Thursday, July 04, 2019

On Milana's Purported Solution To The Reswitching Paradox

Carlo Milana has posted a paper on arXiv. I was prepared to accept this paper's claims. Economists have developed price theory. Referring to Sraffian "paradoxes" and "perverse" switch points is a matter of speaking. There does not exist separate Sraffian and neoclassical versions of price theory. For a result to be "perverse", it need only contradict outdated neoclassical intuition. But it is as much a part of the mathematical economics as any other result. (It is another matter that much teaching in microeconomics is inconsistent with the mathematics.)

In equilibrium, the price of the services of each capital good in use is equal to the value of the marginal product of that good, with all prices discounted to the same moment in time. This discounting implies that the interest rate appears in a formal statement of these equations. These equalities are very different from the claim that the interest rate equals the marginal product of (financial) capital. In limited cases, one can prove something like the aggregate equality. No such thing as a marginal productivity theory of distribution, however, is restored. Milana might cite Hahn (1982) on this background.

But Milana goes further. He claims that reswitching is impossible or, at least, examples up to now are erroneous.

I think Milana's basic mistake is exposed in Salvadori and Steedman (1988). (I go through one of their examples here.) The Samuelson-Garegnani model is not a model of two-(produced) goods. The model contains as many capital goods as there are techniques. Potentially, there can be a continuum of capital goods in the model. As such, it is meaningless to require the price of the capital goods used in each technique that is cost-minimizing at a switch point to be equal to one another. That is analogous to requiring the price of a ton of iron be equal to the price of a ton of tin.

For some reason, Milana does not discuss examples of reswitching in flow-input, point output models, such as in Samuelson (1966). Nor does he acknowledge, as I read him, valid examples in which the same n commodities are produced in all techniques, and all commodities are basic in all techniques. (Does he say anything at all about the distinction between basic and non-basic commodities?) At a non-fluke or generic switch point, in such a framework, the two techniques that are cost-minimizing differ in a process in exactly one industry.

Milana should read and reference Bharadwaj (1970), as well as Bidard and Klimovsky (2004) on fake switches in models of joint production. Other Linear Programming formulations are available for considering the choice of technique. Vienneau (2005) presents one. What does Milana have to say about the direct method for analyzing the choice of technique in Kurz and Salvadori (1995)? I briefly provide a survey of different analysis in Vienneau (2017), as well as an algorithm for finding the cost-minimizing technique? Are all these approaches in error?

  • Khrishna Bharadwaj. 1970. On the maximum number of switches between two production systems. Schweizerische Zeitschrift fur Volkswortschaft and Statistik (4): 401-428. Reprinted in Bharadwaj 1989. Themes in Value and Distribution: Classical Theory Reappraised, Unwin-Hyman.
  • Christian Bidard and Edith Klimovsky. 2004. Switches and fake switches in methods of production. Cambridge Journal of Economics 28:89-97
  • Frank Hahn. 1982. The neo-Ricardians Cambridge Journal of Economics 6:353-374.
  • H. D. Kurz and N. Salvadori. 1995. Theory of Production: A Long-Period Analysis. Cambridge University Press.
  • Carlo Milano. 2019. Solving the Reswitching Paradox in the Sraffian Theory of Capital. arXiv:1907.01189
  • Neri Salvadori and Ian Steedman. 1988. No reswitching? No switching! Cambridge Journal of Economics 12: 481-486.
  • Paul A. Samuelson. 1966. A Summing Up. The Quarterly Journal of Economics 80 (4): 568–583.
  • Robert Vienneau. 2005. On labour demand and equilibria of the firm. The Manchester School 73(5): 612-619.
  • Robert Vienneau. 2017. The choice of technique with multiple and complex interest rates. Review of Political Economy 29(3): 440-453.

Saturday, June 22, 2019

Easy To Be Hard

Young Children Policing Group Members

This post presents examples of psychologists inducing stress in experimental subjects, some showing why we need Institutional Review Boards (IRBs). Some of the older studies involved so much suffering that experimental subjects suffered Post-Traumatic Stress Disorder (PTSD). I recall that at the end of the 1976 movie, The Tenth Level, about the Milgram experiment, starring William Shatner, the scientists are discussing what they would do if they were experimental subjects. Would they refuse to torture others? And one says to Shatner/Milgram something like, "It seems to me, you have already been tested and failed."

  • Yudkin, Van Bavel, and Rhodes: Almost the only somewhat happy story here. Toddlers are willing to close a fun slide, for themselves, to punish another child for misbehavior. The experiment illustrates costly third-party punishment.
  • Stanford prison experiment: A sample of college students are randomly divided up into pretend guards and prisoners. The guards quickly begin abusing the prisoners.
  • Jane Ellliot experiments: In order to understand segregation and prejudice, divides a class of school children into blue eyes and brown eyes. The blue eyes sit at the front and treated well; the brown eyes sit at the back and are badly treated. The next Monday, the situation is reversed. Quickly, the well-treated act as if they believe they are superior and the others inferior.
  • Robber's Cave experiment: A somewhat happy ending, I guess. Boys divided up into two competitive groups at summer camp quickly disdain one another. Given a problem that requires cooperation with the other group, they will work together.
  • Milgram experiment: Given an authority figure telling them that this is experiment on negative re-inforcement for learning, people are willing to increase electric shocks past the point of torture. Some refused.
  • Gibson and Walk experiment: As far as the baby is concerned, they are crawling over the edge of a cliff on air. Tests whether caution about heights is inherent. More about individual psychology than most of the rest in this list.
  • Asch experiment: On conformity. Subject goes last in a group noting which line was the same length as the a standard. The subject does not realize the rest are part of the experiment. Many were willing to go along with the obvious falsehood all the others said.
  • Little Albert experiment: A baby is conditioned, as with Pavlov's dogs, to be terrified of a white rat, rabbit, dog, and a sealskin coat. More about individual psychology than most of the rest in this list.

Randomized Control Trials (RCTs) provide a rigorous methodology, albeit they can present problems of generalization and external validity. Not all of the above are RCTs. They do illustrate that designing ethical RCTs can be difficult. I expect the above list of amazingly mostly abusive studies, even in psychology can be extended.

  • Yudkin, Danial A., Jay J. Van Bavel, and Marjorie Rhodes (2019). Young children police group members at personal cost. Journal of Experimental Psychology.
  • Haney, C., W. C. Banks, and P. G. Zimbardo (1973). A study of prisoners and guards in a simulated prison. Naval Research Review 30: 4-17.
  • Muzafer Sherif (1966). In Common Predicament: Social Psychology of Intergroup Conflict and Cooperation Houghton Miffin.
  • Milgram, Stanley (1963). Behavioral study of obedience. Journal of Abnormal Social Psychology 67: 371-378.
  • Gibson, E. J. and R. D. Walk (1960).Visual Cliff. Scientific American April.
  • Asch, Solomon E. (1955). Opinions and social pressure. Scientific American November.
  • Watson, John B. and Rosalie Rayner (1920). Conditioned emotional reactions. Journal of Experimental Psychology 3(1): 1-14.

Monday, June 17, 2019

Lewin and Cachanosky on Neo-Ricardian Economics [Citation Needed]

This post is about the misrepresentation of Sraffian capital theory in Lewin and Cachanosky (2019). I cannot recommend this short book. Presumably, it is meant as an introduction. But I do not see it as succeeding. I do not see what a more advanced audience would get out of it that is not available in a few recent papers by Lewin and Cachanosky.

Before proceeding to my main theme, let me note that I agree with some parts of this book, mainly where Lewin and Cachanosky draw on Ludwig Lachmann, to parallel themes in Joan Robinson's emphasis on historical time. They state that no physical measurement of capital exists and that capital is not a factor of production, with a demand function. They state, probably as influenced by Jack Birner, that Hayek never set out a coherent and internally valid theory of capital. His triangles are only useful as an expository device. I am also ignoring certain gaps. For example, the text at the bottom of page 30 suggests, incorrectly, that the economic life of a machine would be the same as its physical life in equibrium, where such disequilibrium phenomena as the introduction of new and better vintages and changes in tastes and technology do not arise.

