I Have Only Come Here Seeking Knowledge, Things They Wouldn't Teach Me Of In College

Perhaps some would like to read more practical policy advice and less abstract arguments that I usually point to in my posts. Many organizations present papers, talks, symposia, and so. Some draw on economists I also draw on. Among these are:

• The Bernard Schwartz Center for Economic Policy Analysis (I cannot find Paul Davidson's recent papers here. I know he has one about the housing market, for example.)
• The Center for Economic and Policy Research (CEPR)
• The Center for Full Employment and Price Stability, a research center at the University of Missouri at Kansas City
• The Economic Policy Institute
• The Levy Economics Institute of Bard College
• The Political Economy Research Institute is affiliated with the University of Massachusetts at Amherst

Non-Teaching Of Empirical Superiority Of Non-Neoclassical Theory: Sources For A Case Study

Stephen Marglin is a professor of economics at Harvard. As I understand it, he was just starting out when several promising Harvard professors went on an exodus to Amherst. And Marglin became tenured before he decided that Marx had more to say than neoclassical economics.

He wrote a very interesting book, which Harvard published in 1984. It contains an extensive theoretical investigation of an open model with at least three possible closures. Here is a comment on some of that theory:

"There are, in short, two marginal-productivity theories. There is first of all a general theory that assumes nothing more controversial than continuous substitution, constant returns to scale, and competitive profit maximization. This theory, far from being unique to one school of thought, is - or at least ought to be - the common property of all three approaches ['neo-Keynesian', 'neo-Marxian', and 'neoclassical']. The second marginal-productivity theory adds the assumption that sooner or later, in the long run if not in the short, the wage rate clears the labor market and ensures full employment. This version of marginal productivity theory, the special theory, is manifestly the property of the neoclassical model. Neo-Marxians and neo-Keynesians wouldn't touch it with a ten-foot pole." -- Stephen A. Marglin (1984). Growth, Distribution, and Prices, Harvard University Press: 223.

Marglin's "Neo-Keynesian" model contains the theory of distribution developed by Richard Kahn, Nicholas Kaldor, Luigi Pasinetti, and Joan Robinson in the late 1950s and early 1960s. Marglin's neoclassical model has intertemporal utility-maximization in an overlapping generations setting, but doesn't imply Marshall's principle of substitution or that prices are scarcity indices. That is, while logically consistent, it lacks the features that make the model intuitive and easy to apply.

Marglin looks at both long-run and short-run version of the models. Here he offers a judgement on the neoclassical model:

"Observe that even in neoclassical theory full employment alone is not enough to transform marginal-productivity relationships into a long-run theory of distribution. In long-run neoclassical theory, the capital:labor ratio is endogenously determined, so that the wage rate cannot be determined solely by marginal productivity of labor at full employment - not even in Chicago. Instead, distribution must reflect household preferences with respect to present and future consumption.

Thus, it is fair to conclude that there are two marginal-productivity theories. The first is a relatively innocuous, general theory that involves nothing more controversial than competitive profit maximization - and provides correspondingly little contribution to the theory of growth and distribution under capitalism. The second is more powerful, and very special, providing by itself a theory of distribution, for the short run at least, whose 'only' defects are (1) that it assumes full employment and (2) that it begs the question of accumulation. The wonder is that it is precisely this theory that so many students come away with from their study of economics. Only slightly more wondrous is that by and large they believe it!" - Stephen Marglin, ibid: 330-331

Marglin reports on some econometric evidence. Despite the differences in mechanisms driving value and distribution in the models and the difference in policy implications, it is sometimes difficult, Marglin notes, to draw different implications on the direction of effects in certain empirical applications, such as a shock to oil prices. He does find some contrasting implications when it comes to pensions. And he finds the neoclassical model does the worst, although he thinks his empirical findings are not decisive.

A couple of years ago, some Harvard students wanted to be seriously taught introductory economics, instead of the ideological propaganda that Marty Feldstein and now Greg Mankiw apparently teach. And they wanted to be able to take this course for credit. They asked Marglin to teach this revised Ec 10 course. I'm not sure how much Marglin planned to go into alternatives, or whether he would mention his empirical results. I do know that Harvard decided (again) no way would they permit future leaders of the United States to get an education about the sources of income and property.

Update: Originally posted 5 September 2006. The update is to highlight Ekaterina's comment.

Third World Bourgeoisies Failing In Their Historical Role

I find that Frantz Fanon and Michal Kalecki have similar ideas on the middle classes in many underdeveloped countries. They think that these middle classes are unlikely to fulfill their historical role.

