Saturday, March 28, 2009

Greek To Me

1.0 Introduction
I previously described, in an abstract way, a model in which individuals choose rationally even though they may not have a complete transitive preference relation. In that post, I relied heavily on a paper by S. Abu Turab Rizvi. Searching on some of Turab Rizvi's references, I stumbled upon Jeanne Peijnenburg's doctoral thesis, Acting Against One's Best Judgement: An Enquiry into Practical Reasoning, Dispositions and Weakness of Will. Reading some of this thesis inspired me to revisit my model by presenting a somewhat more concrete example.

2.0 Background
I learned a new word from Peijnenburg's thesis. Acting against one's own best judgement is called "akrasia". Peijnenburg shows that discussion of being divided in mind goes back, at least, to debates among Socrates, Plato, and Aristotle. She provides some amusing quotes about akrasia:
"I do not do what I want to do but what I hate... What happens is that I do, not the good I will to do, but the evil I do not intend." -- Romans 7:15 and 7:19
"The mind orders the body and is obeyed. But the mind orders itself and meets resistance." - Augustine
"Two souls, alas, do dwell within this breast" - Goethe
"Faust complained that he had two souls in his breast. I have a whole squabbling crowd. It goes on as in a republic." -- Otto von Bismarck

3.0 The Example
Consider an individual choosing among three actions. This person foresee an outcome for each action. For my purposes, it is not necessary to distinguish between an action and the outcome the individual believes will result from the action. Accordingly, let A, B, and C denote either the three actions or the three outcomes, depending on context.

3.1 Tastes
Suppose that the individual cares about only three aspects of the outcome. For example, if the action is obtaining an automobile of one of three brands, one aspect of the outcome might be the fuel efficiency obtainable from the car. Another might be the roominess of the car interior. And so on.

In the example, the individual has preferences among these three aspects of the outcomes, but not over the outcomes as a whole. "Preferences" are here defined as in neoclassical economics, that is, as a total order. Let the individual order the actions under each aspect as shown in Table 1. For example, under the first aspect, this person prefers A to B and B to C. Since a total order is transitive, one can conclude that this individual prefers A to C under the first aspect. The individual prefers C to A, however, under either of the other two aspects. (This example has the structure of a Condorcet voting paradox, but as applied to an individual.)
Table 1: Preferences Over Aspects of Outcomes
AspectPreference Over Aspect
1stA > B > C
2ndB > C > A
3rdC > A > B

3.2 The Choice Function
The individual is not necessarily confronted with a choice over all three actions. Mayhaps only two of the three needed automobile dealers have franchaises in this person's area. The specification of the example is completed by displaying possible choices for each menu of choice with which the individual may be confronted. That is, I want to specify a choice function for the example:

Definition: A choice function is a map from a nonempty subset of the set of all actions to a (not necessarily proper) subset of that nonempty subset.

The domain of a choice function is then the set of all nonempty subsets of the set of all actions. Informally, the value of a choice function is the set of best choices on a menu of choices with which an agent is confronted. (The above definition is a variation on the one I gave in my previous post.)

Table 2 gives the choice function for this example. The first three rows show that in a menu consisting of exactly one action, the individual chooses that action. In a menu consisting of exactly two actions, the individual is willing to choose only one of those actions. And in a menu with three actions, the individual is willing to choose any of the three.
Table 2: The Choice Function
Choices on the MenuBest Choice(s)
{A, B}{A}
{A, C}{C}
{B, C}{B}
{A, B, C}{A, B, C}

3.3 The Conditions of Arrow's Impossibility Theorem
I intend the above example as an illustration of application of Arrow's impossibility theorem to a single individual. The choice function given above is compatible with the conditions of Arrow's impossibility theorem:
  • No Dictator Principle: For each aspect, some menu exists in which the choice function specifies a choice in conflict with preferences under that aspect. For example, the choice from the menu {A, C} conflicts with the individual's preferences under the first aspect of the outcomes.
  • Pareto Principle: This principle is trivially true in the example. No menu with more than one choice exists in which preferences under all aspects specify the same choices. So the choice function cannot be incompatible with the Pareto principle when it applies, since it never does apply.
  • Independence of Irrelevant Alternatives: I think this principle is also trivially true.
In compatibility with Arrow's impossibility theorem, the existence of a single preference relation is not possible for the above choice function. A preference relation applies to all possible pairs of actions, and it must be transitive. But a transitive relation cannot be constructed for the three menus consisting of exactly two actions. So I have defined a choice function, but preferences (one total order) does not exist.