Citations are needed for these passages:

"Lachmann's capital theory provides the definitive understanding of the nature and working of the capital structure for Austrians today. Rather than conceiving of production as involving a homogeneous mass of 'capital' as a stock (as in both the neoclassical and modern Ricardian conceptions), Lachmann sees it as involving an ordered structure of heterogeneous multispecific complementary production goods. This structure is ever changing as entrepreneurs combine and recombine productive resources in accordance with their assessments of profitability." -- Lewin and Cachanoksy, p. 35.

Where do the neo-Ricardians reject the analysis in Sraffa's book?

"The Keynesian revolution established macroeconomics as [a] legitmate sub-branch of economic inquiry focusing on the relationship betwenn aggregates... [The] neoclassical production function is the workhorse of much of modern literature...

"...its ability, using the marginal productivity theory, to explain the distribution of output (income) between capital and labor... During the 1960s and following, the neoclassical production function was the object of attack by the 'Cambridge Marxists' UK (neo-Ricardians) against the 'Cambridge Massachusetts' neoclassicals, on the presumption that it was essential to the validity of the marginal productivity explanation of the distribution of income ... and that demolishing the notion of capital upon which the aggregate production function depended, they would, at the same time, demolish the marginal productivity theory of distribution." -- Lewin and Cachanoksy, p. 46-47.

Where do the neo-Ricardians assert the non-existence of disaggregated, microeconomic neoclassical theory?

"These paradoxes consist of cases in which it is alleged, for example, ... a fall in the interest rate may first lead to the adoption [of] a more 'capital-intensive' productive technique, and then switch, paradoxically, to a less 'capital-intensive' technique, and then switch back again as the interest rate continues to fall. These are alternative techniques, characterized by their physical capital labor ratios. In other words, switches may occur, as well as reswitches and reversals..." -- Lewin and Cachanoksy, p. 68.

Even Joan Robinson's "real capital" is measured for a given interest rate. Techniques of production are characterized by a complete list of inputs and outputs. These inputs can include produced means of production, unproduced natural resources, and various kinds of labor. When deciding on which technique to adopt, managers of firms, in Sraffian and in any other reasonable analysis of a capitalist system, coompare costs and revenues, with inputs and outputs evaluated at prices.

"The neo-Ricardians identify all 'capital' as intermediate goods, such as machines, tools, or raw materials. They are goods-in-process from the original labor that constructed them, to the emergence of the final consumer good. So all capital goods (can be and) are reduced to dated labor. In this way, we get a purely physical measure of 'capital', one that, by construction, does not vary with the interest rate." -- Lewin and Cachanoksy, p. 69, footnote 3.

Where do the neo-Ricardians assert that, in all interesting cases of joint production, all intermediate goods can be expressed as produced by inputs consisting only of a stream of dated labor? Where do they put forth a measure of capital that does not vary with the interest rate?

"Also important, the neo-Ricardians identify the price of capital as the rate-of-interest which they regard as synonymous with the rate of profit. But neither is correct... The market interest rate is, indeed, the price of capital as we understand it. It is the cost of borrowing 'capital' for the employment of any valuable resource or for any other reason. It is the price of credit and is determined by the time prefernces of borrowers and lenders and the production possibilities available. (The neo-Ricardians have no discussion of what determines interest rates.)" -- Lewin and Cachanoksy, p. 72.

Post Keynesians have considered a theory of growth and distribution in which the interest rate is set by the monetary authorities and the rate of profits exceeds the interest rate by a conventional markup. They have considered other theories in which the wage is given by forces outside the theory of value. They have developed theories of inflation in which conventions on both the rate of profits and wages conflict. In the late 1950s and early 1960s, Richard Kahn, Nickolas Kaldor, Luigi Pasinetti, and Joan Robinson pointed out that savings propensities out of wages and profits constrained functional income distribution along a steady state growth path. Kaldor (1966), in this tradition, developed a model in which the interest rate and the rate of profits are distinguished. I provide two textbooks, in the references, that survey this large body of work.

  • Duncan K. Foley, Thomas R. Micl, Daniele Tavani (2019). Growth and Distribution, Second edition. Harvard University Press.
  • Peter Lewin and Nicolas Cachanosky (2019). Austrian Capital Theory. Cambridge University Press.
  • Stephen A. Marglin (1984). Growth, Distribution, and Prices, Harvard University Press.

Saturday, June 08, 2019

On Hicks' Average Period of Production

Figure 1: APP Around Switch Points
1.0 Introduction

I take it that the Austrian theory of the business cycle builds on Austrian capital theory. The following two claims are central to Austrian capital theory:

  • Given technology, profit maximizing firms adopt a more capital-intensive, more roundabout technique at a lower interest rate.
  • The adoption of a more roundabout technique increases output per worker.

Originally, Eugen von Böhm-Bawerk proposed a physical measure of the average period of production, but economists of the Austrian school have been distancing themselves from this position for well over half a century. I have argued that the first claim fails, even in a framework without any scalar measure of capital-intensity or the average period of production.

Recently, Nicholas Cachanosky and Peter Lewin, in a series of articles, have championed J. R. Hicks' measure of the Average Period of Production (APP), as a justification of the first claim. They note that the APP, as defined here, is a function of the interest rate. Hence, it cannot fully support Böhm-Bawerk's theory. Saverio Fratini has argued this justification does not work, since the second claim above fails, when this APP is used as a measure of capital-intensity. Lewin and Cachanosky, in reply, argue that Fratini does not properly calculate the APP, since it should be forward looking and apply in disequilibria.

This post re-iterates Fratini's argument, with his example. I more closely follow Cachanosky and Lewin's approach, though.

2.0 Technology

Fratini considers a technology consisting of two techniques of production, Alpha and Beta (Table 1). Each technique requires three years of unassisted labor inputs, per bushel wheat produced at the end of the third year. Labor is advanced and paid at the end of the year. Labor is taken as numeraire. That is, the wage is assumed to be $1 per person-year. The price of a bushel wheat, p, is taken to be $12 dollars per bushel. As I hope becomes apparent, these assumptions generally characterize a disequilibrium.

Table 1: Inputs for Producing A Bushel Wheat
13a3 = 1 Person-Yr.b3 = 2 Person-Yrs.
22a2 = 7 Person-Yrs.b2 = 2 Person-Yrs.
31a1 = 2 Person-Yrs.b1 = 8 Person-Yrs.

The output per worker, in a stationary state, is determined by the chosen technique. Suppose the Alpha technique is adopted. In any given year, 10 person-years are employed per bushel wheat produced. Two person-years are being expended to produce each bushel of wheat harvested at the end of the year, seven person-years are being employed to produce each bushel of wheat available at the end of the next year, and one person-year is employed per bushel wheat harvested even a year later. That is, output per worker, under the alpha technique, yα, is (1/10) bushels per person-year. Similarly, output per worker for the beta technique, yβ, is (1/12) bushels per person-year.

3.0 Net Present Value and the Choice of Technique

Suppose a wheat-producing firm faces a given annual interest rate, r. For convenience, define:

R = 1 + r

The discount factor, f, is defined to be:

f = 1/R = 1/(1 + r)

Consider a decision to choose a technique to adopt for next three years in producing wheat. Powers of the discount factor are used to evaluate the costs and revenues for each technique at the start of the given year. For example, the NPV of the alpha technique is:

NPV(α, f) = -a3 f - a2 f2 + (p - a1) f3

I have assumed that firms expect the given interest rate to remain unchanged for the decision period - a common convention. Revenues are positive, and costs (or outgoes) are negative.

