Thursday, December 26, 2019

2019 Nobel Prize Celebrating The Triumph Of Institutionalism?

Elizabeth Warren Echoing A View Institutionalists Understand

This year, the "Nobel prize" in economics went to Abhijit Banerjee, Esther Duflo, and Michael Kremer. They champion empirical economics over theory. Previously, institutionalist economics was described as 'theory without measurement' (Koopmans 1947). Does institutionalist economics parallel the supposed mainstream empirical turn?

Although institutionalists, as far as I know, did not have the resources to create randomized control trials (RCTs), they did collect and analyze statistical data. I think especially of Wesley Clair Mitchell and the National Bureau of Economic Research (NBER).

Institutionalists was not atheoretical, I think. They developed qualitative analytical concepts. I think of C. E. Ayres extension, for example, of the Veblenian dichotomy. Sometime, I intend to read John R. Commons' 1924 book to see how he breaks up a transaction. John Kenneth Galbraith's concept of the technostructure and Alfred Eichner's idea of the megacorp are other examples here. Institutionalists contributed to the development of Industrial Organization. John Maurice Clark had, at least, a verbal description of the business cycle that combined the multiplier and the accelerator.

Institutionalist economics is not a strictly American school of thought. I include Geoffrey M. Hodgson and Gunnar Myrdal as institutionalists. I suppose I should read the Journal of Economic Issues or the Journal of Institutional Economics more frequently. The Association for Evolutionary Economics (AFEE) puts out the JEI.

  • John R. Commons. 1924. Legal Foundations of Capitalism Macmillan.
  • John S. Gambs. 1946. Beyond Supply and Demand: A Reappraisal of Institutional Economics. Columbia University Press.
  • Tjalling C. Koopmans. 1947. Measurement without theory. Review of Economics and Statistics 29(3): 161-172.

Saturday, December 14, 2019

A Fake Switch Point in an Example With Circulating Capital

Figure 1: A Switch Point and a Fake Switch Point on Wage Curves
1.0 Introduction

In the analysis of the choice of technique, I typically consider examples of technology with a finite number of techniques. For each technique, I find the wage as a function of the rate of profits. The outer envelope of these curves shows the cost-minimizing technique at each rate of profits (or each level of the wage). Points on more than one wage curve are switch points.

This approach is valid when, for example, all techniques produce the same set of commodities, and each commodity is basic, in the sense of Sraffa. That is, all commodities enter directly or indirectly into the production of all commodities.

But another requirement is that prices of all commodities in common between two techniques be identical at a switch point. Points of intersection on wage curves without this property of identical prices are known as fake switch points. I have previously considered fake switch points in (an extension of) an example from Christian Bidard. In this post, I present an example of a fake switch point in an example with single production (or circulating capital) only. It is critical to this example that a non-basic commodity is the numeraire and that the techniques vary in the process used to produce a non-basic commodity.

The necessity to consider prices in the analysis of the choice of technique is, as I understand it, a critical point from Milana. I think he extends this point, though, to examples in which it cannot be used to criticize Sraffians.

2.0 Technology

Table 1 shows the coefficients of production for this example. Coefficients of production specify inputs per unit output. Each process takes a year to complete. Inputs are totally used up in the production of the outputs.

Table 1: Coefficients of Production for The Technology
InputCorn IndustrySilk Industry
Labor112 Person-Yrs
Corn1/53(38/15) Bushels
Silk000 Square-Yds

The first produced commodity, corn, enters directly into the production of both commodities. It is a basic commodity, in the sense of Sraffa. Silk is a non-basic commodity. It does not enter, either directly or indirectly, into the production of corn.

3.0 Price Equations

I take a square yard of silk as the numeraire. The same rate of profits is assumed to be made in both industries when prices of production prevail. Labor is advanced, and wages are paid out of the net product at the end of the year.

3.1 The Alpha Technique

The following two equations specify prices of production for the Alpha technique:

(1/5) p1, α (1 + r) + wα = p1, α
3 p1, α (1 + r) + wα = 1

The variables are:

  • r: The rate of profits.
  • wα: The wage, for the Alpha technique.
  • p1, α: The price of corn, for the Alpha technique.
The solution, in terms of the rate of profits, is:

wα(r) = (4 - r)/(19 + 14 r)
p1, α(r) = 5/(19 + 14 r)

3.2 The Beta Technique

The price equations for the Beta technique are:

(1/5) p1, β (1 + r) + wβ = p1, β
(38/15) p1, β (1 + r) + 2 wβ = 1

The solution is:

wβ(r) = 3(4 - r)/[2( 31 + 16 r)]
p1, β(r) = 15/[2( 31 + 16 r)]

4.0 Switch Points

Suppose, at the given rate of profits, the Alpha technique is in use and prices of production for the Alpha technique prevail. Figure 2 shows the cost of producing silk, for each process, at these prices. The advances, at the beginning of the year, for produced inputs are costed up at the going rate of profits. The cost of producing silk with the process in the Alpha technique, under these assumptions, is unity for any feasible rate of profits. Extra costs are not incurred in the Alpha technique. Neither are supernormal profits available.

Figure 2: Cost of Producing Silk at Alpha Prices

But supernormal profits are available for the silk-producing process in the Beta technique if the rate of profits is feasible and exceeds the rate of profits at the switch point. The Beta technique is cost-minimizing here, while the Alpha technique is only cost-minimizing at lower rates of profits. The same conclusion about when each technique is cost-minimizing would be drawn if one started with prices of production for the Beta technique.

The switch point occurs at a rate of profits of 50 percent. The wage is (7/52) square yards per person-years, and the price of corn is (5/26) square yards per bushel at the switch point. Prices of production are the same, at the switch point, whichever technique is used.

5.0 A Fake Switch Point

Figure 1, at the top of this post, graphs the wage curves for the two techniques. Consider rates of profits that equate wages:

wα(r*) = wβ(r*)

The wage curves have two intersections. One is at the switch points, at a rate of profits of 50%. At the maximum rate of profits of 400 percent, the wage is zero. In the Alpha system, the price of corn is (1/15) square yards per bushel, while it is (3/38) square yards per bushel in the Beta system. Since, prices of production vary among techniques at the maximum rate of profits, it is not a switch point. Rather, it is a fake switch point.

6.0 Conclusions

I would like to find another example of a fake switch point in a circulating capital example with a choice of processes for producing a non-basic commodity. I want a fake switch point not at an extreme, with a wage of zero. The example in Stamatis (2001) seems not to work; maybe there is a misprint in the coefficients of production. Both techniques, however, have the structure of Sraffa's "beans".

  • Carlo Milana. 27 Nov. 2019. Solving the Reswitching Paradox in the Sraffian Theory of Capital
  • Georg Stamatis. 2001. Why the comparison and ordering of techniques is impossible. Political Economy 9: 5-44.

