Comity?

Mike Beggs writes:

"I've thought for quite a while that mainstream economics is supported by an exoskeleton of empiricism rather than a backbone of general equilibrium theory. At least the parts that matter. Attacks on a monolithic ‘neoclassical economics’ - conceived as an abstract, ridiculously unrealistic construct - miss the mark, because outside the academy - and even in much of that - this is not how economics is done. Mostly modern economics is about extrapolating data series from past trends, and drawing maps rather than diagrams."

Nicky Kaldor wrote:

"It is the hallmark of the neo-classical economist to believe that, however severe the abstractions from which he is forced to start, he will 'win through' by the end of the day - bit by bit, if he only carries the analysis far enough, the scaffolding can be removed, leaving the basic structure intact. In fact, these props are never removed; the removal of any one of a number of them - as for example, allowing for increasing returns or learning-by-doing - is sufficient to cause the whole structure to collapse like a pack of cards." -- Nicholas Kaldor (1966), "Marginal Productivity and the Macro-Economic Theories of Distribution", Review of Economic Studies, V. 33, N. 4: 309-319.

Samuelson Versus Sraffians, Recently

I've previously pointed out some of Samuelson's acknowledgements of the Cambridge Capital Controversy.

Some of Samuelson's compliments to Sraffians are backhanded. He also has some critical things to say. For such criticisms, I can pick out 1987, 1990, 1991, 2000, and 2007 essays. (I do not reference a couple of Samuelson and Etula papers which I have not read.) The 1987 and 2000 essays have rejoinders by John Eatwell, Pierangelo Garegnani, Bertram Schefold, and Heinz Kurz and Neri Salvadori, with replies and reactions by Samuelson. The 1991 essay can be read as a reply to Carlo Panico's rejoinder to Samuelson (1987 and 1990). Samuelson's 2000 essay resembles a rejoinder to Garegnani (2007a), with a reply by Garegnani (2007b).

Nowhere does Samuelson disagree with his acknowledgement of the phenomena of capital-reversing and reswitching. To Samuelson, these arise in valid long-period neoclassical theory. Any supposedly neoclassical theory which denies these logical possibilities is simply mistaken and not a theory that Samuelson now accepts. Samuelson was mistaken, he says, in his early 1960s understanding of neoclassical theory.

Samuelson disputes the existence of a valid Classical theory in which demand does not matter, Constant Returns to Scale prevail in manufacturing, equilibrium prices are proportional to embodied labor values, and the margin in agriculture can be taken as given. He presents some simple numerical examples in which, for example, the margin in agriculture is found endogenously and relative prices are unequal to relative labor values.

In his youth, Sraffa agreed that the Classical theory of value was based on Constant Returns to Scale in manufacturing (as opposed to agriculture), but he dropped that claim in his mature work. Nowhere that I am aware of do Sraffians claim that Sraffa's Standard Commodity is a justification of a simple Labor Theory of Value, that is, as a theory of relative prices. Sophisticated Sraffians, such as Garegnani, Kurz, and Salvadori, assert that the Classical theory of value includes the influence of consumer demand. The level and composition of output are taken as given in the theory of value, but explained within the broader range of Classical economics. This modular structure allows Classical economics to make no assumptions on returns to scale within the Sraffian reconstruction of the Classical theory of value, at least as long as the choice of technique is not being analyzed. As I understand it, the Sraffian position does not require challenging the logical validity of any of Samuelson's examples. Samuelson seems not to understand that demand can be modeled other than by a neoclassical theory of supply and demand schedules, in which they mutually interact. Garegnani (2007b) complains that Samuelson refuses to address this point.

References

• Pierangelo Garegnani (2007a). "Professor Samuelson on Sraffa and the Classical Economists", The European Journal of the History of Economic Thought, V. 14, N. 2 (June): 181-242
• P. Garegnani (2007b). "Samuelson's Misses: A Rejoinder", The European Journal of the History of Economic Thought, V. 14, N. 3 (September): 573-585.
• Paul A. Samuelson (1987). "Sraffian Economics", in The New Palgrave: A Dictionary of Economics (edited by J. Eatwell, M. Milgate, and P. Newman), Macmillan.
• P. A. Samuelson (1990). "Revisionists Findings on Sraffa", in Essays on Piero Sraffa: Critical Perspectives on the Revival of Classical Theory (edited by K. Bharadwaj and B. Schefold), Unwin Hyman.
• P. A. Samuelson (1991). "Sraffa's Other Leg", Economic Journal (May): 570-574.
• P. A. Samuelson (2000). "Sraffa's Hits and Misses", in Critical Essays on Piero Sraffa's Legacy in Economics (edited by H. D. Kurz), Cambridge University Press
• P. A. Samuelson (2007). "Classical and Neoclassical Harmonies and Dissonances", The European Journal of the History of Economic Thought, V. 14, N. 2 (June): 243-271.

