Saturday, September 22, 2018

Two Kinds Of Economists

Or, rather, I classify economists into two kinds on each of three dimensions (Table 1).

Table 1: Classifications For Economists
Emphasis on social reproductionEmphasis on allocating scarce resources
Money non-neutralMoney as a veil
Economic issues arise under competitive model, with all agents in possession of all information actually existingEconomic issues to be explained as a result of deviation from an ideal, competitive model

I have written about the first dimension before. Classical political economy, and economists in related traditions, focus on what needs to hold such that society is reproduced. Neoclassical economics is defined, by many, as being about the allocation of scarce resources.

Post Keynesians and others describe money as having real effects. Many mainstream economists, on the other hand, model capitalist economies as, basically, barter economies. They hold money to be neutral, at least in the long run. It is not clear that such models can be extended to contain money.

My third dimension, above, relates to attitudes to two types of models. In one, an economy is described, at a high level of abstraction, as characterized by free competition, with no agent being able to influence market prices, and all agents having complete information about what can be known. In the other model, one introduces rigidities and stickiness in prices; oligopolies, monopolies, and monopsonies; information asymmetries; and so on. One group of economists thinks the former model can describe an economy that need not tend to an equilibrium with desirable properties. Many mainstream economists, however, think actually existing economies are to be described by deviations from perfect competition and that it is the goal of policy to try to make actual economies function like the ideal. (I was inspired to try to define this dimension by Palermo (2016).)

Theoretically, the above taxonomy yields eight kinds of economists. I do not know that one can find important economists at every node of the cube so defined. But, to see how this works out, consider Joseph Schumpeter. He emphasized scarcity, thought money and finance impact real variables, and saw issues with a perfectly competitive economies. For the latter, consider his argument - later taken up by John Kenneth Galbraith - that large corporations were needed for the research and development needed for growth in a mature economy.

John Maynard Keynes is another economist that emphasized the real effects of money and argued issues can arise in the ideal economy. He argued, in the General Theory, that a perfectly competitive economy would be violently unstable. Rigidities in wages are desirable, for they provide stability. I am not sure where I would put him on the first dimension, but followers at Cambridge, such as Kaldor and Robinson, developed models of warranted growth in the 1950s that lie in the upper left box in the figure.

Obviously, this post should go on to explore more nodes in the cube I have outlined.

References
  • John H. Finch and Robert McMaster (2018). History Matters: On the mystifying appeal of Bowles and Gintis. Cambridge Journal of Economics.
  • Giulio Palermo (2016). Post-Walrasian Economics: A Marxist Critique. Science & Society 80(3): 346-378.

Sunday, September 16, 2018

Normal Forms for Switch Point Patterns

My article with the post title is now available at the Review of Behavioral Economics. The abstract follows:

Abstract: The choice of technique can be analyzed, in a circulating-capital model of prices of production, by constructing the wage frontier. Switch points arise when more than one technique is cost-minimizing for a specified rate of profits. This article defines four normal forms for variations in the number and sequence of switch points with a perturbation of, for example, a coefficient of production. The 'perversity' of switch points that appear on and disappear from the wage frontier is analyzed. The conjecture is made that no other normal forms for local patterns of co-dimension one exist.

Saturday, September 15, 2018

Elsewhere

  • Maeve Cohen, the director of Rethinking Economics, notes the absurdism of undergraduate economics teaching, even after the Global Financial Crisis. In this one page article in Nature, she calls for greater pluralism in teaching. (This has led to the usual whining and silliness in the usual places.)
  • The American Economic Association has a moderated discussion board. I suspect much of the discussion will be too focused on narrow questions for interest by non-economists.
  • Thomas Piketty, Emmanuel Saez, and Gabriel Zucman have estimates for income in the United States, over time, for various percentiles. These can be called distributional national accounts.
  • Yanis Varoufakis calls for an international movement to fight both a re-insurgent fascism and establishment globalists.
  • Georgist single-taxers are not too my taste. I found this website for the New Physiocratic League colorful. I find intriguing the concept of certifying a political party's platform.

Saturday, September 01, 2018

Theses For Debate In Reading Marx

I present four claims about Marx's Capital. I strive for topics more general than, for example, squabbles about the transformation problem. I suggest that some of these claims present a useful focus for reading Marx's book, even if part of your focus is arguing why the claim is wrong. If this were more than a blog post, I would need to cite various Marxists and scholars that inspired me.

Thesis I: Capital is organized around a model of a pure, two-class capitalist economy.

I think the above claim is helpful in making sense of the opening chapters of Volume 1 and of Volume 2. In Volume 2, I am thinking of the analysis of the analysis of various circuits, as well as the models of simple and expanded reproduction.

This claim separates out the historical material and the analysis more sharply than some commentators on Marx accept. I guess it is consistent with some of Marx's use of Blue Books filed by factory inspectors in Britain. Historical material that goes beyond a model of pure capitalism includes the analyses of primitive accumulation in pre-capitalist formations and of the development of machinery and manufacture. I think of the replacement of the putting-out system, handicraft, and domestic industry by factories.

Thesis II: Capital continues the tradition of classical political economy; it does not represent a sharp break with this tradition.

One can argue Marx saw William Petty, Francois Quesnay, Adam Smith, and David Ricardo, for example, as having applied a scientific method of abstraction to identify essences that lie behind the surface phenomena of market prices. Of course, Marx had many criticisms of his predecessors. He thought Smith had not sufficiently distinguished labor that was and was not productive of surplus value. Even Ricardo did not distinguish (abstract, social) labor from labor power. Marx argued his distinction between constant and variable capital was more fundamental, in some sense, that the classical political economy distinction between fixed and circulating capital. And the classical did not talk about surplus value in general, instead of manifestations in the form of profits, interest, and rent.

This claim of continuity can also be argued to be consistent with Marx's contrast of vulgar and scientific political economy. Not everybody in the time of the classics, including Adam Smith, were thoroughgoing in the application of their scientific method.

But some of what Marx has to say about illusions generated by competition is in tension with this claim of continuity. He was interested in what social conditions made possible the development of political economy. The classical political economists championed the rising bourgeois before the social question became sufficiently biting. And what about the sarcasm and irony in Capital.

Thesis III: The system of labor values is a reality behind the appearance of freedom in market transactions.

In some sense, labor values provide a sub-basement underlying a building more obvious to our sight.

A counter thesis would be based on a Wittgenstein-like reading of Capital. Nothing is hidden, but markets, like languages, are befuddling. Marx is presenting arrangements in a therapeutic treatment to dissolve confusions. This also gets into some readings of Sraffa's work.

Thesis IV: One can accept the analysis in Capital as a way of understanding the world, independently of a any position on the desirability of changing it, either through a revolution or otherwise.

Friday, August 24, 2018

A Semi-Idyllic Golden Age

1.0 Introduction

This post presents a model of a steady state with a constant rate of growth in which:

  • Total wages and total profits grow at the same rate.
  • Neutral technical change increases the productivity of labor in all industries.
  • The wage per hour increases with productivity.
  • Each worker continues to consume the same quantity of produced commodities.
  • But each worker takes advantage of increased productivity to work less hours per year.

In these times, when concerns about global warning are so important, one would also want to see a suggestion of a reduced ecological footprint. So this model of a steady state is only semi-idyllic.

I do not consider anything in the mathematical model below to be original. I outline it to raise the question whether such a growth path is possible under capitalism. The model demonstrates logical consistency, but cannot demonstrate that details abstracted from in the model would not prevent its realization.

2.0 The Model

Consider a closed economy with no foreign trade. Industries are grouped into two great departments. In Department I, firms produce means of production, also known as capital goods. The output of Department I is called ‘steel’ and measured in tons. In Department II, firms produce means of consumption, also known as consumer goods. The output of Department II is called ‘corn’, measured in bushels. Both steel and corn are produced from inputs of steel and labor.

Constant coefficients of production (Table 1) are assumed to characterize production in each year. All capital is circulating capital. Long-lived machines, natural resources, and joint production are abstracted from in this model. Free competition is assumed. Labor is advanced, and wages are paid out of the net output at the end of the year. Workers are assumed to spend all of their wages on means of consumption. Profits are saved at a constant proportion, s.

