Red-Baiting Keynesian Textbooks

What economists know now is influenced by what they could teach in the past. Perhaps where we are now has something do with interventions in the past from outside of academic economics. I think, for example, of the suppression of Lorie Tarshis' full-throated Keynesianism.

Lorie Tarshis was a Canadian who attended Cambridge while Keynes was working out the General Theory. He attended Keynes' annual lectures from 1932 to 1935. With others, he brought Keynes' economics to Cambridge, Massachusetts. Tarshis was at Tufts. He later wrote the first introductory textbook to incorporate Keynesianism. I gather this textbook, Elements of Economics (Houghton Mifflin, 1947) predates Samuelson's textbook. Let's look at a reaction to the use of this textbook in teaching the introduction to economics at Yale:

"Marx himself, in the course of his lifetime, envisaged two broad lines of action that could be adopted to destroy the bourgeoisie: one was violent revolution; the other, a slow increase of state power, through extended social services, taxation, and regulation, to a point where a smooth transition could be effected from an individualist to a collectivist society. The Communists have come to scorn the latter method, but it is nevertheless evident that the prescience of their most systematic and inspiring philosopher has not been thereby vitiated.

It is a revolution of the second type, one that advocates a slow but relentless transfer of power from the individual to the state, that has roots in the Department of Economics at Yale, and unquestionably in similar departments in many colleges throughout the country. The documentation that follows should paint a vivid picture." -- William F. Buckley, Jr. God and Man at Yale: The Superstitions of Academic Freedom, Henry Regery, 1951, p. 46-47

Buckley applies his ideologically-charged nonsense to textbooks by Tarshis, Samuelson, and a few others.

2005 USA Labor Values

Figure 1 and Table 1 list industries in order of declining labor values, as of 2005. Industries are as aggregated in the North American Industry Classification System (NAICS), and labor values are in units of person-years per $1,000 output. Table 1 also shows direct labor coefficients for each industry. Direct labor coefficients are the full time equivalent staff hired in each industry. Labor values for each industry are the sum of direct labor values and the labor embodied in the inputs purchased by that industry. For example, the labor embodied in the commodities produced by "Food Services and Drinking Places" includes the labor embodied in commodities purchased by such establishements from the Construction; Real Estate; Miscellaneous Professional, Scientific and Technical Services; and Wholesale Trade industries.

I can think of other analyses to do with this and related data, such as some measure of average wage in an appropriate numeraire. For example, one might examine the rate of exploitation, the variation in the organic composition of capital by industry, and the differences between prices and labor values.

Figure 1: 2005 Embodied Labor Values

Industry	Embodied Labor Values (Person-years per Thousand $ Output)	Direct Labor Coefficient (Person-years per Thousand $ Output)
Social Assistance	0.0219	0.0185
Food Services and DrinkingPlaces	0.0200	0.0157
Forestry, Fishing, and Related Activities	0.0192	0.0103
Transit and Ground Passenger Transportation	0.0174	0.0138
Administrative and Support Services	0.0172	0.0136
Educational Services	0.0169	0.0134
Amusements, Gambling, and Recreation Industries	0.0152	0.0122
Other Services, Except Government	0.0152	0.0112
Hospitals and Nursing and Residental Care Facilities	0.0146	0.0107
Warehousing and Storage	0.0141	0.0127
Wood Products	0.0141	0.00537
Apparel and Leather and Allied Products	0.0139	0.00840
Retail Trade	0.0137	0.0106
Accomodation	0.0133	0.00986
State and Local General Government	0.0129	0.00971
Furniture and Related Products	0.0128	0.00651
Printing and Related Support Activities	0.0119	0.00719
Textile Mills and Textile Product Mills	0.0119	0.00548
Other Transportation and Support Activities	0.0111	0.00908
Construction	0.0110	0.00623
Federal Government Enterprises	0.0105	0.00803
Ambulatory Health Care Services	0.0103	0.00727
Fabricated Metal Products	0.0102	0.00555
State and Local Government Enterprises	0.00996	0.00525
Truck Transportation	0.00989	0.00539
Motor Vehicles, Bodies and Trailers, and Parts	0.00963	0.00226
Waste Management and Remediation Services	0.00923	0.00492
Plastics and Rubber Products	0.0922	0.00410
Machinery	0.00920	0.00399
Misc. Professional, Scientific and Technical Services	0.00914	0.00501
Miscellaneous Manufacturing	0.00903	0.00450
Nonmetallic Mineral Products	0.00898	0.00444
Paper Products	0.00895	0.00302
Food and Beverage and Tobacco Products	0.00890	0.00247
Computer Systems Design and Related Services	0.00888	0.00627
Computer and Electronic Products	0.00880	0.00340
Electrical Equipment, Appliances, and Components	0.00880	0.00393
Information and Data Processing Services	0.00869	0.00339
Other Transportation Equipment	0.00847	0.00349
Air Transportation	0.00841	0.00352
Performing Arts, Spectator Sports, Museums, Etc.	0.00831	0.00512
Motion Picture and Sound Recording Industries	0.00821	0.00371
Federal General Government	0.00812	0.00430
Wholesale Trade	0.00811	0.00526
Insurance Carriers and Related Activities	0.00805	0.00372
Rental and Leasing Services and Lessors of Intangible Assets	0.00784	0.00243
Water Transportation	0.00780	0.00159
Farms	0.00778	0.00264
Legal Services	0.00758	0.00512
Management of Companies and Enterprises	0.00757	0.00469
Publishing Industries (Includes Software)	0.00751	0.00317
Primary Metals	0.00736	0.00237
Rail Transportation	0.00686	0.00326
Support Activities for Mining	0.00656	0.00263
Fed. Reserve Banks, Credit Intermediation, Etc.	0.00635	0.00408
Mining, Except Oil and Gas	0.00623	0.00329
Chemical Products	0.00621	0.00160
Broadcasting and Telecommunications	0.00598	0.00188
Securities, Commodity Contracts, and Investments	0.00542	0.00246
Pipeline Transportation	0.00524	0.000922
Funds, Trusts, and Other Financial Vehicles	0.00514	0.000918
Real Estate	0.00326	0.000687
Petroleum and Coal Products	0.00325	0.000274
Utilities	0.00294	0.00133
Oil and Gas Extraction	0.00250	0.000507