A Reader Of Mirowski And Georgescu-Roegen?

I don't think I have previously read Robert Nadeau. I know I haven't read this book. But I find his editorial in this month's Scientific American of interest. (Here is a non-gated copy,) I wonder what Jeffrey Sachs makes of this. His column appears immediately before this editorial in the dead trees version.

Notre Dame over George Mason

Although both are heterodox, I prefer one of the economics departments at Notre Dame to the George Mason economics department anyway.

Against Supply And Demand

1.0 Introduction

(I will not be blogging for maybe a week after maybe tomorrow.)

The dominant economic theories during the classical period did not explain prices by the interaction of supply and demand. In particular, the leading economic theorists of the time rejected the following ideas:

• Supply and demand explain not only market prices, that is, temporary deviations from natural prices, but natural prices themselves.
• Supply and demand are schedules relating the quantity demanded or supplied as a function of price.

I point out some texts relevant to this thesis below.

I am not denying that precursors to marginalist economics can be found during the classical period. I conclude by pointing out some backsliding from the classical school.

1.0 Classical Economics

1.1 Adam Smith

The distinction between market and natural prices apparently goes back to William Petty. Adam Smith defines 'market price':

"The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price.

The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand..." -- Adam Smith, An Inquiry into the nature and Causes of the Wealth of Nations, Book I, Chap. VII: "Of the Natural and Market Price of Commodities"

Notice "proportion". I think it unnatural to read this passage as presuming supply and demand are described by schedules. It seems to me Smith is talking about the ratio between two quantities, the quantity available on the market and the level of effectual demand.

1.2 David Ricardo

I want to make use below of a distinction clearly stated by Ricardo:

"There are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity, are all of this description. Their value is wholly independent of the quantity of labour originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them.

These commodities, however, form a very small part of the mass of commodities daily exchanged in the market. By far the greatest part of those goods which are the objects of desire, are procured by labour; and they may be multiplied, not in one country alone, but in many, almost without any assignable limit, if we are disposed to bestow the labour necessary to obtain them.

In speaking then of commodities, of their exchangeable value, and of the laws which regulate their relative prices, we mean always such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint." -- David Ricardo, On the Principles of Political Economy and Taxation (3rd edition), Chapter I: "On Value", Section 1

I think Ricardo is clear here that he does not think natural prices are determined or explained by supply and demand:

"It is the cost of production which must ultimately regulate the price of commodities, and not, as has been often said, the proportion between the supply and demand: the proportion between supply and demand may, indeed, for a time, affect the market value of a commodity, until it is supplied in greater or less abundance, according as the demand may have increased or diminished; but this effect will be only of temporary duration." -- David Ricardo, Principles (3rd edition), Chapter XXX: "On the Influence of Demand and Supply on Prices"

(Ricardo, in Chapter XXXI, "On Machinery", says that he thinks that persistent unemployment is consistent with his theory where some of "the population will become redundant, compared with the funds which are to employ it." This view is inconsistent with explaining wages and employment by supply and demand. By the way, Ricardo is not denying Say's law here. He doesn't expect unused capacity for production to be created or to persist.)

1.3 Karl Marx

Karl Marx makes many of the same points as Ricardo. Here he points out that supply and demand do not determine natural prices for commodities:

"Nothing is easier to understand than the disproportion between demand and supply, and the consequent divergences of market prices from market values... If demand and supply coincide, they cease to have any effect, and it is for this very reason that commodities are sold at their market value... If demand and supply cancel one another out, they cease to explain anything, have no effect on market value..." -- Karl Marx, Capital: A Critique of Political Economy (Trans. by David Fernbach), V. 3, Chapter 10: "The Equalization of the General Rate of Profit through Competition. Market Prices and Market Values. Surplus Profit."

