Economists Refusing To Do Math

Tyler Cowen doesn't seem to know that this discussion of the Marginal Product of Capital is nonsense.

Tyler Cowen also doesn't know that Austrian Business Cycle theory is mistaken.

Robert Barro seems to mistakenly think that one can legimately express production functions as functions of capital goods, measured in numeraire units.

Notice that Tyler Cowen and Robert Barro seem to be using these mistakes in applied and policy-oriented models. I do not see why I should pretend such nonsense has any credibility whatsoever.

To Read: Oxfam Study On Cotton Subsidies

This looks interesting:

"One of the first studies of its kind after the US reformed a controversial export subsidy program called “Step 2,” Paying the Price estimates how much farmer incomes in West Africa could increase after further subsidy reform, and what these gains would mean in practical terms for a typical West African cotton farming household. The report confirms that substantial reform of American cotton subsidies in the 2007 Farm Bill could lead to increased income to feed an additional million children for a year or pay school fees for at least two million children living in poor West African cotton-growing households."

"Reform" in the above, I gather, means the elimination of "counter-cyclical payments, marketing loans, and direct payments" in the U.S.

Trivia: This CD is in my collection.

Rejection

Some time ago, I submitted a paper, "Some Fallacies of Austrian Economics" to the Quarterly Journal of Austrian Economics (Fixed journal title). I received referee comments, as well as a rejection letter.

I find the references to the literature helpful. I would have liked more guidance on recent articles on Austrian Business Cycle theory in the QJAE and the Review of Austrian Economics. (Aren't there any in Critical Review or the Review Of Political Economy?) I would have also liked suggestions on where to cut. Probably like most authors, I find some of the referee's comments misguided, and he sometimes missed what I was saying. Maybe I'll be more clear in my next revision.

10 Principles of Institutional Economics

• Economics is about social provisioning, not merely choices and scarcity.
• Both scarcity and wants are socially defined and created.
• Economic systems are human creations; no particular economic system is "natural".
• Ecological literacy (economy-ecology interface) is essential to economics.
• Valuation is a social process.
• The government defines the economy; laissez faire capitalism is an oxymoron.
• The history of economic thought is critical to the study of "basic principles" of economics.
• Economic theory ("logical economics") and real world economics are often very different things.
• Race, gender, and class shape economic processes, outcomes, and policies in the real world economy.
• There are many types of economists who do not agree on many things. This reflects the fact that economics is not "value free" and ideology shapes our analyses and conclusions as economists.

From: Janet Knoedler, Jennifer Long, Reynold Nesiba, Janice Peterson, Geoff Schneider, James Swaney, and Daniel Underwood (1998). "10 Things for Economic Pedagogy", Association for Evolutionary Thought, Western Social Science Association, Denver Colorado. (See here.)

"In Bitter Polemic"

"A case has been made for the observation that the modern contributions to economic understanding have not come from marginal economic analysis, but, on the contrary, they have mainly come out in bitter polemic with and as a challenge to it. And they deal with problems of production, not with the optimum allocation of scarce resources. Here we need only mention the modern (post-Keynesian) theory of production based on an open Leontief model, the Sraffian production and value models, and the Harrod-Domar dynamic macro models with the Kaleckian distribution and pricing models. This book looks into some of these developments as it analyzes the relationship between the accumulation of capital that underpins the growth pattern and the associated phenomena of pricing and distribution." -- Stanley Bober (1992). Pricing & Growth: A Neo-Ricardian Approach, M. E. Sharpe: xii-xiii.

