Now war means seizing here and there the bread the tender Father would deny to none

I have an interest in both physiocracy and the distribution of income and wealth in the United States.

A vignette from Marguerite Kuczynski, co-editor (with Ronald Meek) of Quesnay's Tableau Economique surprised me. She rediscovered a copy of the "third edition" in the Du Pont library in the United States. Why would a manuscript from an eighteenth century French school of economics be in a twentieth century U.S. private library, that is the Eleutherian Mills Historical Library?

DuPont de Nemours was not only a great promoter of Quesnay and his ideas. He also founded the American chemical company. Apparently the company and other family businesses made his descendants wealth beyond the ken of most mortals. Here we are two centuries later, and, as I understand it, family members still live off their ancestors in the lap of luxury.

I had understood this connection when the mentally disturbed John E. Du Pont made the news for murder. Another appearance of the family name is in DuPont Circle, in Washington, D.C., named after a Civil War admiral.

I find the discovery of old books amazing, whether they are the Gnostic gospels, a version of the Morte d'Arthur that Caxton had not edited, various of Ricardo's manuscripts and his letters to James Mill, or an edition of the Tableau.

Marxists in Wikipedia Edit Wars

You can see internal squabbles among Marxists in recent edit wars over Wikipedia entries on the Temporal Single System Interpretation of Marx's theory of value and on David Laibman. I find Alan Kliman neutral in his modifications of the TSSI entry, and I do not see why Laibman should not keep reference to the TSSI out of his entry. Apparently he feels that its inclusion will make the description of his work in economics unbalanced.

In the discussion on the TSSI, I find Kliman asserting that the Fundamental Theorem of Marxism is due to Okishio, not Morishima. Apparently, I get it wrong in my LTV FAQ.

I disagree with the TSSI. But I find TSSI advocates amusing, even when they mock views I find more congenial:

"We can discern at least the following variants

Variant 7b.I: philosophico-mystical

The determination of price by value takes place behind our backs. It is part of the internal workings of the capitalist system which are ever so mysterious and can only be understood by reciting das Kapital six times before breakfast and joining my group. There is no such thing as the transformation problem and it doesn't matter that the figures don't add up, but you wouldn't understand that because you are a bourgeois revisionist.

Variant 7b.II: pseudo-dialectical

The determination of prices take place as the Sraffians describe it, and the determination of values takes place as Marx describes it. This can only be understood by reciting das Kapital twelve times before breakfast and joining my study circle. It is true that the figures don't add up, but that is because capital is inherently contradictory, and you should learn to live with it. You can't understand this because you haven't read Hegel.

Variant 7b.III: fake materialist

As Marx explains, the forces of production determine everything. This as Plekhanov explains is the basis of historical materialism. What Marx meant by the determination of value by labour time was the determination of value by technology as you will realize if you read Sraffa and buy my newspaper. The figures do add up. You do not understand this because you are not a worker." - Alan Freeman (1996).

I earlier mentioned that I was reading Andrew Kliman's recent book. And I posted about one narrow point in the book. Some have complained about my use of numerical examples on this blog. Such examples may help those uncomfortable with math, but they may not make the reasoning as clear to others as the use of algebra would. When I began Kliman's book, I worried that his numerical examples would suffer from the same problem. I needn't have worried; his explanations are generally clear. I was impressed with Kliman's refutation of the Okishio theorem. I didn't think that was possible, and I couldn't see any mistakes in his refutation.

I do have some problems with Kliman's book. I am not at all sure that Kliman adequately addresses Veneziani's claim that the Monetary Expression of Labor Time (MELT) is not defined. In arguing that the TSSI is a reasonable interpretation of Marx's texts, Kliman concentrates on those parts in which Marx puts forth quantitative theories. I would like to see more about Theories of Surplus Value and other texts in which Marx engages previous developers of political economy. I find that Marx, while appreciative of Ricardo and Smith, tends to read his own distinctions - e.g., between value and prices of production - back into, for example, Ricardo. Yet I do not find Marx criticizing Ricardo for not having temporal dynamics in Ricardo's treatment of natural prices. I assume TSSI advocates do not think Ricardo had Marx's supposed TSSI theory. What do they have to say about Marx's treatment of Ricardo? As far as I am aware, this is a gap in the literature.

By the way, the positions that Sraffa and the Sraffians take on Marx's theory of value are not uniform. Of course, Steedman's 1977 work is a classic in this literature. But I draw more on Eatwell, who is more approving of Marx's theory. Bellofiore, who has seen Sraffa's unpublished notes, recently argues that Sraffa came to be more accepting of Marx's theory as his research evolved. Sraffa's use of the standard commodity seems to have taken him to a position much like the "New Interpretation" of Foley and Lipietz.

References

• Riccaro Bellofiore (2007). "Sraffa after Marx: An Open Issue" New School seminar, (22 Feb)
• John Eatwell (1975). "Mr. Sraffa's Standard Commodity and the Rate of Exploitation", Quarterly Journal of Economics, V. 89, N. 4 (Nov): 543-555
• Duncan K. Foley (1986). Understanding Capital: Marx's Economic Theory, Harvard University Press.
• Alan Freeman (1996). "The Psychopathology of Walrasian Marxism", in Marx and Non-Equilibrium Economics (Ed. by Alan Freeman and Guglielmo), Edward Elgar
• Alan Kliman (2007). Reclaiming Marx's "Capital": A Refutation of the Myth of Inconsistency, Lexington Books
• Alain Lipietz (1982). "The So-Called 'Transformation Problem' Revisited", Journal of Economic Theory, V. 26, N. 1 (Feb): 59-88
• Ian Steedman (1977). Marx After Sraffa, NLB
• Roberto Veneziani (2004). "The Temporal Single-System Interpretation of Marx's Economics: A Critical Evaluation", Metroeconomica, V. 55, N. 1: 96-114
• Roberto Veneziani (2005). "Dynamics, Disequilibrium, and Marxian Economics: A Formal Analysis of Temporal Single-System Marxism", Review of Radical Political Economics, V. 37, N. 4 (Fall): 517-529