That role is to innovate and to accumulate capital embodied in a massive productive infrastructure. An impressive rate of economic growth comes about when the middle classes fill that role, as in nineteenth century Europe:

"Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call theirs very little of the cake they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice." -- Keynes (1920: 19-20)

Here is Fanon doubting that third world middle classes will play their part:

”The national middle class which takes over power at the end of the colonial regime is an undeveloped middle class. It has practically no economic power, and it is in no way commensurate with the bourgeoisie of the mother country which it hopes to replace... The university and merchant classes which make up the most enlightened section of the new state are in fact characterized by the smallness of their number and their being concentrated in the capital, and in the type of activities in which they are engaged: business, agriculture, and the liberal professions. Neither financiers nor industrial magnates are to be found within this national middle class. The national bourgeoisie of underdeveloped countries is not engaged in production, nor in invention, nor building, nor labor; it is completely canalized into activities of the intermediary type. Its innermost vocation seems to be to keep in the running and to be part of the racket. The psychology of the national bourgeoisie is that of the businessman, not that of a captain of industry... Under the colonial system, a middle class which accumulates capital is an impossible phenomenon.” -- Fanon (1963)

Fanon has much more to say long these lines.

And here is Kalecki saying something similar:

”At the time of achieving independence the lower-middle class is very numerous while big business is predominately foreign controlled with a rather small participation of native capitalists...

...a well known historical pattern – the final submission of the lower-middle class to the interests of big business. This, however, is prevented by the weakness of the native upper-middle class and its inability to perform the role of ‘dynamic entrepreneurs’ on a large scale.” -- Kalecki (1967)

Apparently, this was a quite influential essay from Kalecki.

References

• Franz Fanon (1963). The Wretched of the Earth (Trans. by Constance Farrington), Grove Weidenfeld
• Michal Kalecki (1967). "Observations on Social and Economic Aspects of 'Intermediate Regimes'", Coexistence, V. IV, N. 1: 1-5 (Reprinted in Michal Kalecki (1976). Essays on Developing Economies, Harvester Press.)
• John Maynard Keynes (1920). The Economic Consequences of the Peace, Harcourt, Brace, and Howe

Some Of Samuelson's Textbook On Reswitching

I'm not sure I've ever read any edition of Paul Samuelson's introductory textbook cover to cover. I know I haven't since I've read Sraffa. I've previously commented on Samuelson's appreciation of Robinson and Sraffa in some of his research papers. Charles would like to know how that appreciation has influenced Samuelson in his role as textbook writer. I happened to have looked into this question a number of years ago.

My local library has a copy of the tenth edition of Samuelson's Economics, from 1976 (with assistance from Peter Temin). In an early chapter, Samuelson distances himself from the notion that interest is a reward to a contribution to production, while not exactly denying this idea:

"Part Four will show that, just as wages and rent are the factor-prices of primary labor and land, the 4 or 6 or 10 per cent interest rate per annum can, in a more subtle way, be regarded by the apologists for capitalism, as the factor-price that rations and rewards society's scarce supply of various capital goods and investment projects." (Chap. 3)

Part 4 begins with the statement that the theory of distribution is controversial:

"The theory of distribution is still in an unsettled state." (Chap. 27)

Samuelson says the issue is how much of distribution can be explained by market forces and how much by power.

In Chapter 27, Samuelson explains distribution with a model with labor and land. He later introduces capital goods and argues that, in equilibrium, the marginal product of capital is equal to the "price charged for use of capital good." This is distinguished from the interest rate. Chapter 27 also presents the "aggregate american production function."

Chapter 30 is more explicitly about capital. Samuelson talks about "roundabout processes." Samuelson also says:

"At this point we can greatly simplify the exposition of the traditional theory if we agree to concentrate on the case where all physical capital goods are exactly alike and highly versatile." (Chap. 30)

An appendix to Chapter 30 has a section titled, "Reswitching and all that", with a footnote:

"This section may be skipped. Footnote 5's fine point provided an example of reswitching for a durable machine."

I don't recall that I found all these distinctions when dipping into later editions. As I recall, Samuelson deleted that appendix and all mentions of reswitching. He had firms "usually" adopting more capital-intensive techniques at lower rates of interest. I read that qualification as referring to the Cambridge Capital Controversy, but did not see how students could get that. They might read Samuelson as merely acknowledging the possibility of entrepenuers making mistakes.

