Larry Summers As Dissenting Economist

"... formal econometric work, where elaborate technique is used to apply theory to data or isolate the direction of causal relationships when they are not obvious a priori, virtually always fails. The only empirical research that has contributed to thinking about substantive issues and the development of economics is pragmatic empirical work, based on methodological principles directly opposed to those that have become fashionable in recent years." - Lawrence H. Summers (1991) "The Scientific Illusion in Empirical Macroeconomics", Scandinavian Journal of Economics, V. 93, N. 2: 129-148

Everything Old Is New Again

An orthodox response to the Cambridge Capital Controversy (CCC) is to assert that mainstream price theory is centered around General Equilibrium theory. Very short run models of intertemporal and temporary equilibrium are, it is claimed, unaffected by the CCC. I think that capital reversing is manifested in such models by dynamic equilibrium paths with counter-intuitive behavior.

For example, suppose the labor supply increases along such a path in that later generations increasingly prefer to consume commodities, not leisure. A dynamic equilibrium path can be constructed in which this increasing labor supply is associated with an increasing wage. Likewise, suppose instead that the supply of capital increases in that later consumers increasingly prefer to defer present consumption in favor of future consumption. Here, too, such increased savings can be associated with an increasing interest rate.

I have expressed this view before. I have decided that I am not going to develop concrete numerical examples any time soon. So I have put up what I have so far as a paper over on the Social Sciences Research Network (SSRN).

If I were to continue, the next step in the analysis is conceptually straightforward, although tedious. One would linearize the stationary state solutions around limit points for the dynamic equilibrium points. An examination of eigenvalues of the resulting matrix reveals local stability properties. I expect at least some equilibria will have, at best, the stability of saddle points. But multiple equilibria arise, and perhaps the desired dynamic equilibrium paths can be constructed. One might consider other forms of the utility maximization problem, if different stability properties are desired.

Let The Sunshine In

I was on travel last week. I find intriguing the application of solar, wind, geothermal, hydroelectric, and tide power generation on an industrial scale. In the meridian of a highway near the Denver airport they have an array, which I took a photo of.

Solar Power Generation

Denver

It seems solar and wind are becoming quite practical as a matter of dollars and cents, even without having internalized the externalities of various power generation sources. From Richard Stevenson ("First Solar: Quest for the $1 Watt", IEEE Spectrum, V. 45, N. 8 (August 2008): 26-31), I learn to be competitive for off-peak power generation, solar cells need to be priced to generate electricity at $1 per watt. Apparently, a number of companies are developing competing technologies that may attain this goal in a couple of years.

Disclaimer: In mentioning First Solar and their Cadmium Telluride (CdTe) technology, I am "talking my book" - a phrase I learned from D-Squared - in a small way.

Ricardo On Profits

Sraffa started a controversy on the interpretation of Ricardo's theory of value and distribution. Or perhaps Hollander did in his reaction against Sraffa.

In Sraffa's view, important developments in Ricardo's understanding happened the year before Ricardo's 1815 publication of "An Essay on the Influence of a low Price of Corn on the Profits of Stock". A fortiori, these developments precede the 1817 first edition of On the Principles of Political Economy and Taxation.

Hutches Trower, in his 2 March 1814 letter to Ricardo, states he is returning Ricardo's now lost "papers on the profits of Capital". Ricardo's response is important evidence for Sraffa's interpretation. Here is Ricardo's letter in full:

Upper Brook Street
8^th March 1814

Dear Trower

I called at your house yesterday; I wished to tell you that though well disposed to enter into the defence of my opinions, I was now so much occupied by business, that I could not devote the necessary time to it. Not having found you at home I must tell you so by “these present”. At the same time I must observe that what I feared, I believe, has happened. To one not aware of the whole difference between Mr. Malthus and me, the papers you read were not clear, and I think you have not entirely made out the subject in dispute.

Without entering further into the question I will endeavor to state the question itself. When Capital increases in a country, and the means of employing Capital already exists, or increases, in the same proportion, the rate of interest and of profits will not fall.

