Corporate Governance

Most arguments about the state versus the market seem fundamentally misguided to me, begging, as they do, false premises. Many have noted that the state underlies the ability to trade goods on the market. What attributes of a bundle of property rights are alienable, what contracts can be enforced, default conditions, etc. are all defined by laws enforced by the state.

But I want to consider a reverse interaction between state and market, so to speak. I focus here on how many private actions are not only of public concern, but even are made as part of a political process. Market actors often take actions that in other systems would be delegated to the state. Consider proposals for voting on at the annual meeting of a corporation, which can be of two types:

• Company-sponsored resolutions,
• Shareholder resolutions brought forth under the Securities and Exchange Commission (SEC) Rule 14a-8.

Many resolutions are about pay, or the process for setting pay, appointing independent directors to the committees that set executive compensation, etc. Both Lenin and Hayek consider the question of "who-whom?" as political, even if we leave much of the answer to the result of the interactions of private actors. But many laws you might see debated in Washington, I think, resemble certain shareholder resolutions. My impression is that such resolutions might treat working conditions in China that must be satisfied for parts built into products distributed in the United States, environmentally responsible methods of production, etc. Many of these political resolutions for controlling corporate behavior may have low likelihood of enactment. They are, I think, more about raising consciousness.

I think it would be interesting to find a database of proxy resolutions. One could then confirm my claim above about many being political. Could one classify proxies, especially shareholder-sponsored ones, into various categories? Could the number in such categories be used in some sort of Instrumental Variable (IV) analysis or correlated over time with anything of interest? Broadbridge Financial Solutions provides support to many companies in electronic voting of shareholder proxies at corporate annual meetings. As far as I could see, they only provide access to the statement of proxy resolutions to shareholders of the company to which the resolution applies. Other possible sources of proxy resolutions are the SEC and organizations that track socially responsible investing.

Vatican: Abolish IMF

"The Pontifical Council for Justice and Peace released a document Oct. 24 calling for a radical reform of the world's financial and monetary systems. It also proposed the creation of a global political authority to manage the economy and a new world economic order based on ethics.

The note entitled 'Towards reforming the international financial and monetary systems in the context of the global public authority' was presented to journalists..."-- staff for the National Catholic Reporter

Two Sraffian Propositions

A Wage-Rate Of Profits Fontier

One might infer the following from Sraffa's book, The Production of Commodities by Means of Commodities: A Prelude to a Critique of Economic Theory:

• The distribution of income is not determined by the supply and demand for factors of production. Instead, it is determined by power, politics, and the evolution of social norms.
• The returns to capital are not determined by consumers rationally choosing to trade-off consumption today for consumption sometime in the future.

Sraffa's models, I think, are consistent with these ideas, even if they cannot be formally derived from his propositions as a matter of mathematical proof. Various empirical findings published lately support these ideas¹. I refer, specifically, to the arguments in Hacker & Pierson (2010)² and to the research³ summarized in Chapter 10, "Why is saving for the future so arbitrary?" of Akerlof and Shiller (2009).

Footnotes:

¹One might even argue that certain empirical trends (and an emerging worldwide political movement) should be giving Sraffian research more salience.
²Over a decade ago, James Galbraith provided empirically-supported arguments about the importance of politics in determining income distribution.
³Over a decade and a half ago, Paul Davidson was citing a 1982 study by Danziger, Van der Haag, Smolensky, and Taussig on savings during retirement. Their empirical results were not consistent with a model of lifecycle saving built on a foundation of intertemporal utility-maximizing.

Bibliography

• George A. Akerlof and Robert J. Shiller (2009). Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism, Princeton University Press.
• Paul Davidson (1994). Post Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policies for the Twenty-first Century, Edward Elgar.
• James K. Galbraith (1998). Created Unequal: The Crisis in American Pay, Free Press.
• Jacob S. Hacker & Paul Pierson (2010). Winner-Take-All Politics: How Washington Made the Rich Richer - And Turned Its Back on the Middle Class, Simon & Schuster.

Pierangelo Garegnani (1930 – 14 October 2011)

Figure 1: A Production Function In Garegnani (1970)

I think the following are some of Garegnani's major claims about economics:

• Classical economics provides an alternative theory to marginalist economics (misleadingly called "Neoclassical economics")
• The givens of the classical theory of value and distribution are:
• The gross quantities of output,
• The production technique, and
• The rate of profits or the wage.
• These givens are to be explained within the discipline of political economy.
• The classical theory of value and distribution can be combined with a Keynesian theory of effective demand.
• The marginalists, from about 1870 to about 1930, shared with the classical economists a common method of trying to explain long-period prices and distribution.
• Yet, the marginalist theory was incoherent because of their reliance on a given quantity of capital.
• Hayek and Hicks, among others, initiated a major change in method with their creation of (very short period) theories of intertemporal and temporary equilibrium.
• These new-fangled theories remain vulnerable to capital-theoretic critiques.

