices
AlphaBeta & Gamma
Wheat (Bushel)0 Bushel Rye2 Bushel Rye
Labor (Person-Year)3/4 Bushel Rye3/2 Bushel Rye
Note that the quantity flows specified above show the wage entirely consumed and profits entirely invested.

Note that if only goods with a positive price were shown in the techniques chosen on the respective islands, the input-output matrices would be square in all cases (1x1 on Alpha and 2x2 on the other two islands). I think that this property can arise in some cases where wages are not entirely consumed and profits not entirely invested. As I understand it, however, it is a theorem that the input-output matrices are square under this golden-rule condition.

If wages were the same across all three islands, then the rate of profits would vary between Alpha, on the one hand, and Beta and Gamma, on the other. Since the rate of growth is equal to the rate of profits, the rate of growth for a fully adjusted economy would be determined endogeneously. The different choices of the workers on how to consume their wages would result in a difference in the rate of growth between Alpha and the Beta and Gamma islands.

Even though differences in tastes can be associated with differences in prices, it is not clear that this example illustrates a model consistent with the neoclassical (scarcity) theory of value:
"..in a production context...it makes no sense to talk of 'endowments' of given physical quantities if these physical quantities, to be carried over from one period to another, are the unknowns to be determined. It makes no sense to talk of 'scarce' resources, if these resources can be produced in whatever quantities may be needed by the economic system...

When all inputs are themselves produced, a change in the composition of demand simply means that more of some inputs and less of other inputs will have to be produced, while the optimum technique remains the same. In other words, the process of adaptation to any given change in the composition of final demand is, in a production context, radically different from the one considered by traditional theory. Whereas, with given and fixed inputs (the traditional case), the only way to adapt is through a change of technique which may allow the substitution of some inputs for others, in a production context in which all inputs are themselves produced the obvious way to adapt is to produce the inputs which are needed and to cut down production of those which are no longer needed. There is no question of changing the technique. Input substitution, in a production context, has no role to play...

Another route which has been pursued to minimize the importance of the new results...consists in attributing the irrelevance of substitution to the 'very special' case of no joint production and constant coefficients [ = constant returns to scale -RLV ]. But the inconsistency of this contention is here brought into sharp relief by the very analysis of the previous pages...

As already pointed out...the joint production and nonconstant coefficients case is more complicated than, but not basically different from, the case concerning single products and constant coefficients. The complication arises from the fact that a change of the composition of demand may entail a change of the optimum technique and of the price structure. However, this does not enable us to say anything about the direction in which the input proportions will change.

...It is precisely the unambiguous direction in which relative prices and input proportions are related to each other that justifies talking of 'substitution.' But there is nothing of the sort in a production context. No general relation exists between the changes in the price structure and changes in the input proportions. More specifically, no monotonic inverse relation exists, in general, between the variation of any price, relative to another price, and the variation of the proportions among the two inputs to which these two prices refer. When this is so, to talk of 'substitution' among these inputs no longer makes any sense." -- Luigi L. Pasinetti (1977). Lectures on the Theory of Production, Columbia University Press: 186-188

Thursday, July 26, 2007

Steven Horwitz, Confused?

"A Mengerian understanding of the market process rejects the claim that an economy can be fruitfully understood through the use of simultaneous equations and equilibrium constructs… The Austrian approach rejects equilibrium theory as a description of actual economic events (although some Austrians would retain it as the never-achieved endpoint of economic activity) in favor of other theoretical and metaphorical devices." -- Steven Horwitz (2000: 8)
I don't know why Horwitz identifies "simultaneous equations" with equilibrium.

Consider this applet. I think one can characterize the underlying mathematics as a system of (countably infinite) simultaneous equations. Yet, one can hardly say that the interest in this mathematics lies in an equilibrium point, at least above a certain value of a parameter.

And that mathematics has economic applications. A Ricardian model can yield a logistic equation (Bhaduri). So can a cobweb cycle with an affine supply function and a quadratic demand function (Goodwin).

Advocates of the Austrian school should strive to write so one cannot read them as not being able to do math, instead of as simply choosing not to do math.