Interest rises only when the means of employment for Capital bears a greater proportion than before to the Capital itself, and falls when the Capital bears a greater proportion to the arena, as Mr. Malthus has called it, for its employment. On these points I believe we are all agreed, but I contend that the arena for the employment of new Capital cannot increase in any country in the same or greater proportion than the Capital itself, [footnote:] the following to be inserted: unless Capital be withdrawn from the land [end footnote] unless there be improvements in husbandry, - or new facilities be offered for the introduction of food from foreign countries; - that in short it is the profits of the farmer which regulate the profits of all other trades, - and as the profits of the farmer must necessarily decrease with every augmentation of Capital employed on the land, provided no improvements be at the same time made in husbandry, all other profits must diminish and therefore the rate of interest must fall. To this proposition Mr. Malthus does not agree. He thinks that the arena for the employment of Capital may increase, and consequently profits and interest may rise, altho' there should be no new facilities, either by importation, or improved tillage, for the production of food; - that the profits of the farmer no more regulate the profits of other trades, than the profits of other trades regulate the profits of the farmer, and consequently if new markets are discovered, in which we can obtain a greater quantity of foreign commodities in exchange for our commodities, than before the discovery of such markets, profits will increase and interest will rise.

In such a state of things the rate of interest would rise as well as the profits of the farmer, he thinks even if more Capital were employed on the land. Do you understand?

Nothing, I say, can increase the profits permanently on trade, with the same or an increased Capital, but a really cheaper mode of obtaining food. A cheaper mode of obtaining food will undoubtedly increase profits says Mr. Malthus but there are many other circumstances which may also increase profits with an increase of Capital. The discovery of a new market where there will be a great demand for our manufactures is one.

Believe me
Y^rs very faithfully
David Ricardo

I have written this in great haste after devoting the necessary time to my accounts. You must excuse the scrawl, and corrections.

For Sraffa, Ricardo can be understood as claiming that wages are spent entirely on corn and that corn is the only basic commodity in the system. Sraffa defines "basic commodities" in his book. According to this interpretation, the rate of profits is a physical ratio in agriculture. The prices of manufactured commodities adjust, under the Classical understanding of supply and demand, until this same rate of profit prevails, both in agriculture and in manufacturing.

Militant Voting

This post illustrates a phenomenon that is a possibility in pairwise voting. Consider a constituency of 30 voters deciding among six candidates for a given vacancy. (I take this example from Donald Saari.) Table 1 describes the preferences of these voters. For example, the first row shows that ten voters prefer Anne to Barb, and Barb to Carol, and so on.) The voters are asked to choose between successive pairs of candidates, as shown in Figure 1. In the first election, Debra defeats Elaine. But Carol defeats Debra in the next choice. And so on, until Flicka is the only choice standing, after a landslide victory. It seems that clearly Flicka is the consensus choice. Strangely enough, though, every voter prefers Carol, Debra, and Elaine to Flicka. The voting system doesn’t seem to allow for a true expression of the preferences of the members of the electorate.

Table 1: Voter Preferences

Number	Preference Ranking
10	A > B > C > D > E > F
10	B > C > D > E > F > A
10	C > D > E > F > A > B

Figure 1: Pairwise Elections in Example

Militant was a Trotskyite tendency practicing entryism within the British Labour Party. They seemed to have figured out how to use party discipline to have their way in Liverpool in the early 1980s:

"All political parties on the Monday before the Council meeting on a Wednesday, have a caucus meeting to decide the line of approach at the Council. The agenda for the meeting comes out on a Friday. The ten or twelve Militant members ... meet on either the Friday or the Saturday and go through the agenda to look for important policy decisions and for important vacancies. They then have a meeting with the broad left of the Labour group on Sunday morning at Pirrie Labour Club ... those Militants turn up in their full strength. There are generally about twenty people and the ten or eleven Militants there. They carry the majority vote there that commits the broad left for the meeting of the Labour group. On the Monday night at the Labour group meeting of forty-two members the commitment that Militant have made themselves, plus other people they've taken along at the meeting on Sunday morning, gives them a majority. ... so you find that of forty-two Labour councilors, ten Militants control the policy of the Labour group." -- Eddie Roderick, as quoted by Michael Crick

Crick says, "Roderick's analysis may be a rather simplified version." At any rate, Figure 2 illustrates how the Council seems to have made their decisions. Figures 1 and 2 look quite similar. Maybe Saari’s math describes more than a theoretical possibility.