Table 1: Constant Coefficients of Production
ParameterDefinitionUnits
a0, 1(t)Labor required as input per ton steel produced in year t.Person-Hrs per Ton
a1, 1Steel services required as input per ton steel produced.Tons per Ton
a0, 2(t)Labor required as input per bushel corn produced in year t.Person-Hrs per Bushel
a1, 2Steel services required as input per bushel corn produced.Tons per Bushel

Suppose coefficients of production for steel inputs are constant through time, but labor coefficients exhibit a growth in labor productivity of 100 ρ percent:

a0, j(t + 1) = (1 - ρ) a0, j(t), j = 1, 2

Let Xi(t), i = 1, 2; represent the physical output produced in each department in year t and available at the end of the year. Furthermore, suppose the price of steel, p, and the rate of profits, r, are constant. Let outputs from each of the two departments grow at a constant rate of 100 g percent:

Xi(t + 1) = (1 + g) Xi(t), i = 1, 2

Certain quantity equations follow from these assumptions. The quantity of capital goods added each year must equal the capital goods remaining after reproducing those used up in producing total output, in both departments:

g [a1,1 X1(t) + a1,2 X2(t)]
= X1(t) - [a1,1 X1(t) + a1,2 X2(t)]

The person-years of labor employed relates to labor coefficients and gross outputs:

L(t) = a0, 1(t) X1(t) + a0, 2(t) X2(t)

Price equations are:

p a1, 1 (1 + r) + a0, 1 w(t) = p
p a1, 2 (1 + r) + a0, 2 w(t) = 1

These equations embody the use of a bushel corn as numerate. w(t) is the wage per person-hour, paid out at the end of the year out of the surplus.

These assumptions and parameters are enough to depict Table 2. The column labeled "Constant capital" shows the value of advanced capital goods, taking the output of Department II as the numeraire. The column labeled "Variable Capital" depicts the wages paid out of revenues available at the end of the year. The surplus is what remains for the capitalists.

Table 2: A Tableau Economique
Constant
Capital
Variable
Capital
SurplusOutput
Ip a1,1 X1(t)w(t) a0,1 X1(t)p a1,1 X1(t) rp X1(t)
IIp a1,2 X2(t)w(t) a0,2 X2(t)p a1,2 X2(t) rX2(t)

Workers spend what they get, and capitalists save a constant ratio, s, of their profits. With these assumptions, one can calculate the bushels corn that the workers and capitalists in Department I want to purchase, at the end of each year, from Department II. Likewise, one can calculate the numeraire value of the steel that capitalists in Department II want to purchase from Department I. Along a steady state, these quantities must be in balance:

[a0, 1(t) w(t) + (1 - s) p a1, 1 r] X1(t)
= p a1, 2 [1 + s r] X2(t)

This completes the specification of this model of expanded reproduction with technical change uniformly increasing the productivity of labor.

3.0 The Solution

Output per labor hour is found by solving the quantity equations:

X1(t)/L(t) = a1, 2 (1 + g)/β(t, g)
X2(t)/L(t) = [1 - a1, 1 (1 + g)]/β(t, g)

where:

β(t, g) = a0, 2(t) + [a0, 1(t) a1, 2 - a0, 2(t) a1, 1](1 + g)

That is:

Xi(t)/L(t) = [1/(1 - ρ)t] [Xi(0)/L(0)], i = 1, 2

The path of employed labor hours falls out as:
L(t) = (1 - ρ)t (1 + g)t L(0)

The number of employed person-hours decreases if:

ρ > g

The above expresses the condition that the labor inputs needed to produce a unit of output, in both departments, decrease faster than the rate of growth in both departments.

The price equations are also easily solved. Given a constant rate of profits, the price of steel is constant as well:

p = a0, 1(0)/β(0, r)

The wage per person-hour increases with productivity:

w(t) = [1 - a1, 1 (1 + r)/β(t, r) = [1/(1 - ρ)t] w(0)

The trade-offs between consumption per worker and the steady-state rate of growth and between the wage and the rate of profits have the same form.

These solutions can be substituted into the balance equation. It becomes:

[1 - a1, 1 (1 + s r)] (1 + g) = [1 - a1, 1 (1 + s r)] (1 + s r)

Suppose the rate of profits falls below its maximum (where the workers ‘live on air’) or not all profits are saved. Then this is a derivation of the "Cambridge equation":

r = g/s

A steady rate of growth, when the workers consume their wage, requires that the rate of profits be the quotient of the rate of growth and the savings rate out of profits.

4.0 Demographics and Institutions

I make some rather arbitrary assumptions about demographics and institutions. Suppose the number of person-years supplied as labor grows at the postulated rate of growth:

LS(t + 1) = (1 + g) LS(t)

with LS(t) measured in person-years. Let the number of hours in a standard labor-year, α(t) decrease at the same constant rate as the growth in productivity:

α(t + 1) = (1 - ρ) α(t)

The rate at which the total supply of labor-hours increases is easily calculated:

α(t + 1) LS(t + 1) = (1 - ρ) (1 + g) α(t) LS(t)

Under these assumptions, the supply of labor-hours grows at the same rate as the demand for labor-hours. Total wages and total profits increase at the same rate, 100 g percent. The wage per worker increases at the same rate as the standard length of a labor year declines. Thus, workers consume a constant quantity of commodities, but they take increased productivity in steadily increased free time.

5.0 Discussion and Conclusions

What should one postulate about money in this model? One could assume the money supply grows endogenously, along with commodities. Or, perhaps, the velocity of the circulation of money increases with productivity. A continuous decrease in the money price of corn is another logical possibility. Perhaps Rosa Luxemburg was right, and an external source of demand from less developed regions and countries is needed to support expanded reproduction. Or Kalecki is correct, and military spending by the government will do.

I do not know if this model describes any existing capitalist economy. It does not describe the post-war golden age. In that time, at least in the United States, workers took increased productivity in increased consumer goods. (I think the memory of the Great Depression, the occurrence of World War II, and the existence of the Soviet Union has something to do how this worked out.) Could any capitalist economy function like this? Somehow, an advertising industry is not encouraging workers to consume ever more produced commodities, or they ignore such messages. They continually have more freedom. Yet, they always spend a bit of time under the domination and direction of their employers. Will the capitalists tolerate this?

Monday, August 20, 2018

Samir Amin (1931-2018)

Despite the label at the bottom of this post, this is not really a profile of Amin. I happen to have started reading Modern Imperialism, Monopoly Finance Capital, and Marx's Law of Value (Monthly Review Press, 2018) last month. Here are a couple of quotations:

"Vulgar economics is obsessed with the false concept of 'true prices,' whether for ordinary commodities, for labor, for money, for time, or for natural resources. There are no 'true prices' to be 'revealed' by the genius of the 'market.' Prices are the combined products of rates of exploitation of labor (rates of surplus-value), of competition among fragmented capitals, and the deduction levied in the form of 'oligopoly rents,' and of the political and social conditions that govern the division of surplus-value among profits, interest, ground rents, and extractive rents." -- Amin, p. 99.

"Marx's criticism of the classic bourgeois political economy of Smith and Ricardo concluded by shifting from analysis centered on 'the market' ... to one centered on the depths of production where value and the extraction of on surplus value are determined. Without this shifting of the analysis from the superficial to the essential, from the apparent to the concealed, no radical critique of capitalism is possible...

The law of value formulated by Marx, based on the concept of abstract labor, expresses the rationality of the social utility (the utility for society) of a defined use value. This rationality transcends that which governs the reproduction of a particular mode of production (in this case, the capitalist mode of production). Under capitalism, rationality demands the accumulation of capital, itself based on the extraction of surplus value. The price system frames the operation of this rationality. Economic decisions in this framework ... will be different from those that might be made on the basis of the law of value that would define, in the socialism to come, the mode of social governance over economic decision making.

