Good For Me, Bad For You

I still hope to publish my critique of Austrian business cycle theory (most recent public version). In my introduction, I need to answer the question why anybody should care about criticism of Austrian business cycle theory or Austrian economics more generally. Mentions of Austrian economics in popular venues helps make my case. And some recent outbreaks are available.

On 8 May 2010, the Maine Republicans adopted a platform with these insane planks:

"V. To Promote the General Welfare

• Return to the principles of Austrian Economics, and redirect the economy back to one of incentives to save and invest.
• Cut spending, balance the budget, and institute a plan for paying down debt. Proclaim that generational debt shifting is immoral and unconscionable and will not be tolerated! ..."

Apparently, nobody has told these maniacs that Von Mises declares praxeology, that is, economic theory, to be Wertfreiheit, that is, value-free (Human Action, Chapter II Section 7).

And an unstable liar on Fox News has made Hayek's The Road to Serfdom the number one most popular book at times on Amazon. So Hayek is being discussed in the popular press and among academics who previously had taken no notice. By the way, other works of Hayek are more important for theories of the business cycle. In The Road to Serfdom, Hayek says his differences with Keynes are a matter of pragmatic judgment, not political principle:

"There is, finally, the supremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them. This is, of course, one of the gravest and most pressing problems of our time. But, though its solution will require much planning in the good sense, it does not - or at least need not - require that special kind of planning which according to its advocates is to replace the market. Many economists hope, indeed, that the ultimate remedy may be found in the field of monetary policy, which would involve nothing incompatible even with nineteenth century liberalism. Others, it is true, believe that real success can only be expected from the skillful timing of public works undertaken on a very large scale. This might lead to much more serious restrictions of the competitive sphere, and, in experimenting in this direction, we shall have carefully to watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure. But this neither the only nor, in my opinion, the most promising way of meeting the gravest threat to economic security. In any case, the very necessary efforts to secure protection from these fluctuations do not lead to the kind of planning which constitutes such a threat to our freedom." -- Friedrich A. Hayek, The Road to Serfdom, Chapter IX: Security and Freedom

The popularity of Austrian economics refracts and contributes to a policy environment in which bad ideas are being adopted with bad consequences.

Hyman Minsky On-Line

The Saint Louis Fed provides the following document:

• Hyman P. Minsky "Financial Instability Revisited: The Economics of Disaster"

I have commented on Minsky before. Those interested in Minsky's ideas might want to at literature available at the Levy Economics Institute.

Of Minsky's book, as I recall, I found John Maynard Keynes of most interest. I found Stabilizing an Unstable Economy dryer. That was more than a decade ago and maybe I would find it of greater interest now.

The Con Left In Economics?

The Spring 2010 issue of the Journal of Economic Perspectives has a debate among some mainstream economists on changes in economics since Edward Leamer's 1983 American Economic Review paper, "Let's Take the Con Out of Econometrics". Developments since then include more reliance on sensitivity analysis; randomized experiment designs, both in laboratories and in the field; natural experiments; and Instrumental Variables (IVs). Contributors to this symposium consist of Joshua D. Angrist & Jön-Steffen Pischke, Edward E. Leamer, Michael P. Keane, Christopher A. Sims, Aviv Nevo & Michael D. Whinston, and James H. Stock.

Correlation Between Increased Government Size And Equality

The Organization for Economic Cooperation and Development (OECD) has made some data available to everybody. So I thought I would replicate some of my previous analysis. In particular, income inequality is negatively correlated with the size of government (Figure 1). Income is measured by the Gini coefficient, and the size of government is expressed as a percentage of Gross Domestic Product (GDP).

Figure 1: Inequality Versus Government Size

The Gini coefficient is a measure of inequality, with a higher Gini coefficient denoting a more unequal distribution of income. It is defined as follows: sort the population in order of increasing income. Plot the percentage of income received by those poorer than each value of income against the percentage of the population with less than that value of income. This is the Lorenz curve, and it will fall below a line with a slope of 45 degrees going through the origin. The Gini coefficient is the ratio of the area between the 45 degree line and the Lorenz curve to the area under the 45 degree line. A Gini coefficient of zero indicates perfect equality, while a Gini coefficient of unity arises when one person receives all income and everybody else gets nothing. Consequently, the Gini coefficient lies between zero and one.

I take the data as given from the OECD. I'm not worrying about whether income is found per family, household, or individual. Nor am I worrying about whether government expenditures include transfer payments and include both state and Federal spending. I took data from the year 2000 because that seems to be the most recent year with data for both dimensions and in which the Gini coefficient is given for a definite year. The OECD lacks 2000 data in one or another dimension for Iceland, South Korea, Mexico, the Slovak Republic, and Turkey. The plotted points consist of data from Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Among advanced capitalist nations, countries with bigger governments tend to have a more equal distribution of income.

Formalism in Economics

I think many mainstream economics equate formalism with use of equations. But analytical categories that are not easily set out as the value of a variable in a numerical equation can provide a kind of formalism. And, if you want mathematics, one could, I suppose, set out an ontology, using model theory, for such categories. (I'm not sure what would be the point of that.) To illustrate my claim, I point to two sets of triples that some economists have developed.

Structure, Organization, and Agency need to be analyzed if one wants to understand the provisioning process in capitalist economies. The interindustry dependencies shown in Input-Output tables, macroeconomic income flows, and money flows show some structures important for understanding capitalist economies. Business enterprises, government and quasi-government bureaus, and families are important organizations in such economies. Agency occurs, that is, decisions are made by individuals, in a context provided by such structures and organizations (Lee 2009).

Oligopoly involves a small number of firms maintaining special privileges in a market environment where other firms might enter (Rothschild 1993). Ever since the work of Joe Bain and Paolo Sylos Labini (Modigliani 1958), economists have analyzed oligopoly on the basis of Structure, Conduct, and Performance. The structure of a market is more or less stable in time, observable, and influences the conduct of market participants. Conduct includes the choice of which commodities to buy, the prices to post, decisions about advertisement, etc. Performance is a matter of comparing market results with some sort of ideally efficient results (Schmalensee 1987).

References

• Frederic Lee (2009) A History of Heterodox Economics: Challenging the Mainstream in the Twentieth Century, Routledge
• Franco Modigliani (1958) "New Developments on the Oligopoly Front", Journal of Political Economy, V. 66, N. 3 (June): pp. 215-232.
• Kurt W. Rothschild (1993) "Oligopoly: Walking the Sylos-Path", in Markets and Institutions in Economic Development: Essays in Honour of Paolo Sylos Labini (Edited by S. Biasco, A. Roncaglia, and M. Salvati), St. Martin's Press
• Richard Schmalensee (1987) "Industrial Organization", in The New Palgrave: A Dictionary of Economics (Edited by J. Eatwell, M. Milgate, and P. Newman), MAcmillan

Wittgenstein Online

According to this news story, the University of Bergen is providing online access, for anybody, to their archives of Wittgenstein's notes. The semantic web is made use of in their presentation.

I think I'll stick to dead tree editions of Tractatus Logico-Philosophicus, "Some Remarks on Logical Form", Philosophical Investigations, The Blue and Brown Books, Remarks on the Foundations of Mathematics, Philosophical Grammar, Philosophical Remarks, On Certainty, Culture and Value. And, I guess, there are even more posthumous works. But now, from your computer, you can check the work of G. E. M. Anscombe, Raymond Hargreaves, Anthony Kenny, B. F. McGuiness, D. F. Pears, Rush Rhees, Roger White, Peter Winch, and G. H. von Wright.

Lear Without The King

I have presented several models of a more or less capitalist economy smoothly reproducing.

Some have objected (for example, Jan Kregel (1985)) about the lack of money in these sort of models. Paul Cockshott and his colleagues provide a more recent example:

"For example, prices in neo-Ricardian models are also exchange ratios determined by solutions to static, simultaneous constraints. Similarly, historical time is absent, so there is no causal explanation of how or why a particular configuration of the economy arose. Money only plays a nominal not a causal role... neo-Ricardian theories tend to ignore ... actor-to-actor relations mediated by money, which unfold in historical time, and result in dynamic, not static, equilibria." -- Cockshott et al (2009)

I don't see why money cannot be included, in some sense, in a description of the transactions that must occur for the economy to reproduce. I think, for example, of Marx's account, in Chapter VI of Part I of Theories of Surplus Value, of Quesnay's Tableau.