Figure 1: Pairwise Voting on the Liverpool City Council

References

• Michael Crick (1984). Militant, Faber and Faber
• Donald G. Saari (2004). "Geometry of Chaotic and Stable Discussion", American Mathematical Monthly, V. 111, N. 5: 377-393

Elsewhere

Gualra has a blog, titled "Controversias Del Capital". It seems like the kind of thing I would read if I were able to read spanish. Gualra kindly alerts me to aspects of Kaldor's thought I neglected.

I don't understand Matthew Mueller. One reason I expect professors can know more than most students is that typically students have simply not lived enough years to have been able to read as much. But this does not seem to apply to Matthew. I think this post from Matthew agrees with my previous post on the same topic. But, as I recall, I was alerted to Horwitz's controversy with Post Keynesianism by Matthew's comments on some post over at the Austrian Economics. (Here's a short recommendation of both Matthew's and my blog.)

I laugh at Paul Walker's display of ignorance, to put it kindly. Gabriel Mihalache already points out some major problems with Paul's statements. General Equilibrium does not address a research problem in which Adam Smith was interested; tâtonnement decribes a centralized - not decentralized - process for setting prices; and general results do not show the tâtonnement process converging to a stable equilibrium. In his last comment, Paul makes mistaken claims about Walras. He does not seem to realize that Walras's system is mathematically contradictory. Walras takes endowments of all goods, including individual capital goods, as givens in solving for steady-state prices.

By the way, the email discussion list for the Societies for the History of Economics (SHOE) has replaced the list for the History of Economics Societies (HES).

A Minsky Snapshot

Figure 1 is a screen snapshot of normalized data from Google trends. Terms such as "Austrian Business Cycle" and "Austrian Business Cycle Theory", according to Google, "do not have enough search volume to show graphs." Mayhaps Michael is correct, at least for the incorrect Austrian Business Cycle Theory.

Figure 1: Trends in Popular Minsky Citations

Keynes As "A Puzzling Mathematician"

Where do I recall the quoted phrase in the title from? It's not in Skidelsky:

"Keynes finally saw Roosevelt for an hour at 5:16 p.m. on Monday, 28 May [1934]. No one knows what they talked about. Keynes found the tête-a-tête 'fascinating and illuminating'; Roosevelt told Frankfurter that he had had a 'grand talk with Keynes and liked him immensely'. As always, Keynes paid particular attention to Roosevelt's hands - 'Rather disappointing. Firm and fairly strong, but not clever or with finesse'." -- Robert Skidelsky, John Maynard Keynes: The Economist as Savior: 1920-1937, Penguin (1992)

And it's not in Galbraith, at least here:

"The following year he visited FDR, but the letter had been a better means of communication. Each man was puzzled by the face-to-face encounter. The President thought Keynes some kind of 'a mathematician rather than a political economist.' Keynes was depressed; he had 'supposed the President was more literate, economically speaking.'" -- John Kenneth Galbraith, The Age of Uncertainty

SDM: Path-Dependence and Instability

I recently read Peter Dorman's "Waiting for an Echo: The Revolution in General Equilibrium Theory and The Paralysis in Introductory Economics" (Review of Radical Political Economics, V. 33 (2001): pp. 325-333). Dorman claims that, in teaching introductory microeconomics, General Equilibrium Theory (GET) is "one of the back-of-the-book chapters we rarely get to." And if GET is taught, the teaching fails to reflect a "virtual revolution in GET during the past quarter-century". His thesis is that these developments in GET can and should be taught in introductory microeconomics classes.

The Sonnenschein-Debreu-Mantel theorem is one of these developments. This theorem states that almost any excess demand curves in markets for individual goods can be justified by aggregating over individual excess demands. Theory imposes only Walras' law, homogeneity of degree zero, and a technical continuity condition. No other restrictions need arise on the shape of aggregate demand curves.

Why are the SDM results exciting? They imply the general possibility of multiple equilibrium and instability. Or at least, that's what I have taken from the literature. I first thought idiosyncratic Dorman's take on the SDM results. He says that they show the "path-dependence instability of general equilibrium" and the indeterminancy of equilibrium:

"In general equilibrium, each action that alters the distribution of resources among agents (and that would be just about anything) also alters the equilibrium vector of prices. It is not possible to identify an equilibrium seperate from the actions individuals take either in pursuit of in utter ignorance of it."

