Marc Lavoie - Quite Fierce

I think I downloaded Marc Lavoie's paper, "Neoclassical Empirical Evidence: On Employment and Production Laws as Artefact" from some conference proceedings. It's downloadable from his site, but I'm not sure for which recent conference it was presented.

Lavoie summarizes the orthodox response to the Cambridge Capital Controversy and the counterexamples:

• "Neoclassical authors minimize the capital paradoxes, making an analogy with Giffen goods in microeconomics, which do not question the entire neoclassical edifice;
• They look for the mathematical conditions that would be required to keep production functions as 'well-behaved', or they claim that this is a simple aggregation problem that can be resolved;
• They claim that Walrasian general equilibrium theory is impervious to the critique;
• They claim that they have the faith, or they plead ignorance;
• Empiricism (It works, therefore it exists)."

And he also mentions how some react to the arguments of such economists as Franklin Fisher and Anwar Shaikh:

"I have discussed some of these issues with a few of my neoclassical colleagues - those that I thought would be most open to dialogue. Amazingly, their response has been to fake that they did not understand the implications of the Shaikh or McCombie papers that I emailed them. The most genuine answers have been that without these elasticity estimates they could not say anything anymore. But they would rather continue making policy proposals based on false information than make no proposition at all. In other words, they would rather be precisely wrong than approximately right."

Unsent Letter

Others have already commented on the three articles on the breakdown of macroeconomics and financial economics in the July 18-24 issue of The Economist.

SIR - You write:

"[Macroeconomists'] framework reflected an uneasy truce between the intellectual heirs of Keynes, who accept that economies can fall short of their potential, and purists who hold that supply must always equal demand. The models the epitomise this synthesis ... incorporate imperfections in labour markets ('sticky' wages, for instance, which allow unemployment to rise)..."

But the idea that persistent unemployment is the result of wages sticky downward is a pre-Keynesian idea. Keynes explicitly rejected this explanation of the cause of unemployment:

"...the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment... My difference from this theory is primarily a difference of analysis." (John Maynard Keynes, The General Theory of Employment, Interest and Money, "Chapter 19. Changes in Money Wages"

Apparently neither saltwater nor freshwater macroeconomists follow Keynes.

Woodstock Thirtieth Anniversary

They did not hold the 30th anniversary concert at Woodstock. They held it in my backyard.

Crowd for Dave Matthews. Dave Did "Watchtower"

Naked Man and Photographer

The man in the purple shirt is Ken Kesey's business partner.

Salesman

What With The Arson, That Didn't Work Out So Well, Did It?

Now, Judge, I Had Debts No Honest Man Could Pay/The Bank Was Holding My Mortage And They Were Gonna Take My House Away

1.0 Introduction
This example illustrates one aspect of how Sraffa analyzed natural resources. In this case, natural resources consist of land of various qualities or grades. The quantity of each grade is given; more land cannot be produced. Land is not destroyed either. Appropriate production processes yield as much land as a joint output as given as input. So this sort of model does not incorporate a natural resource like oil that is used up in production.

This example demonstrates that owners of less efficient (productive) natural resources can receive a greater rent.

By the way, Sraffa introduces a distinction between basic and non-basic commodities. Lands with positive rent are non-basic, and therefore their rent is a candidate for taxation.

2.0 Technology
This is a simple economy in which only corn is produced. Table 1 shows the available processes that have corn as an output. Each process requires the use of one grade of land, and no more than one process is known for each grade of land. (This is an example of a model of extensive rent.) Suppose this economy has available 150 acres of land of grade I, 162 acres of grade II land, and 210 acres of grade III land.

Table 1: Technology

Inputs	Process
	Alpha	Beta	Gamma
Labor (Person-Years)	2/5	1	2/7
Grade I Land (Acres)	1	0	0
Grade II Land (Acres)	0	3/2	0
Grade III Land (Acres)	0	0	1
Corn (Bushels)	2/5	1/6	4/7
Output (Bushels)	1	1	1

3.0 Prices
The question to be addressed is what prices and distribution of income are compatible with a long-period position, given the technology. The amount of corn required for net output is a parameter that must be known to answer this question.

3.1 When Only One Grade Of Land Is Cultivated
Suppose the requirements for use for corn in this economy can be satisfied by cultivating any one of the three grades of land. Two grades, and maybe some of the third grade, can lie fallow. So at most 90 bushels are produced each year, after replacinging up the seed corn.