I give a very limited biography of articles in which Garegnani puts forth these theses, in English. As I understand it, his 1960 doctoral thesis was only published in Italian. His 1970 Review of Economic Studies article refutes the neoclassical long period theory of value and distribution, in general, and Samuelson's attempted defense with the pseudo-production function, more specifically. Joan Robinson took the opportunity of his 1978 and 1979 articles to break with Sraffianism on the ground that Garegnani's models were not located in historical time.

I include in the bibliography a festschrift published in his honor.

Selected Bibliography

• Pierangelo Garegnani (1970). "Heterogeneous Capital, the Production Function and the Theory of Distribution", Review of Economic Studies V. 37, N. 3 (July): 407-436.
• -- (1976) "On a Change in the Notion of Equilibrium in Recent Work on Value", in Essays in Modern Capital Theory (ed. by M. Brown, K. Sato, and P. Zarembka), North Holland. (Reprinted in J. Eatwell and M. Milgate (editors) (1983) Keynes's Economics and the Theory of Value and Distribution, Oxford.)
• -- (1978) "Notes on Consumption, Investment, and Effective Demand, Part I", Cambridge Journal of Economics, V. 2: 335-353.
• -- (1979) "Notes on Consumption, Investment, and Effective Demand, Part II", Cambridge Journal of Economics, V. 2:3: 63-82.
• -- (1984). "Value and Distribution in the Classical Economists and Marx", Oxford Economic Papers, V. 36, N. 2 (June): 291-325.
• -- (1990). "Quantity of Capital", in The New Palgrave: Capital Theory (Ed. by J. Eatwell, M. Milgate, and P. Newman), Macmillan Press.
• -- (1990b). "Sraffa: Classical versus Marginalist Analysis", in Essays on Piero Sraffa: Critical Perspectives on the Revival of Classical Theory (Ed. by K. Bharadwaj and B. Schefold), Unwin-Hyman.
• -- (2010). "On the Present State of the Capital Controversy", Sraffa's Production of Commodities by Means of Commodities,1960-2010: Critique and Reconstruction of Economic Theory, Roma (2-4 December).
• Gary Mongiovi and Fabio Petri (editors) (1999). Value, Distribution and Capital: Essays in honour of Pierangelo Garegnani, Routledge.

Update (21 October): Some other obituaries: Tyler Cowen, at Daily Kos, Barkley Rosser, David Ruccio, Matias Vernengo. In other languages than mine: Sergio Cesaratto, Revista Circus, Giorgio Napolitano, Antonella Stirati

A Modest Proposal To A Random Cop

Suppose I walked up to some random strangers on the street and sprayed them with pepper spray. I'm fairly sure that I would be breaking some serious laws. And if I did that in front of a crowd of police officers, I would be quickly arrested. So why don't you arrest an officer if he does that in a totally unprovoked situation?

If some policeman were to consider this, I suspect that they know it would not be good for their career. And they know that there are some (presumably ineffective) Internal Review Board processes. But if you did arrest another officer for committing a crime right in front of you when the whole world is watching, you would have another career. For example, you could be invited to lectures at many colleges for some years.

I think that any cop that does this would want to be smiling, quiet, and polite through the whole process. I recently asked a Military Policeman at some bar if he had ever prohibited a general from entrance onto his facility. (I know there are processes and paperwork to get a visit approved.) He told me, "No, but I did forbid a major the other month." And he told me that his amusement with the major's assertions was increased by smiling the whole while.

Current Mentions Of Keynes In The Press

• John Cassidy's article, "The Demand Doctor: How right was John Maynard Keynes" is in The New Yorker, 10 October 2011 (pp. 46-57).
• Thomas Geoghegan's article "What would Keynes do?" is in The Nation, 17 October 2011 (pp. 11-17).
• Robert Solow's article, "Working in the Dark", is a review of Sylvia Nasar's book, Grand Pursuit: The Story of Economic Genius. It is in the 28 September 2011 issue of The New Republic.

Off topic reminders to myself:

• Consider re-reading Ester-Mirjam Sent's The Evolving Rationality of Rational Expectations: An Assessment of Thomas Sargent's Achievements (Cambridge University Press, 1998).
• Consider buying:
• Robert Leonard, Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to Social Science, 1900-1960 (Cambridge University Press, 2010)
• Malcolm Rutherford, The Institutionalist Movement in American Economics, 1918-1947: Science and Social Control (Cambridge University Press, 2011)
• Steve Keen, Debunking Economics - Revised and Expanded Edition: The Naked Emperor Dethroned? (Zed Books, 2011) (I own the first edition.)

Family Resemblances

I expect many mainstream economists to blithely make many untrue statements. It is not, necessarily, because they disagree with prosaic ideas I think well-established in the literature. I suspect it is because they are just ignorant of the literature. This post offers an example of such a prosaic idea.