Jayadev: Capital Account Openness and the Labour Share of Income

This looks to be an interesting paper:

"This paper investigates the relationship between capital account openness and the share of labour in national income. Employing a new index of financial openness and a cross-country panel of labour shares available from the United Nations System of National Accounts, the author shows a robust negative correlation between the degree of openness and the labour share. Although this effect is not present for low income countries, the direct negative relationship holds for all other subsamples and in the presence of a variety of controls. A plausible explanation is that openness alters the conditions of bargaining between labour and capital. By increasing the bargaining strength of capital vis-a-vis labour, increased capital mobility raises rents accruing to capital. Thus, capital account openness may reduce labour's share of income in the firm, and thereby, at an economy-wide level, its share of national output." - Arjun Jayadev (2007). "Capital Account Openness and the Labour Share of Income", Cambridge Journal of Economics, V. 31: 423-443

My favorite comment in the TPM Cafe discussion the other week:

"So if I pick up a copy of the Cambridge Journal of Economics or the Eastern Economic Journal, I can expect to find higher-quality work than in the AER?" -- Ragout

Sraffa Angers Mussolini

And not for the first time.

Apparently Sraffa, an Italian living in England, probably only wrote the first sentence of the following letter. Angelo Tasca, an Italian communist, wrote the bulk of the letter after discussion with Sraffa. Maurice Dobb translated Tasca into english.

"Sir, - In view of the discussion which has been taking place in your columns on the methods of Fascism, it seems opportune to bring before your readers the facts of a recent case which can hardly be included within Mr. Shaw's category of crimes justified by 'necessity'.

Antonio Gramsci, a Communist deputy in the Italian Parliament and a journalist, was arrested in November, 1926, in spite of the immunity attaching to a deputy, and was banished, along with other members of the Opposition, to the Italian island of Ustica. Signor Gramsci had always been an invalid owing to a pronounced curvature of the spine, and had only been able to indulge in continuous intellectual activity - an academic study of philology at the university prior to the war and a study of Italian politics since the war - by virtue of a special regime of life and a special diet. Even the milder rigours of prision life were therefore likely to be in his case particularly serious.

A few months after his initial arrest Signor Gramsci was taken from the island and sent to Milan. This journey was by means of the extraordinarily slow and painful process by which prisoners in Italy are transferred from place to place: cramped in a small cell of a special prison coach on a crawling train all day, and breaking the journey on the way at various places - at Palermo, Reggio Calabria, Naples, Rome, Florence, Bologna, - to be housed in the dirty and vermine-infested detention cells of the local prison for days on end. In Milan he has been awaiting trial since early February. The diet of a political prisoner is usually little more than a pound of bread and soup per day. Usually this can be supplemented by gifts and by food bought in the canteen by money received from friends and deposited with the prison governor. In Signor Gramsci's case, however, this has not been allowed; both gifts of food and money from friends have been intercepted by the prison authorities and prevented from reaching Signor Gramsci. Friends have been prevented from seeing him, even though he has legally a perfect right to receive such visitors.

A delicate invalid from the first, Signor Gramsci has been reduced to a state of extreme emaciation byt the harhness of his treatment since his arrest - treatment which would have shaken the constitution of the strongest man. Unable to digest even the meagre and poor food he receives, he is in a state of literal semi-starvation. He has several times had to be removed to the prison infirmary, and the state of his helath, affecting his mouth, has caused him to lose most of his teeth in the last few weeks, so that his ability to eat the coarse prison fare is still further lessened. After nine months of such treatment this man has now to undergo a further journey to Rome to stand his trial, at which he is likely to be sentenced to a long term of imprisonment, probably twenty or thirty years, for the crime of organizing opposition to the Fascist regime. - Yours, &c,, An Italian in England" -- Piero Sraffa (1927). Manchester Guardian, (October 21)

It was at this trial that the Fascist prosecutor, pointing to Gramsci, said, "We must prevent this brain from functioning for twenty years." Sraffa opposed this.

References:

• Nerio Naldi (1998). "Some Notes on Piero Sraffa's Biography, 1917-27", Review of Political Economy, V. 10, N. 4: 493-515
• Jean-Pierre Potier (1987). Piero Sraffa: Unorthodox Economist (18989-1983): A Biographical Esay, Routledge

Sraffa's Revolution In The History Of Economics

I don't understand this:

"... and Sraffa's obscure, at least to me, Production of Commodities by Means of Commodities." -- Gavin Kennedy

It seems to me that if one is interested in interpretations of Adam Smith, in particular, or the history of economic thought, in general, one is obligated to study Sraffa's impact until his interpretation is no longer totally obscure. If one cannot understand his original works, one can always look at secondary sources.

