Elsewhere

I have added the blog of some economists at the University of Missouri-Kansas City to my blogroll. That blog is more policy-oriented than this. Bill Mitchell blogs from Australia, also more about policy than I do. Grupo Lujan-Circus seems like a blog of interest to me, but I can read only the names. The same remark applies to the blog of the Italian Association for the History of Political Economy.

Occasionally I stumble across curious articles in Wikipedia. The one on Surplus economics references Paul Baron and Paul Sweezy. It doesn't describe their ideas very well, and could do with some reference to Sraffa too. The entry on Newtonian time in economics seems to have been written by Austrian fanboys who, typically, know about neither Joan Robinson's distinction between logical and historical time nor Paul Davidson's attack on the Austrian school.

Current Events Foreseen

First Instance

"[Condolences]
G.O.P.Y.T.

A letter from Ronald Reagan to Michael Jackson, dated 1 February, 1984, five days after the singer's hair was set afire by pyrotechnics during the filming of a Pepsi commercial...

Dear Michael,

I was pleased to learn that you were not seriously hurt in your recent accident. I know from experience that these things can happen on the set - no matter how much caution is exercised. All over America, millions of people look up to you as an example. Your deep faith in God and adherence to traditional values are an inspiration to all of us, especially young people searching fro something real to believe in. You've gained quite a number of fans along the road since "I Want You Back", and Nancy and I are among them. Keep up the good work, Michael. We're very happy for you.

Sincerely,
Ronald Reagan" -- Harper's Magazine (June 2009)

Second Instance
This was almost certainly not written last week:

"[James Hansen] said that he was thinking of attending another deomonstration soon, in West Virginia coal country." -- Elizabeth Kolbert, "The Catastrophist", The New Yorker (June 29, 2009): 39-45

And here we have some news:

"SUNDIAL -- Coal miners confronted environmental protesters June 23 during a sometimes tense standoff at a focal point in the battle over mountaintop mining -- a protest that attracted one of the nation's foremost experts on global warming.

NASA climate scientist James Hansen was among the protesters, and West Virginia State Police arrested him during a planned act of civil disobedience. While upstaged in the media spotlight by actress Daryl Hannah, who also was arrested, it was Hansen's presence at the rally that drew widespread interest in the event from the environmental community..." -- Walt Williams

Suppressed Empirical Results

"An overwhelming majority of the entrepreneurs thought that a price based on full average cost (including a conventional allowance for profit) was the 'right' price, the one which 'ought' to be charged...

...the procedure can be not unfairly generalized as follows: prime (or 'direct') cost per unit is taken as the base, a percentage addition is made to cover overheads (or 'oncost' or 'indirect' cost), and a further conventional addition (frequently 10 per cent.) is made for profit. Selling costs commonly and interest on capital rarely are included in overheads; when not so included they are allowed for in addition for profits." -- R. L. Hall and C. J. Hitch, "Price Theory and Business Behavior", Oxford Economic Papers, (May 1939): 12-45

These findings motivated Milton Friedman in his badly-argued work on methodology.

Not Nostradamus

Brad DeLong still wants the attempted extrapolation of trends to be equivalent to prophecy. So I thought I'd point out another nineteenth century writer:

"There are at the present time two great nations in the world, which started from different points, but seem to tend towards the same end. I allude to the Russians and the Americans. Both of them have grown up unnoticed; and while the attention of mankind was directed elsewhere, they have suddenly placed themselves in the front rank among the nations, and the world learned their existence and their greatness at almost the same time.

All other nations seem to have nearly reached their natural limits, and they have only to maintain their power; but these are still in the act of growth. All others have stopped, or continue to advance with extreme difficulty; these alone are proceeding with ease and celerity along a path to which no limit can be perceived. The American struggles against the obstacles that nature opposes to him; the adversaries of the Russian are men. The former combats the wilderness and savage life; the latter, civilization with all its arms. The conquests of the American are therefore gained by the plowshare; those of the Russian by the sword. The Anglo-American relies upon personal interest to accomplish his ends and gives free scope to the unguided strength and common sense of the people; the Russian centers all the authority of society in a single arm. The principal instrument of the former is freedom; of the latter, servitude. Their starting point is different and their courses are not the same; yet each seems marked out by the will of Heaven to sway the destinities of half the globe." -- Alexis de Tocqueville, Democracy in America, V. 1, last page

By His Bootstraps

1.0 Introduction
One can hold savings in various forms of assets. In effect, savings is a time machine for transferring purchasing power into the future. A debt, when purchased - that is, a bond - is one such asset in which one can store savings. The relationships between bonds of various maturities and the existence of well-developed markets in which to trade bonds allows the determination of interest rates without relying on the theory of time preference, a theory which is a lot of utter hogwash anyhow.