References
  • Bhaduri, Amit (1993). Unconventional Economic Essays: Selected Papers of Amit Bhaduri, Oxford University Press
  • Horwitz, Steven (2000). Microfoundations and Macroeconomics: An Austrian Perspective, Routledge
  • Goodwin, Richard M. (1990). Chaotic Economic Dynamics, Oxford University Press

Tuesday, July 24, 2007

Peter Klein, Mistaken?

I get this quote second-hand, from Peter Lewin (1999):
"[N]o firm can become so large that it is both the unique producer and user of an intermediate product; for then no market based transfer prices will be available, and the firm will be unable to calculate divisional profit and loss and therefore unable to allocate resources correctly between divisions." - Peter Klein (1996: 15). "Economic Calculation and the Limits of Organization", Review of Austrian Economics; V. 9, N. 2: 3-28.
I have already explained that Sraffa's price theory can be read as instructions to accountants. Klein is being too categorical; correct accounting rules can exist in some cases where he says they cannot. (I am sympathetic to the idea that accounting rules, in practice, contain a large conventional element. Sraffa's instructions to accountants need more information than is usually available, and cases may exist - joint production when the so-called Golden Rule does not hold - where the instructions cannot, even in principle, be applied.)

Sunday, July 22, 2007

Ten Principles of Feminist Economics

I've previously referenced expositions of principles of institutional economics and principles of heterodox economics. Geoff Schneider and Jean Shackelford have put forth some principles of feminist economics, also. Since in keeping with an antireductionist view the first principle is that there is no such thing as a definitive list of principles, I will not reproduce the list here.

Friday, July 20, 2007

Milton Friedman's Elegant Tombstones

"Professor Friedman's demonstration [in Capitalism and Freedom] that the capitalist market economy can coordinate economic activities without coercion rests on an elementary conceptual error. His argument runs as follows. He shows first that in a simple market model, where each individual or household controls resources enabling it to produce goods and services either directly for itself or for exchange, there will be production for exchange because of the increased product made possible by specialization. But 'since the household always has the alternative of producing directly for itself, it need not enter into any exchange unless it benefits from it. Hence no exchange will take place unless both parties do benefit from it. Cooperation is thereby achieved without coercion'...So far, so good. It is indeed clear that in this simple exchange model, assuming rational maximizing behavior by all hands, every exchange will benefit both parties, and that no act of coercion is involved in the decision to produce for exchange or in any act of exchange.

Professor Friedman then moves on to our actual complex economy, or rather to his own curious model of it:
'As in [the] simple model, so in the complex enterprise and money-exchange economy, cooperation is strictly individual and voluntary provided: (a) that enterprises are private, so that the ultimate contracting parties are individuals and (b) that individuals are effectively free to enter or not to enter into any particular exchange so that every exchange is strictly voluntary...'
...Proviso (b) is 'that individuals are effectively free to enter or not to enter into any particular exchange', and it is held that with this proviso 'every exchange is strictly voluntary'. A moment's thought will show that this is not so. The proviso that is required to make every transaction strictly volunatry is not freedom not to enter into any particular exchange, but freedom not to enter into any exchange at all. This, and only this, was the proviso that proved the simple model to be voluntary and noncoercive; and nothing less than this would prove the complex model to voluntary and noncoercive. But Professor Friedman is clearly claiming that freedom not to enter into any particular exchange is enough: 'The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal...The employee is protected from coercion by the employer because of other employers for whom he can work...'

One almost despairs of logic, and of the use of models. It is easy to see what Professor Friedman has done, but it is less easy to excuse it. He has moved from the simple economy of exchange between independent producers, to the capitalist economy, without mentioning the most important thing that distinguishes them. He mentions money instead of barter, and 'enterprises which are intermediaries between individuals in their capacities as suppliers of services and as purchasers of goods'...as if money and merchants were what distinguished a capitalist economy from an economy of independent producers. What distinguishes the capitalist economy from the simple exchange economy is the separation of labor and capital, that is, the existence of a labor force without its own sufficient capital and therefore without a choice as to whether to put its labor in the market or not. Professor Friedman would agree that where there is no choice there is coercion. His attempted demonstration that capitalism coordinates without coercion therefore fails...

...The logical humanist liberal will regret that ... and the fallacies make Capitalism and Freedom not a defense but an elegant tombstone of liberalism." -- C. B. Macpherson, "Elegant Tombstones", Canadian Journal of Political Science, March 1968.