Including money in the story, however, is not enough. Money and finance has to make a difference for the theory. Hahn points out an analogous problem with neoclassical general equilibrium. The way I view these models of reproduction, introducing money and finance should identify additional areas in which a capitalist economy can fail to reproduce smoothly.

I think some progress has been made to meet this criteria. Sraffa, in an aside, recognized the importance of monetary institutions:

...And when the wage is to be regarded as 'given' in a more or less abstract standard, and does not acquire a definite meaning until the prices of commodities are dtermined, the position is reversed. The rate of profits, as a ratio, has a significance which is independent of prices, and can well be 'given' before the prices are fixed. It is accordingly susceptible of being determined from outside the system of production, in particular by the level of money rates of interest. -- Piero Sraffa (1960), paragraph 44

I think a conflict theory of inflation can be developed to explain the United States in the 1970s. Suppose both the general level of wages and the rate of profits are given in Sraffa's system. Then the system is overdetermined. Inflation is a means by which certain incompatibilities can be resolved. Since the level of output is consistent with unemployment ruling, here is a possible theory of stagflation.

Given the importance in the current crisis of finance going wrong, I don't think I've identified an adequate theory of money for Sraffa's system. Apparently, the most full development of Sraffa's remark is Pivetti's, which I haven't read. If I recall correctly, Rogers (1989) is more a destructive critique of the Wicksellian foundations of mainstream macroeconomics. Moore (1988), like Hyman Minsky's work, is more Post Keynesian than Sraffian economics. I could also stand to learn more about the circuitists, as well as recent being done at the University of Missouri at Kansas City.

References

• Basil J. Moore (1988) Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Pres
• W. Paul Cockshott, Allin F. Cottrell Gregory J. Michaelson, Ian P. Wright, and Victor M. Yakovenko (2009) Classical Econophysics, Routledge
• Frank Hahn (1965) "On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy" in Theory of Interest Rates (ed. by Hahn and Brechling)
• J. A. Kregel (1985) "Hamlet without the Prince: Cambridge Macroeconomics without Money", American Economic Review, V. 75, N. 2 (May): pp. 133-139
• Marguerite Kuczynski and Ronald Meek (1972) Quesnay's Tableau Economique
• Karl Marx Theories of Surplus Value
• M. Pivetti (1985) "On the Monetary Explanation of Distribution", Political Economy: Studies in the Surplus Approach, 1(2): pp. 73-103 [I haven't read this]
• M. Pivetti (1991) An Essay on Money and Distribution, Macmillan [I haven't read this]
• Colin Rogers (1989) Money, Interest and Capital: A Study in the Foundations of Monetary Theory, Cambridge University Press
• Piero Sraffa (1960) Production of Commodities by Means of Commodities, Cambridge University Press

Kurz And Salvadori Peeved With Mark Blaug?

Usually when Heinz Kurz and Neri Salvadori want to explain some economist is mistaken, they confine themselves to saying something along the lines of certain propositions "cannot be sustained". Recently, I stumbled upon a 2010 paper in which they answer Mark Blaug. I find their tone sometimes striking:

"A careful scrutiny of [Blaug (2009)] shows that Blaug reiterates once again his previous criticisms, adds a few new ones, but does not enter into a serious discussion of the replies to his earlier efforts... Answering him in detail would necessitate repeating again our counter-arguments. We spare the readers this and ask them to consult our earlier replies to Blaug."

"Blaug has already been given the opportunity in this journal to answer his critics; see Blaug (2002). Apparently, he feels that his rejoinder was not effective. This is hardly surprising because Blaug did not attempt to counter the objections of his critics.

Scrutiny of his new effort reveals that the situation has not changed. Once again Blaug merely reiterates his previous criticisms, adds a few new ones, but neglects to answer his critics. He seems to feel that repeating his story often will render it credible."

"If Blaug was concerned with an historical reconstruction of the case under consideration, he needs to spend some time in Trinity College Library, Cambridge (UK), as we did, in order to study Sraffa's papers and library and find out when Sraffa had arrived at which results, and why. He would then see that his above speculation as well as many other statements he put forward concerning Sraffa's contributions are without foundation; they are pure fiction. Historians of economic thought ought to be aware of the usefulness of archival work."

"In order to give credibility to his (in itself rather strange) complaint that 'Sraffians' have not contributed to certain themes or fields in economics, Blaug re-labels some authors: in case X has/has not contributed to field Y, he or she is not/is a 'Sraffian'."

"In the context of a discussion of the problem of the gravitation of market prices to their 'natural' or normal levels, he contends that while Kurz and Salvadori point out 'that little is known about the dynamic behaviour of even simple linear production models; nevertheless, they express the hope that the problem will be "settled in the foreseeable future" (Kurz and Salvadori 1998[a], 20)' (229 n.20). The reader who checks the source mentioned will not find this statement. Has Blaug got the page wrong? No, in the entire book the reader won't find the statement quoted. Has Blaug perhaps confounded some of our books? Yes, he has, but things are worse still. The only passage we are aware of having written that can be related to Blaug's criticism is contained in a book published in 1995. After having pointed out the extreme complexity of the issue at hand ('gravitation') and the dependence of the results obtained on the specific conditions assumed, we conclude: 'It should then be clear that there is no fear that the issue of gravitation will be settled in the foreseeable future' (Kurz and Salvadori 1995, 20; emphasis added). Hence we say exactly the opposite of what Blaug contends we are saying. This is not only annoying but also raises doubts about the seriousness of the entire enterprise. What is the relevance of a critique that lacks the elementary rigor of not misrepresenting (let alone reversing) the view of the people criticised? Misconstruction is an error surely worse even than historically unfaithful reconstruction?"

"None of Blaug's criticisms stands up to close examination. He attributes views to us (and to other authors) we (they) never advocated. He contends that 'Sraffian' authors have not written about certain problems, while referring to writings which show precisely the opposite. He commits a number of elementary blunders and mistakes the mathematical form of an argument for its content. He variously contradicts himself in the paper. He puts forward bold statements that are contradicted by the facts."

I have commented before on the specific Mark Blaug paper Kurz and Salvadori are rejecting; on the history of Blaug's incomprehension of Sraffianism; and even on the Institute of Economic Affairs, a right-wing think tank sponsoring some of Blaug's work.

References

• Mark Blaug (1975) The Cambridge Revolution: Sccess or Failure? A Critical Analysis of Cambridge Theories of Value and Distribution, Institute of Economic Affairs
• Mark Blaug (1985) Economic Theory in Retrospect, Fourth Edition, Cambridge University Press
• Mark Blaug (1988) Economics Through the Looking Glass: The Distorted Perspective of the New Palgrave Dictionary of Economics, Institute of Economic Affairs
• Mark Blaug (1999) "Misunderstanding Classical Economics: The Sraffian Interpretation of the Surplus Approach", History of Political Economy, V. 31, N. 2: pp. 213-236.
• Mark Blaug (2002a) "Kurz and Salvadori on the Sraffian Interpretation of the Surplus Approach", History of Political Economy, V. 34, N. 1: pp. 237-240.
• Mark Blaug (2002b) "Misunderstanding Classical Economics: The Sraffian Interpretation of the Surplus Approach", in Competing Economic Theories: Essays in Memory of Giovanni Caravale (Edited by S. Nisticò and D. Tosato), Routledge
• Mark Blaug (2009) "The Trade-Off Between Rigor and Relevance: Sraffian Economics as a Case in Point", History of Political Economy, V. 41, N. 2: pp. 219-247.
• Pierangelo Garegnani (1987) "Misunderstanding Classical Economics? A Reply to Mark Blaug", History of Political Economy, V. 34, N. 1: pp. 241-254.
• Heinz D. Kurz and Neri Salvadori (2002) "Mark Blaug on the 'Sraffian Interpretation of the Surplus Approach'", History of Political Economy, V. 34, N. 1: pp. 225-236.
• Heinz D. Kurz and Neri Salvadori (2010) "In Favor of Rigor and Relevance. A Reply to Mark Blaug" (4 Feb).
• Carlo Panico (2002) "Misunderstanding the Sraffian Reading of the Classical Theory of Value and Distribution: A Note", in Competing Economic Theories: Essays in Memory of Giovanni Caravale (Edited by S. Nisticò and D. Tosato), Routledge

Geoff Harcourt On YouTube

A 2007 interview with Geoff Harcourt at Cambridge can be found on YouTube (Part 1, Part 2). Presumably, he was writing The Structure of Post-Keynesian Economics at the time.

