On The Road From Mont Pelerin

I have been reading The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective, a collection edited by Philip Mirowski and Dieter Plehwe (Harvard University Press, 2009). One theme I find emergent in this book is the influence of funders (e.g., Harold Luhnow, Jasper Crane) on the redirection of economic thought, without any corresponding empirical evidence.

But I'm not yet ready to offer too many thoughts on this book. Instead I'm interested in the cover photo, reproduced as Figure 1.

Figure 1: Cover Photo

I cannot find photo credits in the book. Presumably, this photo is of attendees at a Mont Pelerin society meeting, maybe the first. Can anybody identify these people? Figure 2 letters them to facilitate referring.

• F. Ludwig Von Mises
• G. Friedrich Hayek

Figure 2: Cover Photo with Annotations

Some Issues In Joint Production

1.0 Introduction
Sraffa's work on single product systems is sufficient for demonstrating the incorrectness of neoclassical economics, at least in applications in which equilibrium prices supposedly are ultimately, in some sense, scarcity indices. Sraffa's work on joint production is important in justifying a claim that Sraffa has rediscovered the logic behind the Classical theory of value. An interesting question is whether Sraffa's treatment of joint production holds up to a rigorous theoretical analysis. Christian Bidard, Heinz Kurz & Neri Salvadori, and Bertram Schefold are some economists who have gone into this question in some detail.

An example developed by J. E. Woods (1990: pp. 281-285) illustrates some questions raised by joint production. Unfortunately, I am not sure Woods is correct in his analysis; he constrains all goods to have positive prices in his example. I do not impose this constraint in my treatment of his example.

2.0 Technology
Consider an economy in which two goods, iron and coal, are produced. The managers of firms each know of three Constant-Returns-to-Scale processes for producing these goods (Figure 1). In each process, the inputs need to be available at the start of the year. The inputs are totally used up in these production processes, and the outputs become available at the end of the year. Since each process produces both iron and corn, this is an example of a model of joint production.

TABLE 1: Processes Exhibiting Joint Production

INPUTS	Process I	Process IIa	Process IIb
Labor	5 Person-Yrs	10 Person-Yrs	10 Person-Yrs
Iron	18 Tons	12 Tons
Coal			10 Cwt
OUTPUTS
Iron	48 Tons	12 Tons	12 Tons
Coal	10 Cwt	30 Cwt	30 Cwt

3.0 Quantity Flows
Suppose the final demand in this economy is for a composite good consisting of an equal amount of iron and coal. Four techniques can be formed from the technology to produce such a commodity. Two processes are used in each of the first two techniques. The Alpha technique consists of Process I and Process IIa operated in the proportions shown in Table 2. Notice that after the outputs are used to replace the inputs, the net output consists of one ton iron and one Cwt. coal, as required.

TABLE 2: Quantity Flows in Alpha Technique

INPUTS	Process I	Process IIa
Labor	1/6 Person-Yr	2/9 Person-Yr
Iron	9/15 Ton	4/15 Ton
Coal
OUTPUTS
Iron	1 9/15 Tons	4/15 Ton
Coal	1/3 Cwt	2/3 Cwt

The Beta technique consists of Process I and Process IIb used in the proportions shown in Table 2. Here too the net output is one ton iron and one Cwt. coal.

TABLE 3: Quantity Flows in Beta Technique

INPUTS	Process I	Process IIb
Labor	1/360 Person-Yr	1/108 Person-Yr
Iron	3/10 Ton
Coal		5/12 Cwt
OUTPUTS
Iron	4/5 Ton	1/2 Ton
Coal	1/6 Cwt	1 1/4 Cwt

If Process I is operated alone at unit level, the net output of the economy is 30 tons iron and 10 cwt. coal. The requirements for use would be satisfied if 20 tons of iron were thrown away - free disposal is assumed. If this technique is adopted, iron is a free good.