Thought Control In Economics

I might as well point out this Tom Green Adbusters' article, "Thought Control in Economics". I have previously recommended works of Fred Lee.

Elsewhere

I'm continually finding articles by authors I like reading:

• Paul Davidson has written an article on oil prices for the July-August issue of Challenge
• The commentator Patch points out the Hans Böckler Summer school lectures and papers
• Last week, Talking Points Memos organized a discussion on James Galbraith's new book, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, which I have not read

As regards the second, I particularly like Marc Lavoie's first lecture, "History and Methods of Post-Keynesian Macroeconomics". It wouldn't surprise me if some of you, dear readers, find more policy-oriented lectures and papers of greater interest.

Against Propaganda Being Institutionalized In Universities

In The Chronicle of Higher Education, Marshall Sahlins criticizes the proposed establishment of the Milton Friedman Institute (MFI). (Hat tip to Brad DeLong.)

The Committee for Open Research on Economy & Society (CORES) has a web site collecting criticism of the MFI.

As indicated by my post title, I think the MFI sounds like it should shame any serious university.

Modest Barkley Rosser

Apparently, just as Barkley Rosser admires the work of János Kornai, so János Kornai admires the work of Barkley Rosser:

"Strong, wide ranging measures to harden the budget constraint came earliest in Hungary. The assessment of J. Barkley Rosser Jr. and Marina V. Rosser, in one of the best-known textbooks of comparative economics, points to the strong intellectual influence of my work on that outcome, and their assessment seems convincing. [Footnote:] 'Hungary has by far the hardest budget constraint of any of the formerly socialist economies... Arguable this reflects the immense policy influence of János Kornai in his native country' (Rosser and Rosser 2004, pp. 377-378)." -- János Kornai (2006) By Force of Thought: Irregular Memoirs of an Intellectual Journey, Massachusetts Institute of Technology

I find there is much about Kornai's views I was not aware of before reading his intellectual memoirs.

Process Recurrence

1.0 Introduction
This post presents another anomaly for neoclassical economics established in Sraffa's framework. It does not present a numeric example, but only outlines the possibility of one. Maybe Kurz and Salvadori (1995) or Woods (1990) contain specific numeric values in which a process can recur along the so-called factor price frontier without the reswitching or recurrence of techniques also arising. Han and Schefold found process recurrence empirically to be more common than reswitching. They say:

"In fact, it is often observed that returns of processes are connected with reverse capital deepening within the scope of our investigation (but it can easily be seen that either phenomenon can also occur without the other)." - Han and Schefold (2006)

2.0 The Model
Consider a simple economy in which workers produce two commodities, apples and bananas from inputs, also composed of apples and bananas. Two processes are known for producing apples, and these processes are labeled I_A and II_A. Two processes, I_B and II_B are also known for producing bananas. This a circulating capital model; all inputs are used up in each production in producing the outputs.