Prices Of Production And A Wheat Theory Of Value

1.0 Introduction
In this post, I describe a theory of prices that is an alternative to the neoclassical supply-and-demand theory of prices as scarcity indices. In this exposition, I consider the simple case in which the modeled economy does not produce a surplus. In this simple case, prices of production are in the ratios of labor values and of commodity values, for any specified commodity. This post illustrates this claim too.

I do not draw the conclusion from the equivalence illustrated here that labor values have no priority over commodity values. After all, the formal model illustrated here does not include a principal agent problem arising with labor.

2.0 Technology and Advanced Wages
Consider a simple economy in which only three commodities are produced, namely, wheat, iron, and pigs. Each commodity is produced by a specified process requiring (possibly zero) inputs of labor, wheat, iron, and pigs. Suppose these processes are observed to produce the quantities of outputs shown in Table 1 from the inputs shown there. In other words, these processes are observed to operate at the scale shown. No assumption about returns to scale is made here. In particular, it is not necessary for Constant Returns to Scale to prevail.

TABLE 1: Technique in Use

INPUTS	Wheat Industry	Iron Industry	Pig Industry
Labor	1 Person-Year	2 Person-Years	3 Person-Years
Wheat	230 Quarters	70 Quarters	90 Quarters
Iron	12 Tons	6 Tons	3 Tons
Pigs	12 Pigs		12 Pigs
OUTPUTS	450 Quarters	21 Tons	60 Pigs

Suppose wages are advanced at the start of the production period, and that these advanced wages consist of 10 quarters wheat and 6 pigs per person-year. Then one could specify the inputs to the production processes as consisting exclusively of wheat, iron, and pigs, with no labor input (as shown in Table 2). This is now the example from paragraph 2 of Sraffa's Production of Commodities by Means of Commodities. Notice that the outputs can just replace the inputs, including the advanced wages, with no commodity surplus being left over. Capitalists do not make an accounting profit in this economy.

TABLE 2: Production of Commodities by Means of Commodities

INPUTS	Wheat Industry	Iron Industry	Pig Industry
Wheat	240 Quarters	90 Quarters	120 Quarters
Iron	12 Tons	6 Tons	3 Tons
Pigs	18 Pigs	12 Pigs	30 Pigs
OUTPUTS	450 Quarters	21 Tons	60 Pigs

3.0 Prices of Production
With the social division of labor in this economy, firms in each industry at the end of the production period have an inventory of a single commodity. To continue production, they must trade some of that commodity for the other commodities they need as inputs. Prices of (re)production are time-invariant prices that allow these trades to occur and the economy to be smoothly reproduced through the actions of the agents in the economy. For this simple example, prices of production must satisfy three equations:

240 p_w + 12 p_i + 18 p_p = 450 p_w

90 p_w + 6 p_i + 12 p_p = 21 p_i

120 p_w + 3 p_i + 30 p_p = 60 p_p

where:

• p_w is the price of a quarter of wheat,
• p_i is the price of a ton of iron, and
• p_p is the price of a pig.

These equations are linearly dependent. Any multiple of a solution set of prices is also a solution. I arbitrarily pick a quarter of wheat as the numeraire. The solution set of prices is then $1 per quarter wheat, $10 per ton iron, and $5 per pig.

4.0 Labor Values
One can work out a consistent accounting in which the amount of labor time embodied in each commodity is measured. Labor values are found as the solution to the following system of three linear inhomogeneous equations in three unknowns:

1 + 230 v_w + 12 v_i + 12 v_p = 450 v_w

2 + 70 v_w + 6 v_i = 21 v_i

3 + 90 v_w + 3 v_i + 12 v_p = 60 v_p

where:

• v_w is the person-years labor embodied in a quarter of wheat,
• v_i is the person-years labor embodied in a ton of iron, and
• v_p is the person-years labor embodied in a pig.

This system of equations has a unique solution. The labor values for the commodities are 1/40 person-years per quarter wheat, 1/4 person-years per ton iron, and 1/8 person-years per pig.

5.0 Wheat Values
One can also work out a consistent accounting system in which the amount of wheat embodied in each commodity is measured. Wheat values for iron and pigs are found as the solution to the following system of two linear inhomogeneous equations in two unknowns:

90 + 6 w_i + 12 w_p = 21 w_i

120 + 3 w_i + 30 w_p = 60 w_p

where:

• w_i is the quarters wheat embodied in a ton of iron and
• w_p is the quarters wheat embodied in a pig.

The wheat values of commodities are w_i = 10 quarters per ton and w_p = 5 quarters per pig.

Calculating iron values for wheat and pigs and calculating pig values for wheat and iron are left as an exercise to the reader.

6.0 Contrast and Comparison
For any set of values (prices of production, labor values, or commodity values), one can find quantities of each commodities that are valued as equal for that set. Table 3 illustrates by showing the values of specified quantities of each commodity. In this example, the following equation holds:

10 quarters wheat = 1 ton iron = 2 pigs,

whether commodities are valued in terms of dollars, embodied labor, or any commodity value (such as wheat). The equivalence of all these values is a special case. This equivalence works out from considering a pure circulating capital case in which an economic surplus not paid out in wages is not produced.

TABLE 3: Value of Specified Quantities of Commodities

Quantities	Value in
	Prices of Production	Person-Years of Embodied Labor	Quarters of Embodied Wheat
10 Quarters Wheat	$10	1/4 Person-Years	10 Quarters
1 Ton Iron	$10	1/4 Person-Years	10 Quarters
2 Pigs	$10	1/4 Person-Years	10 Quarters

No Mistakes In Marx's Analysis Of Social Classes

Marx puts forth an analysis of social class in Volume 3, Chapter 52 of Capital. He poses his problem in five paragraphs. I find no mistakes in his answer in the succeeding paragraphs.

Alternative Economics In Mechanics' Institutes And Think Tanks

Various nonacademic institutions have helped shaped the development of academic economics. Fred Lee, in his recent history, describes some aspects of the culture of university economics departments:

"Intellectual bullying of heterodox-interested graduate students; denying appointments, reappointments, and tenure to heterodox economists; red-baiting; and professional ostracism/discrimination" (Lee 2009)

In the United States around 1945, some institutions outside universities provided intellectual support and culture for left-wing intellectuals, including economists. I refer to schools for workers supported to some extent by the Communist Party:

• School for Jewish Studies (New York)
• Jefferson School for Social Science (New York)
• Abraham Lincoln School (Chicago)
• Samuel Adams School (Boston)
• Boston School for Marxist Studies
• Tom Paine School of Social Sciences (Philadelphia)
• Walt Whitman School of Social Sciences (Newark)
• Joseph Weydemeyer School of Social Sciences (St. Louis)
• Ohio School of Social Sciences (Cleveland)
• Michigan School of Social Sciences (Detroit)
• Seattle/Pacific Northwest Labor School
• Tom Mooney/California Labor School (San Francisco)

Under Truman, these schools were listed by the Attorney General as subversive. With continued McCarthyist oppression, none existed by 1957.

On the other hand, extremely rich reactionaries paid economists to argue for right wing views. This funding went to both universities and to think tanks set up since the workers' schools were shut down. Some examples:

• Harold Luhnow, who made his fortune selling furniture, is important for the history at, among other places, the University of Chicago (Van Horn and Mirowski 2009)
• Jasper Crane, a former executive of the DuPont Chemical Company was a major funder at one point of the Mont Pélerin Society (Phillips-Fein 2009)
• Sir Antony Fisher, who introduced factory farming into Great Britain, set up the Institute of Economic Affairs in Great Britain (Blundell 2007, Mitchell 2009)
• Leonard Read led the Foundation for Economic Education
• Edward H. Crane founded the Cato Institute in 1977

Perhaps the long history of oppression of economists with certain views and funding of economists with others has had some influence on what ideas are developed. The above only provides a very limited glimpse of political interventions into academic economics. Much more can be found for those willing to look.