On Arguments Not Of A Logical Type

"The critique of Robinson and Sraffa is more than forty years old. Yet for psychological and political reasons, rather than for logical and mathematical ones, the capital critique has not penetrated mainstream economics. It likely never will. Today only a handful of economists seem aware of it. Aggregate production function applications run rampart in studies of economic growth (new growth theory), development and convergence, and international trade (factor-price equalization and other applications of Heckscher-Ohlin). Ostensible liberals are not exempt; their arguments for higher public infrastructure investment (based on its alleged marginal productivity) are precisely of this type, as are arguments for increased investment in education based on the higher marginal productivity of human skill. To mainstream economics, Keynesianism has been reduced to a narrow doctrine relating sticky wages, public spending, and employment. The fact that there exists a Post Keynesian distribution theory, still less the reasons for it, has been mostly forgotton." -- James Galbraith, "The Distribution of Income". In A New Guide to Post Keynesian Economics, 2001.

"It should not be asked why the post-classical theory has been so determined in rejecting, or so astute in avoiding, the capital theory criticism raised against it; it should instead be asked why that criticism has been so ineffective to the point of being ultimately incapable of undermining currently dominant economic theory. Perhaps the question which should be asked is whether a purely logical critique could undermine a theory with so many ideological implications. That question – one that invites no small irony when asked about a tradition of economic theorising that prides itself on having excluded ethical values – surely deserves careful consideration." -- Guglielmo Chiodi and Leonardo Ditta (forthcoming)

Perception of Behavioral Economics

David Leonhardt, in the 2 January edition of the New York Times, describes behavioral economics as "a left-leaning academic movement that has challenged traditional neoclassical economics over the last few decades." I never thought of behavioral economics as particularly leftist.

(Peter Dorman comments on other aspects Leonhardt's article.)

Who Changes The Prices?

An assumption in neoclassical models of perfect competition is that all agents are price-takers. That is, they take prices on the market as parametric data. If everybody takes prices as given, nobody is left to change the prices. So, for example, in general equilibrium theory, one has to assume the existence of an auctioneer to oversee the tâtonnement process. No trading, consumption, and production can take place outside of equilibrium.

This is not an original criticism. Bernard Guerrien calls this problem "the logical flaw in micro theory" and "the principal bug in microeconomics". (I do not agree. Neoclassical microeconomics has so many bugs it seems hard to justify calling one, even though important, the principal bug.) Apparently Kenneth Arrow brought this problem up in 1959. ("Toward a Theory of Price Adjustment", in The Allocation of Economic Resources (edited by M. Abramovitz), Stanford University Press).

Qualms On Foreign Trade

"7.5. The idea that the opening of foreign trade bears a close resemblance to technical progress, in that in both cases additional processes of production are made available to the economy, is clearly expressed in Ricardo's Principles in the chapter 'On Foreign Trade'... Ricardo in fact compares the extension of trade to improvements in machinery, and, taking the real wage rate as given, investigates whether trade or improved machinery will have an impact on the general rate of profit. He concludes that if 'by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise,' whereas 'if the commodities obtained at a cheaper rate... be exclusively the commodities consumed by the rich, no alteration will take place in the rate of profits'...

7.6. In recent years the pure theory of trade has been reformulated, using a 'classical' approach to the theory of value and distribution and paying special attention to the fact that capital consists of produced means of production. A start was made by Parrinello (1970), followed by several contributions by Steedman, Metcalfe and Steedman, and Mainwaring... It was shown that several of the traditional trade theorems, derived within the Heckscher-Ohlin-Samuelson model, do not carry over to a framework with a positive rate of profit (interest) and produced inputs (capital goods). (As is well known, the Heckscher-Ohlin-Samuelson model of international trade assumes two countries producing the same two commodities by means of the same constant returns to scale technology, using the same two primary inputs, each of which is taken to be homogeneous across countries.) With a positive rate of interest that is uniform across countries some, though not all, of the standard theorems are undermined (including the 'factor price equalization theorem'), while with different rates of interest in different countries all standard theorems except the Rybczynski theorem turn out to be untenable. The 'gains' from trade for the single small open economy need not be positive. When in the Heckscher-Ohlin-Samuelson theory one of the two primary factors (land) is replaced by a factor called 'capital', the 'quantity' of which is represented in terms of a given total value of capital, then the theory is deprived of its logical coherence..." -- Heinz D. Kurz and Neri Salvadori, Theory of Production: A Long-Period Analysis, Cambridge University Press, 1995.