4.0 Conclusions
Neoclassical economists tend to equate rationality with the existence of a unique preference relation for an individual. In other words, rationality for an individual is identified with the existence of one total order (that is, a complete and transitive binary relation) over a space of choosable actions. The example suggests this point of view is mistaken. An orthodox economist can either assert that the individual in the example is not rational or accept that he has been learning and teaching error.

A choice function is a generalization of preferences, as neoclassical economists understand preferences. If such preferences exist for an individual, then a choice function exists for that individual. But individuals can have choice functions without having such preferences, as is demonstrated by the above example. It is up to those asserting the existence of preferences to state their special-case assumptions, to show that models with those assumptions can provide falsifiable predictions about society, and to provide empirical evidence. The evidence from experimental economics, though, is systematically hostile to neoclassical economics. The phenomenon of menu-dependence is particularly apposite here.

So much for prattle about competitive markets yielding efficient outcomes.

Thursday, March 26, 2009

If I Read Italian...

...I suspect I would find this amusing. (I get glimmers thanks to Google language tools.) Notice the contributions from Fabio Petri in the comments below that post, and Boldrin's complaint about their incomprehensibility, format, and length. I offer cool water to contrast to the heat of those exchanges:
Fontana con tritone, da Bernini a Roma

Sunday, March 22, 2009

Wiener On Economics As A Cargo Cult

I've seen this quote referenced from time to time:
"The success of mathematical physics led the social scientist to be jealous of its power without quite understanding the intellectual attitudes that had contributed to this power. The use of mathematical formulae had accompanied the development of the natural sciences and become the mode in the social sciences. Just as primitive peoples adopt the Western modes of denationalized clothing and of parliamentatism out of a vague feeling that these magic rites and vestments will at once put them abreast of modern culture and technique, so the economists have developed the habit of dressing up their rather imprecise ideas in the language of the infinitesimal calculus." -- Norbert Wiener (quoted by Joan Robinson in Freedom and Necessity)
Looking at the last chapter in his Cybernetics: or Control and Communication in the Animal and the Machine (John Wiley & Sons, 1948) provides some insight into Wiener's attitude. That chapter is titled "Information, Language, and Society". He looks at society as an organization, the elements of which are themselves small organizations. He looks at communication between these elements as being an application of cybernetic theory, now days more commonly known as C3I. And Wiener makes such observations as:
"In connection with the effective amount of communal information, one of the most surprising acts about the body politic is its extreme lack of efficient homeostatic processes. There is a belief, current in many countries, which has been elevated to the rank of an official article of faith in the United States, that free competition is itself a homeostatic process: that in a free market, the individual selfishnesses of the bargainers, each seeking to sell as high and buy as low as possible, will result in the end in a stable dynamics of prices, and with rebound to the greatest common good. This is associated with the very comforting view that the individual entrepreneur, in seeking to forward his own interest, is in some manner a public benefactor, and has thus earned the great rewards with which society has showered him. Unfortunately, the evidence, such as it is, is against this simple-minded theory." -- p. 185
Wiener also comments on those those who
"consider the main task of the immediate future is to extend to the fields of anthropology, of sociology, of economics, the methods of the natural sciences..."
He thinks they "show an excessive optimism, and a misunderstanding of the nature of all scientific achievement." He thinks the social sciences do not have the requisite "degree of isolation of the phenomenon from the observer."

So it seems the prodigious Norbert Wiener considered cybernetics to encompass an alternative to neoclassical economics and was concerned about the proper methodology of applying his theories to society.

Tuesday, March 17, 2009

Business As Sabotage

Over at Boing Boing, Dan Gillmor praises some comments of Thorstein Veblen on the media. (One of these days I might read Robert McChesney.) I did not recall the passage Gillmor quotes, but I was amused by the following passage from earlier in the same book:
"It was then still true, in great measure, that the undertaker was the owner of the industrial equipment, and that he kept an immediate oversight of the mechanical processes as well as of the pecuniary transactions in which his enterprise was engaged; and it was also true, with relatively infrequent exceptions, that an unsophisticated productive efficiency was the prime element of business success. A further feature of that precapitalistic business situation is that business, whether handicraft or trade, was customarily managed with a view to earning a livelihood rather than with a view to profits on investment...