References

• John Blundell (2007) Waging the War of Ideas,Third and expanded edition, Institute of Economic Affairs
• Colleen Dyble (editor) (2008) Taming Leviathan: Waging the War of Ideas Around the World, Institute of Economic Affairs
• Frederic Lee (2009) A History of Heterodox Economics: Challenging the Mainstream in the Twentieth Century, Routledge
• Timothy Mitchell (2009) "How Neoliberalism Makes Its World: The Urban Property Rights Project in Peru", in The Road from Mont Pélerin: The Making of the Neoliberal Thought Collective (ed. by Philip Mirowski and Dieter Plehwe), Harvard University Press.
• Kim Phillips-Fein (2009) "Business Conservatives and the Mont Pélerin Society", in The Road from Mont Pélerin: The Making of the Neoliberal Thought Collective (ed. by Philip Mirowski and Dieter Plehwe), Harvard University Press.
• Rob Van Horn and Philip Mirowski (2009) "The Rise of the Chicago School of Economics and the Birth of Neoliberalism", in The Road from Mont Pélerin: The Making of the Neoliberal Thought Collective (ed. by Philip Mirowski and Dieter Plehwe), Harvard University Press.

Manifesto for Freedom of Economic Thought

The Paolo Sylos Labini Associazione is named after a great Sraffian economist. They are collecting signatures for a Manifesto for freedom of economic thought: Against the dictatorship of the dominant theory and in favour of a new ethic (Italian version).

Wynne Godley (1926-2010)

"Yet when, having produced a destructive critique of the neoclassical production function, [Sylos Labini] asks, 'When will economists finally accept their own logic?' I do believe he is not just sniping from the sidelines at the Neoclassical Paradigm (NCP), he is shaking at one of its foundation stones. For this reason my short answer to his question is 'Never' or at least 'Not until we have a new paradigm...' ...I am convinced that this concept of general equilibrium in a monetary economy [with markets for real product, the stock of money, labour, and the stock of bonds] constitutes the primal scene - the primitive imaginary vision of the world - out of which the whole of mainstream macroeconomics now flows. At one extreme are 'monetarists' of various hue who believe that the classical version of this simple model does, or should, or can somehow be made to describe the real world. Almost all other modern macroeconomists, while forming a huge spectrum, have as their essential activity the study what happens if parts of the machine do not function properly, e.g. are subject to rigidities or time lags. For instance, much work has been concerned with effects on the solution of this model if the various prices do not clear markets or clear them imperfectly. If wages are not flexible the labour market may not clear; this is what most students now understand as Keynesian economics. If the price of goods is not flexible, the market for goods may not clear, perhaps generating 'classical' unemployment. Now Sylos Labini (like Kaldor and Pasinetti in different ways) makes a devastasting case against the empirical relevance or even meaningfulness of the aggregate neoclassical production function. What I want to emphasize here is the system role which the production function fulfils and therefore just why the Sylos Labini critique is so important. What the production function does for all equilibrium systems - whether markets clear or not - is to bring labour into instantaneous equivalence with real product in such a way that alternative quantities of each can potentially be traded against one another. The production function is necessary for this equivalence so that labour can instantaneously be translated into the profit-maximising quantity of product which firms are therefore motivated to supply. Without the production function no neoclassical model will start up; the blood supply to its head is cut off... ...I have reached a point when I am prepared to make a declaration. I want to say of neoclassical macroeconomics what I have sometimes said of certain kinds of fiction; I know that the world is not like that and I have no need to imagine that it is. In particular, I do not believe that there exists a market in which goods in aggregate and labour in aggregate can be exchanged for one another provided only that the price of each is right in relation to some given stock of 'money.'" -- Wynne Godley (1993) "Time, Increasing Returns and Institutions in Macroeconomics: Essays in Honour of Paolo Sylos Labini", in Market and Institutions in Economic Development (ed. by S. Biasco, A. Roncaglia and M. Salvati), St. Martin's Press.

Godley goes on in this paper to outline a stock-flow consistent macroeconomic model with both real and monetary sectors.

The (??) Natural Rate of Unemployment

Milton Friedman defined the natural rate of unemployment, also known as the Non-Accelerating Inflation Rate of Unemployment (NAIRU), at least at the level of abstraction of this post:

"The 'natural rate of unemployment' in other words, is the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the labor and commodity markets." -- Milton Friedman (1968), as quoted in James K. Galbraith (1998)

Two mathematical mistakes are embedded in the above definition.

First, what does Friedman mean by the "Walrasian system"? At the time of his statement, the Arrow-Debreu model of intertemporal equilibrium was becoming the canonical statement of general equilibrium theory. But the Arrow-Debreu model is a very short run model, in which the initial quantities of capital equipment are among the given endowments. Consequently, a solution to the model yields neither a rate of employment nor a rate of unemployment, independent of time. Rather, these rates are time-varying. So he cannot mean to refer to that model.

Now, Walras himself presented a model with given quantities of capital goods and a supposed steady state set of prices and quantities. But this model was just logically inconsistent. In consistent long-run economic models the set of capital goods are found by solving the model, not taken as givens. Thus, the logic of such models is not about allocating given resources among alternative ends. To refer to such a model as "the Walrasian system of general equilibrium" is dubious.

Second, Friedman's definition relies on an implicit mathematical theorem: that the equilibrium solution of whatever model he is talking about is unique. But no reason exists for such a theorem to hold in either the Arrow-Debreu model or a long run equilibrium model with many markets. I have myself created a model with multiple equilibria.

Here, then, is another example of right-leaning economists giving decades of policy advice based on theoretical claims with no support in economic theory. Unsurprisingly, the policy did not work empirically either, as can be seen by looking at results in the 1980s and 1990s. (These claims are not new. James Galbraith made my second point long ago.)

Have mainstream economists ever addressed this failure? Did they not mostly just continue their mistake with Dynamic Stochastic General Equilibrium (DSGE) models?

References

• Milton Friedman (1968) "The Role of Monetary Policy", American Economic Review Papers and Proceedings (May): pp. 1-17
• James K. Galbraith (1998) Created Unequal: The Crisis in American Pay, The Free Press.

Performing Corporate Finance

1.0 Introduction

Economics can change the world, and not necessarily for the better. Mainstream economists often do not describe actual capitalist economies, but theorize an imaginary, supposedly ideal world in which everybody pursues their own self-interest, narrowly defined. Participants in this world are then sometimes encouraged by the theory to change institutions and their behavior to come closer to that imaginary world.

This post describes theories that encouraged corporations to become more vulnerable, by taking on large amounts of debt, and to become more short-run oriented, by focusing more on immediate stock market prices. I know about these two contributions to economics more from Bernstein and Cassidy's popularizations than the primary literature. I am deliberately treating some elements that I think have not much appeared in popular discussion since the advent of the global financial crisis.

2.0 Modigliani and Miller (M&M) and Capital Structure

The Modigliani and Miller theorem states that whether a corporation obtains financing with stocks or with bonds has no impact on its stock price. I gather that this follows from an arbitrage argument under admittedly unrealistic assumptions. An individual can buy stock with borrowed money. By buying stock on the margin, individuals can raise the leverage ratio from whatever corporations have decided on to whatever they like.

The M&M theorem serves as a baseline in corporate finance. One considers the implications of existing deviations from the theorem assumptions. Apparently the treatment for corporate taxes in the United States of dividends and interest is one such deviation. Interest on bonds can be deducted as expenses on corporate taxes; stock dividends cannot. Therefore financing by issuing bonds is to be preferred.

"This [proposition] carried not very flattering implications for the top managements of companies with low levels of debt. It suggested that the high bond ratings of such companies in which the management took so much pride, may actually have been a sign of their incompetence; that the managers were leaving too much of their stockholders' money on the table in the form of unnecessary corporate income tax payments [of] many millions of dollars." -- Merton Miller (1988), quoted in Bernstein (2005)

The implication is that corporations should increase their leverage.