Bourgeois economic theory attempts to prove that the mode of decision making in the framework of its system of prices and incomes produces a rational allocation of labor and capital resources synonymous with an optimal pattern of output. But it can reach that goal only through cascading tautological arguments. To do so it artificially slices productivity into 'components' attributed to 'factors of production.'

Although this pattern of slices has no scientific value and rests on tautological argument, it is 'useful' because it is the only way to legitimize capital's profits. The operative method of this bourgeois economics to determine 'the wage' by the marginal productivity of 'the last employee hired' stems from the same tautology and breaks up the unity of the collective, the sole creator of value. Moreover, contrary to the unproven affirmations of conventional economics, employers do not make decisions by using such 'marginal calculations.'" -- Amin, pp. 232-234.

I have several other books by Amin on my bookshelf:

  • Samir Amin (2006). Samir Amin: A Life Looking Forward: Memoirs of an Independent Marxist. Zed Books.
  • Samir Amin (1998). Spectres of Capitalism: A Critique of Current Intellectual Fashions. Monthly Review Press.
  • Samir Amin (1997). Capitalism in the Age of Globalization: The Management of Contemporary Society. Zed Books.

As I understand Amin is most well known for inventing the word "Eurocentrism" and for extending the law of value to the law of worldwide value.

Amin builds on the concept of the "surplus", as developed in the work of Paul Baran and Paul Sweezy. One can formalize this notion in a model of a developed country with three departments, for producing capital goods, consumption goods, and luxuries. The last department is not in Marx's models of simple and expanded reproduction. This department is needed to address the problem of realization in an age of monopoly capital.

When it comes to realization problems, there is a long tradition among Marxists of looking at open economies, with advanced industrial capitalist economies trading with less developed peripheral regions or countries. Amin, an Egyptian trained in Paris and working in Dakar, was well positioned to develop these ideas of North-South trade. In the book mentioned above, he often talks about extending Marx's law of value to the law of worldwide value. I gather his ideas are partly the result of a critical engagement with Andre Gunder Frank's work, which I do not know.

To my mind, you can find similar ideas, about monopoly and finance capital and imperialism, going back to the time of the Second International. Amin mentions Rosa Luxembourg, but, as I recall, is critical of her. By the way, he groups Sraffa with bourgeois economists.

I was hoping to find Amin providing an exposition of a mathematical model in Modern Imperialism. He does provide some, but mostly he sticks with numerical examples and historical analysis. He says that this is, partly, to make his work accessible to a larger audience. Also, I am not sure that a mathematical model of the whole is appropriate for monopoly capital. I guess if I want to explore more, I should look at his 1974 book, Accumulation on a World Scale.

Saturday, August 11, 2018

Economists In Popular Fiction

Apparently, a character in a current movie, Crazy Rich Asians is an economist. Dan Kopf considers whether she is a good economist. In a couple of recent tweets, Paul Krugman reacts:

"Actually, I can fill this gap.

"There was a movie titled The Internecine Project ... with James Coburn as a chairman of the Council of Economic Advisers who gets a bunch of people to kill each other to hide his evil past. Sounds good to me, but the movie was terrible." -- Paul Krugman, 9 August 2018

I do not know about the movie versions, but I can name a couple of book series with characters who are economists:

  • Meyer is the sidekick in John D. MacDonald's Travis McGee mystery series. Meyer's houseboat is the John Maynard Keynes, until it is blown up. He replaces it with the Thorstein Veblen.
  • The love interest in the Bourne Identity series is an economist. If I recall correctly, Jason Bourne first meets her by carjacking and kidnapping her, and then forcing her to drive with him to Paris.

I don't think you can count the Marshall Jevons' mystery series, since that is a pen name for two economists.

Friday, August 03, 2018

A Unique Natural Rate Of Interest?

1.0 Introduction

In explaining the policy implications of the Austrian Business Cycle Theory, Hayek argued that the central bank should try to keep the money rate of interest rate equal to the natural rate. Sraffa famously criticized Hayek by describing a model with multiple interest rates, not necessarily all equal. In reply, Hayek asserted that all the interest rates in Sraffa's example would be equilibrium rates. Sraffa had a rejoinder:

"The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates."

This interchange was part of the downfall of the Austrian theory of the business cycle. I thought I would try to shortly explain what is and is not compatible with a unique natural interest rate.

2.0 Multiple Interest Rates Compatible with a Unique Natural Interest Rate

When one talks about the interest rate or the rate of profits, one may be abstracting from all sorts of complications. And these complications may be consistent with multiple interest rates, in some sense. Yet these multiple interest rates were not in dispute between Hayek and Sraffa.

2.1 Interest Rates for Loans of Different Lengths

Suppose at the start of the year, one can obtain a one-year loan of money for an interest rate of 10%. At the same time, one can obtain a two-year loan for 21%. Implicit in these different rates is a prediction that a one-year loan will be available at the start of next year for an unchanged interest rate of 10%. This implication follows from some trivial arithmetic:

1 + 21/100 = (1 + 10/100)(1 + 10/100)

The yield curve generalizes these observations. A certain shape, with the interest rate increasing for longer loans is consistent with the interest rate being expected to be unchanged, for loans of a standard length, over time.

2.2 Interest Rates for Loans of Different Risks

One might also find interest rates being higher for loans deemed riskier, independently of the time period for which the loan is made. This variation is consistent with talk of the interest rate. Often, in finance, one sees something called the risk-free rate of interest defined and used for discounting income streams. In practice, the rate on a United States T-bill is taken as the risk-free rate.

2.3 Rate of Profits

One can also distinguish between finance and business income. One might refer to the interest rate for the former, and the rate of profits for the latter. Kaldor and others, in a dispute over a Cambridge non-marginal theory of the distribution of income, have described a steady state in which the interest rate is lower than the rate of profits. Households lend out finance to businesses and obtain the interest rate. Such a steady state is compatible with the existence of two classes of households. Capitalist households receive income only from their ownership of firms.

2.4 Rates of Profits Varying Among Industries

Steady states are also compatible with the rate of profits varying among industries, as long as relative profit rates are stable. Perhaps some industries require work in more uncomfortable circumstances. Or perhaps firms are able to maintain barriers to entry.

3.0 Interest Rates with Different Numeraires

I have shown above how money interest rates for loans of different lengths embody expectations of the future course of money interest rates. Interest rates need not be calculated in terms of money. They can be calculated for any numeraire. And the ratio of real interest rates embody expectations of how relative prices are expected to change.

As an example, suppose that at a given time t, both spot and forward markets exist for (specified grades of) wheat and steel. One pays out dollars immediately on both spot and forward markets. Consider the following prices:

  • pW, t: The spot price of a bushel wheat for immediate delivery.
  • pS, t: The spot price of a ton steel for immediate delivery.
  • pW, t + 1: The spot price of a bushel wheat for delivery at the end of a year.
  • pS, t + 1: The spot price of a ton steel for delivery at the end of a year.

The wheat-rate of interest is defined by:

(1 + rW) = pW, t/pW, t + 1

I always like to check such equations by looking at dimensions. The units of the numerator on the right-hand side are dollars per spot bushels. The denominator is in terms of dollars per bushel a year hence. Dollars cancel out in taking the quotient. The wheat interest rate is quoted in terms of bushels a year hence per immediate bushels.

Suppose all real interest rates are equal. So one can form an equation like:

pW, t/pW, t + 1 = pS, t/pS, t + 1

Or:

pW, t/pS, t = pW, t + 1/pS, t + 1

If spot prices a year hence were expected not to be in the ratio of current forward prices, one would expect to be able to make a pure economic profit by purchasing some goods now for future delivery. Hence, a no-arbitage condition allows one to calculated expected relative prices from quoted prices on complete spot and forward markets.

Anyways, a steady state requires constant ratios of spot prices and, thus, real interest rates to be independent of the numeraire. This is the condition Hayek imposed in his exposition of Austrian business cycle theory in Prices and Production. And this is the condition that he dropped in his argument with Sraffa, leaving his macroeconomics a confused mess.

I might as well note that a steady state is consistent with constant inflation. If all prices go up at, say, ten percent, relative spot prices do not vary. On the other hand, relative spot prices differ with the interest rate in comparisons across steady states.