...The economic welfare of the community at large is best served by a facile and uninterrupted interplay of the various processes which make up the industrial system at large; but the pecuniary interests of the business men in whose hands lies the discretion in the matter are not necessarily best served by an unbroken maintenance of the industrial balance. Especially is this true as regards those greater business men whose interests are very extensive. The pecuniary operations of these latter are of large scope, and their fortunes commonly are not permanently bound up with the smooth working of a given sub-process in the industrial system. Their fortunes are rather related to the larger conjunctures of the industrial system as a whole, the interstitial adjustments, or to conjunctures affecting large ramifications of the system. Nor is it at all uniformly to their interest to enhance the smooth working of the industrial system at large in so far as they are related to it. Gain may come to them from a given disturbance of the system whether the disturbance makes for heightened facility or for widespread hardship, very much as a speculator in grain futures may be either a bull or a bear. To the business man who aims at a differential gain arising out of interstitial adjustments or disturbances of the industrial system, it is not a material question whether his operations have an immediate furthering or hindering effect upon the system at large. The end is pecuniary gain, the means is disturbance of the industrial system, - except so far as the gain is sought by the old-fashioned method of permanent investment in some one industrial or commercial plant, a case which is for the present left on one side as not bearing on the point immediately in hand. The point immediately in question is the part which the business man plays in what are here called the interstitial adjustments of the industrial system; and so far as touches his transactions in this field it is, by and large, a matter of indifference to him whether his traffic affects the system advantageously or disastrously. His gains (or losses) are related to the magnitude of the disturbances that take place, rather than to their bearing upon the welfare of the community.

The outcome of this management of industrial affairs through pecuniary transactions, therefore, has been to dissociate the interests of those men who exercise the discretion from the interests of the community. This is true in a peculiar degree and increasingly since the fuller development of the machine industry has brought about a close-knit and wide-reaching articulation of industrial processes, and has at the same time given rise to a class of pecuniary experts whose business is the strategic management of the interstitial relations of the system. Broadly, this class of business men, in so far as they have no ulterior strategic ends to serve, have an interest in making the disturbances of the system large and frequent, since it is in the conjunctures of change that their gain emerges. Qualifications of this proposition may be needed, and it will be necessary to return to this point presently.

It is, as a business proposition, a matter of indifference to the man of large affairs whether the disturbances which his transactions set up in the industrial system help or hinder the system at large, except in so far as he has ulterior strategic ends to serve. But most of the modern captains of industry have such ulterior ends, and of the greater ones among them this is peculiarly true. Indeed, it is this work of far-reaching business strategy that gives them full title to the designation, 'Captains of Industry.' This large business strategy is the most admirable trait of the great business men who with force and insight swing the fortunes of civilized mankind. And due qualification is accordingly to be entered in the broad statement made above. The captain's strategy is commonly directed to gaining control of some large portion of the industrial system. When such control has been achieved, it may be to his interest to make and maintain business conditions which shall facilitate the smooth and efficient working of what has come under his control, in case he continues to hold a large interest in it as an investor; for, other things equal, the gains from what has come under his hands permanently in the way of industrial plant are greater the higher and more uninterrupted its industrial efficiency.

An appreciable portion of the larger transactions in railway and 'industrial' properties, e.g., are carried out with a view to the permanent ownership of the properties by the business men into whose hands they pass. But also in a large proportion of these transactions the business men's endeavors are directed to a temporary control of the properties in order to close out at an advance or to gain some indirect advantage; that is to say, the transactions have a strategic purpose. The business man aims to gain control of a given block of industrial equipment - as, e.g., given railway lines or iron mills that are strategically important - as a basis for further transactions out of which gain is expected. In such a case his efforts are directed, not to maintaining the permanent efficiency of the industrial equipment, but to influencing the tone of the market for the time being, the apprehensions of other large operators, or the transient faith of investors. His interest in the particular block of industrial equipment is, then, altogether transient, and while it lasts it is of a factitious character.

The exigencies of this business of interstitial disturbance decide that in the common run of cases the proximate aim of the business man is to upset or block the industrial process at some one or more points. His strategy is commonly directed against other business interests and his ends are commonly accomplished by the help of some form of pecuniary coercion. This is not uniformly true, but it seems to be true in appreciably more than half of the transactions in question. In general, transactions which aim to bring a coalition of industrial plants or processes under the control of a given business man are directed to making it difficult for the plants or processes in question to be carried on in severalty by their previous owners or managers. It is commonly a struggle between rival business men, and more often than not the outcome of the struggle depends on which side can inflict or endure the greater pecuniary damage. And pecuniary damage in such a case not uncommonly involves a setback to the industrial plants concerned and a derangement, more or less extensive, of the industrial system at large.

