Wednesday, January 30, 2013

Frank Hahn (1925-2013)

Frank Hahn's 1982 article, "The Neo-Ricardians", in the Cambridge Journal of Economics is important in my understanding of Sraffa's economics, even though I think it was misdirected in many ways. Here are some posts where I have mentioned Hahn's work:

  • Geoff Harcourt reminiscing about an oral debate with Hahn.
  • Wondering if macroeconomists have yet met Hahn's challenge to make money matter in General Equilibrium Theory.
  • Quoting Hahn on intellectual regression in macroeconomics.

Friday, January 25, 2013

Books That I Find Sad

These days, neither mathematics, nor clowning, nor games seem to be reliable escapism.

Saturday, January 19, 2013

Selected Principles Of Microeconomics

This post presents a series of claims, without argument, references, or empirical evidence.

  1. Raw materials & agricultural products, commodities produced by industry, and services are priced differently by firms producing each in advanced capitalist countries.
    • Undeveloped, industrial, and post-industrial economies systematically vary in which of these three types of commodities they mainly produce.
    • Thus, these economies may differ in their microeconomic and macroeconomic behavior.
    • And even the performance of a single economy may vary among regions in that economy.
  2. The prices and quantities produced of raw materials and agricultural products are mediated by supply and demand, in some sense.
    • These commodities are traded on organized commodity markets.
    • These markets have definite rules for matching bids and asks.
    • Some speculators in these markets are willing to take either side of an exchange.
    • Some firms in these markets are tasked with "making" the market.
  3. The prices of industrial products are administrated, with firms setting a markup over cost.
    • Typically, the ownership of a firm producing industrial commodities is separated from its control.
    • Typically, such a firm operates multiple plants and produces multiple products, often in more than one industry.
    • The allocation of overhead costs among the produced products is a challenge, and is mediated by accounting conventions.
    • Plants typically face constant average variable costs, up to some maximum.
    • Firms in these industries plan plants to operate at some average capacity below this maximum, so as to have room to respond to unforeseen demand.
    • Firms in these industries respond to short-run fluctuations in demand more by varying output than by varying quoted prices.
    • Firms set their markup over cost to generate internal finance for a planned rate of growth.
  4. I should say something about the quantities produced and prices of services here.
    • The concept of dual economies, in which some parts of a modern economy behave like an undeveloped economy, seems particularly appropriate for analyzing firms providing services.
  5. Piero Sraffa's model, suitably modified, provides a framework to analyze how markets for these different kinds of commodities fit together.
    • One modification involves dropping the assumption that the same rate of profits is earned in all industries.
    • The absence of barriers to entry in an industry is the relevant notion of a competitive industry.
    • One might consider how firm reaction functions or old Industrial Organization theory fit in here.

Friday, January 11, 2013

Charlatanism On The Theory Of Foreign Trade

I’ve noticed some foolish things said about free trade in the news recently. Yes, Ricardo showed that trade in two goods generates surplus for both countries under free trade. Samuelson later gave a more formal, general proof of the benefits of Ricardian trade for a nation, though his theorem with Stopler explains which individuals may be made worse off. Samuelson also showed that even when individuals are worse off, there is enough surplus that transfers can be made to the harmed individuals such that free trade is a Pareto improvement on autarky. Note that the last sentence is absolutely not implied by Ricardo, and how could it have been: he didn’t have the apparatus of ordinal utility nor the concept of Pareto improvement nor the idea of the Hicksian demand curve.

All of the above is true, but ..."