Tuesday, July 17, 2007

Sunday, July 15, 2007

Kaldor On Neoclassical Economics

What could Alan Blinder have meant when the N. Y. Times quoted him as saying, "Mathematics is not scientific"? Perhaps Blinder was saying something like Kaldor did a over a quarter century ago:
"...unlike any scientific theory, where the basic assumptions are chosen on the basis of direct observation of the phenomena the behaviour of which forms the subject-matter of the theory, the basic assumptions of economic theory are either of a kind that are unverifiable - such as that producers 'maximize' their profits or consumers 'maximize' their utility - or of a kind which are directly contradicted by observation - for example, perfect competition, perfect divisibility, linear homogeneous and continuously differentiable production functions, wholly impersonal market relations, exclusive role of prices in information flows and perfect knowledge of all relevant prices by all agents and perfect foresight. There is also the requirement of a constant and unchanging set of products (goods) and of a constant and unchanging set of processes of production (or production functions) over time - though neither category, goods nor processes, is operationally defined: in other words, no attempt is made to show how these axiomatic concepts are to be defined or recognised in relation to empirical material.

While this pure theory is not intended to describe reality, it is put forward as the necessary conceptual framework - the necessary starting point - for any attempt at explaining how a 'decentralised' system works; how individuals guided entirely by the market, or rather by price information, sort themselves out between different activities and thereby secure the maximum satisfaction both to themselves and, in the specific Pareto-sense, to society as a whole.

Indeed it is the deep underlying belief, common to all economists of the so-called 'neo-classical' school, that general equilibrium theory is the one and only starting point for any logically consistent explanation of the behaviour of de-centralised economic systems. This belief sustained the theory despite the increasing (not diminishing) arbitariness of its basic assumptions - which was forced upon its practitioners by the ever more precise cognition of the needs of logical consistency. In terms of gradually converting an 'intellectual experiment' (to use Professor Kornai's phrase) into a scientific theory - in other words, into a set of theorems directly related to observable phenomena (*) - the development of theoretical economics was one of continual degress, not progress: the ship appears to be much further away from the shore now than it appeared to its originators in the nineteenth century. The latest theoretical models, which attempt to construct an equilibrium path through time with all prices for all periods fully determined at the start under the assumption that everyone foresees future prices correctly to eternity, require far mor fundamental 'relaxations' for their applicability than was thought to be involved in the original Walrasian scheme. The process of removing the 'scaffolding,' as the saying goes, - in other words of 'relaxing' the unreal basic assumptions - has not yet started. Indeed, the scaffolding gets thicker and more impenetrable with each successive reformulation of the theory, with growing uncertainty as to whether there is a solid building underneath.

Yet the main lessons of these increasingly abstract and unreal theoretical constructions are also increasingly taken on trust - as if in the social sciences, unlike the natural sciences, the problem of verification could be passed over or simply ignored. It is generally taken for granted by the great majority of academic economists that the economy always approaches, or is near to, a state of 'equilibrium'; that equilibrium, and hence the near-actual state of the world, provides goods and services to the maximum degree consistent with available resources; that there is full and efficient utilisation of every kind of 'resource'; that the wage of every kind and quality of labour is a measure of the net contribution (per unit) of these varying kinds and qualities of labour to the total product; that the rate of profits reflects the net advantage of substituting capital for labour in production, etc., etc. - all propostitions which the pure mathematical economist has shown to be valid only on assumptions that are manifestly unreal - that is to say, directly contrary to experience and not just 'abstract'. In fact, equilibrium theory has reached the stage where the pure theorist has successfully (though perhaps inadvertently) demonstrated that the main implications of this theory cannot possibly hold in reality, but that has not yet managed to pass his message down the line to the textbook writer and to the classroom.

(*) The difference between a scientific theory and an 'axiomatic' theorem has been well put by Einstein:
'Physics consitute a logical system of thought which is in a state of evolution, whose basis cannot be distilled, as it were, from experience by an inductive method, but can only be arrived at by free invention. The justification (truth content) of the system rests in the verification of the derived propositions by sense experiences.