The last technique to be considered is the operation of process IIb alone. In this case more coal would be produced net than is needed. If this technique is cost minimizing, coal is a free good. (Notice than the combination of Process IIa and Process IIb would just produce more of coal, a free good. This is not economical.)

4.0 Prices
Since I want to consider cases where either iron or coal is a free good, neither can be chosen as the numeraire in an analysis of prices. Accordingly, suppose a person-year - in other words, labor commanded - is the numeraire.

4.1 The Alpha Technique
The price equations for the Alpha technique show the same rate of profits being obtained in the processes comprising the technique:

18 p_I(1 + r) + 5 = 48 p_I + 10 p_C

12 p_I(1 + r) + 10 = 12 p_I + 30 p_C

where p_I is the price of iron in units of person-years per ton, p_C is the price of coal in units of person-years per Cwt., and r is the rate of profits. By assumption, workers are paid at the end of the year. If the rate of profits as taken as given, the above system consists of two equations in two unknowns. The solution is:

p_I = 5/[6 (15 - 7 r)]

p_C = (5 - 2 r)/(15 - 7 r)

An economic restriction is that both prices be non-negative. Thus, the solution only obtains in the following interval for the rate of profits:

0 ≤ r ≤ 15/7

4.2 The Beta Technique
The price system for the Beta technique is:

18 p_I(1 + r) + 5 = 48 p_I + 10 p_C

10 p_C(1 + r) + 10 = 12 p_I + 30 p_C

Its solution is:

p_I = -5 r/[6 (r - 1)(3 r - 8)]

p_C = (4 - 3 r)/[(r - 1)(3 r - 8)]

Both prices are nonnegative if:

(4/3) ≤ r ≤ (8/3)

4.3 Choice of Technique
First, suppose Process I were operated alone. Since iron would be in excess supply, its price would be zero person-years per ton. Revenues would be equated to costs in Process I if p_C were 1/2 person-years per Cwt. But revenues would exceed costs in Process IIa by five person-years when operated at the unit level. Thus, firms would want to adopt Process IIa. Thus, operating Process I alone could not be cost-minimizing. (Since Process IIa alone cannot satisfy final demand, Process IIa could also not be operated alone.)

Second, suppose Process IIb were operated alone. In this case, coal would be a free good, and the price of iron would be 5/6 person-years per ton. For any non-negative rate of profits, revenues would never cover costs in Process IIa. On the other hand, for any rate of profits below approximately 133%, Process I would earn pure economic profits (Figure 1). That is, for rates of profits below this level, Process IIb would never be operated alone.

Figure 1: Profitability of Process I (Process IIb Prices)

Third, suppose prices corresponding to the Alpha technique were ruling. Figure 2 shows the difference in revenues and costs for Process IIb, the one process not in the Alpha technique. As usual in this analysis, costs include interest charges on the value of advanced capital. The Alpha technique is cost-minimizing only for rates of profits between zero and 200%, inclusive.

Figure 2: Profitability of Process IIb (Prices for Alpha Technique)

Last, suppose prices solved the price system for the Beta technique. Figure 3 shows the resulting difference in revenues and costs for process IIa, which lies outside the Beta technique. The Beta technique is cost-minimizing for rates of profits between 133 1/3 percent and 200%.

Figure 3: Profitability of Process IIa (Prices for Beta Technique)

5.0 Conclusions
The above analysis demonstrates that, for rates of profits between 0% and approximately 133%, the Alpha technique is cost-minimizing. For rates of profits above approximately 133%, Process IIb is operated alone and coal is free.

In a comparison of the Alpha and Beta techniques alone (without considering the possibility of operating a single process alone):

• The Alpha technique would be cost minimizing if the rate of profits were between 0% and 200% and the prices associated with the Alpha technique were ruling.
• The Beta technique would also be cost minimizing if the rate of profits were between approximately 133% and 200% and the prices associated with the Beta technique were ruling.
• The Beta technique would be cost minimizing if the rate of profits were between 200% and approximately 214% and the prices associated with the Alpha technique were ruling.
• The Alpha technique would be cost minimizing if the rate of profits were between 200% and approximately 267% and the prices associated with the Beta technique were ruling.