Figure 2 graphs the difference between the NPV for the two techniques. A positive difference indicates that the alpha technique maximizes the NPV, while a negative difference arises when the beta technique is preferred. Which technique is chosen by cost-minimizing firm for each interest rate is shown. At switch points, firms are indifferent between the two techniques.

Figure 2: Difference in NPVs

Under the assumptions, NPV is always positive. (If the beta technique were adopted at an interest rate of zero, its NPV would be zero then.) If markets were competitive, the price of wheat would vary until the NPV was zero, given the interest rate. Fratini does indeed assume equilibrium and analyzes the choice of technique with backwards-looking calculations of costs, as Lewin and Cachanosky claim. But this makes no difference to his argument, so far.

4.0 The Average Period of Production

One might be interested in how NPV varies with the discount factor. The elasticity of the NPV, with respect to the discount factor, is a dimension-less number for assessing such sensitivity. Somewhat arbitrarily, I discount elasticity one period:

APP(α, f) = f [1/NPV(α, f)] [d NPV(α, f)/df]

Elasticity is the variation of NPV with variation of the discount factor, as a proportion of NPV.

APP(α, f) = [-a3 f/NPV(α, f)] x 1
+ [- a2 f2/NPV(α, f)] x 2
+ [(p - a1) f3/NPV(α, f)] x 3

The APP for a technique, at a given discount factor, is the weighted average of the time indices, looking forward, for a given income stream. The weights are the proportion of the income stream received in each period. All income is discounted to the start of the first year.

So the elasticity of the NPV of an income stream, with respect to the discount factor can also be expressed as the average period of production.

Notice that the APP is not defined in equilibrium. The denominators in the above terms are zero, and the APP could be said to be infinite. If only costs are used in the above calculations (thus, no longer of a NPV), the APP is well-defined, at least in the flow-input, point output case. Fratini (2019) does this.

One could also express the APP as a function of the interest rate:

APP(α, r) = [-a3 R2/NPV(α, r)] x 1
+ [- a2 R/NPV(α, r)] x 2
+ [(p - a1)/NPV(α, r)] x 3


NPV(α, r) = -a3 R2 - a2 R + (p - a1)

I skip over some some algebraic manipulations above.

The above is not the definition of the APP in Fratini (2019), for example, in Equation 7. Where I have time indices of 1, 2, and 3, Fratini has indices of 3, 2, 1. I guess one can say that his definition of the APP is backwards-looking.

Fratini's argument still goes forward with Cachanosky and Lewin's (or Hicks') definition. One could present a mathematical proof that the APP is always increased around a switch point with a fall in the interest rate. But here I'll just graph it for the example. See Figure 1, at the top of this post. Around each switch point a lower interest rate is indeed associated with the adoption of a technique with a larger APP. But consider the switch point at an interest rate of 200 percent. The beta technique, adopted at a notionally lower interest rate, has a lower value of output per head.

4.0 Conclusion

The example illustrates that, around a switch point, a lower interest rate is associated with the adoption of a more roundabout technique, where roundaboutness is measured by Hicks' Average Period of Production. Incidentally, the example demonstrates that in a region where one technique is cost-minimizing the APP may decrease with the interest rate. But the adoption of a more roundabout technique can be associated with a decrease in output per worker. So much for Austrian capital theory and the Austrian theory of the business cycle.

Update (14 June 2019): Re-order numbers in table, as they are used in the calculations. References

Thursday, June 06, 2019

Refutation Of Austrian Business Cycle Theory

Those who understand price theory reject the theory of the Austrian Business Cycle (ABC). I am thinking here that its logical invalidity follows from post-Sraffian capital theory. It is also wrong because of its reliance on the concept of the natural rate of interest.

Some years ago, I tried to get published a demonstration that ABC theory was in error. I forget how many journals rejected it. Four or five articles here are from this series of revisions. The rejections from the journals more sympathetic to Post Keynesians generally said that everybody knows that ABC theory is wrong. The rejections from the journals more sympathetic to the Austrian school said that I ought to read more and more obscure literature. Some of this was helpful for my understanding of the history of ABC theory, but none really addressed my points.

Anyways, my favorite revision is the last. I think this is fairly good, but, as of now, do not intend to resubmit it anywhere. I find that recently some articles on the Cambridge Capital Controversies have been published in the Review of Austrian Economics.


Friday, May 31, 2019

Some Reviews of Quiggin's Economics in Two Lessons

I have been thinking of posting a review of Quiggin's book, but this is not it. I suppose I should mention that I am in the acknowledgements.

Quiggin has a response to a couple of the above. By the way, he had a paper, in 1987, on public choice.

I think any reviewer should note that Quiggin is extremely generous to Hazlitt's Economics in One Lesson. Hazlitt does not mention "opportunity cost". By focusing on this concept, Quiggin makes Hazlitt seem more coherent than he is. I agree with Quiggin that this coherence does not require Hazlitt to think the economy is always in equilibrium. It is consistent with prices providing signals, that, when entrepreneurs act on them, move the economy towards equilibrium. It is not consistent, as Quiggin notes in his book, with the economy persisting for a long time within the production possibility frontier, without any tendency to more towards the frontier.

It is no answer to or review of Quiggin's book to rattle on about Keynesianism or the logically incorrect AustrianBusiness Cycle theory. One has to also address Quiggin's points about externalities, information asymmetries, and the continual redefinition of property rights.

Furthermore, a fair reviewer would note that Quiggin does not recommend a mechanical calculation of, say, taxes and subsidies to correct market failures. Although, I guess, he does not mention "government failure" in his book, his consideration of policies is a lot more nuanced than that.

Furthermore, if one thinks the theory of public choice provides an answer to Quiggin, one should note that Hazlitt does not discuss these matters. Hazlitt was a propagandist and, for decades, should have not been taken seriously.

As far as I know, public choice is an application of neoclassical economics. Gloria-Palermo and Palermo (2005), as I recall this paper, argues that the Hayekian argument about the coordinating function of market prices does not provide a welfare criterion alternative to Pareto efficiency. I think I have such criteria in focusing on conditions for the continued reproduction of society, as opposed to the efficient allocation of given resources. One can also point to the Veblenian dichotomy, between instrumental and ceremonial aspects of institutions, as well as to the pragmatism of John Dewey. If I do review Quiggin's book, I want to point out how it is too accepting of Neoclassicism, as well as where it points beyond.

  • Sandy Gloria-Palermo and Giulio Palermo (2005). Austrian economics and value judgements: A critical comparison with Neoclassical Economics. Review of Political Economy 17(1): 63-78.

Saturday, May 25, 2019

All Combinations of Real Wicksell Effects, Substitution of Labor

Figure 1: A Pattern Diagram

Consider an example of the production of commodities, in which many commodities are produced within capitalist firms. Suppose two techniques are available to produce a given net output. These techniques use the same set of capital goods, albeit in different proportions. They differ in process in use for only one industry. Given the qualification about the same capital goods, generic (non-fluke) switch points are the intersection of the intersection of the wage curves for two techniques that differ in exactly one process.

Suppose that, due to technological progress, some coefficients of production decrease in the process unique to the Alpha technique. Figure 1 shows a possible pattern diagram for this generalization of a previous example. Here, switch points and the maximum rate of profits are plotted against the rate of profits. As time goes by, a reswitching pattern leads to a reswitching example. The switch point created at the larger rate of profits exhibits, after t = 1/2, a negative real Wicksell effect and a reverse substitution of labor. A pattern over the axis for the rate of profits then results in the existence of another switch point at an even higher rate of profits. Technological progress can bring about, in a single example, the combination of both non-zero directions of real Wicksell effects with both non-zero directions of the substitution of labor.

The regions in Figure 1 in which reswitching occurs also illustrate process recurrence. Process recurrence is more general, inasmuch as it can arise even without reswitching.