Tuesday, December 10, 2019

The Interest Rate: Prime, Overnight, Or The Rate On T-Bills

As far as I am concerned, cost-push inflation is a manifestation of class conflict between workers and owners. In the late 1970s, Paul Volker and Ronald Reagan took the side of the owners. I am willing to accept that Volker genuinely believed in Milton Friedman's incorrect quantity theory of money. And, since then, workers have been getting a smaller share in increased productivity. Some obituaries of Paul Volker exhibit an understanding of what he did.

But I want to talk about my recollection of how interest rates have been covered in the press from that time. Of course, at any given time, there are a whole range and time structures of interest rates. When Volker drove the interest rate above 20 percent, the focus in news coverage was, as I recall it, on the prime rate, that is, the best interest rate commercial borrowers, such as large corporations, can obtain. My perception is that now, when movements in interest rates are reported on in the press, the emphasis is more likely to be on one of two rates. One is the overnight rate, that banks charge each other overnight. One can hear about the repo market, I guess, in this context. The other much-discussed rate is the rate on short term treasury bills (T bills).

Is my perception accurate? When did this change occur, if so? Is it actually an example of society learning? After all, the Federal Reserve has much more direct control over the latter interest rates and only indirect and tenuous control over the prime rate. Has Volker's demonstration that the quantity theory is wrong been generally taken on board?

Friday, December 06, 2019

The Cambridge Equation, Expanded Reproduction, and Markup Pricing: An Example

1.0 Introduction

I have sometimes set out Marx's model of expanded reproduction, only with prices of production instead of labor values. I assume two goods, a capital good and a consumption good, are produced with constant technology. If one assumes workers spend all their wages and capitalists save a constant proportion of profits, one can derive the Cambridge equation in this model.

The Cambridge equation shows that, along a steady state growth path, the economy-wide rate of profits is determined by the ratio of the rate of growth and the saving rate out of profits. Maybe one should not use causal language here. The Cambridge equation is a necessary, consistency condition for smooth reproduction in a capitalist economy.

This post derives the Cambridge equation with markup pricing, in a highly aggregated model of expanded reproduction. I am curious how far this result generalizes. I am thinking of a model in which, say, n capital goods are produced in Department I and m consumer goods are produced in Department II. At this point, I am not thinking of generalizations in which workers save and therefore own some of the capital stock. Nor am I worrying about fixed capital, depreciation, and technical change.

Table 1: Definition of Variables
a01The person-years of labor hired per unit output (e.g., ton steel) in the first sector.
a02The person-years of labor hired per unit output (e.g., bushel corn) in the second sector.
a11The capital goods (measured in tons) used up per unit output in the first (steel-producing) sector.
a12The capital goods (measured in tons) used up per unit output in the second (corn-producing) sector.
p1The price of a unit output in the first sector.
p2The price of a unit output in the second sector.
s1Relative markup in producing steel.
s2Relative markup in producing corn.
The scale factor for the rate of profits.
rThe rate of profits.
σThe savings rate out of profits.
wThe wage, that is, the price of hiring a person-year.
cConsumption per worker, in units of bushels per person-year.
X1The number of units (ton steel) produced in the first sector.
X2The number of units produced (bushels corn) in the second sector.
gThe rate of growth.
2.0 The Model

Certain quantity equations follow from the assumptions. No produced capital goods remain each year after subtracting those used to reproduce the capital goods used up in throughout the economy and those needed to support the given rate of growth:

0 = X1 - (1 + g)(a11 X1 + a12 X2)

Consumption per person year is the output of the second department:

c = X2

The model economy is scaled such that one person-year is employed:

a01 X1 + a02 X2 = 1

I have the usual price equations, with labor advanced:

p1 a11 (1 + r̂ s1) + a01 w = p1

p1 a12 (1 + r̂ s2) + a02 w = p2

The consumption good is the numeraire:

p2 = 1

As with Marx in volume 2 of Capital, industries are here grouped into two great departments (Table 1). Means of production (also known as capital goods) are produced in Department I, and means of consumption (or consumer goods) are produced in Department II.

Table 2: Value of Outputs by Department and Distribution
I. Capital Goodsa11 X1 p1a01 X1 wa11 X1 p1 s2
II. Consumption Commoditiesa12 X2 p1a02 X2 wa12 X2 p1 s2

The overall, economy-wide rate of profits is defined in terms of profits and capital advances, aggregated over both departments:

r = (a11 X1 p1 s2 r̂ + a12 X2 p1 s2 r̂)/(a11 X1 p1 + a12 X2 p1)

The economy experiences expanded reproduction when it consistently expands each year. In this case, the demand for capital goods from the second department includes the savings of the capitalists receiving profits from that department. Likewise, the demand for consumption goods from the first department excludes the savings of the capitalists in that department. Observing these qualifications, it is easy to mathematically express the condition that the demand for capital goods from the second department match the demand for consumption goods from the first department:

a01 X1 w + (1 - σ) a11 X1 p1 s2 r̂ = a12 X2 p1 + σ a12 X2 p1 s2

3.0 Some Aspects of The Model Solution

Quantity variables (c, X1, and X2) can be found as a function of the rate of growth. Price variables (w, p1, and p2) can be found as a function of the scale factor for the rate of profits. These solutions allow one to use the balance equation to find a relation between the scale factor for the rate of profits:

r̂ = (g/σ){1/[s2 - (1 - g)(s2 - s1)a11]}

One can use the above relationship and the solution quantities and prices to find the economy-wide rate of profits:

r = g/σ

Along a path in which the economy steadily expands, the rate of profits must be equal to the quotient of rate of growth and the savings rate out of profits. The rate of profits is dependent on investment and savings decisions, out of the control of the workers. (In a two-class economy in which the workers save at a smaller rate than the capitalists, the Cambridge equation remains valid, with the savings rate in the denominator being that of the capitalists.) It is independent of the technical conditions of the chosen technique, and marginal productivity has nothing to do with it.

4.0 Conclusions

I know that this model can be generalized to hold when any number of consumer goods are produced. I have not yet been able to show the Cambridge equation holds when any number of capital goods are produced.

Saturday, November 30, 2019


  • David Graeber's review of Robert Skidelsky's Money and Government: The past and Future of Government.
  • A TED talk, by Nick Hanauer, on how complexity economics is replacing "neoliberal" economics. He is especially interested in reciprocity.
  • A 2014 interview by Bill Moyers, of Paul Krugman, on Piketty's book.
  • Mariana Mazzucato, with a talk on the value of everything. She also has a 2013 TED talk.
  • Heinz Kurz on the Cambridge capital controversy.
  • Bertram Schefold on the CCC and his recent research.
  • John Eatwell on Joan Robinson, including on the "disgrace" of mainstream economists not taking on board the results of the CCC.

Update (6 Dec. 2019): Added link for John Eatwell.

