Thoughts On Economics

Welcome

2014-12-31T03:00:00.001-05:00

I study economics as a hobby. My interests lie in Post Keynesianism, (Old) Institutionalism, and related paradigms. These seem to me to be approaches for understanding actually existing economies.

The emphasis on this blog, however, is mainly critical of neoclassical and mainstream economics. I have been alternating numerical counter-examples with less mathematical posts. In any case, I have been documenting demonstrations of errors in mainstream economics. My chief inspiration here is the Cambridge-Italian economist Piero Sraffa.

In general, this blog is abstract, and I think I steer clear of commenting on practical politics of the day.

I've also started posting recipes for my own purposes. When I just follow a recipe in a cookbook, I'll only post a reminder that I like the recipe.

Comments Policy: I'm quite lax on enforcing any comments policy. I prefer those who post as anonymous (that is, without logging in) to sign their posts at least with a pseudonym. This will make conversations easier to conduct.

On The Lack Of Persuasiveness Of Austrian-School Economists

2012-01-28T11:33:00.002-05:00

Mattheus von Guttenberg exemplifies what I think are defects in many fanboys of Austrian school economics. Among these defects is an uncritical acceptance of Ludwig von Mises' characterization of his own theories. And another defect is uncritical acceptance, likewise, of what Mises, or even worse, Murray Rothbard, had to say about the mainstream economics of their day. And a third defect is to apply these characterizations to mainstream economics of our day, while remaining quite ignorant of relevant trends in contemporary economics. Without more widespread correction of such defects, advocates of the Austrian school should not be able to persuade many economists, both orthodox and heterodox, of the worth of their views.

For this post, I focus on the theory of choice.

Here are examples of arguably a weak understanding of both the Austrian school and of mainstream economic theory:

"...we're not rejecting cardinal utility functions because it's hip and counter-culture. There's a distinct reason utility functions are impossible and unrealistic, and that's because utility cannot be known or measured... The degree to which we draw swooping utility functions overlaying cost curves is a unacceptable practice borrowed from coordinate geometry. Utility, again - is ordinal, it is intrinsically subjective, and it cannot be made known by other people." -- Mattheus von Guttenberg

"The concept of diminishing marginal utility is implicit in the logic of action, the Austrians just draw it to the fore." -- Mattheus von Guttenberg

The claim that utility reaches an interval-level measurement scale is a conclusion formally drawn from the Von Neumann and Morgenstern axioms (which can be considered independently of game theory). Most introductory economic textbooks claim that utility only reaches an ordinal-level measurement scale, anyways. The introductory textbooks have a different set of axioms, where choice among a set of goods with specified probability is not formally modeled. And they assert that the utility obtained is not interpersonally comparable. Mattheus' objections are not addressed to any views prominent in mainstream economic teaching for at least half a century. And to assert that diminishing marginal utility is consistent with utility reaching only an ordinal-level scale requires an argument. (I'm actually intrigued by J. Huston McCulloch's 1977 attempt to make such an argument, the one example of which I know in the last quarter of the last century.)

Mises incorrectly asserted that much of his theory could be deduced from a single postulate.

"The only axiom is 'man acts' and we draw the entire body of economic science spanning a thousand pages." -- Mattheus von Guttenberg

"...I have always been interested in rewriting [Human Action] 'as a set of numbered axioms, postulates, and syllogistic inferences using, say, Russell's Principia.' I believe it can be done." -- Mattheus von Guttenberg

I think such a rewriting, as it starts from the above informally stated premise, would be unconvincing.

Furthermore, the current state of decision theory suggests that analyses other than Mises' approach, are consistent with this axiom. The Austrian school approach is roughly akin to Samuelson's revealed preference theory. (One important difference is that Austrian advocates have some silly things to say about the impossibility of indifference.) Anyways, the idea is that an acting human, when presented with two lists of goods, decides between them. But social choice theory, as developed by, say, Amartya Sen in the late 1960s and early 1970s, has shown how to dispense with the formalization of choice as a binary relation as a primitive notion. Instead, one can start with a choice function, that is, a mapping from each menu that an agent might be presented with to a set of best choices for that menu. The derivation of a complete and transitive binary preference relation from a choice function requires additional structure on how menu choices relate across menus. And why the imposition of those additional requirements follows from human action needs to be argued. For example, why are not increasingly prevalent models, at least in research literature, of divided selves consistent with human action?

Elsewhere

2012-01-24T08:32:00.000-05:00

The Non-Equilibrium Social Science community and newsletter.
Mike Beggs, in Jacobin Magazine, on Occupy Economics.
Robert Johnson, in Time, on Economists: A Profession at Sea.
Yanis Varoufakis has been building on his paper, "The Dance of the Meta-Axioms: On the Dynamic Mechanism by which the Inescapable Theoretical Failures of Neoclassical Economics Reinforce Its Dominance".
Noah Smith has a couple of posts that I find hard not to read as implying that mainstream economists are trained into, at best, ignorance.

Nell's Diagram Of A Capitalist Economy

2012-01-20T15:18:00.000-05:00

Figure 1: Nell's Diagram

Over at Naked Keynesian, Matías Vernengo explains some aspects of how he teaches the surplus approach. Vernengo presents a diagram created by Garegnani. Garegnani's diagram shows the logical relations among the endogenous variables and the givens in the Classical theory of value.

I thought I would take this opportunity to present the (complementary?) diagram above. Nell's diagram shows flows among three foci: production, markets, and the social classes comprising the population of an idealized capitalist economy.

Nell represents industrial production with an icon in the lower right of his diagram. The arrows connecting the factories in a circle suggest the production of commodities by means of commodities. Sraffa's book expresses this viewpoint in rigorous theory, and Leontief applied it empirically. Gross industrial output consists of a heterogeneous odd-lot of commodities. This output is divided into:

The replacement of the existing means of production (represented by the previously mentioned arrows within the icon for industry)
The surplus (represented by the arrow labeled "Net social product").

The net social product presents itself as an immense accumulation of commodities. It is further decomposed into:

Necessities, consumed by the workers and the Unemployed
Luxuries, consumed by the owners (i.e., capitalists)
New capital goods, channeled back into industrial production from the markets on which industrial firms sell them.

Each component of the net social product also consists of a heterogeneous collection of commodities.

The diagram also shows money flows. The diagram illustrates the simplifying assumption that workers consume all their income. And the diagram also abstracts from the existence of government and of foreign trade. (All of these abstractions are removed in more advanced political economy, for example, in Kalecki's work.) Anyway one can identify a couple of accounting identities under these assumptions:

Total Receipts = Worker Consumption + Capitalist Consumption + Investment

Total Receipts = Wages + Profits

I like the clarity with which monetary flows and commodity flows are distinguished in this approach. It is not the case that capitalists own blast furnaces sitting in their backyard, which they then loan to firms. Mainstream economists are deliberately and consistently obfuscating on this issue, from introductory teaching to beyond. Perhaps there's a reason for this widespread confusion:

"From the point of view of Political Economy, however, the most important fact is that while wages are paid for work, and one can (and in some circumstances should) think of the wage bill, equal here to Worker Consumption, as reproducing the power to work, profits are not paid for anything at all. The flow of profit income is not an exchange in any sense. The Samuelson [circular flow] diagram...is fundamentally misleading; there is no 'flow' from 'household supply' to the factor market for capital. The only flow is the flow of profit income in the other direction. And this, of course, leads straight to that hoary but substantial claim that the payment of wages is not an exchange either, or at any rate, not a fair one. For Wages plus Profits adds up to the Net Income Product; yet profits are not paid for anything, while wages are paid for work. Hence the work of labor (using the tools, equipment, etc., replacement and depreciation of which is already counted in) has produced the entire product. Is labor not therefore exploited? Does it not deserve the whole product?" -- Edward Nell

References

Edward Nell (1972). "The Revival of Political Economy"

Economists Working To Increase The Pain And Misery Of Billions

2012-01-14T08:10:00.000-05:00

"Over the last three decades, economists played an important role in creating the conditions of the 2008 crisis (and dozens of smaller financial crises that came before it since the early 1980s, such as the 1982 Third World debt crisis, the 1995 Mexican peso crisis, the 1997 Asian crisis and the 1998 Russian crisis) by providing theoretical justifications for financial deregulation and the unrestrained pursuit of short-term profits. More broadly, they advanced theories that justified the policies that have led to slower growth, higher inequality, heightened job insecurity and more frequently financial crises that have dogged the world in the last three decades... On top of that, they pushed for policies that weakened the prospects for long-term development in developing countries... In the rich countries, these economists encouraged people to overestimate the power of new technologies..., made people's lives more and more unstable..., made them ignore the loss of national control over the economy..., and rendered them complacent about de-industrialization... Moreover, they supplied arguments that insist that all these economic outcomes that many people find objectionable in this world - such as rising inequality..., sky-high executive salaries... or extreme poverty in poor countries... - are really inevitable, given (selfish and rational) human nature and the need to reward people according to their productive contributions.
In other words, economics has been worse than irrelevant. Economics, as it has been practised in the last three decades, has been positively harmful for most people." -- Ha-Joon Chang, 23 Things They Don't Tell You About Capitalism. Bloomsbury Press (2011).

On "Lady Rosa De Luxembourg"

2012-01-09T08:17:00.000-05:00

Figure 1: Statue on top of Obelisk

During the last week of 2011, I saw an exhibition of Sanja Ivekovíc's work at the Museum of Modern Art (MOMA). This show, Sweet Violence, continues through March.

The centerpiece of the exhibition is Ivekovíc's Lady Rosa of Luxembourg. This work mocks a statue, Gëlle Fra (Golden Lady), in Luxembourg. As I understand it, the original commemorates partisans active during World War II. The base of Ivekovíc's obelisk combines the phrases "La Résistance", "La Justice", "La Liberté", "L’Indépendence"; "Kitsch", "Kultur", "Kapital", "Kunst"; and "Whore", "Bitch", "Madonna", "Virgin". Three words, one from each of the three groups, is repeated on each of the four sides.

As far as I can see, this work, despite its title, does not have much to do with Rosa Luxemburg. It is more a matter of épater la bourgeoisie. I think Luxemburg's friend and colleague Clara Zetkin was more of a feminist; Luxemburg focused more on class. I don't know how Luxemburg looked while giving speeches. I know she walked with a limp as a result of a childhood disease. One leg was longer than the other. So I doubt she stood like the statue.

And I didn't overhear any museum visitors discussing such questions as:

Do Marx's models of simple and expanded reproduction require an outside source of demand for capitalists to make the depicted investment decisions?
Does Marx's depiction in volume 2 of Capital of smoothly reproducing capitalist economies contradict his account in volumes 1 and 3 of the breakdown of capitalism?

Occupy the American Economic Association@Chicago

2012-01-07T07:33:00.001-05:00

Today's events consist of:

12:00 - 3:00 - People's Economic Conference Roosevelt University (430 S. Michigan, 3rd Floor)
4:30 - Mock Awards Ceremony (Michigan and Wacker)

If I were there, would I be able to explain reswitching and capital-reversing?

"Perverse" Price Wicksell Effects Swamping "Normal" Real Wicksell Effects

2011-12-26T19:43:00.000-05:00

1.0 Introduction

Capital-reversing can arise in a couple of ways without reswitching. This post steps through a case in which positive price Wicksell effects can dominate negative real Wicksell effects. Around each switch point, firms choose to adopt a more capital-intensive technique of production for slightly lower interest rates. So real Wicksell effects agree, in this example, with the incoherent and outdated intuition of applied neoclassical economics. Nevertheless, due to the re-evaluation of a given set of capital goods at different interest rates, one can find a pair of points such that cost-minimizing firms adopt a more capital-intensive technique, from the given technology, at the higher interest rate. And this pair of points can span at least one switch point. Basically, I created a simple example to replicate graphs like those in Appendix D in Lazzarini (2011).

A case of a positive price Wicksell and negative real Wicksell effect is one case in my suggested taxonomy of Wicksell effects. Burmeister provides one possible neoclassical response to this sort of example. Burmeister advocated the use of David Champernowne’s (unobservable) chain-index measure of capital.

2.0 The Technology

Consider a very simple economy in which a single consumption good, corn, is produced. Entrepreneurs know of the two processes for producing corn shown in the last two columns of Table 1. One corn-producing process produces corn from inputs of labor time and steel. The other corn-producing process uses inputs of labor time and tin. The entrepreneurs know of two other processes, also shown in Table 1. Additional steel can be produced from inputs of labor time and steel. Similarly, labor time and tin can produce more tin.

**Table 1: The CRS Technology**
Inputs	Steel Industry	Steel Industry	Corn Industry
Labor	1 Person-Year	1 Person-Yr	1 Person-Yr	2 Person-Yrs
Steel	1/2 Ton	0 Ton	1/4 Ton	0 Ton
Tin	0 Kg.	9/20 Kg.	0 Kg.	1/3 Kg.
Output:	1 Ton Steel	1 Kg. Tin	1 Bushel Corn	1 Bushel Corn

All processes exhibit Constant Returns to Scale (CRS). Each process requires a year to complete. Their outputs become available at the end of the year, and they totally use up their inputs of capital goods over the course of the year.

3.0 Quantity Flows

Two techniques are available for producing a bushel of corn as net output.

The first technique, to be called the steel technique, operates the first process to produce 1/2 ton steel and the first corn-producing process to produce one bushel corn. 1/4 ton of the output of the steel-producing process replaces the steel-capital used up in producing steel. The other 1/4 ton output from the steel-producing process replaces the 1/4 ton steel used up in producing corn. In effect, 1 1/2 person-years labor are used in the steel technique for each bushel corn producing in a self-sustaining way.

In the tin technique, 20/33 kilograms tin are produced with the tin-producing process, and one bushel corn is produced with the second corn-producing process. 2 20/33 person-years labor are used in the tin technique for each bushel of corn in the economy’s net output.

Note that the production of corn with the steel system provides more consumption per worker-year than is provided with the tin system. Under the false and exploded neoclassical theory, one would expect the steel system to require more capital per worker. One would also expect it to be adopted at a low interest rate, since the low interest would be signaling a relative lack of scarcity of capital.

4.0 Price Equations

Next, I consider constant prices consistent with the adoption of each technique. Firms will not adopt a technique unless the interest rate (also known as the rate of profits) is earned for each process in use in a technique. For definitiveness, I assume that wages are paid at the end of the year out of output and that a bushel corn is the numeraire.

4.1 Steel Technique

Given these assumptions, the following system of two equations must hold when the steel technique is in use:

(1/2)p_s(1 + r) + w = p_s

(1/4)p_s(1 + r) + w = 1

where p_s is the price of a ton of steel, w is the wage, and r is the interest rate.

Above is a system of two equations in three variables. This system has one degree of freedom. Two variables can be found as functions of the one remaining variable. For example, the wage and the price of steel can be expressed as (rational) functions of the rate of profits. And that price of steel can be used to find the value of capital. The resulting capital-output ratio is:

v_s(r) = 2/(3 - r)

where v_s is the ratio of the value of capital to the value of output in the steel technique.

4.2 Tin Technique

The following system of two equations must hold when the tin technique is in use:

(9/20)p_t(1 + r) + w = p_t

(1/3)p_t(1 + r) + 2 w = 1

where p_t is the price of a kilogram of tin.

The ratio of the value of capital to the value of output in the tin technique, v_t, expressed as a function of the interest rate, is:

v_t(r) = 200/(473 - 187 r)

5.0 Choice of Technique

The trade off between the wage and the rate of profits, for a given technique, is the wage curve for that technique. Figure 1 shows the wage curves for the two techniques, as well as the wage frontier formed as an outer envelope of the wage curves for all the techniques that comprise the technology. Given the interest rate, the cost-minimizing firm adopts the technique whose wage curve is on the frontier at that point. At the switch point, two techniques are simultaneously cost minimizing.

Figure 1: The Wage-Rate of Profits Frontier

The wage curve for a given technique expresses the wage as a function of the rate of profits. The rate of profits at which the switch point occurs is found by equating the wage for two techniques. In the numerical example analyzed in this post, the following quadratic equation arises:

(41/240)(1 + r)² - (13/15)(1 + r) + 1 = 0

The switch point occurs at a rate of profits of approximately 77.46%.

6.0 Conclusion

The above analysis has shown for the example:

Which technique is cost-minimizing at any given interest rate up to a maximum.
The ratio of the value of capital to output for each technique for each interest rate.

Thus, as shown in Figure 2, one can find the capital-output ratio for the cost-minimizing technique for each economically feasible interest rate. The price Wicksell effect exhibits the revaluation of given capital goods at different interest rates, while the real Wicksell effect results from the adoption of different capital goods at a given interest rate. Both effects are illustrated in Figure 2.

Figure 2: The Rate of Profits Versus Capital-Intensity

This example has shown that capital-reversing can exist around a switch point even in the absence of reswitching.

References

Edwin Burmeiser (1980). Capital Theory and Dynamics, Cambridge University Press.
Andrés Lazzarini (2011). Revisiting the Cambridge Capital Theory Controversies: A Historical and Analytical Study, Pavia University Press.

Pecan Pie

2011-12-23T08:42:00.000-05:00

9 inch pie	8 inch pie
3 large eggs	2
2/3 cup sugar	1/2 cup
1/3 teaspoon salt	1/4 teaspoon
1/3 cup butter, melted	1/4 cup
1 cup maple syrup	3/4 cup
1 cup chopped pecans	3/4 cup

Add ingredients in order, stirring thoroughly after each ingredient. Pour into pastry-lined pie pan. Bake at 375 degrees for 40-50 minutes, until set and pastry is nicely browned. Cool. Serve cold or slightly warm.

Elsewhere

2011-12-16T08:34:00.000-05:00

Dan Berrett, in The Chronicle of Higher Education, reports that "Economists push for a broader range of viewpoints". The Institute for New Economic Thinking, Econ4, a couple of professors at the University of Massachusetts at Amherst, and Stephen Marglin are all mentioned.
Daron Acemoglu recommends five books¹ on inequality in the distribution of income or wealth. Is he basically confused about the logic of the theory of marginal productivity?
Bryan Caplan parades his ignorance of Keynes on wages. According to Caplan, "nominal wage rigidity is the driving force of the Keynesian model" and if employment increases, wages must fall. But:

Keynes explicitly argues, in chapter 19 of the General Theory that his analysis applies if money wages are flexible.
At the time of the publication of the General Theory, Keynes had "always regarded decreasing physical returns in the short period as one of the very few incontrovertible propositions in our miserable subject". So he believed then that less unemployment would be associated with lessened real wages. He changed his mind² in responding to empirical evidence from John T. Dunlop and Laurie Tarshis. Empirical evidence for reverse L-shaped cost curves in industry has held up since then.

Footnotes

1. My list includes, at least:

James K. Galbraith (1998). Created Unequal: The Crisis in American Pay. Free Press.
Stephen A. Marglin (1984). Growth, Distribution, and Prices. Harvard University Press

2. References (which I know of from the secondary literature):

John T. Dunlop (1938). "The Movement of Real and Money Wage Rates", Economic Journal. v. 48 (Sept.): 413-434.
J. M. Keynes (1939). "Relative Movements of Real Wages and Output", Economic Journal, v. 49 (March): 34-51.
Lorie Tarshis (1939). "Changes in Real and Money Wages", Economic Journal, v. 49 (March): 150-154.

A Serendipitous Juxtaposition

2011-12-14T11:22:00.000-05:00

Tuesday, Peter Dorman, at Econospeak, considers why reactionaries in the United States are not embarrassed when caught at their constant lying. He says the contemporary right-wingers' pride in lying is ultimately derived from Leo Strauss. According to Dorman, Strauss taught:

"The cartoon version of Strauss, which is broadly correct, goes like this: The great philosophers of the past, each in their way, were led by the force of logic and experience to a dangerous insight, that no social or cultural arrangement can substitute for the necessity of virtue, and that only a small minority of individuals are truly virtuous... Those who perceive this truth must write deceptively, since the unworthy masses, if they sense that they are being judged unworthy, will persecute the truth-teller. Strauss provided readings of the canonical texts that claimed to show they functioned on two levels, as decoys for the average reader and secret wisdom for the initiate." -- Peter Dorman

And on Monday, Dani Rodrik, at Project Syndicate notes the difference between discourse among elite economists and what they tell introductory students and the general public:

"As the late great international economist Carlos Diaz-Alejandro once put it, 'by now any bright graduate student, by choosing his assumption...carefully, can produce a consistent model yielding just about any policy recommendation he favored at the start.' And that was in the 1970's! An apprentice economist no longer needs to be particularly bright to produce unorthodox policy conclusions.
Nevertheless, economists get stuck with the charge of being narrowly ideological, because they are their own worst enemy when it comes to applying their theories to the real world. Instead of communicating the full panoply of perspectives that their discipline offers, they display excessive confidence in particular remedies - often those that best accord with their own personal ideologies...
...In my book The Globalization Paradox, I contemplate the following thought experiment. Let a journalist call an economics professor for his view on whether free trade with country X or Y is a good idea. We can be fairly certain that the economist, like the vast majority of the profession, will be enthusiastic in his support of free trade.
Now let the reporter go undercover as a student in the professor’s advanced graduate seminar on international trade theory. Let him pose the same question: Is free trade good? I doubt that the answer will come as quickly and be as succinct this time around. In fact, the professor is likely to be stymied by the question. 'What do you mean by "good?"' he will ask. 'And good for whom?'
The professor would then launch into a long and tortured exegesis that will ultimately culminate in a heavily hedged statement: 'So if the long list of conditions I have just described are satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone's well-being.' If he were in an expansive mood, the professor might add that the effect of free trade on an economy’s growth rate is not clear, either, and depends on an altogether different set of requirements.
A direct, unqualified assertion about the benefits of free trade has now been transformed into a statement adorned by all kinds of ifs and buts. Oddly, the knowledge that the professor willingly imparts with great pride to his advanced students is deemed to be inappropriate (or dangerous) for the general public." -- Dani Rodrik

This bifurcated discourse in economics creates a problem for critics. They can point out that most introductory mainstream teaching and applied policy advice of mainstream economists is self-contradictory and theoretically and empirically unfounded. Defenders of orthodox economists can then accuse the critics of attacking a strawperson. The failure to take their own advanced teaching seriously leads orthodox economists to disappear as a target, in some sense. Maybe the question is one of professional ethics.

On Hayek's Lack Of Impact On Macroeconomics

2011-12-09T13:30:00.000-05:00

I'm agreeing with, for example, Brad DeLong, Paul Krugman, and David Warsh. I'm disagreeing with, for example, Peter Klein, Mario Rizzo, Alex Tabarrok, and Steven Horwitz. I suppose I'm also disagreeing with Nicholas Wapshott. Refutations of Austrian Business Cycle Theory (ABCT) are relevant today because of confusions propagated in popular literature.

Keynes argued with many while writing the General Theory. Why not say Keynes versus Dennis Robertson is "the clash that defined modern economics"? I think one could argue that Hayek influenced mainstream macroeconomics through J. R. Hick's exposition of temporary equilibrium in Value and Capital, but this seems a quite attenuated influence.

Keynesians can accept that Hayek had the better of the early 1930s debate with Keynes over Keynes's Treatise on Money. The Treatise is not the General Theory. But Sraffa and Kaldor embarrassed Hayek in his attempt to develop the ABCT. I think the two most important errors in the ABCT are:

The natural rate of interest is undefined in intertemporal General Equilibria (also known as, more or less, "plan coordination").
No simple relation exists between the optimal allocation of resources among orders of goods and interest rates.

In short, both Hayek's monetary theory and his capital theory are incorrect.

Qualitative stories about the embodiment in capital goods of misaligned plans are, perhaps, the best one can get from Hayek's capital theory. Ludwig Lachmann and Peter Lewin are my favorite Austrian-school economists to read on this point. (Did Lachmann have any enduring effect on mainstream economics?) But it is hard to quantitatively estimate the effects of such misalignments, and I don't find convincing that recovering from these misalignments are the source of the largest worldwide business cycles that we have seen. Anyways, I prefer Joan Robinson on capital theory in disequilibrium.