Binmore and Mirowski Going at It Hammer and Tongs

In 2004, the Journal of Economic Methodology sponsored a symposium on Philip Mirowski's Machine Dreams: Economics Becomes a Cyborg Science. The exchange between Kenneth Binmore and Mirowski is amusing for those who prefer lots of heat, whether or not there is any light. (I read them as not having any personal dislike.) Mirowski is particularly critical of this passage from Binmore:

"...Mirowski thinks that only computable mathematics should be used in economic modeling. He is particularly scathing about the fact that the Walrasian correspondence is non-computable, and rejects out of hand the response that Scarf has provided a computable algorithm for finding approximate Walrasian equilibria. If I understand him correctly, the reason is that an approximate Walrasian equilibrium may not be an approximation to an exact Walrasian equilibrium. But this is to misunderstand how mathematical modeling works - not only in economics, but in physics as well.

The equilibria of physics are no more computable than those of economics. It is not just that Scarf cannot think of an algorithm that computes them, but that there is nothing whatever the universe as a whole can do to instantiate them. So how come the non-computable models of physics work? The reason is that they provide mathematically tractable approximations to the way the universe really is. Similarly, in economics, it is wrong-headed to reject Scarf's algorithm because it does not adequately approximate the Arrow-Debreu model. On the contrary, we need to elaborate the Arrow-Debreu model so it approximates better whatever the real-world analogue of Scarf's algorithm happens to be in any particular context. Whether the elaboration turns out to be computable or not matters not in the least. If you think it does, consistency also demands that you advocate abandoning the use of calculus and most other mathematical tools in physics."

References

• Kenneth Binmore (2004). "A Review of Philip Mirowski's Machine Dreams", Journal of Economic Methodology, V. 11, N. 4 (Dec.): 477-483
• John B. Davis (2004). "Economists' Dreams: Machine Dreams", Journal of Economic Methodology, V. 11, N. 4 (Dec.): 483-488
• Matthias Klaes (2004). "Algorithmic Economics: A Plea for Natural Economic History", Journal of Economic Methodology, V. 11, N. 4 (Dec.): 489-498
• Philip Mirowski (2004). "Philosophizing with a Hammer: Reply to Binmore, Davis and Klaes", Journal of Economic Methodology, V. 11, N. 4 (Dec.): 499-513

Lord Eatwell Celebrates Sraffa

"...But Sraffa's most dramatic scholarly achievement went further than mere correction of perspective. His reconstruction of Ricardo's surplus theory, presented in but a few pages of the introduction to his edition of Ricardo's Principles, penetrated a hundred years of misunderstanding and distortion to create a vivid rationale for the structure and content of surplus theory, for the analytical role of the labor theory of value, and hence for the foundations of Marx's critical analysis of capitalist production...

...But the greater achievement was yet to come. Neoclassical orthodoxy survived the attacks on Marshall by retreating to the less persuasive but apparently secure general equilibrium theory. By the late fifties the neoclassical resurgence was well under way, overwhelming the Keynesian critique, armed, as it was, with seemingly invincible algebraic weapons. Sraffa punctured the balloon. He demonstrated in Production of Commodities that the foundations of neoclassical theory are logically unsound, and, remarkably, demonstrated simultaneously that the old surplus approach to problems of value and distribution, which had been cast aside with ascent of neoclassical theory, was logically sound and, indeed, was the ideal basis on which to develop a satisfactory analysis of market economies.

At first sight, these precise logical exercises, dramatic though their influence may have been in theoretical circles, might seem to be the very stuff of arid academic debate. But on the contrary, they represent the very nucleus of the interpretation and evaluation of the operation of capitalism. Sraffa's demonstration that price formation and the distribution of income cannot be the outcome of the forces of supply and demand, as believed by the orthodox theorists, eliminates the case for the market system as a mechanism which brings about an efficient allocation of scarce resources. Thus the theoretical arguments which are commonly claimed to support so many of today's economic policies, including those of the monetarists, are revealed to be the utterly unfounded claims of sectional interests...

...The objective analysis which Sraffa sought he found in the surplus theories of Ricardo and Marx. The classical theory of value and distribution takes as its starting point quantities which are all, in principle, objectively measurable, and behind those quantities lie the objective characteristics of social institutions. There is no place for utility or disutility. For example, labor requires a given quantity of commodities as wages, and this must be replaced from the product. The wage is a set of physical magnitudes, its determination rooted in the character of contemporary society. It is not a measure of how the worker subjectively feels about working. Orthodox theory asks us to believe that real cost is the sum not only of the disutility of labor, but also of the subjective pain suffered by the capitalists, who must be induced to sacrifice their wealth to engage in the acquisition of profit." -- John Eatwell (1984). "Piero Sraffa: Seminal Economic Theorist", Science and Society, V. 48, N. 2 (Summer): 211-216.

Other Perspectives On Ergoditicy

I've recently noted that the Post Keynesian economist Paul Davidson thinks economic theory should not impose a priori the special case assumption of ergodicity.