Since all four possible combinations, of nonzero-real Wicksell effects and the substitution of labor, are possible, the direction of real Wicksell effects and the direction of the substitution of labor are independent of one another. The choice of technique results in variation in gross outputs in multiple industries, for given net outputs. (The question of returns to scale is of interest in this context.) These variations in gross outputs also result in variation in the amount of labor firms want to employ. Around a switch point with a positive real Wicksell effect, firms want to employ more labor, per unit of net output, in the aggregate across all industries. A necessary consequence is that they want to employ more labor in at least one industry. This variation in aggregate employment is consistent with any direction in the variation in the labor coefficient of production in the industry with the varying process.

Friday, May 24, 2019

Alfred Eichner's Microfoundations, Or An Open Letter To Marco Rubio

The Growing Importance of Finance in the Post-War U.S. Economy

As I understand it, Marco Rubio takes from Post Keynesians the idea that, during the post-war golden age, investment decisions were dominated by industrial firms. But now, they are dominated by financial corporations. This change has been accompanied by deleterious effects on economic growth, stagnant wages, and an upward shift in the distribution of income and wealth. The increasing importance of finance in the economy in the United States, at least, is illustrated by the above graph. The impact of the global financial crisis is immediately apparent in 2008.

The distinction between having investment directed by finance or by industry might not make any sense to you if you think of every investment as like purchasing a bond. In this sort of way of looking at things, every investment can be evaluated by a Return On Investment, taking suitable account of risk, the payback period, and so on. It does not matter if one is talking about a college degree; research and development in, say, clean energy; a painting by Monet; or a stock option. To the financier, it is all one.

I take some of the most notable work of Alfred Eichner (1937-1988) as a description of the previous era. Eichner learned a lot about how corporations set prices by looking at the results of Senate Committee on the Judiciary, Subcommittee on Antitrust and Monopoly, as chaired by Estes Kefauver. Various corporate executives from the steel industry testified. Rubio, as I understand it, could similarly investigate how American businesses operate now.

Eichner theorized megacorporations. These are corporations that operate multiple plants and produce multiple products and that try to maintain market power. Eichner took aboard the idea, as developed by Gardiner Means and Adolfe Berle (1932), that ownership and control are separate in the modern corporation. In a sense recently explained by Dan Davies, Eichner's approach is microfounded. His theory is consistent with recognizing the principal agent problems that come about when a corporate board is somewhat independent of stock owners, when corporate executives are another group of personnel, and so one. According to Eichner, managers in the megacorp are interested in pursuing a satisfactory rate of growth, not in maximizing economic profits.

Eichner recognizes that corporations set prices as a markup on costs. He builds on the survey findings of R. L. Hall and C. J. Hitch. Eichner's ideas relate to theories of administered or full cost pricing. I guess they are consistent with Robin Marris's managerial theory of the firm.

Markups vary among industries and within an industry over time. How is the markup set? According to Eichner, the markup, at least for industry leaders in price-setting, are put at the level needed to finance investment for planned growth targets. Eichner draws an analogy to a tax, in the Soviet Union, on turnover. This tax was used to finance planned investment.

Eichner had some correspondence with Joan Robinson. He saw his theory of the megacorp as compatible with Post Keynesian theories of growth.

I explicitly do not claim that this theory is descriptive of how investment is determined nowadays in the United States. But I find lots of interesting ideas here.

  • Alfred S. Eichner. 1973. A Theory of the Determination of the Mark-up Under Oligopoly pp. 1184-1200.
  • William Milberg (ed.) 1992. The Megacorp & Macrodynamics: Essays in memory of Alfred Eichner M. E. Sharpe.

Saturday, May 18, 2019


Thursday, May 16, 2019

How To Defend Capitalism?

1.0 Summary of Defense

Last month, Mike Munger purports to "summarize the basic argument for capitalism" (emphasis added). He acknowledges his argument is superficial. I find it excessively so. Munger argues that capitalism:

  • Supports the division of labor
  • Provides price signals so as to direct production appropriately
  • Promotes economies to scale

Ultimately, this defense is that capitalism delivers the goods. Here's a well-expressed, simple defense that, partially, argues along these lines:

It is possible to defend our economic system on the ground that, patched up with Keynesian correctives, it is, as he put it, the 'best in sight'. Or at any rate that it is not too bad, and change is painful. In short, that our system is the best system that we have got.

Or it is possible to take the tough-minded line that Schumpeter derived from Marx. The system is cruel, unjust, turbulent, but it does deliver the goods, and, damn it all, it's the goods that you want.

Or, conceding its defects, to defend it on political grounds - that democracy as we know it could not have grown up under any other system and cannot survive without it.

What is not possible, at this time of day, is to defend it, in the neoclassical style, as a delicate self-regulating mechanism, that has only to be left to itself to produce the greatest satisfaction for all.

But none of the alternative defences really sound very well. Nowadays, to support the status quo, the best course is just to leave all these awkward problems alone." -- Joan Robinson (1962). Economic Philosophy, p. 130

2.0 Division of Labor and Efficiencies of Scale

I am not sure that Munger has three principles. I think of the division of labor and efficiencies of scale as closely related. But are either specific to capitalism, as opposed to any society with large scale production? In some sense, Munger is not necessarily attacking a strawperson. Here's an expression of a wish for a post-capitalist society that is arguably not consistent with large-scale production:

" communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic." -- Karl Marx, The German Ideology.

But, maybe with enough automation, such a society would be possible.

I find it of interest that Marx, in The Communist Manifesto and in Capital describes how capitalism brought about a remarkable increase in productivity. I find Marx, on the division of labor, much more concrete and extensive than Adam Smith, even though he is writing about the abstraction of capital in general. How much has been written about what Marx took from Charles Babbage's On the Economy of Machinery and Manufactures? This book has a lot to say about what would now be called Command, Control, Communications, and Intelligence (C3I)?

Anyways, questions arise when a defense of capitalism echoes capitalism's greatest critic.

3.0 Price Signals Consistent with Market Socialism

Munger's second principle, about price signals, draws, I assume, on Friedrich Hayek. I do not see how this is a defense of capitalism, as opposed to markets. Whatever you think of it, a large literature on market socialism exists. Private ownership of capitalist enterprises is not necessary for the existence of price signals. I suppose one could argue about incentives in this context, which I do not think Munger does.

4.0 Other Arguments

I think interesting that Munger does not say anything about the efficient static allocation of resources or the first and second welfare theorems. In some sense, he is correct to put these ideas aside, since a good apologetic argument for capitalism cannot be fashioned in these terms.

On the other hand, Munger avoids all of the issues that John Quiggin brings up in his recent Economics in Two Lessons. Issues with unregulated capitalism include externalities, the assignment and distribution of property rights, and periodic bouts of widespread unemployment. (I find unpersuasive talk of "government failure" as a response to the demonstration that unregulated capitalism is bound to misallocate resources. Is a claim being made that anybody can calculate a closed-form optimal allocation at any point in time?)

5.0 What is Capitalism?

I suspect that Munger supports a fairly hierarchical version of capitalism, with widespread private, brutal, and authoritarian institutions (for example, corporations). Inspired by Chapter 9, "Security and Freedom", of Hayek's The Road to Serfdom, I would ask what is compatible with Munger's apologetics for capitalism? Widespread co-operative, syndicates, and and factory councils? Co-determination, in which union representatives are on corpation boards? Sovereign Wealth Funds, Employee Stock Ownership Plans, Universal basic income, government insurance, and social security?

So Munger's three principles do not seem to rule out either an extensive social democracy or even democratic socialism.