The importance one should assign the clash between Hayek and Keynes in the history of macroeconomics seems to me to depend crucially on the impact of Hayek on mainstream views of Keynes' General Theory. But Hayek had no such impact. Hayek tried to address the General Theory in his Pure Theory of Capital. But Hayek's book was ignored at the time and is generally considered a failure. About the only thing else Hayek had to say about Keynes's General Theory occurred in interviews and other transient popular pieces. So, whatever you may think about the worth of Hayek's writings, where can you locate their impact?

Walras's Law Is False

2011-12-05T08:09:00.000-05:00

1.0 Introduction

I have asserted that the distribution of income is determined by political power, not by intertemporal utility-maximization. Interest rates are not the result of individual decisions trading off consumption at future dates against consumption now.

Is it not a consequence of this view that Walras's law does not apply to capitalist economies?

2.0 On the Derivation of Walras's Law

Walras's law states that the sum of excess demand across all goods is zero:

p z(p) = p₁z₁(p) + p₂z₂(p) + ... + p_nz_n(p) = 0

The excess demand for the jth good is the difference between the demand and supply of that good at the set of prices at which these functions are being evaluated:

z_j(p) = d_j(p₁, p₂, ..., p_n) - s_j(p₁, p₂, ..., p_n)

And supply and demand functions for each market are found by summing over the supplies and demands for all individuals. But individual supply and demand functions are derived from the theory of utility-maximization, given the initial distribution of the endowments of all goods.

3.0 Macroeconomic Reasoning With Walras's Law

Don Patinkin considered an economy in which n - 1 commodities and "money" are traded.

"For the amount of excess demand for money equals the aggregate value of the amounts of excess supplies of commodities." -- Don Patinkin, Money, Interest, and Prices (2nd edition, Harper and Row, 1965)

I believe Patinkin's approach can be seen as building on J. R. Hicks's Value and Capital (2nd edition, Oxford University Press, 1946). Hicks included demands for both money and other securities in his General Equilibrium approach.

One can argue that the world economy is currently in a disequilibrium; both labor and produced commodities are in excess supply. Thus, by Walras's law, there must be an excess demand for money. And it is the job of monetary authorities, such as the United States's Federal Reserve, to meet that demand, by flooding the market with money while this disequilibrium exists. At least, this is the argument of prominent mainstream "Keynesians", such as Brad DeLong and Paul Krugman (suggestions for links to their blogs here are welcome).

4.0 Conclusion

Keynes's emphasis on fundamental uncertainty is arguably incompatible with the explanation of the demand for money by intertemporal utility-maximizing in a model of General Equilibrium. Thus, the above justification of "Keynesian" monetary policy, based on Walras's law, does not harmonize with Keynes's theory.

Krugman Wrong, Robinson Correct

2011-11-29T08:08:00.000-05:00

In last Friday's column in the New York Times, Paul Krugman writes:

"After all, in an idealized market economy each worker would be paid exactly what he or she contributes to the economy by choosing to work, no more and no less. And this would be equally true for workers making $30,000 a year and executives making $30 million a year." -- Paul Krugman

Elsewhere, Rod Hill and Tony Myatt quote Joan Robinson:

"There is the problem of the relative levels of different types of earned income. Here we have the famous marginal productivity theory... The real wage of each type of labour is supposed to measure its marginal product to society. The salary of a professor of economics measures his contribution to society and the wage of a garbage collector measures his contribution. Of course this is a very comforting doctrine for professors of economics but I fear that once more the argument is circular. There is not any measure of marginal products except the wages themselves. In short, we have not got a theory of distribution. We have nothing to say on the subject which above all others occupies the minds of the people whom economics is supposed to enlighten." -- Joan Robinson

I like to refute the existence of the so-called marginal productivity theory of distribution with reswitching examples. In such examples, at least two vastly different distributions of income between wages and profits are associated with a single technique. Presumably in Krugman's morality play, the owner of each factor of production would be making the same "contribution" to the economy, whichever income distribution happened to prevail. Furthermore, it can be the case that a higher wage results in more labor being hired by cost-minimizing competitive firms. A similar point can be made with models with heterogeous labor.

I welcome Krugman's support for (some) good policies - including in the referenced newspaper column, despite his archaic knowledge of economics.

Mark Blaug (1927 - 2011)

2011-11-26T11:21:00.001-05:00

Was any historian of economics more prominent throughout the last half century? As I understand it, David Ricardo was an early area of concentration for Blaug, even influencing him in naming his son. It's been decades since I read Blaug's 1958 book on Ricardo, and I recall it hardly at all. As you can see, he wrote it just after Sraffa had provided a trove of new materials and scholarship on Ricardo, but before the novelty of Sraffa's interpretation was widely apparent. Blaug's work spans changes in standards in history, including the development of more contextualized, thick, postmodern histories.

The first edition of Blaug's Economic Theory in Retrospect was published in 1962, and later editions came out in 1968, 1978, 1985, and 1997. I can comment on the fourth edition. I particularly like the suggested readings at the end of each chapter, which, as far I can see, provide tasteful selections of competing interpretations. And I appreciate the reading guides to various classic books. The fourth edition guides are to Smith's The Wealth of Nations, Ricardo's Principles, J. S. Mill's Principles, Marx's Capital, Marshall's Principles, Wicksteed's Common Sense of Political Economy, Wicksell's Lectures. I find the book too Whiggish for my tastes, and I have differences with Blaug throughout. Nevertheless, I can say Blaug seems equally at home in writing about any economist in the period from before Smith to after Keynes.

Blaug has been quarreling with Sraffians for decades. Consequently, I have previously had something to say about his work. The current issue of the History of Political Economy contains a posthumous article by Garegnani and an article by Kurz and Salvadori, both counter-attacking Blaug's most recent attack on Sraffians. A demand for empirical demonstrations of Sraffa effects is a defense of neoclassical economics I have never found plausible. The Cambridge critique is a logical demonstration of the incoherence of neoclassical theory. I think this defense on the basis of supposed empiricism was introduced by C. E. Ferguson, but Blaug may have been the most consistent advocate of this point of view.

Blaug has also been a critic of trends in mainstream economics, especially the effects of the formalist revolution, which he dates to the 1950s. I found particularly surprising a recent article praising Henry George.

I have nothing to say about the economics of art and the economics of education, apparently two fields in which Blaug had a lot to say.

References

Mark Blaug (1958). Ricardian Economics: A Historical Study, Yale University Press.
Mark Blaug (1975). The Cambridge Revolution: Success or Failure? A Critical Analysis of Cambridge Theories of Value and Distribution, Institute of Economic Affairs.
Mark Blaug (1985). Economic Theory in Retrospect, Fourth edition, Cambridge University Press. [This is the version I have most convenient. I believe there is a fifth edition.]
Mark Blaug (1987). "Classical Economics", in The New Palgrave (ed. by J. Eatwell, M. Milgate, and P. Newman), Macmillan.
Mark Blaug (1998). Economics Through the Looking Glass: The Distorted Perspective of the New Palgrave Dictionary of Economics, Institute of Economic Affairs.
Mark Blaug (1997). "Ugly Currents in Modern Economics", Policy Options (September): pp. 3-8.
Mark Blaug (1998). "The State of Modern Economics: Disturbing Currents in Modern Economics", Challenge (May-June).
Mark Blaug (1999). "Misunderstanding Classical Economics: The Sraffian Interpretation of the Surplus Approach", History of Political Economy, V. 31, n. 2: pp. 213-236.
Mark Blaug (2000). "Henry George: Rebel with a Cause", European Journal History of Economic Thought, V. 7, n. 2 (Summer): pp. 270-288.
Mark Blaug (2001). "No History of Ideas, Please, We're Economists", Journal of Economic Perspectives, V. 15, n. 1 (Winter): pp. 145-164.
Mark Blaug (2002). "Kurz and Salvadori on the Sraffian Interpretation of the Surplus Approach", History of Political Economy, V. 34, n. 1: pp. 237-247.
Mark Blaug (2003). "Rational vs. Historical Reconstruction - A Counter-note on Signorino's Note on Blaug", European Journal of History of Political Economy, V. 10, n. 4 (Winter): pp. 607-608.
Mark Blaug (2003). "The Formalist Revolution of The 1950s", Journal of History of Economic Thought, V. 25, n. 2: pp. 145-156.
Mark Blaug (2009). "The Trade-Off between Rigor and Relevance: Sraffian Economics as a Case in Point", History of Political Economy, V. 41, n. 2: pp. 219-247.
Pierangelo Garegnani (2002). "Misunderstanding Classical Economics? A Reply to Blaug", History of Political Economy, V. 34, n. 1 (Spring): pp. 241-254.
Pierangelo Garegnani (2011). "On Blaug Ten Years Later", History of Political Economy, V. 43, n. 3: pp. 591-605.
Heinz D. Kurz and Neri Salvadori (2002). "Mark Blaug on the 'Sraffian Interpretation of the Surplus Approach'", History of Political Economy, V. 34, n. 1 (Spring): pp. 225-236.
Heinz D. Kurz and Neri Salvadori (2011). "In Favor of Rigor and Relevance: A Reply to Mark Blaug", History of Political Economy, V. 43, n. 3: pp. 607-616.
Carlo Panico (2002). "Misunderstanding the Sraffian Reading of the Classical Theory of Value and Distribution: A Note", in Competing Economic Theories: Essays on Memory of Giovanni Caravale (ed. by Nisticò and D. Tosato), Routledge.

Two Updates

2011-11-22T03:22:00.000-05:00

A couple of weeks ago, I mentioned the Harvard students walkout on Mankiw's introductory economics class. Gabriel Bayard and Rachel Sandalow-Ash, apparently two Harvard undergrads, had an article in the Harvard Crimson a couple of tuesdays ago. This article has better points than the "Open Letter to Greg Mankiw" closer to the date of the walkout. Daniel MacDonald has other links.

Last October, I briefly surveyed some experimental evidence, including a paper by Romer and Romer, demonstrating the existence of the Keynesian multiplier. Christina Romer has a more comprehensive presentation of the evidence. (Hat tip: Paul Krugman.)

Keynes Versus Hayek On The Radio

2011-11-17T08:00:00.000-05:00

Yesterday, National Public Radio concluded a three part series. Each day surveyed a thinker have shaped the past and may shape the future. I'll ignore the first part, since it was about a deluded non-philosopher. Tuesday, NPR covered Friedrich Hayek. Yesterday, they discussed John Maynard Keynes.

"He's Mixin' Up The Truth With Something Funny, I Start To See"

2011-11-12T11:22:00.001-05:00

I consider the following propositions to be well-established:

Adam Smith did not use the phrase "The invisible hand" to refer to the optimality properties of a static general equilibrium supposedly brought about by the workings of competitive markets.
Thomas Carlyle did not coin the phrase "The dismal science" to refer to Thomas Malthus's anti-utopian theory of population. According to that theory, human population responds endogenously to increased prosperity, thereby making impossible any rapidly established, long-lasting general rise in per capita income beyond the custom and habits of mankind.
John Maynard Keynes, in The General Theory of Employment, Interest, and Money, did not explain widespread and persistent unemployment by sticky, rigid, or slowly adjusting money wages and prices - a pre-Keynesian theory that, in fact, he opposed.

Many economists, I claim, teach the opposite of these propositions. Here, for example, is Tyler Cowen falsely characterizing Keynes' theory (at least, if "Keynesian" is supposed to refer to that theory):

"You can even give this all a Keynesian take... Since 1997-2000, there is downward pressure on lots of wages, but morale matters and labor market incumbents retain a favored position. Though some wages fall, employers resist that downward pressure, and pass along a lot of the burden of adjustment to new job seekers. Even if that original downward pressure on wages is smallish, new job seekers have to make big adjustments in their career plans, majors, ambitions, etc. to get through the door at all. They didn't." -- Tyler Cowen

It seems to be a quixotic and never-ending task to oppose demonstrably false statements about economics, often made by economists. Gavin Kennedy illustrates such a quest in defense of my first proposition.

Sausage With Pepper And Onions

2011-11-10T08:08:00.000-05:00

Note to myself: I liked this recipe. Next time, consider making it with only two peppers. On the other hand, despite the leftover sauce, having a slightly different pepper taste with each bite is neat. Maybe I'll look for other recipes at that site.

(The sides in this case are mashed sweet potatoes and a cut-up Granny Smith apple with a little bit of sugar sprinkled and mixed in. I like a mixture of cut-up apples and pears, too.)

Elsewhere

2011-11-06T08:28:00.000-05:00

Arjo Klamer has a blog, mainly in dutch. In one post in English, he argues that the award of the Nobel to Sargent and Sims symbolizes the failure of economics.
The U.S. Solidarity Economy Network (SEN) looks like an interesting site to explore. They attempt "to connect a diverse array of individuals, organizations, businesses and projects in the shared work of building and strengthening regional, national and international movements for a solidarity economy."
A group anti-Mankiw blog has been created to respond to the bushwa Mankiw posts on his blog. (Hat tip to Daniel MacDonald, who has quite a bit to say about walking out on Mankiw's class and the incoherence of his textbook.)
Corey Robin has a blog. His book, The Reactionary Mind: Conservatism from Edmund Burke to Sarah Palin, argues that what unites conservatives is reacting against attempts of oppressed groups (slaves vs. masters, workers vs. capitalists, women vs. men) to assert agency. The reaction is important - conservatives are often modernizers and derisive of the abilities of the ruling classes that they are attempting to defend. His book is analytical, not mocking, and not arguing for what is to be done.

Walkout On Mankiw's Blather

2011-11-02T08:05:00.000-04:00

Apparently, some Harvard students are planning on an organized walkout on Mankiw's introductory economics class today. This action is planned in solidarity with the Occupy Wall Street movement.

Stephen Marglin is one Harvard economist I respect. I find the Harvard Crimson has been, with difficulty*, scanning back issues. Apparently, they rewrote the same article about Marglin every few years for a while there: 1975, 1980, 1982, 2009. Here's a 2009 article about his controversial introductory economics class.

Update: CNN and the Crimson report on the results. An open letter to Greg Mankiw, from one of the organizers, explains the action. Some Harvard student has a response at the same site.

* Substituting "Mary" for "Marx" is probably a scanning error.

Corporate Governance

2011-10-30T16:05:00.000-04:00

Most arguments about the state versus the market seem fundamentally misguided to me, begging, as they do, false premises. Many have noted that the state underlies the ability to trade goods on the market. What attributes of a bundle of property rights are alienable, what contracts can be enforced, default conditions, etc. are all defined by laws enforced by the state.

But I want to consider a reverse interaction between state and market, so to speak. I focus here on how many private actions are not only of public concern, but even are made as part of a political process. Market actors often take actions that in other systems would be delegated to the state. Consider proposals for voting on at the annual meeting of a corporation, which can be of two types:

Company-sponsored resolutions,
Shareholder resolutions brought forth under the Securities and Exchange Commission (SEC) Rule 14a-8.

Many resolutions are about pay, or the process for setting pay, appointing independent directors to the committees that set executive compensation, etc. Both Lenin and Hayek consider the question of "who-whom?" as political, even if we leave much of the answer to the result of the interactions of private actors. But many laws you might see debated in Washington, I think, resemble certain shareholder resolutions. My impression is that such resolutions might treat working conditions in China that must be satisfied for parts built into products distributed in the United States, environmentally responsible methods of production, etc. Many of these political resolutions for controlling corporate behavior may have low likelihood of enactment. They are, I think, more about raising consciousness.

I think it would be interesting to find a database of proxy resolutions. One could then confirm my claim above about many being political. Could one classify proxies, especially shareholder-sponsored ones, into various categories? Could the number in such categories be used in some sort of Instrumental Variable (IV) analysis or correlated over time with anything of interest? Broadbridge Financial Solutions provides support to many companies in electronic voting of shareholder proxies at corporate annual meetings. As far as I could see, they only provide access to the statement of proxy resolutions to shareholders of the company to which the resolution applies. Other possible sources of proxy resolutions are the SEC and organizations that track socially responsible investing.

Vatican: Abolish IMF

2011-10-27T08:03:00.000-04:00

"The Pontifical Council for Justice and Peace released a document Oct. 24 calling for a radical reform of the world's financial and monetary systems. It also proposed the creation of a global political authority to manage the economy and a new world economic order based on ethics.
The note entitled 'Towards reforming the international financial and monetary systems in the context of the global public authority' was presented to journalists..."-- staff for the National Catholic Reporter

Two Sraffian Propositions

2011-10-26T07:56:00.000-04:00

A Wage-Rate Of Profits Fontier

One might infer the following from Sraffa's book, The Production of Commodities by Means of Commodities: A Prelude to a Critique of Economic Theory:

The distribution of income is not determined by the supply and demand for factors of production. Instead, it is determined by power, politics, and the evolution of social norms.
The returns to capital are not determined by consumers rationally choosing to trade-off consumption today for consumption sometime in the future.

Sraffa's models, I think, are consistent with these ideas, even if they cannot be formally derived from his propositions as a matter of mathematical proof. Various empirical findings published lately support these ideas¹. I refer, specifically, to the arguments in Hacker & Pierson (2010)² and to the research³ summarized in Chapter 10, "Why is saving for the future so arbitrary?" of Akerlof and Shiller (2009).

Footnotes:

¹One might even argue that certain empirical trends (and an emerging worldwide political movement) should be giving Sraffian research more salience.
²Over a decade ago, James Galbraith provided empirically-supported arguments about the importance of politics in determining income distribution.
³Over a decade and a half ago, Paul Davidson was citing a 1982 study by Danziger, Van der Haag, Smolensky, and Taussig on savings during retirement. Their empirical results were not consistent with a model of lifecycle saving built on a foundation of intertemporal utility-maximizing.

Bibliography

George A. Akerlof and Robert J. Shiller (2009). Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism, Princeton University Press.
Paul Davidson (1994). Post Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policies for the Twenty-first Century, Edward Elgar.
James K. Galbraith (1998). Created Unequal: The Crisis in American Pay, Free Press.
Jacob S. Hacker & Paul Pierson (2010). Winner-Take-All Politics: How Washington Made the Rich Richer - And Turned Its Back on the Middle Class, Simon & Schuster.

Pierangelo Garegnani (1930 – 14 October 2011)

2011-10-18T08:14:00.000-04:00

Figure 1: A Production Function In Garegnani (1970)

I think the following are some of Garegnani's major claims about economics:

Classical economics provides an alternative theory to marginalist economics (misleadingly called "Neoclassical economics")
The givens of the classical theory of value and distribution are:

The gross quantities of output,
The production technique, and
The rate of profits or the wage.

These givens are to be explained within the discipline of political economy.
The classical theory of value and distribution can be combined with a Keynesian theory of effective demand.
The marginalists, from about 1870 to about 1930, shared with the classical economists a common method of trying to explain long-period prices and distribution.
Yet, the marginalist theory was incoherent because of their reliance on a given quantity of capital.
Hayek and Hicks, among others, initiated a major change in method with their creation of (very short period) theories of intertemporal and temporary equilibrium.
These new-fangled theories remain vulnerable to capital-theoretic critiques.

I give a very limited biography of articles in which Garegnani puts forth these theses, in English. As I understand it, his 1960 doctoral thesis was only published in Italian. His 1970 Review of Economic Studies article refutes the neoclassical long period theory of value and distribution, in general, and Samuelson's attempted defense with the pseudo-production function, more specifically. Joan Robinson took the opportunity of his 1978 and 1979 articles to break with Sraffianism on the ground that Garegnani's models were not located in historical time.

I include in the bibliography a festschrift published in his honor.

Selected Bibliography

Pierangelo Garegnani (1970). "Heterogeneous Capital, the Production Function and the Theory of Distribution", Review of Economic Studies V. 37, N. 3 (July): 407-436.
-- (1976) "On a Change in the Notion of Equilibrium in Recent Work on Value", in Essays in Modern Capital Theory (ed. by M. Brown, K. Sato, and P. Zarembka), North Holland. (Reprinted in J. Eatwell and M. Milgate (editors) (1983) Keynes's Economics and the Theory of Value and Distribution, Oxford.)
-- (1978) "Notes on Consumption, Investment, and Effective Demand, Part I", Cambridge Journal of Economics, V. 2: 335-353.
-- (1979) "Notes on Consumption, Investment, and Effective Demand, Part II", Cambridge Journal of Economics, V. 2:3: 63-82.
-- (1984). "Value and Distribution in the Classical Economists and Marx", Oxford Economic Papers, V. 36, N. 2 (June): 291-325.
-- (1990). "Quantity of Capital", in The New Palgrave: Capital Theory (Ed. by J. Eatwell, M. Milgate, and P. Newman), Macmillan Press.
-- (1990b). "Sraffa: Classical versus Marginalist Analysis", in Essays on Piero Sraffa: Critical Perspectives on the Revival of Classical Theory (Ed. by K. Bharadwaj and B. Schefold), Unwin-Hyman.
-- (2010). "On the Present State of the Capital Controversy", Sraffa's Production of Commodities by Means of Commodities,1960-2010: Critique and Reconstruction of Economic Theory, Roma (2-4 December).
Gary Mongiovi and Fabio Petri (editors) (1999). Value, Distribution and Capital: Essays in honour of Pierangelo Garegnani, Routledge.

Update (21 October): Some other obituaries: Tyler Cowen, at Daily Kos, Barkley Rosser, David Ruccio, Matias Vernengo. In other languages than mine: Sergio Cesaratto, Revista Circus, Giorgio Napolitano, Antonella Stirati

A Modest Proposal To A Random Cop

2011-10-16T17:06:00.000-04:00

Suppose I walked up to some random strangers on the street and sprayed them with pepper spray. I'm fairly sure that I would be breaking some serious laws. And if I did that in front of a crowd of police officers, I would be quickly arrested. So why don't you arrest an officer if he does that in a totally unprovoked situation?

If some policeman were to consider this, I suspect that they know it would not be good for their career. And they know that there are some (presumably ineffective) Internal Review Board processes. But if you did arrest another officer for committing a crime right in front of you when the whole world is watching, you would have another career. For example, you could be invited to lectures at many colleges for some years.

I think that any cop that does this would want to be smiling, quiet, and polite through the whole process. I recently asked a Military Policeman at some bar if he had ever prohibited a general from entrance onto his facility. (I know there are processes and paperwork to get a visit approved.) He told me, "No, but I did forbid a major the other month." And he told me that his amusement with the major's assertions was increased by smiling the whole while.

Current Mentions Of Keynes In The Press

2011-10-12T08:11:00.000-04:00

John Cassidy's article, "The Demand Doctor: How right was John Maynard Keynes" is in The New Yorker, 10 October 2011 (pp. 46-57).
Thomas Geoghegan's article "What would Keynes do?" is in The Nation, 17 October 2011 (pp. 11-17).
Robert Solow's article, "Working in the Dark", is a review of Sylvia Nasar's book, Grand Pursuit: The Story of Economic Genius. It is in the 28 September 2011 issue of The New Republic.

Off topic reminders to myself:

Consider re-reading Ester-Mirjam Sent's The Evolving Rationality of Rational Expectations: An Assessment of Thomas Sargent's Achievements (Cambridge University Press, 1998).
Consider buying:

Robert Leonard, Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to Social Science, 1900-1960 (Cambridge University Press, 2010)
Malcolm Rutherford, The Institutionalist Movement in American Economics, 1918-1947: Science and Social Control (Cambridge University Press, 2011)
Steve Keen, Debunking Economics - Revised and Expanded Edition: The Naked Emperor Dethroned? (Zed Books, 2011) (I own the first edition.)

Family Resemblances

2011-10-08T15:48:00.000-04:00

I expect many mainstream economists to blithely make many untrue statements. It is not, necessarily, because they disagree with prosaic ideas I think well-established in the literature. I suspect it is because they are just ignorant of the literature. This post offers an example of such a prosaic idea.

Works by David Ricardo (1821), Karl Marx, Wassily Leontief (1941), John Von Neumann (1945-1946), and Piero Sraffa (1960) are important components in a long-established, anti-marginalist, analytical tradition.

