Keynes All The Rage

I noticed some articles and posts on Keynes recently. The ones I noticed are somewhat different than those highlighted by the Sandwichman. I think Robert Skidelsky's new book, Keynes: The Return of the Master, is getting more buzz than Paul Davidson's new book, The Keynes Solution: The Path to Global Economic Prosperity. Paul Krugman's review of Skidelsky's book in the Observer contrasts the rejection of Say's law with an emphasis on fundamental uncertainty. Davied Warsh also alludes to the debates over what Keynes really meant. Here is a year old oped by Skidelsky, while here is a more recent article quoting him. Aaron Swartz has been reading The General Theory of Employment, Interest, and Money. He has both a chapter-by-chapter summary and a brief explanation.

I think Keynes book was primary about economic theory and only secondary about advocating policy based on that theory. One can perhaps explain why an economy might deviate from a full employment equilibrium. Workers are constrained to budget based on the income they receive, not on the income they would receive if they were fully employed. This idea could be basis of a dynamic story. But Keynes argued, building on Richard Kahn's multiplier, that it could also explain an equilibrium with involuntary unemployment.

I think that Keynes argued that such an unemployment equilibrium could hold in both the Marshallian short run and the long run. To make sense of Keynes' claim, one must construct a model in which money enters in some essential way. And I would expect money to be non-neutral in all runs. To me, this introduction of money into an economic model is connected with modeling fundamental uncertainty. In short, I see Keynes' rejection of Say's law and his emphasis (e.g., in Chapter 12) on uncertainty as complementary.

(Apropos of none of the above - some might be amused by this cartoon. H/T to Brian Leiter.)

O Brave New World That Has Such Bacteria In It

The BioBricks Foundation (BBF) has Request For Comments (RFCs), just like the Internet Engineering Task Force (IETF). They have a BioBrick language, a graphical language, and are working on an RDF-based framework for a synthetic biology ontology. (The Resource Description Framework (RDF) is a standard for the semantic web.)

BBF is using this this computer science technology and organizational structure to create "standard biological parts" that "encode basic biological functions". The goal is to enable biological engineers to "program living organisms in the same way a computer scientist can program a computer".

(Hat Tip to Michael Specter's New Yorker 28 September 2009 article.)

From Alexander Rosenberg On Cochrane On Krugman

Brian Leiter reports Alexander Rosenberg's thoughts. I'll select one extract:

"Add in [Chicago economists'] ideological attachment to the nonsensical ideas that the marginal productivity of labor or capital measures its causal role, and therefore its moral right to a proportional slice of the profits, and you easily slip from Laissez-faire 'science' to 'trickle down' political philosophy."

(Rosenberg's views remind me of this comment.) The nonsense isn't limited to Chicago. I have seen positive references to Rosenberg's book, Economics: Mathematical Politics or Science of Diminishing Returns, but I have not read it.

Stiglitz Reports

Joseph Stiglitz has been chairing commissions. The draft report of the Commission of Experts of the President of the UN General Assembly on Reform of the International Monetary and Financial System is downloadable from here. The Report of the Commission on the Measurement of Economic Performance and Social Progress is downloadable from here. (Amartya Sen was the Chair Advisor for the latter commission.)

Samir Amin has some criticisms of the former report. Amin thinks the report treats the global financial crisis as a short-term downturn, not as a manifestation of a Fordist accumulation regime that needs to be replaced.

It does seem like a new Bretton Woods, along with a meeting like the Bandung conference in 1955, might be a good thing at this conjuncture.

To Read:

• M. Aglietta (1979) A Theory of Capitalist Regulation: The U.S. Experience, Verso Books.
• Giovanni Arrighi (1994) The Long Twentieth Century, Verso Books.

Piling On

A fool writes:

"Paul's Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income... In economics, stimulus spending ran aground on Robert Barro's Ricardian equivalence theorem. This theorem says that debt-financed spending can't have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more." -- John H. Cochrane, "How did Paul Krugman get it so Wrong?"

On the other hand:

"Ricardian equivalence was another property of rational expectations monetarism. It was tested, in effect, by the Bush administration, which swung the federal budget into large deficit. The increase in the deficit was not compensated by increased private saving. Instead, American households decreased their savings to basically nothing. This violation of Ricardian equivalence suggests that the transversality condition imposed in intertemporal general equilibrium models has no empirical counterpart. Without such a condition consistency of all decisions is no longer guaranteed in intertemporal models. But bubbles and crashes are admitted." -- Axel Leijonhufvud (2009) "Out of the corridor: Keynes and the crisis", Cambridge Journal of Ecnomics, V. 33: pp. 741-757

Special Issues on Global Financial Crisis

Some journals with articles on current problems:

• Cambridge Journal of Economics, V. 33, N. 2 (July 2009).
• Challenge, V. 52, N. 1 (January-February 2009) to V. 52, N. 4 (July-August 2009).
• Real-Word Economics Review, Issue no. 47 (3 October 2008) to Issue no. 50 (8 September 2009). (They've also collected some of their articles in Crash: Why It Happened and What to Do About It, V. 1 Edited by Edward Fullbrook, 2009.)
  