1.4 Piero Sraffa

I thought about going into the diverse theories the classical economists and Marx had for natural prices. But this post is already too long. Instead, I will point out a modern economist taking over the distinction between market and natural prices:

"A less one-sided description than cost of production seems therefore required. Such classical terms as 'necessary price', 'natural price' or 'price of production' would meet the case but value and price have been preferred as being shorter and in the present context (which contains no reference to market prices) no more ambiguous." - Piero Sraffa, Production of Commodities by Means of Commodities p. 9

2.0 Vulgar Economics

2.1 Thomas Malthus

Thomas Malthus rejected the classical theory of value and distribution:

"The principle of demand and supply is the paramount regulator of the prices of labour as well as of commodities, not only temporarily but permanently; and the costs of production affect these prices only as they are the necessary condition of the permanent supply of labour, or of commodities." -- Thomas Malthus, Principles of Political Economy, Chapter IV: "Of the Wages of Labour", Section 1

I don't know whether Malthus regarded supply and demand as schedules.

2.2 John Stuart Mill

I think Schumpeter described Mill as being a half-way house between classical and marginalist economics. Mill noted his predecessors did not regard supply and demand as schedules, and he thinks they should be so regarded:

"Meaning, by the word demand, the quantity demanded, and remembering that this is not a fixed quantity, but in general varies according to the value... The demand, therefore, partly depends on the value...

Thus we see that the idea of a ratio, as between demand and supply, is out of place, and has no concern in the matter: the proper mathematical analogy is that of an equation. Demand and supply, the quantity demanded and the quantity supplied will be made equal. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. If the demand increases, the value rises; if the demand diminishes, the value falls: again, if the supply falls off , the value rises; and falls if the supply is increased. The rise or the fall continues until the demand and supply are again equal to one another: and the value which a commodity will bring in any market is no other than the value which, in that market, gives a demand just sufficient to carry off the existing or expected supply.

This, then, is the Law of Value, with respect to all commodities not susceptible of being multiplied at pleasure. Such commodities, no doubt, are exceptions. There is another law for that much larger class of things, which admit of indefinite multiplication. But it is not the less necessary to conceive distinctly and grasp firmly the theory of this exceptional case. In the first place, it will be found to be of great assistance in rendering the more common case intelligible. And in the next place, the principle of the exception stretches wider, and embraces more cases, than might at first be supposed." - John Stuart Mill, Principles of Political Economy with Some of their Applications to Social Philosophy, Book III, Chapter II: "On Demand and Supply in their Relation to Value", Section 4.

Notice that Mill uses supply and demand to explain the prices of only those commodities that cannot be (re)produced - here is where that distinction stated by Ricardo comes in. But Mill stretches this exceptional case further than others had.

Typical Mirowski?

"Concerning the [Induced Value Theory], it should be noted that in principle reward structures can be employed so as to generate any preference profiles, and (thus) any demand configurations. Given this potential generality of the IVT, it is interesting that [Vernon] Smith never considered any preference profiles other than quasi-linear and homothetic preferences - namely no preference profiles other than those bringing about 'nice' demand curves, of which the line integral in commodity space is path independent and consumer's surplus is indeed a legitimate measure of welfare change - in his (published) attempt to put the [Hayek Hypothesis] to the test. -- Kyu Sang Lee and Philip Mirowski (2008) "The Energy behind Vernon Smith's Experimental Economics", Cambridge Journal of Economics, 32, pp. 257-271."

We see above allusions to advanced theory. I find it difficult to locate mainstream economists discussing this theory. Who else writes about line integrals in commodity space? And Mirowski and his co-authors' presentation of the theory casts established portions of mainstream economics - in this case, experimental market economics - in a new light. And this new light suggests that mainstream economists misrepresent their supposed achievements. Neoclassical demand theory was not tested in its full generality in Smith's work.

I find no allusions to Nietzsche or postmodern sociologists of science in this paper. Maybe I missed something, or maybe Kyu Sang Lee has less interest in Nietzsche that Mirowski does.

Marxists Against Sraffians

It's been years since I read these references:

• Frank Roosevelt (1975). "Cambridge Economics as Commodity Fetishism", Review of Radical Political Economics, V. 7: 1-32.
• Bob Rowthorn (1974). "Neo-Classicism, neo-Ricardianism and Marxism", New Left Review, V. 86: 63-87.

I just felt like pointing out that some Marxists attack neo-Ricardianism. In fact, the label "Neo-Ricardianism" was coined as an insult.

Neoclassical Economics as Imitation Physics

I cannot recall any literature that develops this point:

"One interesting sidelight before we leave the subject of intertemporal pricing: Consider any efficient capital program and its corresponding profile of prices and own-rates. At every point of time the value of the capital stock at current efficiency prices, discounted back to the initial time, is a constant, equal to the initial value. This law of conservation of discounted value of capital (or Net National Product) reflects, as do the grand laws of conservation of energy of physics, the maximizing nature of the path." -- Robert Dorfman, Paul A. Samuelson, Robert M. Solow (1958). Linear Programming and Economic Analysis, New York: Dover Publications

Does this mean the accumulation of capital in this model is impossible?

