Vernengo On Recent History Of Macroeconomics

Matias Vernengo argues that, "The fundamental problem of the neoclassical/marginal approach, and the importance of Keynesian analysis, can ONLY be properly understood in light of the 1960s capital debates."

Vernengo is riffing off a Krugman post on his New York Times blog. A commentator on that brings up John Eatwell's 1980s work on capital theory and Keynes. See also this Krugman post on Keynes' debunking of the idea that unemployment is caused by excessively high wages.

Update (12 October 2011): Peter Cooper has two posts discussing Vernengo's views.

The European Union: A Prescient Sraffian Economist

"It is my view that the European project for arriving at economic and monetary union (EMU) should be regarded as the combined result of a radical change, since the late 1970s, in the principal economic policy objective of the major industrial countries - an epoch-making shift in emphasis away from unemployment and poverty to the objective of reducing inflation; and of the theoretical restoration that has occurred over the last twenty years, with the revival of pre-Keynesin conceptions in macroeconomic thinking. This view, which I have discussed elsewhere ..., makes it reasonable to believe also that the project's fortunes will reflect developments in these two ambits. Specifically, one can sensibly expect the EMU project to be definitively abandoned as soon as the social impact of actual unemployment will again make the pursuit of its reduction each government's main focus of concern, at the same time leading to a rejection of the 'natural' rate concept of the economy.

This process of gradual abandonment of the project, however, is likely to be delayed as regards countries in which the EMU is seen as a means of solving a 'commitment problem' in their national economic policies - an irreplaceable source of discipline, that is to say, with respect to inflation, government budget deficits and government debt." -- Massimo Pivetti (1999). "High Public Debt and Inflation: On the 'Disciplinary' View of European Monetary Union". In Value, Distribution and Capital: Essays in Honour of Pierangelo Garegnani (edited by Gary Mongiovi and Fabio Petri), Routledge.

I think federal systems are a good idea. I'm hoping a European government capable of conducting fiscal policy and issuing "euro-bonds" will emerge under the pressure of events.

International Journal of Pluralism and Economics Education

I recently stumbled upon this journal. Its first issue was in 2009, and the articles in the third issue of the first volume are available for download by non-subscribers.I like Fred Lee's article, "A Heterodox Teaching of Neoclassical Microeconomic Theory". He mentions my favorite criticism:

"Another example is that in a system of production with produced inputs with circular production, a change in a factor input price generates collateral effects that invalidates the ceteris paribus, partial equilibrium methodology underpinning the derivation of the slope of the constant output factor input demand function. This not only makes the function meaningless, it also undermines partial equilibrium analysis. However, this well-known point is simply ignored." -- Frederick S. Lee

Fathers And Children and Rediscovering Fire

1.0 Turgenev's Novel
I recently stumbled across an English-language copy of the Turgenev novel where the title was translated as in this blog post. This reminds me that I once listed the following pairs of economists:

• John Bates Clark, John Maurice Clark
• Milton Friedman, David Friedman
• John Kenneth Galbraith, James Galbraith
• John Neville Keynes, John Maynard Keynes
• James Mill, John Stuart Mill
• Auguste Walras, Marie Esprit Leon Walras
• Sidney Weintraub, Eliot Roy Weintraub

I now find I can add another pair of names, Edward J. Nell and Guinevere Liberty Nell.

One way of reading the series of models in Sraffa's Production of Commodities by Means of Commodities is as an historical series. Later models in the series apply to an institutional setup that followed earlier models. Some, including maybe Engels, have read Marx in this way. The labor theory of value is alleged to apply to a pre-capitalist, late medieval artisan economy. The transformation of values into prices of production is then a historical process occurring with the emergence of capitalism. Be that as it may, Edward Nell's work on the theory of Transformational Growth, fits well with this literature.

2.0 Rediscovering Fire
Guinever Liberty Nell has written a book, Rediscovering Fire: Basic Economic Lessons From the Soviet Experiment (Algora Publishing, 2010), in some ways in a very different tradition. She also considers institutions in different historical settings. But consider that Peter Boettke and Peter Leeson, in the George Mason tradition, appear in the acknowledgments. I gather she currently works for the Center for Data Analysis of the Heritage Foundation. She notes her differences with her family:

"I also thank my brother Jacob for introducing me to Alec Nove's work, which was the inspiration for writing this book. I must also thank Thomas W. Moore IV for endless intellectual battles that helped me challenge the beliefs I was raised with, and my sister Miranda for then debating with me endlessly from the other side."