The skeptic will say: "it may be true that this system of equations is reasonable from a logical standpoint. But it does not prove that it corresponds to nature." You are right, dear skeptic. Experience alone can decide on truth.'
A. Einstein, Ideas and Opinions, New York, 1960, pp. 322 and 355 (quoted by Kornai...)
The difference mainly resides in this. In the case of physics, any fundamental re-consideration of the basic 'axioms' of the system is the result of observations which could not be made consistent with existing hypotheses. Examples (chosen at random) are the observation that the amount of radiation emitted by Pitchblende was greater than could be accounted for by the absorption of sunlight; that a stream of light which passed through a glass and was directed at a mirror at some particular angle is not reflected by the mirror; or that there is a 'reddening' of the spectrum observed in distant stars. In economics, observations which contradict the basic hypotheses of prevailing theory are generally ignored: the 'theorist' and the 'empiricist' operate in two isolated compartments and the challenge of anomalous observations is ignored by the theorist - as something that could be taken into account at the stage of 'second approximation' without affecting the basic hypotheses. And where empirical material is brought into conjunction with a theoretical model, as in econometrics, the role of empirical estimation is to 'illustrate' or to 'decorate' the theory, not to provide support to basic hypothesis (as for example, in the case of numerous sudies purporting to estimate the coefficients of production functions)." -- Nicholas Kaldor (1972). "The Irrelevance of Equilibrium Economics", V. 82, N. 328 (Dec.): 1237-1255.

Saturday, July 14, 2007

Heterodox Economics Varietals

Austrian, Behavioral, Black, Ecological, Feminist, Institutionalist, Marxist, Post Keynesian, Post-Walrasian, Radical Political, Sraffian, and Structuralist economics. Also, Econophysics and Regulation Schools.

This list is not complete. I think a name may exist for economics drawing on Catholic social teaching. I am not sure how to label economists inspired by the mathematics of complexity, some of who might be heterodox.

Wednesday, July 11, 2007

Newsflash: New York Times Not Last Word On Technical Debates

The Times had an article today on heterodox economics. Some commentators do not seem to understand this sort of popularization isn't likely to be great at conveying what the argument is about. Others have more of a clue. My suggestion is that if you want to know what Fred Lee has to say about heterodox economics, read his publications on the topic.

Update (12 July): Mainstream Harvard economists comment. Naturally, none of these three comment on:
  • How Amherst economics acquired that tendency (mentioned in the Times’ article)
  • Why Harvard won’t allow Marglin to teach a section of the intro course
  • Feldstein’s refusal to modify his views on Social Security after finding his “empirical” results came from a computer programming error
  • How the thief Andrei Shleifer manages to still be a Harvard economist in good standing
By the way, Patricia Cohen, the Times reporter, explicitly says (correctly) that Blinder, Card, and Rodrik are not heterodox economists. I would think the Leontief paradox, when it comes to international trade, is empirical data.

Elsewhere, Max Sawicky points out that he does not develop heterodox economic theory.

I continue to think that you cannot offer a substantial critique of heterodox economics based on what is said about it in this New York Times article.

Peter Lewin, Correct To Mistaken

Peter Lewin is influenced by Ludwig Lachmann:
"In a world in which the production and sale of outputs was part of a plan that was assumed to be consistent with all the other related plans, so that there were no disappointments in production schedules or, most notably, in the sale of output, the value of the resources that were part of the plan would clearly be certain. And if everyone shared in the knowledge of the value of the output and the contribution of each input, then, in some sense, these values would be reflected in the price of the inputs. In such a situation of perfect plan coordination, a meaningful capital aggregate could then be obtained…

…Production plans, considered as a whole, are typically in disequilibrium – are based, at least in part, on inconsistent expectations, not regarding the ‘rules of the game,’ but regarding the viability of the product or the productive technique. There is no way to derive an aggregate measure of capital in this situation. The net present values as (assumed to be) computed by each individual planner are based on inconsistent futures…" -- Peter Lewin (1999, p. 112-113).
Here his views are, to put it nicely, inadequately researched:
"The Neoclassicals seemed to think it was a question of the degree of substitutability between inputs, which the Neo-Ricardians assumed to be low (their models involved discrete substitutability by 'switching' from one fixed technique to another). Neither side wondered about the relevance of their framework to the market process as we know it." -- Peter Lewin (1999, p. 83)
Many Sraffians use examples of techniques with fixed coefficients. I think Austrians would be comfortable with models in which some capital goods are technique-specific. But some Sraffians were quite clear that some of their criticisms did not depend on a lack of substitutability (e.g., Pasinetti 1969 and maybe this).