Brian Arthur and Paul David also have argued that economics should have room for non ergodic processes. They discuss such processes under the rubric of "path dependence". "Path Dependence - A Foundational Concept for Historical Social Science" is an example of a 2006 statement of Paul David's.

One can see that others thought neoclassicalism contained an assumption of ergodicity:

"Finally, there was an even more interesting third assumption implicit and explicit in the classical mind. It was a belief in unique long-run equilibrium independent of initial conditions. I shall call it the 'ergodic hypothesis' by analogy to the use of this term in statistical mechanics. Remember that the classical economists were fatalists (a synonym for 'believers in equilibrium'!). Harriet Martineau, who made fairy tales out of economics (unlike modern economists who make economics out of fairy tales), believed that if the state redivided income each morning, by night the rich would again be sleeping in their comfortable beds and the poor under the bridges. (I think she thought this a cogent argument against equilitarian taxes.)

Now, Paul Samuelson, aged 20 a hundred years later, was not Harriet Martineau or even David Ricardo; but as an equilibrium theorist he naturally tended to think of models in which things settle down to a unique position independently of initial conditions. Technically speaking, we theorists hoped not to introduce hystersis phenomena into our model, as the Bible does when it says, 'We pass this way only once' and, in so saying, takes the subject out of the realm of science into the realm of genuine history." -- Paul A. Samuelson, "What Classical and Neo-Classical Monetary Theory Really Was," Canadian Journal of Economics, V 1., # 1, pp. 1-15, 1968. (Reprinted in Monetary Theory: Selected Readings, edited by Robert W. Clower, Penguin, 1969.)

What Are Your Assumptions?

Neoclassical economic theory, correctly understood, imposes no restrictions on the direction of real Wicksell effects. Paul Samuelson's student Edwin Burmeister writes:

"Imposing some set of conditions on the technology T(.) should be sufficient to assure that the real Wicksell effect is always negative. Such conditions would be of interest - especially if they could be empirically tested - since they would validate the quantitative conclusions derived from the one-good models often used in macroeconomics without any theoretical justification for ignoring aggregation problems... Unfortunately, no set of such sufficient conditions is known, but the literature on capital aggregation suggests they would impose severe restrictions on the technology." -- Edwin Burmeister (1987). "Wicksell Effects", The New Palgrave: A Dictionary of Economics (edited by John Eatwell, Murray Milgate, and Peter Newman)

So, from the point of view of the M.I.T. side of the Cambridge Capital Controversy, economists should either (1) Develop economic theory compatible with real Wicksell effects going in any direction, or (2) Recognize that we don't know special-case assumptions that are consistent with methodological individualism and that restrict real Wicksell effects to be always negative.

Anarchists Not For Property

"Anarchists don't believe property is, or should be, the ultimate value of society... Private property is not more important than human life, and it is not more important than individual freedom." -- Eric Laursen, as quoted by Colin Moyhihan, in "Book Fair Unites Anarchists. In Spirit Anyway", New York Times (16 April 2007): B3

Prescott on the Cambridge Capital Controversy

"I will argue that much of the failure of monetary economics to progress over the last 25 years is the failure to construct models that provide guidance on how the national accounts should be extended to include production of 'financial services'. In the 1960s there was the famous Cambridge capital controversy. This controversy bears on the issue 'What is money?' The Cambridge capital controversy was a silly one, as pointed out so clearly by Arrow (1989). Arrow, being a general equilibrium theorist, pointed out that there are multiple types of capital goods and with multiple capital goods only under very special conditions is there an aggregate capital stock. I emphasize that this does not mean that a model with a single capital good, which is matched to the value of some capital good statistic, is not useful in drawing scientific inference. I use such models along with other national accounts statistics to draw quantitative inference concerning a variety of phenomena, including business cycle fluctuations, secular movements in output and hours worked in the market sector, depressions and prosperities, and even in the behavior of stock prices. Rather, it means that for some purposes this single capital stock abstraction is not a good one for drawing inference." -- Edward Prescott (2005). "Comments on 'Inflation, Output, and Welfare' by Ricardo Lagos and Guillaume Rocheteau", International Economic Review, V. 46, N. 2 (May): 523-531

Some Post Keynesian Propositions on Inflation

James Galbraith and Barkley Rosser, for example, are familar with this view.

Inflation is not always and everywhere a monetary phenomenon. In the United States in the 1970s, it was a matter of cost-push. When nominal claims on income add up to more than real income, inflation can result.

An incomes policy is one approach to attacking inflation that might have been tried. For example, a tax-based incomes policy could have been implemented. Institutions matter. For example, in an economy with large unions, major labor contracts could be coordinated to be renegotiated at once, or they could be staggered. The latter is likely to lead to more inflation.

Monetary policy is not impotent. In a modern industrial economy, the supply of money is endogenous. The Federal Reserve in the U.S., for example, sets an important interest rate but, generally, does not have control over the amount of money in circulation. Lowering the interest rate (pushing on a string) may not be effective, but raising interest rates can be a defacto incomes policy. When combined with union-busting, as in Ronald Reagan's foul policy, one can expect inflation to moderate.

Compare And Contrast...