In old Wikipedia edits to the entry on Classical Economics, I tried to go into changes in how scholars look at the history of economic thought. As usual, I recommend other writers, for example, Roncaglia (2005) or Screpanti and Zamagni (2005). (I'm having trouble reading both these books. The minor variations in textbook variations of ideas with which I am quite familiar doesn't hold my attention. In particular, I have read the first edition of Screpanti and Zamagni and previous contributions by Roncaglia (e.g., 1978a, 1978b, 2000, and 2001).) Screpanti and Zamagni are particularly good on how neoclassical general equilibrium theory has run into a dead end, for internal reasons.

• Alessandro Roncaglia (1978a). Sraffa and the Theory of Prices (Translated by Jan Kregel), John Wiley & Sons
• Alessandro Roncaglia (1978b). "The Sraffian Contribution", in A Guide to Post-Keynesian Economics (edited by Alfred S. Eichner), M. E. Sharpe
• Alessandro Roncaglia (2000). Piero Sraffa: His Life, Thought and Cultural Heritage, Routledge
• Alessandro Roncaglia (2001). "Production of Commodities by Means of Commodities Between Criticism and Reconstruction: The Given Quantities Assumption", in Piero Sraffa's Political Economy: A Centenary Estimate (edited by Terenzio Cozzi and Roberto Marchionatti), Routledge
• Alessandro Roncaglia (2005). The Wealth of Ideas: A History of Economic Thought, Cambridge University Press
• Ernesto Screpanti and Stefano Zamagni (2005). An Outline of the History of Economic Thought (Translated by David Field and Lynn Kirby), Second edition, Oxford University Press

I Have Been On Vacation

I wonder if I might be missing something.

Saari Extends Sonnenschein-Mantel-Debreu Results

I recently found out that one can download Saari (1995). (Hat tip to Ars Mathematica.)

Before going into advanced mathematics, Saari notes a theoretically unjustified popular portrayal of economics :

"On the evening news and talk shows, in the newspapers, and during political debate we hear about the powerful moderating force of the market which, if just left alone, would steadily drive prices toward an equilibrium with the desired balance between demand and supply. The way this story is invoked to influence government and even health policies highlights its imporant critical role. But, is it true? I have no idea whether Adam Smith's invisible hand holds for the 'real world', but, then, no one else does either. This is because, even though this story is used to influence national policy, no mathematical theory exists to justify it. Quite the contrary... "

Saari considers dynamic processes in which the Walrasian auctioneer lowers prices in which supply exceeds demand and raises prices in which demand exceeds supply. The auctioneer knows about offers in all markets, and no trades are allowed unti equilibrium is achieved, if ever.

Saari does not only consider processes in which the rate at which the auctioneer changes prices is proportional to the discrepancy between demand and supply. He generalizes the problem to consider all processes which depend on both this discrepancy and the rate of change with respect to price at which agents change their offers. He finds that even when their is a stable equilibrium for some such process, some agents can upset this stability by withholding one commodity from the market.

I have thought about documenting - after having written about all the Sraffa examples I care to treat - Scarf's example of a non-stable equilibrium. Saari makes clear many more interesting examples exist. I don't know whether I am bright enough to find specific numeric examples.

I'm interested in the Arrow-Debreu model of intertemporal equilibrium, with production. Two sorts of dynamics exist in this model. Saari is talking about a tâtonnement process before the beginning of time. A question exists about how relative prices change over time in the cleared forward markets. I think one can explore the implications of Sraffa effects on the latter dynamics. I think it is still an open question whether Sraffa effects have implications for tâtonnement processes, although Mandler gives good arguments in the negative.

