Tuesday, June 06, 2017

Price Wicksell Effects in Random Economies

Figure 1: Blowup of Distribution of Maximum Distance of Frontier from Straight Line
1.0 Introduction

This post is the third in a series. Here is the first, and here is the second.

In this post, I am concerned with the probability that price Wicksell effects for a given technique are negative, positive, or both (for different rates of profits). A price Wicksell effect shows the change in the value of capital goods, for different rates of profits, for a technique. If a (non-zero) price Wicksell effect exists, for some range(s) of the rate of profits in which the technique is cost-minimizing, the rate of profits is unequal to the marginal product of capital, in the most straightforward sense. (This is the general case.) Furthermore, a positive price Wicksell effect shows that firms, in a comparison of stationary states, will want to employ more capital per person-hour at a higher rate of profits. The rate of profits is not a scarcity index, for some commodity called "capital", limited in supply.

My analysis is successful, in that I am able to calculate probabilities for the specific model of random economies. And I see that an appreciable probability exists that price Wicksell effects are positive. However, I wanted to find a visually appealing example of a wage frontier that exhibits both negative and positive Wicksell effects. The curve I end up with is close enough to an affine function that I doubt you can readily see the change in curvature.

Bertram Schefold has an explanation of this, based on the theory of random matrices. If the Leontief input-output matrix is random, in his sense (which matches my approach), the standard commodity will tend to contain all commodities in the same proportion, that is, proportional to a vector containing unity for all elements. And I randomly generate a numeraire (and net output vector) that will tend to be the same. So my random economies tend to deviate only slightly from standard proportions. And this deviation is smaller, the larger the number of commodities produced. So this post is, in some sense, an empirical validation of Schefold's findings.

2.0 Simulating Random Economies

The analysis in this post is based on an analysis, for economies that produce a specified number of commodities, of a specified sample size of random economies (Table 1).

Table 1: Number of Simulated Economies
Seed for
Number of
Number of

Each random economy is characterized by a Constant-Returns-to-Scale (CRS) technique, a numerate basket, and net output. The technique is specified by a:

  • A row vector of labor coefficients, where each element is the person-years of labor needed to a unit output of the numbered commodity.
  • A square Leontief input-output matrix, where each element is the units of input of the row commodity needed as input to produce a unit of the column commodity.

The numeraire and net output are column vectors. Net output is set to be the numeraire. The elements of the vector of labor coefficients, the Leontief matrix, and the numeraire are each realizations of independent and identically distributed random variables, uniformly distributed on the unit interval (from zero to one). Non-viable economies are discarded. So, as shown in the table above, more economies are randomly generated than the specified sample size (1,000).

I am treating both viability and the net output differently from Stefano Zambelli's approach. He bases net output on a given numeraire value of net output. Many vectors can result in the same value of net output in a Sraffa model. He chooses the vector for which the value of capital goods is minimized. This approach fits with Zambell's concentration on the aggregate production function.

3.0 Price Wicksell Effects

Table 2 shows my results. As I understand it, the probability that a wage curve for a random economy, in which more than one commodity is produced, will be a straight line is zero. And I find no cases of an affine function for the wage curve, in which the maximum wage (for a rate of profits of zero) and the maximum rate of profits (for a wage of zero) are connected by a straight line in the rate of profits-wage space.

Table 2: Price Wicksell Effects
Number w/
Number w/
Number w/
Both Price

The wage curve in a two-commodity economy must be of a single curvature. So for a random economy in which two commodities are produced, price Wicksell effects are always negative or always positive, but never both. And that is what I find. I also find a small number of random economies, in which three or four commodities are produced, in which the wage curve has varying curvature through the economically-relevant range in the first quadrant.

4.0 Distribution of Displacement from Affine Frontier

I also measured how far, in some sense, these wage curves for random economies are from a straight line. I took the affine function, described above, connecting the intercepts, of the wage curve, with the rate of profits and the wage axes as a baseline. And I measured there absolute vertical distance between the wage curve and this affine function. (My code actually measures this distance at 600 points). I scale the maximum of this absolute distance by the maximum wage. Figure 1, above, graphs histograms of this scaled absolute vertical distance, expressed as a percentage. Tables 3 and 4 provide descriptive statistics for the empirical probability distribution.