Tuesday, May 07, 2019

Positive Real Wicksell Effect, Forward Substitution Of Labor

Figure 1: Wage-Rate of Profits Curves

Consider a comparison of stationary states. Net output is taken as given, and a unit of net output is the numeraire. Technology consists of a finite set of techniques. In each technique, net output is produced from inputs of labor and produced circulating capital goods. No fixed capital is used, and land of the best quality is in such abundance that it is free. Also assume constant returns to scale.

One can find a wage-rate of profits curve for each technique. The cost-minimizing technique at is the technique its wage curve on the outer envelope, also known as the wage-rate of profits frontier, at that wage. Switch points are points at which two or more wage curves intersect (on the frontier). Suppose the same gross vector commodities are produced, albeit in different proportions, at a switch point. Generically, the techniques differ in the process in use for one industry. The same processes are in use in all other industries. (I have argued that fluke switch points in which wage curves for more than two techniques intersect at a single switch point are of importance for understanding how qualitative changes in the properties of the wage frontier can come about from, for example, technological progress.)

A generic switch point can exhibit positive or negative real Wicksell effects. And it can exhibit a forward or reverse substitution of labor.

Around a switch point with a positive real Wicksell effect, a higher wage is associated with firms wanting to employ more labor throughout the economy, per unit of net output.

Around a switch point with a reverse substitution of labor, a higher wage is associated with firms, in the industry in which the process of production varies, wanting to employ more labor per unit of gross output.

I have previously given a numerical example that illustrates switch points with:

  • A positive real Wicksell effect and a reverse substitution of labor.
  • A negative real Wicksell effect and a reverse substitution of labor.
  • A negative real Wicksell effect and a forward substitution of labor.

Figure 1 illustrates a switch point can have a positive real Wicksell effect and a forward substitution of labor. Suppose that the wage curves for two techniques have three intersections. One intersection is between a rate of profits of negative one hundred percent and zero. The other intersections are at two feasible poisitive rates of profits. Then the switch point at the largest positive rate of profits has a positive real Wicksell effect and a forward substitution of labor. (I have not actually specified a technology, with three or more produced commodities, that generates wage curves like those illustrated.)

Since all four possible combinations are possible, the direction of real Wicksell effects and the substitution of labor are independent of of one another. The choice of technique results in variation in gross outputs in multiple industries, for given net outputs. These variations also result in variation in the amount of labor firms want to employ. This variation in aggregate employment is consistent with any direction in the variation in the labor coefficient of production in the industry with the varying process.

If somebody explains wages and employment by supply and demand for labor, they are making a political point. This holds even if they argue that a supply and demand explanation provides a baseline. They may be demonstrating that economists continue to adopt a price theory that has been known for decades to be incoherent nonsense.

Friday, April 19, 2019

Some Experts On The Cambridge Capital Controversy

Many years ago, I used to argue, on Usenet, about the Cambridge Capital Controversy. Many mainstream economists used to ignorantly assert, when pretending to respond, that an application of the CCC to labor economics was my idea alone. So I used to demonstrate that this was false by quoting from the literature. As far as I can see, mainstream economists are still mostly trained into ignorance.

P. Garegnani:

"The idea that demand and supply for factors of production determine distribution has become so deeply ingrained in economic thought that it is almost viewed as an immediate reflection of facts, and not as the result of an elaborate theory. For the same reason, it is easily forgotten how comparatively recent that theory is. In the first systematic analysis of value and distribution by the English classical economists up to Ricardo, we would look in vain for the conception that demand and supply for labour and 'capital' achieve 'equilibrium' as the proportions in which those 'factors' are employed in the economy change with the wage and rate of profits. Thus, Ricardo saw no inconsistency between free competition and unemployment of labour. In his view lower wages could eliminate unemployment only by decreasing the growth of population or by favouring accumulation...

...Outputs can influence relative prices ... by affecting the relative scarcity of labour and capital, and thus the wage and rate of interest, given the supply of the two factors and the state of technical knowledge. This link between prices and outputs is one and the same thing as the explanation of distribution by demand and supply of factors of production: and it becomes untenable once that explanation is abandoned.

Thus, the separation of the pure theory of value from the study of the circumstances governing changes in the outputs of commodities, does not seem to meet any essential difficulty. On the contrary, it may open the way for a more satisfactory treatment of the relations between outputs and the technical conditions of production. Moreover, by freeing the theory of value from the assumption of consumers' tastes given from outside the economic system, this separation may favour a better understanding of consumption, and its dependence on the rest of the system.

With this, the theory of value will lose the all-embracing quality it assumed with the marginal method. But what will be lost in scope will certainly be gained in consistency and, we may hope, in fruitfulness." -- P. Garegnani, RES, 1970.

Harvey Gram:

"The intractable problems created by the effort to extend into the unobservable future the terrain over which the forces of supply and demand hold sway are somehow set aside as questions that will ultimately yield to a more sophisticated analysis. Meanwhile, the existence of an alternative framework of thought based on a revival of classical theory is denied. Certainly the critics of neoclassical theory committed a great heresy during the capital theory debate by proving false the analytical basis for the principle of substitution in so far as it affects the demand for capital and labour. Those who would defend neoclassical theory against any attack on its logical structure fail to see the significance of this result. This is because they have given up any causal claims for general equilibrium theory..., thus abandoning the traditional notion of equilibrium as a centre of gravity relative to which prices and quantities fluctuate. The revival of interest in classical theory is, in part, a revival of interest in this old-fashioned idea. It is also a revival of interest in a broadly based theory that does not presume to find the essence of all market phenomena in terms of the single principle of substitution." -- Harvey Gram, 1990.

Heinz Kurz and Neri Salvadori

"However, as was argued in Section 3 with regard to 'perversely' shaped, that is, upward sloping, factor-demand functions, this possibility would question the validity of the entire economic analysis in terms of demand and supply." -- H. D. Kurz and N. Salvadori, Theory of Production: A Long Period Analysis, Cambridge University Press, 1995.

Heinrich Bortis:

"...Specifically, it must be shown that under ideal conditions, i.e. perfect competition and absence of disturbing elements like uncertainty and money, one or more markets do not function properly so that, even in the long run, no tendency towards full employment exists: the problem is not about possible market failures, but about principles.

This task has been accomplished by the capital-theory debate, the main economic implications of which are set out in Garegnani (1970), Kurz (1985) and Pasinetti (1974, pp. 132-42; 1977, pp. 169-77); a comprehensive and easily understandable presentation of the crucial issues is Harcourt (1972).

...As a consequence, no regular (downward-sloping) associations between profit rates, on the one hand, and capital and output per worker and the capital-output ratio, on the other hand, exist. These relationships are, in fact, totally irregular. Since the 'capital market' does not function in the neoclassical sense and since factor markets are supposed to be interrelated, regular long-period relationships between 'factor prices' and 'factor quantities' cannot exist in general, i.e. there are no 'factor markets' at all if the long run is considered. This is the main result of the capital-theory debate...

...The fact that there are no regular relationships between 'factor prices' and 'factor quantities' is extremely damaging for equilibrium theory: the market cannot produce a tendency towards some postulated long-period equilibrium to solve the central economic problems, i.e. value, distribution and employment....

...These references to the history of the capital-theoretic discussion show that it is a discussion about fundamentals. The basic question is whether there are regular relationships between 'factor prices' and 'factor quantities' or not, i.e. normally functioning factor markets. Examining this question seriously will inevitably shape an economist's vision in a decisive way. The capital-theoretic debate is a theoretic watershed dividing two different views of looking at socioeconomic phenomena, i.e. neoclassical equilibrium theory which emphasizes behavior and classical-Keynesian political economy which starts from the functioning of the socioeconomic system, the question being which approach is more appropriate to tackle fundamental socioeconomic problems, such as value, distribution and employment. Therefore, as Geoffrey Harcourt was one of the first to perceive, the Cambridge controversies are 'not merely about the measurement of capital...but about the scientific status of neoclassical (equilibrium) theory' (Dixon 1988, pp. 251-2)...." -- Heinrich Bortis, Institutions, Behavior and Economic Theory: A Contribution to Classical-Keynesian Political Economy, Cambridge University Press, 1997.