Works by David Ricardo (1821), Karl Marx, Wassily Leontief (1941), John Von Neumann (1945-1946), and Piero Sraffa (1960) are important components in a long-established, anti-marginalist, analytical tradition.

References

• D. G. Champernowne (1945-1946). "A Note on J. v. Neumann's article on 'A Model of Economic Equilibrium'", Review of Economic Studies, V. 13, N. 1: pp. 10-18.
• Heinz D. Kurz and Neri Salvadori (1995). Theory of Production: A Long-Period Analysis, Cambridge University Press.
• Wassily Leontief (1941). The Structure of the American Economy, Harvard University Press. [I haven’t read this particular reference.]
• Karl Marx (). Capital: A Critique of Political Economy
• David Ricardo (1821). On the Principles of Political Economy and Taxation, Third edition. (Republished as the first volume of The Works and Correspondence of David Ricardo (ed. by P. Sraffa), Cambridge University Press.)
• Piero Sraffa (1960). Production of Commodities by Means of Commodities: Prelude to a Critique of Political Economy, Cambridge University Press.
• John Von Neumann (1945-1946). "A Model of Economic Equilibrium", Review of Economic Studies, V. 13, N. 1: pp. 1-9.

Mainstream Multipliers

1.0 Introduction

"Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two." -- Robert Barro, Wall Street Journal

I find the above disingenuous, although cleverly worded to narrowly focus on transfer payments. Empirical evidence exists on Keynesian multipliers, thereby supporting the theory from which the policy recommendations are drawn.

In this post, I draw attention to four studies using Instrumental Variables (IVs) to estimate Keynesian multipliers. Currently, many economists find quite promising the use of IVs to emulate controlled experiments. For some more on the stimulus, that is, the 2009 American Recovery and Reinvestment Act, see Dylan Matthews' summaries of nine studies. I also have yet to make anything of Auerbach and Gorodnichenko (2011).

2.0 Methodology
The change in the ratio of public debt to GDP is increased by a rise in nominal interest rates, a fall in the rate of growth of real GDP, and a fall in the rate of inflation. The question addressed by this post is how to distinguish the effects of government policy on GDP from the effects of changes in GDP on government policy.

Some tax and government spending is endogenous to the economy. For example, a reduction in Gross Domestic Product (GDP) can result in:

• Lower taxes, since the income on which taxes are based has declined, and more government spending on predefined social programs
• Deliberate attempts at short-run government counter-cyclical increases in government spending and lower taxes.

One cannot easily use such endogenous changes to spending or taxes to identify subsequent causal effects from government spending and taxes on the overall level of economic activity. Accordingly, Christina D. Romer and David H. Romer (2010) consider exogenous changes to taxes, which generally fall into two categories:

• Taxes to supposedly lower or raise long run rate of growth of GDP
• Taxes to bring thedeficit closer to balance.

Romer and Romer consider quarterly USA data from 1945 to 2007. They look at narrative data, such as official reports, to classify changes in tax rates as endogenous or exogenous. The exogenous changes provide their IV which they can then use to identify subsequent causal changes in GDP.

David Cloyne (2011) applies this narrative approach for constructing a time series of exogenous tax changes to the United Kingdom. Jaime Guajardo, Daniel Leigh, and Andrea Pescatori (2011) extend this narrative approach across countries in the Organisation for Economic Co-Operation and Development (OECD).

Daniel Shoag adopts a different approach, applicable at the state level in the United States. He considers changes in state-level spending associated with windfall gains and losses in state pensions. A state pension is typically not invested in that individual state, and the dispersion of pension performance across states is exogenous, he argues, to the variation in the economic performance across states. So pension performance gives Shoag his IV. (His references include additional multiplier estimates, if I understand correctly.)

3.0 Results

• Romer and Romer find lowering taxes by 1% of GDP raises GDP by 3% in 2 1/2 years.
• Cloyne finds that lowering taxes by 1% of GDP raised GDP by 2.5% in three years.
• Guajardo et al find that fiscal consolidation (that is, raising taxes or lowering government spending) of one percent of GDP reduces real GDP by 0.62 percent.
• Shoag finds that a dollar of government spending generates $2.12 of personal income. Raising government spending by $35,000 generates another job in-state.

Update (12 October 2011): The September issue of the Journal of Economic Literature contains three articles debating the size of the multiplier.

Bibliography

• Alan J. Auerbach and Yuriy Gorodnichenko (Aug. 2011) "Fiscal Multipliers in Recession and Expansion"
• James Cloyne (2011) "What are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation"
• Jaime Guajardo, Daniel Leigh, and Andrea Pescatori () "Expansionary Austerity: New International Evidence", IMF Working Paper WP/11/158.
• Roberto Perotti (16 June 2011) ""The 'Austerity Myth': Gain Without Pain?"
• Christina D. Romer and David H. Romer (June 2010) "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks", American Economic Review: 763-801.
• Daniel Shoag () "The Impact of Government Spending Shocks: Evidence on the Multiplier from State Pension Plan Returns".