-- Kevin Bryan, "'Gains From Trade Without Lump-Sum Compensation'"

I have yet to read the paper referenced in the blog post linked to above. But contrast the following two quotations with the above:

"We have examined a version of the familiar H-O-S analysis, with two countries, two commodities and two factors; we have made all the normal assumptions except that, instead of a common zero rate of profit, we have assumed a common positive rate of profit. Since the existence of a positive profit rate does not affect the properties of the familiar relationship between commodity-prices and factor-prices it does not affect the factor-price-equalisation and Stolper-Samuelson theorems. In general, however, nothing can be said a priori about the relationship between factor-prices and the factor-intensity of production methods, when the profit rate is positive, and it follows that nothing can be said a priori about the shape of the relative supply curve. This does not prevent the H-O-S theorem about the pattern of trade from holding in its 'quantity' form, but does make the theorem invalid in its 'price' form, does mean that trade need not 'harm' a country's scarce factor, and does mean that uniqueness of international equilibrium is to be regarded as a special case when the common rate of profit is positive."

-- Ian Steedman and J. S. Metcalfe (1977). "Reswitching, Primary Inputs and the Heckscher-Ohlin-Samuelson Theory of Trade", Journal of International Economics

"7.5. The idea that the opening of foreign trade bears a close resemblance to technical progress, in that in both cases additional processes of production are made available to the economy, is clearly expressed in Ricardo's Principles in the chapter 'On Foreign Trade'... Ricardo in fact compares the extension of trade to improvements in machinery, and, taking the real wage rate as given, investigates whether trade or improved machinery will have an impact on the general rate of profit. He concludes that if 'by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise,' whereas 'if the commodities obtained at a cheaper rate... be exclusively the commodities consumed by the rich, no alteration will take place in the rate of profits'...

7.6. In recent years the pure theory of trade has been reformulated, using a 'classical' approach to the theory of value and distribution and paying special attention to the fact that capital consists of produced means of production. A start was made by Parrinello (1970), followed by several contributions by Steedman, Metcalfe and Steedman, and Mainwaring... It was shown that several of the traditional trade theorems, derived within the Heckscher-Ohlin-Samuelson model, do not carry over to a framework with a positive rate of profit (interest) and produced inputs (capital goods). (As is well known, the Heckscher-Ohlin-Samuelson model of international trade assumes two countries producing the same two commodities by means of the same constant returns to scale technology, using the same two primary inputs, each of which is taken to be homogeneous across countries.) With a positive rate of interest that is uniform across countries some, though not all, of the standard theorems are undermined (including the 'factor price equalization theorem'), while with different rates of interest in different countries all standard theorems except the Rybczynski theorem turn out to be untenable. The 'gains' from trade for the single small open economy need not be positive. When in the Heckscher-Ohlin-Samuelson theory one of the two primary factors (land) is replaced by a factor called 'capital', the 'quantity' of which is represented in terms of a given total value of capital, then the theory is deprived of its logical coherence..."

-- Heinz D. Kurz and Neri Salvadori, Theory of Production: A Long-Period Analysis, Cambridge University Press, 1995.

I happen to know the factor price theorem is false, once one takes into account the existence of capital.

My post here was inspired by a comment on Noah Smith's query, "Why do people think economists are charlatans"? Empirically, I expect most mainstreams economists to not give a fair overview of the literature, whether from incapacity or dishonesty. In this case, the author of the blog, "A Fine Theorem", does not even seem to be aware of the existence of work on international trade by such authors as L. Mainwaring, J. S. Metcalfe, Sergio Parrinello, Ian Steedman. Instead he just blithely claims ideas to be true that I consider to have been falsified a third of a century ago. Thus, he cannot refute their conclusions or quickly evaluate any literature on the topic.

I consider the point of this example to be general.

Tuesday, January 08, 2013


  • Dean Baker notes problems created by the Cambridge Capital Controversy (CCC) for Krugman's position on capital-intensive technological change. Most of Dean Baker's blog does not have a theoretical flavor, but is more practical.
  • Matt Yglesias notes CCC problems for Krugman's position.
  • A macroeconomist tells the readers to ask him anything on Reddit. (Paul Krugman once did one of these Ask-Me-Anythings.)
  • Maybe one might want to occasionally look at the Ask Social Science and Academic Economics reddits.