Friday, November 23, 2012

A Keen Defense

My major point in this post is to draw attention to the existence of Kapeller and Pühringer (2010).

Steve Keen's book, Debunking Economics, is mainly a compilation of well-established criticisms of textbook economics. He attempts as popular a presentation as the material will permit. These criticisms, in my opinion, leave textbook economics, both microeconomics and macroeconomics, in tatters1.

Keen, in the first edition, also offered his own original criticism of the textbook theory of the firm under perfect competition. You can find various brouhahas on the internet over Keen's remarks. Between editions of his book, Keen has published, with others, a series of papers developing his criticism2.

Some have asserted theories of perfect competition in models with a continuum of agents provide a defense of the textbook theory. As Kapeller and Pühringer point out, this is a change of subject. A non sequitur should not be a considered an adequate defense of the textbook model. Furthermore, the primary developer of models with a continuum of agents presents his approach as inconsistent with the textbook theory:

"Though writers on economic equilibrium have traditionally assumed perfect competition, they have, paradoxically, adopted a mathematical model that does not fit this assumption. Indeed, the influence of an individual participant on the economy cannot be mathematically negligible, as long as there are only finitely many participants. Thus, a mathematically model appropriate to the intuitive notion of perfect competition must contain infinitely many participants. We submit that the most natural model for this purpose contains a continuum of participants." -- Robert Aumann (1964).

It seems to me only four possibilities are open here:

  1. Aumann is not talking, in his critical remarks, about the model of perfect competition taught in almost any intermediate microeconomics textbook.
  2. Aumann is mistaken.
  3. The economists who write and teach the self-contradictory textbook model are deliberately teaching self-contradictory models to their students.
  4. The economists who write and teach the self-contradictory textbook model are ignorant.

I think only the third and fourth options are credible3. I can understand the difficulty of writing and teaching in an intellectually bankrupt discipline.

Update: Nick Rowe illustrates the willingness of some economists to teach nonsense to students: "To the individual farmer, who sees only a tiny slice of the whole demand curve, because even a 100% change in his output will cause only a tiny percentage change in total output, it will look perfectly flat." Note that in his post, even when considering the limiting case, he never considers the existence of a continuum of producers.

Update 2: Steve Keen, in the Business Spectator, re-iterates his critique of the incorrect neoclassical textbook theory of perfect competition. Tim Worstall lies to readers of Forbes. It is not true that "everyone subscribes" to the "usual basics of economics" that Keen debunks. It is not true that the bulk of Keen's book is about his "breakthroughs in showing us all the errors of our ways." One can accept almost all of Keen's demonstration of the mendacity of neoclassical textbooks without accepting any claim that Keen says is original with him. In fact, Keen notes that Stigler showed that perfectly competitive firms that are not systematically mistaken, if they produce a positive, non-infinitesimal quantity in equilibrium, will not produce at a level of output where the market price, Marginal Revenue, and Marginal Cost are all equated.

  1. Some areas of economics, such as game theory or the recent popularity of instrumental variables and experiments (natural and otherwise), remain unaddressed by Keen.
  2. Kapeller and Pühringer point to a 2008 paper published by Anglin in Physica A as a peer-reviewed response.
  3. The existence of the downward-sloping part of the U-shaped average cost curve for the textbook firm hardly seems compatible with the existence of an infinite number of firms, each producing a quantity of zero units of an homogeneous good.

  • Aumann, Robert J. (1964). Markets with a Continuum of Traders, Econometrica, V. 32, No. 1-2.
  • Kapeller, Jacob and Stephan Pühringer (2010). The Internal Consistency of Perfect Competition, The Journal of Philosophical Economics, V. III, No. 2: pp. 134-152.

Wednesday, November 21, 2012

A Barefoot Bum Critiques Propertarianism

"Larry, the Barefoot Bum" has been refuting propertarianism1. Crudely stated, his thesis is that if you believe taxation is unjust because it implies the initiation of force (coercion by the state), you cannot coherently also defend private property.

  1. To me, what was traditionally called "libertarianism" is anarchism, that is, a kind of communism.

Monday, November 12, 2012

Widespread Incompetence In Economics

Should one try to engage with those putting forth positions refuted decades ago? Maybe one's time would be better spent on looking at arguments that come closer to reflecting the state of the art, even when those arguments are not backed up by external funding from vicious reactionaries.

Suppose the economy were a complex dynamic system. Those who have investigated this idea have long ago shown that, even if all wages and prices were perfectly flexible, no tendency need exist for the economy to tend towards an equilibrium in which all markets, including the labor market, clear. Some just do not know:

"Given the position [Casey Mulligan is] trying to defend, these are the best arguments available. And that position is widely shared, not only by economists much more famous than Mulligan but by lots of governments and policymakers. Most mainstream opponents of Keynesianism are committed, one way or another, to the view that persistent high unemployment must be caused by problems in labour markets. But it's much easier to talk in vague general terms about rigidities and structural imbalances than to present an operational explanation for the sustained high US unemployment of the last four years. Mulligan at least makes the attempt, which is more than most of the New Classical/Chicago/Real Business Cycle school have done, and necessary if there is to be any progress in the debate." -- John Quiggin
"If (Casey) Mulligan were an isolated crank, I'd ignore him. But he’s endorsed by people like Tyler Cowen who should know better. And, as I said in the opening para, most of the freshwater crowd and quite a few people who were once "New Keynesians" believe or go along with this stuff." -- John Quiggin