P.S. Some mainstream economists have recently expressed doubts about the empirical ability of the theory of comparative advantage and its use as a basis for policy. One can add Paul Krugman to the doubters.

Hoisted From Comments: Query On Foreign Trade

A reader asks:

"This is an unrelated discussion, but I was hoping that maybe you (or someone else reading this forum) could help me with a question that may also be of interest to you.

How does a standard neo-Walrasian CGE (computational general equilibrium) model predict economic losses from trade liberalisation?

I understand the logic behind the two goods and country case where welfare gains can be made through the elimination of trade barriers if there exists a comparative advantage (assuming the standard assumptions of perfect competition, constant returns to scale etc.), but how does the logic work with more than two countries and goods?

Is the answer simply that those countries which do not have a comparative advantage (in any or critical goods), experience welfare losses, because they are now importing more (due to lower prices abroad) and exporting less (trade is being diverted to other countries)?

Most (if not all) countries when getting the CGE treatment with full liberalisation scenarios, seem to make welfare gains. Is this because most countries have at least some comparative advantage in some goods, and the theory neglects any adjustment and transaction costs?

Some background on this question: I'm not an economist by trade, but rather study development studies, for which I'm writing a Master's Thesis. My strategy has been to use the Lakatosian methodological framework for studying the hardcore assumptions behind general equilibrium analysis. This has led me to study for example Keen's work, and Fabio Petri's (on the capital controversies) among others. Since I'm not concentrating on heuristics (and I'm not particularly mathematically inclined), I'm not familiar with all the implications of the standar neo-Walrasian theory (e.g. Arrow-Debreu) that the criticism, quite rightly it seems, is able to destroy by attacking its inconsistent or absurdly narrowed assumptions. To the standard unacquainted reader (for example my supervisor) it is however perhaps not only enough to attack the assumptions, but also be able to reduce the theory via its implications. I'm thinking that for a conclusion, I could write up a kind of characterisation of what the theory implies in the narrow sense and a wish list of what problems a perfect economic theory would be able to cover and account for as a contrast (perhaps a distant dream, but why not?)

Any ideas on the above would be appreciated.."

I don't know much about CGE models. I understand that commodities can be indexed in the Arrow-Debreu model on space, and this provides a theory of foreign trade. In the Arrow-Debreu model, the initial endowments of all commodities are taken as given data. This makes it a very short run theory. I was under the impression that the traditional argument about comparative advantage takes place in the Heckscher Ohlin Samuelson (HOS) model, which is a long run model.

Given the presence of produced capital goods and a positive interest rate, many supposed theorems in the HOS model are simply incorrect. In particular, trade according to the pattern of comparative advantage can move a country's Production Possibilities Frontier inward. Ian Steedman is a good author to read here. Perhaps your university library has a copy of the New Palgrave, and Steedman wrote the entry on "Foreign Trade". (I talked to Keen about these ideas before the publication of his book. He said that if he writes another edition, he might put in a chapter on foreign trade.)

I don't think comparative advantage explains the pattern of trade. A theory based on the Keynesian multiplier is another possibility. Literature here includes Luigi Pasinetti's Structural Economic Dynamics: A Theory of the Economic Consequences of Human Learning (Cambridge, 1993). Paul Davidson has proposed some reforms of the international monetary system. I have not read Ha-Joon Chang, neither his Bad Samaritans nor his Kicking Away the Ladder.

Two PDFs that I have downloaded from somewhere or other in the past year and have never got around to reading might be of interest. I am talking about Roberto Mangabeira Unger's Free Trade Reimagined and Robert Driskill's "Deconstructing the Argument for Free Trade".

Another body of literature that I have never explored is new trade theory, as presented by Paul Krugman. Given that comparative advantage fails to justify free trade, I don't see the point of that theory. As I understand it, new trade theory asserts incorrectly that comparative advantage would provide this justification if it were not for increasing returns or oligopoly or something. According to Barkley Rosser (in a 1996 book review in the Journal of Economic Behavior and Organization), Krugman claims more originality for his presentation than can be justified.