Her book is dedicated as so:

"To my mother for raising me in confidence in my own creativity and ability, and my father for infusing me with the economics 'bug'."

The book is organized in somewhat repetitive themes. Aside from the introduction and conclusions, chapters treat competition, (un)employment, profit (impact on the firm), profit (impact on the economy), middlemen and trade, prices, money, regulation, democracy, corporations. Each of these substantive chapters consists of an introduction, a summary of the socialist argument, a description of the soviet experience, lessons to be drawn, and a conclusion. I'm not finished; I'm in the chapter on prices.

In many cases, I disagree with her account of the socialist argument. For example, she writes:

"Under socialism, workers were to be paid according to work, while under communism they would be paid according to need. According to theory, workers were to receive the full value of their product." -- Guinevere Libery Nell, Rediscovering Fire, p. 61.

As far as I am concerned, this claim is explicitly contradicted in Marx's Critique of the Gotha Program. Lenin knew this work quite well, he writes about it in State and Revolution. As another example, Nell writes:

"Marx did not believe in gains from trade... However, there are several reasons why both parties can gain from an exchange. One is that division of labor enables one person to make a product at lower cost than another person can make it." -- Guinevere Libery Nell, Rediscovering Fire, p. 92.

But Marx, in Capital explicity states that such gains from trade exist. On the other hand, she extensively references Nikolai Bukharin and Evgenii Preobrazhensky's The ABCs of Communism, which I have often seen referenced as a primer to Bolshevikism. I think Nell would agree with me that the book concentrates more on economic history than the history of economic thought.

I'm no expert on Soviet history (I'm best on the 1920s, I think). Nevertheless, I'll record my impression that I find the thematic organization confusing. In some chapters, she writes about either war communism, the New Economic Program, the collectivization of agriculture, or the 1965 reform, for example. But these analyzes are not arranged chronologically. If she ever produces a new edition (paperback?), perhaps she can include a short chronology or timeline.

I'm willing to accept, say, war communism as an attempt to construct a close to pure socialist economy. But I found Nell's attempts to apply lessons directly to current institutions in the United States economy unconvincing. Maybe pure planning of an entire economy cannot be done. I don't see why a large amount of planning and regulation is therefore inappropriate for specific sectors (for example, utilities or health) in certain settings. On the other hand, she is often careful to be tentative in her suggestions. Maybe Obama "may" want to consider some unintended consequence in restructuring health insurance. A somewhat facile objection to her lessons can easily be constructed. Of course, the Soviet experience with planning did not work very well. They did not have powerful networked computers.Maybe this objection would be less likely to arise if she had taken more of a historical and less of a thematic approach.

3.0 An Open Request
But that's not what I want to talk about. I wonder whether Nell would be willing to share any anecdotes about growing up. Is she able to discuss political disagreements with family members without rancor? I guess of more interest to me would be whether she has formed personal impressions of Joan Robinson, Pierangelo Garegnani, or Anwar Shaikh. On the other hand, if her stories would be like those in Jan Myrdal's memoir Childhood, who seems not to have got on with much of his family, I don't know that I want to hear about it.

Davidson On Obama's Job Plan

Paul Davidson discusses Obama's job plan. The blogger "Lord Keynes" presents links to other reactions to Obama's speech. (I dislike the use as pseudonyms of historical names of still current interest.)

Nick Rowe, Confused

Nick Rowe comments on the Cambridge Capital Controversy in comments to this post:

"Don't take my answer as authoritative.

As far as I can see, the Cambridge-Cambridge Capital Controversy has had almost zero impact on modern macroeconomics. My guess is that not many have much knowledge of that debate. (I have *some* knowledge, through my own curiosity 30 years ago, but not much). The existence of a natural rate is treated as unproblematic. There is some possibility allowed that monetary policy might have some long-run non-neutralities, (multiple equilibria), but even here the focus is more on natural rates of output and unemployment, rather than on the natural rate of interest itself (though one would almost always imply the other).

The concept and existence of the natural rate of interest plays a central role in modern Neo-Wicksellian/New Keynesian macroeconomics...