...this quotation from Aumann and the following:

"T. C. Koopmans, perhaps the greatest defender of the use of the mathematical tool in economics, countered the criticism of the exaggeration of mathematical symbolism by claiming that the critics have not come forward with specific complaints. The occasion was a symposium held in 1954 around a protest by David Novick. But, by an irony of fate, some twenty years later one of the most incriminating corpora delicti of empty mathematization got into print with the direct help of none other than Koopmans. R. J. Aumann had already published in Econometrica an article dealing with the problem of a market in which there are as many traders as the real numbers, that is, as many as all the points on a continuous line. In 1972, Koopmans presented to the National Academy of Sciences a paper by Donald Brown and Abraham Robinson for publication in its official periodical. The authors assumed that there are more traders even than the elements of the continuum. Now, since the authors of both these papers and Koopmans are well versed in mathematics, they must have known the result proved long ago by George Cantor, namely, that even an infinite space can accommodate at most a denumerable infinity of three-dimensional objects (as the traders must necessarily be)." -- Nicholas Georgescu-Roegen, "Methods in Economic Science". Journal of Economic Issues, V. XIII, N. 2. June 1979. pp. 317-328.

Brian Doherty: Completely Wrong and Nothing New

I'm trying to decide if I want to purchase Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement. I've skimmed through two chapters in my local Barnes and Noble.

The book begins with a falsehood. On the first page of the introduction, Doherty states that Social Security is unsustainable in its current form. Not too further into the introduction, he has "libertarians" building on classical liberals. In this context, Doherty makes the false statement that classical economists depicted markets as bringing about social harmony. No, neither Adam Smith nor David Ricardo depicted members of different classes as having harmonious interests.

I also looked at the chapter on the Austrian economists. My problem here was that I know this story in too much detail. I doubt I would learn much new from Doherty's account.

So I'm leaning against purchasing Doherty's book.

Old Ideas Ramifying Into Every Corner Of Our Minds

Mark Thoma, Bruce Bartlett, and Paul Krugman, for example, are discussing how "supply-side economics trickled down". The frame of reference, as I understand it, is MIT-style Keynesianism circa 1970, including Solovian growth theory; macroeconomics after Lucas; and policy entrepreneurs in the United States. Real Business Cycle theorists and New Keynesians (that is, "New Pigouvians") are among groups I think of as following macroeconomics after Lucas.

As far as I have seen in the post and comments, Bartlett, Krugman, and Thoma do not acknowledge that their framework seems to be, at least, based on empirically doubtful special case assumptions. At worst, their approach is just incoherent and mistaken. At any rate, supposed empirical results in the literature are a matter of fitting an accounting relationship. Other approaches are possible.

In the early 1960s, Paulo Sylos Labini, an applied Sraffian economist, discussed supply-side economics with others. But that was in another country. As I understand it, Sylos Labini got on well politically with Franco Modigliani, one of the inventors of bastard Keynesianism.

Business as Sabotage

I once somewhere described Veblen as America's greatest economist. (I always exempt living people in such comparisons, since, I think, we don't have enough historical perspective on them).

"It was then still true, in great measure, that the undertaker was the owner of the industrial equipment, and that he kept an immediate oversight of the mechanical processes as well as of the pecuniary transactions in which his enterprise was engaged; and it was also true, with relatively infrequent exceptions, that an unsophisticated productive efficiency was the prime element of business success. A further feature of that precapitalistic business situation is that business, whether handicraft or trade, was customarily managed with a view to earning a livelihood rather than with a view to profits on investment...

...The economic welfare of the community at large is best served by a facile and uninterrupted interplay of the various processes which make up the industrial system at large; but the pecuniary interests of the business men in whose hands lies the discretion in the matter are not necessarily best served by an unbroken maintenance of the industrial balance. Especially is this true as regards those greater business men whose interests are very extensive. The pecuniary operations of these latter are of large scope, and their fortunes commonly are not permanently bound up with the smooth working of a given Sub-process in the industrial system. Their fortunes are rather related to the larger conjunctures of the industrial system as a whole, the interstitial adjustments, or to conjunctures affecting large ramifications of the system. Nor is it at all uniformly to their interest to enhance the smooth working of the industrial system at large in so far as they are related to it. Gain may come to them from a given disturbance of the system whether the disturbance makes for heightened facility or for widespread hardship, very much as a speculator in grain futures may be either a bull or a bear. To the business man who aims at a differential gain arising out of interstitial adjustments or disturbances of the industrial system, it is not a material question whether his operations have an immediate furthering or hindering effect upon the system at large. The end is pecuniary gain, the means is disturbance of the industrial system, - except so far as the gain is sought by the old-fashioned method of permanent investment in some one industrial or commercial plant, a case which is for the present left on one side as not bearing on the point immediately in hand. The point immediately in question is the part which the business man plays in what are here called the interstitial adjustments of the industrial system; and so far as touches his transactions in this field it is, by and large, a matter of indifference to him whether his traffic affects the system advantageously or disastrously. His gains (or losses) are related to the magnitude of the disturbances that take place, rather than to their bearing upon the welfare of the community.

The outcome of this management of industrial affairs through pecuniary transactions, therefore, has been to dissociate the interests of those men who exercise the discretion from the interests of the community. This is true in a peculiar degree and increasingly since the fuller development of the machine industry has brought about a close-knit and wide-reaching articulation of industrial processes, and has at the same time given rise to a class of pecuniary experts whose business is the strategic management of the interstitial relations of the system. Broadly, this class of business men, in so far as they have no ulterior strategic ends to serve, have an interest in making the disturbances of the system large and frequent, since it is in the conjunctures of change that their gain emerges. Qualifications of this proposition may be needed, and it will be necessary to return to this point presently.