3.0 Michael Jensen and Executive Compensation

Most owners (that is, holders of stock) of modern corporations are absentee owners. They would like corporate executives to act in a non self-dealing manner, against their own interests. This is a principal agent problem. The stock holder is the principal, the Chief Executive Officer (CEO), for instance, is an agent. In theory, the problem is how to structure executive pay and corporate incentives such that in value of stock is maximized. (I gather that in this theory, social norms about how stockholders, traders, and executives should behave doesn't come into it.) A supposed answer to the principal agent problem is to pay executives partly with stock options. They will then be encouraged to do their utmost to ensure the market price of the stock exceeds the price specified in their options.

References

• Peter L. Bernstein (2005) Capital Ideas: The Improbable Origins of Modern Wall Street, John Wiley & Sons.
• John Cassidy (2002) "The Greed Cycle: How the Financial System Encouraged Corporations to go Crazy", The New Yorker (Sept. 23): pp. 64-
• Michael C. Jensen and William H. Meckling (1976) "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure", Journal of Financial Economics, V. 3, N. 4
• Meron H. Miller (1988) "The Modigliani-Miller Propositions After Thirty Years", Journal of Economic Perspectives, V. 2, N. 4 (Fall): pp. 99-120.
• Franco Modigliani and Merton H. Miller (1958) "The Cost of Capital, Corporation Finance, and the Theory of Investment", American Economic Review, V. 48, N. 3 (June): pp. 655-669

We Have Ideas Yet...

...That we haven't tried.

Ian Parker has an article, "The Poverty Lab", in this week's(May 17, 2010) issue of The New Yorker. This article is a profile of Esther Duflo, this year's winner of the John Bates Clark award and a co-founder of the Abdul Latif Jameel Poverty Action Lab (J-PAL). J-PAL conducts controlled experiments in the field in developing countries.

This is neat work. As I understand it, it can be extended. Does J-PAL conduct experiments designed to implement more than one treatment at once? In such experiments, one would analyze the results with Analysis Of Variance (ANOVA), instead of a T test (or the Mann-Whitney-Wilcoxon test, which is the corresponding nonparametric test). This would probably be challenging on the scale of their experiments, but part of the point of the design of experiments is to allocate resources efficiently.

Field experiments, in some sense, are an extension of the methodology of laboratory experiments, seen in the work of, for example, Daniel Kahneman and Amos Tversky. The design of experiments could also be extended back into theory by applying it to simulations and computer programs implementing theoretical models. Duflo's work tells us about the world, while this would tell us more about economic theory. I'm thinking of Stefano Zambelli's work on aggregate production functions.

A Nonergodic, Stationary Random Process

1.0 Introduction
Joan Robinson famously distinguished between economic models set in logical and historical time. According to Robinson, the distinguishing feature of Keynes’ General Theory is its setting in historical time. Building on Paul Davidson, one might say that one sign that a model is set in historical time is that it generates nonergodic stochastic processes.

This post explains that claim somewhat by presenting a simple example of a stationary nonergodic stochastic processes, namely a Spherically Invariant Random Process (SIRP).

2.0 Spherically Invariant Random Processes (SIRPs)
A stochastic process, {X(i), i = 0, 1, ..., n - 1}, is an indexed set of random variables. Typically, the index is taken to be time. Each random variable X(i) has an associated probability distribution, which can be specified by a Cumulative Distribution Function (CDF):

F_i(x) = Prob( X(i) ≤ x),

where F_i is the CDF. The derivative of the CDF is the Probability Density Function (PDF). (I guess differentiation, in this sense, is the inverse operation of Lebesque-Stieltjes integration.)

If the stochastic process {X(i), i = 0, 1, ..., n - 1} is a SIRP, it can be represented as the product

X(i) = Y Z(i), i = 0, 1, ..., n - 1,

where Y is a random variable not indexed on time and Z(i) is from a Gaussian distribution with a mean of zero.

2.1 A Single Realization
To consider an example, I picked a distribution for Y, namely the Chi distribution. (A random variable is from a Chi distribution if it is the square root of a random variable from a Chi Squared distribution.) Arbitrarily, I set the degrees of freedom of the corresponding Chi Squared distribution to be 2. For simplicity, let the variance of the normally distributed random variables {Z(i), i = 0, 1, ..., n - 1} be unity.

Figure 1 shows 100 time samples generated from this stochastic process. A single realization y of the Chi distribution is generated for each realization of the SIRP. The time samples consist of the product of this value and 100 realizations generated from a standard normal distribution. Figure 2 is a histogram formed from these 100 time samples. Does the histogram look bell-shaped?

Figure 1: A Realization of a Random Process

Figure 2: Distribution Over Time

2.2 Many Realizations
I generated 100 realizations of this SIRP, each consisting of 100 time samples. Consider a fixed time sample, say i = 4. The 100 realizations of the SIRP allow one to create a sample of the value of the SIRP at this time sample. Figure 3 shows the resulting distribution. The distribution shown reflects variation resulting from the Chi distribution, as well as the variation in the Gaussian distribution. I don’t find it obvious to the eye that this distribution is peaked differently (has a different kurtosis) than a Gaussian distribution.

Figure 3: Distribution Across Realizations

2.3 Nonergodic Stochastic Processes
Figures 2 and 3 are constructed from two random samples, each of 100 points. These samples can each be used to estimate parameters of the stochastic process – for example, the CDF at specified values. If the stochastic process were ergodic such estimates would converge as the sample sizes increased. That is, an estimator based on a large enough number of time samples from a single realization would be equally as good, in some sense, as an estimator based on data across a large enough number of realization at a specified time sample.

But this SIRP is nonergodic. Figure 4 shows the CDFs estimated from the two random samples. The Kolmogorov-Smirnov statistic provides a formal statistical test for deciding whether the difference between these two estimates of the CDF can be explained by random variation. And that test rejects the null hypothesis at a 5% level of statistical significance. To summarize – this post has presented a Monte Carlo demonstration that a SIRP can be nonergodic. The question raised for the economist is whether their theories apply if stochastic processes observed in actual economies (for example, the prices of stocks) are nonergodic.

Figure 4: Empirical Cumulative Distribution Functions (CDF)

References

• Paul Davidson, "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes", Journal of Post Keynesian Economics, V. V, N. 2 (Winter 1982-83): 182-198.
• Joan Robinson, "History versus Equilibrium", in Contributions to Modern Economics, Blackwell (1978)

My Fame

A couple of weeks back, some silly anonymous commentators on Tyler Cowen's blog wrote:

"Who gives two [esses] what Robert Vienneau thinks about anything?"

and

"...and Robert Vienneau is a self-published hack."

And last week, Econ Job Market Rumors witnessed this typically enlightening exchange:

"Robert Vienneau is a [effing] retard."

"Why?"

"Still complaining that GE theory doesn't deal with reswitching and other sraffian critiques when it clearly does."

I don't know what that response is about. I follow Barkley Rosser, Jr., in thinking that reswitching points to the possibility of some interesting dynamics in General Equilibrium models. And I know of no adequate response to Fabio Petri's critique of General Equilibrium theory, particularly what he calls the impermance problem.

This has nothing to do with me. But I thought I'd quote it for an illustration of a completely wrong opinion:

"A related paper of interest is Mas-Collel (1989), 'Capital Theory Paradoxes: Anything Goes,' which notes that the 'problems' coming from aggregating capital are very much related to the Anything Goes theory of Sonnenschein-Mantel-Debreu, and about as problematic to neoclassical theory (meaning, not very problematic)."

Empirical Results in a Whig History of Mainstream Economics

A comprehensive history of physics would not be only about changing ideas and the social setting in which they evolved. It would include stories of many experiments. One might talk about Galileo, the moons of Jupiter, inclined planes, and pendulums. One would have experiments that demonstrate a result long after physicists became convinced of it for other reasons. I think Foucault'a pendulum and the rotation of the earth falls into this category. And one would have empirical results that were cited at times of paradigm shifts - for example, the Michelson Morley experiment and precession of Mercury's orbit for Einstein's theory of special and general relativity, respectively.

What would go into a corresponding history of economics? I suppose one would mention unemployment in the Great Depression and stagflation during the 1970s. Notice these phenomena are not controlled experiments. Vernon Smith's experiments would enter into such a history. I'm not sure where Kahneman and Tversky's prospect theory would go. I suppose it is a triumph for neoclassical economics that it can be formulated sufficiently rigorously that it can be shown experimentally to be false. I suppose natural and field experiments are too recent to get a good historical perspective on. Looking back, one might mention Wesley Clair Mitchell and the National Bureau of Economic Research. I like Wassily Leontief's work. One might mention Richard Stone and work on setting up the system of national accounts. But, as far as I am aware, this gathering of a body of empirical data is not tightly linked to changes in economic theory. What am I missing?