And suppose that the wage is 1/2 bushels per person-year. The wage is paid out at the end of the year. These assumptions are enough to derive the factor-price curves shown in Figure 1. These curves are drawn under the assumption that all grades of land paid no rent.

Figure 2: Factor Price Curves

Since the beta factor-price curve is rightmost (on the outer frontier) at the given wage, all corn is produced on land of the second grade, and this land pays no rent. The wage and the rate of profits must satisfy the following equation:

(1/6)(1 + r) + w = 1

where a bushel corn is the numeraire. For a wage of 1/2 bushels per person-year, the rate of profits is 200%.

Under the given assumptions, the cost of producing a bushel corn on the first grade of land, even if that land were to pay no rent, is 7/5 bushels. Since this cost exceeds the revenues from selling a bushel of land, no capitalist would want to produce on the first grade of land. The reader can check that the cost of producing a bushel corn on the third grade of land also exceeds unity.

3.2 When Two Grades Of Land Are Cultivated
Now suppose the requirements for use are such that two grades of land must be cultivated. The net output of this economy is between 90 and 180 bushels corn. The wage remains 1/2 bushels per person-year. In this case, the first and second grades are cultivated, with the second grade paying rent. The price equations are:

(2/5)(1 + r) + (2/5)w + ρ₁ = 1

(1/6)(1 + r) + w + (3/2)ρ₂ = 1

ρ₁ ρ₂ = 0

ρ₁, ρ₂ ≥ 0

The equations specify that no land can have a negative rent and that at least one grade of land must have a rent of zero. The rate of profits is 100%, when the wage is 1/2 bushels per person-year. Land of grade I pays no rent, and the rent on land of grade II is 1/9 bushels per acre.

The cost of producing a bushel corn on the third grade of land, accounting just for outlays of seed corn and labor, is 9/7 bushels. Capitalists will not want to cultivate the third grade of land, even if it is free.

3.3 When Three Grades Of Land Are Cultivated
Finally, suppose the requirements for use for use require all three grades of land to be cultivated. The price equations are:

(2/5)(1 + r) + (2/5)w + ρ₁ = 1

(1/6)(1 + r) + w + (3/2)ρ₂ = 1

(4/7)(1 + r) + (2/7)w + ρ₃ = 1

ρ₁ ρ₂, ρ₃ = 0

ρ₁, ρ₂, ρ₃ ≥ 0

The rate of profits is 50%, when the wage is 1/2 bushels per person-year. The rent on land of grade I is 1/5 bushels per acre. The rent on grade II land is 1/6 bushels per acre

3.4 Orders Of Efficiency And Rentability
The above analysis has identified a definite order in which different grades of land will be cultivated as greater quantities of output are required to be produced. This is the order of efficiency. In this example, the order of efficiency, from most efficient to least efficient, is: Grade II, Grade I, Grade III.

One can also rank the grades of land from high rent to low rent, when all three grades of land are cultivated and the wage is 1/2 bushels per person-year. The order of rentability, from highest rent to zero rent, is: Grade I, Grade II, Grade III.

The orders of rentability and efficiency differ. It is possible for a less productive, that is, the less efficient, resource to provide its owner with a greater rent than the more efficient resource.

This example is not driven by the existence of switch points.

Reference

• Alberto Quadrio-Curzio, "Rent, Income Distribution, and Orders of Efficiency and Rentability", in Essays on the Theory of Joint Production (Edited by L. L. Pasinetti), Columbia University Press, 1980.

Elsewhere

• Benedict's encyclical letter, "Charity in Truth". (Comments on the encyclical at Open Economics.)
• James Galbraith's "No Return to Normal: Why the economic crisis, and its solution are bigger than you think", in the Spring 2009 issue of Democratic Left, the national magazine of Democratic Socialists of America (DSA).
• Steve Keen's "The Creative Destruction of G8 Economics: A plan to shift the theoretical foundations of our global system", in the current issue of Adbusters. (The September/October issue will explore alternatives to the neoclassical economic paradigm.)
• A Warning label: "This economics textbook is for entertainment purposes only..." for your mainstream economics textbook.

Labor Demand Curves Slope Down?