For Radek: I note that some editor has complained that the Wikipedia entry on General Equilibrium uses too much technical jargon. I don't know what to do about this. Compare and contrast the level of jargon in the entry on "Null set". I don't know what decides the level that is acceptable; perhaps the laity expects to be able to follow economics and not to be able to follow advanced mathematics.

• Donald Saari (1995). "Mathematical Complexity of Simple Economics", Notices of the AMS, V. 42, N. 2 (Feb): 222-230

Ludwig Changes His Mind

I had this as a draft post before the discussion on this over at Max's place.

"Wittgenstein and P. Sraffa, a lecturer in economics at Cambridge, argued together a great deal over the ideas of the Tractatus. One day (they were riding, I think, on a train) when Wittgenstein was insisting that a proposition and that which it describes must have the same 'logical form', the same 'logical multiplicity', Sraffa made a gesture, familiar to Neapolitans as meaning something like disgust or contempt, of brushing the underneath of his chin with an outward sweep of the finger-tips of one hand. And he asked: 'What is the logical form of that?' Sraffa's example produced in Wittgenstein the feeling that there was an absurdity in the insistence that a proposition and what it describes must have the same 'form'. This broke the hold on him of the conception that a proposition must literally be a 'picture' of the reality it describes." --Norman Malcolm (1966). Ludwig Wittgenstein: A Memoir. Oxford University Press: 69

(I'm quoting second-hand.)

By the way, Pierangelo Garegnani has been permitting scholars to quote Sraffa's unpublished notes for a number of years. For example, Luigi Pasinetti has examined them and reported on them. Why shouldn't Sraffa have chosen a literary executor who is as slow to publish as he was? I am looking forward to their publication, though.

• Luigi L. Pasinetti (2001). "Continuity and Change in Sraffa's Thought: An Archival Excursus", in Piero Sraffa's Political Economy: A Centenary Estimate (edited by Terenzio Cozzi and Roberto Marchionatti), Routledge

Arrow-Debreu Worth Generalizing To Model Power?

Power can be formally modeled in a framework of incomplete contracts, asymmetric information, strategic interaction, and principals and agents. Samuel Bowles & Herbert Gintis and Joseph Stiglitz, for example, have developed models of asymmetric information.

Is it worth developing models of power, as a generalization of the Arrow-Debreu model? I don't know that Stiglitz has ever addressed this question. His papers, as I understand them, do tend to be generalizations of the Arrow-Debreu model. This could be a rhetorical strategy. Bowles and Gintis (2000), however, assert that the Arrow-Debreu model is a detour. One can model power more directly.

Perhaps this contrast is an illustration of the different perspectives of economists that, until recently, would have been considered orthodox and heterodox. If so, it also illustrates that the boundary between orthodoxy and heterodoxy is murky.

• Samuel Bowles and Herbert Gintis (2000). "Walrasian Economics in Retrospect", Quarterly Journal of Economics (November)
• Samuel Bowles and Herbert Gintis (2007). "Power", University of Sienna, Working Paper number 495

Chris Hayes' Work Is Done Here

Many economics blogs were abuzz last week with comments on this discussion of Chris Hayes' Nation article on heterodox economics. I have already mentioned some of these discussions, but I thought I would do more to organize additional links. I think the following are some central questions in these discussions:

1. As a matter of the sociology of economics, are heterodox economists with worthwhile research programs being unjustly denied resources, graduate students, tenure, and publications in top-ranked journals?
2. Are heterodox economists developing ideas about economics that have not yet been adopted by mainstream economists?
3. Is this argument about something other than what policies economists should promote?

"Yes" is the correct answer to all three questions.

Anyways, contributors to Crooked Timber have commented. Gabriel Mihalache mostly emotes. Like Matt Yglesias, Unfogged contributors mistakenly think the debate is about policy opinions. Will Wilkinson and Bryan Caplan also confuse the policy question with the questions of the sociology of economics. I am not going to try to summarize what diverse posters at Max's place say.