The work of the greater modern business men, in so far as they have to do with the ordering of the scheme of industrial life, is of this strategic character. The dispositions which they make are business transactions, 'deals,' as they are called in the business jargon borrowed from gaming slang. These do not always involve coercion of the opposing interests; it is not always necessary to 'put a man in a hole' before he is willing to 'come in on' a 'deal.' It may often be that the several parties whose business interests touch one another will each see his interest in reaching an amicable and speedy arrangement; but the interval that elapses between the time when a given 'deal' is seen to be advantageous to one of the parties concerned and the time when the terms are finally arranged is commonly occupied with business manoeuvres on both or all sides, intended to 'bring the others to terms.' In so playing for position and endeavoring to secure the largest advantage possible, the manager of such a campaign of reorganization not infrequently aims to 'freeze out' a rival or to put a rival's industrial enterprise under suspicion of insolvency and 'unsound methods,' at the same time that he 'puts up a bluff' and manages his own concern with a view to a transient effect on the opinions of the business community. Where these endeavors occur, directed to a transient derangement of a rival's business or to a transient, perhaps specious, exhibition of industrial capacity and earning power on the part of one's own concern, they are commonly detrimental to the industrial system at large; they act temporarily to lower the aggregate serviceability of the comprehensive industrial process within which their effects run, and to make the livelihood and the peace of mind of those involved in these industries more precarious than they would be in the absence of such disturbances. If one is to believe any appreciable proportion of what passes current as information on this head, in print and by word of mouth, business men whose work is not simply routine constantly give some attention to manoeuvring of this kind and to the discovery of new opportunities for putting their competitors at a disadvantage. This seems to apply in a peculiar degree, if not chiefly, to those classes of business men whose operations have to do with railways and the class of securities called 'industrials.' Taking the industrial process as a whole, it is safe to say that at no time is it free from derangements of this character in any of the main branches of modern industry. This chronic state of perturbation is incident to the management of industry by business methods and is unavoidable under existing conditions. So soon as the machine industry had developed to large proportions, it became unavoidable, in the nature of the case, that the business men in whose hands lies the conduct of affairs should play at cross-purposes and endeavor to derange industry. But chronic perturbation is so much a matter of course and prevails with so rare interruptions, that, being the normal state of affairs, it does not attract particular notice." -- Thorstein Veblen (1904). The Theory of Business Enterprise, Chapter 3.

Sunday, March 15, 2009

CCC Not Exclusively About Aggregate Theory

I thought I might point out what some others say the Cambridge Capital Controversy is about:
"It is also worth noting that Samuelson...assesses the relevance of capital reversing mainly in terms of the beehavior of the interest rate consequent upon a change in saving behavior: a decrease in current consumption may entail a new steady-state equilibrium in which the interest rate is higher rather than lower than initially. This was indeed unexpected in conventional theory, but its ramifications are rather more serious than Samuelson lets on. The conventional relation between consumption and the interest rate emerges from the operation of the substitution mechanisms that underlie the downward-sloping factor demand functions of the marginalist theory; it is the latter distribution theory that capital reversing undermines." -- Gary Mongiovi, 2002. "Classics and Moderns: Sraffa's Legacy in Economics", Metroeconomica, V. 53, N. 3: 223-241.

" must conclude that at present there is no defensible neoclassical theory (in the sense of explanation) of prices and distribution. The onus is on the neoclassicals to show that this is not so. Unless and until they succeed, it seems reasonable to turn to different, non-neoclassical approaches to value and distribution (and employment and growth)." -- Fabio Petri, 1999. "Professor Hahn on the 'neo-Ricardian' Criticism of Neoclassical Economics", In Value, Distribution and Capital: Essays in Honour of Pierangelo Garegnani, Routledge.

"After the stirring, contentious debate over the theory of capital generated by the discovery of the phenomenon of re-switching in the 1960s, one has surprisingly witnessed, in the economic literature, within the course of only a few years, the sudden, one might even say abrupt, disappearance of all discussions on such themes.

The phases through which this state of affairs has come about are themselves an interesting phenomenon, from the view point of the history of economic science, and deserve careful consideration, even at the cost of a brief digression.