Consider the consequences of capital-reversing. I like to say that one is that explaining wages and employment by well-behaved supply and demand functions for labor is of doubtful logic. Here's what some others have had to say:

"the pattern of activities adopted in the face of long-run factor-price changes can be complicated and counterintuitive. Consequently, the long-run demand for factors can be badly behaved functions of factor prices." -- Michael Mandler (1999) Dilemmas in Economic Theory: Persisting Foundational Problems of Microeconomics, Oxford University Press.

"However, as was argued in Section 3 with regard to 'perversely' shaped, that is, upward sloping, factor-demand functions, this possibility would question the validity of the entire economic analysis in terms of demand and supply." -- H. D. Kurz and N. Salvadori (1995) Theory of Production: A Long Period Analysis, Cambridge University Press

"The essential point of the criticism concerns the factor demand curves. The discovery that factor demand curves may be positively sloped in the relevant range, not negatively..." -- Bertram Schefold (1990) "Joint Production, Intertemporal Preferences, and Long-Period Equilibirum," Political Economy: Studies in the Surplus Approach, V. 6, 1990, pp. 162-163.

"there is not necessarily an inverse monotonic relation between the cost-minimizing quantity of an input and its price... Figures 6.17a-6.17c can be interpreted as demand curves for labour... in Figure 6.17b, ...the sectoral demand curve is upward-sloping... I have shown in Figure 6.17c that the aggregate demand curve is not downward-sloping in the presence of reswitching: indeed, like the sectoral demand curve, it is not even monotonic. Reswitching is sufficient, not necessary, for the aggregate demand curve for labour not to be downward-sloping: to see this, consider Figure 6.18..." -- J. E. Woods (1990) The Production of Commodities: An Introduction to Sraffa, Humanities Press

It is a theme of this blog that mainstream economists have yet to integrate this challenge into their theories and teaching.

Principles of Neoliberalism

Some of these strike me as too absurd (e.g., 7, 9) to bother refuting:

1. "...contrary to classical liberal doctrine, [the neoliberal] vision of the good society will triumph only if it becomes reconciled to the fact that the conditions for its existence must be constructed and will not come about 'naturally' in the absence of concerted political effort and organization...
2. ...'the market' is posited to be an information processor more powerful than any human brain, but essentialy patterned on brain/computational metaphors... The market always surpasses the state's ability to process information...
3. ...for purposes of public understanding and sloganeering, market society must be treated as a 'natural' and inexorable state of humankind...
4. A primary ambition of the neoliberal project is to redefine the shape and functions of the state, not to destroy it...
5. ...Neoliberals treat... politics as if it were a market and promoting an economic theory of democracy...
6. Neoliberals extol freedom as trumping all other virtues, but the definition of freedom is recoded and heavily edited within their framework... Freedom can only be 'negative' for neoliberals (in the sense of Isaiah Berlin)...
7. ...capital has a natural right to flow freely across national borders. (The free flow of labor enjoys no similar right.)...
8. ...pronounced inequality of economic resources and political rights [is] not ... an unfortunate by-product of capitalism, but as a necessary functional characteristic of their ideal market system...
9. Corporations can do no wrong, or at least they are not be blamed if they do...
10. The market (suitably reengineered and promoted) can always provide solutions to problems seemingly caused by the market in the first place...
11. The neoliberals have struggled from the outset to make their political/economic theories do dual service as a moral code..."

-- Philip Mirowski, "Postface", in The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective (edited by Philip Mirowski and Dieter Plehwe), Harvard University Press (2009)

(I've miscategorized this post since neoliberalism encompasses more than economics.)

Four Papers On Henry George

I have never been enamored of Henry George. But for those who like him, the recent History of Economics Society Annual Conference (Denver, CO, 26-29 June 2009) had a session on "Henry George and the Concept of the Commons", with four papers:

• Lew Daly, "Creation Ethics and the Distribution of Wealth from Genesis to Cyberspace"
• Neil B. Niman, "Henry George and the Intellectual Foundations of the Open Source Movement"
• William S. Peirce , "Allen Ripley Foote and the Revenues for the Progressive State"
• Francis Peddle, "Henry George and the Open Knowledge Commons"

I guess one can get the following from George: Many do not legitimately contribute to production, but merely charge those who do work a toll for access to the property with which they work. I can get the same idea, however, from P. J. Proudhon's What is Property?; Karl Marx's idea of the worker's "double freedom" (in chapter VI of Capital, Volume 1) to sell his labor power and of ownership of other commodities for sale; and of Thorstein Veblen's concept of business as sabotage, in contrast to industry. What do I need Henry George for, at least with respect to this idea?