It is, as a business proposition, a matter of indifference to the man of large affairs whether the disturbances which his transactions set up in the industrial system help or hinder the system at large, except in so far as he has ulterior strategic ends to serve. But most of the modern captains of industry have such ulterior ends, and of the greater ones among them this is peculiarly true. Indeed, it is this work of far-reaching business strategy that gives them full title to the designation, 'Captains of Industry.' This large business strategy is the most admirable trait of the great business men who with force and insight swing the fortunes of civilized mankind. And due qualification is accordingly to be entered in the broad statement made above. The captain's strategy is commonly directed to gaining control of some large portion of the industrial system. When such control has been achieved, it may be to his interest to make and maintain business conditions which shall facilitate the smooth and efficient working of what has come under his control, in case he continues to hold a large interest in it as an investor; for, other things equal, the gains from what has come under his hands permanently in the way of industrial plant are greater the higher and more uninterrupted its industrial efficiency.

An appreciable portion of the larger transactions in railway and 'industrial' properties, e.g., are carried out with a view to the permanent ownership of the properties by the business men into whose hands they pass. But also in a large proportion of these transactions the business men's endeavors are directed to a temporary control of the properties in order to close out at an advance or to gain some indirect advantage; that is to say, the transactions have a strategic purpose. The business man aims to gain control of a given block of industrial equipment - as, e.g., given railway lines or iron mills that are strategically important - as a basis for further transactions out of which gain is expected. In such a case his efforts are directed, not to maintaining the permanent efficiency of the industrial equipment, but to influencing the tone of the market for the time being, the apprehensions of other large operators, or the transient faith of investors. His interest in the particular block of industrial equipment is, then, altogether transient, and while it lasts it is of a factitious character.

The exigencies of this business of interstitial disturbance decide that in the common run of cases the proximate aim of the business man is to upset or block the industrial process at some one or more points. His strategy is commonly directed against other business interests and his ends are commonly accomplished by the help of some form of pecuniary coercion. This is not uniformly true, but it seems to be true in appreciably more than half of the transactions in question. In general, transactions which aim to bring a coalition of industrial plants or processes under the control of a given business man are directed to making it difficult for the plants or processes in question to be carried on in severalty by their previous owners or managers. It is commonly a struggle between rival business men, and more often than not the outcome of the struggle depends on which side can inflict or endure the greater pecuniary damage. And pecuniary damage in such a case not uncommonly involves a setback to the industrial plants concerned and a derangement, more or less extensive, of the industrial system at large.

The work of the greater modern business men, in so far as they have to do with the ordering of the scheme of industrial life, is of this strategic character. The dispositions which they make are business transactions, 'deals,' as they are called in the business jargon borrowed from gaming slang. These do not always involve coercion of the opposing interests; it is not always necessary to 'put a man in a hole' before he is willing to 'come in on' a 'deal.' It may often be that the several parties whose business interests touch one another will each see his interest in reaching an amicable and speedy arrangement; but the interval that elapses between the time when a given 'deal' is seen to be advantageous to one of the parties concerned and the time when the terms are finally arranged is commonly occupied with business manoeuvres on both or all sides, intended to 'bring the others to terms.' In so playing for position and endeavoring to secure the largest advantage possible, the manager of such a campaign of reorganization not infrequently aims to 'freeze out' a rival or to put a rival's industrial enterprise under suspicion of insolvency and 'unsound methods,' at the same time that he 'puts up a bluff' and manages his own concern with a view to a transient effect on the opinions of the business community. Where these endeavors occur, directed to a transient derangement of a rival's business or to a transient, perhaps specious, exhibition of industrial capacity and earning power on the part of one's own concern, they are commonly detrimental to the industrial system at large; they act temporarily to lower the aggregate serviceability of the comprehensive industrial process within which their effects run and to make the livelihood and the peace of mind of those involved in these industries more precarious than they would be in the absence of such disturbances. If one is to believe any appreciable proportion of what passes current as information on this head, in print and by word of mouth, business men whose work is not simply routine constantly give some attention to manoeuvring of this kind and to the discovery of new opportunities for putting their competitors at a disadvantage. This seems to apply in a peculiar degree, if not chiefly, to those classes of business men whose operations have to do with railways and the class of securities called 'industrials.' Taking the industrial process as a whole, it is safe to say that at no time is it free from derangements of this character in any of the main branches of modern industry. This chronic state of perturbation is incident to the management of industry by business methods and is unavoidable under existing conditions. So soon as the machine industry had developed to large proportions, it became unavoidable, in the nature of the case, that the business men in whose hands lies the conduct of affairs should play at cross-purposes and endeavor to derange industry. But chronic perturbation is so much a matter of course and prevails with so rare interruptions, that, being the normal state of affairs, it does not attract particular notice." == Thorstein Veblen (1904). The Theory of Business Enterprise (Chapter 3)

The Veblenian dichotomy is an aspect of institutional analysis.

"Not In Your Lifetime"

"I was walking to a classroom with Nicky Kaldor in 1971, and Cambridge had just won the capital controversies-reswitching debate with MIT Cambridge Mass. And Kaldor said to me, ‘How long do you think it will be before people in the United States stop teaching the marginal productivity theory?’ And my response to him was, ‘Nicky, not in your lifetime and not in my lifetime, because there are a million other ways of justifying the marginal productivity theory as long as the basic neoclassical theory remains as the microfoundations of macroeconomic theory.’” -- Paul Davidson in Colander, David (2001). “An Interview with Paul Davidson”, Eastern Economic Journal (Winter)

This Is Rocket Science

Mark Thoma has recently been trying to justify the hypothesis of rational expectations.