Saturday, November 03, 2012

The Historical Failure of Neoclassical Economics

"Both classical and marginalist economics provided accounts of the long-period (uniform rate of profit) theory of value and distribution, but whereas a classical economist could take the real wage as a datum for the purpose of such analysis (whatever the implicit ‘background’ theory of wages might be), the marginalist economist had to ‘close the system’ in some other manner. In effect, since ‘resource supplies’ were often taken as given, this meant that the ‘the supply of capital’ had to be taken as given, in one way or another. Just how the given supply of capital was to be represented was an issue which led to considerable heterogeneity amongst even those marginalist economists who shared the long-period method of analysis with the classical economists and with each other. That heterogeneity cannot be entered into here (see Kurz and Salvadori, 1995: 427-43) but it is now widely recognized that each version of such traditional long-period marginalist theory of value and distribution encountered insoluble problems (ibid: 443-8)." -- Ian Steedman (1998).
1.0 Introduction

The ‘neoclassical’ revolution is conventionally dated to the 1870s, with the works of William Stanley Jevons, Leon Walras, and Carl Menger. Neoclassical economists, from the 1870s to the 1930s, tried to develop neoclassical theory:

  • To include production, including production with previously produced means of production, within the scope of the theory.
  • To extend supply and demand-based reasoning to all runs, including the long run.

All long-run neoclassical models produced in this period failed; they were logically self-contradictory.

2.0 The Endowment of Capital in Early Neoclassical Theories

In long-run theory, relative spot prices are stationary in equilibrium1. In a long-run equilibrium, entrepreneurs have correctly anticipated effective demand, and the size of plants have been adapted to this demand. Furthermore, plants are being operated at their ideal capacity for which they have been designed2. These early economists can be said to have specified the given endowment of capital in two ways:

  1. As a vector of physical quantities of heterogeneous produced goods to be used as inputs in production.
  2. As a homogeneous quantity, given in value, but free to change its form.

Leon Walras adopted the first approach, even though his fully developed model contained a market for value capital. His approach comes to grief on the need to simultaneously assume a uniform rate of profit in all markets for produced goods, to equate supply prices and market prices of capital goods, and to impose the condition that capital goods are being produced in proportions that will allow the economy to be reproduced (perhaps on an expanded scale).

The second approach can be further subdivided. In the first subdivision, Jevons and Eugen von Böhm-Bawerk, for example, took the homogeneous stuff of which capital consists to be a fund of subsistence goods to maintain the workers while they labored. More capital somehow represents a longer period of production. These economists incorrectly thought that a meaningful physical measure of this period of production could be defined independently of prices and that a lower interest rate would necessarily encourage entrepreneurs to extend this period, given the available technology.

In the second subdivision, this homogeneous stuff consists of the value of a heterogeneous quantity of capital goods. This ignores price Wicksell effects, the variation of the value of a given collection of physical quantities of capital goods with distribution and prices. Knut Wicksell was both a prominent proponent of this approach and an early economist to realize why it does not work.

3.0 Later Developments

From around the end of the 1920s to the 1960s, neoclassical economists abandoned the long-run to concentrate on the refinement of certain general, logically consistent, although empirically empty, theories. I refer to the works of Erik Lindahl, J. R. Hicks, Friedrich Hayek, and Gerard Debreu and Kenneth Arrow on intertemporal and temporary equilibrium3. Towards the end of this second period, economists returned to the elaboration of long run theories of stationary and steady states. In the logically consistent multisectoral models in this trend, capital is not taken as given, either as a value quantity nor as a vector of physical quantities. Rather, the quantity of capital, in both senses, is found by solving the model4.

4.0 Conclusion

Economists have developed a logically consistent and empirically applicable theory of classical ‘natural prices’ (also known as Marxian ‘prices of production)’. As I and others have repetitively demonstrated, such prices are inconsistent with supply and demand-based reasoning. Since the endowment of means of production is not taken as given in such theories, these theories are not about the allocation of given resources among alternative ends.

Over, the last century economists have extensively explored the logic of models in which given resources are allocated among alternative ends. Although such models might be of use to a central planner, they seem to be unable to describe prices in actually existing capitalist economies.

The development of these claims have been available in the scholarly literature for about a third of a century. They have not been refuted. Most mainstream economists just ignore this collapse of neoclassical economics, in their teaching, in their applied work, in policy advice, and in their research.

  1. Long run equilibrium is compatible with slow, secular changes, such as improvements in technology and in the composition of output.
  2. Neoclassical economists, of course, did not claim that an actual economy would ever be in such a long-run equilibrium. The model was developed as an aid to analyze tendencies to equilibrium thought to be in existence at any given moment of time.
  3. I have seen some claim Irving Fisher as a forerunner for these theories.
  4. Many of the recent mainstream developers of models of endogenous growth (such as, Paul Romer) seem to be ignorant of this fact.