Syed Ahmad:

"The issue was settled in favour of Cambridge University when Samuelson wrote (1976) that wherever 'informed economic theory is taught', the 'paradoxes' are accepted, and their consequences for the concept of capital known. It is another matter that, on the basis of this criterion, many seats of learning in North America, as perhaps also elsewhere, do not teach informed economic theory." -- Syed Ahmad (1998)

Edward Nell:

"After Sraffa's book in 1960 the next decades saw major battles in the journals, battles which resulted in conclusions widely held today: to wit, the technical errors are conceded, but their significance is contested. This has a practical meaning: open any major journal at random today, and there will be marginal products... - with no hint that any technical error is involved. The critique is simply ignored. It can't be answered, but it is held to be unimportant." -- Edward Nell (1998)

Ian Steedman:

"Both classical and marginalist economists provided accounts of the long-period (uniform rate of profit) theory of value and distribution, but whereas a classical economist could take the real wage as a datum for the purpose of such analysis (whatever the implicit 'background' theory of wages might be), the marginalist economist had to 'close the system' in some other manner. In effect, since 'resource supplies' were often taken as given, this meant that 'the supply of capital' had to be taken as given, in one way or another. Just how the given supply of capital was to be represented was an issue that led to considerable heterogenity amongst even those marginalist economists who shared the long-period method of analysis with the classical economists and with each other. That heterogenity cannot be entered into here (see Kurz and Salvadori, 1995: 427-43) but it is now widely recognized that each version of such traditional long-period marginalist theory of value and distribution encountered insoluble problems (ibid.: 443-48)." -- Ian Steedman (1998)

Michael Mandler:

"But, as economic theory has learned since the 1930s, the pattern of activities adopted in the face of long-run factor-price changes can be complicated and counterintuitive. Consequently, the long-run demand for factors can be badly behaved functions of factor prices... The principle of variation works as an argument for long-run determinancy insofar as the set of zero-profit activities shift in response to factor price changes; it is not necessary that newly adopted activities use cheaper factors more intensively..." -- Michael Mandler (1999)

Luigi L. Pasinetti:

"But something even more interesting and intriguing has happened. After only a few years, even the admissions initially made no longer found any mention... The typical economics student entering university from the 1980s onwards has heard nothing of the re-switching difficulties involved in the neoclassical theory of capital and income distribution." -- Luigi L. Pasinetti (200?).

James Galbraith:

"The critique of Robinson and Sraffa is more than forty years old. Yet for psychological and political reasons, rather than for logical and mathematical ones, the capital critique has not penetrated mainstream economics. It likely never will. Today only a handful of economists seem aware of it... Ostensible liberals are not exempt; their arguments for higher public infrastructure investment (based on its alleged marginal productivity) are precisely of this type, as are arguments for increased investment in education based on the higher marginal productivity of human skill." -- James Galbraith (2001).

Steve Keen:

"Of course, the average economist would never tell you that economic theory has suffered such a devasting blow. This is because the average YOUNG economist doesn't even know that this intellectual bout took place - the concepts in this debate don't make it onto the curriculum for either undergraduate or postgraduate students. Older economists cannot avoid some knowledge of the war, but they erroneously believe that their camp won, or they dismiss the issue completely.

Today economic theory continues to use exactly the same concepts which Sraffa's critique showed to be completely invalid...

There is no better sign of the intellectual bankruptcy of economics than this." -- Steve Keen (2001)

Neri Salvadori:

"Reswitching debate is relevant for...theories which determine income distribution on the basis of demand and supply of all factors including labour and 'capital'."

Fabio Petri:

"The arguments necessary to surmount these confusions started becoming available in English only with Garegnani (1976), which was quickly followed by a number of other papers and books among which Petri (1978, 1991, 1998, 1999), Garegnani (1978-9, 1989, 1990, 2000), Eatwell (1979, 1982), Milgate (1979, 1982), Eatwell and Milgate (1983), Schefold (1985, 1997), Kurz (1987). This wave of contributions finally started clarifying the difference between long-period and neo-Walrasian versions of the marginalist/neoclassical approach, as well as the different roles of the conception of capital as a single factor, roles some of which were argued to be present even in the neo-Walrasian versions... The neoclassical reaction was striking: no reply at all. Some of the neoclassical assessments of the Cambridge controversies (e.g. Blaug, 1974; Stiglitz, 1974; Bliss, 1975b) antedate the writings of this second critical wave, but other ones do not (e.g. Dougherty, 1980; Burmeister, 1980, 1991; Hahn, 1982) and yet contain no reference to any of the post-1975 critical writings just mentioned. One possible interpretation ... is that no reply came forth because a satisfactory reply was not easy to find. Be that as it may, the fact is that up to now (end 2002) none of the post-1975 critical writings just remembered is mentioned in any of the writings of Hahn or Solow or F. M. Fisher or Burmeister even when they return on the themes of the Cambridge controversy. No wonder that considerable misunderstandings persist, which is what prompted me to write the present essay." -- Fabio Petri

Thursday, April 11, 2019

Gramsci Should Be Difficult To Understand

Fact: If you use the word "carceral" instead of "prison" your argument immediately becomes more persuasive.

Good praxis is to use words like "praxis" that nobody understands. -- Matthew Yglesias (5 April 2019, on Twitter)

A large academic literature exists around Antonio Gramsci's Prison Notebooks. Topics discussed include the relationship of civil society to the state, hegemony, the contrast between consent and coercion, class alliances in political parties, Fordism, the contrast between a "war of position" and a "war of movement", the contrast between organic intellectuals and traditional intellectuals, and the concept of a passive revolution.

When writing his notebooks, Gramsci had to be concerned with Fascists guards reading them and tearing them up in displeasure. Thus, he wrote in a kind of code. The communist party becomes the "modern prince". Machiavelli wrote to advise the ruler of Florence how to obtain rule over Italy; Gramsci was thinking about how communists could rule with the consent of the governed. Marxism or Marxist-Leninism becomes "the philosophy of praxis." As I understand it, praxis is practice informed by theory or theory embodied in practice, in some sense. Gramsci is referring to the last of Marx's Theses on Feuerbach:

The philosophers have only interpreted the world, in various ways; the point is to change it. -- Karl Marx

As you can see, these code words are not a mechanical substitution. To understand Gramsci, one would want to think about these choices.

Gramsci never thought of his notebooks as complete. You can find him often writing about what a study on some topic should contain. I saw this in the selection titled, "The Modern Prince", for example. Gramsci could order books. Piero Sraffa provided an unlimited account at some bookstore. Nevertheless, he hoped to complete his work, which was to be "for forever", sometime in the future. Given the circumstances of their writing, the Notebooks were not required to be internally consistent.

Despite the abstractions used by Gramsci, his writing is often quite concrete. But to appreciate it, one would need to know about Italian intellectuals before he entered prison. Myself, I am no expert on Amadeo Bordiga, Benedetto Croce, Giovanni Gentile, Antonio Labriola, or Achille Loria. Nor can I easily check claims about arguments on how to standardize Italian, whether focused on the dialect in Florence or also allowing for influence of other dialects. I suppose to understand Gramsci, one should also know about Giuseppe Garibaldi, Sardina and the southern question, and lots more about Italian history.

For me, there is a language issue. I rely on Quentin Hoare and Geoffrey Nowell Smith's Selections from the Prison Notebooks, not Joseph Buttigieg's comprehensive translation. The literature on Gramsci also contains attempts to translate his concepts to times and places, other than the Italy of Gramsci's day.