• Review of Radical Political Economics, V. 41, N. 3 (September 2009).

Economists With Ethics

The Association for Integrity and Responsible Leadership in Economics and Associated Professions (AIRLEAP) is "deeply concerned about the issues of integrity and responsible leadership in economics as they relate to economic discourse, economic decision making, and the career development of economists and related professionals."

One Math, Three Applications

I previously pointed out that the same math that can formalize classical economics is used by Google to find page ranks. Now Stefano Allesina and Mercedes Pascual have found that the Perron-Frobenius theorem also supports the detection of critical species in ecosystems.

Only Mainstream Macroeconomists Exist For Krugman

Many have already written about Paul Krugman's article, "How Did Economists Get It So Wrong?" in the September 6 issue of the New York Times Magazine. Krugman himself followed up with blog comments. Brad DeLong has prepublication and postpublication comments, as well as comments on other commentators. I like Colin Danby's take, in comments, on the intolerance of the orthodoxy. Mark Thoma has a comment on Sean Carroll's take. Some commentators, such as Ramanan get it.

In Krugman's article, all macroeconomists are either freshwater or saltwater. Post Keynesian criticisms that apply to both types are not mentioned. Although I am not too familiar with mainstream macro, I can think of three:

• Both situate their models in logical, not historical time
• Both assume a representative agent
• Both assume a single good that functions as both a capital and a consumption good.

These limitations rule out a priori the possibility of some interesting dynamics and perhaps make it difficult to see why agents in the model would want to hold money or even trade with one another.

References

• Paul Davidson (1982-83) "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes", Journal of Post Keynesian Economics, V. V, N. 2 (Winter): pp. 182-198
• Alan P. Kirman (1992) "Whom or What Does the Representative Individual Represent" Journal of Economic Perspectives, V. 6, N. 2 (Spring): pp. 117-136
• Graham White (2004) "Capital, Distribution and Macroeconomics: 'Core' Beliefs and Theoretical Foundations", Cambridge Journal of Economics, V. 28, N. 4: pp. 527-547

Samuelson’s Revealed Preference: A Failed Research Program

Wong (1978, 2006) grew out of what may have been the last doctorate thesis Joan Robinson supervised. As it is, Wong did not complete his thesis under Robinson's supervision. Luigi Pasinetti and then Geoffrey Harcourt later became Wong's supervisor.

Wong’s study is centered around three publications by Paul Samuelson, in 1938, 1948, and 1950. Samuelson, in 1938, according to Wong, attempted to construct a new theory without any reliance on utility theory or any concept that relies on non-observational phenomena. This theory was intended to be a replacement, not a complement for utility theory.

Samuelson, in 1940, according to Wong, attempted to construct indifference maps from observed consumer choices in a space of price and quantity observations. "The whole theory of consumer's behavior can thus be based upon operationally meaningful foundations in terms of revealed preference." -- Samuelson (1948)

Samuelson, in 1950, according to Wong, was responding to work primarily by Hendrik Houthakker, who showed that ordinal utility theory and revealed preference theory were logically equivalent. Thus, utility theory has the same empirical implications and operational foundations.

Wong interprets the observational equivalence of utility and revealed preference as a defeat for Samuelson's 1938 program. Samuelson, however, asserted this finding was the completion of a victorious research program. And mainstream economists have let him get away with this claim, without ever subjecting it to a critical inquiry.

"I soon realized that [the weak axiom of revealed preference] could carry us almost all the way along the path of providing new foundations for utility theory. But not quite all the way. The problem of integrability, it soon became obvious, could not yield to this weak axiom alone." -- P. A. Samuelson (1950)

References

• Paul A. Samuelson (1938) “A Note on the Pure Theory of Consumer’s Behaviour”, Economica, v. 5: pp. 61-71.
• Paul A. Samuelson (1948) “Consumption Theory in Terms of Revealed Preference”, Economica, v. 15: pp. 243-253.
• Paul A. Samuelson (1950) “The Problem of Integrability in Utility Theory”, Economica, v. 17: pp. 355-385.
• Stanley Wong (1978, 2006) Foundations of Paul Samuelson’s Revealed Preference Theory: A Study by the Method of Rational Reconstruction, Revised Edition, Routledge.