Rational expectations characterize a model of the economy in which the agents in the model know the model, including model parameters. Presumably agents learn the parameters of the underlying model from looking at past realizations of the time series generated by the model. A better estimate of model parameters might come from looking at many realizations at a single moment in time (say, one lag ago). But, since the world has only one history, the latter estimate is not available.

Which estimate is used does not matter for some stochastic processes. Estimates across realizations and from past values of a single realization converge, in some sense, as the number of realizations and the number of time lags increase, respectively, without bound. This property is known as ergodicity. So rational expectations only makes sense if economic time series are ergodic.

Non-stationarity is a sufficient, but not necessary, condition for non-ergodicity. Since some time series in economics (for example, output per person-hour) are non-stationary, rational expectations cannot abide in a general theory for economics.

I provide some random references examining different aspects of macroeconomics after Lucas. Sent's award-winning book documents how this macroeconomics draws on the mathematics invented by the likes of Claude Shannon and Norbert Wiener. The above application of ergodicity to critiquing rational expectations is due to Paul Davidson, who offers a formalization of Joan Robinson's contast of history with equilibrium.

References

• Davidson, Paul (1982-82). "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes", Journal of Post Keynesian Economics, V. 5, N. 2 (Winter): 182-198
• Hartley, James E. (2006). "Kydland and Prescott's Nobel Prize: the Methodology of Time Consistency and Real Business Cycle Models", Review of Political Economy, V. 18, N. 1 (Jan.): 1-28
• Hoover, Kevin D. (1988). The New Classical Macroeconomics: A Sceptical Inquiry, Basil Blackwell
• Sent, Esther-Mirjam (1998). The Evolving Rationality of Rational Expectations: An Assessment of Thomas Sargent's Achievements, Cambridge University Press

How to Succeed in Economics?

Peter Leeson, Dan Klein, Peter Boettke and Frederic Sautet, and Peter Boettke have been discussing how to advance Austrian economics.

I find of particular interest the claim that, "Most economists will have no idea what you're talking about if you tell them you're working on 'capital theory'".

Against the Washington Consensus

The following worry that "third rank" economists and "cheerleaders" are insufficiently aware of the downside of "free trade":

• William J. Baumol (2005). "Errors in Economics and Their Consequences", Social Research, V. 72, N. 1 (Spring): 169-194.
• Alan S. Blinder (2007). "Offshoring: The Next Industrial Revolution?", Foreign Affairs (March/April)
• David Wessel and Bob Davis (2007). "Pain from Free Trade Spurs Second Thoughts: Mr. Blinder's Shift Spotlights Warnings of Deeper Downside", Wall Street Journal (28 March): A1
• Hat Tip: Max Sawicky
• Dani Rodrik (2007). "The Cheerleaders' Threat to Global Trade", Financial Times (27 March). (Hat tip to Christopher Hayes)
• Paul A. Samuelson (2004). "Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization", Journal of Economic Perspectives, V. 18, N. 3 (Summer): 135-146
• Joseph E. Stiglitz (2000). "What I Learned at the World Economic Crisis: The Insider", The New Republic. (I couldn't find an online link for this at TNR's site.)

Not to mention, myself.

The Unconscious Is Structured Like A Language

I find Zizek difficult to read in large doses. For instance, I did not even make it all the way through this. I don't think I retain much from the book containing the following:

"So what is hegemony? Those who still remember the good old days of Socialist Realism are well aware of the key role played by the notion of the 'typical' in its theoretical edifice: truly progressive Socialist literature should depict 'typical' heroes in 'typical' situations. Writers who, for example, presented a predominately bleak picture of the Soviet reality were not accused simply of lying - the accusation was that they provided a distorted reflection of social reality by focusing on phenomena which were not 'typical', which were sad remainders of the past, instead of focusing on phenomena which were 'typical' in the precise sense of expressing the deeper underlying historical tendency of the progress towards Communism. A novel which presented a new Socialist type of man who dedicated his life to the happiness of all the people, of course, depicted a minority phenomenon (the majority of people were not yet like that), but none the less a phenomenon which enabled us to identify the truly progressive forces active in the social situation.

Ridiculous as this notion of the 'typical' may sound, there is a grain of truth in it - it lies in the fact that each apparently universal ideological notion is always hegemonized by some particular content which colours its very universality and accounts for its efficiency. In the present rejection of the social welfare system by the New Right in the USA, for example, the very universal notion of the present welfare system as inefficient is contaminated by the more concrete representation of the notorious single African-American mother, as if social welfare were, in the last resort, a programme for single black mothers - the particular case of 'the single black mother' is silently conceived of as 'typical' of the universal notion of social welfare, and what is wrong with it... The same goes for every universal ideological notion: one always has to look for the particular content which accounts for the specific efficiency of an ideological notion. In the case of the Moral Majority campaign against abortion, for example, the 'typical' case is the exact opposite of the (jobless) black mother: a successful and sexually promiscuous career woman who gives priority to her professional life over her 'natural' assignment of motherhood (in blatant contradiction to the facts, which tell us that the great majority of abortions occur in lower-class families with several children).

The specific 'twist', the particular content which is promulgated as 'typical' of the universal notion, is the element of fantasy, of the phantasmic background/support of the universal ideological notion - in Kant's terms, it plays the role of 'transcendental schematism', translating the empty universal notion into a notion which directly relates and applies to our 'actual experience'. As such, this phantasmic specification is by no means a mere insignificant illustration of exemplification: it is on this of which particular content will count as 'typical' that ideological battles are won or lost. To go back to our example of abortion: the moment we perceive as 'typical' the case of abortion in a large lower-class family unable to cope economically with another child, the perspective changes radically...