References

D. G. Champernowne (1945-1946). "A Note on J. v. Neumann's article on 'A Model of Economic Equilibrium'", Review of Economic Studies, V. 13, N. 1: pp. 10-18.
Heinz D. Kurz and Neri Salvadori (1995). Theory of Production: A Long-Period Analysis, Cambridge University Press.
Wassily Leontief (1941). The Structure of the American Economy, Harvard University Press. [I haven’t read this particular reference.]
Karl Marx (). Capital: A Critique of Political Economy
David Ricardo (1821). On the Principles of Political Economy and Taxation, Third edition. (Republished as the first volume of The Works and Correspondence of David Ricardo (ed. by P. Sraffa), Cambridge University Press.)
Piero Sraffa (1960). Production of Commodities by Means of Commodities: Prelude to a Critique of Political Economy, Cambridge University Press.
John Von Neumann (1945-1946). "A Model of Economic Equilibrium", Review of Economic Studies, V. 13, N. 1: pp. 1-9.

Mainstream Multipliers

2011-10-05T08:15:00.000-04:00

1.0 Introduction

"Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two." -- Robert Barro, Wall Street Journal

I find the above disingenuous, although cleverly worded to narrowly focus on transfer payments. Empirical evidence exists on Keynesian multipliers, thereby supporting the theory from which the policy recommendations are drawn.

In this post, I draw attention to four studies using Instrumental Variables (IVs) to estimate Keynesian multipliers. Currently, many economists find quite promising the use of IVs to emulate controlled experiments. For some more on the stimulus, that is, the 2009 American Recovery and Reinvestment Act, see Dylan Matthews' summaries of nine studies. I also have yet to make anything of Auerbach and Gorodnichenko (2011).

2.0 Methodology
The change in the ratio of public debt to GDP is increased by a rise in nominal interest rates, a fall in the rate of growth of real GDP, and a fall in the rate of inflation. The question addressed by this post is how to distinguish the effects of government policy on GDP from the effects of changes in GDP on government policy.

Some tax and government spending is endogenous to the economy. For example, a reduction in Gross Domestic Product (GDP) can result in:

Lower taxes, since the income on which taxes are based has declined, and more government spending on predefined social programs
Deliberate attempts at short-run government counter-cyclical increases in government spending and lower taxes.

One cannot easily use such endogenous changes to spending or taxes to identify subsequent causal effects from government spending and taxes on the overall level of economic activity. Accordingly, Christina D. Romer and David H. Romer (2010) consider exogenous changes to taxes, which generally fall into two categories:

Taxes to supposedly lower or raise long run rate of growth of GDP
Taxes to bring thedeficit closer to balance.

Romer and Romer consider quarterly USA data from 1945 to 2007. They look at narrative data, such as official reports, to classify changes in tax rates as endogenous or exogenous. The exogenous changes provide their IV which they can then use to identify subsequent causal changes in GDP.

David Cloyne (2011) applies this narrative approach for constructing a time series of exogenous tax changes to the United Kingdom. Jaime Guajardo, Daniel Leigh, and Andrea Pescatori (2011) extend this narrative approach across countries in the Organisation for Economic Co-Operation and Development (OECD).

Daniel Shoag adopts a different approach, applicable at the state level in the United States. He considers changes in state-level spending associated with windfall gains and losses in state pensions. A state pension is typically not invested in that individual state, and the dispersion of pension performance across states is exogenous, he argues, to the variation in the economic performance across states. So pension performance gives Shoag his IV. (His references include additional multiplier estimates, if I understand correctly.)

3.0 Results

Romer and Romer find lowering taxes by 1% of GDP raises GDP by 3% in 2 1/2 years.
Cloyne finds that lowering taxes by 1% of GDP raised GDP by 2.5% in three years.
Guajardo et al find that fiscal consolidation (that is, raising taxes or lowering government spending) of one percent of GDP reduces real GDP by 0.62 percent.
Shoag finds that a dollar of government spending generates $2.12 of personal income. Raising government spending by $35,000 generates another job in-state.

Update (12 October 2011): The September issue of the Journal of Economic Literature contains three articles debating the size of the multiplier.

Bibliography

Alan J. Auerbach and Yuriy Gorodnichenko (Aug. 2011) "Fiscal Multipliers in Recession and Expansion"
James Cloyne (2011) "What are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation"
Jaime Guajardo, Daniel Leigh, and Andrea Pescatori () "Expansionary Austerity: New International Evidence", IMF Working Paper WP/11/158.
Roberto Perotti (16 June 2011) ""The 'Austerity Myth': Gain Without Pain?"
Christina D. Romer and David H. Romer (June 2010) "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks", American Economic Review: 763-801.
Daniel Shoag () "The Impact of Government Spending Shocks: Evidence on the Multiplier from State Pension Plan Returns".

Vernengo On Recent History Of Macroeconomics

2011-09-30T08:19:00.000-04:00

Matias Vernengo argues that, "The fundamental problem of the neoclassical/marginal approach, and the importance of Keynesian analysis, can ONLY be properly understood in light of the 1960s capital debates."

Vernengo is riffing off a Krugman post on his New York Times blog. A commentator on that brings up John Eatwell's 1980s work on capital theory and Keynes.See also this Krugman post on Keynes' debunking of the idea that unemployment is caused by excessively high wages.

Update (12 October 2011): Peter Cooper has two posts discussing Vernengo's views.

The European Union: A Prescient Sraffian Economist

2011-09-28T08:02:00.000-04:00

"It is my view that the European project for arriving at economic and monetary union (EMU) should be regarded as the combined result of a radical change, since the late 1970s, in the principal economic policy objective of the major industrial countries - an epoch-making shift in emphasis away from unemployment and poverty to the objective of reducing inflation; and of the theoretical restoration that has occurred over the last twenty years, with the revival of pre-Keynesin conceptions in macroeconomic thinking. This view, which I have discussed elsewhere ..., makes it reasonable to believe also that the project's fortunes will reflect developments in these two ambits. Specifically, one can sensibly expect the EMU project to be definitively abandoned as soon as the social impact of actual unemployment will again make the pursuit of its reduction each government's main focus of concern, at the same time leading to a rejection of the 'natural' rate concept of the economy.
This process of gradual abandonment of the project, however, is likely to be delayed as regards countries in which the EMU is seen as a means of solving a 'commitment problem' in their national economic policies - an irreplaceable source of discipline, that is to say, with respect to inflation, government budget deficits and government debt." -- Massimo Pivetti (1999). "High Public Debt and Inflation: On the 'Disciplinary' View of European Monetary Union". In Value, Distribution and Capital: Essays in Honour of Pierangelo Garegnani (edited by Gary Mongiovi and Fabio Petri), Routledge.

I think federal systems are a good idea. I'm hoping a European government capable of conducting fiscal policy and issuing "euro-bonds" will emerge under the pressure of events.

International Journal of Pluralism and Economics Education

2011-09-22T08:13:00.000-04:00

I recently stumbled upon this journal. Its first issue was in 2009, and the articles in the third issue of the first volume are available for download by non-subscribers.I like Fred Lee's article, "A Heterodox Teaching of Neoclassical Microeconomic Theory". He mentions my favorite criticism:

"Another example is that in a system of production with produced inputs with circular production, a change in a factor input price generates collateral effects that invalidates the ceteris paribus, partial equilibrium methodology underpinning the derivation of the slope of the constant output factor input demand function. This not only makes the function meaningless, it also undermines partial equilibrium analysis. However, this well-known point is simply ignored." -- Frederick S. Lee

Fathers And Children and Rediscovering Fire

2011-09-17T11:36:00.000-04:00

1.0 Turgenev's Novel
I recently stumbled across an English-language copy of the Turgenev novel where the title was translated as in this blog post. This reminds me that I once listed the following pairs of economists:

John Bates Clark, John Maurice Clark
Milton Friedman, David Friedman
John Kenneth Galbraith, James Galbraith
John Neville Keynes, John Maynard Keynes
James Mill, John Stuart Mill
Auguste Walras, Marie Esprit Leon Walras
Sidney Weintraub, Eliot Roy Weintraub

I now find I can add another pair of names, Edward J. Nell and Guinevere Liberty Nell.

One way of reading the series of models in Sraffa's Production of Commodities by Means of Commodities is as an historical series. Later models in the series apply to an institutional setup that followed earlier models. Some, including maybe Engels, have read Marx in this way. The labor theory of value is alleged to apply to a pre-capitalist, late medieval artisan economy. The transformation of values into prices of production is then a historical process occurring with the emergence of capitalism. Be that as it may, Edward Nell's work on the theory of Transformational Growth, fits well with this literature.

2.0 Rediscovering Fire
Guinever Liberty Nell has written a book, Rediscovering Fire: Basic Economic Lessons From the Soviet Experiment (Algora Publishing, 2010), in some ways in a very different tradition. She also considers institutions in different historical settings. But consider that Peter Boettke and Peter Leeson, in the George Mason tradition, appear in the acknowledgments. I gather she currently works for the Center for Data Analysis of the Heritage Foundation. She notes her differences with her family:

"I also thank my brother Jacob for introducing me to Alec Nove's work, which was the inspiration for writing this book. I must also thank Thomas W. Moore IV for endless intellectual battles that helped me challenge the beliefs I was raised with, and my sister Miranda for then debating with me endlessly from the other side."

Her book is dedicated as so:

"To my mother for raising me in confidence in my own creativity and ability, and my father for infusing me with the economics 'bug'."

The book is organized in somewhat repetitive themes. Aside from the introduction and conclusions, chapters treat competition, (un)employment, profit (impact on the firm), profit (impact on the economy), middlemen and trade, prices, money, regulation, democracy, corporations. Each of these substantive chapters consists of an introduction, a summary of the socialist argument, a description of the soviet experience, lessons to be drawn, and a conclusion. I'm not finished; I'm in the chapter on prices.

In many cases, I disagree with her account of the socialist argument. For example, she writes:

"Under socialism, workers were to be paid according to work, while under communism they would be paid according to need. According to theory, workers were to receive the full value of their product." -- Guinevere Libery Nell, Rediscovering Fire, p. 61.

As far as I am concerned, this claim is explicitly contradicted in Marx's Critique of the Gotha Program. Lenin knew this work quite well, he writes about it in State and Revolution. As another example, Nell writes:

"Marx did not believe in gains from trade... However, there are several reasons why both parties can gain from an exchange. One is that division of labor enables one person to make a product at lower cost than another person can make it." -- Guinevere Libery Nell, Rediscovering Fire, p. 92.

But Marx, in Capital explicity states that such gains from trade exist. On the other hand, she extensively references Nikolai Bukharin and Evgenii Preobrazhensky's The ABCs of Communism, which I have often seen referenced as a primer to Bolshevikism. I think Nell would agree with me that the book concentrates more on economic history than the history of economic thought.

I'm no expert on Soviet history (I'm best on the 1920s, I think). Nevertheless, I'll record my impression that I find the thematic organization confusing. In some chapters, she writes about either war communism, the New Economic Program, the collectivization of agriculture, or the 1965 reform, for example. But these analyzes are not arranged chronologically. If she ever produces a new edition (paperback?), perhaps she can include a short chronology or timeline.

I'm willing to accept, say, war communism as an attempt to construct a close to pure socialist economy. But I found Nell's attempts to apply lessons directly to current institutions in the United States economy unconvincing. Maybe pure planning of an entire economy cannot be done. I don't see why a large amount of planning and regulation is therefore inappropriate for specific sectors (for example, utilities or health) in certain settings. On the other hand, she is often careful to be tentative in her suggestions. Maybe Obama "may" want to consider some unintended consequence in restructuring health insurance. A somewhat facile objection to her lessons can easily be constructed. Of course, the Soviet experience with planning did not work very well. They did not have powerful networked computers.Maybe this objection would be less likely to arise if she had taken more of a historical and less of a thematic approach.

3.0 An Open Request
But that's not what I want to talk about. I wonder whether Nell would be willing to share any anecdotes about growing up. Is she able to discuss political disagreements with family members without rancor? I guess of more interest to me would be whether she has formed personal impressions of Joan Robinson, Pierangelo Garegnani, or Anwar Shaikh. On the other hand, if her stories would be like those in Jan Myrdal's memoir Childhood, who seems not to have got on with much of his family, I don't know that I want to hear about it.

Davidson On Obama's Job Plan

2011-09-11T08:30:00.000-04:00

Paul Davidson discusses Obama's job plan.The blogger "Lord Keynes" presents links to other reactions to Obama's speech. (I dislike the use as pseudonyms of historical names of still current interest.)

Nick Rowe, Confused

2011-09-07T08:14:00.000-04:00

Nick Rowe comments on the Cambridge Capital Controversy in comments to this post:

"Don't take my answer as authoritative.

As far as I can see, the Cambridge-Cambridge Capital Controversy has had almost zero impact on modern macroeconomics. My guess is that not many have much knowledge of that debate. (I have *some* knowledge, through my own curiosity 30 years ago, but not much). The existence of a natural rate is treated as unproblematic. There is some possibility allowed that monetary policy might have some long-run non-neutralities, (multiple equilibria), but even here the focus is more on natural rates of output and unemployment, rather than on the natural rate of interest itself (though one would almost always imply the other).

The concept and existence of the natural rate of interest plays a central role in modern Neo-Wicksellian/New Keynesian macroeconomics...

In my own case, recently I made the more modest critique that the natural rate may exist, and be unique, but we cannot come anywhere close to observing it in real time...

And that's leaving aside the problem that different financial assets will have different natural rates, and the spreads between them may vary over time, especially in a financial crisis.

Now, funnily enough, there is one small exception *I know about* (others may know of others) to my statement that macroeconomists ignore CCCC. David Laidler recently wrote a paper for the CD Howe that explicitly used CCCC to critique the Neo-Wicksellian monetary policy of the Bank of Canada. And David is a monetarist!

...I, personally, remain unconvinced by the Cambridge critique. *As far as I can see*, if a Walrasian/Arrow-Debreu equilibrium exists, and is unique, it defines within it a natural rate of interest (subject to qualifications in my question below). *As far as I can see* a lot of the CCCC debate was really about whether the natural rate could be determined *independently of preferences*. And (outside of very special one-good Y=F(K,L) models) it cannot. So what? I say. Preferences matter too, in determining relative prices including intertemporal prices like interest rates.

BUT, the chances of getting a nicely-well-behaved downward-sloping Investment demand function (and hence IS curve) out of anything other than a one-good model? I wouldn't bet on it. But my hunch is that the complications that arise from firms being sales-constrained (ignored in the Walrasian model) are more important than anything coming out of CCCC. Hence this post.

Now, my question: I never found Sraffa easy to understand. Sraffa said (I think) that the natural rate on wheat would, in general, be different from the natural rate on barley. Right? If so, is this what he meant:

Suppose the relative price of barley against wheat is rising at (say) 1% per year. Then, under perfect competition, and free flow of capital across sectors, the barley natural rate of interest must be one percentage point lower than the wheat natural rate of interest.

Is that what Sraffa was saying? (With all due allowance for over-simplification?)" -- Nick Rowe

I doubt Rowe is aware of the existence of Colin Rogers. I don't know what it means to talk of a natural rate of interest in the Arrow-Debreu model of intertemporal equilibrium. (This is certainly not Wicksell's long period approach.) Money does not exist in the model. For every numeraire, one will get another interest rate (for a loan for one one period of the numeraire good, starting at a designated time period). Which of these many interest rates is the "natural rate"? (It would help if when Rowe asks his question about Sraffa on own rates of interest of barley and wheat, he would bring up that he referencing Sraffa's critique of Hayek, not the more mature Production of Commodities by Means of Commodities.) Rowe has not grasped that classical economics and extensions of the economics of Keynes provide different theories of distribution. One need not close Sraffa's model by assuming intertemporal utility-maximization. I don't see why I need I care about Rowe's hunches on "importance", although, I suppose, he gets points for recognizing the arbitrariness of a downward-sloping investment demand function.

"Those re-switching examples never seemed to me to pay enough attention to the term structure of interest rates. There was always a flat term structure assumed. Not to mention how the term structure of investment would interact with the desired term structure of saving and consumption at the aggregate level, to create a term structure of interest rates." -- Nick Rowe

I find this incomprehensible. Let the interest rate on a loan for n years be 100 r_n percent. Typically, in a reswitching example, the following relationship holds:

1 + r_n = (1 + r₁)ⁿ

This is a term structure of interest rates. Suppose one wanted to allow expectations of future yearly interest rates to differ from the current yearly interest rate. That is easy to introduce, but those extra degrees of freedom make it even easier to show violations of traditional neoclassical parables. Although it's easy to construct closed reswitching examples, I don't see why mainstream economists cannot consider open models.

Bill Woolsey's comment in the same thread is too stupid to bother with. I would think it possible to discuss analytical points somewhat separately from ideology.

Elsewhere

2011-09-02T08:33:00.000-04:00

Arindrajit Dube takes the opportunity of Alan Krueger's nomination, as chair of the Council of Economic Advisors, to note that Card and Krueger's work has stood the test of time. He also notes the bias in Neumark and Wascher's work.
Dean Baker's new book, The End of Loser Liberalism: Making Markets Progressive is now available. What is the point of the cover photo of Biscuit? Is it that poodles are losers; progressives should try to emulate a bigger, more assertive breed? (Anyway, I am currently reading Jacob Hacker and Paul Pierson's Winner-Take-All Politics: How Washington Made the Rich Richer - And Turned Its Back on the Middle Class; so I'm not enthusiastic about reading a similarly themed book right away.

David Henderson, Idiot

2011-08-18T07:38:00.000-04:00

David Henderson tells us:

"Then, in my late teens, I started to learn economics. I started to understand that the vast majority of income in a relatively free society is earned. It's true that a small number of wealthy people did get their money by fraud or dishonesty. More common, especially in societies with lots of government controls, were people who got wealthy by using political pull. But I started to see that the typical high-income person in a relatively free society gets his or her income the old-fashioned way--by earning it." -- David Henderson

I suppose it is good that some economists are willing to expose themselves, or their teachers, as incompetent. Economists refusing to teach theories that collapsed half a century ago, except as history, would be better. Even if markets were perfectly competitive, marginal productivity would not be a theory of income distribution. In neoclassical economics, properly understood, no sense can be attached to the claim that the rich earn their income. But, of course, markets are not perfectly competitive in the United States. The ever increasing income and wealth being seized by the top quintile, or 10%, or 1%, or 0.1%, etc. is the result of the exercise of political power.

Noah Smith, who probably thinks of himself as a liberal opposing "libertarians" (that is, propertarians), is not much better. In his discussion, he fails to mention any empirical facts about the increasing and astonishing unequal distribution of income in the United States. He fails to discuss whether or not gross inequalities in the distribution of income and wealth is consistent with the smooth expanded reproduction of a capitalist economy. And he fails to discuss whether having an income distribution in the United States that has not been matched since the 1920s might have something to do with current recessionary conditions. Instead, he writes about feelings. As far as feelings go, the vast majority of Americans should be angrier. "Let fury have the hour, anger can be power/D'you know that you can use it?"

Scholarly Fantasies

2011-08-17T15:40:00.000-04:00

Maybe many that read old books might find interest the rediscovery of works whose existence was previously unknown or thought to be gone forever. Some examples:

The Gospel According to Thomas and other gnostic manuscripts: Two Egyptian farmers discovered the Nag Hammadi library in 1945. This story is fairly incredible. While these Egyptian brothers pursued a feud with one of their neighbors, they left them in the keeping of their mother. She, in turn, I guess, started a fire with them every morning, until a coptic priest recognized their importance. And then they were smuggled out of Egypt.
Thomas Malory's Le Morte d'Arthur: While cataloging the Winchester College library, in 1934, Sir Walter Fraser Oakshott discovered a manuscript of this book. This manuscript suggests that Malory conceived his work as a collection of tales. Caxton, the printer, edited it into an unified tragedy.
Third edition of François Quesnay's Tableau Économique: Marguerite Kuczynski, in the late 1960s, asked the heirs of Pierre Samuel Du Pont de Nemours if they had any printed works by Quesnay in their possession. And the Eleutherian Mills Historical Library told her "Yes".
David Ricardo's unknown correspondence and manuscripts: Piero Sraffa's discovered, in 1934, a bundle in F. E. Cairnes castle at Raheny. Raheny is near Dublin, and F. E. Cairnes, son of a 19th-century economist, had recently died. The bundle contained 57 letters from Ricardo to James Mill and various manuscripts written by Ricardo
Ludwig Von Mises' papers from his apartment in Vienna: Unbeknownst to Mises, the Nazis preserved these after Mises fled. The Soviets captured them from Germany at the end of WW II, catalogued them, and preserved them in the KGB archives. Richard Ebeling brought them back from Russia in 1996 after their discovery by western scholars after the collapse of the Soviet Union.

Video Strategy Games As A Testbed For Decision Theory

2011-08-09T08:27:00.000-04:00

Daniel MacDonald occasionally mentions video games. It turns out some researchers use strategy video games for exploring decision theory models. (Partially observable Markov decision processes and partially observable stochastic games are examples of such models for decision theory.) Frans A. Oliehoek and others at the Intelligent Systems Lab, at the University of Amsterdam, have developed the Multi-Agent Decision Process (MADP) Toolbox, "an open source C++ library for decision-theoretic planning under uncertainty in multiagent systems."

Some researchers, I guess in this lab, have integrated MADP into StarCraft, a real-time strategy game. StarCraft has a science fiction setting, and MADP routines are used to calculate policies for one of the three races in the game.

I consider Edward Castronova one the most interesting researchers exploring the intersection of computer games and economics.

Don't tell Brad DeLong (who at one time found he had to choose between playing Civilization or doing economics) about this post.

Quiggin Fortunate In His Enemies; Williamson Still A Fool

2011-08-07T08:28:00.000-04:00

An attack by Michael Stutchbury in The Australian. (Even the title is a lie - social democrats are not on the "far left".)
John Quiggin responds.
Stephen Williamson reviews Zombie Economics. We learn "DSGE has no implications, and therefore can't be wrong. Indeed DSGE encompasses essentially all of modern macroeconomics."
John Quiggin tries to correct Williamson.
Noah Smith also tries.
Paul Krugman links to Smith and gently chides Williamson.
Stephen Williamson comically explains this is not pulling rank: "Zombie Economics reads like fringe economics (Austrians, Post-Keynesians, etc.). In fringe economics, the game is dismissing things you know little about, and offering little that is actually constructive."
Stephen Williamson provides an even worse elaboration, as if Krugman's point were that his synthetic Nobel makes him right.

Hahn On Regression In Macroeconomics

2011-08-03T15:35:00.000-04:00

One can find many amusing quotes from such as Frank Hahn and Robert Solow on trends in macroeconomics after Robert Lucas. I get this one second-hand:

"One should now ask how the present mess came into being. For macroeconomics today is in a state which astronomy would be if Ptolemaic theory once again came to dominate the field. There can be few instances in other disciplines of such a determined turning back of the clock. A great deal of what is written today as well as the policy recommendations which have been made would be thoroughly at home in the twenties. So something needs explaining and I hope that some good intellectual historian will attempt to do so soon." -- Frank Hahn (1985) (as quoted in Philip Mirowski's More Heat Than Light, p. 411).

Do I need to note some economists today would still find Hahn's opinion apposite?

Economists Joining The Austrian School In The Wilderness

2011-07-30T12:22:00.001-04:00

Around 1940, the Austrian school of economics collapsed. Who did most to propagate the Austrian school in the interval between this collapse and the 1974 South Royalton conference? I'd like to formulate this question so it's clear I'm talking about generations following Ludwig Von Mises and Friedrich Hayek.

David Friedman has recently refuted some fantastic claims on behalf of Murray Rothbard. (See also Friedman on Rothbard's willingness to advocate lying.)