Anger Can Be Power

What I'm reading:

"The colonial world is a world cut in two. The dividing line, the frontiers are shown by barracks and police stations. In the colonies it is the policeman and the soldier who are the official, instituted go-betweens, the spokesmen of the settler and his rule of oppression. In capitalist societies the educational system, whether lay or clerical, the structure of moral reflexes handed down from father to son, the exemplary honesty of workers who are given a medal after fifty years of good and loyal service, and the affection which springs from harmonious relations and good behavior - all these aesthetic expressions of respect for the established order serve to create around the exploited person an atmosphere of submission and of inhibition which lightens the task of policing considerably. In the capitalist countries a multitude of moral teachers, counselors and 'bewilderers' seperate the exploited from those in power. In the colonial countries, on the contrary, the policeman and the soldier, by their immediate presence and their frequent and direct action maintain contact with the native and advise him by means of rifle butts and napalm not to budge. It is obvious here that the agents of government speak the language of pure force. The intermediary does not lighten the oppression, nor seek to hide the domination; he shows them up and puts them into practice with the clear conscience of an upholder of the peace; yet he is the bringer of violence into the home and into the mind of the native." -- Frantz Fanon, The Wretched of the Earth (1963).

Wages, Employment Not Determined By Supply And Demand

1.0 Introduction
One theme of this blog is that the introductory textbook model of the labor market is incorrect. Two recent papers make this point from the perspective of institutional economics.

2.0 The Impossibility of a Perfectly Competitive Labour Market
The abstract of the first paper under consideration states:

Using the institutional theory of transaction costs, I demonstrate that the assumptions of the competitive labour market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labour market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labour demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction costs and with zero transaction costs all labour is hired as independent contractors, implying that multi-person firms, the employment relationship and labour market disappear. With positive transaction costs, on the other hand, employment contracts are incomplete and the labour supply curve to the firm is upward sloping, again causing the labour demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price. -- Bruce E. Kaufman (2007). "The Impossibility of a Perfectly Competitive Labour Market", Cambridge Journal of Economics, V. 31: 775-787

Kaufman states that, "Institutional, post-Keynesian, radical and other heterodox economists have for many years expressed scepticism about the theoretical and empirical validity of the competitive model of labour markets." He cites the following literature:

• C. Kerr (1950). "Labour Markets: Their Character and Consequences", American Economic Review, V. 40 (May): 278-291
• G. Hodgson (1988). Economics and Institutions: A Manifesto for a Modern Institutional Economics, Philadelphia: University of Pennsylvania Press.
• D. Vickers (1996). "The Market: The Tyranny of a Theoretical Construct", in Employment, Economic Growth, and the Tyranny of the Market, (ed. by P. Aretis), Brookfield: Edward Elgar
• W. Streeck (2005). "The Sociology of Labour Markets and Trade Unions", in The Handbook of Economic Sociology (ed. by N. Smelser and R. Swedberg), 2nd edition, New York: Russel Sage
• S. Fleetwood (2006). "Rethinking Labour Markets: A Critical-Realist-Socioeconomic Perspective, Capital & Class, V. 107 (Summer): 59-89

As far as I can tell, none of these papers are about the Cambridge Capital Controversy, which is the basis of my favorite critique of the introductory textbook model of labor markets.

3.0 Professor Lester and the Neoclassicals
The abstract of the second paper follows:

"This article revisits what is remembered as the 'Marginalist Controversy' in light of its immediate context and object: the substantial late 1940s increase in the federal minimum wage. Richard Lester's critique of 'marginalist theory,' and its implication that the minimum wage would be detrimental to labor was founded upon empirical studies and surveys that supported an Institutionalist conception of the business firm, the labor market, and economic policy. His disputants, Fritz Machlup and George Stigler, countered his points on the basis of what they took to be 'economic theory'. By any measure, including those of their own intellectual allies, Machlup and Stigler faired poorly. Interestingly, they are collectively remembered as having been triumphant in this debate. The essay suggests that what triumphed was not their arguments but rather the Neoclassical school of economics that Stigler represented." -- Robert E. Prasch (2007). "Professor Lester and the Neoclassicals: The 'Marginalist Controversy' and the Postwar Academic Debate Over Minimum Wage Legislation: 1945-1950", Journal of Economic Issues, V. 41, N. 3 (September): 809-826."

I had not known that the context of the debate about full cost pricing included minimum wage policies. Prasch makes the point that neoclassicals often misrepresent their position as a defense of economic theory, instead of as of a specific theory. In addition to drawing on a specific school of thought, Institutionalist economics, Lester had survey data supporting his position that the typical firm does not operate in a region of increasing marginal cost. It is this sort of data, which has been repeatedly replicated, that Milton Friedman argued, in his famous paper on positive economics, should be ignored.