The point of this post is to explain how, under certain institutions for selling second-hand debt, a relatively stable long-term interest rate can be maintained by beliefs in its stability. No need arises to call on the forces of thrift and productivity. This post might even be relevant to current events in the USA.

2.0 Institutions Providing a Setting in Which a Second Decision Must be Made
The model I outline here is based on Keynes' account of the two decisions a saver must make:

"The psychological time-preferences of an individual require two distinct sets of decisions to carry them out completely. The first ... determines for each individual how much of his income he will consume and how much he will reserve in some form of command over future consumption. But this decision having been made, there is a further decision which awaits him, namely, in what form he will hold the command over future consumption which he has reserved, whether out of his current income or from previous savings." -- J. M. Keynes, The General Theory of Employment, Interest and Money (1936): p. 166

Assume that the debts of the best quality available for purchase consist of Treasury bills (T-bills) that mature in three months, T-bills that mature in a year, and Treasury notes (T-notes) that mature in 10 years. These are all available in the U.S.A., along with T-bills, T-notes, and T-bonds of other maturities. In this exposition, I abstract from the existence of these other maturities. By including debts of these three maturities, the model incorporates the decision to hold money, assets that pay the short-term interest rate, or assets that pay the long-term interest rate.

In describing three-month T-bills as money, I again follow Keynes:

"...we can draw the line between 'money' and 'debts' at whatever point is most convenient for handling a particular problem. For example, we can treat as money any command over general purchasing power which the owner has not parted with for a period in excess of three months, and as debt what cannot be recovered for a longer period than this; or we can substitute for 'three months' one month or three days or three hours or any other period; or we can exclude from money whatever is not legal tender on the spot. It is often convenient to include in money time-deposits with banks and, occasionally, even such instruments as (e.g.) treasury bills." -- J. M. Keynes, The General Theory of Employment, Interest and Money (1936): p. 167

Suppose, contrary to fact, that the short term interest rate, r, was known to be constant for the next ten years, where 100 r is stated as an annual percentage. Then the long term interest rate would be established in the market at the start of the year as 100 [(1 + r)¹⁰ - 1] percent for 10 years, and the interest rate on money would be 100 [(1 + r)^1/4 - 1] percent for three months. A higher price on a bond corresponds to a lower interest rate. For example, the price of a T-bill with a face value of $1000 to be paid in a year is 1000/(1 + r) dollars.

3.0 The Individual
In this model, federal authorities set the interest rate on money. The short term interest rate provides a market consensus on monetary policy is likely to be over the next year. If the annual interest rate embodied in the price of one-year T-bills is higher than the annualized interest rate on money, the market price of T-bills is predicting a tightening of monetary policy. The individual allocates his savings partly on his opinion of this consensus. If he thinks, for example, that the monetary authority is not going to tighten that much, he would sell three-month T-bills and buy one-year T-bills, so as to make a profit from speculation when the price of the latter rises.

The individual, one assumes, has some idea of what is a normal long-term interest rate. He expects that over a long enough period, the federal authority's monetary policy will average out, thereby achieving this normal rate. The individual expects the price of T-notes to eventually rise when the current long-term interest rate is above that normal long-term rate and to fall when the current long-term rate is below that normal rate. Here, too, the possibility for speculative gains influences the individual in his allocation of his savings between T-notes and T-bills.

3.0 Markets
Consider a range of the price of T-notes. For a high enough price, those who are bears on this market (who expect the long term interest rate to rise) would dominate the bulls (who expect the long term interest rate to fall). More would be selling than buying, and the price would fall. The opposite is true for a low enough price. The equilibrium price at an instant of time balances bulls and bears:

"In the Treatise [Keynes] pictures the Bulls and Bears of the gilt-edged market going into and out of bonds as they individually come to think that the next price movement will be up or down. In this speculative market the price of bonds and thus their yield, the interest rate, can only settle if opinion is divided, so that those who wish to sell for fear of a fall find their offers matched by the bids of those who wish to buy in hope of a rise. It is thus, as Keynes says, a variety of opinion in the gilt-edged market which gives stability to the interest rate and some control over it to the monetary authorities." -- G. L. S. Shackle, "Simplicity in Keynes's Theory of Money and Employment", The South African Journal of Economics, v. 51, n. 3 (1983): 357-367

Elsewhere Shackle talks about equilibrium in such a speculative market as inherently restless.