Saturday, November 23, 2019

Literature Distinguishing Large Corporations And Finance From Competitive Firms

A considerable body of literature has been published, during the last century, arguing that a movement away from competitive markets must be recognized in trying to describe and understanding contemporary capitalism. The literature I am thinking of emphasizes big business, corporations, and finance. Here are some selections, not all of which I have read:

I find that I have provided a similar list before. If I wanted to include journal articles, I would say something about Paulo Sylos-Labini. There was a nearby literature arguing the convergence of different systems across, say, the first and second worlds. Another related literature develops theories of imperialism, especially in the context of north-south relations.

As I understand it, many of the above writers were influenced by Marx. But I think even those who accepted the labor theory of value for competitive conditions, argued that the developments they were writing about implied that it no longer applies. For instance, Baran and Sweezy replaced surplus value by the (non-quantitative?) concept of the economic surplus. I was surprised to find myself arguing against this conclusion in recent work.

Friday, November 15, 2019

The Rate of Profits is Not the Scale Factor

Figure 1: Rate of Profits Unequal to Scale Factor for Rate of Profits

This post continues the example in the previous post. I modify the prices equations so that the rate of profits in producing corn is (s1 r̂), and the rate of profits in producing ale is (s2 r̂). The solution to the price equations are:

pcorn = 16 [16 + (s1 - s2) r̂]/[204 + (3 s1 + 9 s2) r̂]

pale = 32 [10 - (s1 - 3 s2) r̂]/[204 + (3 s1 + 9 s2) r̂]

w = 4 [51 - (9 s1 + 5 s2) r̂ - s1 s22]/[204 + (3 s1 + 9 s2) r̂]

where r̂ is what I have been calling the scale factor for the rate of profits.

I want to show that, only in exceptional cases can the the markups s1 and s2 be rescaled such that the scale factor is equal to the economy-wide rate of profits, whatever the distribution of income. For concreteness, assume that the rate of profits is four times as high in the corn industry, as compared to the ale industry. That is, introduce a new parameter α such that:

s1 = α
s2 = (1/4) α

Suppose the wage is unity and workers receive the entire standard commodity. Then both the scale factor for the rate of profits and the rate of profits are identically zero percent.

Next, consider the other extreme case, where the wage is zero. The maximum rate of profits is 300 percent. For the scale factor to also be three, the numerator for the wage, in the third equation above must be zero, when a rate of profits of 300 percent and the above scale factors are substituted in. One thereby obtains a quadratic equation:

3 α2 + 41 α - 68 = 0

The positive solution is:

α = (1/6)( -41 + 2,4971/2)

For any scale factor for the rate of profits, one can find the wage with these markups. For any wage, one can find the economy-wide rate of profits:

r = 3 (1 - w)

The simplicity of the above equation results from taking the standard commodity as the numeraire. The graph at the top of this post shows the difference between the rate of profits and the scale factor, as a function of the proportion of the standard commodity paid out in wages. The rate of profits and the scale factor are equal only at the two extremes. I guess that in a model with more commodities, the difference does not come out looking like a quadratic function.

This counterexample demonstrates that, in general, one cannot rescale markups such that the scale factor for the rate of profits is the economy-wide rate of profits, however distribution stands. Part of Marx's point in Capital is that observers who focus on surface phenomena will not perceive underlying value relations.

"The relations connecting the labour of one individual with that of the rest appear, not as direct social relations between individuals at work, but as what they really are, material relations between persons and social relations between things."

I guess I have shown that the existence of persistent ratios between the rate of profits in various industries, as with a corporate sector and a sector of small firms and proprietorships, provides another layer of confusion in economic analysis. Here is a source of another illusion created by competition.

Aside: I have stumbled across the International Symposium on Marxian Theory (ISMT). They have a series of books out, with a focus on reacting to the complete works of Marx and Engels (MEGA2). MEGA2 is published under the auspices of the Internationale Marx-Engels-Stiftung (IMES) in Amsterdam and of other groups in other countries. Apparently, volume 1 of Capital varied among editions, and Marx had several drafts. Furthermore, MEGA2 apparently has editions of volumes 2 and 3 that show exactly how Engels edited them. These facts re-enforce the point of this post, not that I want to read all of these variants.

Wednesday, November 06, 2019

An Example Of The Labor Theory Of Value

Figure 1: Variation of Prices of Production with Wages and Markups
1.0 Introduction

This post documents an example in my working paper, The Labor Theory of Value and Sraffa's Standard Commodity with Markup Pricing.

2.0 Technology

Consider a simple economy in which corn and ale are each produced from inputs of labor, corn, and ale. Inputs for unit outputs are shown in the columns in Table 1. Obviously, the units of measure should not be taken serious. Inputs are totally used up in the production of outputs. I abstract from the existence of fixed capital, land, and joint production.

Table 1: The Technology
Labor1 Person Year1 Person-Year
Corn(1/8) Bushels(3/8) Bushels
Ale(1/16) Pints(1/16) Pints

The standard net product consists of (9/16) bushels corn and (3/16) pints ale. The Perron-Frobenius root of the Leontief input-output matrix is 1/4. (The other eigenvalue is (-1/16). The maximum rate of profits is 300 per cent. Labor values are (64/51) person years per bushel corn and (80/51) person-years per pint ale.

3.0 Price Equations

Equations for prices of production are:

[(1/8) pcorn + (1/16) pale]( 1 + r̂) + w = pcorn

[(3/8) pcorn + (1/16) pale]( 1 + s2 r̂) + w = pale

(9/16) pcorn + (3/16) pale = 1

I have taken the standard commodity as the numeraire. This allows one to freely move back and forth, when evaluating aggregates, from labor values to monetary units.

The rate of profits in producing corn is 100 r̂ percent, while it is s2 r̂ percent in producing ale. I am assuming there are persistent barriers to entry or some reason why the rate of profits persistently varies between industries. Some economists talk about dual markets. I can also point to John Kenneth Galbraith's The New Industrial State for a contrast of corporations in the planning system and more traditional firms. Anyways, the solution of these equations is:

pcorn = 16 [16 + (1 - s2) r̂]/[204 + (3 + 9 s2) r̂]

pale = 32 [10 - (1 - 3 s2) r̂]/[204 + (3 + 9 s2) r̂]

w = 4 [51 - (9 + 5 s2) r̂ - s22]/[204 + (3 + 9 s2) r̂]

These equations show that prices of production vary from labor values when the rate of profits is positive. Furthermore, these are not straight lines, although the curvature is not visually impressive in the figure at the top of this post.

Anyways, here is a question. Suppose labor coefficients happen to be a left-hand eigenvector of the Leontief input-output matrix, a very special case. When prices of production are defined with equal rates of profits across all industries, prices of production are labor values in this special case. (The specification of the numeraire does not matter.) Does this property still hold under the sort of markup pricing which I am assuming?

Update (8 Nov 2019): A supporter in email points out a special case. Let s1 = 5/13 and let s2 = 5/29. Then prices of production are labor values. The scale factor for the rate of profits is: r̂ = 3 (1 - w). That is, the scale factor is the rate of profits. Presumably, with these relative markups, relative prices are relative labor values, whatever the numeraire.