History Is A Nightmare From Which I Am Trying To Awake

Last year I bought my 12-year-old niece a novel. My sister-in-law says that as far as books goes, my niece likes memoirs and history, like The Diary of Anne Frank. I ended up buying my niece something other than a book. But I wonder what would be a good book to buy my niece.

I presented this to the salesperson at Barnes and Noble as, "Suggest a book like the Diary... about a girl growing up in troubled circumstances. She suggested Smashed: Story of a Drunken Girlhood. This does not seem a good answer to me. I haven't read Zailckas' book. From a review, I know she went to Syracuse University, and, for some reason, I think she may be a product of the Syracuse creative writing program. I have a vague impression that that program is quite good. The authors I associate with it write well about drunkenness and drugs.

I could always loan my niece a book from my collection. Perhaps my niece would like Eric Hobsbawm's The Age of Extremes: A History of the World, 1914-1991. I find the Russian names in Hope Against Hope confusing, even with the translator's or editor's appendix. Likewise, I think Antonio Gramsci's Letters from Prison is not understandable without quite a bit of knowledge of the historical setting. I seem to have mislaid my copy of Biko. I just bought The Mascot: Unraveling the Mystery of My Jewish Father's Nazi Boyhood and will not lend that away until I have read it.

I've loaned my copy of A Long Way Gone: Memoirs of a Boy Soldier to a young friend of mine. This was his choice in a selection I thought of after he told me about a somewhat autistic kid in his class: "He's even better at math than I am." I think I talked him out of The Curious Incident of the Dog in the Night Time by trying to explain the concept of a unreliable narrator. I don't seem to be able to sell Life As We Know It: A Father, A Family, And An Exceptional Child, including to my sister, who has children and a degree from University of Illinois at Urbana-Champaign.

A salesperson at Borders suggested Zlata's Diary: A Child's Life in Wartime Sarajevo. A librarian in Rome, NY, suggested Four Girls From Berlin: A Ture Story of a Friendship That Defied the Holocause and two novels: The Devil's Arithmetic and The Diary of Pelly D. Come to think of it, isn't the Speilberg film, The Empire of the Sun, based on a memoir?

Does anybody have any comments on any of the above books or any further suggestions?

Jeopardy!

The answer for 42-across in today's New York Times crossword puzzle is "Larry Summers". What do you think the clue should be? Will Shortz, the puzzle editor and an institution, is content with "Former president of Harvard". I think being former secretary of the treasury is more impressive, myself.

Rich Man Wanna Be King, And A King Ain't Satisfied 'Til He Rules Everything

I have a series of posts on the distribution of income, the distribution of wealth, income mobility, and related matters. I don't know Lane Kenworthy's work, but his blog, "Consider the Evidence", looks interesting. He describes himself as "a social scientist who studies causes and consequences of poverty, inequality, employment, mobility, economic growth, and social policy. [He] focus[es] mainly on the United States and other affluent countries."

More To Read

Apparently, Andrew Trigg has written a book Marxian Reproduction Schema: Money and Aggregate Demand in a Capitalist Economy (Routledge, 2006) on the topics of my post. He relates Marx's schemes for simple and expanded reproduction to Keynes' theory of effective demand, Kalecki's idea that capitalists "get what they spend", input-output analysis, and post-war growth models. At least a chapter discusses money and finance in this approach, including circuitist models. In my exposition, I put aside the labor theory of value. Trigg, on the other hand, discusses the transformation problem and whether or not a tendency exists for the rate of profit to decline.

I don't know if I'll purchase this book. Mike Beggs should be interested in it.

It's Never Enough Until Your Heart Stops Beating

Aaron Swartz quotes a paper by Louis Pascal posing a thought experiment. I wonder if many find this argument emotionally unsatisfying. It doesn't feel that one causes the starvation of others just by consuming one's income. And, although giving to charity may help a few, nothing is systematically changed.

But perhaps this is all self-justification. Aaron's argument reminds me of some of Blaise Pascal's mockery of the Jesuits. It is hard to approach how Pascal says they made morality all too easy to live up to:

"I mentioned, at the close of my last letter, that my good friend, the Jesuit, had promised to show me how the casuists reconcile the contrarieties between their opinions and the decisions of the popes, the councils, and the Scriptures. This promise he fulfilled at our last interview, of which I shall now give you an account.

'One of the methods,' resumed the monk, 'in which we reconcile these apparent contradictions, is by the interpretation of some phrase...'