4.0 Conclusions and a Policy Implication
I suppose one could express the above model in mathematics, if one were so inclined. One might start with some distribution of agents' beliefs about the conventional long term interest rate, and allow each agent to slowly update their view, maybe with the addition of random noise. (One might draw on Shackle's "The Bounds of Unknowledge" (in Beyond Positive Economics (ed. by J. Wiseman) Macmillan, 1983) in specifying this updating.) And the agents would decide on the distribution of their savings based on their views. Maybe the model should have more types of assets. One would want a model in which a diversity of opinion is maintained among agents, and in which time series for stock equilibria exhibit hysteresis and non-ergodicity. It wouldn't surprise me if somebody has already published such a model.

Keynes had something to say about policy based on this sort of analysis:

"Thus a monetary policy which strikes public opinion as being experimental in character or easily liable to change may fail in its objective of greatly reducing the long-term rate of interest... The same policy, on the other hand, may prove easily successful if it appeals to public opinion as being reasonable and practicable and in the public interest, rooted in strong conviction, and promoted by an authority unlikely to be superseded." -- J. M. Keynes, The General Theory of Employment, Interest and Money (1936): p. 203

Weird Science

I'm not sure I had heard of the Voynich Manuscript before this xkcd cartoon. But it did remind me of a couple of other artifacts whose existence I think extremely curious:

• The Antikythera Mechanism is a mechanical computer for calculating astronomical positions, and it dates from classical Greece.
• Piri Reis map dates, maybe, from before the Europeans had explored the New World, but yet shows the coast of South America and Anartica under the ice sheet.
• The Nazca lines are a series of drawings on a plateau in Peru dating from before Columbus and that make the most sense when viewed from the air.

Backstop Technologies And Natural Resources

1.0 Inroduction
Patch writes:

"I just finished reading Pasinetti's

Lectures on the Theory of Production (New York: Colombia University Press and London: The Macmillan Press Ltd., 1977.).

It is a readable introduction of production price models and it gave me an idea of what actually is the difference between prices optimizing the use of endowments and production prices. But then again I found some problems and I thought I might ask you before I send an email to Pasinetti himself.

The most important problem is, how do the production models work if you don't have an endowment? If you need commodity A to produce commodity B AND VICE VERSA, you can't start off producing at all because you don't have the necessary A to produce B and vice versa. The second problem maybe already is solved but I don't know: Can you use these models to say anything about natural resources? These resources are 'given', but you don't have to use them up in the first period so you still need an optimization I think."

Luigi Pasinetti, I think, has an ability to distill his ideas and express them remarkably clearly. His Lectures is a great textbook, and I could easily imagine Pasinetti getting a "Nobel" prize. Perhaps Sraffa's abstractions can be combined with Joan Robinson's emphasis on historical time to provide insight into actually existing capitalist economies. If so, such an advance might be based on Pasinetti's work, especially on structural economic dynamics.

I think both of Patch's questions are good questions, and I am going to decompose each into two.

2.0 Proportions and Endowments
One can think of the first as asking one of the following:

1. What happens if the means of production are not in the proportions needed for steady growth at the start of a production period?
2. What happens if none of some input needed for a cost-minimizing technique exists at the start of the production period?

An orthodox economist might want to analyze the first question by talking about intertemporal equilibria, the turnpike theorem, or tranverses between long period equilibria. However:

"5. Thus, if Sraffa's propositions are to be contained in an 'orthodoxy', which as [Frank] Hahn states has the endowment of factors among its data, such a datum should be present also in Production of Commodities. But how can Hahn trace it since that datum is not there?