For me, two names pop to mind - Israel Kirzner and Ludwig Lachmann. I don't think of Murray Rothbard as somebody that academics need pay any attention to, other than historians studying the American right during the second half of the twentieth century. I think one can draw many analytical parallels between Lachmann and Robinson's views on capital. I'm also interested, with Lachmann, in G. L. S. Shackle, a Post Keynesian economist. I don't find Kirzner's views on entrepreneurship as of as much interest. I like Kirzner better on the history of the Austrian school and in his attempts to differentiate Mises from Robbins in their views on methodology. What did Rothbard contribute, other than political polemics and rants for 'zines read by only a handful of true believers? I know some will cite his books. But I don't find much in Man, Economy, and State other than repetition of Mises, including Mises' unwillingness or inability to accurately state the views of his contemporaries.

Although I am quite aware of the difficulties of this metric, I looked to see who among these three managed to publish, after the Austrian-school revival, in economic journals I find of interest and that cannot be perceived as a ghetto for the Austrian school. I have handy what purports to be a complete bibliography for Lachmann, a couple of Kirzner collections, and google searches for Rothbard. I think impressive Lachmann's 1976 survey in the Journal of Economic Literature. I expected to find Kirzner had more impressive outlets for a few of his papers. Since I note that Kirzner contributed the survey article on the Austrian school for the first edition of The New Palgrave, I suppose I should also note his New Palgrave articles on "Economic harmony" and (with Roger Garrison) on Hayek, as well as Murray Rothbard's New Plagrave articles on "Catallactics", "Frank Fetter", "Imputation", Mises, and "Time Preference". I'm not sure this evidence leads to my conclusion.

Bibliography

Edwin G. Dolan (editor) (1976). The Foundations of Modern Austrian Economics, Sheed and Ward.
Israel Kirzner (). "Entrepreneurship, Entitlement, and Economic Justice", Eastern Economic Journal.
Israel Kirzner (). "Menger, Classical Liberalism, and the Austrian School of Economics", History of Political Economy.
Israel Kirzner (1987). "The Austrian School of Economics", in The New Palgrave: Dictionary of Economics (Ed. by J. Eatwell, M. Milgate, and Peter Newman), Macmillan.
Hansjörg Klausinger (2006). "'In the Wilderness': Emigration and the Decline of the Austrian School", History of Political Economy, V. 38, N. 4: 617-664.
Ludwig Lachman (Mar. 1976) "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society", Journal of Economic Literature: 54-62.
Ludwig Lachmann (1980). "Review of Hayek's Law, Legislation, and Liberty, Vol. III", Journal of Economic Literature, V. 18: 1079-1080.
Louis M. Spadaro (1978).New Directions in Austrian Economics, Sheed Andrews and McMeel.

Murphy On Sraffa's Victory In Debates On ABCT

2011-07-24T08:34:00.000-04:00

Robert P. Murphy has provided electronic access to his article, "Multiple Interest Rates and Austrian Business Cycle Theory". Murphy presented this paper at a Liberty Fund conference a number of years ago. (At least one other has commented on this paper. Has Murphy on his blog brought up his papers, also growing out of his PhD thesis, in the Journal of the History of Economic Thought?)

Many fanboys of so-called Austrian economics that you may meet, especially on the Internet, are ignorant of economics, including the economics of the Austrian school. For some reason, proclaiming themselves to be members of this tribe and moralizing about outsiders fills an emotional need for some. Even among academics adhering to this school, I have noticed little discussion, for example, of the distinction between Mises' Evenly Rotating Economy and Hayek's notion of plan compatibility in an intertemporal equilibrium. (I can provide caveats.)

These strictures do not apply to Murphy. He is fully aware of this distinction. And he accepts that the variation of own rates of interest among commodities outside steady states overthrows Hayek's exposition of Austrian Business Cycle Theory (ABCT) in Prices and Production. Murphy should and does acknowledge the correctness of Sraffa on this point in his debate with Hayek over ABCT.

In my critique of ABCT (on other grounds), I end up with a bibliography consisting almost exclusively of recent work by heterodox economists. Murphy's bibliography is like this, except his heterodox economists are drawn exclusively from one school.

Nevertheless, Murphy should include a selection of references from other traditions, including mainstream economics. No matter what one may think of mutualism, Kevin Carson (2004) is not a good cite for "a modern statement of classical price theory". Kurz and Salvadori (1995) is a more canonical modern statement. Debreu (1959) and Arrow & Hahn (1971) are standard references for intertemporal equilibrium. Hahn (1982) explains how own-rates of interest vary among goods in such models. Boehm (1986) strives to distinguish the mainstream concept of intertemporal equilibrium from Hayek's. Hicks (1946) and Grandmont (1977) are two canonical statements of temporary equilibrium. Samuelson (1958), Diamond (1965), Benhabib (1992 & 2008) and Geanakoplos (2008) describe Overlapping Generations (OLG) models.

Economists have established, I think, that conditions on the parameters of short-run equilibrium models (e.g., in intertemporal and temporary equilibrium models) fail to limit the dynamics of equilibrium paths in such models. I like to draw on the Cambridge Capital Controversies and on the Sonnenschein-Mantel-Debreu theorem to argue for this result.

Since the dynamics are unlimited, one should be able to construct examples in such models of cycles. Of the literature I have read, I find, perhaps because of my own limitations, too few concrete examples. It is my understanding that cycles can arise in these models, even if expectations are being fulfilled and plans continue unchanged. This may be an unduly restrictive approach to expectations, but, given the current hegemony of neoclassical economics, other approaches need an explicit motivation. Post Keynesians and, I guess, the Austrian school have such a motivation in their emphasis on historical time. But I do not see Murphy connecting up this emphasis to his story in his paper. (I need to reread his section on "Meeting Sraffa's Objection" with more attention to ensure the story is coherent.) Murphy wants agents in his story to make mistakes through responses to the monetary authority. But these are basically barter models. Introducing money into such models is challenging, and Murphy might want to examine some attempts in the literature.

I think established results should lead one to drop an insistence on methodological individualism (or microfoundations) in macroeconomic research along these lines. In any case, I fail to see what is specifically "Austrian", especially inasmuch as the Austrian school relates to the ABCT, about such a description of business cycles.

Bibliography

Kenneth J. Arrow and Frank H. Hahn (1971). General Competitive Analysis, Holden-Day [I haven't read this].
Jess Benhabib (editor) (1992). Cycles and Chaos in Economic Equilibrium, Princeton University Press [I haven't read this].
Jess Benhabib (2008). "Chaotic Dynamics in Economics", in The New Palgrave Dictionary of Economics, 2nd edition. (ed. by S. N. Durlauf and L. E. Blume), Palgrave Macmillan.
Stephan Boehm (1986). "Time and Equilibrium: Hayek's Notion of Intertemporal Equilibrium Reconsidered" in Subjectivism, Intelligibility, and Economic Unerstanding (ed. by I. M. Kirzner), New York University Press.
Kevin A. Carson (2004). Studies in Mutualist Political Economy.
Gerard Debreu (1959). Theory of Value: An Axiomatic Analysis of Economic Equilibrium, Yale University Press.
Peter A. Diamond (Dec. 1965). "National Debt in a Neoclassical Growth Model", American Economic Review, V. 55, Iss. 5: 1126-1150.
John Geanakoplos (2008). "Overlapping Generations Model of General Equilibrium", in The New Palgrave Dictionary of Economics, 2nd edition. (ed. by S. N. Durlauf and L. E. Blume), Palgrave Macmillan.
Jean Michel Grandmont (Apr. 1977). "Temporary General Equilibrium Theory", Econometrica, V. 45, N. 3: 535-572.
Frank Hahn (1982). "The Neo-Ricardians", Cambridge Journal of Economics, V. 6: 353-374.
J. R. Hicks (1946). Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory, 2nd edition, Oxford University Press,
Heinz D. Kurz and Neri Salvadori (1995). Theory of Production: A Long-Period Analysis, Cambridge University Press.
Robert P. Murphy. "Multiple Interest Rates and Austrian Business Cycle Theory".
Paul A. Samuelson (Dec. 1958). "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money", Journal of Political Economy, V. 66, N. 6: 467-482.

Against Hegemony Of "Overton Window"

2011-07-20T15:26:00.001-04:00

I don't see why some people are so willing to talk about the "Overton Window". Another theory is available to discuss how and why some range of ideas become hegemonic in a society. And this is a theory of politics that was formulated when the left was doing poorly.

Actually, reading more of Antonio Gramsci's prison writings has been and probably will continue to be on my to-read list for a long time.

Some More On Hayek And Sraffa

2011-07-13T16:52:00.003-04:00

1.0 Introduction
I have previously discussed Sraffa's review of Prices and Production, Hayek's reply, and Sraffa's rejoinder. I thought I would bring up today a couple of other aspects of that debate.

2.0 Hayek Changes His Notion Of Equilibrium
The traditional neoclassical equilibrium concept, in the period roughly from 1870 to 1930, is roughly of a stationary state. Neoclassical economists in this period erroneously thought that one could define such an equilibrium, given tastes, technology, and endowments, including the endowment of capital, by some or another definition of capital. As Walras recognized, such an equilibrium can never be expected to be established. At most, actual capitalist economies can be expected to be tending towards this kind of equilibrium at any point in time.

This was Hayek's equilibrium concept in Prices and Production. He put forth another equilibrium concept in The Theory of Capital, a concept he had been developing for some time. (Hayek is very clear on this in Chapter 2.) This equilibrium concept is of plan compatibility, a concept formally equivalent in some sense to the Arrow-Debreu model of intertemporal equilibrium.

Given spot prices, a monetary interest rate, and the past history of an economy, entrepreneurs, based on their economic theories, form expectations about future prices and the expectations and plans of others. They form their plans based on these expectations. Equilibrium exists if all these plans are mutually compatible. Under this equilibrium concept, no need exists for entrepreneurs to plan to produce the same quantities period after period. Likewise, consumers might plan to consume different quantities in different periods. Furthermore, entrepreneurs and consumers will generally expect spot prices to vary over time.

Hayek's equilibrium concept of plan compatibility, as I understand it, cannot be used to ground Austrian Business Cycle Theory.

3.0 Austrian Business Cycle Theory Outside Of Historical Time
Sraffa destroyed Hayek's version of Austrian Business Cycle Theory, as Robert Skidelsky notes.

I am amused in noting part of Sraffa's critique. Keynes sets his General Theory in historical time, not logical time. I read Sraffa as pointing out that Hayek's theory, like neoclassical theory on Keynes's reading, is set in logical time:

"That the position reached as the result of 'voluntary saving' will be one of equilibrium... is clear enough; though the conclusion is not strengthened by the curious reason he gives for it.¹³

But equally stable would be that position if brought about by inflation; and Dr. Hayek fails to prove the contrary. In the case of inflation, just as in that of saving, the accumulation of capital takes place through a reduction in consumption. 'But now this sacrifice is not voluntary, and is not made by those who will reap the benefit from the new investments... There can be no doubt that, if their money receipts should rise again [and this rise is bound to happen as Dr. Hayek promises to prove] they would immediately attempt to expand consumption to the usual proportion', that is to say, capital will be reduced to its former amount; 'such a transition to less capitalistic method of production necessarily takes the form of an economic crisis'...

As a moment's reflection will show, 'there can be no doubt' that nothing of the sort will happen. One class has, for a time, robbed another class of a part of their incomes; and has saved the plunder. When the robbery comes to an end, it is clear that the victims cannot possibly consume the capital which is now well out of their reach. If they are wage-earners, who have all the time consumed every penny of their income, they have no wherewithal to expand consumption. And if they are capitalists, who have not shared in the plunder, they may indeed be induced to consume now a part of their capital by the fall in the rate of interest; but not more so than if the rate had been lowered by the 'voluntary savings' of other people.

¹³The reason given is that 'since, after the change had been completed, these persons [i.e., the savers] would get a greater proportion of the total real income, they would have no reason' to consume the newly acquired capital... But it is not necessarily true that these persons will get a greater proportion of the total real income, and if the fall in the rate of interest is large enough they will get a smaller proportion; and anyhow it is difficult to see how the proportion of total income which falls to them can be relevant to the 'decisions of individuals'. Dr. Hayek, who extols the imaginary achievements of the 'subjective method' in economics, often succeeds in making patent nonsense of it." -- Piero Sraffa (March 1932)

And again:

"The first question is whether, as Dr. Hayek asserts, the capital accumulated by 'forced saving' will be, 'at least party' dissipated as soon as inflation comes to an end: 'It is upon the truth of this point that my [Dr. H's] theory stands or falls'. My simple-minded objection was that forced saving being a misnomer for spoliation, if those who had gained by the inflation chose to save the spoils, they had no reason at a later stage to revise the decision; and at any rate those on whom forced saving had been inflicted would have no say in the matter. This appeal to common sense has not shaken Dr. Hayek: he describes it as 'surprisingly superficial', though unfortunately he forgets to tell me where it is wrong." -- Piero Sraffa (June 1932)

The distribution of endowments - who owns what - is a datum for traditional neoclassical theory. Disequilibria employment, production, and purchases will change this data. So one cannot expect, contrary to Hayek, the previous equilibra corresponding to previous data to be restored after the economy is on some disequilibrium path for some extended time.

Sraffa, like later Post Keynesians, suggested a coherent economic theory must be set in historic time.

References

P. Garegnani (1976) "On a Change in the Notion of Equilibrium in Recent Work on Value and Distribution", reprinted in Keynes's Economics and Theory of Value and Distribution (edited by J. L. Eatwell and M. Milgate, 1983), Oxford University Press.
F. A. Hayek (1935) Prices and Production, 2nd. Edition, Routledge and Sons.
F. A. Hayek (June 1932) "Money and Capital: A Reply", Economic Journal, V. 42: 237-249.
F. A. Hayek (1941) The Pure Theory of Capital, University of Chicago Press.
M. Milgate (1979) "On the Origin of the Notion of 'Intertemporal Equilibrium'", Economica, V. 46, N. 1: 1-10.
P. Sraffa (March 1932) "Dr. Hayek on Money and Capital" Economic Journal, V. 42: 42-53.
P. Sraffa (June 1932). "A Rejoinder", Economic Journal, V. 42: 249-251.

Against The TSSI: Some Literature

2011-07-10T11:52:00.001-04:00

The Temporal Single System Interpretation (TSSI) is a reading of Marx in which Marx's theory of value, including his approach to the transformation problem, is internally consistent. I think of Alan Freeman and Andrew Kliman, among the extensive community developing the TSSI, as the most prominent advocates. And, for me, Andrew Kliman's book, Reclaiming Marx's "Capital": A Refutation of the Myth of Inconsistency (Lexington Books, 2007) is the canonical statement, for now, of the TSSI. (I have already posted some initial reactions to Kilman's book.)

The purpose of this post is to list some literature criticizing the TSSI, often harshly. At least some of the articles in the bibliography have replies and responses. Despite the tone of some of this literature, I think the TSSI worth engaging with. On my lengthy to-do list is, some day, to carefully step through Kliman's refutation of the Okishio theorem and through refutations of Kliman's refutation. The Okishio theorem refutes Marx's law of the declining rate of profit.

If one were curious about what Marxists economists have to say today, one might browse recent back issues for some of these journals.

Bibliography

Simon Mohun and Roberto Veneziani (Summer 2007) "The Incoherence of the TSSI: A Reply to Kliman and Freeman", Capital and Class, V. 31: 139-145.
Gary Mongiovi (Fall 2002) "Vulgar Economy in Marxian Garb: A Critique of Temporal Single System Marxism", Review of Radical Political Economics, V. 34, N. 4: 393-416.
Ernesto Screpanti (Jan. 2005) "Guglielmo Carchedi's 'Art of Fudging' Explained to the People", Review of Political Economy, V. 17, N. 1: 115-126.
Ajit Sinha (Summer 2009) "Book Review: Reclaiming Marx's 'Capital'", Review of Radical Political Economics: 422-427
Roberto Veneziani (2004) "The Temporal Single-System Interpretation of Marx's Economics: A Critical Evaluation", Metroeconomica, V. 5, N.1: 96-114.
Roberto Veneziani (Fall 2005) "Dynamics, Disequilibrium, and Marxian Economics: A Formal Analysis of Temporal Single-System Marxism", Review of Radical Political Economics, V. 37, N. 4: 517-529.

Too Long; Didn't Read

2011-07-08T15:40:00.000-04:00

Tom Walker mentions Paul Lafargue The Right to be Lazy. I started reading this book months ago and did not get much further than the description of the horrors of nineteenth century working conditions. Is not finishing in the spirit of the piece?

J. R. Hicks' Use of "Malinvestment"

2011-07-05T15:19:00.001-04:00

In the influential Value and Capital: An Inquiry Into Some Fundamental Principles of Economic Theory (2nd edition, Oxford, 1946), J. R. Hicks writes:

"...it is the strict interpretation - divergence between expected and realized prices - which is of central importance theoretically. Whenever such a divergence occurs, it means (retrospectively) that there has been malinvestment and consequent waste. Resources have been used in a way in which they would not have been used, if the future had been foreseen more accurately; wants, which could have been met if they had been foreseen, will not be satisfied or will be satisfied imperfectly. Thus, disequilibrium is a mark of waste, and imperfect efficiency of production." -- J. R. Hicks, p. 133, my emphasis.

This passage occurs in Hicks' introduction of the method of temporary equilibrium. I think Hicks relied heavily on Hayek in developing this method¹. But I see a large difference in Hicks' use of "malinvestment" here and Hayek's account in Prices and Production.

For Hayek's version of ABCT, malinvestment occurs when entrepreneurs more or less share the same systematic expectations and plans. In explaining business cycles, he abstracts from non-systematic mistakes in capital investments. Hayek thinks entrepreneurs will invest in too capital-intensive techniques when monetary authorities set the interest rate too low. They will tend to adopt a capital structure in too many high-order goods and not enough low-order goods are produced, as compared to the capital-structure justified by consumer tastes².

Hicks, on the other hand, is considering a case in which all spot markets clear, but some ongoing production could be the result of variation among entrepreneurs in expectations or plans. Since some expectations or plans are incorrect, he characterizes this state as a disequilirium. Hicks does not posit a systematic bias in plans or expectations for his use of the term "malinvestment". Consequently, his business cycle theory is quite different from Hayek's.

Footnotes

Hicks mentions Hayek in his acknowledgments. I'm surprised to see he also acknowledges criticisms from Sraffa.
This theory cannot be sustained.

Robert Nozick, The Refutation Of Rational Choice, Etc.

2011-06-26T08:43:00.001-04:00

"Robert Nozick has a unique place in the annals of rational choice theory: he refuted it." -- Ian Hacking (1994)

My reaction, when reading this, was, "What?" Hacking is referring to a paper by Robert Nozick¹ on Newcomb's Paradox. I'm fairly sure I've read something about this paradox, but I had to look it up.

Suppose there exists a psychic that has shown themselves to be extremely reliable in their predictions. And the psychic has presented you with a choice, based on one of their predictions. You are presented two boxes, one transparent and one wrapped such that you cannot see the contents. The rules are that you can take either:

Just the opaque box, or
Both boxes.

The transparent box contains $1,000, as you can plainly see. If the psychic has predicted you will pick just the opaque box, they have placed $1,000,000 in it. If they have predicted you will pick both boxes, they have ensured that the opaque box contains nothing. The prediction has been made, and the boxes have been sealed. You know all these conditions but not what the prediction was. What should you do?

Apparently many initially are very decided on what they would do. But people split half-and-half on what that is. Anyways, Hacking states that this example shows that two principles of rational decision-making are not necessarily consistent². I guess he is correct, and I'm in no position to challenge that this is of philosophical interest³. But, since no such psychic can exist, I find other examinations of rational choice theory of more practical import.

By the way, I want to give a qualified defense of Stephen Metcalfe's comments in Slate on Nozick's Wilt Chamberlin example⁴. Strictly speaking, Metcalf's confusion about which Keynes comment was on which Hayek book is irrelevant to these comments later in the article⁵. And I accept that he doesn't describe the logic of Nozick's argument⁶. Neither did I. It is perfectly legitimate to argue that the rhetorical force of the argument comes from elements of the argument extraneous to its strict logic. And that is what Metcalf does⁷.

Footnotes

Nozick's "Reflections On Newcomb's Paradox" (in Knotted Doughnuts and Other Mathematical Entertainments (ed. by M. Gardner), W. H. Freeman, 1986).
Choose dominant strategies. Maximize mathematical expected utility.
I find Wittgenstein perennially fascinating.
Metcalf's Slate followup is here.
So is the fact that Nozick was smoking dope during the period in which he wrote Anarchy, State, and Utopia; I was startled to find he mentions in his book his experiences while under the influence. More by Brad DeLong on Nozick is here. Even more can be found in the Delong's blog archives.
By the way, Yglesias is mistaken in concluding, "Since as best I can tell nobody does hold such a [patterned] theory [of distribution]". Nozick explicitly states that marginal productivity gives such a patterned theory. Nozick is confused, since marginal productivity, correctly understood, is a theory of the choice of technique, not a theory of distribution.
Although I am not convinced appealing to guilty regret over the history of race relations in the United States has anything to do with Nozick's rhetoric.

Really, Really Free Market

2011-06-23T15:15:00.000-04:00

I stumbled upon this idea recently. Not that I've ever physically seen such a market.

Elsewhere

2011-06-19T08:38:00.002-04:00

Alejandro Nadal asks, "Whatever happened to stability analyisis?" (h/t: Brad DeLong).
A blogger with the pseudonym of "Lord Keynes" critiques Austrian Business Cycle Theory, based on Sraffa's demonstration of the non-uniqueness of the "natural" rate of interest in an intertemporal equilibrium.
Jayati Ghosh provides access, from here, to an essay surveying Michal Kalecki's contributions to development economics.

A Popular Exposition Of Post Keynesianism

2011-06-17T09:28:00.002-04:00

I have stumbled across a commentator, Tim Bending, at Open Democracy has been explaining some practical implications of Post Keynesianism. I particularly like this exposition of the theoretical incoherence of marginal productivity as a theory of the distribution of income.

Numeraire-Free Tests Of The Labor Theory Of Value

2011-06-13T17:25:00.000-04:00

A reminder to my self - the following article belongs on this list.

Mariolis, Theodore and George Soklis (2011) "On Constructing Numeraire-Free Measures of Price-Value Deviation: A Note on the Steedman-Tomkins Distance" Cambridge Journal of Economic, V. 35, N. 3: 613-618.

Three Routes To Choice

2011-06-11T10:19:00.000-04:00

A theme of this blog is the incorrectness of the neoclassical textbook description of how agents choose. The assumptions of this view can be stated as:

An agent knows the complete list of choices from which they must select.
Given any two elements from this space of choices, the agent knows whether one of these elements is not preferred to the other.
Any element from this space is not preferred to itself.
The ranking obtained from the preference relation is transitive.
If the space of choices is a continuum, a certain continuity assumption must hold for the preference relation so as to rule out lexicographic preferences.

These assumptions supposedly imply the claim that utility attains at most an ordinal measurement scale level¹. And they allow one to derive the demand for consumer goods and the supply of factors of production.

Economists have transcended this framework. I have previously pointed out models of agents as consisting of multiple selves. I think this approach exhibits a consilience with theories in, for example, cognitive psychology. I have recently stumbled upon two other ways of modeling choice, generalizing the textbook view to an approach more consistent with empirical evidence from behavioral economics and that cannot be justifiably characterized as "irrational".

Nadeem Naqvi has developed an approach of incorporating tertiary information into choice. In the outdated neoclassical theory, one might represent the relationship y is not preferred to x for agent i by:

x R_i y

Naqvi and his colleaques introduce the relation R_i(V_i^j), where V_i^j is the background set for agent i. Parametric variation in the agent’s background set can alter the agent’s preferences. That is, one can have, for l ≠ m:

x R_i(V_i^l) y

and

y R_i(V_i^m) x

One interesting consequence of this modeling strategy is that racial discrimination is formally consistent with Pareto optimality. This "is a surprising, though serious, indictment of relying exclusively on the Pareto principle in social evaluation."

Gul and Pesendorfer consider choice among menus. They consider an agent who is a vegetarian for health reasons, but who is tempted to choose hamburgers, if available. In choosing a restaurant at noon, they would prefer a restaurant with hamburgers on the menu. But in choosing in the morning a restaurant to visit at noon, they will select one with an all-vegtable menu. I hope you can see how this approach allows one to analyze time-consistency of choices.