Friday, April 05, 2019

The FAA Process For Certifying Flightworthy Software

1.0 Introduction

This post is on current events. The plane crashes of the Boeing 737 Max 8 airplane is arguably about more than a software bug. I point out in this post that you can read about how the United States' Federal Aviation Administration (FAA) is supposed to certify software and electronic hardware in airplanes yourself. In some sense, this post is not about software bugs, but rather about software engineering certification processes that fit into a larger systems engineering perspective.

2.0 FAA Resources

The FAA provides lots of resources associated with DO-278C, Software Considerations in Airborne Systems and Equipment Certification, the primary document of interest in this context.

  • You can find an overview of the FAA Airplane Certification Service here.
  • Position papers from the Certification Authorities Software Team (CAST) are available here.
  • I was particularly interested in some of these Research Reports.
3.0 Conclusion of Recent FAA Research on Software Reliability Models

For historical reasons, I am interested in software reliability models. These models address an important problem. One could mandate that software be developed by rigourous processes, by some defined model or another. And one could require that developers produce certification arguments along with delivered software. But how does the variability of rigor relate to quantitative measures of software reliability and availability, as needed for system reliability? A recent report looks at software reliability and, as I understand, concludes the technology is not mature enough yet:

"the current position is that methods for estimating probabilities of software errors have not yet provided a level of confidence acceptable for software assurance purposes. Since the publication of the report and DO-178C document, work on software reliability has improved the level of confidence. However, the multiplicity of available models and absence of quantified performance objectives contribute to the confidence issue remaining open and added the issue of guidelines on selecting an adequate reliability method." Final Report for Software Service History and Airborne Electronic Hardware Service Experience in Airborne Systems (DOT/FAA/TC-16/18, Section 7.5.4, p. 102)

I don't know that I disagree with this conclusion. One important issue is not mentioned in that summary statement. If enough catastrophic or hazardous failures exist for estimating model parameters, the software is unlikely to ever meet reliability goals. One might apply the models to less severe failures, though. I do not think the range of models is quite as diverse as suggested. For example, the Goel-Okumoto model is a continuous version of the Jelinski-Moranda model. But no sign exists of settling down on a single model. I think there are a number of quantified performance objectives for these models: the LaPlace test for a decreasing failure rate, measures of the stability of parameter estimates, and Bev Littlewood's U and S tests of goodness of fit. Of course, one would have to agree to adopt some convention for confidence intervals or some such.

4.0 Further Thoughts

It is my impression that the FAA takes certification very seriously. Cost pressures and the evolution of technology lead to developers continually wanting to introduce new technology. And FAA-sponsored research has looked at the desirability of such introductions. For example, does the possibility of model checking make formal verification more practical? How should code coverage metrics be applied in testing object-oriented software? How should software developed with Model-Based Design be certified? Do MBD tools need to be certified and accredited, perhaps as installed on specific platforms? Should both the inputs and generated software be assessed?

Some of these considerations and developments in software technology are not all that new. The FAA should be conservative in what they will allow. For example, I like Java, but do not think it should be used for mission-critical software, with hard real-time and performance requirements. It might be used on an airplane for delivering consumer services, like music and movies to passengers, but in isolation from flight software.

At any rate, certification and accreditation by the FAA requires insight into engineering processes and cooperation with certification teams within developer organizations and their subcontractors. Even in an ideal world, decisions about who does what must be made here. Software technology is an important driver here, orthogonal to the need to align incentives.

But it does not matter how thoroughly certification and accreditation are defined if the FAA does not have the resources to provide oversight. And certification authorities must be willing to refuse to allow a plane to fly, with both commercial and government entities accepting such a decision. This is not a responsibility that I would want to have.

Saturday, March 23, 2019


  • Arindrajit Dube writes an obituary for Alan Krueger, in Slate.
  • Maria Cristina Marcuzzo, at INET, highlights Krishna Bharadwaj's contributions to economics.
  • Longtime commentator Emil Bakkum's web page, collecting a variety of resources, is here.
  • An advocate of Modern Monetary Theory, Brian Romanchuk is apparently writing a book about models supposedly of Dynamic Stochastic General Equilibrium. Some recent posts include:
    • Questions about time scales in DSGE models. Anticipations have a time scale and so does calendar time as it passes.
    • A tutorial introduction to the limitations of linear models of business cycles. Basically, they either explode or decay, with possibly sinusoidal variation. Persistent cycles can only exist because of driving noise.
    • A long summary of problems with DSGE. Some of Romanchuk's objections, like that DSGE models are not put forth with standard mathematics, I find it hard to credit. On the other hand, I find it difficult to make sense of them too. (Romanchuk should probably read Athreya's book.)

Friday, March 15, 2019

Arguing Against "Libertarianism"

1.0 Introduction

By "libertarianism", I mean propertarianism, a right-wing doctrine. In this post, I want to outline some ways of arguing against this set of ideas. (On this topic, Mike Huben has much more extensive resources than I can allude to.)

2.0 On Individual Details

I like to use certain policy ideas as a springboard for arguments that they have no coherent justification in economic theory. Unsurprisingly, the outdated nonsense market fundamentalists push does not have empirical support either. I provide some bits and pieces here.

Consider the reduction or elimination of minimum wages. More generally, consider advocacy of labor market flexibility. I like to provide numerical examples in which firms, given a level and composition of net output, want to employ more workers at higher wages. Lots of empirical work suggests wages and employment are not and cannot be determined by supply and demand.

Lately, I have been developing examples of international trade. (I think these examples need work when produced means of production can be traded.) In these numerical examples, the firms in each country specialize as in the theory of comparative advantage. That is, they produce those commodities that are relatively cheaper to produce domestically. I explicitly show processes for producing capital goods and assume that capitalists obtain accounting profits. Numeric examples demonstrate that a country can be worse off with trade than under autarky. Their production possibilities frontier (PPF) is moved inward. So much for the usual opposition to tariffs.

Some like to talk about the marginal productivity theory of distribution. But no such valid entity exists. I suppose one could read empirical data on the distribution of income and wealth and mobility as support for this, although others might talk about monopsony and market power.

No natural rate of interest exists. So some sort of market rate would not be an attractor, if it wasn't for the meddling of Jerome Powell and the Federal Reserve. As I understand it, this conclusion also has empirical support.

A whole host of examples arises in modeling preferences. I do not think I have previously mentioned, for example, Sen's demonstration of The Impossibility of a Paretian Liberal.

One can point out sources of market failure from a mainstream perspective. I think of issues arising from externalities, information asymmetries, principal agent problems, and so on. As I understand it, John Quiggin is popularizing such arguments in his upcoming Economics in Two Lessons.

3.0 Arguments From Legitimate Authority

I like to cite literature propertarians claim as their own. One set of arguments is of their experts advocating policies on the other side. For example, in The Road to Serfdom, Hayek advocates a basic income and social security. He says his disagreement with Keynes is a technical argument about whether fiscal or monetary policy can stabilize the economy and prevent business cycles, not a matter of the fundamental principles he is arguing about in the book. Adam Smith argues for workers and against businessmen, projectors, and speculators. He doesn't expect rational behavior, as economists define such. Among scholars, those building on Marx could with more right wear Smith ties than Chicago-school economists.

A second set of arguments from authority provide a reductio ad absurdum. One points out that propertarian authorities seem to end up praising authoritarians and fascists or adopting racists as allies. I think of Von Mises praising Mussolini, Friedman's advice to Pinochet, and Hayek's support for the same. The entanglement between propertarianism and racists in the USA has been self-evident at least since Barry Goldwater's run for president. I might also mention Ron Paul's newsletters.

4.0 Hermeneutics of Suspicion

Instead of arguing about the validity of certain supposed propositions, one might argue about why some come to hold them. Why do so many argue against their concrete material interests and for the whims of malefactors of great wealth? In social psychology, one can point to research on the need for system justification and on the just world fallacy. Marxists can draw on Lukács' analysis of reification or Gramsci's understanding of civil society and hegemony.