[Footnote] Another name for this short circut between the Universal and the Particular, by means of which a particular content hegemonizes the Universal, is, of course, suture, the operation of hegemony 'sutures' the empty Universal to a particular content. For that reason, F.W.J. Schelling must be considered the originator of the modern notion of critique of ideology: he was the first to elaborate the notion of 'false' unity and/or universality. For him, 'evil' lies not in the split (between the Universal and the Particular) as such but, rather, in their 'false'/distorted unity, that is, in a Universality that effectively privileges some narrow particular content and is impenetrably 'anchored' in it. Schelling was thus the first to elaborate the elementary procedure of the critique of ideology: the gesture of discerning beneath the appearance of neutral universality (say, of 'human rights'), the privileged particular content (say, white upper-middle-class males) which 'hegemonizes' it...[End Footnote]

'Single unemployed mother' is thus a sinthome in the strict Lacanian sense: a knot, a point at which all the lines of the predominant ideological argumentation (the return to family values, the rejection of the welfare state and its 'uncontrolled' spending, etc.) meet. For that reason, if we 'untie' this sinthome, the efficiency of its entire ideological edifice is suspended. We can see now in what sense the psychoanalytic sinthome is to be opposed to the medical sympton: the latter is a sign of some more fundamental process taking place on another level. When one claims, say, that fever is a symptom, the implication is that we should not cure only the sympton, but attack its causes directly. (Or, in the social sciences, when one claims that adolescent violence is a sympton of the global crisis of values and the work ethic, the implication is that one should attack the problem 'at its root', by directly addressing problems of the family, employment, etc., not only by punishing the offenders.) The sinthome, in contrast, is not a 'mere sympton', but that which holds together the 'thing itself' - if one unties it, the 'thing itself' disintegrates. For that reason, psychoanalysis actually does cure by addressing the sinthome.

This example makes it clear in what sense 'the universal results from a constitutive split in which the negation of a particular identity transforms this identity into the symbol of identity and fullness as such': the Universal emerges from the Particular when some particular content starts to function as the stand-in for the absent Universal - that is to say, the universal is operative only through the split in the particular. A couple of years ago, the English yellow press focused on single mothers as the source of all the evils of modern society, from the budget crisis to juvenile delinquency - in this ideological space, the universality of the 'modern social Evil' was operative only through the split of the figure of 'single mother' into itself in its particularity and itself as the stand-in for the 'modern social Evil'. Owing to the contingent character of this link between the Universal and the particular content which functions as its stand-in (i.e. that fact that this link is the outcome of a political strugle for hegemony), the existence of the Universal always relies on an empty signifier: 'Politics is possible because the constitutive impossibility of society can only represent itself through the production of empty signifiers.' Since 'society doesn't exist', its ultimate unity can be symbolized only in the guise of an empty signifier hegemonized by some particular content - the struggle for this content is the political struggle. In other words, politics exists because 'society doesn't exist': politics is the struggle for the content of the empty signifier which represents the impossibility of Society. The worn-out phrase 'the politics of the signifier' is thus fully justified: the order of the signifier as such is political and, vice versa, there is no politics outside the order of the signifier. The space of politics is the gap between the series of 'ordinary' signifiers (S2) and the empty Master-Signifier (S1)..." -- Slavoj Zizek (1999), The Ticklish Subject: The Absent Centre of Political Ontology, Verso: 174-177, 180.

Depreciation of the One Hoss Shay

1.0 Introduction
Some economists have mistakenly thought that depreciation is merely a matter of capital goods wearing out:

"One of the advantages of the von Neumann model is that it can handle capital goods without fuss and bother. A nondepreciating capital good simply enters both as input and as output in the corresponding process. If the capital good depreciates 3 per cent per unit of time, 1 unit of the good may appear as input, and 0.97 unit as output." --Robert Dorfman, Paul A. Samuelson, and Robert M. Solow (1958: 382-383)

The above is an incorrect characterization of the von Neumann model. Von Neumann got depreciation right, unlike Dorfman, Samuelson, and Solow in that quotation. (Luigi Pasinetti points out this error.)

2.0 A Three-Period Example
2.1 Production
As an example of the correct calculation of depreciation, consider a machine of constant efficiency that lasts three production cycles. Each cycle takes a year. Table 1 summarizes the Constant-Returns-to-Scale production processes assumed to be in use for this example. The left five columns show inputs applied over the course of the year. The three right-most columns show outputs available at the end of the year. Oil is representative of inputs used up in producing the output, which the machine is an example of fixed capital. Suppose this machine, at whatever age, is only used in producing wheat; it is not used as an input in any production processes other than those shown in Table 1.

Table 1: Three Production Processes

1 New Machine	&	a Barrels Oil	&	l Person Yrs	Produce	1 Quarter Wheat	&	1 One-Year Old Machine
1 One-Year Old Machine	&	a Barrels Oil	&	l Person Yrs	Produce	1 Quarter Wheat	&	1 Two-Year Old Machine
1 Two-Year Old Machine	&	a Barrels Oil	&	l Person Yrs	Produce	1 Quarter Wheat

This data illustrate the phenomenon of joint production. A process exhibits joint production when its output consists of more than one good. Because the von Neumann model is a model of general joint production, it "can handle capital goods without fuss or bother." Capital goods of different ages and history are distinguished as different goods; capital goods differing only in age are not treated as different quantities of identical goods. This is the point Dorfman, Samuelson, and Solow get wrong in the above quote.