The first reaction to the discovery of re-switching was one of uneasy fastidiousness. The intuitive conjecture prevailed that it should be an odd, weird, bizarre or rare case of no empirical relevance whatsoever. The economists who nevertheless originally had to admit it did so with instinctive reluctance, as it clashed with their inherited way of thinking. They used a variety of terms for it, ranging from 'paradoxical' and 'perverse' to 'exceptional', 'inconvenient' and 'anomalous'; a case that 'intuition suggests is unrealistic', and so on (see the numerous quotations in Pasinetti 1966, p. 515, and also Pasinetti 1978). Charles Ferguson, as reported above, was more explicit and candid. He reasserted his instinctive confidence in the neoclassical production function, but admitted that his trust was 'a statement of faith'.

There followed a second phase in which there was a painstaking search for specifying the conditions that could be sufficient to exclude the re-switching phenomenon (on the subject see, for example, Franklin Fisher 1971, Sato 1974, Burmeister 1980). There was moreover a substantial effort to re-interpret the rate of interest as at least expressing the rate of return for society as a whole, when the economic system was changing the proportions between two equally profitable techniques (Solow 1963 and 1967). However, all these efforts did not lead very far. On the one hand the conditions that would be needed in order to avoid the re-switching of techniques proved to be so extremely restrictive as to leave no reasonable possibility of relying on them. On the other hand, in a critique of Solow's attempt to revive Irving Fisher's concept of the 'rate of return', Pasinetti investigated a general discontinuity property of the conception of spectrum of techniques, showing that the vicinity, even an infinitesimal vicinity, of any two techniques on the scale of variation of the rate of profits does not entail at all any vicinity of such techniques (as marginal productivity theory would require) on the scale of variation of their degree of capital-intensity (capital/output, or capital/labour ratios). Capital-intensity might in fact remain quite far apart for the two techniques involved (Pasinetti, 1969). These discontinuity properties have been analysed in detail by J. Barkley Rosser Jr. (1991, ch. 8: 'Discontinuity and Capital Theory'). Thus, new analytical investigation could bring no help for the traditional views; quite the contrary.

Yet there finally came a third very curious phase, which should appear rather strange, given its weak theoretical and empirical underpinning, but which was greeted with relief by the theorists of mainstream economics. The essence of this third phase can be summed up with the following proposition: the criticisms of the traditional theory of capital raised by the phenomenon of re-switching (and consequent reverse capital-deepening) are valid, but only with reference to the neoclassical model conceived in aggregate terms. They do not apply to the neoclassical case of the general economic equilibrium model, conceived in disaggregated terms and based on the behaviour of individuals maximising inter-temporal functions of profits and of utility.

This proposition actually has no objective foundation: phenomena of non-convexity, re-switchings of techniques and badly-behaved production functions, to take an expression that has been widely used ('behaving badly' meaning simply that they behave in a way as not to obey the assumptions of neoclassical economics), are not ­ as has been amply demonstrated ­ a consequence or a characteristic of any particular process of 'aggregation'. They may occur at any time and in any context, aggregated or disaggregated. Various authors have continued to demonstrate this point (e.g. Kurz 1987, Schefold 1997, Garegnani 1998, and others). But so things go. The contrary conviction had taken root and has continued to spread. Above all, the proposition cited above has been trundled out again and again, with no proof, but simply referring back to other sources, which in turn are either insufficient or inconsistent.

The principal one of these sources is represented by an incredibly polemical and dogmatic paper by Frank Hahn (1982), explicitly intended to heap discredit on those economists whom he calls 'the Neo-Ricardians'. With undeniable rhetorical and dialectical skill, Hahn shifted the bases of the whole debate. He admits, without mincing words, that the entire version of neoclassical theory of capital and income distribution, based on aggregate production functions (basically, the whole neoclassical stream of thought descending from Böhm-Bawerk, Wicksell and John Bates Clark) has to be scrapped as inconsistent and incorrect. He then goes on to argue that the correct and relevant version of the neoclassical theory is not that of Böhm-Bawerk, Wicksell and Clark, and not even that of Marshall, but rather the theory that stems from the Walrasian scheme of general economic equilibrium; a scheme which in its modern version is represented by the Arrow-Debreu formulation (Arrow and Debreu 1954, Debreu 1959, Arrow-Hahn, 1971). In this version, the scheme appears as a very general one. Although, in its essential terms, the scheme is a pure exchange model (i.e. a scheme of given resources, which the 'agents' exchange among themselves on the basis of the postulate of maximisation of utility), it can also be reinterpreted in inter-temporal terms, by associating with each resource a quantity index and a time index. In this version, the phenomenon of production becomes a phenomenon of inter-temporal exchange. Thus a framework can be traced out containing a whole range of heterogeneous capital goods. At any given moment of time, the postulates of maximisation (of utility and of profit) by the 'agents' (consumers and entrepreneurs) lead the system to positions of 'temporary equilibrium', generating an overall system of prices for all resources, present and future.