4.0 Temporary Equilibrium with Consistent Plans and Expectations

Perhaps Hayek was willing to get himself into a muddle about the natural rate because he had already investigated another equilibrium concept in previous work.

Suppose above that real interest rates vary among commodities. Then forward prices show expected movements in spot prices. One might go further and assume a complete set of forward markets do not exist. Markets clear when each agent believes they can carry out their plans, consistent with their expectations, including of future spot prices. Should one call such market-clearing an equilbrium, even if agents plans and expectations are not mutually consistent?

Concepts of temporary, intertemporal, and sequential equilibrium were to become more important in mainstream economics after Hayek quit economics, more or less. John Hicks was a major developer of these ideas, under Hayek's influence at the London School of Economics. He eventually came to accept that the mainstream notions could not be set in historical time and were, at best, of limited help in understanding actual economies.

5.0 Conclusion

The above has outlined multiple ways in which multiple interest rates and multiple rates of profits are compatible with steady states. Nevertheless, such circumstances are often described by models in which one might talk about the rate of interest.

I have also described an equilibrium in which one cannot talk about the interest rate, whether natural or not. Advocates of Austrian business cycle theory have never clarified how it can be set in a temporary equilibrium. One can sometimes find Austrian fanboys asserting that critics do not appreciate distinctions between:

  • Sources of exogenous shocks in central banks and supposed determinants (inter temporal preferences, technology) of the natural rate
  • Money rates of interest and real rates
  • Subjectivism and objectivism
  • Interest rates and relative prices.

But assertions do not constitute an argument. One would have to do some work to show that these distinctions can serve to rehabilitate Austrian business cycle theory. No matter how much you send somebody chasing through the literature by Kirzner, Lachmann, Jesus Huerta de Solo, and Garrison, they will find the work has yet to be done. (Robert Murphy probably knows this.)

References
  • Hahn, Frank. 1982. The neo-Ricardians. Cambridge Journal of Economics 6: 353-374.
  • Hayek, F. A. 1932. Money and Capital: A Reply. Economic Journal 42: 237-249.
  • Kaldor, Nicholas. 1966. Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani. Review of Economic Studies 33(4): 309-319.
  • Sraffa, Piero. 1932. Dr. Hayek on Money and Capital. Economic Journal 42: 42-53.
  • Sraffa, Piero. 1932. A Rejoinder. Economic Journal 42: 249-251.

Saturday, July 28, 2018

Complex Numbers As A Field Extension

1.0 Introduction

This is some well-established mathematics. I do not know of any use in economics.

2.0 The Field of Real Numbers

I start by taking real numbers R, with binary operations for addition and multiplication, as known.

3.0 A Ring of Polynomials

Consider polynomials with coefficients taken from the reals as a formal object:

R[X] = { an Xn + ... + a1 X + a0 | n ≥ 0,
coefficients from the reals. }

The symbol X is known as an indeterminate. One does not consider it here as a member of some set. Polynomial addition is defined to yield another polynomial, with addition of coefficients in the reals. Polynomial multiplication is also defined as usual.

3.1 Evaluation Homomorphisms

Still, one would like to talk about evaluating polynomials. For every real number r, there exists an evaluation homomorphism φr( ) that maps R[X] into the reals. This homomorphism is defined by:

φr( an Xn + ... + a1 X + a0 ) = an rn + ... + a1 r + a0

Addition and multiplication on the right-hand side above is performed in the reals. The map is a homomorphism because it preserves addition and multiplication:

φr( f(X) + g(X) ) = φr( g(X) ) + φr( g(X) )
φr( f(X) g(X) ) = φr( g(X) ) φr( g(X) )

In words, it does not matter, in evaluating the sum or product of polynomials if:

  • You perform the operation in the polynomial ring first and then evaluate the sum, or
  • You evaluate the polynomials and then sum or multiply in the reals.

A homomorphism that is one-to-one is an isomorphism. These evaluation homomorphisms are not isomorphisms since more than one polynomial may be evaluated to have the same value. An example follows:

φ2(X2) = φ2(X + 2) = 4

3.2 A Polynomial Without a Multiplicative Inverse

The constant polynomials 0 and 1 are the additive and multiplicative identities for polynomial addition and multiplication, respectively. These identities are distinct.

Not all polynomials have a multiplicative inverse. A simple example is the polynomial X. Suppose f(X) were a polynomial in R[X] that was the multiplicative inverse of X. Then:

X f(X) = 1

Consider the evaluation homomorphism for the additive identity in the reals.

1 = φ0(X f(X)) = φ0(X) φ0(f(X)) = 0 φ0(f(X)) = 0

So the non-existence of a multiplicative inverse for X is proven by a proof by contradiction.

It has been demonstrated that R[X] cannot be a field, since not every non-zero element has a multiplicative inverse. I believe it is actually an integral domain. Just as the field of rational numbers can be constructed as equivalence classes of ordered pairs of integers, a field of rational polynomials with real coefficients can be constructed. I do not pursue this construction here.

4.0 Polynomial Addition and Multiplication Modulo p(X)

One can define the quotient q(X) and remainder r(X) for any polynomials f(X) and g(X) in R[X]:

f(X) = q(X) g(X) + r(X)

where r(X) is of degree less than g(X). Since the reals are a field, the quotient and remainder are unique.

The above theorem allows one to define polynomial addition and multiplication modulo p(X). In particular, consider:

p(X) = X2 + 1

p(X) is irreducible. There do not exist non-constant polynomials f(X) and g(X) in R[X such that:

p(X) = f(X) g(X)

I now define the set C of polynomials

C = { r(X) | there exists a f(X) in R[X]
such that r(X) = f(X) mod p(X)}

All polynomials in C are at most of degree one.

4.1 C as a Two-Dimensional Vector Space

Each element of C can be expressed as a linear combination of the elements of the basis {X, 1}:

C = { (a1, a0) | a1 X + a0 is in R[X]}

4.2 C as a Field Extension of the Reals

Consider C with addition and multiplication defined modulo p(X). I claim this is a field. Consider:

f(X) = a1 X + a0
g(X) = (-a1/(a02 + a12)) X + a0/(a02 + a12)

Their product in R[X] is:

f(X) g(X) = ((-a12/(a02 + a12)) X2 + a02/(a02 + a12))

The quotient and remainder are found from:

f(X) g(X) = p(X) (-a12/(a02 + a12)) + 1

Or:

(f(X) g(X)) mod p(X) = 1

So every non-zero element of C has a multiplicative inverse.

The set of constant polynomials in C is isomorphic to the reals. Thus, C extends the reals in a precise sense.

4.3 Evaluation Homomorphisms in C

For every a1 X + a0 in C, one can define an evaluation homomorphism φ(a1 X + a0)( ) that maps R[X] into C. For every constant polynomial in C, this evaluation homomorphism yields the same answer as the corresponding evaluation homomorphism in Section 3.1.

As an example of this evaluation homomorphism, consider:

φX(p(X)) = φX(X2 + 1)

Or:

φX(p(X)) = φX(X2) + φX(X1)

Or:

φX(p(X)) = (XX) mod p(X) + 1

With addition and multiplication in R[X]:

X2 = p(X) - 1

Thus:

φX(p(X)) = -1 + 1 = 0

In other words, the polynomial X in the field extension C is the square root of -1.

5.0 Summary

The above has extended the field of reals to the field of complex numbers. This field extension contains a zero for the equation:

p(X) = X2 + 1 = 0

Furthermore:

  • The imaginary numbers are polynomials of degree one and no constant term, with addition and multiplication defined modulo p(X).
  • The real numbers are isomorphic to constant polynomials, with addition and multiplication defined modulo p(X).

That is, the extension field C is the field of complex numbers. The complex numbers are only defined up to isomorphism. But their existence is constructed here, not postulated.

6.0 Other Field Extensions

One need not begin this exposition with polynomials with coefficients from the real numbers. Coefficients can be drawn from other fields.