6. Hahn attempts to do so when he introduces a simplified model of 'neoclassical theory' involving two commodities - wheat and barley - each of which is both a capital good and a consumption good. He asserts that, in order to obtain Sraffa's uniform rate of return on the two capital goods, the initial endowments of wheat and barley must bear some particular proportion to each other, because 'It cannot be part of the doctrine of Sraffa that you are uninterested in whether there is enough ... wheat and barley to meet demand" (Hahn, 1982, p. 365; emphasis added). In other words, Hahn finds it inconceivable that the simple answer to the question he raises in that passage might be:

Yes, it can, and it is, part of the doctrine of Sraffa's that distribution and normal prices do not require the initial endowments of wheat and barley for their determination.

Clearly, Hahn has begged his question here. He has assumed, and not proved, that what constitutes a characteristic feature of 'neoclassical' theory by his own definition of it - the determining role of factor endowments - is present in Sraffa's analysis. To that extent he has assumed what he intended to prove, namely that Sraffa's analysis is a 'special case' of neoclassical theory.

In fact, as he tells us in his Preface, Sraffa's standpoint is that 'of the old classical economists from Adam Smith to Ricardo', and, as we shall presently see, this standpoint does not attribute a determining role to 'the endowment of agents'. Therefore, his analysis can hardly be a 'special case' of the 'neoclassical' theory, which does admittedly rest on such a role." - P. Garegnani, "Sraffa" Classical versus Marginalist Analysis", in Essays on Piero Sraffa: Critical Perspectives on the Revival of Classical Theory (Edited by K. Bharadwaj and B. Schefold), Unwin Hyman (1990).

The second question is addressed by postulating the existence of a backstop technology in which, say, B can be produced without the existence of any A. I think this accords well with experience. Maybe no industry in the USA today produces without inputs of computer software and hardware, at least indirectly. Yet clearly this situation has come about without computer software and hardware being produced forever in the past.

3.0 Natural Resources
I think of natural resources as falling into two kinds:

1. Resources, like land in classical economics, that are given in quantity, cannot be manufactured, and provide services over a production period without ever suffering any diminution.
2. Resources, like oil, that are used up over time and cannot be replaced.

Land is usefully thought of as a case of joint production. Many economists, including Pasinetti himself, have analyzed joint production. I think of Christian Bidard, Bertram Schefold, and Heinz Kurz & Neri Salvadori. I even have an example treating land in the theory of joint production.

Although issues exist in extending Sraffa's results for single production to the theory of joint production, I think how to treat exhaustible resources in the long-period method is more problematic. As I understand it, Kurz and Salvadori have treated exhaustible resourses in what they call the guano model.

Two Tabs

• Matthew Yglesias (and informed commentators) on the microfoundations of macroeconomics
• Robert Nadeau on neoclassical economic theory for the Encyclopedia of Earth. (Recall this.)

Bolsheviks Versus Keynes

Anti-intellectuals and stupid people have long been conflating all variants of Keynesianism with communism.

In arguing against this conflation, Keynesians of some sort like to point out Keynes' explicit remarks on Marx:

"How can I accept a doctrine which sets up as its bible, above and beyond criticism, an obsolete text-book which I know to be not only scientifically erroneous but without interest or application for the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and the intelligentsia who, with whatever faults, are the quality in life and surely carry the seeds of all human advancement? Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values." -- John Maynard Keynes, "A Short View of Russia" (1925) in Essays in Persuasion

Equally of interest, perhaps, is the abuse that Soviet Russia heaped on Keynes.

The following are some of the first comments in Soviet literature about Keynes's General Theory:

"One should not say that the conclusions of Keynes are a novelty. Analogous repair patches on capitalism were offered by reformers of various creeds in the USA and other countries long ago. Economic reality has proved the unadaptability of all these prescriptions for the saving of the capitalist system a countless number of times..." -- L. Freiman, "Bezrabotitsa V Kapitalisticheskikh Stranakh", Planovoe Khozyaistvo (1938)

"This theory is one of the many attempts of bourgeois science to adapt its apologetics to demands of the rule of capital at the present stage of development." -- A. Arutinyan, "Garvardskie Ekonomisty I Burzhuaznoe Konyunturovedenie, Problemy Ekonomiki (1940)

"Through the right-wing socialists, Keynesian ideas penetrate the working class. Keynesianism sows among the workers the harmful illusion of the possibility of overcoming crises and unemployment within the framework of capitalist society. The fight against Keynesianism is one of the most important tasks of the ideological work of Marxist economic science." -- I. G. Blyumin, from the Introduction to the first (1948) translation of The General Theory of Employment, Interest and Money