Friday, November 01, 2019

Keen's Debunking Economics Most Popular Among Popular Critiques

Table 1: Selected Critiques
Moshe AdlerEconomics for the Rest of Us214
Rod Hill & Tony MyattThe Economics Anti-Textbook134
Steve KeenDebunking Economics, 1st edition253 to 4
Debunking Economics, 2nd edition564 to 5
Paul OrmerodThe Death of Economics103 to 4
John QuigginEconomics in Two Lessons24
John WeeksEconomics of the 1%134 to 5

Steve Keen seems to be the most popular of those writing internal critiques of economics directed towards the common reader. I selected the above books and looked at rankings on Amazon's United States website. You can spend lots of time reading the comments.

I am not sure about how to characterize this genre. I am more focused on theory than offering political programs. Would Robert Reich's Saving Capitalism be excluded? But what about memoirs, such as John Perkins' Confessions of an Economic Hit Man, Stiglitz' Globalism and its Discontents, Thaler's Misbehaving, or Kahneman's Thinking Fast and Slow? These books seem to have much more ratings than the ones I list in the above table.

Why is Keen's book more popular than the other ones in the table? Keen often overstates his case. One reviewer said he confuses necessary conditions with sufficient ones. I'm covered here; I suggested to him, before publication of the first edition, that well-behaved aggregate excess demand curves might exist in special, numeric, cases even if all consumers did not have identical and homothetic preferences. But those who know of Alan Kirman's work, with others, in the 1970s know Keen has a point. You cannot find any other condition than Gorman form that is sufficient to have well-behaved aggregate excess demand curves. And this is true of many other of Keen's points. I had not realized before reading Keen that the standard textbook presentation of perfect competition assumes managers of firms are systematically mistaken in their understanding of the demand curves they face.

Anyways, neoclassical economics is mostly wrong or useless for internal, logical reasons.

Wednesday, October 23, 2019

The Labor Theory of Value and Sraffa's Standard Commodity with Markup Pricing

I have uploaded a working paper with the post title.

Abstract: This article demonstrates relationships that are transparent in Sraffa's standard system hold even when relative rates of profit vary persistently among industries. Even with such variations, total constant capital, total variable capital, total surplus value, and the rate of profits are unaltered by evaluation at labor values and at prices of production in Sraffa’s standard system. These results buttress those who see in the standard commodity a solution for Marx’s so-called transformation problem.

Saturday, October 19, 2019

Actually Existing Socialism In A Capitalist Setting?

Elements of a post capitalist society are and have been developing in actually existing capitalism. This post points out a couple of examples.

The Green Bay Packers is a community-owned (non-profit) football team in the National Football League (NFL). One can find some arguing that they are socialist. And some are concerned to refute this claim.

Decades ago, some universities in the United States set up research and development organizations that then became independent, not-for-profit companies. For example, here is the web site for SRC, formerly Syracuse Research Corporation. This means, apparently, that they re-invest what they make. IRS Publication 557 explains how to apply for status as a 501(c) organization.

A quick Google search gets me to the National Center for Employee Ownership. They explain how a Employee Stock Ownership Plan (ESOP) works.

The cooperative movement is of interest in this context. I gather the Mondragon Corporation, in Spain, is the most well-known example. But I want to turn to producer cooperatives in dairy. The Lowville Producers Dairy Cooperative is one near me. Apparently, the National Milk Producers Federation is a federation of such cooperatives. The United States Department of Agriculture (USDA) provides background. I see that they confirm what I know anecdotally, that not all dairy farmers are members of a coop.

I guess some theory is needed to make sense of any claim that, say, producer coops are an example of socialism or to obtain a general understanding of such organizations. I have only read Hodgson (1998) and Jossa (2005) in the list of references below. From Hodgson, as I recall, I learned that an issue with cooperatives is start-up finance. It may be that producer cooperatives are more efficient than capitalist firms and still be smaller than one would hope. Jossa (2005) argues that cooperatives are consistent with Marx's vision. He draws on Vanek's distinction between worker-managed firms (WMFs) and labor-managed firms (LMFs). In WMFs, workers provide the finance, while in a LMF, the firm borrows. Anyways, here is some literature to explore.

  • Geoffrey M. Hodgson (1998). Economics and Utopia: Why the Learning Economy is not the End of History. Routledge.
  • Bruno Jossa (2019). The Political Economy of Cooperatives and Socialism, Routledge.
  • Bruno Jossa (2005). Marx, Marxism and the cooperative movement. Cambridge Journal of Economics 29: 3-18.
  • Jaroslav Vanek (1970). The General Theory of Labor-Managed Market Economies. NCOL.
  • Jaroslav Vanek (1971). The Participatory Economy: An Evolutionary Hypothesis and a Strategy for Development. Cornell University Press.
  • Jaroslav Vanek (1977). The Labor-Managed Economy: Essays. Cornell University Press.

Thursday, October 10, 2019

Structural Economic Dynamics and Fake Switch Points

Figure 1: A Pattern Diagram with Joint Production
1.0 Introduction

This post completes an example. I analyzed bits of this example here and here. This post may make no sense if you have not read a long series of previous posts or, maybe, the papers highlighted here and here. I am interested in how and if my approach to analyzing and visualizing variations in the choice of technique with technical progress extends to joint production. The example suggests fake switch points do not pose an insurmountable obstacle for such an extension.

2.0 Technology

I repeat the specification of technology.

I postulate an economy in which two commodities, corn and linen, can be produced from inputs of corn, linen, and labor. Managers of firms know of three processes (Tables 1 and 2) to produce corn and linen. Each process produces net outputs of corn and linen as a joint product. Inputs and outputs are specified in physical units (say, bushels and square meters) per unit level of operation of the given process. Inputs are acquired at the start of the year, and outputs are available for sale at the end of the year.

Table 1: Inputs for The Technology
Laboreσ0,1(1 - t)eσ0,2(1 - t)eσ0,3(1 - t)

Table 2: Outputs for The Technology

I assume that requirements for use are such that two processes must be operated to satisfy those requirements. I need to investigate the implications of this assumption further. Apparently, for this example, it implies that the economy is not on a golden rule steady state growth path, with the rate of profits equal to the rate of growth. Anyway, with this assumption, three techniques - Alpha, Beta, and Gamma - can be operated. Table 3 specifies which processes are operated for each technique.

Table 3: Techniques
Alphaa, b
Betaa, c
Gammab, c

The technology, as I have defined it, is parameterized. I consider the following specification for the rate of decrease in labor coefficients.

σ0,1 = 2
σ0,2 = σ0,3 = 5/2

Bidard & Klimovsky's example arises when t is unity.