And he writes:

"The first task facing a principles instructor is to ignore the scholarly debate that has surrounded S-D-M. The original authors demonstrated that out-of-equilibrium exchanges altered the distribution of resources, and, since different individuals have different preferences, also altered the general equilibrium itself. Since then, researchers have been investigating the exact extent of preference differentiation under which this result would hold. This, it seems to me, is an utterly arid line of investigation, and it has no meaningful implications for nonspecialists."

I have heard of indeterminacy, but had not thought of it in the context of the SDM. As I understand the instability implications of the SDM results, they are explored in the context of tâtonnement dynamics. How then, can one talk about path dependence here?

I did come up with some justification after some thought. The SDM results show that any dynamics is possible in GET. And I know of an interesting example of chaos in which the sensitive dependence on initial conditions is connected to a particular fractal structure. Newton's method is a numerical method for solving non-linear equations. One can think of Newton's method as a dynamical system for iteratively mapping a point in the complex plane to a root of an equation, when the method converges. Polynomials, for example, have multiple roots. Color the plane by the roots to which Newton's method maps each point. All points that map to a given root are the same color. For certain simple polynomials, you will have drawn a fractal. (Google also gave me this.) Thus, in certain regions, any infinitesimal change in the initial conditions can cause this dynamical method to tend towards a different equilibrium. This property is independent of any claim that multiple equilibrium lie along a continuum.

Since, according to the SDM results, any dynamics is possible, I guess that some sort of dynamics like I have described for Newton's method is possible in GET. And so one can say that the SDM results show the possibility of path-dependence in economics.

Sraffa at Corfu

"[O]ne should emphasize the distinction between two types of measurement. First, there was the one in which the statisticians were mainly interested. Second, there was measurement in theory. The statisticians' measures were only approximate and provided a suitable field for work in solving index number problems. The theoretical measures required absolute precision. Any imperfections in these theoretical measures were not merely upsetting, but knocked down the whole theoretical basis. One could measure capital in pounds or dollars and introduce this into a production function. The definition in this case must be absolutely water-tight, for with a given quantity of capital one had a certain rate of interest so that the quantity of capital was an essential part of the mechanism. One therefore had to keep the definition of capital separate from the needs of statistical measurement, which were quite different. The work of J. B. Clark, Bohm-Bawerk and others was intended to produce pure definitions of capital, as required by their theories, not as a guide to actual measurement. If we found contradictions, then these pointed to defects in the theory, and an inability to define measures of capital accurately. It was on this - the chief failing of capital theory - that we should concentrate rather than on problems of measurement." -- Piero Sraffa, Interventions in the debate at the Corfu Conference on the "Theory of Capital", 4-11 September 1958.

The Route To Normal Science

"Compared with physics, it seems fair to say that the quantitative success of the economic sciences has been disappointing. Rockets fly to the Moon; energy is extracted from minute changes of atomic mass. What is the flagship achievement of economics? Only its recurrent inability to predict and avert crises, including the current worldwide credit crunch...

...Crucially, the mindset of those working in economics and financial engineering needs to change. Economics curricula need to include more natural science. The prerequisites for more stability in the long run are the development of a more pragmatic and realistic representation of what is going on in financial markets, and to focus on data, which should always supersede perfect equations and aesthetic axioms" -- Jean-Phillippe Bouchard, "Economics Needs a Scientific Revolution", Nature, V. 455, 30 October 2008

Peter Boettke With Nothing To Say

Peter Boettke goes on and on and on in this post. I'll confine my comments to Boettke's first numbered "point", even though I have views on some others. This point deals with Paul Davidson's review essay on O'Driscoll and Rizzo's The Economics of Time and Ignorance.

I believe Boettke's first point is an inadequate response to Matthew Mueller here and here. Boettke points out a verbal statement from Mises rejecting the claim that money is neutral. It never seems to occur to Boettke that Davidson's point might be that the logic of Mises and Hayek's positions requires them to accept the axioms of ergodicity (logical time), money neutrality, and gross substitution. Boettke cannot rationally challenge that view by citing statements where Mises or Hayek refuse to accept the first two axioms and therefore become inconsistent.

I am of the opinion that Austrian Business Cycle Theory is consistent with money non-neutrality only in the short run. Furthermore, Hayek's notion of intertemporal equilibrium is closely related to J. R. Hick's Capital and Value model of temporary equilibrium and to the Arrow-Debreu model of intertemporal equilibrium. Hicks came to recognize late in his life that his model could not be set in historical time. Hahn has pointed out the difficulties of introducing money in any essential way into the Arrow-Debreu model. I don't know that Austrians have ever grappled with these decades-old developments. I don't see that Boettke engages in arguments.