For example, consider the set {0, 1, 2, ..., p - 1}, with addition and multiplication defined modulo p, and p prime. This set with these operations is a field. Let p(X) be, as above, an irreducible polynomial in the ring of polynomials with coefficients in the set. Suppose p(X) is of degree n. Then the field extension is the Galois Field, GF(pn). The set of elements of GF(2n) - {0}, with multiplication, is a cyclic group. GF(2n) has application in the Advanced Encryption System (AES) and in Reed-Solomon error correction codes. (The latter has something to do with how checkout scanners work in your neighborhood supermarket.)

On the other hand, consider the field of rational numbers with addition and subtraction defined as usual. There are at most a countably infinite number of polynomials with rational coefficients. An irreducible polynomial leads to an extension field for use in constructing real numbers. But this construction leaves out an uncountably infinite number of real numbers, namely the transcendental real numbers. A real number is algebraic if it is the root of some polynomial with rational coefficients. The real numbers, including transcendentals, can be constructed, instead, as Dedekind cuts or as equivalence classes of Cauchy-convergent sequences of rational numbers. (Cauchy often comes across as a villain in accounts of Galois and Abel's short lives.)

Finally, consider polynomials with coefficients drawn from the field of complex numbers. (Since, under the above construction, a complex number is, in some sense, a first-degree polynomial with real coefficients, this may be a somewhat confusing construction to think about.) Suppose one defines polynomial addition and multiplication modulo p(X), where p(X) is a first degree polynomial in the ring C[X]. Then one obtains a field "extension" isomorphic to the field of complex numbers.

To find a bigger field extension, one needs to find an irreducible polynomial of at least degree two in C[X]. But no such polynomial exists. Proof: Abel was something else, wasn't he?

Friday, July 27, 2018

Lack Of Rigor In Mas-Colell, Whinston, And Green

Whether or not the government should intervene in the economy is a false choice. Government and the economy are not two separate and non-intertwined entities.

The standard introductory graduate microeconomics textbook now current was written by Mas-Colell, Whinston, and Green. This happens to be from Chapter 15, in the part on the Edgeworth box:

"We can now verify a simple but important fact: Any Walrasian equilibrium allocation ... necessarily belongs to the Pareto set... Thus, at any competitive allocation ..., there is no alternative feasible allocation that can benefit one consumer without hurting the other. The conclusion that Walrasian allocations yield Pareto optimal allocations is an expression of the first fundamental theorem of welfare economics, a result that ... holds with great generality...

The first fundamental welfare theorem provides, for competitive market economies, a formal expression of Adam Smith's 'invisible hand.' Under perfectly competitive conditions, any equilibrium allocation is a Pareto optimum, and the only possible welfare justification for intervention in the economy is the fulfillment of distributional objectives."

  • Andreu Mas-Colell, Michael D. Whinston, and Jerry R. Green. Microeconomic Theory, Oxford University Press (1995): p. 524

Adam Smith was little interested in the allocation of given resources, as compared to economic growth. But put aside the dubious historical claim. I want to focus on other reasons why the above passage is nonsense.

What is an "intervention in the economy"? Here are some examples of what could be interventions:

  • Refusing to permit contracts in which people sell themselves into slavery.
  • Banning child labor.
  • Banning the enforcement of clauses in deeds which prohibit owners, in perpetuity, from selling their property to jews, negroes, or members of some other groups.
  • Requiring sellers of food in grocery stores to list the amount of the Recommended Daily Allowance of various vitamins and minerals provided by that food.
  • Inventing a legal structure in which people can form corporations which limit their legal liability.
  • Banning people from copying some books, computer source code, DVDs, and making them freely available or selling them.

Whether to count these as interventions could be viewed as a political question. I would like to think the first four are not current questions. Law provides a background, often taken as given, on which buying and selling can be based. What contracts will be backed up by government varies with time and place.

Some elements of this background are disputed at the moment, at least by those who can attract the attention of the owners of the means of communication. An alteration or decision on a disputed element could be defined as a matter of government intervention in the economy. But such a definition does not seem to have any place in a mathematical theorem.

What counts as property is a question closely related to what counts as an intervention. It is easy easy to write, "Let ω be a vector of endowments..." But whether or not something is an endowment also varies with time, space, and the legal background. Examples that come to my mind without much thinking include air rights in New York City, a capability of a eight-year old to supply so many hours of labor, and wombs in a society where one can contract for surrogate motherhood.

Notice that conventions on contracts and property law shape the distribution of income. The distribution of income is a subject that mainstream economists have been notoriously poorly-trained to discuss.

Mainstream economists may think they are getting a rigorous introduction to economics, what with the "maze of pretentious and unhelpful symbols" (Keynes) in their books. They are also getting, however, a replication of a confused naturalization and reification of the economy common in popular discourse.

Update (27 July 2018): Fixed deleted part of quotation that made nonsense of my point.

Monday, July 23, 2018

An Opportunity For The Working Class With Increased Markups

A Switch-Point Perturbation Diagram

I have a new working paper at SSRN.

Abstract: This article presents an analysis based on a comparison of stationary states. With technology and relative markups among industries taken as exogenous, the long-period trade-off between wages and rates of profits is determined. A long-period change in relative markups among industries can create a switch point exhibiting capital-reversing. Around such a switch point, a higher wage is associated with firms wanting to employ more labor for a given net output – a favorable occurrence for organized labor.

Wednesday, July 11, 2018

Neoliberals, Liberals, Progressives, Social Democrats, and Democratic Socialists

I guess this is a post on current events in the United States. Some articles I have recently found interesting are:

I take it socialists want to work towards a society in which, "The free development of each is the condition for the free development of all" (Karl Marx). The idea is that each person should be able to develop their talents to the fullest extent possible, both for their own sake and to contribute as much as possible to society. This is a Christian idea as well, put forth in the parable of the talents (Matthew 25, verses 14-30).

I think traditional conservatives do not agree. They think the vast majority must be consigned to nasty and grubby grunt work. Only those at the top can flourish. Neoliberals put forth a vision of personal development which I find narrow and stilted. In neoliberalism, everybody is an investor developing their human capital for validation by the market. If you have a skill that does not pay - too bad. You wasted your time. For more on this, see Wendy Brown's Undoing the Demos: Neoliberalism's Stealth Revolution.

Somewhere in here I should probably say something about meritocracy. Also, if one wants to look for authoritative Marxist-Leninist accounts of the distinction between socialism and communism, one might look at Marx's private letter, Remarks on the Gotha Program, or Lenin's State and Revolution. But these documents are not what this post is about, since they do not seem relevant to why debates on the post topic are current events.

A crucial question, I think, is whether capitalism could ever be a society in which the free development of all is possible. Social democrats say, "Yes". They think the cruelties of capitalism can be tamed with a generous enough welfare state. One might say, they want a capitalism with a human face. Democratic socialists think not. They want to eventually move beyond capitalism.

I do not see that social democrats and democratic socialists need disagree on immediate, short term programs. Such a tactical coalition can include progressive and liberals. I was curious that none of those three articles linked at the top mentioned Eduard Bernstein. Sure, Otto Von Bismarck created many elements of the first welfare state, as a reactionary response to growing worker power. One might also mention Pope Leo XIII's Rerum Novarum, on the rights and duties of labor. But Bernstein's Marxist reformism - "The movement is everything, the final goal is nothing" - is also important in considering the historical origins of social democracy and democratic socialism.

I was annoyed with Wilentz's suggestion that those further left than him have forgotten John Maynard Keynes. Keynes was historically and globally important in designing the post war Bretton Woods system, a system that brought general prosperity for three decades. For national and international policies, Gunnar Myrdal, Michel Kalecki, Nicholas Kaldor, and Joan Robinson had some influence. Myrdal and Kalecki came to their Keynesianism independently of Keynes.

Where democratic socialists want to go when transcending capitalism is not exactly clear. I do not see that they need to agree. Developing sovereign wealth funds; developing Universal Basic Income (UBI) programs; and supporting labor unions, Employee Stock Ownership Plans (ESOPs), and workers cooperatives are elements of a program fairly radical for these barbaric times.

Update (14 July 2018): A Nicholas Colin article in Medium. There's probably a lot more on-topic current articles.