A firm can be thought of as using all three of these production processes side by side. The managers of a firm will want to know how much to enter on thier books for old machines of different ages. They will also want to know the rate of (accounting) profits that they are making. The firm's book prices will be such that the firm is making the same rate of profits in all three process:

(1)

(2)

(3)

where:

• p0 is the price of a new machine,
• p1 is the price of a one-year old machine,
• p2 is the price of a two-year old machine,
• pa is the price of a barrel oil,
• pw is the price of a quarter wheat,
• w is the wage, and
• r is the rate of profits.

A little algebra is of interest here. Multiply each of Equations 1, 2, and 3 by the appropriate power of (1 + r) to obtain Equations 4, 5, and 6:

(4)

(5)

(6)

In summing, the prices of old machines drop out:

(7)

Or:

(8)

In the price equations for an input-output system, Equation 8 can replace the system of equations specified in Displays 1, 2, and 3. Suppose the original system can be solved for prices, given the numeraire and, say, the rate of profits. Then the new system can be solved, as well. And the price of old machines does not appear in the system.

One can think about Equation 8 as follows. A wheat-producing firm buys a new machine that lasts for three production cycles. It doesn't make sense in calculating profit to charge the cost of the machine totally at the time it is bought. The later two production cycles make use of the services of the machine. The cost of the inputs for all three cycles should include some part of the cost of the machine. Equation 8 shows how much the machine should contribute to costs of the inputs of each year's production process, where the costs are assessed at the end of the year.

2.2 An Annuity
Consider an annuity, where (equal) payments are made at the end of three consecutive years. If the interest rate is such that the present value of this stream of payments is equal to the price, p0, of the annuity at the start of the first year, Equation 9 must hold:

(9)

where x is the payment made at the end of the year. Summing the terms on the right, one obtains:

(10)

That is, an annuity of:

(11)

paid at the end of three years has a present value of p0.

The charge for the machine at the end of each production cycle, inclusive of profit and depreciation, is then the value of a fixed annuity paid at the end of each production cycle over the lifetime of the machine.

3.0 Generalizations and a Limit
The above analysis is easily generalized to a machine of constant efficiency that lasts for n years. The annual charge is:

(12)

One can also figure out the the price of the machine of constant efficiency at any age as a ratio of the price when new:

(13)

Figure 1 shows this ratio, for various rates of profits, for the above example of a machine that lasts three years. (Sraffa provides a graph for machine that lasts 50 years, and the rate of profits in his example ranges up to 20%.) A machine that lasts forever would have a charge of p0 r. This is a charge only for profit; there is no depreciation in the case of a machine with an infinite lifespan. This conclusion correctly suggests that joint production provides a framework in which to analyze the rent of land.

Figure 1: Dependence of Variation in Capital Value With Rate of Profits

The analysis can also be generalized to consider machines of varying technical efficiency throughout their age. An (industrial) plant might be analyzed as a collection of processes, where each process uses more than one kind of machine. These generalizations lead to more equations being appended to the system, as well as matching prices for machines of distinct ages and history. In principle, if the efficiency of the machines dependes on the history of the machines it is combined with as inputs in the processes, the number of equations can be countably infinite (Roncaglia 1978). The analysis must also be one of the choice of technique, where the technique includes the possibility of junking a machine while processes still remain that can use it. That is, the economic life of a machine may be shorter than its technical life.

It seems to me incredible that conventions for depreciation in practice could be the solutions of the general theory of joint production. One of the world’s foremost experts on the theory of joint production has this to say:

”Every economist knows that there is indeed much arbitrariness in accounting for depreciation or in the prices set for different derivatives from crude oil. Of course, competition always settles the matter somehow, but whereas it was easy – as de Quincey knew ... – to predict the value of shoes produced by a shoemaker in the nineteenth century, it is very difficult to predict on the basis of cost calculations how a modern refinery will recover its costs by setting administered prices for different refined products. Its rate of return for all its processes taken together can in general not deviate much from the rate of profit of the economy, but this observation does not explain how the relative prices of its individual products are set. Is this therefore another area where history must (as in the case of distribution) supplement theory because it is open-ended? The example of public goods as a form of joint social costs proves that there are cases of indeterminancy of possibly growing historical importance, but Sraffa has shown that there is a solution to the problem of the evaluation of joint products that does not require any explicit reference to the subjective elements of demand.” --Bertram Schefold (1989: 32)

The question becomes whether the number of cost-minimizing processes is equal to the number of products in the general case of joint production, except at flukes. I’m not convinced that the answer to this question is in the affirmative.

4.0 Conclusion
Suppose an economist claims that firms maximize profits. And that economist depicts depreciation as a technical datum, not dependent on prices and the rate of profits. Then, that economist has made a mistake in mathematics.

References

• Robert Dorfman, Paul A. Samuelson, and Robert M. Solow (1958). Linear Programming and Economic Analysis, Dover
• Luigi L. Pasinetti (1977). Lectures in the Theory of Production, Columbia University Press
• Alessandro Roncaglia (1978). Sraffa and the Theory of Prices (English translation), John Wiley & Sons
• Bertram Schefold (1989). Mr. Sraffa on Joint Production and Other Essays, Unwin-Hyman
• Piero Sraffa (1960). Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory, Cambridge University Press

Some Other Blogs

• I used Google's translation services to read this explanation of the Cambridge Capital Controversies, titled, "What is wrong with Neoliberalism".
• I thought interesting this comment on the attitude to economics among Cal Tech students. Presumably, given their economics department, some MIT students would not agree.
• This blog has something to say about general equilibrium theory. I haven't formed an opinion here, though the mention of Gödel raises my suspicions.