'Take another instance: It is said in the Gospel, "Give alms of your superfluity." Several casuists, however, have contrived to discharge the wealthiest from the obligation of alms-giving. This may appear another paradox, but the matter is easily put to rights by giving such an interpretation to the word superfluity that it will seldom or never happen that any one is troubled with such an article. This feat has been accomplished by the learned Vasquez, in his Treatise on Alms, c. 4: "What men of the world lay up to improve their circumstances, or those of their relatives cannot be termed superfluity; and accordingly, such a thing as superfluity is seldom to be found among men of the world, not even excepting kings." Diana, too, who generally founds on our fathers, having quoted these words of Vasquez, justly concludes, "that as to the question whether the rich are bound to give alms of their superfluity, even though the affirmative were true, it will seldom or never happen to be obligatory in practice."'" -- Blaise Pascal, "Letter VI", Provincial Letters (trans. by Thomas M'Crie

(Letter XII is also on topic.)

One can react in various ways to the raw need that prevails so much throughout the world. I don't think I am very charitable, but you would think otherwise based on the organizations that feel it is worth their while to send me solicitations. A friend of mine adopted several children and founded his own charity. I never asked him his motivation.

Simple and Expanded Reproduction

1.0 Introduction
This post presents a model in which a capitalist economy smoothly reproduces itself. The purpose of such a model is not to predict that capitalist economies will converge to some such path as illustrated in the model. Rather, the model provides a basis for the analysis of where things can go wrong.

This sort of model has a long history. My exposition is close to Marx (1956), with the difference that Marx sets out the conditions of simple and expanded production in terms of labor values, not in terms of prices of production. Rosa Luxemburg (1951) and Michal Kalecki (1969) used Marx's department break-down to develop a Keynes-like model of the long run and the short run. Shigeto Tsuru (1942) apparently exposed this model to english-speaking academics when few were looking at Marx's analysis. Joan Robinson (1962) drew on these ideas, among others, in her models of metallic ages. Goodwin's generalization (1949) of Keynes to a multisectorial model and Pasinetti's (1981, 1993) analyses of vertically integrated sectors also seem to me to bear family resemblances to this model. Doubtless, my references could be extended in many directions.

Table 1: Definition of Variables

Variable	Definition
	The person-years of labor hired per unit output (e.g., ton steel) in the first sector.
	The person-years of labor hired per unit output (e.g., bushel corn) in the second sector.
	The capital goods used up per unit output in the first (steel-producing) sector.
	The capital goods used up per unit output in the second (corn-producing) sector.
	The price of unit output in the first sector.
	The price of unit output in the second sector.
	The rate of profits.
	The savings rate out of profits.
	The wage, that is, the price of hiring a person-year.
	The number of units (tons steel) produced in the first sector.
	The number of units (bushels corn) produced in the second sector.

2.0 Two Departments
This model considers a capitalist economy with no government and no foreign trade. The outputs of this economy are grouped into two great departments. In the first department, capitalists direct workers to produce means of production (also known as capital goods) with the means of production in that department. In the second department, the workers are directed to produce means of consumption (also known as consumption goods) with the means of production in that department.

For ease of exposition, I make certain additional simplifying assumptions. The workers consume all of their wages. Only the capitalists save, and they save only in the case of expanded reproduction. All capital is circulating capital. That is, there is no fixed capital, such as long-lived machinery. In other words, all capital goods are totally used up each year in producing the yearly output. No technological innovations are introduced.

I think introducing technological innovations and fixed capital makes the possibility of smooth reproduction more incredible. A govenrment can be introduced as a third department, or perhaps by dividing government output among the two departments shown. Foreign trade introduces the possibility of correcting imbalances in domestic demand from outside the domestic economy. But then one could recast the model as of the world economy.

3.0 Prices
A necessary condition for smooth reproduction of a competitive capitalist economy is that the same rate of profit be made in all departments. Otherwise, some capitalists are finding that the expectations on which investments were made are being unfulfilled. They would want to have contracted some departments and expanded others. I also impose the condition that spot prices remain stationary. Equations 1 and 2 express these conditions:

(1)

(2)

I suppose one could put time indices on the prices in Equations 1 and 2, thereby defining a dynamic system for prices. Suppose distribution and the ratios of physical quantity flows remain unchanged year after year. Then the steady-state prices expressed in Equations 1 and 2 (without time indices) would be a limit point of the dynamic process so defined. It is this caveat, I think, that allows me to ignore that constant prices are, perhaps, not a necessary condition for smooth reproduction.