How long do you think before such approaches are presented in mainstream textbooks in widespread use?

Footnotes:
¹ Nominal, ordinal, interval, and ratio are well-known measurement scale level, where a level is defined up to a set of transformations. I find curious the claim that the expression of the marginal rate of transformation as a ratio of marginal utilities is consistent with an ordinal scale. Mirowski, in More Heat Than Light has also raised questions about the claim that utility only attains an ordinal scale level. I recently stumbled upon Mandler (2006), where he suggests, not necessarily for related reasons, utility be considered to attain a measurement scale level between ordinal and interval.

References

George A. Akerlof and Rachel E. Kranton (2010) Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being, Princeton University Press (TO READ).
Arian Berdellima and Nadeem Naqvi (2011) "Existence of a Pareto optimal social interaction with non-binary preferences".
Frank Gul and Wolgang Pesendorfer (November 2001) "Temptation and Self-Control", Econometrica, V. 69, N. 6: 1403-1435.
Michael Mandler (September 2006) "Cardinality versus Ordinality: A Suggested Compromise", American Economic Review, V. 96, N. 4: 1114-1136.
Nadeem Naqvi (2010) "On Non-binary Personal Preferences, Economic Theory and Racial Discrimination".

Play It Cool, Daddy-O

2011-06-04T08:23:00.001-04:00

1.0 Introduction
"Is Von Neumann Square?" is one of my favorite titles for an article in economics¹. This post is about a case in which Von Neumann is more hep².

Sraffa’s book presents a succession of models in which, after the second chapter, the system of price equations have one degree of freedom. This is usually taken to be a trade-off between wages and the rate of profits. Once the distribution of the surplus product is exogenously specified, prices are determined.

Some, such as Michael Mandler and Paul Samuelson, have criticized Sraffian economics on the basis that this number of degrees of freedom is arbitrary. Cases can arise in which the system of price equations has either more or less than one degree of freedom. This post illustrates a case in which more than one degree of freedom exists.

2.0 The Example
2.1 Technology and Quantity Flows
Consider a very simple economy in which laborers produce corn from seed corn on lands of definite types. Two types of land are available. Assume that this economy has 100 acres of land of each type available. Two Constant-Returns-to-Scale processes are known for producing corn. As shown in Table 1, each process requires inputs of a single type of land, as well as labor and seed corn. The technology is such that the order in which types of land will be rented can be read off directly from the technology. As I have previously pointed out, this is not a general property in long period models analyzing rent. I think this special case property, however, is not what drives the existence of possibly more than one degree of freedom.

**Table 1: The Technology**
	α Process	β Process
Labor	1 person-year	1 person-year
Type I Land	1 acre	0 acre
Type II Land	0 acre	1 acre
Corn	1/5 bushels	1/4 bushels
Outputs	1 bushel corn	1 bushel corn

Under the assumptions, anywhere from zero to 200 bushels of corn can be produced as gross output in this economy. Assume that the gross output of this economy is 100 bushels of corn. Then cost-minimizing firms will cultivate all of type I land, and all of type II land will lie fallow.

2.2 The Price System
For stationary-state prices, no process can earn pure economic prices. This condition imposes the following inequalities:

(1/5)(1 + r) + ρ₁ + w ≥ 1

(1/4)(1 + r) + ρ₂ + w ≥ 1

w is the wage (bushels per person-year), paid at the end of the year
r is the rate of profits
ρ1 is the rent (bushels per acre) on type I land, paid at the end of the year
ρ2 is the rent (bushels per acre) on type II land, paid at the end of the year

An equality applies for any process in use.

Land of a given type can be modeled, in an alternative specification of the technology, as jointly produced at the end of the period from the inputs of labor, seed corn, and that type of land³. As long as less than 200 bushels of corn are produced, at least one type of land will pay no rent:

ρ₁ ρ₂ = 0

2.2.1 First Special Case
Consider what would happen if the gross output was infinitesimally less. Both types of land would be in excess supply. The rent on both would be zero:

ρ₁ = ρ₂ = 0

The solution in this case is:

0 ≤ r ≤ 4

w = (1/5)(4 - r)

Only type I land is cultivated. The number of processes in use is equal to the number of produced commodities, that is produced goods with a positive price. The system of price equations has one degree of freedom.

(1/5)(1 + r) + ρ₁ + w = 1

(1/4)(1 + r) + ρ₂ + w > 1

2.2.2 Second Special Case
Consider, however, what would happen if the gross output was infinitesimally more. Both types of land would be cultivated. Type I land would not be able to produce all the output quantity needed for the requirements for use, and it would have a positive rent:

ρ₁ > 0

Type II land would be in excess supply, and it would have a rent of zero.

ρ₂ = 0

The price system becomes:

(1/5)(1 + r) + ρ₁ + w = 1

(1/4)(1 + r) + ρ₂ + w = 1

The solution is:

0 ≤ r ≤ 3

w = (1/4)(3 - r)

ρ₁ = (1/20)(1 + r)

Two produced commodities with positive prices exist: corn and the first type of land. And two processes are activated.

2.2.3 The Case With Two Degrees of Freedom
But type II land does not need to be cultivated in the case under consideration. Thus, the costs of cultivating type II land can exceed the revenues, and the rent on Type I land is not determined by the price equations. Only the first equation in the system of equations for prices need obtain.

(1/5)(1 + r) + ρ₁ + w = 1

The second process is still characterized by an inequality:

(1/4)(1 + r) + ρ₂ + w ≥ 1

This system has the solution:

0 ≤ r ≤ 4

0 ≤ ρ₁ ≤ (1/20)(1 + r)

ρ₂ = 0

w = (1/5)(4 - 5ρ₁ - r)

Figure 1 illustrates one projection of this solution into two dimensions. The lines closer to the origin are drawn for a higher rent on the first type of land.

Figure 1: Variation in the Wage-Rate of Profits Frontier with Rent

3.0 Conclusions
I am loath to argue that the extra degree of freedom in this example is negligible since it arises only for a knife-edge. If the quantity produced is a hair larger or a hair smaller, the input-output matrices for commodities with positive prices are square. But in a larger model, the quantity produced is a choice variable. I also don't see why Sraffian models must not have more than one degree of freedom.

Footnotes
¹ If I’ve actually read this article, it must have been in a reprint in some collection.

² Some posts take me a while to write. I began this one the day after Arthur Laurents died.

³ I don't here show the derivation of rent from such a model.

References

Christian Bidard (1986) "Is Von Neumann Square?" Journal of Economics, V. 46: pp. 407-419.
Michael Mandler (20xx) "Sraffian Economics (new developments)" New Palgrave, 2nd edition.

Austrian Welfare Economics Confused

2011-06-02T08:18:00.001-04:00

In my critique of Austrian Business Cycle Theory, I cite some critiques of the Austrian school. Hill (2004) and Gloria-Palermo & Palermo (2005) critiques I do not cite.

Palermo and Palermo focus on how Austrian school economists reach normative conclusions. They put aside the influence of values in, for example, choosing the questions one addresses in one's positive analysis. For Austrian school economists, the idea of coordinated plans acts as a bridge from their positive theory to their normative claims. A state in which all agent's plans are coordinated is thought to be a desirable state by Austrian school economists. They claim that a market system has a tendency towards such a state without ever reaching it. Since then market systems are always in an undesirable state in which some agents' plans are mutually inconsistent and uncoordinated, why do Austrian school economists, in their nascent normative analysis, not conclude that market systems are undesirable?

Greg Hill (2004). "From Hayek to Keynes: G.L.S. Shackle and Our Ignorance of the Future". Critical Review.
Sandye Gloria-Palermo & Giulio Palermo (2005). "Austrian Economics and Value Judgements: A Critical Comparison with Neoclassical Economics". Review of Political Economy, V. 17, N. 1 (Jan.): pp. 63-78.

Quiggin's Optimism Of The Intellect

2011-05-28T08:35:00.001-04:00

Quiggin says much in Zombie Economics: How Dead Ideas Still Walk Among Us I agree with. I see no reason, however, to believe that economists will follow this recommendation or that this is the best way for economists to model actually-existing more-or-less capitalist economies:

"A new project in the D[namic] S[tochastic] G[eneral] E[quilibrium] framework will typically, as Blanchard indicates, begin with the standard general equilibrium model, disregarding the modifications made to that model in previous work examining the other ways in which the real economy deviated from the modeled ideal.

By contrast, a scientifically progressive program would require a cumulative approach, in which empirically valid adjustments to the optimal general equilibrium framework were incorporated into the standard model taken as the starting point for research. Such an approach would imply the development of a model that moved steadily further and further away from the standard general equilibrium framework, and therefore became less and less amenable to the standard techniques of analysis associated with that model." -- John Quiggin, Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton University Press, 2010)

I was inspired by this Crooked Timber thread to post this.

Picoeconomics: A New Vocabulary Word For Me

2011-05-27T08:52:00.000-04:00

I have previously described models of agents divided in mind. And I have noted that akrasia is defined as the phenomenon of acting against one's own best judgement.

I find that George Ainslie uses the term picoeconomics to describe the study of the interaction of components of a mind in individual behavior and decision-making. Microeconomics is, in some sense, the study of the interactions of individuals in determining economic behavior. Picoeconomics is an analysis on an even smaller scale. I also found a website for this subject¹.

By the way, picoeconomics is not necessarily a non-mainstream field of economics. For example, Glen Weyl (2009), a very young mainstream economist trained at some of the most prestigious economics departments in the United States, adopts a model of an agent as a community. He uses this model to examine political individualism. If a community cannot have group rights and cannot have an unique ordering of choices², how can an individual have such rights when he may be just as divided in mind as a community?

One criticism of mainstream economists relates to their treatment of the literature. A mainstream economist can ignore long-established analytical tools to treat their subject, introduce some related analysis into orthodox models in an ad-hoc way, and never reference the previously-existing heterodox literature. I do not feel I have enough understanding of picoeconomics to say whether this criticism applies to mainstream and non-mainstream contributions to the field³.

Footnotes

¹ Is this Ainslie's website? I could not quickly find a name associated with the site?
² See the Arrow impossibility theorem.
³ I'm not even sure I know the field boundaries. My blogs posts on divided minds build on some literature by Amartya Sen. Some recent papers from Nadeem Naqvi and others build on later literature from Sen. They analyze agent decision-making, but, as I understand it, do not model the mind as composed of subagents. Does this literature fall within picoeconomics?

References

George Ainslie (1992) Picoeconomics: The Strategic Interaction of Successive Motivation States within the Person, Cambridge University Press. (I haven't read this.)
George Ainslie (2001) "Breakdown of Will" , Cambridge University Press. (I haven't read this.)
G. Ainslie (October 2005) "Précis of Breakdown of Will" Behav. Brain Sci., V. 28, N. 5: 650-673.
Arian Berdellima and Nadeem Naqvi (2011) "Existence of a Pareto optimal social interaction with with non-binary preferences".
E. Glen Weyl (May 2009) "Whose rights? A critique of individual agency as the basis of rights" Politics, Philosophy & Economics, V. 8, N. 2: 139-171.

Monetarism And Marxism

2011-05-22T08:16:00.001-04:00

I want to draw a parallelism between monetarism and marxist economics. I do not refer to the attempt by the United States Federal Reserve to implement Marx's theory of the reserve army of the unemployed. Rather, I think an analogy may exist between money and productive labor and their relationships to available empirical data.

If monetarists have a rigorous definition of money that picks out one unique time series, I do not know of it. Suppose they find some correlation between, say, M2 and a price level. And suppose that correlation subsequently breaks down. They need not take this as evidence against their theory. For they can always search for another time series for the quantity of money and a different price deflator.

Likewise, economists building on Marxism, as I understand it, have not settled upon a rigorous theoretical definition of the distinction between productive and non-productive labor. For example, I don't think Marx - especially in the first volume of Theories of Surplus Value - argues that all services are unproductive of surplus value. Rather, his distinction is between labor that produces surplus value and other labor. Duncan Foley finds a tighter correlation between real national income, excluding services, and non-farm employment than he does between all national income and non-farm employment. By my argument, I do not take this as dispositive evidence for Marx's distinction. I worry that which correlation works best can vary by time period and time series.

Nevertheless, I find Foley's analysis of interest. Finance, Insurance, and Real Estate (FIRE) certainly seems to need more analysis by economists in these days.

References

Duncan K. Foley (2011) "The Political Economy of Output and Employment 2001-2010"
James K. Galbraith, Olivier G. Giovannoni, and Ann J. Russo (2007) "The Fed's Real Reaction Function: Monetary Policy, Inflation, Unemployment, Inequality - and Presidential Politics"

Galbraith On Sociology Of Economics

2011-05-17T08:08:00.003-04:00

I thought this short comment was interesting:

Figure 1: James Galbraith on Sociology of Economics

Provenance is, of course, no guarantee of the quality of art. But one thing that strikes me about dissenters and non-mainstream economists is that many have doctorates in economics from elite schools (e.g., Harvard, Yale, Cambridge), have taught at such elite schools, or might even be professors at such places. Is there any other discipline in which members treated as on the fringe have so many with such credentials?

Elsewhere

2011-05-14T07:29:00.002-04:00

With the exception of the first two, these links seem more closely related than most I list. I ought to add something about the flash crash.

Richard Thaler compares utility to aether, an imaginary substance that 19th century scientists thought existed.
Matthew Yglesias misunderstands; he thinks Thaler’s comments apply only to macroeconomics.
Donald MacKenzie describes the effects of automated trading algorithms on microsecond variations in stock market volumes:. Some of this sounds like network security applications. You have sniffers detecting what bots are doing, spoofers attempting to fool the sniffers, etc.
Kieran Healy reviews MacKenzie's book describing finance theory as performative.
A news story reports "Some Users Find the Speed of Light Too Slow for Their Networks", (IEEE Computer, V. 44, N. 4 (Apr. 2011): 18-19). These users are ones trying to decide where to locate their automated trading algorithms.
K. J. Ray Liu describes how radio devices will use game theoretical algorithms to allocate spectrum. ("Cognitive Radio Game", IEEE Spectrum, V. 48, Iss. 4, Apr 2011: 40-56)

Models Building On Minsky

2011-05-06T08:07:00.000-04:00

Some recent resources on Hyman Minsky:

Gauti B. Eggertsson and Paul Krugman (2010) "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach"
Steve Keen (15 March 2011) "The Debt Krugman Would Rather Forget", Business Spectator.
Steve Keen (2011) "A Monetary Minsky Model of the Great Moderation and Great Recession", Journal of Economic Behavior & Organization
Thomas I. Palley (April 2010)"The Limits of Minsky's Financial Instability Hypothesis as an Explanation of the Crisis", Monthly Review, V. 61, Iss. 11.
Thomas I. Palley (2011) "A Theory of Minsky Super-Cycles and Financial Crises", Contributions to Political Economy.
Lance Taylor and Stephen A. O'Connell (1985) "A Minsky Crisis", Quarterly Journal of Economics, V. 100, Supplement: pp. 871-885.

With some work, one can find downloadable copies of the above papers containing the formal models. In the more popular paper above, Keen criticizes Krugman for retaining flawed assumptions of mainstream macroeconomics. Why should anyone care at this point how a Dynamic Stochastic General Equilibrium (DSGE) model can be tweaked? Palley's Monthly Review article is also deliberately designed to generate controversy. He argues that Minsky's approach needs to be supplemented by more structuralist explanations.

Internet Sites For Discussing Economics

2011-05-01T10:34:00.000-04:00

I find dispiriting the inability of most mainstream economists to discuss economics. Here are some emerging sites:

Research Gate has a part set aside for economics.
Stack Overflow has some proposed topics. (Apparently, mathematical economics occasionally comes up on Math Overflow.)
Economics Questions apparently uses the Stack Overflow software.
Quantitative Finance has its own Stack Overflow site.
The Test Magic forum for PhD applicants in economics has been around for awhile.

Off topic: Matt Rognlie, who strikes me on first perusal as unjustifiably arrogant, casually dismisses Modern Monetary Theory.

Slope Of "Demand Curve" Varying With Numeraire

2011-04-25T08:09:00.002-04:00

1.0 Introduction
As I have previously blogged, Ian Steedman has a number of articles explaining price theory. These articles typically explain the implications, for example, for the slopes of certain functions, but often do not contain graphical illustrations. Here then is an opportunity for me to develop blog posts. For instance, this post works through the example in Section 4 of Arrigo Opocher and Ian Steedman's article, "Input price-input quantity relations and the numéraire" (Cambridge Journal of Economics, V. 33, N. 5 (2009): 937-948).

2.0 Technology
Consider a simple economy in which three commodities - iron, steel, and corn - are produced. Corn is the only commodity people consume, and corn is not used as an input in the production of any commodity. The problem considered here is how much of each input into the production of corn will be demanded by the firms in the corn-production industry.

Iron is produced by unassisted labor. The production function for iron is:

q₁ = f₁(l₁, x_1,1, x_2,1, x_3,1) = l₁

where:

q_i; i = 1, 2, 3; is the quantity of the ith commodity produced in the period under consideration.
f_i( ); i = 1, 2, 3; is the production function for the ith commodity.
l_j; j = 1, 2, 3; is the number of person-years hired in the period under consideration to produce the jth commodity.
x_i,j; i = 1, 2, 3; j = 1, 2, 3; is the quantity of the ith commodity used in the production of the jth commodity in the period under consideration.

Steel is produced by labor from iron. Steel production is modeled by a Cobb-Douglas production function:

q₂ = f₂(l₂, x_1,2, x_2,2, x_3,2) = (l₂)^D (x_1,2)^E/(D^D E^E)

where D and E are positive parameters and D + E = 1.

Corn is produced by labor from inputs of iron and steel. The production function for corn is:

q₃ = f₃(l₃, x_1,3, x_2,3, x_3,3) = (l₃)^d (x_1,3)^e (x_2,3)^f/(d^d e^ef^f)

where d, e, and f are positive parameters and d + e + f = 1.

All production functions exhibit Constant Returns to Scale (CRS). All capital goods are totally used up in production, and all production processes require the same amount of time.

3.0 Cost Functions and Coefficients of Production
Consider competitive firms producing a commodity who want to adopt a cost-minimizing technique. For definitiveness, consider a firm producing steel. Let w be the wage (paid at the beginning of the period) and p_j; j = 1, 2, 3; be the spot price of the jth commodity. The unit cost function, c₂( ), for producing steel is the value of the objective function in the solution to the following mathematical programming problem:

Given w, p₁, p₂, p₃

Choose l₂, x_1,2, x_2,2, x_3,2

To Minimize wl₂ + p₁x_1,2 + p₂x_2,2 + p₃x_3,2

Such that:

f₂(l₂, x_1,2, x_2,2, x_3,2) = 1

l₂ ≥ 0; x_i,2 ≥ 0, i = 1, 2, 3.

Solving this programming problem, one finds the unit cost function for producing steel is:

c₂(w, p₁, p₂, p₃) = (w)^D (p₁)^E

In working out the cost function, I also figured out how much labor and iron a steel-producing firm would hire to produce one ton of steel. Opocher and Steedman pose the problem with given cost functions, not production functions. They derive the coefficients of production by invoking Shephard’s Lemma.

A similar cost-minimizing problem arises for corn-making firms.
The unit cost function, c₃( ), for producing corn is:

c₃(w, p₁, p₂, p₃) = (w)^d(p₁)^e(p₂)^f

The derivatives of the cost functions are summarized by the coefficients of production, a₀ and A, where:

a₀ is a three-element row vector such that a_0,j; j = 1, 2, 3; is the person-years of labor hired per unit output of the jth industry.
A is a 3x3 matrix such that a_i,j; i = 1, 2, 3; j = 1, 2, 3; is the quantity of the ith commodity purchased as an input per unit output in the jth industry.

Table 1 displays coefficients of production.

**Table 1: The Cost-Minimizing Technique**
	Iron Industry	Steel Industry	Corn Industry
Labor	a_0,1 = 1	a_0,2 = D (p₁/w)^E	a_0,3 = dw^{d - 1} (p₁)^e(p₂)^f
Iron	a_1,1 = 0	a_1,2 = E (w/p₁)^D	a_1,3 = ew^d (p₁)^{e - 1}(p₂)^f
Steel	a_2,1 = 0	a_2,2 = 0	a_2,3 = fw^d (p₁)^e(p₂)^{f - 1}
Corn	a_3,1 = 0	a_3,2 = 0	a_3,3 = 0
Output	1 ton iron	1 ton steel	1 bushel corn

4.0 Long Period Price Equations
The above shows the coefficients of production that perfectly competitive firms choose, given prices. Each column in Table 1 has been derived independently of the others. Firms will continue to produce corn, the consumption good, period after period only if some firms also choose to produce iron and steel. Cost-minimizing firms will not make these choices for any configuration of prices. The long-period condition that firm choices be self-sustaining yields the following system of three equations:

a_0,1 w (1 + r) = p₁

[p₁ a_1,2(w, p₁) + w a_0,2(w, p₁)](1 + r) = p₂

[p₁ a_1,3(w, p₁, p₂) + p₂ a_2,3(w, p₁, p₂) + w a_0,3(w, p₁, p₂)](1 + r) = p₃

where r is the rate of profits. Since production takes time, the rate of profits is generally positive. These equations, when solved, define long-period equilibrium prices for produced commodities as functions of the wage and the rate of profits:

p₁ = w(1 + r)

p₂ = w(1 + r)^{1 + E}

p₃ = w(1 + r)^{1 + e + f + (1 + E)f}

5.0 The Numeraire
The above system of price equations has two degrees of freedom. One degree of freedom is removed when the numeraire is specified. Let the numeraire consist of σ₁ units of iron, σ₂ units of steel, and λ person-years:

σ₁p₁ + σ₂p₂ + λw = 1

Prices of the commodities comprising the numeraire are then:

w = 1/[σ₁(1 + r) + σ₂(1 + r)^{1 + E} + λ]

p₁ = (1 + r)/[σ₁(1 + r) + σ₂(1 + r)^{1 + E} + λ]

p₂ = (1 + r)^{1 + E}/[σ₁(1 + r) + σ₂(1 + r)^{1 + E} + λ]

Figure 1 shows the relationship between the wage and the rate of profits. This relationship is known as the wage-rate of profits frontier. In this example, coefficients of production vary continuously along the frontier.

Figure 1: Wage-Rate Of Profits Frontier

6.0 Quantity Demanded for Inputs
The above derivations allow one to draw various graphs for specific parameter values. I set the parameters for the production functions as follows: D = 3/4; E = 1/4; d = 2/3; e = 1/6; and f = 1/6. And I considered two numeraires. For the first numeriare, σ₁ = 1/3; σ₂ = 1/3; and λ = 1/3. For the second numeriare, σ₁ = 1/3; σ₂ = 1/2; and λ = 1/6.

For each numeraire, the wage and other prices in a long-period position are defined as functions of the rate of profits. And the cost-minimizing coefficients of production are functions of these prices, that is, ultimately of the rate of profits. Figure 2 shows a locus constructed out of these functions. Curves at the top of the figure plot the price of iron against the quantity of iron demanded by the (non-vertically integrated) corn-producing industry. In drawing this figure, the quantity of corn produced is constrained to be unity. The curves are analogous to conditional demand curves in neoclassical economic theory. And one can see that, for certain regions, whether the slope of such a curve is positive or negative depends on the numeraire. But is not a main point of neoclassical economics to argue that demand curves are downward-sloping (for arbitrary numeraires)?

Figure 2: A Locus for Firms in Long Period Equilibrium

7.0 Conclusion
So much for explaining the price of a capital good by well-behaved supply and demand curves in the market for that commodity.

Book Series

2011-04-21T08:13:00.000-04:00

Any number of publishers have published series of books over the last couple of decades of interest to heterodox economists. Some are, I think, targeted for reference libraries - who else can afford them¹? Some collect papers for specific themes or schools of thought. And various publishers specialize in such.