Some have taken this discussion as an opportunity to discussion specific strains of heterodox economics. In response to Tyler Cowen's query for heterodox ideas that the mainstream neglects, Marginal Revolution went off on the Cambridge Capital Controversy and the contributions of Piero Sraffa, before returning to the value of heterodoxy. (Cowen also gives his impression of Post Keynesianism.) Brad DeLong is concerned to claim bastard Keynesianism as legimate.

Geoffrey Hodgson Defines Neoclassical Economics

I think he offers definitions in other works, too.

"Let us attempt to identify the key characteristics of neoclassical economics; the type of economices that has dominated the twentieth century. One of its exponents, Gary Becker (1967a, p. 5) identified its essence when he described 'the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly.' Accordingly, neoclassical economics may be conveniently defined as an approach which:

• (1) assumes rational, maximizing behaviour by agents with given and stable preference functions,
• (2) focuses on attained, or movements towards, equilibrium states, and
• (3) is marked by an absence of chronic information problems.

Point (3) requires some brief elaboration. In neoclassical economics, even if information is imperfect, information problems are typically overcome by using the concept of probabilistic risk. Excluded are phenomena such as severe ignorance and divergent perceptions by different individuals of a given reality. It is typically assumed that all individuals will interpret the same information in the same way, ignoring possible variations in the cognitive frameworks that are necessary to make sense of all data. Also excluded is uncertainty, of the radical type explored by Frank Knight (1921) and John Maynard Keynes (1936).

Notably, these three attributes are interconnected. For instance, the attainment of a stable optimum under (1) suggests an equilibrium (2); and rationality under (1) connotes the absence of severe information problems alluded to in (3). It can be freely admitted that some recent developments in modern economic theory - such as in game theory - reach to or even lie outside the boundaries of this definitions. Their precise placement will depend on inspection and refinement of the boundary conditions in the above clauses. But that does not undermine the usefulness of this rough and ready definition.

Although neoclassical economics has dominated the twentieth century, it has changed radically in tone and presentation, as well as in content. Until the 1930s, much neoclassical analysis was in Marshallian, partial equilibrium mode. The following years saw the revival of Walrasian general equilibrium analysis, an approach originally developed in the 1870s. Another transformation during this century has been the increasing use of mathematics, as noted in the preceding chapter. Neoclassical assumptions have proved attractive because of their apparent tractability. To the mathematically inclined economist the assumption that agents are maximizing an exogeneously given and well defined preference function seems preferable to any alternative or more complex model of human behaviour. In its reductionist assumptions, neoclassical economics has contained within itself from its inception an overly formalistic potential, even if this took some time to become fully realized and dominant. Gradually, less and less reliance has been placed on the empirical or other grounding of basic assumptions, and more on the process of deduction from premises that are there simply because they are assumed.

Nevertheless, characteristics (1) to (3) above have remained prominent in mainstream economics from the 1870s to the 1980s. They define an approach that still remains ubiquitous in the economics textbooks and is taught to economics undergraduates throughout the world." -- Geoffrey M. Hodgson (1999). "False Antagonisms and Doomed Reconcilations", Chapter 2 in Evolution and Institutions: On Evolutionary Economics and the Evolution of Economics, Edward Elgar

Journalistic Comments On Economics

• David Warsh has a piece on János Kornai's challenges in pursuing a career in economics in communist Hungary. (I don't know if David Warsh reads me. If I interested him, he later did more research for his piece, from which I am grateful to learn.)
• Chris Hayes has a piece in the Nation on the last American Economic Association meeting. He writes about the unwillingness of mainstream economists to acknowledge heterodox economic ideas. Other bloggers and journalists have already commented on this article. I have yet to see anybody else in these and other discussions reference Fred Lee
• Many other bloggers have already commented on a Robert Solow review, in The New Republic, of a recent biography of Joseph Schumpeter. I might as well acknowledge I wrote the first draft of the Wikipedia entry on Schumpeter.

Update: Added some links, including reference to Fred Lee.

Greg Mankiw: Incompetent or Dishonest?