Meme Response

It took me a while to notice this tag:

1. Pick up the nearest book (of at least 123 pages).
Open the book to page 123.
2. Find the fifth sentence.
3. Post the next three sentences.
4. Tag five people.

"There is also a third possible scenario - even faster growth for print media, because more people spend their time with a variety of media which mutually reinforce each other in an increasingly closed and mediated world.

Driving forces, predetermined elements, and critical uncertainties give structure to our exploration of the future. Several times in this chapter I have referred to powerful impact of the baby boom on my thinking."

I think I'll only tag three people, if they haven't already been tagged:Daniel Davies, Gabriel Mihalache, and Aaron Swartz.( I've lost track of where I've seen this.)

Why Isn't "New Keynesianism" Called "New Pigouvianism"?

Axel Leijonhufvud had at least this part right decades ago:

"That a model with wage rigidity as its main distinguishing feature should become widely accepted as crystallizing the experience of the unprecedented wage deflation of the Great Depression is one of the more curious aspects of the development of Keynesianism, comparable in this regard to the orthodox view that 'money is unimportant' - a conclusion presumably prompted by the worst banking debacle in U.S. history. The emphasis on the 'rigidity' of wages, which one finds in the 'new economics', reveals the judgement that wages did not fall enough in the early thirties. Keynes, by contrast, judged that they declined too much by far. It has been noted before that, to Keynes, wage rigidity was a policy recommendation and not a behavioral assumption." -- Axel Leijonhufvud (1976). "Keynes and the Keynesians: A Suggested Interpretation", American Economic Review, V. 57, N. 2: 401-410.

Lots can be argued about in Leijonhufvud's interpretation of Keynes, and Joan Robinson came to argue about it.

Goodbye to "Rational Expectations"

Consider an economic model in which the agents within the model act on decisions based on their understanding of the model. For ease of exposition, assume the models within the heads of the agents all have the same form, and that that form matches the actual model. The agents must estimate the parameters of the model.

Suppose the agents have made some estimate of the model parameter. Their decisions result in the parameters being set in the actual model. And the agents use the data generated from the actual model to make their estimates. A rational expectations equilibrium is said to result when the agents' estimates match the model parameters. A rational expectations equilibrium can be thought of as a fixed point of a function from the agents' estimated parameters to the actual parameters.

Rational estimations is often applied to models of economic time series considered as stochastic processes. An important parameter for a stochastic process is the population mean at a given point in time. One can conceptually describe two types of sample means for a stochastic process:

• At a single point in time across many realizations of a stochastic process
• Across time samples for a single realization of a stochastic process

If and only if a stochastic process is ergodic, these two types of sample means converge as the number of realizations and the number of time samples increase.

Some stochastic processes observed in real world economies are non-stationary, for example, if they have a component growing at a constant rate. Non-stationary is sufficient for non-ergodicity, but not necessary. (For an example of a non-ergodic stationary process, consider a Spherically Invariant Random Process (SIRP).) Hence, some real-world processes are non-ergodic.

Agents only have access to a single realization of some processes. They therefore cannot form a sample spatial average for such a process. They only can take statistics, such as a time average, for a time series. And, if that process is non-ergodic, such a sample average will have no tendency to converge to the true model parameter, which is an average across the population of all realizations.

So much for "rational expectations".

Reference

• Paul Davidson (1982-1983). "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes", Journal of Post Keynesian Economics, 5 (Winter): 182-197.

I Reject A Fact

Many firms nowadays find their value is embodied in ideas, processes, algorithms, genetic information, etc. Artifacts expressing knowledge can be losslessly and digitally distributed on the Internet. I think legimate questions arise the appropriate legal regime for trademarks, trade secrets, copyrights, and patents. Likewise, questions arise about what sort of business models are likely to be successful - and should be successful - for knowledge-based firms.

A number of organizations have sprung up around these issues. I think of expounders of Open Source and Creative Commons licenses and certain public interest groups as well within the mainstream of United States politics. Maybe these are liberal groups, insofar as it makes sense to classify them on the political spectrum.

I don't think of these groups as particularly leftist. After all they have critics to their left. I would include Richard ("Free as in Freedom") Stallman somewhere to their left. Likewise, advocates of an Autonomous Commons, insofar as I understand them, seem much more leftist. I gather the name is supposed to suggest the autonomist movement, which I associate with Empire, a book by Michael Hardt and Antonio Negri.