According to Hahn, this framework also includes Sraffa's model as a very special case; namely, as the case where the original heterogeneous goods in the given initial set are exactly in those proportions that generate a uniform rate of profits. But, in general, the 'equilibrium prices' generated by the system will imply rates of interest (and of profit, taken to coincide with the rates of interest) differing from any one (heterogeneous) capital good to another. This does not matter in the Walrasian model à la Arrow-Debreu, given that this model is a price determining model (a point which will be taken up again in the following section). Indeed, the non-uniformity of interest rates is proudly pointed out as a sign of the generality of the model. Hahn admits that the framework might show cases and problems of lack of uniqueness and/or lack of stability of the solutions. However, Hahn claims that the scheme should be immune to the criticisms prompted by the re-switching phenomenon.

But how? The point is precisely here. According to Hahn, in a system with manifold production techniques, equality would still hold between the return on each capital good and the derivative of its production with respect to its input, namely the 'marginal productivities' (in physical terms), although no causal relation could ever be asserted, since all the solutions emerge from a system of simultaneous equations. Hahn admits that there might, of course, be some 'non-convexities' and 'badly-behaved' production functions, in other words that cases of re-switching might occur. So Hahn admits cases of re-switching after all! But here is the ruse: while admitting such cases, Hahn relegates them to the category of difficulties concerning the zones of 'instability'. Now, zones of instability of the system can always occur, in models with heterogeneous capital goods, even in the case of perfectly convex and well-behaved production functions. Indeed, Hahn himself had demonstrated precisely this in an earlier article of his (Hahn 1966) ­ an article, it is to be it noted, written as a critique of dominant theory. Here is therefore how the confusion has been generated ­ a confusion between two different phenomena, namely: a) instabilities, that can in general arise in all neoclassical models with heterogeneous capital goods, and b) the particular phenomenon of re-switching, which ­ by being re-classified as generating instability (a characteristic which is not incorrect, since, among other things, re-switching also generates instability in the capital goods market) is restrictively associated (and confused) with the case previously considered by Hahn.

The paradoxical outcome has been that, instead of taking up Hahn's first finding (1966), which is critical and negative with reference to all the multi-sector models of neoclassical theory, mainstream literature has used Hahn's second article (1982) to assert that the difficulties connected with instability were already well-known.

Conclusion: re-switching had nothing new to tell us. As if the difficulties, when they are already known could, by this very fact, acquire a justification for being ignored, no matter whether they crop up in a different context, where they are reiterated and extended! Surprisingly enough, however, this is precisely what has happened.

Hahn has certainly been very careful not to stress his previous findings ­ strictly logical and negative. Instead, he has adopted the familiar expedient of saying that, of course, there are difficulties; of course these difficulties call for further research; hopefully further research will settle them in the future.

And here we finally come to the non sequitur of the conclusion: the 'Neo-Ricardians' could safely be ignored.

Mainstream economists could not have asked for better. The effect has been to give re-switching the air of an obsession vexing others, and to induce dominant economic theorists not to talk of it any more. The debate soon flagged; in the major economics journal it has been forgotten.

But something even more interesting and intriguing has happened. After only a few years, even the admissions initially made no longer found any mention. Aggregate production functions have made their untroubled re-appearance in the macroeconomic textbooks, without the slightest hint as to their earlier (recognised) logical inconsistencies. It has taken only a few years for them to reappear in papers published in the major journals of dominant economic theory, which at the same time have begun systematically to reject all articles dealing with re-switching as unpublishable. The same authors, who had for two decades been asserting the need to scrap the aggregate neoclassical production functions are now using them quite normally. The typical economics student entering university from the 1980s onwards has heard nothing of the re-switching difficulties involved in the neoclassical theory of capital and income distribution.

It is as if the debate on the choice of techniques had never taken place. Amnesia on such a vast scale can only be explained by more appropriate terms, such as 'suppression' or 'repression' or 'removal'. This is, perhaps, one of the most interesting examples of that process described by Kuhn (1962), through which dominant 'normal' science suppresses, and thus ignores, the cases of contradiction and anomaly it bears within." -- Luigi L. Pasinetti, "Critique of the Neoclassical Theory of Growth and Distribution", 200?