Lord Skidelsky on Hayek versus Keynes

Just something to add to my references if I ever manage to publish my critique of Austrian Business Cycle theory:

"The Achilles heel in Hayek’s position was that his remedy of Nature's cure was politically unacceptable. But it was also analytically incoherent, as Piero Sraffa pointed out, in a devastating review of Price and Production in 1932. Sraffa singled out for attack Hayek's claim that a structure of production built on credit was less stable than one built on voluntary saving. Credit creation, he argued, produced an increased flow of voluntary saving on the part of those who received credit facilities. So there would never be a shortage of voluntary saving. Thus Hayek's account of the genesis of the slump collapses. Admittedly, Sraffa's argument is incomplete, since, like Keynes at the time, he assumed full employment, and thought of credit creation as redistributing income from wage earners to entrepreneurs. But this was Hayek's line, too. Sraffa was accepting Hayek’s assumption, and making a nonsense of it." -- Robert Skidelsky, "Interpreting the Great Depression: Hayek versus Keynes", prepared for the INET Conference, Cambridge University, 8-11 April 2010

Silly People Carrying Signs

On 15 April, I went to laugh at a local "Tea Party" rally.

Figure 1: Stupid and Proud of It

Figure 2: I'd Rather Discuss Marxism with My Dining Room Table

Figure 3: Against the War

Reasons To Be Cheerful

I look at the speakers (here and here)at the Institute for New Economic Thinking conference that just concluded at King's College, Cambridge. And I see a number of economists I consider heterodox: Sheila Dow, John Eatwell, Duncan Foley, James Galbraith, Tony Lawson, and Philip Mirowski. (You can download selected papers at those sites.)

Not that this addresses Benjamin's worries about whether the institutional structure that George Soros seems to to be setting up will be as open to new ideas and pluralism as it might be.

Eruption of Discussion on Austrian School Economics

• Martin Wolf, of the Financial Times asks whether Austrian economists have a superior understanding of financial crises. (Having him ask this on April Fools Day doesn't help my case that Austrian Business Cycle Theory is still worth refuting.)
• Paul Krugman answers and clarifies.
• Brad DeLong answers. (I don't like that Brad makes Austrian school economics to be almost solely a matter of policy advocacy with little supposed analytical content behind it. That may be how Ron Paul and random internet-based commentators put it, but something different can be found in old literature.)
• Tyler Cowen comments. (I think the point is to throw out ABCT.)
• What do you think of this old post from Peter Boetke? Does he get at a fundamental weakness of mainstream price theory in lacking any convincing dynamics?

Deluded With A Myth

"Nothing is more likely than that the verbal expression of the result of a mathematical proof is calculated to delude us with a myth." -- Ludwig Wittgenstein, Remarks on the Foundations of Mathematics (1978) Part III., 26.

"Justin Fox sums up the overwhelming majority of economics papers in one sentence:

'The basic form of an academic economics paper is a couple of comprehensible paragraphs at the beginning and a couple of comprehensible paragraphs at the end, with a bunch of really-hard-to-follow math or statistical analysis in the middle.'

What he doesn't (need to) mention is the way that journalists, myself included, read economics papers: we generally have no ability or inclination to try to understand the details of the formulae and regression analyses, so we confine ourselves to reading the stuff in English, and work on the general assumption that the mathematics is reasonably solid." -- Felix Salmon

The problem isn't that one has no good basis for thinking this assumption true. Rather, the problem is that lots of evidence indicates this assumption is false.

For example, macroeconomists will claim to be presenting models with microfoundations, and thus invulnerable to the Lucas critique. Typical assumptions in such models included the existence of only one good and of a representative agent. The one good serves as both a means of production and a consumption good. The agent decides how much of the good in each period to allocate to consumption and to the accumulation of capital. The Cambridge Capital Controversy and the Sonnenschein-Mantel-Debreu results show this approach lacks microfoundations.

Some economists might say this is old news. For example, they might point to models supposedly with heterogeneous capital goods. But some of these lauded models use the quantities of the capital goods, as measured in numeraire units, as arguments in production functions. Economists who model "heterogeneous" capital in this way typically seem to be ignorant of the impact of price Wicksell effects.

Further, Philip Mirowski has shown that economists fail to investigate the conservation laws built into their equations.

As with economists themselves, journalists covering developments in academic economics vary in their understanding of the theoretical issues embodied in the math. Chris Hayes made quite a splash with his Nation article a couple years ago on heterodox economics. John Cassidy examines, for example, the impact of the Sonnenschein-Mantel-Debreu results, on general equilibrium theory, in his book, How Markets Fail: The Logic of Economic Calamities. (I haven't read Justin Fox's book.)

Bracketology Combinatorics

This is combinatorics, not economics. I suppose this sort of math is useful for political science in calculating power indices.

Consider a single-elimination tournament with 2ⁿ teams entered. Ignoring the play-in games, n is six for the NCAA basketball tournament. Some tournaments have "bys" on the first round, and I am ignoring that aspects of those tournaments too.

Let f(n) be the number of ways of filling out your brackets for the tournament. The problem considered here is to calculate f(6).

Since 2ⁿ teams are in the tournament, 2^{n - 1} games are played in the first round. Since there are two possible victors for each game, there are 2^{(2n - 1)} possible ways of filling out your brackets for the first round. The total number of ways of filling out your brackets is then:

f(n) = 2^{(2n - 1)} f(n - 1)

One could guess a closed-form solution for this difference equation and prove it correct by mathematical induction. If I recall correctly, generating functions are useful in finding the solution to such recurrence relations. But, since I am only interested in a few terms, I adopt the brute force calculations shown in Table 1.

Table 1: Tournament Counts

n	Number of Teams	2(2n - 1)	Ways of Filling Out Brackets
1	2	2	2 = 21 = 100.301
2	4	4	8 = 23 = 100.903
3	8	16 = 24	128 = 27 = 102.11
4	16	256 = 28	215 = 104.515
5	32	216	231 = 109.33
6	64	232	263 = 1019.0

Suppose, by some luck of the draw, you correctly chose the 32 winners of all the first round games. There would still be over one billion (10⁹) possible ways of filling out the remainder of the brackets. Even if everybody in the world filled out a bracket for the full tournament, the overwhelming majority of possible brackets would still be unfilled.

Lo and Mueller's Need for More Scholarship

Consider Andrew W. Lo and Mark T. Mueller's draft paper "WARNING: Physics Envy May Be Hazardous To Your Wealth!", to appear in the Journal of Investment Management. They argue that economists' "physics envy" has led to "a false sense of mathematical precision in some cases", and they illustrate their argument by pointing to Paul Samuelson. They distinguish between uncertainty and risk and offer a checklist to assess the degree of uncertainty in your decision-making environment. They mention chaotic dynamics.

I find their references lacking. They don't reference Philip Mirowski, particularly his book More Heat Than Light in which he considers Samuelson. They do reference Frank Knight's Risk, Uncertainty, and Profit, but not Keynes. They do not reference G. L. S. Shackle and his role on the development of scenario planning. No reference to Joan Robinson appears. I think her 1974 paper "History vs. Equilibrium", with its distinction between logical time and historical time, is particularly apropos. Paul Davidson's 1982 JPKE paper, "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes" is also of some importance, with its emphasis on the mainstream economist's assumption of ergodicity. J. Barkley Rosser, Jr., with his treatment of insights from complex dynamics, is also unreferenced.

I don't see why one would want to read Lo and Mueller until they engage some of this literature on their point.

Me, Elsewhere

At NEP-DGE Blog, I commented on some post about some dynamic general equilibrium model explaining the distributions of wealth and income:

"Chapter 13 of Cockshott, Cottrell, Michaelson, Wright, and Yakovenko’s Classical Econophysics (Routledge, 2009) explains the distribution of income and wealth to some extent. They have social classes and are interested in statistical equilibrium, as in thermodynamics. I don’t know why one should care about what [one] can do in the failed neoclassical paradigm."