I have been reading Down and Out in the Magic Kingdom, the first novel distributed with a Creative Commons license. This is cyberpunk science fiction. The author, Cory Doctorow, also writes about Internet technology and culture. He has decided opinions on "Intellectual property". He seems to fit into a "liberal" category, rather than a "leftist" category.

All of the above seems coherent to me. But what am I to make of Doctorow's parents being Trotskyites?

I Stared At This For A Good Five Minutes

Referee Report on "Some Capital-Theoretic Fallacies of Austrian Economics"
January 2008

Summary: This paper challenges some of the very premises of the Austrian theory of the business cycle, via a criticism of Mengerian/Böhm-Bawerkian/Hayekian capital theory. In particular, the author challenges the standard Austrian claim that a reduction in the rate of interest leads to a deeper, more roundabout capital structure. To prove that such a claim is false in the general case, the author draws on the reswitching debate from the Cambridge Capital Controversy (CCC).

Recommendation: I must advise that the current paper is not suitable for publication in the RAE in its present form. If I have understood it, the paper is basically saying, "The reswitching examples that surfaced in the CCC demonstrate that the starting point of ABCT is wrong. As Sraffa and his followers showed, entrepreneurs can switch from one technique to another, and then back again to the first, as interest rates fall. This means it is clearly impossible to rank objective capital structures in terms of their roundaboutness."

However, if this is indeed the author’s contribution (and if it isn’t, then s/he needs to rewrite the paper to make the true thesis much clearer!), then it is not novel. Paul Samuelson's famous "A Summing Up" (1966 Quarterly Journal of Economics) article - in which he comes as close to admitting he was wrong as Paul Samuelson ever does — presents a beautiful illustration of the flaws in the basic Böhm-Bawerkian "fable" (Samuelson’s term). The numbers in Samuelson's example are nice round ones, making the issue far easier to grasp than the complicated fractional numbers chosen by the current author. Moreover, historians of economic thought understood the implications as well: In his Economic Theory in Retrospect, Mark Blaug says that the possibility of reswitching proved the "final nail in the coffin" for Böhm-Bawerkian capital theory.

Therefore, economists have been well aware of the vulnerability of orthodox Böhm-Bawerkian capital theory to the reswitching examples. What's more, the Austrians themselves have responded. Ironically, the present author cites Garrison's 2006 work - which John Hicks apparently told Garrison was the best response to the reswitching issue—but doesn’t deal directly with Garrison's responses, except for a short quote questioning the empirical relevance of reswitching. A novice who read the present paper would have no idea that Garrison (or any other Austrian) had tried to grapple with the theoretical challenges posed by reswitching. In fact, when the author claims on page 6 that "this paper is the first to look at Hayekian triangles in light of the CCC," the novice reader would probably consider this entire critique as a new challenge to ABCT.

My recommendation is for the author to first, read the Samuelson paper. Then, if s/he is willing, a new paper could be written, demonstrating to the Austrian reader that reswitching is not merely a theoretical curiosity, but a real-world phenomenon. I personally have not read the empirical literature to which the author alludes on page 14 (in response to Garrison). So a new paper might be acceptable for the RAE, if it (a) started out with a very quick summary of the reswitching controversy, and used a simple example such as Samuelson's, then (b) presented the major Austrian responses, and finally (c) used the empirical literature and/or theoretical arguments to show why the responses quoted in (b) are unsatisfactory.

Let me end this section by disclosing my identity as Robert Murphy, because I am going to recommend some of my own work as background (and I don’t want to be coy about it). The following online article gives a quick summary of Samuelson’s piece (and my own response): http://mises.org/story/1148

Some other of my articles that may interest the writer are another online article about Sraffa: http://mises.org/story/1486. I also have two formal expositions of Böhm-Bawerkian capital theory in The Journal of the History of Economic Thought. The first is "Dangers of the One-Good Model: Böhm-Bawerk's Critique of the 'Naïve Productivity Theory of Interest'" (Vol. 27, No. 4 (December 2005), pp. 375-382), and "Interest and the Marginal Product of Capital: A Critique of Samuelson" (December 2007).

Please note that I am NOT saying the above articles need to be cited in a future RAE submission. It's just that it is very rare for economists to write articles that deal with both Sraffian and Austrian concerns, and so I want the author (who belongs to this select club) to be aware of them.

Specific Comments: Below I offer some minor comments on the draft for the author.

Page 2, bottom quote from Garrison: It seems that this particular statement is OK, even with reswitching.

Page 4, top: The citation says Lewin 1991, but no such work is in the bibliography. I think the year is wrong?