A technique consists of two processes, one for producing apples and one for producing bananas. The claim is that processes can be such that techniques are cost-minimizing at the rates of profits indicated in Table 1. Notice that in this table, each technique is cost-minimizing only in one interval for the rate of profits. Techniques do not reswitch or recur. Yet the first process for producing apples does recur. That process is part of the cost-minimizing technique in both the first and the last interval for the rate of profits. The reswitching of techniques is sufficient for processes to recur, but is not necessary.

Table 1: Cost-Minimizing Techniques

Rate of Profit	Technique
0 ≤ r ≤ r1	IA, IB
r1 ≤ r ≤ r2	IIA, IB
r3 ≤ r ≤ r1	IIA, IIB
r3 ≤ r ≤ rmax	IA, IIB

Rates of profit at which more than one technique is cost minimizing are called switch points. r₁, r₂, r₃, and r₄ are switch points in the example. Capital reversing is the phenomenon in which around a switch point the cost-minimizing technique at the higher rate of profit also has a higher ratio of the value of capital goods to the value of a physically-specified output. In exploded neoclassical intuition, equilibrium prices are scarcity indices. A higher price was thought to indicate that a commodity is more scarce and to lead producers to subsitute other inputs for the more scarce commodity. If the interest rate were the price of capital, a higher interest rate would lead producers to adopt less capital-intensive techniques, in some sense, from a known book of blueprints for techniques. Capital reversing is paradoxical from this perspective and shows that neoclassical heuristics are logically invalid.

Process recurrence is also paradoxical from the exploded neoclassical perspective. An ill-trained neoclassical economist might expect the principle of substitution to hold for individual industries, as well as at the level of the entire economy. In the simple sort of model from which the outlined example is drawn, a higher rate of profits is associated with a lower wage. The specification of a process includes the specification of the how many person-years of labor is needed per unit output in the given industry. Figure 1 shows this normalized direct labor input as a function of the wage. Process recurrence is incompatible with the supposed neoclassical principle of substitution.

Figure 1: Labor Intensity Versus Wage In A Single Industry

References

• Z. Han and B. Schefold (2006) "An Empirical Investigation of Paradoxes: Reswitching and Reverse Capital Deepening in Capital Theory", Cambridge Journal of Economics, V. 30
• Heinz D. Kurz and Neri Salvadori (1995) Theory of Production: A Long-Period Analysis, Cambridge University Press
• J. E. Woods (1990) The Production of Commodities: An Introduction to Sraffa, Humanities Press

Wicksteed Versus Marx

As far as I know, Philip Wicksteed was the first economist to oppose Marx's theory of value on the basis of the neoclassical or marginal theory. Does his essay, "The Marxian Theory of Value: Das Kapital: A Critique" even predate Böhm-Bawerk on this topic? Wicksteed's essay was published in the October 1884 issue of To-Day. Wicksteed, by the way, considered himself a socialist.

I find curious George Bernard Shaw's answer in the January issue. Shaw presented himself as calling for somebody better trained in mathematical economics to answer Wicksteed, not as answering Wicksteed himself:

"I have not the slightest intention here of defending Karl Marx against Mr. Wicksteed... I write partly to draw further attention to a controversy which seems to me of great interest because it is one on which Socialists, without at all ceasing to be Socialists, are sure to divide very soon; and partly because I wish to have a word with Mr. Wicksteed as to my own perplexities concerning 'final utility' before some more competent hand deals him the coup de grâce to which I have already alluded. Even were I economist enough to do that myself, I am not mathematician enough to confute Mr. Wicksteed by the Jevonian method. I somewhat mistrust mathematical symbols. I remember at school a plausible boy who used to prove to me by algebra that one equals two. He always began by saying, 'Let x equal a.' I saw no great harm in admitting that; and the proof followed with rigorous exactness. The effect was not to make me proceed habitually on the assumption that one equals two, but to impress upon me that there was a screw loose somewhere in the algebraic art, and a chance for me to set it right some day when I had time to look into the subject. And I feel bound to make the perhaps puerile confession that when I read Jevons's Theory of Political Economy, I no sooner glanced at the words 'let x signify the quantity of commodity,' than I thought of the plausible boy, and prepared myself for a theory of value based on algebraic proof that two and two make five." -- George Bernard Shaw

I fear many may react like this to mathematical arguments on practical matters.

(Wicksteed's critique, Shaw's response, and Wicksteed's rejoinder are all republished as an appendix to the second volume of the 1933 London School of Economics re-issue of Wicksteed's The Common Sense of Political Economy.)