Over at Crooked Timber, I mentioned some books that I think were influential for me:

"I guess the Lord of the Rings is the book I’ve read the most times.

I read the Bible from cover to cover once at an early age.

One friend in college had a couple of serious books of physics. So, if I was going to spout off on politics, I ought to read some serious books on economics. The two I found in a used book store were Keynes’ General Theory (which I reread several times) and Von Neumann and Morgenstern’s Theory of Games. Part of the influence of these is to show me I can read original research, whether I understand it or not. I’ve read a number of books others have listed, but one can say that that’s a consequence of this lesson.

Somewhere I came across a reference to Joan Robinson as “the english Galbraith”. I had liked Galbraith, so I read her. I read a lot of her collections and then Sraffa’s Production of Commodities, as well as secondary literature such as Geoff Harcourt’s book, Some Cambridge Controversies. The lesson here is that almost everything economics professors were teaching me as an undergraduate had been shown to be mostly nonsense decades before.

Somewhere in here I read Schumpeter’s History and Hayek’s Individualism and Economic Order. Basically, I read Hayek before I found out right-wingers cite him without reading him. Why wouldn’t a leftist who has also read Orwell accept that Stalinist central planning couldn’t be expected to work well?

I had read a lot of commentary – I particularly like Harrington’s The Twilight of Capitalism – before reading Marx with understanding. I actually read Theories of Surplus Value before the first volume of Capital.

I found some works of economic history eye-opening – maybe Braudel’s Capitalism and Material Life, Hobsbawm’s The Age of Revolution: 1789-1848, or Polanyi’s The Great Transformation.

I’m not sure about what were the earliest works in philosophy that I think I might have understood somewhat – probably some Russell, Kuhn’s Structure of Scientific Revolutions, or Popper’s The Open Society and It’s Enemies. Wittgenstein’s Philosophical Investigations is on my list of books I’ve read multiple times."

With this exercise, you will see books on others lists that you maybe should have put on yours. Then there are all the books I haven't yet read, have unjustly forgot, or never understood in the first place. I'll refrain from commenting on any other comments on Crooked Timber, but I will note that young Matt Zeitlin includes Rorty's Achieving Our Country - a good book - on his list.

James Galbraith "In Defense of Deficits"

James Galbraith speaks up against "one of the great misinformation campaigns of all time":

"To put things crudely, there are two ways to get the increase in total spending that we call 'economic growth.' One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that's basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors--public deficits or private loans--has to be in action." -- James K. Galbraith, "In Defense of Deficits", The Nation, 4 March 2010

Historians and Philosophers on Empirical Failures of Neoclassical Economics

Empirical evidence went against neoclassical economics in the following three cases:

• Empirical studies and surveys of businessmen found that they followed a full cost policy, not marginalism
• Behavioral economists have accumulated a body of experimental evidence, including preference-reversals and violations of transitivity, that people are not utility maximizers.
• David Card and Alan Krueger found that increased minimum wages did not decrease employment.

These incidents present data for philosophers, historians, and sociologists of economics. They can explore how mainstream economists reacted to these empirical findings. And three have done just this. Daniel Hausman and Philippe Mongin compare and contrast the reactions to full cost pricing and preference reversals. Tim Leonard compares and contrasts the reaction of mainstream economists to their findings on full cost pricing and on the minimum wage. In keeping with current trends, these articles are descriptive, not prescriptive. That is, they try to understand the positions of participants without passing judgement.

References

• Daniel M. Hausman and Philippe Mongin (1998) "Economists' Responses to Anomalies: Full-Cost Pricing versus Preference Reveresals" [Should this link work?]
• Thomas C. Leonard (2000) "The Very Idea of Applying Economics: The Modern Minimum-Wage Controversyand Its Antecedents, History of Political Economy, V. 32, Annual Supplement: 117-144

Kaldor's Model of Industry and Agriculture

In comments, an anonymous poster asks:

Is the Kaldorian model on industrial and General productivity in an economy applicable in understanding economic development in LDC's like Zambia?

I don't know anything about Zambia.

As I understand it, Kaldor developed that model for the world as a whole. Thirlwall applied that model to a Less Developed Country in a 1986 paper.

In the model, labor is originally not scarce - there is disguised unemployment in agriculture. Industrial production, unlike in agriculture, experiences increasing returns. If wages are low in agriculture, there would be more savings to finance expansion of industry. But there might not be the demand for industrial products. Demand for industrial products is increased by a relatively low price of industrial products, as compared to the price of agricultural products. Demand for industrial commodities might also be for exports. A dynamic equilibirum arises in the model in which a steady state of growth is achieved and the terms of trade between agriculture and industry are specified. The model is supposed to capture certain stylized facts and exhibit a certain complementarity between agriculture and industry. It is also supposed suggest different possibilities, such as the possibility of economic development from favorable terms of trade for agriculture at an initial stage and export-oriented growth at a later stage.

Later essays in Thirlwall's book in which his essays was reprinted treat Africa, particularly the Sudan. This empirical work treats some other considerations than those included in the mathematical outlined verbally above. I don't know current thinking about these issues, although I question the thinking that had been dominant in the Internation Monetary Fund, that is, the "Washington consensus".

• A. P. Thirlwall (1986) "A General Model of Growth and Development on Kaldorian Lines", Oxford Economic Papers (July) (Reprinted in The Economics of Growth and Development: Selected Essays of A. P. Thirlwall, Edward Elgar (1995))

Anti-Intellectualism Among Mainstream Economists

I find these comments to be anti-intellectual:

• John Quiggin rejects the Austrian school of economics on the ground that partisans of that school discuss political philosophy and the epistemology and methodology of economics.
• Roberto Perotti critizes Post Keynesians and neo-Ricardians on the grounds that they don't spend their time exclusively constructing formal models and estimating correlations. (I used Google's translation feature. Sergio Cesaratto answers from a Sraffian perspective.)
• Commentators at Mark Thoma reject discussions about what Adam Smith wrote.

I thought the point of scholarship was to attempt to make true statements. If somebody makes an untrue statement about what Keynes or Adam Smith said, one should correct them. This is not to say that that the fact that Keynes or Smith advocated something or other is a justification for policy. I think a historically accurate representation of an old text entails quite a bit of contextualization in terms of its time. To apply policy conclusions to our time would require recontextualization in contemporary terms, as well as empirical work.

I would think different scholars, even within a discipline, would find different questions of interest. Some economists argue for a supposed freedom to choose. Shouldn't some then be legitimately allowed to explore old texts or methodology or whatever? If Thomas Kuhn was somewhat correct, wouldn't one expect more discussion about methodology when the defining paradigm in a field has so obviously broken down, as today among mainstream economists?

On Sraffa, Elsewhere

Alex M. Thomas has begun a series of posts about Piero Sraffa's work in economics.

Survey of Utility Theory?

1.0 Introduction
I think utility theory has a canonical textbook presentation. Many variations seem to exist. In some, the additional structure is imposed on the (commodity?) space over which agents choose. In others, more basic assumptions are made from which preferences can be derived under certain special cases.

I'd like to know if there are any surveys to read over these variations. I'm not insisting on something critical. And, given the dryness of the subject matter, I might not put such a survey on top of my queue. As can be seen below, I'm not sure of the field that would be demarcated by such a surveys. But literature surveys, in some sense, construct their object.

2.0 Textbook Treatment
Consider a space of n commodities. Each element of the space is a vector x = (x₁, x₂, ..., x_n). Under the usual interpretation, x_i is the quantity of the ith commodity.

An agent is modeled as having a preference relation, ≤, over the space of commodities. A typical question is what assumptions must hold for a utility function to exist. A utility function u(x) exists if, for all x and y in the space of commodities:

x ≤ y if and only if u(x) ≤ u(y)

Typically, the preference relation is taken to be a total order, that is, complete, reflexive, and transitive. A preference relation is complete if, for all x and y in the space of commodities,

x ≤ y or y ≤ x

A preference relation is reflexive if, for all x in the space of commodities

x ≤ x

A preference relation is transitive if, for all x, y, and z in the space of commodities,

if x ≤ y and y ≤ z then x ≤ z

If the quantities of commodities fall along a continuum, a preference relation being a total order is not sufficient for a utility function to exist. Lexicographic preferences are an example of a preference relation for which a utility function does not exist. A continuity assumption rules out this case. This assumption is that for all x in the space of commodities, the sets {y | y ≤ x} and {z | x ≤ z} of commodities not preferred to x and commodities x is not preferred to, respectively, are closed.