But here I want to focus on the Modern Cambridge Economics Series. These books seem to be targeted for the more introductory student. They consist of, as far as I can tell:

A. Asimakopulos (1991) Keynes's General Theory and Accumulation²
Amiya Kumar Bagchi (1982) The Political Economy of Underdevelopment
John Cornwall and Wendy Cornwall (2007) Capitalist Development in the Twentieth Century
Phyllis Deane(1978) The Evolution of Economic Ideas²
Michael Ellman (1989) Socialist Planning
Eprime Eshag (1984) Fiscal and Monetary Policies and Problems in Developing Countries
Frederick S. Lee (2006) Post Keynesian Price Theory
Joan Robinson (1979) Aspects of Development and Underdevelopment
Colin Rogers (1989) Money, Interest and Capital: A Study in the Foundations of Monetary Theory²

Phyllis Deane and Joan Robinson were the original editors. Phyllis Deane, Geoffrey Harcourt, and Jan Kregel were the editors after a later relaunch.

¹Edward Elgar has a series on Schools of Thought in Economics, another series called The Elgar Companion to ..., and The International Library of Critical Writings in Economics. Palgrave Macmillan had themed extracts from the New Palgrave (with some original entries) and is currently publishing their Great Thinkers in Economics series. (This last series is more introductory and affordable by some students.) Routledge has their multi-volume Critical Assessments of Leading Economists collections and, for the Austrian school, the Foundations of the Market Economy Series. Back in the 1970s, Penguin had the Penguin Modern Economic Readings collections. (Links are to information about random books in a series.)

² I have read and enjoyed these.

Cyril Hédoin On The Failure Of Macroeconomics

2011-04-17T10:53:00.002-04:00

Some time ago, I noted James Galbraith's article, "Who Are These Economists, Anyway?" Galbraith suggests that it might be worthwhile to on the work of those economists who were researching "the nature and causes of financial collapse" before the present crisis and had presciently warned of potential problem areas. These empirically successful economists happen to be non-orthodox economists.

The other day, I stumbled upon a somewhat old response to Galbraith,
"Vers un changement de paradigme en économie" (English version), from Cyril Hédoin. As I understand it, he thinks neoclassical economics is collapsing and - what with behavioral economics, evolutionary game theory, complexity economics, etc. - mainstream economics is pluralist. Given these changes, he thinks economists have no need to look among traditionally heterodox economists for good ideas. Hédoin cites articles I like by David Colander, Richard Holt, & Barkley Rosser and by John B. Davis.

Galbraith replies in the comments. He unequivocally rejects the idea that his recommended alternative is on the periphery of economics. He says he cites the economists he does because he thinks their work is good.

Mainstream economists certainly have a problem in explaining - especially to outsiders - why one should not cite certain past presidents of the American Economic Society, various Harvard-trained economists or professors in the Harvard economics department, articles published in certain economics journals associated with the University of Cambridge, some "Nobel Prize" winners, and so on. (For any Austrian-school economists who may be reading this - certain economists trained at New York University don't count either.)

Nozick's Anarchy, State, and Utopia

2011-04-11T07:52:00.002-04:00

1.0 Overview
Propertarianism, misleadingly called "libertarianism" by its fans, is a political philosophy. Do any supposedly rigorous arguments exist for this philosophy? Some cite Robert Nozick's 1974 tome, Anarchy, State, and Utopia as a demonstration that this question can be answered in the affirmative.

The book has three main parts. In the first part, Nozick argues that a state can emerge from an anarchistic state of nature without violating anybody's rights. The state, according to Nozick, evolves from a private protection agency; its clients become citizens. In the second part, Nozick argues that a state that tries be to more than a minimal state will violate somebody's rights, especially their right to property. For the distribution of property to be just, according to Nozick, three conditions must be met:

The original acquisition of property must not have violated anybody's rights.
The transfer of holdings must be likewise just.
Whatever injustices may nevertheless have arisen in original acquisition or transfer must be rectified justly.

In the last part, Nozick provides a recipe for cookbooks of the future. He describe an association of voluntary communities, where people are free to join whichever commune they like. Only some of these communities may initially be propertarian.

This obvious decomposition of the book explains the three-word title. Despite Nozick's pretense to be presenting an analytic argument, I did not find nearly as much structure at a lower level. The first part seems to beg how people in an original anarchy would behave. Nozick postulates bourgeois contract-making; I think feudalism would more likely result. He continually brings up objections and needed refinements, pursues the argument to an arbitrary level, and then declares the resolution of these details beyond his scope since he is not writing a work of psychology or epistemology or whatever. So I find it difficult to summarize much more of the book.

2.0 Popular Bits
I think Nozick originated many sayings now popular among propertarians. Maybe some he reformulated or re-emphasized.

Nozick's calls his version of Descartes' demon "The Experience Machine". His story is a science fiction story with technology, tanks to float in, and computers. It raises the question, "What else can matter to us, other than how our lives feel from the inside?"

Nozick comes fairly close to saying that there is no such thing as society:

"But there is no social entity with a good that undergoes some sacrifice for its own good. There are only individual people, different individual people, with their own individual lives."

Nozick formulates a non-aggression principle, now called the No-Initiation-of-Force principle in propertarian polemics:

"An underlying notion sufficiently powerful to support moral side constraints against the powerful intuitive force of the end-state maximizing view will suffice to derive a libertarian constraint on aggression against another."

Nozick creates a well-known example with Wilt Chamberlain. Wilt Chamberlain's contract with a basketball team gives him a share of the gate. People "cheerfully attend his team's game". Nozick's imagines that when they buy their tickets, part of the price is that each person "drops" 25 cents "of their admission price into a special box with Chamberlain's name on it." What can be wrong with all of these voluntary transactions making Chamberlin rich? In the course of this exposition, he comes up with a clever turn of phrase:

"The socialist society would have to forbid capitalist acts between consenting adults." (my emphasis)

3.0 Some Absurdities
Nozick's book is a work of political philosophy containing much economic reasoning. But Nozick makes many mistakes in economics, and ignores what seems to me some major problems in political philosophy.

For example, I think a major question in political philosophy is how people with different ideas of good and evil can live together. Nozick acknowledges he doesn't address this question:

"I have proceeded in this essay (as much as possible) without questioning or focusing upon the assumption common to much utopian and anarchist theorizing, that there is some set of principles obvious enough to be accepted by all men of good will, precise enough to give unambiguous guidance on particular situations, clear enough so that all will realize its dictates, and complete enough to cover all problems that actually will arise. To have rested the case for the state on the denial of such an assumption would have left the hope that the future progress of humanity (and moral philosophy) might yield such agreement, and so might undercut the rationale for the state.

... the day seem[s] distant when all men of good will shall agree to libertarian principles... People who prefer peace to the enforcement of their view of right will unite together in one state."

In contrast to my opinion, Nozick thinks Marxian exploitation is a normative idea¹:

"One traditional socialist view is that workers are entitled to the product and full fruits of their labor; they have earned it; a distribution is unjust if it does not give the workers what they are entitled to."

Nozick doesn't understand marginal productivity. He incorrectly thinks that it is a theory of distribution:

"Almost every suggested principle of distributive justice is patterned: to each according to his moral merit, or needs, or marginal product, or how hard he tries, or..."

I could cite many more instances in which Nozick makes this mistake.

Nozick erroneously ignores the possibilities of multiple equilibria and of path dependence:

"Let us suppose that we know from economic theory that under the standard assumptions defining a competitive market economy, income and wealth will be distributed in an efficient way, and that the particular efficient distribution which results in any period of time is determined by the initial distribution of assets, that is, by the initial distribution of income and wealth, and of natural talents and abilities. With each initial distribution, a definite efficient outcome is arrived at."

Also, Nozick begs the question of the definition of property rights, of how a society determines what can be a commodity and what cannot. I could cite even more examples of Nozick getting economics wrong.

Nozick has a definite view on the always burning question of whether or not slavery is compatible with propertarianism. He thinks it is:

"Perhaps no persons completely sell themselves into slavery... Since this very extensive domination of some persons by others arises by a series of legimate steps, via voluntary exchanges, from an initial situation that is not unjust, it itself is not unjust."

And again:

"The comparable question about an individual is whether a free system will allow him to sell himself into slavery. I believe that it would."

4.0 Conclusion
I do not find Nozick's book convincing². You might want to read it to understand some context for certain debates in political philosophy. Nozick treats Rawls in the second part of his book. Before having read Nozick, I already knew about some of the popular bits from having read Alan Haworth. Nozick tends to be cited by many soi-disant libertarians - I suspect by more than have actually read him.

Footnotes
¹Nozick does foreshadow John Roemer's game-theoretic definition of exploitation:

"An individual benefits from the wider system of extensive cooperation between the better and the worse endowed to the extent of his incremental gain from this wider cooperation; namely, the amount by which his share under a scheme of general cooperation is greater than it would be under one of limited intra-group (but not cross-group) cooperation."

Nozick formulates "a condition of stable associations" much like this in the third part of his book.

²This is probably not surprising, given my preconceptions.

Robert Lucas On The Impossibility Of Involuntary Employment

2011-04-07T08:08:00.000-04:00

As I understand it, so-called Dynamic Stochastic General Equilibrium (DSGE) models are central to contemporary mainstream macroeconomics. Some may want to criticize DSGE on the grounds that they failed to predict the recent global financial crisis. I think a stronger criticism would be that they led their users to believe in the impossibility of current circumstances arising.

I think of DSGE models as having evolved out of trends in macroeconomics started by Robert Lucas. Here is Lucas being sarcastic:

"The first sentence in Malinvaud, The Theory of Unemployment Reconsidered, is 'The term involuntary unemployment makes it obvious from the start that the labor market is one in which supply exceeds demand.' Thus we acquire factual information about labor markets from the terminology earlier theorists have used to describe them!" -- Robert E. Lucas, Jr. Models of Business Cycles. Basil Blackwell (1987).

And here is more:

"A theory that does deal successfully with unemployment needs to address two quite distinct problems. One is the fact that job separations tend to take the form of unilateral decisions - a worker quits, or is laid off or fired - in which negotiations over wage rates play no explicit role. The second is that workers who lose jobs, for whatever reason, typically pass through a period of unemployment instead of taking temporary work on the 'spot' labor market jobs that are readily available in any economy. Of these, the second seems to me much the more important: it does not 'explain' why someone is unemployed to explain why he does not have a job with company X. After all, most employed people do have jobs with company X either. To explain why people allocate time to a particular activity - like unemployment - we need to know why they prefer it to all other available activities: to say that I am allergic to strawberries does not 'explain' why I drink coffee. Neither of these puzzles is easy to understand within a Walrasian framework, and it would be good to understand both of them better, but I suggest we begin by focusing on the second of the two." -- Robert E. Lucas, Jr. Models of Business Cycles. Basil Blackwell (1987).

Joe Stiglitz As Cambridge Economist?

2011-04-03T19:45:00.000-04:00

Joseph Stiglitz has an article, "Of the 1%, By the 1%, For the 1%", in next month's Vanity Fair. In analyzing America's increasingly ridiculous unequal society, he writes:

"Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called 'marginal-productivity theory.' In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards 'performance bonuses' that they felt compelled to change the name to 'retention bonuses' (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin."

Stiglitz had negative reviews in 1974 and 1975 of books by Harcourt and Pasinetti. Nevertheless, the idea that marginalism was formulated to justify those with high income echoes certain ideas from Sraffa and others. Likewise, finding marginal productivity theory to be "all bosh" is a long-standing Cambridge idea.

I can think of three ways to attack a theory

To claim, as above, that the premises and conclusions of the theory are empirically false.
To argue that, even given all the premises of the theory, the conclusions do not follow.
To argue that the premises of the theory are mutally inconsistent.

I guess it is a matter of taste which approach you think is strongest. I have a preference for the second.

Brouhaha Over Krugman On Endogenous Money

2011-03-31T08:02:00.000-04:00

I recently posted about the theory that the money supply is endogenous and under the control of a country's central bank, such as the Federal Reserve. Paul Krugman dismisses the theory.

Proponents of Modern Monetary Theory, in the comments and elsewhere, have taken issue with Krugman. I have in mind, for example, Dean Baker, Peter Cooper, Scott Fullwiler, Greg Hannsgen (of the Levy Institute), Bill Mitchell, Warren Mosler, Cullen Roche, and Pavlina Tcherneva (cross-posted). James Galbraith appears in various comments, for example, in this one, in which he says, "I was a student of Godley (and even more so, of Kaldor) many years ago and a close observer of monetary policy during my years on Capitol Hill, so this material came easily to me."

Elsewhere

2011-03-22T07:58:00.000-04:00

Steve Keen, in the Australian newspaper The Business Spectator simultaneously praises Paul Krugman for building on Hyman Minsky's work, while criticizing him for "embod[ying] everything that is bad in neoclassical economics."
Bill Mitchell argues, in last week's Nation, that government responses to the global economic crisis have been based on a series of economic myths. (Will the winning cruciverbalist for the Nation be paid in the "high two figures"?)
John T. Harvey also warns, but in Forbes, against cutting the deficit.
Branko Milanovic, in a guest post for D. M. Nuti, explains the connection between rising income equality and the global economic crisis.

H/T: Peter Cooper for the links to the second and third links.

Some British Nineteenth Century Controversies In Monetary Theory

2011-03-20T12:59:00.001-04:00

Britain suspended convertibility during the Napoleonic wars. During that period, until 1821, money in England was paper, unbacked by gold. The restoration of convertibility was followed by a stagnant period in British development, with a crisis in 1825 and a reform in 1844 called the Bank Charter Act.

This post recalls some debates in monetary theory among British political economists while these events were occurring. (I don't consider myself expert on monetary theory during the Classical period.) Table 1 shows some schools of thought in monetary theory. The term schools is traditional with respect to the currency and banking schools, but should not be interpreted too strongly for any groups in the table. These schools, unlike, say, the Physiocrats, do not have a recognized leader, followers, popularizers, etc. Rather, they are more like the Mercantilists, a diverse set of pamphleteers and politicians grouped together by later writers.

**Table 1: Some "Schools" and Example Members**
Years	Contending Schools
1797-1821	Bullionists Henry Thornton David Ricardo	Anti-Bullionists Robert Torrens Robert Malthus
1825-1844	Currency School Robert Torrens Samuel Jones Lloyd Mountifort Longfield	Banking School Thomas Tooke John Stuart Mill
2nd Half of the 20th Century	Quantity Theory Milton Friedman	Endogenous Money Nicholas Kaldor

In each period shown in the table, I have listed two schools. Economists in the first school in each row argued that the money supply was exogenous and that the price level varied with amount of money issued by central bank. Economists in the second school in each row argued that the money supply was endogenous, that is was not capable of being controlled by the central bank, and that it varied with demand for it. The details of these arguments varied among these and other economists.

The last row suggests that these arguments are still current. In fact, advocates of Modern Monetary Theory currently argue that the money supply is endogenous.

Card And Krueger's Research On Minimum Wages Superceded

2011-03-17T07:59:00.001-04:00

I think of David Card and Alan Krueger's empirical demonstration that increased minimum wages do not reduce employment as having two main components:

Natural experiments, especially one comparing and contrasting New Jersey and Pennsylvania.
A meta-analysis of previous published research on minimum wages.

Recent researchers have replicated Card and Krueger's results for both components. And this recent research is more comprehensive and rigorous. (Since Card and Krueger's work, many economists have adopted the methods of natural experiments and meta-analysis, aside from the specific application to labor "markets".)

For natural experiments, I look to a paper by Dube and others. Here's their abstract:

"We use policy discontinuities at state borders to identify the effects of minimum wages on earnings and employment in restaurants and other low-wage sectors. Our approach generalizes the case study method by considering all local differences in minimum wage policies between 1990 and 2006. We compare all contiguous county pairs in the U.S. that straddle a state border and find no adverse employment effects. We show that traditional approaches that do not account for local economic conditions tend to produce spurious negative effects due to spatial heterogeneities in employment trends that are unrelated to minimum wage policies. Our findings are robust to allowing for long term effects of minimum wage changes." -- Andrajit Dube, T. William Lester, and Michael Reich. "Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties". Review of Economics and Statistics, V. 92, N. 4 (Nov. 2010): 945-964.

For meta-analysis, I look to some studies by Doucouliagos and others. Here's the abstract of an accessible working paper:

"Card and Krueger’s (1995a) meta-analysis of the employment effects of minimum wages challenged existing theory. Unfortunately, their meta-analysis confused publication selection with the absence of a genuine empirical effect. We apply recently developed meta-analysis methods to 64 US minimum wage studies and corroborate that Card and Krueger’s findings were nevertheless correct. The minimum wage effects literature is contaminated by publication selection bias, which we estimate to be slightly larger than the average reported minimum-wage effect. Once this publication selection is corrected, little or no evidence of a negative association between minimum wages and employment remains. --Hristos Doucouliagos and T. D. Stanley (2008). "Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis". Deakin University, Australia.

I don't expect orthodox economists to absorb any time soon my unoriginal point that economic theory gives no foundation for the belief that minimum wages must lead to disemployment, even when one abstracts from less than perfect competition, principal agent problems, information asymmetries, etc. After all, mainstream economists are trained in mumpsimus.

Three Routes To The Choice Of Technique

2011-03-11T08:08:00.002-05:00

1.0 Introduction
I think the analysis of the choice of technique in a steady state is a settled question. (The meaning of Sraffa's equations in wider contexts can be debated.) One strength of the analysis of the choice of technique is the existence of several methods of analysis, all reaching the same conclusion. If one wanted to overthrow this analysis, one would need to show that one is not attacking just one such method, but all of them - or at least as many as possible. This post illustrates this strength of the analysis by presenting three such methods.

2.0 Example Technology
I need an example technology (Table 1) to use in stepping through different methods for analyzing the choice of technique. Each process requires the inputs shown to be purchased at the start of the production period (a year) for each unit of output produced and available at the end of the year. Two processes are known for producing steel, and two other processes are likewise known for producing corn. The coefficients are fairly arbitrary. In this example, to produce any net output in a steady state, all commodities - that is, both steel and corn - must be produced.

**Table 1: Constant-Returns-to-Scale (CRS) Production Processes**
Inputs	Industry Sector
	Steel Industry		Corn Industry
	First Steel-Producing Process	Second Steel-Producing Process	First Corn-Producing Process	Second Corn-Producing Process
Labor (Person-Yrs)	3220/3321	13930/63099	3115/3321	1
Steel (Tons)	0	0	1/2	9/20
Corn (Bushels)	1/18	2752/7011	0	0
Output	1 Ton	1 Ton	1 Bushel	1 Bushel

The analysis of the choice of technique calculates which production process would be adopted for each combination of prices and interest rates. For this technology to be compatible with a steady state, at least one process for producing steel and one process for producing corn must be adopted. A "technique" consists of one process from each of the industries in this example. Table 2 defines the four techniques, each named with a greek letter. (I think this convention of using greek letters in this context may have been introduced by Joan Robinson.)

**Table 2: Techniques and Production Processes**
Technique	Steel-Producing Process	Corn-Producing Process
Alpha	First	First
Beta	First	Second
Gamma	Second	First
Delta	Second	Second

A technique, in this case, is expressed by a 2-element row vector of direct labor coefficients and a square Leontief Input-Output matrix. For example, the labor coefficients, a₀^α, for the first technique are:

a₀^α = [(3220/3321) (3115/3321)]

The Leontief Input-Output matrix, A^α, for the first technique can be expressed as two columns a_.1^α and a_.2^α:

A^α = [ a_.1^α a_.2^α]

The first labor coefficient and the first column in the Leontief Input-Output matrix come from the specified production process from the steel industry for that technique:

a_.1^α = a_.1^β = [0, (1/18)]^T

The second labor coefficient and the second column in the Leontief Input-Output matrix come from the specified production process from the corn industry for that technique:

a_.2^α = a_.2^γ = [(1/2), 0]^T

I leave to the reader how to completely specify a₀^β, A^β, a₀^γ, A^γ, a₀^δ, and A^δ.

3.0 Direct Method
Heinz D. Kurz and Neri Salvadori refer to this method for analyzing the choice of technique I describe here as the "Direct Method". Before proceeding, I need to introduce some notation. Let p be a two-element row vector of prices:

p = [p₁, p₂]

where p₁ is the price of a ton steel and p₂ is price of a bushel corn. Let w be the wage, assumed to be paid at the end of the year for each person-year of labor expended during the year. Let r be the rate of interest, also called the rate of profits.

I need to introduce a column vector to represent the numeraire. Let e₂ be the second column of the 2x2 identity matrix:

e₂ = [0, 1]^T

The assumption that e₂ is the numeraire implies the following equation:

p e₂ = 1

This specification of the numeraite implies that, p₂, the price of a bushel corn is unity.

The problem is to find a pair (p, w), given the interest rate r, such that

No process can be operated with costs less than revenues.
For any process that is operated, the costs do not exceed the revenues.

The first condition implies the following four inequalities must hold:

p a_.1^α(1 + r) + a₀₁^α w ≥ p₁

p a_.1^γ(1 + r) + a₀₁^γ w ≥ p₁

p a_.2^α(1 + r) + a₀₂^α w ≥ p₂

p a_.2^β(1 + r) + a₀₂^β w ≥ p₂

The conjunction of the requirement that steel be produced with the second condition implies that one of the first two inequalities must be met with a strict equality. The analogous requirement for corn production implies that at least one of the last two inequalities must be met with equality.

These specifications are easily graphed (Figure 1). Given the interest rate, the first two inequalities yield upward-sloping lines in the the figure. The last two inequalities yield the downward-sloping lines. The first condition implies the solution must lie on or above all of the lines in the figure. The second condition implies that the solution must lie on

At least one of the upward-sloping lines
At least one of the downward-sloping lines.

The only point that satisfies these conditions is graphed. It lies on the upward-sloping line corresponding to the first steel-producing process and the downward-sloping line corresponding to the second corn-producing process. Thus, this analysis shows that the beta technique is cost-minimizing at an interest rate of 100%. The solution wage and price of steel can be read off the figure.

Figure 1: Direct Method Illustrated At r = 100%

The direct method is easily generalized to any finite number of techniques. Each additional production process results in an additional line in the figure, upward-sloping for the steel industry and downward-sloping for the corn industry. The method also generalizes for any finite number of commodities. Each additional commodity results in the introduction of another dimension to the figure. Although the figure quickly becomes unvisualizable, the mathematics generalizes.

4.0 Indirect Method
The indirect method generalizes to cases in which an uncountably infinite number of techniques are available. It is based on constructing the wage-rate of profits frontier as the outer envelope of the wage-rate of profits curve for each technique (Figure 2). I illustrate how to construct the wage-rate of profits curve for the Alpha technique.

Figure 2: Indirect Method Illustrated

The condition that the same rate of profits be earned for each process comprising a technique yields a system of two equations:

p A^α(1 + r) + a₀^α w = p

One also has the equation setting the price of the numeraire to unity:

p e₂ = 1

For a given interest rate r, the above is a linear system of three equations for three variables (p₁, p₂, and w). One can solve the system to express each of these three variables as a function of the interest rate. The wage, for example, can be found as:

w = 1/(a₀^α [ I - (1 + r)A^α]^-1e₂)

One knows, from a theorem due to Perron and Frobenius, that the inverse exists between an interest rate of zero and some maximum interest rate.

Figure 2 shows the wage-rate of profits curves for each of the four techniques. The cost-minimizing technique at each rate of interest is the one with the highest wage. Points at which the rate-rate of profits curves for two or more techniques interesect on the outer frontier are known as switch points. The two switch points are shown in the example. The Gamma technique is cost-minimizing for a very low interest rate. For a somewhat larger interest rate, the Delta technique is cost-minimizing. Finally, the Beta technique is cost minimizing for larger interest rates. My exposition illustrates that the direct and indirect methods give the same conclusion. For example, the wage-rate of profits frontier shows that the Beta technique is cost-minimizing for an interest rate of 100%.

5.0 Cost Minimization Algorithm
This method I take from J. E. Woods. He provides an algorithm for finding the cost-minimizing technique(s), given the interest rate.