Wednesday, June 20, 2018

The Loss From Trade With Capital Goods: The Sraffian Bonus Can Be Negative

I have written up this result here

Abstract: Paul A. Samuelson extends the Ricardian theory of foreign trade to a model of small open economies in which countries can trade semi-finished capital goods on international markets, as well as trade in produced consumer goods. He argues that this extension provides an additional gain from trade, which he labels the Sraffian bonus. This article demonstrates that trade in consumer and capital goods can result in a loss for an economy, given positive rates of profits in the trading countries, as compared with trade in consumer goods only. In other words, the Sraffian bonus can be negative.

Saturday, June 16, 2018

A Country Worse Off With Trade In Capital Goods

Figure 1: PPFs in Portugal
1.0 Introduction

This post continues these two posts. I change the model here to have wages advanced, not paid out of the surplus at the end of the year.

I here consider an example of a model of stationary states in which two countries can trade in produced commodities to be used for consumption. The countries face given prices on international markets for traded commodities. (They are small open economies, in the jargon.) I take the rate of profits as given in each country. They may differ, since I assume that finance capital cannot be traded internationally. I also assume labor is immobile between countries.

I contrast the model with and without foreign trade being possible in capital goods. Paul Samuelson calls the supposed gains from trade in capital goods the Sraffian bonus. This post demonstrates that the Sraffian bonus can be negative. The inhabitants of a country might be better off, in the sense that the total bundle of consumption goods is larger, if international markets do not exist in capital goods.

2.0 Parameter Values

I assign the numeric values in Table 1 to coefficients of production. For those who do not want to click, a unit of steel can be made in England from a direct and unassisted labor input of l2, C, E person-years. A unit of corn can be made from one unit of steel and l1, C, E. A unit of linen is made from l1, L, E person-years of direct and unassisted labor.

Table 1: Technology for the Example
ParameterEnglandPortugal
l1, C, n37
l2, C, n22
l1, L, n12
Ln11
rn300%400%

I take the endowments of labor - LE and LP person-years, respectively - as given. Production Possibility Frontiers (PPFs) are constructed per worker.

I also take rates of profits, rE and rP, as given. I do not strive for realism. But, if you are concerned by the sizes of the rates of profits, pretend that my "year" is actually a decade or so.

3.0 Stationary States with and without Trade in Capital Goods

I now consider what prices could be consistent with stationary states.

First, suppose foreign trade is not possible in capital goods. Only corn and linen can be traded on international markets. Suppose prices are as in Table 2. The cost of producing linen in England:

l1, L, E wE (1 + rE) = 1 (1/6) (1 + 3) = 2/3

If firms in England manufacture linen for both domestic consumption and for foreign trade, they make the going rate of profits. The cost of producing corn in England is:

[l2, L, E (1 + rE) + l1, L, E] wE (1 + rE) = [2 (4) + 3](1/6)(4) = 22/3

Firms in England will not want to produce corn. They would be undercut by foreign competition. You can do the analogous calculations for Portugal. Portuguese firms will produce corn and the needed steel to continue production. They will not produce linen. With these prices and this specialization, consumers in both countries can consume baskets of commodities containing both corn and linen. And firms will be minimizing costs.

Table 2: Example with Foreign Trade in Corn and Linen
VariableEnglandPortugal
PC6
PL2/3
Cost of producing corn22/36
Cost of producing linen2/312/7
SpecializationLinenCorn and Steel
wn1/66/85

Suppose now that international markets exist in corn, linen, and steel. Table 3 shows prices for consideration in this case. One tabulates the cost of producing corn with the steel input evaluated at the international price. For example, the cost of producing corn in England is:

(PS + l1, C, E wE) (1 + rE) = [1 + 3 (1/6)](4) = 6

Going through these tabulations, one will find that the firms in England specialize in producing corn and linen. The cost of producing steel in England exceeds its price. Likewise, firms in Portugal specialize in producing steel. Cost-minimizing firms in Portugal are unwilling to produce either corn or linen.

Table 3: Example with Foreign Trade in Corn, Linen, and Steel
VariableEnglandPortugal
PC6
PL2/3
PS1
Cost of producing corn617/2
Cost of producing linen2/31
Cost of producing steel4/31
SpecializationCorn and LinenSteel
wn1/61/10

Notice that the international prices of corn and linen are unchanged between Tables 2 and 3. Steady states are here shown as resulting in an increased wage in Portugal when foreign trade is possible in steel. But rates of profits and the wage in England are shown as constant.

3.0 Production Possibility Frontiers

What about physical quantities of commodities? I restrict myself to stationary states. Figure 2 shows PPFs in England. The PPF under autarky is constructed from technical data on coefficients of production and the endowment of labor in England. When only linen is produced in England, whether foreign trade is possible or not, the same amount of linen is produced as under autarky. Consequently, all three PPFs are shown as rotated around the same intercept in Figure 2.

Figure 2: PPFs in England

Consider England when foreign trade is only possible in corn and linen. Since England specializes in linen, the maximum amount of corn consumed by the English is (LE/l1, L, E)(PL/PC). In this example, that quantity is less than LE/(l1, C, E + l2, C, E), the maximum quantity of corn consumed in England without foreign trade.

When foreign trade is also possible in steel, the maximum quantity of corn manufactured in England is (LE/l1, C, E) units. But not all of this corn can be consumed. Steel must be purchased from Portugal to continue production on the same scale. That is, (LE/l1, C, E)(PC - PS) numéraire units are available for consumption. So the maximum corn consumption in England is (LE/l1, C, E)(PC - PS)/PC units of corn. For England, the Sraffian bonus is positive. The possibility of foreign trade in steel has left the PPF for domestic consumption rotated outwards, even beyond the maximum consumption under autarky.

The situation in Portugal, as illustrated by Figure 1 at the top of this post, is quite different, however. Foreign trade in consumer, but not capital goods, results in a PPF rotated outwards from the autarkic PPF. This conforms to the nonsense long-suffering students in economics taught out of mainstream textbooks must endure. At the prices considered above, Portugal produces only steel when foreign trade is possible in all produced goods. The maximum amount of linen that can be consumed in Portugal is (LP/l2, C, E)(PS/PL) units. Neither intercept with an axis for this PPF is equal to the corresponding intercept for autarky. Furthermore, the PPF with foreign trade in all goods is strictly inside the PPF with foreign trade only in consumer goods. The Sraffian bonus is negative. Suppose one compares the PPF with foreign trade in all goods to the autarkic PPF for Portugal. Whether or not there are gains from trade is ambiguous. It depends on the consumption basket.

4.0 Conclusion

So this post has extended long-ignored proofs that the theory of comparative advantage does not provide a valid a-priori argument for so-called free trade. Opening up markets in capital goods may not provide a country with more goods, setting aside problems of adjustment.

I know of some empirical work purporting to demonstrate gains from trade. I do not know of any that addresses the issues brought forth in this post.

References
  • Paul A. Samuelson (2001). A Ricardo-Sraffa Paradigm Comparing Gains from Trade in Inputs and Finished Goods. Journal of Economic Literature 39, 4: 1204-1214.
  • Ian Steedman (1980). Trade amongst Growing Economics. Cambridge University Press.

Thursday, June 07, 2018

More On Foreign Trade In Consumer And Capital Goods

Figure 1: Rates Of Profits for Specialization in Consumer Goods
1.0 Introduction

This post is a continuation of this example. How a country specializes in foreign trade depends on distribution. And foreign trade can reduce the consumption basket to be divided among the inhabitants of a country, as compared with autarky.

2.0 Patterns of Specialization

Assume that the consumption basket in both countries contains both corn and linen. In a steady state, international prices and the distribution of income in both countries must be such that at least one country produces each one of the three commodities. Table 1 lists the six possible patterns of specialization in which each commodity is produced in exactly one country. If foreign trade is possible in consumer goods, but not in capital goods, steel must be produced in the same country in which corn is produced. Only cases 2 and 5 are possible. All six cases must be analyzed if foreign trade is possible in both consumer and capital goods.