The 4,827th Reexamination of Hayek's System

In various blogs, John Holbo, Julian Sanchez, and Matthew Yglesias comment on Hayek. In commenting on Jesse Larner's views on Hayek, I have already mentioned my opinion that The Road to Serfdom can be read more as a jeopardy argument than a slippery slope argument. I've also noted Hayek's difficulties in analyzing mixed, mainly capitalist economies.

Update: Brad DeLong says that The Road to Serfdom was too a slippery slope argument, and Matthew Yglesias reacts.

Read Colander and Klamer Before Applying to Graduate School

I am amused by the thread created by this polemic, titled "What I thought a PhD was about":

When I first envitioned the dream of having a PhD one day, I had really wrong ideas about it. At first, I thought a PhD was a synonimous of erudition in economics. I believed that someone who had a PhD would have run trhough all the economic theory. But I was mistaken.

It really amaze me that it exists some people who have a PhD in economics and who have never read the wealth of Nations. Right now, a PhD in Economics looks more like an Applied Math PhD. Which is something that really annoys me.

Today, a PhD in economics is not about mastery of economic science but about mastery of statistics and mathematics, in respect to their applications to economic theory.

If I were a graduate dean, I wouldn't admit anyone without undergrad training in economics to persuit graduate studies. In my opinion the profession is too much full with frustrated mathematician and physist who, after they realized they wouldn't do anything worth in their field turned to economics to corrupt that beautiful science with their arcane mathematics.

I hate that. And I hate people who allows that..."

A Characteristic In Common Between the New Palgrave and Wikipedia

Mark Blaug reviewed the 1987 edition of the New Palgrave, apparently for some right-wing outfit. I find much in his review to disagree with. But I think he has a point here:

"The Eatwell-Milgate-Newman policy of publishing multiple entries with slightly different titles for identical subjects constantly produces curious results... On balance, a policy of presenting competing opinions under the same title would have been vastly preferable to the Eatwell-Milgate-Newman policy of several entries under different titles on what is in fact one and the same topic." -- Mark Blaug, Economics Through the Looking Glass: The Distorted Perspective of the New Palgrave Dictionary of Economics, Institute of Economic Affairs, 1988.

An example I found would be Walter Eltis' article "Falling Rate of Profit" and N. Okishio on "Choice of Technique and Rate of Profit". Neither references the other. Sometimes the Eatwell-Milgate-Newman policy makes no difference, e.g. in successive articles on "Competition," "Competition: Austrian Conceptions," "Competition: Classical Conceptions," and "Competition: Marxian Conceptions".

Wikipedia also has closely related articles with different names. Here are some examples in economics:

• Arrow-Debreu Model and General Equilibrium
• Comparative Advantage and Heckscher-Ohlin Model (Only the former is part of the International Trade template)
• Labor Theory of Value and Law of Value (Only the latter appears in the Marxist Theory template)
• Marginalism and Neoclassical Economics

I admit an interest in some of these entries. I did quite a bit of work on the General Equilibrium entry. The Labor Theory of Value entry, which is terribly written, currently includes a link to my FAQ. Although it has evolved, I wrote, near-enough, the original version of the Neoclassical entry.

The Law of Value/Labor Theory of Value and Marginalism/Neoclassical economics pairs closely follow Blaug's complaint. Each member of a pair are written from very different perspectives. (I've been in edit wars with the crank maintaining the marginalism entry.)

By the way, both the comparative advantage and the Heckscher-Ohlin entry, including related entries on HO theorems, contain the usual errors about capital. That is, these entries are simply incorrect.

Edward, You Ignorant Arse

In an email exchange with a graduate student, Edward Prescott proves himself to be an impolite, ignorant, arrogant fool. Prescott's correspondent, Leonid Teytelman, doubted this must be Prescott in full possession of his faculties - maybe an adolescent niece or nephew had somehow gotten ahold of Prescott's account. He could not be drunk, since the interchange took place over several days. Myself, I have no problem in believing that Prescott understands neither the science of economics nor basic facts about the United States economy.