Tuesday, March 10, 2009

A Manhattan Project For Economics?

Last December, Mike Brown, Stuart Kauffman, Zoe-Vonna Palmrose, and Lee Smolin discussed "Can Science Help Solve the Economic Crisis?" They suggest that what we need now is an economics Manhattan project. And by the way, neoclassical economics is not completely correct. (The Edge seems like an interesting place, whatever you think of this article.)

I vaguely know something about two of these authors. I read Stuart Kauffman's At Home in the Universe a number of years ago. I had previously read something about the Santa Fe Institute, including some of Brian Arthur's papers. But the idea of mathematical biology, with an emphasis on cross-disciplinary work from computer science was new to me.

I have been struggling through Peter Woit's Not Even Wrong: The Failure of String Theory and the Search for Unity in Physical Law for a month or so now. The algebra is tough going for me. Maybe I would have been better off with Lee Smolin's book on the same topic. And I have Smolin's paper "Time and Symmetry in Models of Economic Markets" to read. Barkley Rosser, Jr., suggests that Smolin should read some more economics, but it seems to me Smolin is quite modest about the potential of his work. I think Rosser and Smolin and his colleague approach some harmony in the comments in that thread.

Hat Tip: New York Times

Monday, March 09, 2009

The First Thing We Do, Let's Kill All The Lawyers

Paul Samuelson seems to be aware of the possibility of hostile, sometimes politically-motivated, readings of works in economics:
"Piero's was a subtle mind, which had thought long and hard on these (mathematical) relationships. His pen writes as if a lawyer were at hand to ensure that no vulnerable sentence appears. I honour him for that, and with my own students felt obligated to point out the subtelty of the text..." -- Paul A. Samuelson (2000) "Sraffa's Hits and Misses", in Critical Essays on Piero Sraffa's Legacy in Economics (ed. by Heinz D. Kurz), Cambridge University Press
"For some reason that I have no understanding of, the virulence of the attack on Tarshis was of a higher order of magnitude than on my book, but there were plenty of attacks on my book, and there was a lot of work done by people. Also I wrote carefully and lawyer-like so that there were a lot of complaints that Samuelson was playing peek-a-boo with the Commies. The whole thing was a sad scene that did not reflect well on conservative business pressuring of colleges."-- Paul A. Samuelson (quoted in David Colander and Harry Landreth, "Political Influence on the Textbook Keynesian Revolution: God, Man, and Laurie Tarshis at Yale")

Saturday, March 07, 2009

Some Links

Wednesday, March 04, 2009

Paul Lewis On Unproven Justifications For Flexible Labor Markets

Many who do not understand economics, such as many mainstream economists working at the OECD, the IMF, the World Bank, and other powerful institutions, think less unemployment would result from more "flexible" labor markets. Flexibility is a code-word for eliminating unions, lowering the real value of minimum wages, and otherwise decreasing standards in labor markets. I have pointed out some reasons why this push for labor market flexibility is theoretically and empirically unjustified.

There is more to Paul Lewis' recent paper than this echo of my favorite argument:
"One rationalisation of F[lexible] L[abour] M[arkets] rests upon neoclassical economic theory, in particular M[arginal] P[roductivity] T[heory]. A key feature is optimisation of the quantity of each factor employed so that its price equals its marginal productivity. To fit with the trade and technology hypotheses this neoclassical model must contain a minimum of two homogeneous categories of labour - low and high skilled - and two types of 'capital' - advanced high-skill complementary and low-skill complementary equipment.1...

...What results from these labour market conditions at a macro level is the natural rate of unemployment, or N[on]-A[ccelerating] I[nflation] R[ate] of U[nemployment] as it has come to be known. This is a long-run equilibrium, a consequence of supply and demand in the labour market, in this case largely constituted by the market for the low-skilled. It is consistent with firms having zero net profit,3 which corresponds with a 'warranted wage' for labour (Blanchard, 2006, p. 13).

1 I consider the arguments for F[lexible] L[abour] M[arkets] rest upon the following neoclassical assumptions. (i) Capital refers to the physical means of production, which has to be homogeneous in its inherent productive features, (ii) it is quantifiable independently of its price, which allows it to be optimised in production. This characterisation of capital was shown to be nothing more than a 'neoclassical parable' as Samuelson put it, with no grounding in reality (see Blaug, 1997; Hodgson, 1997; Hunt, 2002). However, this shortcoming has not prevented its continued use as a foundation of mainstream microeconomics.