Pick an initial technique. (For illustration, I start with the Beta technique in the example.)
Solve the equations specifying the wage-rate of profits curve for the selected technique. So you now have a price vector p and the wage w.
Using p and w, calculate the cost of producing a ton steel with each of the known production processes (Figure 3).
If the steel-producing process in the selected technique is cheapest, go to Step 6. Otherwise go to Step 5. (In the example, one would go to Step 5 for low interest rates and to Step 5 for higher interest rates.
Replace the steel-producing process in the technique analysed in Step 2 with the cheapest steel-producing process identified in Step 4. Solve the equations specifying the wage-rate of profits curve for the newly selected technique. Use the resulting p and w in Step 6. (In the example, one would calculate the wage-rate of profits curve for the Delta technique for a sufficiently low interest rate.)
Using the specified p and w, calculate the cost of producing a bushel corn with each of the known production processes (Figure 4).
If cost of producing corn could be found in Step 6 for the technique selected in Step 2 and the corn-producing process in that technique is cheapest, then stop. You have identified the cost-minimizing technique. Otherwise, replace the corn-producing process in the technique analyzed in Step 6 with the cheapest corn-producing process identified in Step 6. (In the example, the algorithm would terminate in one-pass for a sufficiently high interest rate, with the Beta technique identified as the cost-minimizing technique.)
Go to Step 2.

Figure 3: Costs of Producing Steel with Prices for the Beta Technique

Figure 4: Costs of Producing Corn with Prices for the Beta Technique

Figures 3 and 4 suggest that for a sufficiently low interest rate, the technique consisting of the second steel-producing process and the first corn-producing process, that is, the Gamma technique, is cost-minimizing. For a somewhat higher interest rate, the technique consisting of the second steel-producing process and the second corn-producing process, that is, the Delta technique, seems to be cost-minimizing. And, as noted above, the algorithm terminates with the Beta technique identified as the cost-minimizing technique at an even higher interest rate. In other words, the graphs suggest that the above algorithm converges to the same solution as the indirect method.

6.0 Conclusions
I have not exhausted the methods available for analyzing the choice of technique. For example, I have not formulated any Linear Programs above. Nor have I presented the diagram in my 2005 Manchester School paper. Furthermore, I have glossed over many interesting mathematical questions, such as proving the existence of solutions and proving that all methods give the same result. But this post is already too long.

References

Heinz D. Kurz and Neri Salvadori (1995) Theory of Production: A Long-Period Analysis. Cambridge University Press.
J. E. Woods (1990) The Production of Commodities: An Introduction to Sraffa, Humanities Press.

Great Female Economists

2011-03-08T17:53:00.002-05:00

This is a selection. I always exempt those alive in making such judgements.

Jane Marcet
Harriet Martineau
Rosa Luxemburg
Mary Paley Marshall
Beatrice Webb
Charlotte Perkins Gilman
Elizabeth Boody Schumpeter
Joan Robinson
Krishna Bharadwaj

Lost Knowledge In Economics

2011-03-05T08:49:00.000-05:00

Economists' concerns can be expected to change as the world changes. In a serious scholarly discipline, however, such changes in emphasis should be theorized and argued. They should not be just a matter of fads and the following of changes in the political environment. I am not sure economics meets this standard. Anyways, here are examples I came up with today for exploring this question:

Managerial theories of the firm (as developed by, e.g., Robin Marris)
Markup pricing
Sidney Chapman's theory of the length of the working day (as opposed to the textbook analysis of tradeoffs between leisure and commodities) (Derobert (2001), (Spencer 2003), and (Walker 2007)).
Co-operatives (Kalmi 2007).
Sidney and Beatrice Webb's analysis of labor markets (Kaufman 2008).

References

L. Derobert. "On the Genesis of the Canonical Labor Supply Model". Journal of the History of Economic Thought, V. 23, N. 2 (2001): 197-215.
Panu Kalmi. "The Disappearance of Cooperatives from Economics Textbooks". Cambridge Journal of Economics, V. 31 (2007): 625-647.
Bruce Kaufman. "How a Minimum Wage Can Improve Efficiency Even in Competitive Labor Markets: The Webbs and the Social Cost of Labor". Andrew Young School of Policy Studies Research Paper Series, Working Paper 08-16 (July 2008).
D. A. Spencer. "The Labor-Less Labor Supply Model in the Era Before Philip Wicksteed". Journal of the History of Economic Thought, V. 25, N. 4 (2003): 505-513.
Tom Walker. "Why Economists Dislike a Lump of Labor". Review of Social Economy, V. 65, N. 3 (2007).

Coase Theorem Not About Markets

2011-03-03T08:02:00.001-05:00

Mainstream economists tend to think of the "laws of demand and supply", for example, as applying to all of human history and independent of institutional structure¹. Geoffrey Hodgson has noted the difficulty of finding a definition of "markets" in mainstream economics.

To me, a market must allow for repetitive purchases and sales of a commodity where participants have information on, for example, prices from previous purchases and sales. A contract drawn up between two organizations to last for several years is a bilateral negotiation, not a market transaction, when neither organization is simultaneous to draw up parallel contracts with competing organizations².

One application of this idea is to labor unions. Maybe the difficulties mainstream economists have with defining "markets" is connected with their backward notions on labor unions, backward notions that others have recently pointed out³.

I was inspired to write this post by Hahnel and Sheeran's article. An train engine with tracks through a farmer's field is an example of application of the Coase Theorem. If vegetation isn't kept a certain distance from the rails, supposedly sparks from the train wheels are likely to start a fire and burn the crops. Do the farmers have a well-defined property right not to have sparks ejected on their fields? Or do trains have a well-defined right to emit sparks? Depending on the answers to these questions, the legal liability for maintaining the track and paying for any resulting fires is different. But, according to the Coase "theorem", if property rights are well-defined and no transaction costs exist, the farmer and the railroad will negotiate an efficient price for allowing the trains to emit sparks. Some conclude that it is government's job to ensure property rights are well-defined and perhaps lower transaction costs. Then the market will come to an efficient solution to the problem of externalities, however property rights are allocated.

Among other criticisms, Hahnel and Sheenan point out that the conclusion is a non-sequitur. This is not an example of a market. I think their treatment of information asymmetries is a formalization of a point I first read from Michael Albert. The Coase set-up will encourage those with property rights to act as bullies, to threaten obnoxious behavior they wouldn't otherwise do, so as to extort payments from their victims.

¹ An interesting experiment would be to count the number of occurrences of the word "capitalism" in, say, the American Economic Review or the Journal of Political Economy in the last decade and contrast those counts with the same counts in, say, the Cambridge Journal of Economics, the Review of Political Economy, or the Review of Radical Political Economics.

² Even if you object to this usage of "market", you should see that the game theoretic models appropriate for a bilateral negotiation under various assumptions about available information is not the typical model of demand and supply schedules.

³ Haven't the criticized economists heard of the theory of the second best? I thought that the case of a large employer and a labor union was a canonical example.

References

Michael Albert. "Nobel Nerve", Z Magazine (Nov. 1991).
Robin Hahnel and Kristen A. Sheeran. "Misinterpreting the Coase Theorem" Journal of Economic Issues. V 43, N. 1 (March 2009): 215-238.
Geoffrey M. Hodgson Economics and Institutions: A Manifesto for a Modern Institutionalist Economists, Basil Blackwell (1989).
R. G. Lipsey and Kevin Lancaster. "The General Theory of the Second Best", Review of Economic Studies, V. 24, N. 1 (1956-1957): 11-32.

Geoff Harcourt In Audio And Video Formats

2011-02-28T08:05:00.002-05:00

As I understand it, Geoff Harcourt is now living in Australia, after having recently moved home from Cambridge, England. While in Cambridge, he wrote The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers and, especially, Joan Robinson, the latter with Prue Kerr.

While there, Harcourt contributed his time to a few interviews and lectures. I have previously mentioned his November 2009 lecture to the Post Keynesian Study Group on the legacy of Joan Robinson. He also gave a May 2010 lecture, to the same forum, on the crisis in mainstream economics. Finally, one can find a two-interview on YouTube.

Figure 1: First Part of Geoff Harcourt Interview

Figure 2: Second Part of Geoff Harcourt Interview

H/T Daniel Kuehn for links to the You Tube video.

Letter To The Editor

2011-02-22T08:03:00.000-05:00

Mike Cushman, the secretary of the London School of Economics University and Colleges Union (LSE UCU) writes to the Guardian:

"Philip Inman (Scene of the crime, G2, 18 February) describes the complicity of economics academics in the crash. They were responsible for providing an intellectual gloss for reckless and maybe criminal behaviour. ...They circulated their legitimising patina in the house journals of their club: the leading economics journals beloved of the US and UK business schools.

These journals, a key part of the conspiracy, continue to cast their shadow. It is almost impossible for economists to get employed or promoted in leading economics and management departments like LSE without publishing in these "A-grade" journals. ...It is the same self-referential circulation of authority that underpinned the collateralised debt obligations and other key instruments of the credit bubble. Essential research income is allocated through the Research Excellence Framework by reference to success in those same publications and adjudicated by those who edit and publish in those journals.

Scholars who will not act as shills for the banks and reinforce the Panglossian orthodoxies, and instead promote critical analyses, are rarely welcome in these journals and thus increasingly not welcome in universities... The REF (Research Exalting Finance) is a dangerous, flawed mechanism, at least in economics and management: an ideological straitjacket disguised as a fair and unbiased assessment." -- Mike Cushman

Mr. Cushman's claims are backed up by academic research on the history and sociology of economics. If I recall correctly, Geoffrey M. Hodgson and Harry Rothman¹, for example, demonstrate the self-referential and closed nature of the supposedly "leading" journals in economics.Frederick Lee² adds to the documentation of the unwillingness of mainstream economists to cite non-mainstream economists with empirically validated analyses of the British Research Excellence Framework (REF). In my reading of Lee, the REF is leading to less excellence in British economics, at least if your measure is an ability to understand actually existing capitalist economies.

¹ Geoffrey M. Hodgson and Harry Rothman. "The Editors and Authors of Economics Journals: A Case of Institutional Oligopoly?". Economic Journal, V. 109, Iss. 453 (Feb. 1999): pp. 165-186.

² Frederic Lee. A History of Heterodox Economics: Challenging the Mainstream in the Twentieth Century.

People I've Never Heard Of, Am Barely Aware Of, And Thought I Knew

2011-02-19T07:59:00.000-05:00

News coverage of the Egyptian revolution introduced me to Gene Sharp, who I have never heard of before. Apparently he is at the Albert Einstein Institution, and protesters are taking recipes from his book, From Dictatorship to Democracy.

Nonviolent revolutions these days are somewhat anarchist¹. I am not well read on contemporary anarchists. I found out existence of Colin Ward when he died. I am vaguely aware of Murray Bookchin. I have had a copy of Bill Devall and George Sessions' book, Deep Ecology: Living as if Nature Mattered on my bookshelf for a decade. Going back further, I like Hannah Arendt's On Revolution and Crises of the Republic and Paul Goodman's
Growing Up Absurd.

I have been much influenced, of course, in my views on economics by Joan Robinson. I don't know if I've read these before, but I find her Tanner lectures, "The Arms Race," are available online². In fact, almost all of the Tanner lecture series can be downloaded. There's just too much to read there, but I will pick out Albert Hirschman's, since I have blogged before on his book drawing from those lectures.

Notes:

¹A crossword puzzle clue passed on by Will Shortz: "Disordered sort?" The answer is, "Anarchist."

² I was motivated to look up Robinson's Tanner lecture by listening to Geoff Harcourt's November 2009 presentation on Robinson to the Post Keynesian Study Group.

Stephen Smale Presciently On Global Financial Crisis?

2011-02-14T16:52:00.000-05:00

I have argued before that weaknesses in mainstream economics exposed by our current macro-economic problems have been known for decades. I here note another example.

Stephen Smale is a Fields medal-winning mathematician who has advanced our understanding of chaotic dynamical systems. Smale has also contributed to mathematical economics. He wrote the following in 1976:

"A criticism commonly made of economic theory is its failure to make predictions of crises in the country or anticipate correctly unemployment or inflation. One must be cautious in the social sciences about looking towards physics for answers. However, some comparisons with the physical sciences seem profitable in connection with the above criticism. In those sciences, where theory itself is in a far more advanced state, limitations can be seen in a similar way. For example a given individual human body functions according to physical principles; however no physical scientist would predict a heart attack. The physical theory gives understanding of aspects of what goes on in the human body only under very idealized conditions. The physical theories eventually play some role in the education of medical doctors, who can then say some things, some times about a patient's susceptibility to a heart attack, preventive measures, and cures.

The economy of the world or even a nation is a very complex phenomenon, like a human body, involving a number of factors, both economic and political. It is no more reasonable to expect economic theorists to predict a nation's economic future than for a theoretical scientist to predict the future health of an individual...

...I would like to give some reasons why I feel equilibrium theory is far from satisfactory. For one thing the theory has not successfully confronted the question, 'How is equilibrium reached?' Dynamic considerations would seem necessary to resolve this problem. Another is the reliance of the theory on long range optimization.

In the main model of equilibrium theory, say as presented in Gerard Debreu's Theory of Value, economic agents make one life-long decision, optimizing some value. With future dating of commodities, time has almost an artificial role." -- Stephen Smale. "Dynamics in General Equilibrium Theory." American Economic Review V. 66, N. 2 (1976): pp. 288-294.

Celebrity Economists?

2011-02-12T08:43:00.001-05:00

When I look at many economists who have won the "Nobel" prize, I often wonder, where is the empirical evidence for their theories? Are they making empirical claims that have passed potentially falsifying tests? It seems to me that both Solow and Lucas, for example, won prizes more on the basis that their work is frequently cited than for expanding our understanding of actually existing economies. Perhaps some, such as Leontief or Stone, won for work providing an accounting framework that is useful in organizing empirical data.

Hence, my title: a celebrity has been defined as somebody who is famous for being famous.

This is a topical post.I was inspired by this list of "top twenty" articles in the American Economic Review, selected by six senior economists.

(While I was writing this post, Merijn Knibbe posted similar thoughts.)

I append the article list for reference:

Alchian and Demsetz (1972). "Production, Information Costs and Economic Organization".
Arrow (1963). "Uncertainty and the Welfare Economics of Medical Care".
Cobb and Douglas (1928). "A Theory of Production".
Deaton and Muellbauer (1980). "An Almost Ideal Demand System".
Diamond (1965). "National Debt in a Neoclassical Growth Model.
Diamond and Mirrlees (1971). "Optimal Taxation and Public Production" (two parts).
Dixit and Stiglitz (1977). "Monopolistic Competition and Optimum Product Diversity".
Friedman (1968). "The Role of Monetary Policy".
Grossman and Stiglitz (1980). "On the Impossibility of Informationally Efficient Markets".
Harris and Todaro (1970). "Migration, Unemployment and Development: A Two-Sector Analysis.
Hayek (1945). "The Use of Knowledge in Society".
Jorgenson (1963). "Capital Theory and Investment Behaviour".
Krueger (1974). "The Political Economy of the Rent-Seeking Society"
Krugman (1980). "Scale Economies, Product Differentiation, and the Pattern of Trade.
Kuznets (1955). "Economic Growth and Income Inequality".
Lucas (1973). "Some International Evidence on Output-Inflation Tradeoffs".
Modigliani and Miller (1958). "The Cost of Capital, Corporation Finance and the Theory of Investment".
Mundell (1961). "A Theory of Optimum Currency Areas".
Ross (1973). "The Economic Theory of Agency: The Principal's Problem".
Shiller (1981). "Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?"

Elsewhere

2011-02-05T14:12:00.001-05:00

Russell Jacoby pans Erik Olin Wright's book Envisioning Real Utopias. I don't know much about Jacoby. I find his review encourages me not to read Wright. It would help, however, if Jacoby didn't cite Wright's use of the word "interstitial" as an example of boring cant, while praising Veblen, who also used the word.
Victoria Chick and Ann Pettifor write about the 75th anniversary, on February 3 of Keynes' General Theory.
Eric Schliesser, a philosopher, notes Greg Mankiw's refusal to acknowledge the existence of literature on his points, a topic I've mentioned before.

Daron Acemoglu

2011-02-04T07:55:00.001-05:00

What do you think of Daron Acemoglu?

Since he is a mainstream economist at MIT, I should be inclined to take a critical stance to be consistent with my themes. Acemoglu has written so many papers that I do not feel that I can have a comprehensive view. Maybe I should read up on the summary that must have accompanied his 2005 John Bates Clark medal.

Acemoglu writes on political economy and political science topics I think of interest - for example, power, coercion, social networks, innovation, governance, and economic development. The conclusions he and his colleagues reach are not necessarily a whitewash of capitalism. I've been trying to read, for example, Glenn Ellison and Alexander Wolitzky's paper, "A Search Cost Model of Obfuscation", in which more-or-less competitive firms deliberately put clauses hard to understand in contracts, thereby making it difficult to compare products and to obtain, for example, payouts on warranties, insurance, etc. Most of the papers I've read by Acemoglu and his colleages seem to tell just-so stories with game theory, a branch of mathematics I think can be fascinating. Empirical accounts can be used to illustrate the theories, but I wonder whether the theories are passing potentially falsifying tests. As an exemplar, I take Acemoglu, Egorov, and Sonin's accounts of incidents in the history of the Soviet Politburo in their 2008 Review of Economic Studies paper, "Coalition Formation in Non-Democracies".

Entrepreneurial Profits In A Classical Model

2011-01-29T15:51:00.002-05:00

I came upon this passage recently:

"Thus, in the short run, the entrepreneurs introducing new techniques would reap supernormal profits. [Suppose] there is continuous technical change in the system, which Marx assumes to be in the nature of capitalist competition and a requirement for the maintenance of the 'reserve army of labour', then there arises a permanent income category that cannot be accounted for by labour-time accounting... Though Pareto does not clearly separate such entrepreneurial income from returns to capital in general, or from the notion of productivity of capital, it is plain that he foreshadows the idea that was later developed by Schumpeter...as an explanation for positive profits in a capitalist economy." -- Ajit Sinha (Theories of Value from Adam Smith to Piero Sraffa, Routledge (2010) pp. 214-215.)

This suggests to me a puzzle: can I create a model in which entrepreneurs make profits even though the workers are paid what would be the entire net output if the technology in use during the period in which they are paid were to persist unchanged? This post demonstrates that Sinha's comment is well-founded.

2.0 A Model
2.1 The Technology
Consider a simple economy in which a single commodity, corn, is produced each year. Workers produce the annual output from inputs of (seed) corn and their labor. The technology is defined by:

a₀(t): the labor (in person-years) needed as input per bushel corn produced in the tth year.
a₁(t): the (seed) corn needed as input per bushel corn produced in the tth year.

The coefficients of production evolve as in the following two equations:

a₀(t) = e^-λ₀t

a₁(t) = c e^-λ₁t

where the positive constants λ₀ and λ₁ are the rate of decrease in the labor and (seed) corn inputs, respectively. I impose the condition that the quantity harvested must exceed the quantity of seed corn planted in the spring:

0 < c < 1

2.2 Quantity Flows
Let Q(t) be the bushels of corn produced during the tth year and available after the harvest at the end of year. Assume:

Q(t) = e^λ₀t

The labor employed each year is a₀(t)Q(t), that is, one person-year.The seed corn, K(t), required for planting at the start of the tth year is:

K(t) = a₁(t)Q(t) = c e^{-(λ₁-λ₀)t}

The seed corn decreases each year if and only if the rate of decrease of the labor input per bushel corn produced exceeds the rate of decrease of the seed corn input per bushel corn produced:

λ₁ < λ₀

The surplus corn harvest, Y(t), over the seed corn planted at the start of the year is:

Y(t) = Q(t) - K(t) = e^λ₀t(1 - c e^-λ₁t)

2.3 Prices, Wages, And Distribution
Assume the labor hired during a given year is paid at the end of the year out of the harvest. The Sraffian price equations for this model are:

a₁(t) + a₁(t) w(t) = 1

where w(t) is the wage per person year, and I have taken a bushel of corn as the numeraire. It is easy to solve this equation to find that the wage is the net output produced by the person-year employed:

w(t) = Y(t)

If the seed corn required for a constant labor force declines year-by-year, this model provides a source of entrepreneurial profit:

π(t) = K(t + 1) - K(t) = c e^{-(λ₁-λ₀)t}[e^{(λ₀-λ₁)} - 1]

What happens if the condition on technological progress is not met? I haven’t worked out this case, but two possibilities seem to me to arise. In the first case, workers cannot consume the entire surplus each year. Perhaps, the capitalists obtain some accounting profits on their capital and they save those profits as additions to the seed corn each year. In the second case, the number of hours worked decline.

No Crisis In Mainstream Economics...

2011-01-26T20:43:00.002-05:00

...Instead, the situation is chronic. The long-festering situation of economics is seen in the constant literature on the "crisis" in economics, going back for maybe half a century.

The book The Crisis in Economic Theory (1981) is a timely example. It was edited by Daniel Bell and Irving Kristol, and Daniel Bell's obituary was published in the New York Times today. (See also this Crooked Timber post.) The editors wrote the introduction, and each wrote a chapter. Other contributions include Frank Hahn on general equilibrium theory, Israel Kirzner on the Austrian school, Paul Davidson on Post Keynesianism, and Edward Nell on a Sraffa-influenced interpretation of Marxist economics.

Blah, Blah, Jevon's Paradox, Blah, Blah, Backfire

2011-01-25T08:03:00.000-05:00

Figure 1: The Carrier Dome, Named After A Manufacturer Of A/C Equipment No Longer In Syracuse, NY

The Jevon's paradox arises when increased efficiency in the use of a resource results in greater overall use of that resource. This is a severe example of "rebound", where the effects of increased efficiency are lessened by increased use. Jevon's wrote about Coal.

Some may have noticed David Owen's recent article in The New Yorker focused on air conditioning (A/C). By synchronicity, Computer, the flagship journal of the Institute of Electrical and Electronic Engineers (IEEE) Computer Society, also published an article on rebound about the same time. Tomlinson, Sliberman, and White recommend mindfulness in the pursuit of energy efficiency in Information Technology and reference a report from an organization in the United Kingdom. (I'm not as dismissive of the Jevon's paradox as my title may suggests; I just wanted a template to could apply to both articles.)

The New Yorker published three letters on their article. I select Amory Lovins' letter for not just because he is a well-known advocate of increased energy efficiency. He points out that much of the increased use of A/C that David Owens describes is due to increased wealth, not rebound. He uses the example of oil to assert that increases in efficiency could drop energy use in absolute terms, even with economic growth. Apparently, between 1977 and 1985, the United States Gross Domestic Product rose 27 percent and oil use fell 17 per cent.

For utility-sponsored research in the United States, I look to the Electric Power Research Institute (EPRI). I don't know if they have a take on the Jevon's paradox. I think Leontief Input-Output analysis and Luigi Pasinetti's structural economic dynamics provide empirical tools for investigating the question.

References

Amory B. Lovins (2011) "Letter", The New Yorker (17 Jan.): p. 3.
David Owen (2010). "The Efficiency Dilemma", The New Yorker (20 & 27 Dec.): pp. 78-85.
Steve Sorrell (2007). The Rebound Effect: An Assessment of the Evidence for Economy-Wide Energy Savings From Improved Energy Efficiency, UK Energy Research Center.
Bill Tomlinson, M. Six Sliberman, and Jim White (2011). "Can More Efficient IT Be Worse for the Environment?", Computer, V. 44, Iss. 1 (Jan.): pp. 87-89.

Krugman On The Importance Of Austrian Business Cycle Theory

2011-01-21T07:58:00.000-05:00

Paul Krugman writes:

"Someone, I don’t know who at this point, sent me to this post by Robert Murphy, which is the best exposition I’ve seen yet of the Austrian view that’s sweeping the GOP..."

I think the Republicans are not as coherent as Krugman makes them out to be. They are even less coherent than coherent than Austrian Business Cycle Theory.

I don't know that I will pursue trying to publish my rebuttal of Austrian Business Cycle Theory. Some have previously brought up my working papers in discussions of Krugman's blog and column. So far, I have not seen my name mentioned in discussions of this Krugman blog post.