Apparently Prescott, in his professional work with Kyland, is equally incoherent. Jim Hartley documents that

"In five different programmatic manifestos over a span of 15 years, Kydland and Prescott have offered five different—and in many ways mutually incompatible—justifications for the models they were advocating." -- James E. Hartley (2006) "Kyland and Prescott's Nobel Prize: the Methodology of Time Consistency and Real Business Cycle Models", Review of Political Economy, V. 18, N. 1 (January): 1-28

At one point, business cycles are caused by the time-to-build capital equipment. No, they are caused by technology shocks in a growth model. You should believe this because "the smoothed series and the derivations from the smoothed series are quantitatively consistent with the observed behavior". No, only because the model explains co-movements of the deviations. No, because the newly interpreted model follows from "standard" theory (Solow-Swan growth modeling). And deviations from the model are because the measurements are bad. No, the model was built to explain previously observed facts, which are observed not by looking at deviations from the Solow-Swan growth model, but from deviations from the output of the Hodrick-Prescott filter. In particular, the model explains the observed acyclical nature of movements in real wages. That is, the model explains the observed strong procyclical nature of movements in real wages. And the model is merely an application of Computable General Equilibrium modeling. The parameters of the model are based on observed values. No, they are chosen so the model outputs "mimic the world".

A SF Fraction Or Faction

I sometimes wonder if Ken MacLeod writes science fiction novels just for me. What other novelist has characters refer to Leontief matrices?

Anyway, he has a blogroll I find quite interesting to explore. I here skip over commentators on science and on current events. The suggested reading off Kevin Carson's mutualist site makes available all sorts of old works. I trust William Godwin's Enquiry Concerning the Principles of Political Justice is the pamphlet Malthus reacted to. I am interested in how the Ricardian socialists argued, on the basis of classical political economy, that the source of returns to capital is the exploitation of labor. I expect to find that that is an aspect of Thomas Hodgskin's Labour Defended against the Claims of Capital Or the Unproductiveness of Capital proved with Reference to the Present Combinations amongst Journeymen.

Another site on MacLeod's blogroll that will take me years to explore gathers essays refuting myths & legends about Marx. I suspect I will be more open to some of these arguments than others.

I have read compliments on David Schweickart. I want to recall to look up his "Economic Democracy: A Worthy Socialism that Would Really Work" (Science & Society, V. 56, N. 1, Spring 1992: 9-38) next time I am in a university library, also available at SolidarityEconomy.net, which seems defunct.

Kaldor's Contributions: An Impressionistic Survey

Introduction
This post gives a quick overview of my impressions of the contributions to economics of Nicholas Kaldor. In writing this post, I deliberately did not review the entries on him at Gonçalo Fonseca's site on the history of economic thought, in the New Palgrave, or at Wikipedia. I did use Turner (1993) for the biographical details.

Biography
I will be brief on the biography of Lord Nicholas Kaldor (12 May 1908 - 1986). Born in Budapest, he later studied at Berlin. He transferred to the London School of Economics (LSE) as an undergraduate in the Fall of 1927. Kaldor visited the United States, including Harvard and Princeton, in 1935. He moved to Cambridge in 1939, with the evacuation of the LSE to Cambridge, and stayed on at Cambridge (King's College) after the war. He joined the United States Strategic Bombing Survey under the direction of John Kenneth Galbraith. He became a Baron in 1974 and was the president of the Royal Economic Society in 1976. Kaldor's wife was named Clarissa, and they had four daughters. Anthony P. Thirwall was named his literary executor.

1930s
Economists in the 1930s had, once again, a controversy on the theory of capital, with Frank Knight on one side and Friedrich A. Hayek and Fritz Machlup on the other. Early in his career, Kaldor (1937) surveyed that dispute. He followed up with investigations (1939a, 1942) of Hayek's capital theory and exposition of the Austrian Business Cycle Theory. Although Kaldor's judgments are sharp, I think these articles might have been more convincing if the standard of the time allowed for more mathematics.

I don't recall ever reading Kaldor's original contributions to welfare economics. Apparently, he had an article in the 1939 volume of the Economic Journal. This article and one by J. R. Hicks are the primary source of the famous Hicks-Kaldor compensation principle.

Apparently the younger economists at Cambridge and LSE, such as Robinson and Kaldor, respectively, met once a month to debate macroeconomics even before the publication of Keynes' General Theory. Kaldor became a convert to Keynes, as can be seen in Kaldor (1939b). Barkley Rosser, Jr., tends to cite Goodwin and Kaldor as early explorations of non-linear dynamics in economic models. Maybe Kaldor (1940) is important here, which I have not read in at least a decade, if ever.