Here are some extracts from a thesis accepted by the Institute of Economics of the Academy of Sciences of the USSR:

"The chatter of the possibility of liquidating unemployment and economic crises in capitalism serves Keynes only as a smoke screen with the help of which he attempts to hide the real content of his especially anti-people's program directed pointedly against the working class. The unmasking of the conscious distortions by Keynes of the role of the contemporary bourgeois state is the most important requisite in explaining the real content of the Keynesian program of the transition to the so-called 'regulated' capitalism, which in itself is nothing other than a new charlatan project for the notorious 'organized capitalism'...

...The socialist system of the Soviet Union is the best refutation of all the Keynesian apologetics of capitalism and is proof that the only method of liquidating crises, unemployment, and all the other inevitable fellow travelers of capitalism is the destruction of the latter." -- V. S. Volodin (1950)

The above abuse was compiled and translated from the russian by Carl B. Turner (An Analysis of Soviet Views on John Maynard Keynes, Duke University Press, 1969).

This story about the antipathy between Keynes and Marxists is complicated by the existence of Michal Kalecki and of Paul Baran and Paul Sweezy.

An Experiment Protocol

1.0 Introduction
The point of the experiment described here is to offer empirical evidence for the importance of the distinction between uncertainty and risk, as put forth by Frank Knight and by John Maynard Keynes. People are not "rational", as "rationality" is defined by neoclassical economists.

As usual, I don't claim much originality except, maybe, in details. Daniel Ellsberg described the experiment below, as well as another. He references Chipman as having conducted experiments much like these. (Although Ellsberg's paper is oft cited and has been republished, Daniel Ellsberg is probably best known for having leaked The Pentagon Papers to the New York Times and others. Nixon's "plumbers" illegally broke into and searched Ellsberg's psychiatrist's office.)

2.0 The Protocol
The experimenter shows the test subject two urns, urn I and urn II. The test subject is shown that urn 1 is empty. The experimenter truthfully assures the test subject that urn II contains 8 balls, with some or none of them red and the remainder black. The test subject sees the experimented put one red and one black ball in urn II. The experimenter also puts in five red and five black balls in urn I in the test subject's presence. The urns are shaken.

So the test subject knows that urn number I contains 5 red and 5 black balls. Urn number II contains 10 balls. All are either red or black. At least one is black, and at least one is red.

The experimenter flips two coins so as to offer a gamble to the test subject. The coin flipping ensures the probability of offering each gamble is one in four. The gambles are described to the test subject:

• Gamble A: You pay $5 for a draw from urn number I. You choose before the draw whether to play red or black. If a ball is drawn of your color, you receive a payout of $10.
• Gamble B: You pay $5 for a draw from urn number II. You choose before the draw whether to play red or black. If a ball is drawn of your color, you receive a payout of $10.
• Gamble C: You pay $5. You choose urn number I or urn number II. A ball is drawn from the urn you selected. If the ball is red, you receive $10.
• Gamble D: You pay $5. You choose urn number I or urn number II. A ball is drawn from the urn you selected. If the ball is black, you receive $10.

Each test subject goes exactly once, and no test subject is able to observe previous plays by other test subjects (so urn number II cannot be sampled by a test subject).

The hypothesis is that in gambles A and B, statistically equal numbers of people will choose each color, while in gambles C and D, people will prefer to choose urn nmber I.

3.0 To Do

• Demonstrate mathematically that no assignments of probability in urn number II are compatible with the hypothetical behavior.
• Decide on a sample size. Perhaps a sequential test can be defined in which the sample size is not known beforehand.
• Read Craig and Tversky (1995) and Chipman (1960). Where else is Ellsberg referenced?

References

• J. S. Chipman, "Stochastic Choice and Subjective Probability", in Decisions, Values and Groups (edited by D. Willner), Pergamon Press (1960)
• Daniel Ellsberg, "Risk, Ambiguity, and the Savage Axioms", Quarterly Journal of Economics, V. 75, N. 4 (Nov. 1961): 643-669
• Craig R. Fox and Amos Tversky, "Ambiguity Aversion and Comparative Ignorance", Quarterly Journal of Economics, V. 110, N. 3 (1995): 585-603