And some neoclassicals have also been clear that some issues are not a matter of the degree of substitutability:
"As my exposition will reveal, the fatal flaw in question can exist even when a scalar 'leets' is the sole producible input; it can exist even when precise neoclassical marginal products do exist and do serve to pin down unequivocally the distribution of incomes between propertyless workers and affluent capitalists. The statues of Piero and Joan belong in the pantheon of neoclassicism itself." -- Paul A. Samuelson (2001).
The flaw is the belief that output per worker will be higher, given technology, when the interest rate is lower. Samuelson has been repetitive on pointing out that this belief is false, even if all microeconomic production functions are continuously differentiable (e.g., Samuelson 1976).

I think Sraffians were always clear that the analysis of the choice of technique is a theoretical thought experiment. Joan Robinson (e.g., 1974, 1975, 1983) is an example of a Cambridge-Italian economist who worried about the relevance of this thought experiment to the analysis of market processes.

This is incorrect mathematics:
"It will not do to assume that things are only known ‘probabilistically,’ since this presumes that a finite number of possible outcomes and their distribution is known." -- Lewin (1999, p. 79)
A random variable can take on an infinite number of values and still have a probability distribution (e.g., a Poisson distribution). Lewin, in context, is trying to get at the distinction between insurable risk and Knightian/Keynesian uncertainty. Perhaps the problem with the above passage is mainly a problem of exposition, of trying to explain this distinction without going into mathematics.

By the way, the anonymous referee who directed me to Lewin's book can be read as mischaracterizing it. Lewin does not present an exposition of Austrian business cycle theory. His book, however, does contain much of interest to my topic.

References
  • Peter Lewin (1999). Capital in Disequilibrium: The Role of Capital in a Changing World, Routledge
  • Luigi L. Pasinetti (1969). "Switches of Technique and the 'Rate of Return' in Capital Theory", Economic Journal, V. 79, N. 315 (Sep.): 508-531
  • Joan Robinson (1974). "History versus Equilibrium", Indian Economic Journal, V. 21 (Mar.): 202-213
  • Joan Robinson (1975). "The Unimportance of Reswitching", Quarterly Journal of Economics, V. 89 (Feb.): 32-39
  • Joan Robinson (1983). "Garegnani on Effective Demand", in Keynes's Economics and the Theory of Value and Distribution (Ed. by J. Eatwell and M. Milgate), Oxford University Press
  • Paul A. Samuelson (1976). "Interest Rate Determinations and Oversimplifying Parables: A Summing Up", in Essays in Modern Capital Theory (Ed. by M. Brown, K. Sato, and P. Zarembka), North Holland Publishing
  • Paul A. Samuelson (2001). "A Modern Post-Mortem on Bohm's Capital Theory: Its Vital Normative Flaw Shared by Pre-Sraffian Mainstream Capital Theory", Journal of the History of Economic Thought, V. 23, N. 3: 301-317

Sunday, July 08, 2007

Some Principles Of Heterodox Economics

  1. Methodology (rather than just method) is important to understanding economics.
  2. Human actors are social and less than perfectly rational, driven by habits, routines, culture and tradition
  3. Economic systems are complex, evolving and unpredictable - and consequently equilibrium models should be viewed sceptically.
  4. While theories of the individual are useful, so are theories of aggregate or collective outcomes. Further, neither the individual nor the aggregate can be understood in isolation from the other.
  5. History and time are important (reflecting (3)).
  6. All economic theories are fallible and, reflecting (4), there is contemporary relevance of the history of thought to understanding economics.
  7. Pluralism, i.e. multiple perspectives, is advocated (following on from (3) and (6)).
  8. Formal mathematical and statistical methods should be removed from their perceived position as the supreme method - but not abandoned - and supplemented by other methods and data types.
  9. Facts and values are inseperable.
  10. Power is an important determinant of economic outcomes.
-- Andrew Mearman (2007). "Teaching Heterodox Economics Concepts", The Economics Network (June)
(I previously posted a quotation of ten principles of institutional economics.)