Later Work on Growth and Distribution Theory
Kaldor's later work on growth and distribution is more clearly Post Keynesian, in my opinion. His 1956 paper compares and contrast three theories of distribution: a neoclassical theory which makes most sense with a now exploded scarcity theory of value, a classical theory in which wages are exogeneous in the theory of value and distribution, and a Post Keynesian theory in which the distribution of income depends on macroeconomic savings propensities. I think this paper led to the souring of his relationship with Joan Robinson; she was, I guess, worried about priority in publication. Luigi Pasinetti disputed the logical consistency of Kaldor's presentation, in which workers obtain income from capital but save that portion of their income at the higher rate characteristic in Kaldor's model of savings out of profits. In a later seminar with Pasinetti, Robinson, and Samuelson & Modigliani, Kaldor (1966) clarified that he thought of the savings rate as pertaining to the source of income, not the individual savers. This ties into the idea that savings out of retained earnings is not transparent to those holding stock in corporations. Kaldor suggested these ideas can explain how the market value of corporate stock relates to the book value of the assets owned by corporations. Later work by others demonstrate that for two classes to persist in Kaldor's model, the rate of profits must exceed the rate of interest (i.e., the return to capital obtainable by workers in the financial markets they have access to). This may not be a good idea, but perhaps it would be an interesting idea to synthesize this literature with literature related to De Long et al (1990) - and I would prefer not to reference Shleifer.

Kaldor developed a related series of growth models. He presented one at the famous August 1958 Corfu conference. I guess it was in this paper he presented his "stylized facts". He presented another model in this series (Kaldor and Mirrlees 1962) in the same issue of the Review of Economic Studies in which he welcomed (1962) Arrow to the band of heretics for his "Learning by Doing" paper. Kaldor's models use a technical progress function, which, I gather, is empirically indistinguishable from a Cobb-Douglas production function with technical progress.

Kaldor emphasized increasing returns in manufacturing in these models, and he championed Verdoon's law. Thirwall (e.g., 1986) applies these ideas to developing economics. I gather a policy recommendation in this literature is for export-led growth. An emphasis on increasing returns underlies Kaldor's (1972, 1975, and 1985) mature criticisms of neoclassical economics.

Finally, I want to mention Kaldor's theory of endogenous money. Kaldor described both the inability of monetary authorities to control the supply of money under some given definition and the ability of financial institutions to continually evolve new instruments to serve as money. He used these ideas to refute monetarism (1986, first edition 1982).

References

• J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1990) "Noise Trader Risk in Financial Markets", Journal of Political Economy, V. 98, N. 4 (August): 703-738
• Nicholas Kaldor (1937) "Annual Survey of Economic Theory: The Recent Controversy on the Theory of Capital", Econometrica, V. 5, N. 3 (July): 201-233
• -- (1939a) "Capital Intensity and the Trade Cycle", Economica, New Series, V. 6, N. 21 (February): 40-66
• -- (1939b) "Speculation and Economic Stability", Review of Economic Studies, V. 7, N. 1 (October): 1-27
• -- (1940) "A Model of the Trade Cycle", Economic Journal, V. 50, N. 197 (March): 78-92
• -- (1942) "Professor Hayek and the Concertina-Effect", Economica, New Series, V. 9, N. 36 (November): 359-382
• -- (1956) "Alternative Theories of Distribution", Review of Economic Studies, V. 23: 83-100
• -- (1962) "Comment", Review of Economic Studies V. 29, N. 3 (June): 246-250
• -- (1966) "Marginal Productivity and Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani", Review of Economic Studies, V. 33, N. 4 (October): 309-319
• -- (1985) Economics without Equilibrium, M. E. Sharpe
• -- (1972) "The Irrelevance of Equilibrium Economics", Economic Journal, V. 82, N. 328 (December): 1237-1255
• -- (1975) "What is Wrong with Economic Theory", Quarterly Journal of Economics, V. 89, N. 3 (August): 347-357
• -- (1986) The Scourge of Monetarism, Second Edition, Oxford University Press
• Nicholas Kaldor and James A. Mirrlees (1962) "A New Model of Economic Growth", Review of Economic Studies V. 29, N. 3 (June): 174-192
• A. P. Thirwall (1986) "A General Model of Growth and Development on Kaldorian Lines", Oxford Economic Papers (July)
• Marjorie S. Turner (1993) Nicholas Kaldor and the Real World, M. E. Sharpe