Table 1: Patterns of Specialization
CaseEnglandPortugal
1CornLinen, Steel
2LinenCorn, Steel
3SteelCorn, Linen
4Linen, SteelCorn
5Corn, SteelLinen
6Corn, LinenSteel

A pattern of specialization is compatible, given the technology, with certain rates of profits between the trading countries. Under the assumption that financial capital does not flow between countries, the rate of profits may vary between countries. Insofar as the determinants of distribution is unspecified, the model is open. A neoclassical closure would specify intertemporal utility-maximizing consumers in each country

Disequilibrium transitions paths are also not considered here. Firms could find their expectations, with which they have produced or bought capital goods, disappointed. Presumably along such paths, trade might be unbalanced, and exchange rates could vary. Keynesian considerations of effective demand come into play. The elasticities of the demands for imports and exports might be of some importance, as reflected in the Marshall-Lerner conditions. The convergence of such transition paths to steady states does not seem assured.

3.0 Trade in Consumer Goods

Consider the model under the assumption that international markets do not exist for steel. Suppose England specializes in the production of linen, and Portugal specializes in the production of corn, as in case 2. Then the international prices of linen and corn must be related:

l1, L, E/(vC, E + l2, C, E rE) < PL/PC
PL/PC < l1, L, P/(vC, P + l2, C, P rP)

Hence:

l1, L, E/(vC, E + l2, C, E rE) < l1, L, P/(vC, P + l2, C, P rP)

Or:

rP < (l1, L, P l2, C, E rE + l1, L, P vC, E - l1, L, E vC, P)/(l1, L, E l2, C, P)

A specific region in the space for the national rates of profits corresponds to each pattern of specialization. Figure 1, above, shows these two regions, as divided by the upward-sloping line. The figure is drawn under the assumption that England has a comparative advantage in producing linen.

4.0 Production Possibility Frontiers (PPFs)

A production possibility frontier (PPF) shows the upper limits on how much linen or corn can be consumed in a given country in a stationary state. Let YC, n represent bushels corn consumed, and let YL, n be the square-yards of linen consumed, where n = E or P for England or Portugal. Let LE and LP be the endowments of labor in England and Portugal, respectively.

I want to consider three PPFs. Here is the PPF for autarky, when a country does not have the possibility to engage in foreign trade:

l1, L, n YL, n + vC, n YC, n = Ln

The PPF for a country specializing in the production of corn is:

vC, n (PL/PC)YL, n + vC, n YC, n = Ln

The PPF for a country specializing in the production of linen is:

l1, L, n YL, n + l1, L, n (PC/PL) YC, n = Ln

Figure 2 graphs these PPFs. The possibility of foreign trade rotates the autarkic PPF, with the pivot on an axis, depending on which product the country specializes in. I have drawn the PPFs such that when the country specializes in the production of linen, it is worse off as a whole. If any corn is consumed at all, foreign trade results in a smaller commodity basket than under autarky.

Figure 2: Production Possibility Frontiers for One Country

4.1 Comparison of PPFs for Autarky and Specialization in Corn

For a country specializing in corn, the ratio of the international price of linen to the international price of corn is bounded above:

PL/PC < l1, L, n/(vC, n + l2, C, n rn)

For a non-negative rate of profits, the right-hand side cannot exceed l1, L, n/vC, n. Hence:

PL/PC < l1, L, n/vC, n

Or:

(Ln/l1, L, n) < (Ln/vC, n)(PC/PL)

The left-hand side is the maximum consumption of linen for this country under autarky. The right-hand side is the corresponding maximum consumption when the country specializes in producing corn. Thus, in this simple model, specialization in corn when no foreign markets in steel exist, unambiguously rotates the PPF outwards. In a comparison of stationary states, foreign trade gives the country specializing in producing corn a greater consumption basket to distribute among its inhabitants.

4.2 Comparison of PPFs for Autarky and Specialization in Linen

On the other hand, specialization in linen could make a country worse off. For the PPF to be rotated inward, one must have:

(Ln/l1, L, n)(PL/PC) < (Ln/vC, n)

Or:

PL/PC < l1, L, n/vC, n

So a country experiences a loss from trade when it specializes in linen and the following condition holds:

l1, L, n/(vC, n + l2, C, n rn) < PL/PC < l1, L, n/vC, n

Notice a loss from trade is not possible when the rate of profits is zero.

Suppose rates of profits and prices are such that England specializes in the production of linen. Prices can be such that England can gain from trade if and only if:

l1, L, E/vC, E < l1, L, P/(vC, P + l2, C, P rP)

Or:

rP < (l1, L, P vC, E - l1, L, E vC, P)/(l1, L, E l2, C, P)

The right-hand side can be positive if and only if England has a comparative advantage in producing linen when rates of profits are zero in both countries.

5.0 Conclusion

So in this simple model, when international markets exist in consumer goods, but not in capital goods:

  • Which country specializes in producing corn and which in producing linen depends on domestic rates of profits.
  • Only one pattern of specialization for a given pair of rates of profits is possible.
  • For each pattern of specialization, a pair of rates of profits exists for that specialization.
  • If a country specializes in producing corn, its PPF is rotated outwards.
  • If a country specializes in producing linen, its PPF may be rotated outwards, but only if:
    • The country has a (technologically-defined) comparative advantage in producing linen.
    • The relative price of linen on international markets is high enough.
  • The PPF may be rotated inwards when a country specializes in producing linen; the terms of trade matter.

I am finding it non-obvious how to complete this analysis when steel can be traded in foreign markets. Also, I should create numerical examples just to confirm my results.

Saturday, June 02, 2018

Ideological Innocence Of The Fox News Viewer

1.0 Introduction

This post deals with a set of ideas that I find appealing, but contradictory. I know I do not fully understand many of them. Perhaps somebody who understands more can either agree with me that there are contradictions here or point to some way of resolving them. This post is also more about current events than is typical of my posts.

2.0 Ideological Thinking, Ideological Identification, And Party Identification

Consider Philip Converse's claim that a mass majority of the public is innocent of ideology, as contrasted with the non-innocence of elites. I know these ideas best as filtered through Kinder and Kalmoe (2017).

Ideological thinking is not a defect, in Kinder and Kalmoe's account. An ideology, such as liberalism or conservatism in contemporary America, structures how you understand and retains facts. Otherwise, the world, in at least its political aspects, will appear as a blooming, buzzing confusion. Ideological thinking can be seen in a couple of ways. First, when surveying people about issues, you can listen to how they justify their stance. Do they refer to liberalism or conservatism? Second, do they exhibit a certain constraint on issues. For example, if they are against abortion generally being illegal, are they also against the death penalty? (Kinder and Kalmoe define issues narrowly. They do not consider a take on whether a larger or smaller government is desirable as a political issue, as opposed to a more philosophical issue.)

Kinder and Kalmoe note that being informed about politics takes quite a bit of work. I think their take goes along with some of Ahler and Broockman's findings on so-called moderates. It is not that moderates necessarily take middle-of-the road positions on issues. Rather, they may take extreme sides on different issues, with no awareness of how they go together, including in prevailing ideologies among those who pay more attention to politics. Apparently, survey questions to test your knowledge of politics are fairly rudimentary. Common practice is to base an assessment on less than twenty multiple-choice questions like: How long is a senator's term? What is Paul Ryan's position? What party was Franklin Delano Roosevelt a member of?

Kinder and Kalmoe distinguish ideological thinking (non-innocence) from both ideological identification and party identification (also known as partisan identification). In the period of their data they find a closer correlation between ideological identification and partisanship, but there are still plenty of people who call themselves conservatives and Democrats. After taking into account of partisanship and stands on issues, ideological identification counts for little.

3.0 Pyschological Traits of Liberals and Conservatives

I think the literature on social psychology about traits among liberals and conservatives is meant to apply to mass publics. John Jost and Jonathan Haidt are the most prominent writers I know of here.

Jost claims liberals are more open to experience; are tolerant of uncertainty; have less need for order, structure, and closure; have more tolerance of ambiguity and less dogmatism; have less fear of death, threat, and loss; and have higher self-esteem. Conservatives are otherwise. Haidt says that liberals' moral intuitions emphasize the avoidance of harm/the provision of care and fairness and reciprocity. Conservatives include these moral concerns. But they also worry more about in-group loyalty, respect for authority, and purity and sanctity.