Table 2: Values of Outputs By Department and Distribution

Department	Capital	Wages	Profits
Capital Goods
Consumption Commodities

4.0 In Balance
4.1 Simple Reproduction
The economy is in simple reproduction when it is replicated on the same scale year after year. A necessary condition for an economy in simple reproduction is that the production of capital goods each year be equal to the capital goods used up each year. In the model shown here, the value of the capital goods used up each year must equal the value of the output of the first department:

(3)

Equation 3 can be simplified:

(4)

Equation 4 is easily summarized in words. It states that the value of capital goods demanded from the second department matches the demand for consumption goods from the first department. In a sense, Equation 4 is a generalization of Keynes' idea of effective demand. The condition that all workers looking for a job are able to find one at the going wage is a separate condition, not stated here. In a sense, this model generalizes Keynes' theory, in some sense, to the long-run.

An alternate method of deriving Equation 4 is available. Start from the equation of the value of total demand for consumption goods and the value of the output of the department producing consumption goods. This condition, when simplified, also yields Equation 4.

4.2 Expanded Reproduction
The economy experiences expanded reproduction when it consistently expands each year. In this case, the demand for capital goods from the second department includes the savings of the capitalists receiving profits from that department. Likewise, the demand for consumption goods from the first department excludes the savings of the capitalists in that department. Observing these qualifications, it is easy to mathematically express the condition that the demand for capital goods from the second department match the demand for consumption goods from the first department:

(5)

Or:

(6)

Focus on the left-hand side of Equation 6. Is it apparent that the rate of growth in expanded reproduction in this model is the product of the capitalists' saving propensity and the rate of profit? In other words, the rate of profit along a warranted growth path is the quotient of the rate of growth and the saving propensity of the capitalists. So this model points to a Post Keynesian theory of distribution.

5.0 Conclusion
In the model, capitalists independently decide on what department to enter, and how much to produce in that department. A collective result of those decisions is the total output of each department. For those decisions to be validated, the value of consumer goods demanded by workers and capitalists in the department producing capital goods must match the value of capital goods demanded by the capitalists in the department producing consumption goods.

The model is silent on how such an equality can come about. Supply and demand seems like an inadequate answer to me.

References

• Richard M. Goodwin (1949). "The Multiplier as Matrix", Economic Journal, V. 59, N. 236 (Dec.): 537-555
• M. Kalecki (1969). Theory of Economic Dynamics: An Essay on Cyclical and Long-Run Changes in Capitalist Economy, Second Edition, Augustus M. Kelly
• Rosa Luxemburg (1951). The Accumulation of Capital (Trans. by Agnes Schwarzschild), Yale University Press
• Karl Marx (1956). Capital, Volume 2, Progress Publishers
• Luigi L. Pasinetti (1981). Structural Change and Economic Growth: A Theoretical Essay on the Dynamics of the Wealth of Nations, Cambridge University Press
• Luigi L. Pasinetti (1993). Structural Economic Dynamics: A Theory of the Economic Consequences of Human Learning, Cambridge University Press
• Joan Robinson (1962). Essays in the Theory of Economic Growth, Macmillan
• Shigeto Tsuru (1942). "On Reproduction Schemes", Appendix A in Paul Sweezy's The Theory of Capitalist Development, Monthly Review Press [This reference I haven't read]

Judge Friedman's Advice To Pinochet Yourself

Naomi Klein makes available Milton Friedman's 21 April 1975 letter to mass murderer Augusto Pinochet.

Microeconomics Required By Implementation Of Federal Law

President Bush's Executive Order 13422, dated 18 January 2007, further amends President Clinton's EO 12866, of 4 October 1993. These EOs are part of a family of EOs. This family defines a process for performing and reviewing cost-benefit analyses before any Federal agency promulgates any new regulations. As I understand it, President Reagan set up the Office of Information and Regulatory Affairs (OIRA), within the Office of Management and Budget (OMB), to review and approve these analyses. Here's an excerpt from the amended EO:

Section 1. Statement of Regulatory Philosophy and Principles.

(b) The Principles of Regulation.

(1) Each agency shall identify in writing the specific market failure (such as externalities, market power, lack of information) or other specific problem that it intends to address (including, where applicable, the failures of public institutions) that warrant new agency action, as well as assess the significance of that problem, to enable assessment of whether any new regulation is warranted.

Greg Mankiw, Ignorant or Dishonest?

Why choose?

"The model also maintains the neoclassical conclusion that, given ability, people are paid the value of their marginal product. That is, people are paid what they contribute to society." -- Greg Mankiw