A Neoricardian Model of International Trade

Hoisted from comments of October 28:

"Your interest has much in common with my research field. I am a Sraffian and works in the field of international trade theory.

You have cited several times Steedman and Metcalfe. They have worked on the open small country case. As a trade theory, this is not general enough. It cannot analyse the South-North problem, to cite an obvious example. The Ricardian trade theory should be extended to the many country case with the traded commodities across countries. As Sraffa named his major work Productions of commodities by means of commodities, the production is circular in its character and cannot be arranged linearly as it is assumed in the Austrian tradition. Heckscher-Ohlin theory also assumes this linearity, starting with the endowed production factors, then sometimes intermediates goods and final goods. This is completely inadequate as production structure. But the task to develop a trade theory with this circular structure is quite hard. Steedman and Metcalfe did not succeed in this attempt. I recently found the method how to overcome this difficulty. Please look into my paper: A New Construction of Ricardian Trade Theory—A Many-country, Many-commodity Case with Intermediate Goods and Choice of Production Techniques" -- Yoyo_the_economist

I have not had a chance to read this paper. Based on the claims in the introduction, it does sound quite intriguing.

Energy Return On Energy Investment (EROEI)?

According to this New York Times article:

"Last week, about 50 scholars in economics, ecology, engineering and other fields met at the State University of New York's College of Environmental Science and Forestry for their second annual conference on biophysical economics. The new field shares features with ecological economics, a much more established discipline with conferences boasting hundreds of attendees...

...Central to their argument is an understanding that the survival of all living creatures is limited by the concept of energy return on investment (EROI): that any living thing or living societies can survive only so long as they are capable of getting more net energy from any activity than they expend during the performance of that activity.

For instance, if a squirrel burns energy eating nuts, those nuts had better give the squirrel more energy back then it expended, or the squirrel will inevitably die. It is a rule that lies at the core of studying animal and plant behavior, and human society should be looked at no differently, as even technologically complex societies are still governed by EROI...

...Through analyzing historical production data, experts say the petroleum sector's EROI in this country was about 100-to-1 in 1930, meaning one had to burn approximately 1 barrel of oil's worth of energy to get 100 barrels out of the ground. By the 1990s, it is thought, that number slid to less than 36-to-1, and further down to 19-to-1 by 2006..."

I haven't looked up how these scholars calculate EROEI. But it seems to me that an approximate value for EROEI is easily found from Leontief Input-Output tables, as available in, for example, the United States National Income and Product Accounts (NIPA). Consider the reciprocals, expressed as percentages, of the diagonal elements of the Leontief inverse, (I - A)^-1. The NIPA express the entries in Leontief matrices in dollar terms, not the physical terms I prefer for theory. But since these percentages are pure numbers, calculated as ratios, this makes no difference.

I gather the EROEI is approximately this reciprocal for the petroleum sector. In the North American Industry Classification System (NAICS), the sector of concern is industry code 211, "Oil and Gas Extraction".

A better approximation would account for the energy embodied in the other inputs in the vertically integrated oil and gas extraction industry, that is, the corresponding column of the Leontief inverse. An even better approximation would include some concern for depreciation of fixed capital.

On Some Rightists

Alex, the Yorkshire Ranter had some comments about "libertarians", that is, propertarians. (I've previously mentioned Alan Haworth, another Britisher I find amusing on that topic.)

I've wondered about Gavin Kennedy. I agree that it's bad history to claim Adam Smith's metaphor of the invisible hand is about allocative efficiency and clarified by the first welfare theorem. Consider:

"Yet the project of appropriating the politics of the Wealth of Nations to the consideration of the present has not lost its attractions... Examples of this proliferate. One has only to look to ...Gavin Kennedy (2005, a former Scottish Nationalist Party economics spokesperson)..." -- Murray Milgate & Shannon C. Stimson (2009) After Adam Smith: A Century of Transformation in Politics and Political Economy, Princeton University Press.

Ken Kesey Poster

Reading a Book

I bought the poster a bit over ten years ago. As I understand, Kesey's farm outside Eugene, Oregon, makes the label below appropriate.

Heterodox Economics Movements I Don't Pay Much Attention To

As I understand it, each of the following had advocates around the globe in the first half of the twentieth century:

• Georgism (I have read Progress & Poverty)
• Silvio Gesell (Mentioned by Keynes in Chapter 23 of the General Theory)
• Social credit (Keynes also mentions Major Douglas in Chapter 23 of the General Theory)
• Technocracy

I gather remnants of their advocate organizations still exist. But I gather they have little representation among academic economists.

Stupid And Vile Mainstream Economists

The profession does not need these ignoramuses.