ASSA, Not AEA In Denver?

2011-01-18T07:52:00.001-05:00

Denver In Some Other Month

The proceedings of the recent American Economic Association annual conference are online. Preliminary versions of some of the papers are available for download.

I have trouble getting a sense of what mainstream economists are about from such a massive list. Doubtless I would find some of these papers of interest, despite the forbidding technical titles. I regret that downloads are not available for panel discussions (for example, "What's Wrong (and Right) with Economics? Implications of the Financial Crisis", "Lessons for Economics from the Great Recession", "Grand Challenges for Social Science...", "History, Crisis, Institutions and Economic Analysis", and "The Ethics of Professional Economic Practice"). (Actually, doing a search on the word "Panel" does cut down the list of titles to a manageable size that may give a feel to the direction of the profession.)

I also look in this list for economists of schools of thought and fields in which I'm interested. The Union of Radical Political Economics has only one session co-sponsored with the AEA. Steve Keen provides videos and download links. The History of Economics Society also has one co-sponsored session. As far as I can see, the Association for Evolutionary Economics (AFEE) and the International Association for Feminist Economics have no sessions. Brad DeLong's presentation is the only one with the word "Keynes" or "Keynesian" in the title. This sample should not lead one to conclude that heterodox economists were not represented in Denver, for they appear in the program of the Allied Social Science Associations. Explicitly identified heterodox economists just seem to be banished from the AEA, to the AEA's shame.

And The Life Of Man, Solitary, Poore, Nasty, Brutish, And Short

2011-01-14T08:09:00.001-05:00

I am hostile to the notion of logically deriving an ideal society from first principles. Ideal norms can only be understood by us humans in a context that will evolve over time, not from some timeless, interest-free view from nowhere. Humans, in arguing about society, invariably base themselves on some partial perspective or faction. And to understand how to apply some principle articulated from some interest, one will have to draw on empirical results. (Is this an institutionalist, pragmatic view?)

Perhaps, nevertheless, some (not necessarily inconsistent) norms can be stated in keeping with these ideas. I suggest the following:

Human society should be able to reproduce itself (Karl Marx).
Unnecessary suffering should be alleviated (Karl Popper).
Everybody should have the freedom to develop their capabilities to the best of their abilities (Aristotle, Marx).

Other norms don't seem to be compatible with my views on how to think about political philosophy. "People should be able to keep what they make" is a meaningless norm, maybe common among current intellectually and ethically impoverished mainstream economists.

Robert Nozick, as I understand him, begs a definition of natural rights. And then he argues for the following principles on that basis:

A person who acquires a holding in accordance with the principle of justice in acquisition is entitled to that holding.
A person who acquires a holding in accordance with the principle of justice in transfer, from someone else entitled to the holding, is entitled to the holding.
Unjust acquisitions or transfer should be rectified

He ends up arguing for a more-or-less night-watchman state.

Perhaps these sorry days are ripe for an immanent critique of the idea of equality of opportunity.

I did not manage to mention above the Austrian-school economist Israel Kirzner's defense of returns to entrepeneurship with what he calls a "finders keepers" ethic. I have not read John Rawls.

Both Sides Now

2011-01-11T08:25:00.000-05:00

Eric Schoenberg, of Columbia Business School, has a very confused response to the usual idiocy from Greg Mankiw. Schoenberg quotes Mankiw as saying

"under a standard set of assumptions... the factors of production [i.e., workers] are paid the value of their marginal product... One might easily conclude that, under these idealized conditions, each person receives his just deserts."

Schoenberg thinks the above is coherent. He merely questions whether the standard assumptions apply in our economy.

But marginal productivity is not a theory of the distribution of income, as I have demonstrated. It is a theory of the choice of technique. Income distribution can be anywhere on the factor price frontier and all agents will be receiving the value of the marginal product of the factors of production that they own. (I don't know if anybody in the comments at the Huffington Post points out that Mankiw does not know what he is talking about, even given all of his assumptions.)

By the way, Bill Mitchell has a recent post that wanders into my theme.

Canonical Statements Of Current Mainstream Price Theory?

2011-01-09T10:35:00.002-05:00

I find puzzling where contemporary mainstream economists would point for good statements of a theory to explain prices in, say, the United States economy. I can think of a couple of possibilities.

The first would be General Equilibrium models in which a complete set of spot and future markets exist and in which goods are distinguished by location, date of delivery, and contingent events. Canonical statements of such a theory include:

Gerard Debreu (1959). Theory of Value: An Axiomatic Analysis of Economic Equilbrium, Cowles Foundation Monograph.
Kenneth J. Arrow and Frank Hahn (1971). General Competitive Analysis, Holden-Day.

But is this the current theory? Even though more textbooks have been written, the references would seem old to most young economists. The Sonnenschein-Mantel-Debreu results show that dynamic equilibrium paths are not limited by the theory. The theory does not allow for the existence of money to have any effect. Since the quantities of initial endowments are givens of the theory and any groping out of equilibrium, particularly with production going on, would change the data defining the equilibria, any time to reach equilibrium is too long. I think many mainstream economists would tell me General Equilibrium theory was abandoned in the 1980s.

Another possibility is models of temporary equilibrium. I look at the following as canonical statements of this theory

J. R. Hicks (1946). Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory, 2nd edition, Oxford University Press.
J. M. Grandmont (1977). "Temporary General Equilibrium Theory", Econometrica, V. 45, N. 3 (Apr.): pp. 535-572.

In this theory, only spot markets and maybe future markets for the numeraire commodity clear in equilibrium. The plans of different agents for future activities are not brought into agreement in equilibrium. Maybe this approach is related to Samuelson's model of overlapping generations. In addition to all the problems of General Equilibrium Theory, this approach has the difficulty of modeling how expectations alter, something that hardly seems observable or easy to model in a mechanical fashion.

Maybe game theory is the foundation of contemporary mainstream price theory. But cannot a game be found to rationalize almost any observed behavior? Is it not more a bag of tricks than a theory? Nevertheless, I have heard mainstream economists say good things about the following text:

David M. Kreps (1990). A Course in Microeconomic Theory, Princeton University Press.

As I understand it, the dominant introductory graduate textbooks in mainstream microeconomics remain:

Andreu Mas Colell, Michael D. Whinston, and Jerry R. Green (1995). Microeconomic Theory, Oxford University Press.
Hal R. Varian (1992). Microeconomic Analysis, 3rd edition, W. W. Norton.

When I have perused these, I have found them to be more a collection of mathematics than a clear presentation of price theories. And I have found them very unclear on why the student should accept anything in them as applicable to actually existing capitalism.

Increase In The Feasibility Of Economic Planning

2011-01-04T20:14:00.001-05:00

Mathematical programming is a key technique for economic planning. And we can solve linear programs much better now:

"Even more remarkable - and even less widely understood - is that in many areas, performance gains due to improvements in algorithms have vastly exceeded even the dramatic performance gains due to increased processor speed.

The algorithms that we use today for speech recognition, for natural language translation, for chess playing, for logistics planning, have evolved remarkably in the past decade. It's difficult to quantify the improvement, though, because it is as much in the realm of quality as of execution time.

In the field of numerical algorithms, however, the improvement can be quantified. Here is just one example, provided by Professor Martin Gröschel of Konrad-Zuse-Zentrum für Informationstechnik Berlin. Grötschel, an expert in optimization, observes that a benchmark production planning model solved using linear programming would have taken 82 years to solve in 1988, using the computers and the linear programming algorithms of the day. Fifteen years later - in 2003 - this same model could be solved in roughly 1 minute, an improvement by a factor of roughly 43 million. Of this, a factor of roughly 1,000 was due to increased processor speed, whereas a factor of roughly 43,000 was due to improvements in algorithms! Grötschel also cites an algorithmic improvement of roughly 30,000 for mixed integer programming between 1991 and 2008.

The design and analysis of algorithms, and the study of the inherent computational complexity of problems, are fundamental subfields of computer science." -- Report to the President and Congress - Designing a Digital Future: Federally Funded Research and Development in Networking and Information Technology, Executive Office of the President, President's Council of Advisors on Science and Technology (December 2010)

I don't know how such speedup was accomplished. I assume it cannot be merely a tradeoff between Dantzig's simplex algorithm and interior point methods (such as Karmarkar's algorithm). The simplex algorithm, for example, has never struck me, from what I recall, as naturally parallelizable. But parts of it can be done in parallel, I think. I think of choosing a pivot element, multiplying a vector by a scalar, and taking the inner product of two vectors as parallelizable operations. I think these improvements must have been accomplished by customizing an implementation with a well defined Application Programming Interface for a specific architecture.

(H/T: Noam Nisan)

Update: I've been reading Robert E. Bixby's "Solving Real-World Linear Programs: A Decade and More of Progress" (Journal of Operations Research, V. 50, Issue 1 (2002)). Apparently speedups were accomplished by algorithm improvements such as matrix operations that exploit the sparcity of the matrices, removing redundant constraints, aggregating decision variables under specified conditions, and many improvements I do not understand. The simplex algorithm, the dual simplex algorithm, and interior point methods all remain competitive on different problems. Bixby considers example problems with millions of decision variables and constraints. I think a couple of more orders of magnitude of improvements can be achieved with parallelization. Maybe somebody has tried that since Bixby's publication.

Applied Sraffianism

2010-12-28T10:33:00.002-05:00

"These allusions give incidentally some indication of the disproportionate length of time over which so short a work has been in preparation... As was only natural during such a time period, others have from time to time independently taken up points of view which are similar to one or the other adopted in this paper and have developed them further or in different directions from those pursued here." -- Piero Sraffa

Despite my appreciation of Bliss' 1975 book, I think the following view dubious, uninformed, and authoritarian:

"A striking feature of the school to which Piero Garegnani belongs is its seeming lack of interest in the real world... Our world is changing rapidly and in ways that demand economic analysis of what is happening... Over the last 30 years so-called neoclassical economics has been extraordinarily productive... What has been the contribution of the post-Sraffa school in the same period? Nothing at all as far as I can see. This has been an exceptionally sterile approach. Where are the new ideas? Where are the illuminating insights into what is happening today?" -- Christopher Bliss (2009)

I have no problem with a researcher deciding to center their investigations into criticism and the history of economic thought. I think that when Bliss calls neoclassical economics "extraordinarily productive", he includes research that fails to test neoclassical economics and whose relationship to neoclassical economics can be doubted. Sraffian economics can easily exceed this standard.

I take the "others" Sraffa refers to above to be principally Wassily Leontief and John Von Neumann. So, for example, work with Leontief's Input-Output (I/O) analysis is applied Sraffian analysis. Interestingly enough, countries maintain their national accounts in a form supporting I/O analysis. (For the United States, see the benchmark input-output accounts available from the Bureau of Economic Analysis (BEA). For many developed countries, see the Structural Analysis (STAN) Database for data on Industry and Services available from the Organisation for Economic Co-Operation and Development (OECD).) For me, challenges in working with this data arise from statistical discrepancies, rectangular matrices that I expect to be square, components in value added that are neither wages nor profits, import and export flows, etc. But other economists, including some Sraffians have addressed these challenges in their own work.

I have listed selected applied Sraffa work on two topics.. Tony Aspromourgos (2004) lists Sraffian research applied to a larger range of issues.

References

Tony Aspromourgos (2004). "Sraffian Research Programmes and Unorthodox Economics", Review of Political Economy, V. 16, n. 2: pp. 179-206.
Christopher Bliss (2009). "Comment on 'Capital in Neoclassical Theory: Some Notes' by Professor Piero Garegnani".
Thijs ten Raa (2006). The Economics of Input-Output Analysis, Cambridge University Press.
John Von Neumann (1945). "A Model of General Economic Equilibrium", Review of Economic Studies, V. 13, N. 1: pp. 1-9.

"The Impossibility ... [Of] ... A Single Magnitude Representing ... The Quantity Of Capital"

2010-12-22T11:08:00.002-05:00

Figure 1: From Sraffa's Production of Commodities by Means of Commodities

Suppose people save more. A neoclassical and Austrian school¹ idea is that then the supply of capital will have increased, in some sense. One would expect its price, the rate of interest, to be less, absent intervention by the monetary authorities. Entrepreneurs, if they were alert, would adopt more capital-intensive - that is - longer techniques of production. After these techniques came online, output per worker would be higher.

Suppose that the length of the period of production of a technique were defined in terms of purely physical data. Given a complete list of inputs and outputs, including the times at which they flow into and out of the production processes, one would be able to measure the (average) period of production of the technique composed of those processes. Then reswitching shows the above story cannot be universally valid.

Austrian-school economists and economists sympathetic to the Austrian school have had at least two reactions to this demonstration of the logical invalidity of the above story. One reaction is to assert that an aggregate measure of capital-intensity, such as a physical measure of the average period of production, is not needed for the story to go through. Supposedly, entrepreneurs shift resources, in response to low interest rates, to time periods further before the production of consumer goods. In the technical jargon, entrepreneurs tend to move resources towards producing goods of higher orders and away from producing goods of lower orders. I have shown² that this response fails to evade a critique based on reswitching.

The second reaction is to define the average period of production as dependent on the interest rate, as well as physical properties of techniques of production. Thus, the average period of production for a given technique will be different at the interest rates associated with different switch points. Apparently, Edmond Malinvaud, drawing on some work of J. R. Hicks, made this argument in a 2003 paper about Knut Wicksell's contributions. Saverio Fratini, in his paper presented at the recent 50th anniversary conference on Sraffa's book, took the opportunity of Malinvaud's paper to argue that this reaction also cannot be sustained as a response to a critique based on reswitching and capital-reversing.

I associate this second reaction with Leland Yeager, who, in a couple of papers in the late 1970s, argued that waiting has the dimensions of the product of value and time (for example, dollar-years). I find it hard to find a valid non-tautological argument here. I think Fratini's paper could be revised to point out that he refutes Yeager, as well as J. R. Hicks and Edmond Malinvaud. I would like to be referenced too, although I don't know about the conventions of referencing working papers.

Footnotes
¹ Both William Stanley Jevons and Eugen von Böhm-Bawerk expounded this idea.
² Due to a recent hard-disk crash, I have lost originals from which I generated some PDFs, as well as reviewer comments on recent revisions.
References

Saverio M. Fratini (2010). "The Hicks-Malinvaud Average Period of Production and 'Marginal Productivity': A Critical Assessment", Sraffa’s Production of Commodities by Means of Commodities 1960-2010, Roma, Italy (2-4 Dec.)
Robert L. Vienneau (2010) "Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory"
Leland B. Yeager (1976). "Towards Understanding Some Paradoxes in Capital Theory", Economic Inquiry, V. 14: pp. 313-346
Leland B. Yeager (1979). "Capital Paradoxes and the Concept of Waiting", Time, Uncertainty, and Disequilibrium: Exploration of Austrian Themes (ed. By Mario J. Rizzo), D. C. Heath and Company

Videos And Papers From 50th Anniversary Conference On Sraffa's Book

2010-12-20T08:24:00.001-05:00

In comments on my previous post, a blogger from Revista Circus links to a presentation of Gary Mongiovi on Marxian exploitation. This is too modest. The blog has organized a plethora of videos, abstracts, and draft papers from the recently completed international conference in Rome on Sraffa's Production of Commodities by Means of Commodities:

Pierangelo Garegnani's presentation and a paper on the present state of the capital controversy
Fabio Petri's paper and presentation on bringing sense back to the theory of aggregate investment
Franklin Serrano's presentation on elements of continuity and change in the international economic order: an analysis based on the modern classical surplus approach
Gary Mongiovi's paper and presentation on the concept of exploitation in Marxian economics
Heinz Kurz's paper and presentation on reviving the "Standpoint of the old classical economists": Piero Sraffa's contribution to political economy
Tony Aspromourgos' paper and presentation on Sraffa's system in relation to some main currents in unorthodox economics
Marc Lavoie's paper and presentation on should Sraffian economics be dropped out of the post-Keynesian school?
Esteban Pérez Caldentey and Matías Vernengo's paper and presentation on Raúl Prebisch's evolving views on the business cycle and money
Roberto Ciccone's presentation on public debt and the determination of output
Antonella Palumbo's presentation on potential output, actual output and demand-led growth
Heinz Kurz's closing remarks

Update: In the comments, Saverio Fratini informs us that all the available papers are accessible from the conference web site.

Michele Boldrin Confused About Marxian Exploitation, Marginal Productivity

2010-12-11T10:55:00.001-05:00

Michele Boldrin has written a paper in which supposedly Marxian themes are treated in a Dynamic Stochastic Equilibrium Model (DSGE). He writes:

...there is 'exploitation of labor' also in standard neoclassical models of production. Within each firm, almost all workers (i.e. everyone but the marginal worker at the marginal plant) are 'exploited' in the sense that they are being paid a wage smaller than their marginal productivity. -- Michel Boldrin (2009) "Growth and Cycles, in the Mode of Marx and Schumpeter. Scottish Journal of Political Economy, V. 56, N. 4 (p. 432)

The above is mistaken on at least two points:

The notion of exploitation is Joan Robinson's neoclassical idea from the period in which she developed the theory of imperfect competition; this idea is not Marx's.
The above passage seems to take the value of the marginal product of labor as defined prior to prices, including wages. If so, Boldrin follows the mathematically mistaken teaching of some not-so-bright orthodox economists.

Boldrin continues his mistaken line:

From a Marxian view point, labor-saving innovations are the means through which capitalist exploitation can be perpetrated and maintained over time... -- Michel Boldrin (2009)(p. 435)

The above might or might be true of Marxian exploitation, but Boldrin is using a different definition. And again:

Asymptotically, all existing firms use the same, best, technology and the market wage corresponds to the marginal productivity of labor in the marginal technology, which is also the one everybody uses. Hence, exploitation of the workers has ceased. -- Michel Boldrin (2009)(p. 440)

John Roemer describes a source of profits in a model which could exhibit perfect free entry, constant returns to scale, and individual profit maximization:

"...the existence of postive-profit equilibria ... is to associated with the necessity of time in production, that capitalists must advance the costs of production before they receive the revenues from production. It is this temporal structure of production that gives rise to the economic necessity of a capital constraint, whether or not funds for production are limited to internal finance or are available on a capital market." -- John E. Roemer (1981). Analytical Foundations of Marxian Economic Theory, Cambridge University Press (p. 84)

As those familiar with Frank Hahn's critique of the "neo-Ricardians" know, this sort of model is consistent with every valid marginal productivity principle holding.

Man-Seop Park's criticizes new growth theory (from, for example, Paul Romer) on a number of grounds in a number of papers. One of these grounds is that such models ignore the presence of time in production, even when they depict a number of stages in production. I think Boldrin's paper may be weak on this ground.

Update: I thought a little more about this. Bouldrin considers the case in which the marginal plants in both the investment and consumer goods sector are both operated at less than capacity. In this case, the value of the marginal product of labor is positive (in the competitive case), and the marginal product of the capital good is zero.

I would rather consider the case in which both labor and the marginal plants are binding in both sectors. In this case, an additional unit of either labor or plant would contribute nothing to production. On the other hand, a marginal unit decrease in either labor or capital would decrease production by some specified amount. Thus, the value of the marginal product of both labor and the capital good (in the competitive case) would be an interval from zero to some positive amount. I think this case results in the familiar Sraffian wage-rate of profits curve in which wages can only be larger if the rate of profits would be smaller.

Robert Paul Wolff Blogging On Books On Sraffa And Marx

2010-12-08T08:16:00.000-05:00

Here Wolff provides an overview of Marx, agrees with Morishima that Marx was a great economist, and mentions books by the analytical Marxists. Here he describes Sraffa's impact on interpretations of Marx and provides a list of books (which overlaps with my list of textbooks). Here he briefly overviews each of the books in his list, with the exception of Marglin's.

How Smaller Government Leads To Increased Inequality

2010-12-04T10:18:00.002-05:00

David Ruccio hypothesizes that the current worldwide macroeconomic difficulties are related to increased inequality in the distribution of income in, say, the United States over the last few decades. I have been considering hypothetical mechanisms that expand on this idea. Previously I have put forth the Harrod-Domar growth model as a framework in which increased inequality leads to a tendency towards recessions. In this post, I focus on causation in the other direction. (A full analysis of the issues will likely describe a process of cumulative causation.)

Active macroeconomic fiscal policy is assisted if government spending is already a somewhat large component of a nation's economy. It is easier to raise government spending by some given fraction of national income if that change is a smaller percentage of current government spending. We have seen this issue in connection with the Obama administrations talk of "shovel-ready" projects and the stimulus policy. Perhaps this consideration even applies to automatic stabilizers.

So governments that are smaller with respect to their national economies might be expected to exhibit worse macroeconomic performance. And James Galbraith has shown quite some time ago that poor macroeconomic performance leads to increased greater inequality in wages.

Perhaps the above is part of the explanation for the empirical cross-section correlation between decreased government size and increased inequality. I think Hacker and Pierson give some explanation why increased inequality engenders political forces tending towards smaller government size.

Continued Balderdash From Liebowitz And Margolis

2010-11-27T08:58:00.001-05:00

Joan Robinson, drawing on John Maynard Keynes, famously distinguished between models set in historical and logical time. Geoffrey Hodgson, now an institutionalist economist, has written extensively about evolutionary models in economics. Given my interest in such economists, I also find of interest how to formalize the notion that "history matters". I think mathematical models of nonergodic processes is one way of formally setting a model in historical time.

Brian Arthur and Paul David, two economists, have developed a parallel idea, that of path dependence. This post is about false statements Stan Liebowitz and Stephen Margolis like to make about this work. Liebowitz and Margolis quote Paul David:

"The foregoing account of what the term 'path dependence' means may now be compared with the rather different ways in which it has come to be explicitly and implicitly defined in some parts of the economics literature. For the moment we may put aside all of the many instances in which the phrases 'history matters' and 'path dependence' are simply interchanged, so that some loose and general connotations are suggested without actually defining either term. Unfortunately much of the non-technical literature seems bent upon avoiding explicit definitions, resorting either to analogies, or to the description of a syndrome - the set of phenomena with whose occurrences the writers associate path dependence. [Rather than telling you what path dependence is, they tell you some of the symptomology - things that may, or must happen when the condition is present. It is rather like saying that the common cold is sneezing, watering eyes and a runny nose.]" -- Paul David

Liebowitz and Margolis somehow think you will be persuaded to believe the following:

"So here we see David disqualifying, at least from others, any efforts to connect path dependence to observable phenomena. David would have path dependence discussed only in the context of the most severe abstraction, an immaculate concept immune from criticism: it is a dynamic stochastic process that is non-ergodic." -- Stan Liebowitz and Stephen Margolis

Notice Paul David never says that path dependence, under a rigorous definition, never will be manifested in observable empirical phenomena. Elsewhere Paul David notes that Markov processes can be non-ergodic, that is, path dependent. And he notes that economists have connect Markov processes, not all of which need be path-dependent, to observable penomena:

"Homogeneous Markov chains are familiar constructs in economic models of the evolving distribution of workers among employment states, firms among size categories, family lineages among wealth-classes or socio-economic (occupational) strata, and the rankings of whole economies among in the international distribution of per capita income levels." -- Paul David

Why are certain economists so willing to tell untruths?

References

W. Brian Arthur (1989) "Competing Technologies and Lock-In by Historical Small Events", Economic Journal, V. 99, N. 1: pp. 116-131.
W. Brian Arthur (2009) The Nature of Technology: What It Is and How It Evolves, The Free Press. [I haven’t read this]
Paul A. David (1985) "Clio and the Economics of QWERTY", American Economic Review. V. 75, N. 2 (May): pp. 332-337.
Paul A. David (2000) "Path Dependence, It's Critics and the Quest for 'Historical Economics'"
Paul A. David (2007) "Path Dependence - A Foundational Concept for Historical Social Science", Cliometrica, V. 1, N. 2: pp. 91-114 (working copy)
Stan J. Liebowitz and Stephen E. Margolis (2010) "How the Lock-In Movement Went off the Tracks"