Page 4, first full paragraph: I didn't really understand the Lewin argument described here. Is he simply talking about learning by doing, or something else?

Page 7, table: I don't understand why these numbers are so complicated. Would it hurt anything to multiply through by 49? Or by some higher number in order to make it consistent with Table 3? If the fractions are used simply to allow for a surplus of one unit of corn, I’d recommend increasing the surplus in order to make the inputs integers.

Page 8, Table 2: I stared at this for a good five minutes and couldn’t figure it out - and I'm familiar with such diagrams from Hayek, Rothbard, Garrison, and even Samuelson. It should be explained more thoroughly if it is to be retained.

Page 9, middle: "Consistency…ensures…the existence of a maximum above which the interest rate cannot rise in the ERE." The author doesn't take this any further, but it seems s/he is saying that the standard Austrian story wouldn’t "work" in this case, because an increase in time preference couldn’t raise the interest rate above the ceiling set by physical constraints. However, this is only because the author has assumed that certain production processes will be carried out indefinitely, à la Sraffa. There is no reason that these processes would be carried out - thus "determining" the rate of interest - if consumer preferences changed in certain ways.

Page 15, Paul Davidson entry: I think the title is incorrect. Should it be "The Economics of Ignorance OR Ignorance of Economics?"?

Wittgenstein to Sraffa

The March 2008 issue of Harper's Magazine reports that a new edition of Wittgenstein's letters in Cambridge is being published by Blackwell. They include the following 31 January 1934 letter:

Dear Sraffa,

The following are some remarks I've put down on the topic of our last conversation. I hope they won't be too disconnected and that you'll read them to the end.

You said, "The Austrians can do most of things the Germans did." I say, How do you know? What circumstances are you taking into account if you say they can? "This man, Austria, can remove the wedding ring from his finger." True, it's not too heavy and doesn't stick to his finger. But he may be ashamed of doing it, hiw wife may not allow it, etc.

You say, "Learn from what happened in Italy." But what should I learn? I don't know exactly how things happened in Italy. So the only lesson I can draw is that things one doesn't expect sometimes happen.

I ask, How will this whose face I can't imagine in a rage looks when he gets into a rage? And can he get into a rage? What shall I say when I see him in a rage? Not only, "Ah, so he can get into a rage after all," but also, "So this is the way he can be in a rage; so this is how it connects up with his former appearance."

You say to me, "If a man is in a rage, the muscles a, b, c of his face contract. This man has the muscles a, b, c, so why shouldn't they contract? If you, Wittgenstein, wish to know what he will look like in a rage, just imagine him with those muscles contracted. What will Austria look like when it turns Nazi? There will be no Socialist Part, there won't be Jewish judges, etc., etc., etc. That's what it'll look like."

I reply, This gives me no picture of a face; apart from the fact that I don't know enough about the workings of things to know whether all these changes that you point out will happen together. For I understand what it means to say that the muscles a, b, c will contract, but what will become of the many muscles, etc., between them? Can't the contraction of the one in this particular face prevent the contraction of the others? Do you know how in this particular case things interact?

You may say, "Surely the only way to tell the future physiognomy is to know more and more exactly the contractions, etc., of all, not only the main, muscles."

I say, I don't think this is the only way; there is another one, although the two ways meet. I may ask a physiologist what the face will be like, but also a painter. The two will give different answers - the painter by drawing the angry face - although if they both are correct they will agree. Of course, I know that painters have to study anatomy. I want to know the painter's answer, and I also want to know what the physiologist can tell me to check the painter's answer.

I am interested to know what phrases the Austrians will use when they'll have turned Naze. Supposing their patriotism is only talk, then I'm just interested in their future talk.

I wish to say one more thing. I think that your fault in a discussion is this: YOU ARE NOT HELPFUL! I am like a man inviting you to tea in my room, but my room is hardly furnished; one has to sit on boxes, and the teacups stand on the floor, and the cups have no handles, etc., etc. I hustle about fetching anything I can think of to make it possible that we should have tea together. You stand there with a sulky face, say that you can't sit down on a box and can't hold a cup without a handle, and generally make things difficult. At least that's how it seems to me.

Yours,

Ludwig Wittgenstein

Capitalism Advocates Undressed

I find this amusing. I suppose I should be grateful that somebody with a more popular blog than mine cites me.

Jesse Larner On Friedrich Hayek

I bought the Winter 2008 edition of Dissent just to read Jesse Larner's article, "Who's Afraid of Friedrich Hayek?". This article has the intriguing subtitle, "The Obvious Truths and Mystical Fallacies of a Hero of the Right". I did not learn much, if anything, from this article since I had accepted Larner's main points years ago.