3 A condition of perfect competition in the product markets. The outcome of zero profits in equilibrium is a further example of the inability of M[arginal] P[roductivity] T[heory] to model common features of real economies." -- Paul Lewis, "(How) Do Flexible Labour Markets Really Work? The Role of Profitability in Influencing Unemployment, Cambridge Journal of Economics, V. 33 (2009): pp. 51-77

Tuesday, March 03, 2009

No Need For Greed Or Hunger, A Brotherhood Of Man

Last month, I compared and contrasted "socialism" and "social democracy". A discussion on Crooked Timber inspired me here.

I now find John King has a working paper, "Socialist Democratic and Socialist Policies", intended for publication in the International Encyclopedia of Public Policy. I haven't fully absorbed this, but I see King goes back before Eduard Bernstein and his Marxist revisionism.

Freeing Oneself From The Ideas Of Some Academic Scribbler Of A Few Years Back

I have just begun reading James Galbraith's The Predator State. I like this passage:
"What, then, is a reality-based person to do? Many people appear to believe that the best they can do under the circumstances is to hedge and qualify, at the margins. That is, they can aver that the market may be imperfect, that under certain conditions it may fail, that it might function better given the aid of fuller information or certain constraints on behavior. And this position, deeply rooted in academic economics and therefore at least somewhat defensible on the public stage, has become the 'liberal' position in debates over markets, linked to the slogan 'making markets work.'

The problem with this compromise is that it depends on a misreading of the academic economics on which it is based. The underlying idea appears to be that markets exist but sometimes have problems: a bit of monopoly power, some kinks in the flow of information, a few side effects, maybe a little difficulty predicting the future. But in fact, the modern currents of academic economics are far more devastating than that. Each of the problems just mentioned is not incidental; rather they are pervasive. Taken together, they raise serious doubts about the idea that markets can work at all. To state that again: taken together, they form an overwhelming critique of the very concept of the market.

In the purest version of the theory that underlies the conservative version of the perfect market, economic man is a machine to whom whimsy and evolution are unknown. In practice, man is inconsistent; changeable; sometimes, though not consistently, irrational; his judgments biased and distorted and influenced by his peers. Modern behavioral economics has begun - but only begun - to notice this, seeking by experimental methods to show whether the actual behavior of presumptively competent people corresponds to the predictions of the rationalist theory. The findings, associated with the Nobel Prize-winning work of the Princeton psychologist Daniel Kahneman, are that they are not. Ordinary, intelligent people appear consistently unwilling, or unable, to calculate the consequences of their decisions in a manner predicted by the view that they are responding purely to the market. Instead, they act as social beings, concerned about their standing with their peers, about the fairness of the deal they are being offered, and other matters quite irrelevant to the utility of the object or money on offer. These are remarkably subversive findings, for they suggest that even if there were no monopoly, no externalities, perfect information, and perfect foresight, markets composed of real people would still not perform as the conservative vision requires.

But of course there are easier ways to reach the same conclusions, and behavioral economics is of interest mainly because it speaks to market-obsessed academics from within all the mind-boggling restrictions that they habitually impose on their analyses in order to make the problems appear capable of solution. The real world is a different place altogether." -- James K. Galbraith, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, Free Press (2008): pp. 21 -22
I'm not sure that Galbraith contains much of that spontaneous wit that his father generally put in in about the fifth draft.

Sunday, March 01, 2009

A Plague of Economists

What do economists think about Keynesian ideas, such as deficit spending in the midst of a great depression? Oliver Staley and Michael McKee report, "[James] Tobin's stamp is on the $787 billion stimulus signed by President Barack Obama, former students and colleagues say. His philosophies are influencing Austan Goolsbee, a former Tobin student advising Obama, and Ben S. Bernanke, head of the Federal Reserve. Unlike Friedman, Tobin provides guidance for today’s problems, said Paul Krugman, a Princeton University economist." Furthermore, "Bernanke cited Tobin’s 1969 essay on monetary theory in a 2004 paper discussing options available to the Federal Reserve for stimulating the economy when interest rates approach zero."

So economists are for it.

On the other hand, Will Wilkinson interviews Edward Prescott and Edmund Phelps. The idiot savant Edward Prescott says, "Stimulus is not part of the language of economics... There is an old, discarded theory that's been tried and failed spectacularly, which is where that language of stimulus comes from".

So economists are against it.