Thursday, July 05, 2007

Economists as Tools

I've been reading Tiago Mata's award-winning 2005 PhD. thesis, Dissent in Economics: Making Radical Political Economics and Post Keynesian Economics, 1960-1980 (hat tip to Peter Klein).

Here's a statement read, at the 1969 American Economic Association business meeting, by a spokesperson for a group of about 25 radical economists:
"Economists in the United States work as a group and work contrary to the interests of the masses of people. The affluence and the power of the economists derive from their support of the elite, the elite which controls the institutional structure and the sources of power that perpetrate and reproduce the oppression of millions – the economists are the sycophants of inequality, alienation, destruction of environment, imperialism, racism, and the sub jugation of women.

...economists do not merely praise the system; they also supply the tools – indeed, they are the tools – instrumental to the elite’s attainment of its unjust ends. They show how to manipulate people so that the system’s hinges are smoothly oiled.

... the A.E.A. plays directly destructive roles in our society. It serves to insure the perpetuation of professionalism, elitism, and petty irrelevance. It serves to inhibit the development of new ideas, ideas which are reflective of social reality.

...Our conflict with the A.E.A. is not simply an intellectual debate. The A.E.A. cannot lessen our condemnation by their willingness to partake in debate, or by their willingness to provide a room to radical economists at this meeting. Our conflict is a basic conflict of interests. The economists have chosen to serve the status quo. We have chosen to fight it." (quote in Mata, p. 82)
Although I find the above amusing, I find myself more sympathetic to the Post Keynesians chronicled in part III.

P.S.: This week's Nation has letters responding to Chris Hayes' article about heterodox economics. The letter-writers point out the existence of feminist and ecological economics and the non-existence of a Nobel prize in economics.

Tuesday, July 03, 2007

Quoting Joan Robinson

I might as well note that Mark Thoma puts up a long quotation from Joan Robinson.

Gabriel Mihalache, with his confusion of methodological individualism and political individualism, makes the comments, basically, all about him.

Gavin Kennedy cannot seem to handle that a leftist like Joan Robinson is quite aware of the contrast between popular portrayals of Adam Smith and what Smith actually said. He assigns Joan Robinson's words to Mark Thoma.

This should further explode Gavin Kennedy's head:
"I didn't do any research at all on Smith. I just read him. There's no research. Just read it. He's pre-capitalist, a figure of the Enlightment. What we would call capitalism he depised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn them into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceedings to its limits...

[A mixture of stuff that I agree is a good interpretation of Smith and stuff I don't think is all that good an interpretation]

The version of him that's given today is just ridiculous. But I didn't have to do any research to find this out. All you have to do is read. If you're literate you'll find it out. I did do a little research in the way it's treated, and that's interesting. For example, the University of Chicago, the great bastion of free market economics, etc., etc., published a bicentennial edition of the hero, a scholarly edition with all the footnotes and the introduction by a Nobel Prize winner, George Stigler, a huge index, a real scholarly edition. That's the one I used. It's the best edition. The scholarly framework was very interesting, including Stigler's introduction. It's likely he never opened The Wealth of Nations. Just about everything he said about the book was completely false. I went through a bunch of examples in writing about it, in Year 501 and elsewhere..." -- Noam Chomsky (1996). Class Warfare: Interviews with David Barsamian, Common Courage Press.

Don't Believe A Word Greg Mankiw Says

Others have noticed that Greg Mankiw is untrustworthy and unprofessional.

Update: Others are commenting on Mankiw's untrustworthiness, I think on different grounds.

Sunday, July 01, 2007

A Sequence: Civil Rights, Political Rights, Social Rights

Another reminder to myself: The following teleological story is told by T. H. Marshall:
  • In the eighteenth century, the British obtained civil rights (e.g., free speech, freedom of religion)
  • In the nineteenth century, they acquired political rights (e.g., the right to vote)
  • The twentieth century is about the struggle for social rights (e.g., the right to be able to use your talents and skills to provide for yourself and your family, also known as, the right to a job)
The original source for this story is:
  • T. H. Marshall (1950). Citzenship and Social Class, Cambridge University Press.