3.0 Prices and the Choice of Technique

A system of two price equations arises, for each technique. I assume the labor coefficient is treated as a constant over the period of production - say, a year. With linen as numeraire, these equations for the Alpha technique are:

(20 p1 + 20)(1 + r) + [eσ0,1(1 - t)] w = 21 p1 + 27
(20 p1 + 20)(1 + r) + [eσ0,2(1 - t)] w = 23 p1 + 25

One can these equations for two variables in terms of, say, the rate of profits. For each technique, its wage curve shows the wage as a function of the rate of profits. One cannot generally base the choice of technique, under joint production, on figuring out which technique contributes to the outer frontier at a given rate of profits.

Instead, one can calculate profits and losses, with the given rate of profits and a technique's price system for the processes not in the technique. This exercise only makes sense when the rate of profits, the wage, and prices are non-negative for the starting technique. The technique is cost-minimizing only if no extra profits can be made with processes outside the technique.

I deliberately frame this as a combinatorial argument. Bidard likes what he calls a market algorithm, where, when one identifies a process earning extra profits, one introduces the process into the technique. In the case of joint production, it is not clear which process should be dropped. Furthermore, examples exist in which a cost-minimizing technique exists but cannot be reached from certain starting points with the market algorithm.

4.0 Patterns

I have constructed the figure at the top of the post to illustrate how the choice of technique varies with technical progress in this example. The dashed lines highlight features of the example that do not bear on the choice of technique. The light vertical solid lines divide time into numbered regions. Table 3 lists the cost-minimizing techniques, in order of an increasing rate of profits in each region.

Table 3: Regions
1Gamma, No Production, Alpha
2Gamma, No Production, Alpha
3Gamma, Alpha & Gamma, Alpha
4Alpha & Gamma, Alpha
5Beta, Alpha & Gamma, Alpha

I could say a lot more about the example. I will note that in region 1, the wage increases with the rate of profits, for the Alpha technique, in the interval for the rate of profits where both wages and the price of corn are positive. In region 2, the wage decreases with the rate of profits, for the Alpha technique. The division between regions 2 and 3 is associated with that interval for the rate of profits for Alpha transitioning to have a non-empty intersection with the similar interval for the Gamma technique. for

5.0 Conclusion

This post has illustrated that one type of my types of pattern diagrams can apply to joint production. This type illustrates how the relationship between the choice of technique and distribution varies with technical progress. It can be constructed even in cases, such as joint production, where the choice of technique cannot necessarily be based on wage-rate of profits curves and their outer frontier.

If fake switch points are not shown, this type of pattern diagram does not depend on the specification of the numeraire. If the ordinate in Figure 1 were the wage, instead of the rate of profits, it would be upside down, in some sense. A different numeraire would rescale the wage. When corn is numeraire, only one fake switch point exists. It, too, would be a horizontal line segment. But fake switch points are fake precisely because they do not impact the choice of technique. They can be left off the diagram.

The example also illustrates new types of patterns for dividing adjacent regions. Under joint production, a technique can be associated with non-negative prices and a wage for an interval of the rate of profits that does not include a rate of profits of zero. Both the Alpha and the Beta technique exhibit this possibility in the example. And we can divide regions based on when the range of rate of profits in which such a technique becomes cost-minimizing comes to include zero or begins to interact with the range in which another technique is cost-minimizing

This example also illustrates that the cost-minimizing technique may not be unique in a range of rates of profits. I think this non-uniqueness is qualitatively different than how non-uniqueness can arise in models with only circulating capital. In circulating capital models, non-uniqueness is associated with two techniques having identical wage curves. Not so here.

I do not intend to write this example up any more extensively. I have no so-called paradoxical behavior here, such as reswitching, reverse capital-deepening, or the reverse substitution of labor. I may go on to explore where techniques are described by rectangular matrices, with more produced commodities than processes, and there is a dependence on the requirements for use.

  • Bidard, Christian and Edith Klimovsky (2004). Switches and fake switches in methods of production. Cambridge Journal of Economics. 28 (1): 89-97.

Saturday, October 05, 2019


  • Here is a post from a blog devoted to cybercommunism. The blogger is glowing about Paul Cockshoot's work on refuting Hayek's supposed refutation of the possibility of a post-capitalist society.
  • William Milberg writes about how it is becoming more common to use the word "capitalism", a word mainstream economists had mostly stopped using.
  • Herbert Giants and Rakesh Khurana write about the corrupting effects of neoclassical economics on what is taught in business school and then practiced by corporate elites.
  • Osita Nwanevu writes, in The New Republic, about the enthusiasts that showed up at last weekend's Third MMT Conference.
  • Lisa Schweitzer studies urban environments. In a blog post, she expresses irritation at Paul Romer's arrogance, admittedly filtered through a glowing New York Times article.
  • A long time ago, Connie Bruck profiled George Soros in the New Yorker. Soros consciously thinks of himself as building on Karl Popper's The Open Society and its Enemies.

Saturday, September 28, 2019

Variation in Standard Commodity with Relative Markups

I am not sure about the economic logic in this post. Maybe somebody like D'Agata or Zambelli could do something with this. These ideas were suggested to me by email with a sometime commentator.

I start out with notation for Sraffa's price system, modified in an unusual way to allow for persistent variations in the rate of profits among industries:

  • a0 is a row vector of labor coefficients in each of n industries.
  • A is a Leontief input-output matrix, where ai, j is the quantity of the ith commodity needed as input to produce one unit of the jth commodity.
  • S is a diagonal matrix, where all off-diagonal elements are zero. sj, j is the markup on non-labor costs in the jth industry.
  • p is a row vector of prices.
  • w is the wage.
  • r is the scale factor for the rate of profits.

The coefficients of production, as expressed in the labor coefficients and the Leontief matrix are given parameters. Relative markups are also taken as given. Prices, the wage, and the scale factor for the rate of profits are the unknowns to be determined. My problem is to find a numeraire such that the wage and the scale factor for the rate of profits trade off in a straight-line relationship, at least when labor is advanced and wages are paid out of the net product:

r = R (1 - w)

I assume all elements of A are non-negative and that all elements of a0 and all diagonal elements of S are positive. The economy is assumed to be viable, that is, as capable of producing a surplus product. For simplicity, assume that the Leontief matrix is indecomposable. More generally, I need A S to be a Sraffa matrix.

For my purposes here, I formulate price equations as so:

p A S (1 + r) + a0 w = p

Consider the case when wages are zero and the scale factor for the rate of profits is at its maximum R:

p A S (1 + R) = p


p A S = (1/(1 + R)) p

I observe that prices are a left-hand eigenvector of the matrix A S, with (1/(1 + R)) the corresponding eigenvalue. To ensure that prices are positive, of the n eigenvalues, choose the maximum. The maximum eigenvalue is also known as the Perron-Frobenius root of A S.

Let y* be a right-hand eigenvector of A S corresponding to its Perron-Frobenius root. Let q* be gross output such that the net output is y*:

y* = q* - A q*

These quantities flow define the standard system here, when scaled so as employ a unit quantity of labor:

a0 q* = 1

The net output of the standard system is the desired numeraire:

p y* = 1

With this definition of the standard system, the ratio of physical gross outputs to circulating capital inputs varies among commodities. This result contrasts with Sraffa's standard system. I suppose I could restore this property by choosing q*, not y*, to be an eigenvector. Either way, the ratio of net outputs to circulating capital inputs varies among industries. Either way, the relative ratios of commodities in the standard industry depends on relative markups.