How does this literature relate to ideological thinking, ideological identity, and partisanship among mass publics in the United States? As I understand Kinder and Kalmoe, they recognize this contrast. They argue that Jost misunderstands their work, and his traits only gets you to ideological identification. I can see how one could be authoritarian, in personality, and be a strong Democrat or even further left. Could an anti-authoritarian be a strong Republican in the current conjecture?

Do those who have read these literatures think more could be said here?

4.0 Marshall McLuhan And Media

How is all of the above modified by contemporary events? Once upon a time, those on the left decried the biases of the corporate media. They wanted more explicitly class-based channels that were not afraid to affirm a point of view. It is not what they meant, but we now have Fox News. And they explicitly treat "liberal" as a swear word. How much will a regular viewer get a message, which, if accepted and absorbed, will lead to issue constraint, in Kinder and Kalmoe's sense? (Chemtrails are not an issue.)

But if one worries about the message on Fox News, could one accept Marshall McLuhan's take on media? Supposedly reading encourages analytical, linear thought, while television extends your nervous system to be irritated by going-ons throughout the global village. Would this not be just as true for messages on other television channels? Should one just reject McLuhan's approach?

5.0 Some Caveats

In looking at international data, Kinder and Kalmoe convert "liberal" and "conservative" to "left" and "right". I would not call myself a liberal - I would say I'm more somewhere between a democratic socialist and a social democrat. Those who reject the labels "Liberal" and "Conservative", Kinder and Kalmoe classify as non-ideological. I do not know how I would have answered those survey questions. By the way, I voted on a certain resolution on the New York State ballot last time without knowing much about it, but on the grounds that labor unions were opposed. This group-based approach is not ideological thinking, as I understand Kinder and Kalmoe. A Catholic paying attention to the Church's teaching might endorse both making abortion illegal and getting rid of the death penalty. So they would not exhibit, at least on this issue, the kind of constraint Kinder and Kalmoe take as demonstrating ideological thinking. I doubt that many non-elites fall outside their classification, but how could one know?

References
  • Douglas J. Ahler and David E. Broockman (2015). Does Polarization Imply Poor Representation? A New Perspective on the "Disconnect" Between Politicians and Voters
  • Pierre Bayard (2007). How to Talk About Books You Haven't Read
  • Philip E. Converse (1964). The Nature of Belief Systems in Mass Publics
  • Jesse Graham, Jonathan Haidt, and Brian A. Nosek (2009). Liberals and conservatives rely on different sets of moral foundations. Journal of Personality and Social Psychology, V. 96, no. 5: pp. 1029-1046.
  • Jonathon Haidt (2013). The Righteous Mind: Why Good People are Divided by Politics and Religion
  • John J. Jost et al. (2003). Political Conservatism as Motivated Social Cognition
  • Donald Kinder and Nathan P. Kalmoe (2017). Neither Liberal nor Conservative: Ideological Innocence in the American Public
  • Marshall McLuhan (1962). The Gutenberg Galaxy
  • Marshall McLuhan (1964). Understanding Media: The Extensions of Man

Saturday, May 26, 2018

Foreign Trade In Capital And Consumer Goods

Figure 1: Specialization In A Single Country
1.0 Introduction

This post considers how the firms in a small open economy will specialize, given prices on international markets and the domestic rate of profits. The example would only be interesting as part of a larger argument, which I have not yet worked out.

2.0 Technology

Consider a small, open economy which has a flow-input, point-output technology for producing two consumption goods, corn and linen. Corn is manufactured from inputs of direct labor and steel. Steel and linen are each manufactured from inputs of direct, unassisted labor. Table 1 shows an input-output table for the technology. The technology is thus specified by three coefficients of production, (l1, C, n, l2, C, n, and l1, L, n).

Table 1: Example Technology
InputIndustry
SteelCornLinen
Laborl2, C, n Person-Yrsl1, C, n Person-Yrsl1, L, n Person-Yrs
Steel01 Ton0
Linen000
Corn000
Output1 Ton1 Bushel1 Square-Yd

Comparative advantage when the rates of profits is zero in each country is determined by relative ratios of labor embodied in each commodity. The labor value of steel is:

vS, n = l2, C, n

The labor value of corn is the sum of the labor embodied in steel used in producing corn and the direct labor used in producing corn:

vC, n = l1, C, n + l2, C, n

The labor value of linen is:

vL, n = l1, L, n

For a technology in which dated labor inputs extend for a larger number of time periods, finding labor values can require the calculation of sums with a greater number of terms.

3.0 Autarky

In this section, I assume foreign trade is not possible for the country being analyzed.

Let pC, n, pL, n, and pS, n be the domestic prices of corn, linen, and steel when no foreign trade is possible. Let wn be the wage paid for a person-year of labor, and let rn be the rate of profits. Assume labor is advanced and wages are paid out of the surplus at the end of the year.

Under these assumptions, prices, with labor-commanded as the numeraire, are:

pS, n/wn = l2, C, n = vS, n
pC, n/wn = vC, n + l2, C, n rn
pL, n/wn = l1, L, n = vL, n

4.0 Trade in Consumer Goods

Now suppose foreign trade is possible in consumer goods, but not in capital goods. In terms of the example, the firm can trade in corn and linen, but not in steel. Let PC and PL be international prices of corn and linen, respectively.

Two patterns of complete specialization are possible. Suppose the firms in the country want to produce linen (and the required steel), but not corn. Linen is sold on international markets, and corn is purchased. For firms to be unwilling to produce corn, the cost of producing a unit of corn, at the going rate of profits, must exceed the given international price:

[l2, C, n( 1 + rn) + l1, C, n] wn > PC

In a steady state, the cost of producing linen must be equal to its price:

l1, L, n wn = PL

Solving for the wage and substituting, one obtains the following inequality.

PL/PC > l1, L, n/(vC, n + l2, C, n rn)

Or:

PL/PC > pL, n/pC, n

For domestic firms to want to specialize in producing corn, the above inequality is reversed. In words, the country specializes in producing those goods whose international prices exceed autarkic prices.

5.0 Trade in Capital and Consumer Goods

In this section, I assume that the country can trade steel on international markets, as well as corn and linen.

Suppose the country specializes in producing linen. The following inequalities and equalities must be satisfied in a steady state:

l2, C, n wn > PS
PS ( 1 + rn) + l1, C, n wn > PC
l1, L, n wn = PL

Following my usual practice of solving for wages and substituting, I obtain two inequalities:

PL > (l1, L, n/l2, C, n) PS
PL > (l1, L, n/l1, C, n)[PC - PS ( 1 + rn)]

When the country specializes in corn, the system of inequalities and equalities is modified in a way that I hope is obvious. As above, two conditions characterize prices on international markets. The same is true for when the country specializes in the production of steel. For the country to specialize in linen, it is necessary but not sufficient that the country would have specialized in linen in trade in steel were impossible. This is not so for specialization in corn. For some combinations of international prices, the country will specialize in corn even when the country would not have so specialized when trade in capital goods was not possible. Likewise, a set of prices exists in which the country specializes in steel when the country would have specialized in corn without the possibility of trade in steel.

6.0 Conclusion

Figure 1, at the head of this post summarizes the analysis. The upward-sloping line extending from the origin divides regions of specialization under the assumption that foreign markets exist for consumer goods, but not for capital goods. When the international prices of corn and linen are in the region above this line, the country specializes in producing linen. When they are in the region below this line, the country specializes in producing corn.

With the possibility of international trade in steel, additional regions appear. If prices of linen and corn are low enough, for a given price of steel, they fall in the rectangle at the lower left in the figure. The country specializes in steel. All of each year's output of steel is sold in foreign trade, and linen and corn are bought with the revenues thereby obtained. A wedge appears in the upper right. If prices are in this region, the country does not specialize in producing linen. It becomes more cost-effective to produce corn, with inputs of steel purchased on international markets.