"Macroeconomics as an Autonomous Discipline"

"Paradoxically, the main result obtained by the new classical economists is the demonstration - against their wishes and expectations - that a satisfactory synthesis of macroeconomics and microeconomics is not yet mature. As a matter of fact, the micro-foundations of macroeconomics which they suggest are by now far from satisfactory. They rely on the heroic assumption that the decision-makers of the models are representative agents, whose behavior fairly well approximates the aggregate behavior of the economy. Unfortunately this assumption surreptitiously eliminates the main object that should be studied by macroeconomics: aggregation problems and failures of coordination between the behavior of individuals. Even so, the suggested micro-foundations work only under very special assumptions which actually deny any importance to the main problems considered by Keynes's macroeconomics: uncertainty, disequilibrium, instability, structural change, etc. As we have seen, disequilibria are assumed to be non-intelligible and are therefore ignored; uncertainty is emasculated by the 'certainty equivalence' hypothesis; instability is defined away by arbitrarily restricting the analysis to stationary and ergodic processes and taking account only of the subset of stable solutions...

The failure of this reductionist research programme may be due to the immaturity of current macroeconomics, but it may also be due to weaknesses in existing microeconomic theory. Notwithstanding the widespread belief in its intrinsic solidity, the micro theory currently accepted by the new classical economists may prove on closer examination to be insufficiently powerful to provide solid foundations for a satisfactory macroeconomics. To take the preliminary steps towards a real synthesis between macro and micro theories, it is necessary to consider not only the micro-foundations of macroeconomics but also the macro-foundations of microeconomics (Hicks 1983).

The history of scientific thought shows that whenever a synthesis between different disciplines has been successfully accomplished, the result has been a new discipline with features not reducible to those of the original disciplines. Such a synthesis between micro and macroeconomics, if it is possible, is still far away. In the meantime the reciprocal autonomy of disciplines should be carefully safeguarded. It is particularly important to defend the autonomy of macroeconomics, as today this is greatly jeopardized by views like those mentioned above. Therefore we should revert to the original Keynesian concept of macroeconomics as an autonomous discipline. This does not imply that we should give up making serious efforts to provide rigorous micro-foundations for our macroeconomic statements, if that means searching for greater consistency between the two disciplines. In other words we should continue to pursue a full synthesis between microeconomics and macroeconomics. Many things have been learned from past attempts, unsuccessful as they were, and many others may be learned through future efforts.

But in the meantime one should not reject as non-scientific any contribution that lacks proper 'micro-foundations,' particularly in the restricted sense of a 'reduction to current Walrasian microeconomics.' As a matter of fact, though it may be found impossible to provide proper micro-foundations to a given macroeconomic statement, this might become possible in the future. Such developments have occurred many times in the past and it could happen again, especially if microeconomics extends its range well beyond its Walrasian bounds. To reject this view would be as irrational as to reject as non-scientific any biological statement not yet reducible to chemical statements. Unfortunately, as has been wisely remarked, the only known way to reduce biology to chemistry is murder." -- Alessandro Vercelli, Methodological Foundations of Macroeconomics: Keynes & Lucas, Cambridge University Press, 1991.

You Got Me Babe

Here are two books one can read on-line and that I may read:

• Protecting Individual Privacy in the Struggle Against Terrorists: A Framework for Program Assessment, National Academies Press (2008)
• Nicholas Kaldor, The Scourge of Monetarism, Second Edition, Oxford University Press (1986)

The first book discusses data mining in an anti-terrorism context. Success of this tchnology in this context is difficult, while false positives are a threat to privacy. At least this is the conclusion - if I am fairly summarizing - of the Committee on Technical and Privacy Dimensions on Information for Terrorism Prevention and Other National Goals. (The National Academies Press publishes reports by the National Academies and by the National Research Council, organizations of some importance in the formation of United States policies on science and technology.)

The second book is Nicholas Kaldor's demonstration that monetarism does not work. On this blog, Kaldor should need no introduction.

Both books are in a freely readable on-line format that I find annoying. I suppose the format of the free version of the first is a business decision to encourage the purchase of the PDF version. And I blame copyright law for the format of the second.