Do Marx's invariants hold with the above definition of the standard system? I expect not. Nevertheless, does this mathematics provide some insight into classical or Marxist political economy?

Saturday, September 21, 2019

A Fluke Case Over The Wage Axis

Figure 1: Wage Curves and The Price of Corn for the Fluke Case

This post extends a previous post. I am basically introducing structural dynamics into an example, by Bidard and Klimovsky of fake switch points.

At a rate of profits of zero in the example, the price of corn is zero for Alpha, one of the two techniques that is cost-minimizing there and for somewhat higher rates of profits. At a time before the fluke case, only the Gamma technique is cost-minimizing at a rate of profits of zero. The price of corn, as calculated with the Alpha technique, is negative at a rate of profits of zero. Alpha prices become non-negative only for positive rates of profits. This possibility cannot arise in examples with only single production and the choice of technique analyzed by the construction of the wage frontier.

2.0 A Fluke Case

Technology and techniques are specified as in the previous post. I consider variations in labor coefficients with time. Two commodities can be produced jointly with each of three production process. In each process, workers produce outputs of the two commodities from smaller inputs of each commodities. Requirements of use are such that at least two processes must be operated. So each technique combines two processes.

A system of price equations is associated with each technique. The system, including an equation specifying the numeraire, can be taken to define the wage and the prices of both commodities, given an exogenous specification of the rates of profits. Table 1, at the head of this post, illustrates the solution prices at a given point of time. Linen is taken as the numeraire. The top half of the figure shows the wage, for each technique, as a function of the rate of profits. The bottom half of diagram shows the corresponding price of corn. Notice that, for the Alpha technique, the price of corn is zero when the rate of profits is zero.

A technique is only feasible, for the analysis of the choice of technique, when both the wage and prices are non-negative. In Figure 1, the rate of profits is partitioned into two roman-numbered regions. In Region II, both the Alpha and Gamma techniques are feasible. In Region III, only the Alpha technique is feasible.

At a switch point:

  • The wage curves for at least two techniques intersect at the switch point.
  • No extra profits can be made at the going rate of profits in any process.
  • No excess costs arise for any process that can be operated at the switch point.

No switch points exist in the example at the time illustrated in Figure 1. For the structure of the example, all three wage curves intersect at a (non-fake) switch point. Furthermore, the price of corn is the same for all three techniques at the switching rate of profits.

Not enough information has been given so far to determine which techniques are cost-minimizing at each feasible rate of profits in Figure 1. I like to plot extra profits for each process and each price system. I do not show such plots in the post. Nevertheless, Table 1 summarizes which techniques are cost minimizing.

Table 1: Cost-Minimizing Techniques
IGammab, c
IIAlpha and Gammaa, b, c
IIIAlphaa, c
3.0 Before the Fluke Case

Consider time before the fluke case illustrated in Figure 1. Labor coefficients are larger. Figure 2, below, illustrates the wage and price curves for a specified time before the fluke case described above. Notice the appearance of Region I, where Gamma is uniquely cost-minimizing. The fluke case is a knife-edge case where Region disappears. The wage axis becomes the boundary between Regions I and II. Of these two regions, only Region II exists for a positive rate of profits.

Figure 2: A Fluke Fake Switch Point?

Does Figure 2 illustrate another fluke case? At the fake switch point at a rate of profits of five percent, the price of corn is zero. But consider Figure 3 below. The only difference in the example between Figures 2 and 3 is the specification of the numeraire. With corn as numeraire, the fake switch points disappear, and a new fake switch point appears at a rate of profits of 13 1/3 percent. The wage and the price of linen approach an asymptote for the rate of profits at which the price of corn is zero when linen is the numeraire. Which techniques are cost-minimizing is unaffected by the choice of the numeraire.

Figure 3: Not A Fluke With Corn As Numeraire
4.0 After the Fluke Case

Consider some time after the fluke case illustrated in Figure 1. With the chosen parameters, labor coefficients have decreased less in the first production process than in the other two. Figure 4 shows the next qualitative change in the example, in which a switch point appears over the wage axis. I have already analyzed this case for this example.

Figure 4: A Switch Point On The Wage Axis

Between the times illustrated by Figures 1 and 4, Regions II and III continue to characterize the range of feasible non-negative rates of profits. The price of corn is positive, for all three techniques, is positive for feasible rates of profits for each technique. Region I has vanished.

The switch point continues to exist after the time illustrated in Figure 4, but at a positive rate of profits. A new region appears. For a rate of profits of zero and small positive rates of profits, the Beta technique is uniquely cost-minimizing.

5.0 Conclusion

This post has presented a fluke case only possible under joint production. In this example, the choice of technique cannot be determined by constructing the wage frontier.

This post has also presented a sort-of fluke case associated with a fake switch point. In this case, the fake switch point appears on the frontier at a rate of profits at which the price of corn is zero. The set of cost-minimizing techniques and processes varies at the fake switch point. But its existence depends on the choice of the numeraire.

I have been working on a taxonomy of fluke switch points for understanding structural economic dynamics. This post illustrates that my approach can extend to joint production. New phenomena and fluke cases can arise, and one must, perhaps, pay closer attention to what is and is not dependent on the choice of the numeraire.

Monday, September 16, 2019

A Pattern Over The Wage Axis In A Case Of Joint Production

Figure 1: Wage Curves with Corn as Numeraire
1.0 Introduction

This post presents an example of a fluke switch point in which the choice of technique cannot be analyzed by the construction of the wage frontier. Under joint production, the technique that is cost-minimizing, for a given rate of profits, does not necessarily maximize the wage. Nevertheless, one can still see what I call a pattern over the wage axis in this case. The example is a generalization of the numerical example in Bidard & Klimovsky (2004).

2.0 Technology

I postulate an economy in which two commodities, corn and linen, can be produced from inputs of corn, linen, and labor. Managers of firms know of three processes (Tables 1 and 2) to produce corn and linen. Each process produces net outputs of corn and linen as a joint product. Inputs and outputs are specified in physical units (say, bushels and square meters) per unit level of operation of the given process. Inputs are acquired at the start of the year, and outputs are available for sale at the end of the year.

Table 1: Inputs for The Technology
Laboreσ0,1(1 - t)eσ0,2(1 - t)eσ0,3(1 - t)

Table 2: Outputs for The Technology

I assume that requirements for use are such that two processes must be operated to satisfy those requirements. I need to investigate the implications of this assumption further. Apparently, for this example, it implies that the economy is not on a golden rule steady state growth path, with the rate of profits equal to the rate of growth. Anyway, with this assumption, three techniques - Alpha, Beta, and Gamma - can be operated. Table 3 specifies which processes are operated for each technique.