In my own case, recently I made the more modest critique that the natural rate may exist, and be unique, but we cannot come anywhere close to observing it in real time...

And that's leaving aside the problem that different financial assets will have different natural rates, and the spreads between them may vary over time, especially in a financial crisis.

Now, funnily enough, there is one small exception *I know about* (others may know of others) to my statement that macroeconomists ignore CCCC. David Laidler recently wrote a paper for the CD Howe that explicitly used CCCC to critique the Neo-Wicksellian monetary policy of the Bank of Canada. And David is a monetarist!

...I, personally, remain unconvinced by the Cambridge critique. *As far as I can see*, if a Walrasian/Arrow-Debreu equilibrium exists, and is unique, it defines within it a natural rate of interest (subject to qualifications in my question below). *As far as I can see* a lot of the CCCC debate was really about whether the natural rate could be determined *independently of preferences*. And (outside of very special one-good Y=F(K,L) models) it cannot. So what? I say. Preferences matter too, in determining relative prices including intertemporal prices like interest rates.

BUT, the chances of getting a nicely-well-behaved downward-sloping Investment demand function (and hence IS curve) out of anything other than a one-good model? I wouldn't bet on it. But my hunch is that the complications that arise from firms being sales-constrained (ignored in the Walrasian model) are more important than anything coming out of CCCC. Hence this post.

Now, my question: I never found Sraffa easy to understand. Sraffa said (I think) that the natural rate on wheat would, in general, be different from the natural rate on barley. Right? If so, is this what he meant:

Suppose the relative price of barley against wheat is rising at (say) 1% per year. Then, under perfect competition, and free flow of capital across sectors, the barley natural rate of interest must be one percentage point lower than the wheat natural rate of interest.

Is that what Sraffa was saying? (With all due allowance for over-simplification?)" -- Nick Rowe

I doubt Rowe is aware of the existence of Colin Rogers. I don't know what it means to talk of a natural rate of interest in the Arrow-Debreu model of intertemporal equilibrium. (This is certainly not Wicksell's long period approach.) Money does not exist in the model. For every numeraire, one will get another interest rate (for a loan for one one period of the numeraire good, starting at a designated time period). Which of these many interest rates is the "natural rate"? (It would help if when Rowe asks his question about Sraffa on own rates of interest of barley and wheat, he would bring up that he referencing Sraffa's critique of Hayek, not the more mature Production of Commodities by Means of Commodities.) Rowe has not grasped that classical economics and extensions of the economics of Keynes provide different theories of distribution. One need not close Sraffa's model by assuming intertemporal utility-maximization. I don't see why I need I care about Rowe's hunches on "importance", although, I suppose, he gets points for recognizing the arbitrariness of a downward-sloping investment demand function.

"Those re-switching examples never seemed to me to pay enough attention to the term structure of interest rates. There was always a flat term structure assumed. Not to mention how the term structure of investment would interact with the desired term structure of saving and consumption at the aggregate level, to create a term structure of interest rates." -- Nick Rowe

I find this incomprehensible. Let the interest rate on a loan for n years be 100 r_n percent. Typically, in a reswitching example, the following relationship holds:

1 + r_n = (1 + r₁)ⁿ

This is a term structure of interest rates. Suppose one wanted to allow expectations of future yearly interest rates to differ from the current yearly interest rate. That is easy to introduce, but those extra degrees of freedom make it even easier to show violations of traditional neoclassical parables. Although it's easy to construct closed reswitching examples, I don't see why mainstream economists cannot consider open models.

Bill Woolsey's comment in the same thread is too stupid to bother with. I would think it possible to discuss analytical points somewhat separately from ideology.

Elsewhere

• Arindrajit Dube takes the opportunity of Alan Krueger's nomination, as chair of the Council of Economic Advisors, to note that Card and Krueger's work has stood the test of time. He also notes the bias in Neumark and Wascher's work.
• Dean Baker's new book, The End of Loser Liberalism: Making Markets Progressive is now available. What is the point of the cover photo of Biscuit? Is it that poodles are losers; progressives should try to emulate a bigger, more assertive breed? (Anyway, I am currently reading Jacob Hacker and Paul Pierson's Winner-Take-All Politics: How Washington Made the Rich Richer - And Turned Its Back on the Middle Class; so I'm not enthusiastic about reading a similarly themed book right away.