Hayek and Myrdal Quotations

Hayek had a good argument about the difficulties of central planning. The planners do not have a mechanism for using tacit knowledge distributed among agents. But when it came to describing how contemporary western economies work, Hayek gave up:

"It is important to realize in any investigation of the possibilities of planning that it is a fallacy to suppose capitalism as it exists today is the alternative. We are certainly as far from capitalism in its pure form as we are from any system of central planning. The world of today is just interventionist chaos." -- F. A. Hayek (1948). "Socialist Calculation", in Individualism and Economic Order

On a different topic entirely - I am amused by this Myrdal quote:

"It has been suggested that if one tried to construct a consistent system from Marshall's footnotes and reservations, one would arrive at something very different from the Marshallian system. But it seems to me that if the job were critically, one would not arrive at any system at all." -- Gunar Myrdal, The Political Element in the Development of Economic Theory (Trans. by Paul Streeten) pp. 127-128

One such reservation is Appendix H in the eighth edition of Principles of Economics, titled "Limitations of the use of statical assumptions in regard to increasing returns".

Eatwell Exposition of a Sraffian Research Program

"The revival of the analytical principles of classical political economy that has gathered pace since the mid-1960s has been based on the firm foundation of a logically coherent theory of value and distribution. It was the failure to provide this foundation which for many years confined the classical approach to being, at best, a repository of useful ideas on growth and technological progress (Smith's discussion of the division of labour and Marx's dissection of the labour process being good examples), or, at worst, identified with simple-minded devotion of the labour theory of value as the 'qualitative' expression of capitalist exploitation - the position to which Hilferding retreated in the face of Bohm-Bawerk's critique of Marx, so depriving the surplus approach of any quantitative significance as a theory of value and distribution. The publication of Piero Sraffa's Production of Commodities by Means of Commodities changed all that. Sraffa not only generalized the mathematical solutions to the surplus approach which had been advanced by Dmitriev and Bortkeiwicz, but also presented the analytical structure of the surplus approach with stark clarity. Moreover, Sraffa produced a critique of the neo-classical theory of the rate of profit and so of the entire neo-classical explanation of value, distribution, and output - hence clearing the ground for the redevelopment of classical theory.

With the analytical core now secure, attention can be turned to the development of other facets of classical and Marxian theory and to the empirical insights which this theory provides. In stark contrast to the neo-classical approach, which reduces all economic activity to a single principle - the competitive resolution of individual attempts to maximize utility subject to the constraints of technology and endowment - classical theory is constructed from a number of analytically separable components. The core of the theory, the surplus approach to value and distribution, takes as data the size and composition of output, the technology in use (the conditions of reproduction) and the real wage (or, in some cases, the rate of profit). These data do not, however, lie outside the realm of economics (as,for example, the neo-classical economists' utility functions do). We need to provide theoretical explanations of their determination. Hence Smith, Ricardo and Marx advanced theories of the real wage and of the level of output (Say's law in the case of Ricardo), and Smith and Marx presented detailed analyses of technological change. Assembled around the core, these theories are the building-blocks of a general theory of the operations of the capitalist economy. There is in all this a clear danger of constructing a disjointed ad hoc collage of theories and empirical generalisations. This is avoided by enveloping the entire edifice in a general characterisation of the economic system, the clear specification, that is, of the capitalist mode of production. This serves both to cement the elements of the theory together and to eliminate propositions that do not fit.

Broadly, there are two jobs to be done in developing and extending the classical framework.

First, the classical theory itself must be developed and generalised. All the elements surrounding the core analysis of value and distribution - theories of output and employment, of accumulation, of technology, of the wage, of competition and so on - require restatement and 'modernisation' in the light both of Sraffa's results and of the many changing facets of the modern capitalist system. This will involve both theoretical development and empirical analysis, for one of the important characteristics of classical theorising is the manner in which theory is grounded in the socio-economic data of the system under consideration - the institutional environment is an essential part of the theory.

Second, the rejection of the now discredited neoclassical theory throws open a wide range of problems in international trade, development economics, fiscal and monetary policy and so forth, into which the classical approach can provide new insights. In part these will lead to the refreshing task of debunking the policy prescriptions of orthodox theory which revolve primarily around the fundamental theorem of welfare economics and the supposed 'efficiency' of competitive markets. But there is also a positive job to be done. The reconstruction of economic theory will inevitably precipitate a reinterpretation of economic policy and problems." -- John Eatwell (1987). "Foreword", in The Economics of François Quesnay, by Gianni Vaggi, Duke University Press