Table 3: Techniques
Alphaa, b
Betaa, c
Gammab, c

The technology, as I have defined it, is parameterized. I consider the following specification for the rate of decrease in labor coefficients.

σ0,1 = 2
σ0,2 = σ0,3 = 5/2

Bidard & Klimovsky's example arises when t is unity. I consider the following value for time:

t ≈ 0.91973

Structural economic dynamics arises as time varies.

3.0 Price System

Prices of production arise for each technique and each specification of the numeraire. For the Alpha technique, prices of production are characterized by the system of the following three equations:

(20 p1 + 20 p2)(1 + r) + [ eσ0,1(1 - t) ] w = 21 p1 + 27 p2
(20 p1 + 20 p2)(1 + r) + [ eσ0,2(1 - t) ] w = 23 p1 + 25 p2
p1 d1 + p2 d2 = 1


  • r is the rate of profits.
  • w is the wage.
  • p1 is the price of corn.
  • p2 is the price of linen.
  • d1 is the quantity of corn in the consumption basket serving as numeraire.
  • d2 is the quantity of linen in the consumption basket serving as numeraire.

Given one of the distributive variables, this system of equations can be solved. Figure 1, at the top of this post, graphs the wage curves for the three techniques, when d1 = 1 and d2 = 0. Figure 2 graphs the wage curves when linen is the numeraire.

Figure 2: Wage Curves with Linen as Numeraire

Notice that which technique lies on the outer envelope, as the rate of profit, varies with the choice of numeraire. In Figure 1, the Alpha technique maximizes the wage, for all feasible positive rates of profits. In Figure 2, the Gamma technique, then the Alpha technique, maximizes the wage, with an increasing rate of profits. This dependence of qualitative characteristics of the wage frontier cannot arise when all capital goods are circulating capital.

In the example, the two processes for a technique and the remaining process must all obtain the same rate of profits at a (genuine, non-fake) switch point. In the example, all three wage curves must intersect at a switch point. Another aspect of a switch point is that the prices of each good must be invariant across the price systems for the techniques entering the switch point. When corn is the numeraire, the price of linen must be the same for all three techniques at the switch point. This property is illustrated in Figure 3. The corresponding property for the price of corn, when linen is the numeraire, is illustrated in Figure 4. No sign of the fake switch points appears in Figures 3 and 4.

Figure 3: Price of Linen with Corn as Numeraire
Figure 4: Price of Corn with Linen as Numeraire

4.0 Choice of Technique

Wage curves can be misleading when analyzing the choice of technique under models of joint production. How then should the choice of technique be found?

First, suppose the Alpha technique has been adopted. One can cost up the outputs and inputs of each process, for the solution to the price system for the Alpha technique. Figure 5 shows results. No extra profits, sometimes called pure economic profits, are made in operating the processes comprising the Alpha technique. For positive rates of profits, operating process c will not obtain the going rate of profits. Clearly, the Alpha technique is cost-minimizing for the graphed range of the rate of profits.

Figure 5: Extra Profits with Alpha Prices

Second, suppose the Beta technique is chosen. Figure 6 graphs extra profits, for each process, as a function of the rate of profits, given Beta prices. For a positive rate of profits, the second process earns extra profits and will be adopted by managers of firms. Notice that one cannot tell from the diagram which process will be dropped. This issue does not arise without joint production. In the case of single production, only one process in the given technique produces the same commodity as that produced by the new process.

Figure 6: Extra Profits with Beta Prices

Finally, suppose the Gamma technique is chosen. Figure 7 graphs extra profits for this case. And the Gamma process is cost-minimizing for the full range of the rate of profits shown in the figure.

Figure 7: Extra Profits with Gamma Prices

The above has shown that, in this example, both the Alpha and Gamma techniques are cost-minimizing at feasible positive rates of profits. The Beta technique is cost-minimizing only at the switch point at a rate of profits of zero percent. The choice of technique is independent of the numeraire. Presumably, the choice between the Alpha and Gamma techniques is made based on requirements for use. At any rate, the chosen technique need not maximize the wage, given the rate rate of profits and the specification of the numeraire.

5.0 Conclusion

This example has illustrated that a specific fluke switch point, which I originally defined for cases with only circulating capital, can also arise in joint production. I except to find a need for new kinds of fluke switch points as I further examine joint production. I am hoping to be able to draw pattern diagrams in which qualitative properties are independent of the choice of the numeraire.

  • Bidard, Christian and Edith Klimovsky (2004). Switches and fake switches in methods of production. Cambridge Journal of Economics. 28 (1): 89-97.

Saturday, September 07, 2019

Martin Weitzman's The Share Economy

I happen to have one book by Marty Weitzman (1942 - 2019) on my bookshelf. So I thought I would write a bit about The Share Economy: Conquering Stagflation.

This is an ill-timed book. It proposes that firms negotiate with workers to pay them a percentage of revenues, instead of, say, an hourly money wage. It argues that such a change will address the widespread macroeconomic problem, throughout the 1970s, of simultaneously high unemployment and high inflation. But, by the time the book came out, stagflation had been "solved", in an extremely reactionary way. The countervailing power of organized labor was being abolished. Labor unions were being crushed, and workers would, by and large, no longer see their wages increase with productivity. Instead of unemployment being addressed, workers would just have to get used to long-lasting higher unemployment.

Maybe some day, we will get back to a setting where Weitzman's book is socially relevant. Even so, it is worth exploring how macroeconomic performance is affected by microeconomic structures.

Although I think of Weitzman as a mainstream economist, his view of the microeconomic setting at the time of his writing was not that far away from Post Keynesianism. He thinks of the "tone" of "modern industrial capitalism" as set by "a relatively small number of large-scale firms", such as those in the Fortune 500. These firms are described by the theory of monopolistic competition. (quotes on p. 11). These firms are characterized by constant costs over a wide range of levels of production below limits set by capacity. They set their prices at a markup over cost. The theory of profit maximization, under these assumptions, yields a markup based on elasticity of consumer demand.

Weitzman explicitly rejects a theory of monopsony for labor markets:

"...If your aim is to focus in on fine close-up details and you wish to do justice to the facts, you must rely on a heavily institutional approach. But I think the unique long-run substitutability of labor among different uses actually makes the competitive theory a rather good description of long-run tendencies in the labor market...

In this book I am primarily interested in the general theory of wage determination... least the labor market behaves 'as if' it is competitive, in the sense that countervailing power between buyers and sellers of labor is sufficiently balanced that neither party has a clear upper hand and both possess approximately equal bargaining strength. The economy-wide real wage is not very different from what would be determined by competitive forces in the labor market." (pp. 29-30.)

I am not sure that Weitzman's account of firms is consistent with firms operating multiple plants and producing multiple products. I think of Alfred Eichner's theory of the megacorp here. I also doubt that theories of full cost, markup, or administered prices should be developed based on markups determined by elasticities. Rather, the markup might be theorized as based on firm's plans for growth.