Unemployment In A Barter Economy

"...it may be doubted whether under a system of barter the decisions of individuals would have their full effects..." - Piero Sraffa (1932)

In the General Theory, Keynes presents an argument for how widespread unemployment can come about. I think money enters in an essential way in Keynes' argument. This raises the question whether unemployment would exist if it were not for monetary phenomena.

Sraffa, in Production of Commodites by Means of Commodities, has a lot to say about numeraires, including the Standard Commodity. One can read Sraffa as making certain points about a monetary economy.

But put that reading of Sraffa aside. Instead, think of Sraffa's model as half of a limit point of a neoclassical model of general equilibrium. The other half of such a model of a steady state consists of utility maximization. This is a model of a barter economy. And steady state models can exhibit multiple equilibria, bifurcations, and catastrophes. I think these phenomena suggest the possibility of complex dynamics. Thus, even though neither general overproduction nor an uncleared labor market can arise in a long run competitive equilibrium in a barter economy, such an equilibrium may never be reached. Instead, the economy may cycle around with unemployment continually being recreated.

The idea that unemployment could be cured by making labor and product markets more flexibile is unsupported by price theory.

Endogenous Money Supply In The Long Run

This post is not about how the United States Federal Reserve cannot control, on a day-to-day basis, the quantity of money in circulation. Rather, I consider financial innovation over time leads to the creation of new debt instruments that fall under a reasonable definition of "money".

One way of looking at money is that, under capitalism, money buys goods, and goods sell for money, but goods do not buy goods. A simple example: I understand one can write checks against a hedge fund. So hedge funds are money.

The emergence of new forms of money illustrates why no final systems of regulations can exist in a capitalist economy. Should something like the Federal Deposit Insurance Corporation be set up to guarantee these new forms of money? If so, some capital requirements, restrictions on leverage ratios, and so on would need to be instituted. Maybe some sort of firewalls, as in the Glass-Steagall act, should be rebuilt.

Who Should Win The "Nobel Prize" But Won't

Luigi L. Pasinetti and Paul Davidson.

Enrico Barone, The Originator Of The Socialist Calculation Argument

Arguably, socialism, when implemented with a centrally planned economy, is guaranteed to not produce a fairly high standard of living. Market prices are needed. This argument was originated by Enrico Barone:

"25. But it is frankly inconceivable that the economic determination of the technical coefficients can be made a priori, in such a way as to satisfy the condition of the minimum cost of production which is an essential condition for obtaining that maximum to which we have referred. The economic variability of the technical coefficients is certainly neglected by the collectivists; but that it is one of the most important sides of the question Pareto has already very clearly shown in one of his many ingenious contributions to the science.

The determination of the coefficients economically most advantageous can only be done in an experimental way: and not on a small scale, as could be done in a laboratory, but with experiments on a very large scale, because often the advantage of the variation has its origin precisely in a new and greater dimension of the undertaking. Experiments may be successful in the sense that they may lead to a lower cost combination of factors; or they may be unsuccessful, in which case that particular organization may not be copied and repeated and others will be preferred, which experimentally have given a better result.

The Ministry of Production could not do without these experiments for the determination of the economically most advantageous technical if it would realize the condition of the minimum cost of production which is essential for the attainment of the maximum collective welfare.

It is on this account that the equations of the equilibrium with the maximum collective welfare are not soluble a priori, on paper.

26. Some collectivist writers, bewailing the continual destruction of firms (those with higher costs) by free competition, think that the creation of enterprises to be destroyed later can be avoided and hope that with organized production it is possible to avoid the dissipation and destruction of wealth which such experiments involve, and which they believe to be the peculiar property of 'anarchist' production. Thereby these writers simply show that they have no clear idea of what production really is, and that they are not even disposed to probe a little deeper into the problem which will concern the Ministry which will be established for the purpose in the Collectivist State.

We repeat, that if the Ministry will not remain bound by the traditional technical coefficients, which would produce a destruction of wealth in another sense - in the sense that the greater wealth which could have been realized will not be realized - it has no other means of determining a priori the technical coefficients most advantageous economically, and must of necessity resort to experiments on a large scale in order to decide afterwards which are the most appropriate organizations, which it is advantageous to maintain in existence and to enlarge to obtain the collective maximum more easily, and which, on the other hand, it is best to discard as failures.

27. Conclusions. From what we have seen and demonstrated hitherto, it is obvious how fantastic those doctrines are which imagine that the production in the collectivist regime would be ordered in a manner substantially different from that of 'anarchist' production.

If the Ministry of Production proposes to obtain the collective maximum - which it obviously must, whatever law of distribution may be adopted - all the economic categories of the old regime must reappear, though maybe with other names: prices, salaries, interest, rent, profit, saving, etc..." -- Enrico Barone, translated from "The Ministry of Production in the Collectivist State" Giornale delgi Economisti (1908)