Larner argues that Hayek is not nearly as extreme as some of his fans in contemporary political debates make him out to be. I take Larner's main examples to be:

1. Hayek, in, for example, Chapter 9 of The Road to Serfdom, states that important social democratic ideas are compatible with his principles. Among these are the state guaranteeing a minimum standard of life, organizing a comprehensive system of social insurance, and combating economic flucuations.
2. Hayek offers no principled limitation on the size of government.
3. The socialist calculation argument, including in Hayek's formulation, is an argument exclusively against a thorough-going central planning. It is not an argument for laissez faire inasmuch as it does not address all sorts of interventionist policies in a mixed economy and, for example, anarcho-syndicalism.

Although Larner doesn't mention it, a Hayek obituary in Commentary made his second point. Larner quotes Keynes on The Road to Serfdom:

"In my opinion it is a grand book... Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement." -- John Maynard Keynes

That blurb is on the back cover of the edition on my bookshelf.

I started reading Hayek in the mid 1980s before I realized how he was claimed by the right. I took the dedication in the Road seriously: "To the socialists of all parties." I now have some questions about this book. I doubt that historians accept Hayek's thesis about specific ways german socialists paved the way for the nazis. I don't read it as a slipperly slope argument, but rather as a jeopardy argument. If english socialists were to implement their policies after the war, they should be made aware of the risks. In this way, they could implement them in the best way possible. They might even have been persuaded to moderate some of these policies.

I think Individualism and Economic Order was the first book I read by Hayek. I still think this an extremely insightful book. I wish I could find off-hand the bit where Hayek characterizes the mixed economy as "interventionist chaos". An inability to analyze mixed economies is a defect. Another defect is the chapter on the Ricardo effect - but my views on Austrian business cycle theory have long been available. Hayek's strength, including in the socialist calculation controversy, is on the use of distributed tacit knowledge in an economy. (I thought interesting how Mirowski traces the influence of this Hayek argument on the Cowles Commission.)

Marginalism As A Reaction To Marxism

I should be able to find older citations and by non-Sraffians for this thesis. Nikolai Bukharin would be good to reread, or at least rebrowse. Neoclassical economics seems to be a type of vulgar political economy, as Marx labelled it. Are these ideas complementary with Mirowski’s account of neoclassical economics as an imitation of nineteenth century physics?

"What turned out to be so devastating was the social impact of [Marx's] writings. The immediate practical effect of Marx's call for a social revolution was to elicit a strong social reaction. The establishment of the Western nations, at the end of the nineteenth century, became scared by Marx's revolutionary call. This by itself explains a lot of the fortune that in academic circles blessed marginalism in the 1870s, whose success was essentially analytical. By simply going back to the pre-industrial age concept of wealth considered as a set of given endowments of scarce natural resources (a stock concept), the marginalists succeeded in reaching an analytical breakthrough, against which Classical economic theory had nothing to compare. They elaborated a formally sophisticated and elegant scheme capable of dealing with the problems of a simpler society - a society in which the more traditional concept of wealth, as consisting of a stock endowment of resources provided by nature in given and, for most components, scarce quantities, could be placed at the very centre of the whole investigation. Hence, not the dynamism of a changing society as, paradoxically, could be observed all around, but the problems of managing efficiently the wealth that existed already became the crucial subject of economic investigation, through the assumption of a perfectly rational behaviour of the single individuals, in a perfectly competitive, strictly atomistic stationary society.

In academic circles, this no doubt represented a radical change, but not in the strict sense of a scientific 'revolution', though some historians of economic thought later hastened to call it so (the 'Marginal Revolution'). Conceptually, it was a 'counter-revolution', an anachronistic achievement, yet a beautiful one, reached with the most sophisticated tools of economic analysis (precisely what the Classical economists had lacked).

At the end of the nineteenth and the beginning of the twentieth century, marginal economic theory, marginal economic theory led to conclusions which were pleasing to the establishment, especially in terms of a splendid detachment from the hot social issues that were boiling up in the real world, and in terms of arguments that could easily be used for the advocacy of unrestricted laissez-faire policies, supposedly leading, in ideal conditions, to optimal positions..." -- Luigi L. Pasinetti (2007).