Weitzman sees that firms will respond to fluctuations of demand by adjusting quantities, not prices. He cites Janos Kornai's contrast of planned, socialist economies with capitalist economies. In the United States, firms must attend to making the consumer's shopping experience as pleasant as possible, while in the Soviet Union, establishments do not care and consumers wait in queue. On the other hand, establishments in the Soviet Union cater to the worker. Weitzman argues his share economy would change the dynamics of the labor market such that firms in the United States would also worry more about the worker's experience.

Wietzman sees the contemporary practice of firms awarding year-end bonuses as a start towards his share economy. He includes Eastman Kodak as an example. Kodak is now bankrupt, and Kodak Park in Rochester, NY, is mostly empty and decaying. In my anecdotal experience, bonuses are often experienced as a present that cannot be planned or depended on. Maybe it would be different with more transparency from your employer, as resulting from a union contract, representatives from the union sitting on the board of directors, an Employee Stock Ownership Plan (ESOP), or some such.

Overall, I find The Share Economy intriguing. It illustrates how good economists will not develop an universal theory, but will address problems of the economist's own time and place.

(A propos of nothing in particular, Branko Milanovic has a post coming close to an endorsement of Neo-Ricardianism.)

Sunday, September 01, 2019


This list is mostly a matter of aspirational reading.

Wednesday, August 28, 2019

Mass Publics Apathetic About Democratic Norms?

This post gestures to a worrisome argument that could be constructed by combining arguments from certain references. It is also more about current events than most posts on this blog.

Philip Converse's argument that most members of the mass public are ideologically innocent has long been influential among political scientists. Why should those who have families to raise, bills to pay, and jobs to take up their time pay much attention to the details of politics?

Barber and Pope (2018) provides recent empirical evidence, from something like a natural experiment, that conservative Republicans, especially, are unprincipled. Their results are based on a survey conducted in early 2017, before Trump had a record as governing. Since Trump does not care to know anything about anything, one can truthfully report statements of him supporting either side on almost any issue. The survey contained questions on minimum wages, taxes, abortion, immigration, gun control, Iran, health care, climate change, planned parenthood. Some surveys just asked the questions. Others reported Trump's opinion in a liberal direction. Others reported Trump's opinion in a conservative direction. "[L]ow knowledge respondents, strong Republicans, Trump-approving respondents, and self-described conservatives" generally just follow what their leader says.

It is difficult to construct an experiment like this for others. One might think that liberal Democrats might be swayed against a position by hearing that it is Trump's position. But one would like to find an authority that they accept that is equally inconsistent. Otherwise, one would have to assign views in a survey that are not truthful. As I understand it, the latter is what Jaydani and Chang (2019) do in demonstrating that mainstream economists are unprincipled. They show agreement with a statement among economists depends on whether it is assigned to a mainstream economist or to a heterodox economist.

Levitsky and Ziblatt (2018) argue that a democracy deteriorates into something like fascism when gate keepers fail to uphold democratic norms. I do not know if this is an example, but journalists are trained in an ethic in which one is supposed to disclose an interest in a story, if one has one. Sean Hannity, for example, violated this norm when he reported on Michael Cohen and Trump's violation of campaign finance laws; Cohen was Hannity's lawyer for certain real estate transactions. Calling the press "the enemy of the people" is a fascist slogan. American First is a slogan for pro-Nazis. Presidents do not accuse the Chairman of the Federal Reverse of playing politics. Whatever one may think of these norms, I do not expect many watchers of, say, Fox News to worry about this sort of rhetoric unless it is pointed out to them by authorities they trust.

Mark Tushnet's 2004 concept of constitutional hardball is another discussion of democratic norms in the United States. And he argued that they were being violated, partly in a tit-for-tat fashion. For example, how willing is Congress to give advise and consent to qualified appointees of the President when he is of the other party? Fishkin and Pozen argue that a willingness to throw out norms that uphold our system of government is not symmetrical.

Stanley (2018) can be read as suggesting that the effects of elites and gate keepers to fail to uphold democratic norms can be cumulative. Anti-intellectualism and a disrespect for truth leads followers to be unaware of norms being violated. Conspiracy theorizing and a sense of victimhood increases. Followers become less accepting of reasoned argument and more dismissive of those not in their hierarchy.

To summarize: members of mass publics cannot be expected to understand the risks of willful and blatant violation of democratic norms without leadership. In the give and take of politics, our leaders have been not upholding such norms and, in fact, have been discarding them. Perhaps a process of cumulative causation is underway that can lead to nowhere good.


Friday, August 23, 2019

Economists Insulting Me And Insulting Keynes

I happen to think the minimum wage in the United States should be raised. I'll go along with the consensus of $15 an hour.

I also happen to know that, even under ideal conditions, wages and employment cannot be explained by supply and demand.

Some economists, who I have no (other) reason to disrespect, seem to think my true statement about labor economics can be discredited by attacking my motivations. So they point out how, under (incoherent) neoclassical theory, higher minimum wages can be justified by, for example, the theory of monopsony. But my motivations are almost the opposite. I take the evidence that neoclassical economics is wrong about labor markets as a launching pad into the illogic of mainstream economics. (Is this the most recent meta-analysis on minimum wages?)

The attack, based on motive, is insulting. One might think a point of logic cannot be discarded by presuming that it was made because of a desired political conclusion. But enough about me. I want to talk about how John Maynard Keynes was attacked in a similar way.

Some may portray the Keynesian revolution as about policy. The point is to demonstrate that fiscal or monetary policy can be effective in the short run, while prices and quantities are adjusting to a long run equilibrium in which all markets, including the labor market, clear. But Keynes is clear that his book about is about theory, not policy:

"This book is chiefly addressed to my fellow economists. I hope that it will be intelligible to others. But its main purpose is to deal with difficult questions of theory, and only in the second place with the applications of this theory to practice." -- the first three sentences in (the preface to) The General Theory of Employment Interest and Money (Keynes, 1936).

And sticky prices is characteristic of the theory that he is rejecting:

"For the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on the rigidity the blame of maladjustment." -- Keynes, 1936: p. 257.

So, insofar as the Keynesian revolution was about, say, fiscal policy it was a counterrevolution against Keynes' ideas.

I realize that economics can have great practical effects, for good or ill. Some, perhaps, want to advocate policies which they deem good. Rather than trying to tilt at windmills, they may think it more worthwhile to show how one can argue for such policies within orthodox theory. I hope some who do this are not merely trying to ensure they retain access to levers of power. If one puts on a mask long enough, one risks becoming what one pretends to be. The understanding of capitalism is not advanced in any way at all. Suppose one thinks about policy with simple models. Then, when one has a conclusion, one bows to the orthodoxy and appends a superfluous shell of constrained maximization. (I haven't read the book in the link.) If this is typical among a population of mainstream economists, outsiders may wonder what is the point of all that mathematics and supposed science?