Table 3: Parametric Statistics
Number of Produced Commodities
TwoThree Four
Sample Size1,0001,000 1,000
Mean1.9621.025 0.498
Std. Dev.3.4281.773 0.772
Skewness5.1114.837 3.150
Kurtosis48.46738.230 12.492
Coef. of Var.0.57240.578 0.645

Table 3: Nonparametric Statistics
Number of Produced Commodities
TwoThree Four
Minimum0.000180.000251 0.0000404
1st Quartile0.1790.114 0.0608
Median0.6530.402 0.203
3rd Quartile2.2111.120 0.583
Maximum50.61323.374 5.910
IQR/Median3.1102.504 2.574

We see that the wage curves for these random economies tend not to deviate much from an affine function. And, as more commodities are produced, this deviation is less.

5.0 An Example

For three commodity economies, the maximum scaled displacement of the wage curve from a straight line I find is 23.4 percent. But, of those three-commodity economies with both negative and positive price Wicksell effects, the maximum displacement is only 0.736 percent. Table 5 provides the randomly generated parameters for this example.

Table 5: The Technology for a Three-Industry Model

Figure 2 shows the wage curve for the example. This curve is not a straight line, no matter how close it may appear so to the eye. Figure 3 shows the distance between the wage curve and a straight line. Notice that the convexity towards the left of the curve in Figure 3 varies slightly from the convexity for the rest of the graph. This is a manifestation of price Wicksell effects in both directions. (I need to perform some more checks on my program.)

Figure 2: A Wage Frontier with Both Negative and Positive Price Wicksell Effects

Figure 3: Vertical Distance of Frontier from Straight Line

6.0 Conclusion

I hope Bertram Schefold and Stefano Zambelli are aware of each other's work.

Postscript: I had almost finished this post before Stefano Zambelli left this comment. I'd like to hear from him at rvien@dreamscape.com.

  • Bertram Schefold (2013). Approximate Surrogate Production Functions. Cambridge Journal of Economics.
  • Stefano Zambelli (2004). The 40% neoclassical aggregate theory of production. Cambridge Journal of Economics 28(1): pp. 99-120.


Blissex said...

Quite interesting approach. Wonder why there is little about this kind of stuff in the literature? I would guess that this is relevant:

«Furthermore, a positive price Wicksell effect shows that firms, in a comparison of stationary states, will want to employ more capital per person-hour at a higher rate of profits. The rate of profits is not a scarcity index, for some commodity called "capital", limited in supply.»

That directly contradicts JB Clark's "fable" that absent government distortion the distribution of income between capital and labour is solely determined by productivity, that is by "merit" :-). So it cannot be part of Economics, because JB Clark's "three fables" don't validate it.

As Samuelson conceded so many decades ago the marginalist approach is incompatible with models with more than one type of capital commodity (my intuition is that happens because more than one type of capital commodity introduces time-related considerations).

As to part of this I will add some of my undefinable "wisdom":

«for some commodity called "capital"»

The word "capital" is a bit overloaded, and it is only relatively recently in my life that I understood that "capital" and "capital commodities" don't mean the same thing, in particular in the case of JB Clark and bearded Karl.

* For JB Clark "capital" is a metaphysical entity, and the "production function" is not defined in terms of capital commodities but in terms of this single metaphysical entity that all capital commodities possess. As M Gaffney arguesd he did this to expunge "land" for anti-Georgist purposes; but also "land" obviously also gives rise to Wicksell-effects.

* For bearded Karl, "Das Kapital" is a *social relationship*. He points out emphatically that while a lathe may be "capital", in his sense it is not necessarily "capital"; it becomes "capital" only when it is used in production as part of the relationship between employer and employee. The late may well be in some abstract sense a capital commodity, but in Karl's approach capital is a means of production that links employer and employee.

The sraffian "commodities by means of commodities", does away with both the metaphysics of JB Clark, and the definition of bearded Karl, and just looks at capital *goods* as actually employed in production, not "capital". And looks at the consequences. From a purely neoclassical (without marginalism) free markets with "no veil of money" point of view. Leading to the discovery that "capital" in the sense of JB Clark is a vital aspect of marginalist models that are validated by the "three fables".

I hope that my quickly typed thought made some sense to somebody, it would take quite a bit of consideration to do the subject justice.

Robert Vienneau said...

Part of the point certainly is the distinction between capital and capital goods.

In the example, which assumes a stationary state, a certain set of capital goods exists. They must be reproduced each year, under the model assumptions. And the physical composition of this set of capital goods is not dependent on the distribution of net national income. (The assumption of a single technique is relevant here.)

But the numeraire-value of this set of capital goods differs with different divisions of the net national income between wages and profits. That's an implication of the existence of price Wicksell effects. The same set of capital goods can represent different amounts of "savings".

There is a vulgar justification for returns to capital based on the idea that "savings" is a sacrifice.

So I think we agree that there's a reason mainstream economists have not absorbed correct price theory.