"The labour theory of value was devised by Ricardo as a stick to beat landlords (rent does not enter into cost of production.) But later, having been advocated by Marx to beat the capitalists, it was necessary for the defenders of the present system to devise a new theory, the utility theory of value. As for Ricardo, it should not be thought that he was consciously biased in his theory, that he was the champion of the rising capitalist against the landlord. ... As for Marx, the fact that the utility theory of value had been found several times before (by Dupuit, Gossen) and had fallen flat while when it was again almost simultaneously published by Jevons, Menger, and Walras in the years immediately following the publication of vol. I of Capital, found suddenly a large body of opinion prepared to accept it and support it is significant enough." -- Piero Sraffa (1927, quoted in Bellofiore 2008)

Sraffa references Ashley:

"The marginal conception of value which this generation owes to Jevons and Menger was clearly enough expounded by Longfield in 1833, but it passed unregarded... It is evident that their inattention was due, not to dissatisfaction with what men like Longfield offered them, but to satisfaction with the apparently sufficient formulae they had already mastered...

...Meanwhile ... the dissemination of the teachings of the so-called 'scientific' socialists - of Lassalle's 'Iron Law of Wages,' and Marx's 'Surplus Value' - disposed conservatively minded thinkers to re-examine that Ricardian teaching to which the Socialists, with so much show of reason, were in the habit of appealing." -- W. J. Ashley (1907).

Update (17 Feb.): Added Ashley quotation.

References

• W. J. Ashley (1907). "The Present Position of Political Economy", Economic Journal, V. 17, N. 68 (Dec.): 467-489.
• Ricardo Bellofiore (2008). "Sraffa After Marx: An Open Issue", Sraffa or an Alternative Economics (Ed. by Gugielmo Chiodi and Leonardo Ditta), Palgrave Macmillan.
• Nikolai Bukharin (1972). Economic Theory of the Leisure Class, Monthly Review Press
• Luigi L. Pasinetti (2007). Keynes and the Cambridge Keynesians: A 'Revolution in Economics' to be Accomplished, Cambridge University Press.

Reaction to Rodrik

Thomas Palley has been reading Rodrik's book, One Economics, Many Recipes. Pallay's reaction is better expressed and better thought out than my reactions to some of Rodrik's posts. Palley says, "Most people are incredulous that economists could be so audacious as to enforce one view of economics."

I like that Jesus Felipe shows up in the comments when Rodrik raises the question, on his blog, of the purpose of growth accounting. I think of Felipe's cited work as extending Anwar Shaikh's argument on the humbug production function.

Pasinetti's Principles

Luigi Pasinetti, in his new book, Keynes and the Cambridge Keynesians: A "Revolution in Economics" to be Accomplished, summarizes what he takes to be characteristic features of the Cambridge school:

1. Reality (and not simply abstract rationality) as the starting point of economic theory.
2. Economic logic with internal consistency (and not only formal rigour).
3. Malthus and the Classics (not Walras and the Marginalists) as the major inspiring source in the history of economic thought.
4. Non-ergodic (in place of stationary, timeless) economic systems.
5. Causality vs. Interdependence.
6. Macroeconomics before Microeconomics.
7. Disequilibrium and instability (not equilibrium) as the normal state of the industrial economies.
8. Necessity of finding an appropriate analytical framework for dealing with technical change and economic growth.
9. A strong, deeply felt social concern.

Time that with this strange excuse Pardoned Kipling and his views

There was a certain political tendency in the United States around 1900. Historians call it the Progressive movement. I think it interesting how Kipling depicts "progressive" as almost a slang term in a novel he wrote around then:

"'Allus can, till we begin to dress daown. Efter thet, the heads and offals 'u'd scare the fish to Fundy. Boat fishin' ain't reckoned progressive, though, unless ye know as much as dad knows.'" -- Rudyard Kipling, Captains Courageous, 1897

"'I tell you, Harve, there ain't money in Gloucester 'u'd hire me to ship on a reg'lar trawler. It may be progressive, but, battin' that, it's the putterin'est, slimjammest business top of earth.'" -- ibid.

"'Dad's sot agin 'em on account o' their pitchin' an' joltin', but there's heaps o' money in em. Dad can find fish, but he ain't no ways progressive - he don't go with the march o' the times. They're chock-full o' labour-savin' jigs an' sech all.'" -- ibid.

"'We know it ain't, but there's no goin' in the teeth o' superstition. That's one o' the advantages o' livin' in a progressive country.'" -- ibid.

"'Why didn't that Eastport man bid, then? He bought his boots. Ain't Maine progressive?'" -- ibid.

"'Huh! I guess I'm as enlightened and progressive as the next man, but when it comes to a dead St. Malo deck-hand scarin' a couple o' pore boys stiff fer the sake of a thirty-cent knife...'" -- ibid.