I also like how doubt is cast on the doctrines just by noting their arguments are easily classified as falling into a couple of categories. Propertarians can be seen as hopping back and forth from, on one foot, justifying their ideas on consequential, utilitarian, or efficiency grounds to, on the other foot, justifying it based on supposed deductions from first principles. So when you attack one argument, they can revert to the other, without ever admitting defeat. (Am I stealing from John Holbo here? From Cosma Shalizi?)

Albert Hirschman classified arguments into three categories: perversity, futility, and jeopardy. One could always say, "I agree with your noble goals", but:

  • Your implementation will lead to the opposite.
  • What you are attempting is to change something that is so fundamental (e.g., human nature) that it cannot succeed.
  • Your attempt risks losing something else we value (e.g., self-reliance, innovation, liberty etc.)

If the arguments are always so simply classified, they cannot be about empirical reality, one might think.

5.0 Conclusion

None of the above addresses issues of political philosophy that propertarians may think central to their views. I do not talk about what roles of the state are legitimate, the source of authority in law, the false dichotomy of state versus markets, negative liberties and positive liberties, or the exertion of private power by means of the ownership of property. In short, this approach is probably irritating to propertarians. I'm good with that.

Thursday, March 07, 2019

Should Liberals Want A Coalition With Conservatives Or Labor?

This is current events, but this post is about current events in Britain in 1920. Lenin comments on reports of a dispute between Lloyd George and H. H. Asquith, both leaders of the Liberal party:

[In] the speech delivered by Prime Minister Lloyd George on March 18, 1920... Lloyd George entered into a polemic with Asquith (who had been especially invited to this meeting but declined to attend) and with those Liberals who want, not a coalition with the Conservatives, but closer relations with the Labour Party. (In the above-quoted letter, Comrade Gallacher also points to the fact that Liberals are joining the Independent Labour Party.) Lloyd George argued that a coalition — and a close coalition at that — between the Liberals and the Conservatives was essential, otherwise there might be a victory for the Labour Party, which Lloyd George prefers to call "Socialist" and which is working for the "common ownership" of the means of production. "It is . . . known as communism in France," the leader of the British bourgeoisie said, putting it popularly for his audience, Liberal M.P.s who probably never knew it before. In Germany it was called socialism, and in Russia it is called Bolshevism, he went on to say. To Liberals this is unacceptable on principle, Lloyd George explained, because they stand in principle for private property. "Civilisation is in jeopardy," the speaker declared, and consequently Liberals and Conservatives must unite. . . . -- Lenin (1920).

We see here centrists justifying an alliance with the right by calling those to their left "socialists" and "communists". Lenin, of course, was to the left of the British Labour party and did not consider them communists or Bolsheviks. Rather, he grouped their leaders with those like Karl Kautsky, who could not be counted on to stand up for the workers when World War II started. Or maybe Lenin considered the British soft left as worse, for Kautsky, according to Lenin, had previous achievements, including in theoretical works.

The context of this argument was Lenin arguing with those to his left. I think he is talking about anarchists and anarcho-syndicalists. He was criticizing them for arguing that, as a matter of principle, communists should not participate in such compromised institutions as parliaments and labor unions. Lenin asserts that this rules out the tactical flexibility the Bolsheviks exhibited in Russia through the 1905, February 1917, and October 1917 revolutions and so on. Lenin thinks British communists should support Labour, although he does say this support should be like the noose supports the hanged man. He continues the Marxist view that anarchism is a petty bourgeois tendency.

Lenin always wanted to agitate everywhere and on everything, including in labor unions, in parliaments, on economic questions, on land redistribution, on non-economic issues. The working class, according to him, need an external vanguard to elevate their consciousness from just trying to get more under capitalism, instead of throwing over capitalism. This approach worked for Lenin. But perhaps his attempt to generalize from Russia to Western Europe exhibited the need for the development of Antonio Gramsci's ideas.


Saturday, March 02, 2019

Scholars on Neoliberalism

The literature on neoliberalism is large. Here are some scholarly books on this subject or on related matters:

I think this literature has some common themes:

  • Neoliberalism was always a global project. (Is there a whole literature on Latin America I am missing?)
  • Markets are not natural, but a society organized around such must be created by a system of laws, along with instilling a "common sense" in the population so governed.
  • Neoliberalism must be accompanied by control on or limitations of democracy.
  • The development of neoliberalism was funded by extremely wealthy individuals around the world, who sought to prevent their project from receiving public scrutiny.
  • Those academics funded to develop apologetics and guidance were always interdisciplinary, including those specializing in law and international relations, as well as in economics.

The literature also contains disagreements, including what institutions, groups, and individuals to emphasize in telling the story of the project of imposing neoliberalism on the world.

Tuesday, February 26, 2019

"The Microeconomic Foundations of Aggregate Production Functions"

Figure 1: A Production Network

I here comment on Baqaee and Farhi (2018). I am still trying to absorb it. I suppose that it is nice that an economist at Harvard is revisiting the Cambridge Capital Controversy (CCC). (Where is Michael Mandler these days?)

My major criticism is they do not do what their title claims. That is, their supposed microeconomic foundations are still up in the air.

In many CCC examples, technology is specified in terms of fixed-coefficient production processes. Sometimes, more than one process is available for producing a specified commodity. This structure gives rise to a choice of technique. If one wanted, one could formulate a programming problem, in each sector, whose solution is a production function for that sector. This production function would not be differentiable everywhere.

Baqaee and Farhi, on the other hand, assume the existence of continuously-differentiable microeconomic production functions in each sector. In this paper, these production functions are specifically Constant Elasticity of Scale (CES) production functions. (As should be the case, their inputs and outputs are specified in physical units, not in price terms.)

I am willing to be convinced that this difference in starting points is a technical matter. Or that Baqaee and Farhi are making some progress towards a more complete framework that will include models of the production of commodities by means of commodities. I have some challenges, however.

There is a theorem whose status I am not sure of. It states that, given a continuously differentiable production function for a commodity that is basic, in the sense of Sraffa, for all techniques, reswitching is not possible. (Stephen Marglin was not the first to offer a proof of this theorem.) Thus, Baqaee and Farhi rule out, by assumption, many (most?) of the reswitching examples and much of the structure in the literature on the CCC. As they note, their assumptions do include an example from Paul Samuelson, in his 1966 "Summing Up" article. That example, had a flow-input, point-output structure, with no commodity basic in any technique.

Second, I gather Baqaee and Farhi think of themselves as starting with microeconomic data that is in principle empirically observable. These would be elasticities of substitution at points on factor demand curves that are chosen at an instance of time. Part of the point of the CCC is to question the existence of factor demand curves, including for intermediate inputs. In a comparison of long period positions, it is an incoherent thought experiment to vary one price at a time. On the other hand, as Han and Schefold have shown, empirical work can be based on given fixed coefficients processes. I think if Baqaee and Farhi were to take this point, they would have to rewrite a lot of their paper, including sections talking about the bias of technical change and macroeconomic elasticities of substitution between factors.

Baqaee and Farhi do have an interesting suggestion for visualizing a production network in logical time. (I've previously presented a less detailed approach from Bidard.) My diagram above is an attempt to expand on Baqaee and Farhi's approach. For each time period, four processes (a, b, c, and d) exist for producing one of two commodities from inputs of labor and those two commodities. The first two processes have the first good as output, and the second two processes produce the second good. The second commodity can be used for consumption, as well as a capital good in the production of either good. This is basically the technology for the examples in Vienneau (2005). The diagram could be simplified by not explicitly showing the demultiplexers and the summations.

  • David Rezza Baqaee and Emmanuel Farhi (2018). The Microeconomic Foundations of Aggregate Production Functions. 26 November.
  • Robert L. Vienneau (2005). On Labour Demand and Equilibria of the Firm. Manchester School 73(5): 612-619.