Some have assured me that mainstream economics is valid because this is not valid neoclassical economics (and mainstream economists know the invalidity of these claims):

"The neoclassical theory of distribution teaches us that a person's earnings depend on his or her productivity." -- Greg Mankiw, "How to Become Rich"

Of course, I am aware of mainstream economists who don't believe what Mankiw says:

"All optima imply marginal conditions in some form. These conditions are part of an overall solution. Neither they nor the quantities involved in them are prior to the overall solution. It reflects badly on economists and their keenness of intellect that this was not always obvious to everyone." -- Christopher Bliss, "Introduction, The Theory of Capital: A Personal Overview", in Capital Theory (edited by C. Bliss, A. Cohen, and G. C. Harcourt), Edward Elgar

"Why Do People Hate Economists?"

Ezra Klein has a series of posts on the topic. Some of the commentators seem to me to know what they are talking about. The discussion gets into the question of whether issues of efficiency can be separated from issues of equity, of whether efficiency can be discussed in a value-neutral way. (Short answer: No.)

Klein also talks about how "econ-speak" privileges attempts to raise Gross Domestic Product over attempts to pursue other goals. He illustrates this claim by discussion of vacation time. (I realize that, at the level of high theory, Klein's claim is false. I think that this objection elides questions of how economists participate in public discourse.)

I think people "hate" economists, like Democrats "hate" President Bush, or the French "hate" Americans. That is, it is just something some people disconnected from reality tell themselves to discredit other points of view.

The Meaning(lessness) Of Rationality

After many analyses, some mainstream economists acknowledge that they may not have a coherent understanding for what it means for a person to be rational:

"When these assumptions [of equilibrium, competition, and the completeness of markets] fail, the very concept of rationality becomes threatened, because perceptions of others and, in particular, of their rationality become part of one’s own rationality. Even if there is a consistent meaning, it will involve computational and informational demands totally at variance with the traditional economic theorist’s view of the decentralized economy." -- Kenneth J. Arrow (1986). "Economic Theory and the Hypothesis of Rationality" Journal of Business, V. 59, N4, Pt. 2 (reprinted in The New Palgrave)

A lot of this attempt to conceptually clarify the meaning of "rationality" uses game theory. In parallel with this theoretical work, economists and others have performed a body of experiments. These experiments found many cases in which the predictions of neoclassical theory were falsified. Daniel Hausman, in a chapter in his The Inexact and Separate Science of Economics, treats the resulting work as a case study. He tries to understand why mainstream economists retain a theory with such a poor track record in controlled experimental settings.

I have blogged on experimental economics before. (A Mark Thoma post post inspired me to put this post up.)

Daniel Hausman On One Aspect Of The CCC

"Demand theorists know there are few Giffen goods. They know why there are Giffen goods. They can successfully predict that certain goods in certain economies (potatoes in Ireland, rice in China, or yams in New Guinea) are likely to be Giffen goods. Capital theorists, on the other hand, do not know whether capital reversing is common or rare. Until recently they possessed no theory which made sense of the phenomenon. The status of that fundamental theory remains, moreover, questionable. From the perspective of the Austrian theory or of Clark's theory, capital reversing is nothing but a disconfirmation. Capital theorists are also unable to predict when capital reversing will occur. They cannot point to some feature of an economy and say, 'Ah, we can see that this is one of the exceptional cases in which we should not expect our simpler capital theories to work.' There is no justification for the claim that capital reversing demands only minor qualifications in simplified capital theories." -- Daniel M. Hausman (1981). Capital, Profits, and Prices: An Essay in the Philosophy of Economics, Columbia University Press

Hausman makes a distinction in this book between Models and Theories. Those interested in how Hausman's draws his lines are probably better advised, though, to read his later The Inexact and Separate Science of Economics.

Surowiecki Popularizes My View

Like Dean Baker, I have said before that important issues in "free" trade agreements are matters of governance, not trade. James Surowiecki makes fairly closely the same point in his weekly New Yorker column, in the 14 May 2007 edition. I read this in the dead trees version before reading comments on this column from various bloggers.