Theorem: If a preference relation is a total order and is continuous in the above sense, then a utility function exists.

The utility function is only defined up to a monotonically increasing transformation. In other words, utility is ordinal. Typical exercises are to show certain properties of utility functions, such as ratios of marginal utilities (du/dx_i)/(du/dx_j), are invariant over the set of such transformations.

3.0 Probability
Von Neumann and Morgenstern generalized the commodity space to include vectors of the form: (p₁, x⁽¹⁾; p₂, x⁽²⁾; ..., p_m, x^(m)), where:

p₁ + p₂ + ... + p_m = 1

A commodity, in this sense, is a lottery. Each superscripted commodity vector x⁽ⁱ⁾ is associated with a probability p_i that it will be chosen.

Von Neumann and Morgenstern defined a new set of axioms to go along with their redefined commodity space. One implication is that for any two elements x and y in the commodity space, the linear combination (p, x; (1 - p), y) is also in the space. They obtain that a utility function exists, and it acts like mathematical expectation:

u(p₁, x⁽¹⁾; p₂, x⁽²⁾; ..., p_m, x^(m)) = p₁ u(x⁽¹⁾) + p₂ u(x⁽²⁾) + ... + p_m u(x^(m))

Under Von Neumann and Morgenstern's approach, utility functions are only defined up to affine transformations. That is, they are cardinal. In other words, they attain an interval measurement scale level. The utility for a lottery depends only on the probabilities and the resulting outcomes. It does not depend on how many spins of the wheel or roll of the dice are needed to decide between otherwise equivalent lotteries. Gambling is assumed to have no utility or disutility.

Leonard Savage develops axioms of probability concurrently with axioms of utility theory in his personalistic approach to probability and statistics. I'm not sure how much the survey I would like would go into approaches to probability, even if probability is important to decision theory. The same comment applies to game theory.

4.0 Attributes and Needs
Some see commodities as being chosen as an indirect means to choose something more abstract. As I understand it, Kevin Lancaster depicts a commodity as a bundle of attributes. Different commodities can have some attributes in common. A choice of an element in the space of commodities can then be related to an element in a space of commodity attributes.

The early Austrian school economists thought of goods as being desired for the satisfactions of wants. Water, for example, can be used to water your lawn, to satisfy a pet's thirst, or to drink yourself. One can imagine ranking wants in disparate categories. I am thinking of the triangular tables in Chapter III of Carl Menger's Principles of Economics, in Book III, Part A, Chapter III of Eugen von Böhm-Bawerk's Positive Theory of Capital, and in Chapter IV of William Smart's An Introduction to the Theory of Value. The tables are triangular because the most pressing want in one category typically is less pressing than the most pressing want in another category. An element in the space of commodities corresponds to the set of wants that the agent would choose to satisfy with the quantities of commodities specified by that element.

This mapping from quantities of commodities to sets of wants leads to a redefinition of marginal utility, which one might as well designate by a new name - marginal use. The marginal use of a quantity of commodity is, roughly, the different wants that would be added, with a set union, to the set of wants satisfied by the the given quantities of commodities with that additional quantity of the given commodity. McCulloch shows that a ranking of wants in different categories can arise such that a measure does not exist for the space of sets of wants. (A measure in this sense is a technical term in mathematics, typically taught in courses in analysis or advanced courses in the theory of probability.) He argues that the Austrian theory of the marginal use is thus ordinal. Surprisingly, his argument implies that the law of diminishing marginal utility does not require utility to be measured on a cardinal scale.

I haven't read Ian Steedman's work on consumption, but I think I'll mention it here.

5.0 Choices from Menus
Another generalization of the textbook treatment is to examine how a preference relation can be built out of a more fundamental structure. Imagine the agent is presented with a menu, where a menu is a nonempty set of elements of the commodity space. The agent is assumed to have a choice function, which maps each menu to the set of best choices, in some sense, in that menu. The agent is not postulated to rank either the elements not chosen for a given menu or the elements in the choice set.

A question: what constraints need to be put on choices out of menus such that preferences exist? Since a choice function can be constructed for which no preference function exists, some such constraints exist. I previously noted literature drawing on the logical structure of social choice theory in this context. Alan Isaac emphasizes temporal and menu independence in his overview of abstract choice theory.

6.0 Experimental Economics
I am emphasizing theory. A literature exists on experiments, many of which have falsified the textbook treatment of economics.

7.0 Computatibility, Conservation Laws, Etc.
Some of the above extensions of the textbook treatment seem to postulate some sort of structure within the agent's mind. Computers provide an arguable metaphor of mental processes, and some literature applies the theory of computability to economics. Gerald Kramer, for example, shows that no finite automaton can maximize utility in the simplest setting. I gather others have shown that the textbook treatment postulates that each agent's computation powers exceed those of a Turing machine, that agents compute functions that are, in fact, noncomputable. I turn to Kumaraswamy Velupillai's work for insights into computability, constructive mathematics, and economics. Philip Mirowski is always entertaining. One might also mention the literature on Herbert Simon's notion of satisficing

8.0 Conclusion
This post is a brief overview of some of what would be treated in a survey of variations and approaches to utility theory. Apparently, the notion of economic man can be complicated.

An Incomplete List of References

• Colin F. Camerer (2007) "Neuroeconomics: Using Neuroscience to Make Economic Predictions", Economic Journal, V. 117 (March): C26-C42.
• Alan G. Isaac (1998) "The Structure of Neoclassical Consumer Theory"
• Daniel Kahneman and Amos Tversky (1979) "Prospect Theory: An Analysis of Decision under Risk" Econometrica, V. 47, N. 2 (March): pp. 263-292
• Gerald H. Kramer () "An Impossibility Result Concerning the Theory of Decision-Making", Cowles Foundation Paper 274
• Kevin J. Lancaster (1966) "A New Approach to Consumer Theory", Journal of Political Economy, V. 75: pp. 132-157.
• J. Huston McCulloch (1977) "The Austrian Theory of the Marginal Use and of Ordinal Marginal Utility", Journal of Economics, V. 37, N. 3-4: pp. 249-280.
• Judea Pearl (1988) Probabilistic Reasoning in Intelligent Systems: Networks of Plausible Inference, Morgan Kaufmann
• Leonard J. Savage (1954, 1972) The Foundations of Statistics, Dover Publications
• Chris Starmer (1999) "Experimental Economics: Hard Science or Wasteful Tinkering?" Economic Journal, V. 109 (February): pp. F5-F15
• Ian Steedman (2001) Consumption Takes Time: Implications for Economic Theory, Routledge
• S. Abu Turab Rizvi (2001) "Preference Formation and the Axioms of Choice", Review of Political Economy, V. 13, N. 12 (Nov.): pp. 141-159
• John Von Neumann and Oskar Morgenstern (1953) Theory of Games and Economic Behavior, Third Edition, Princeton University Press

Labor Market Flexibility

Some mainstream economists claim that unemployment would be less if labor markets were more flexible and less rigid. In a 1998 paper arguing against this view, Bob Solow explains what this labor market rigidity that so many mainstream economists, especially "freshwater" economists, want to abolish is:

"My first observation is that 'labour-market rigidity' is never defined very precisely or directly in this context, but only be enumeration of tell-tale symptons. Thus a labour market is inflexible if the level of unemployment-insurance benefits is too high or their duration is too long, or if there are too many restrictions on the freedom of employers to fire and to hire, or if the permissible hours of work are too tightly regulated, or if excessively generous compensation for overtime work is mandated, or if trade unions have too much power to protect incumbent workers against competition and to control the flow of work at the site of production, or perhaps if statutory health and safety regulations are too stringent. It seems clear that those who point to labour-market rigidity as the source of high unemployment have something other than simple nominal or real wage rigidity in mind, or so shall I assume." -- Robert M. Solow, "What is Labour-Market Flexibility? What is it Good for?", Proceedings of the British Academy, V. 97

As I understand it, many of these "rigidities" were put in place in the United States context around the time of the New Deal with the cooperation and assistance of Institutionalist economists, a school with some sense of the real world.