In short, the cost-minimizing technique would not be unique between the rate of profits of approximately 133% and 200%, if it were not for the possibility of operating Process IIb alone. The cost-minimizing technique would not exist between the rate of profits of 200% and approximately 267%, once again if it were not for the possibility of operating process IIb alone.

This example raises a question: Can examples arise with these sorts of non-uniqueness and non-existence problems, even allowing for the possibility of free goods? This is a theme in some of Christian Bidard's and Bertram Schefold's work. (Bidard amusingly names one of his articles "Is von Neumann Square?") I do not recall their conclusions. I think Bidard comes down negatively on Sraffa, based, I guess, partly on his analysis of joint production.

References

• Christian Bidard (2004) Prices, Reproduction, Scarcity, Cambridge University Press
• Heinz D. Kurz and Neri Salvadori (1995) Theory of Production: A Long-Period Analysis, Cambridge University Press
• Bertram Schefold (1989) Mr. Sraffa on Joint Production and Other Essays, Unwin-Hyman
• Bertram Schefold (1997) Normal Prices, Technical Change and Accumulation, Macmillan
• J. E. Woods (1990) The Production of Commodities: An Introduction to Sraffa, Humanities Press International

"The Most Notable Critic of Austrian Economics"

Apparently, that is me.

Good Timing, Paul

Compare and contrast this:

"Some of us were skeptical. A couple of months after Mr. Obama gave that speech, I warned that his vision of a 'different kind of politics' was a vain hope, that any Democratic who made it to the White House would face 'an unending procession of wild charges and fake scandals, dutifully given credence by major media organizations that somehow can't bring themselves to declare the accusations unequivocally false.'" -- Paul Krugman, "Republican Death Trip", New York Times, 14 August 2009, p. A19 (Emphasis added)

to this:

"The stubborn yet false rumor that President Obama's health care proposal would create government-sponsored 'death panels' to decide which patients were worthy of living seemed to arise from nowhere in recent weeks.

Advanced even this week by Republican stalwarts including ... Sarah Palin and Charles Grssley ..., the nature of the assertion nonetheless seemed reminiscent of the modern-day viral Internet campaigns that dogged Mr. Obama last year, falsely calling him a Muslim and questioning his nationality." -- Jim Rutenberg and Jackie Calmes, "Getting to the Source of the 'Death Panel' Rumor", New York Times, 14 August 2009, Page A1 (Emphasis added)

More On Economic Reasoning

All ten of the letters in the 8-14 August issue of The Economist are responses to the critique of academic economics in the 18-24 July issue. My favorite is from Meghnad Desai:

"SIR - When I was a student we studied business cycles, but the topic disappeared with the rise of mathematical equilibrium theorising. The idea that capitalism is an equilibrium system is common among Keynesian and neoclassical economists; they only differ as to whether the equilibrium is at full employment or under employment. The grand synthesis being taught makes the equilibrium stochastic and dynamic, but that is all.

Capitalism is, however, a disequilibrium dynamic stochastic system as Marx, Wicksell, Schumpeter and Hayek have told us over the past two centuries. Richard Goodwin tried his best to present a mathematical theory of such a disequilibrium system. After the crisis we need to revive that tradition if we are not to be surprised by another crisis."

The on-line Lucas Roundtable at The Economist doesn't have any invited contributions from left-leaning non-mainstream economists.

Still A Man Hears What He Wants To Hear And Disregards The Rest

Mark Blaug has another paper criticizing Sraffianism. Here's one quotation from it:

"One of the striking features of the Sraffian side of the debate, the victorious side, was their categorical refusal to throw light on the debate by empirical research, insisting along with Sraffa himself that an anomaly such as reswitching is a theoretical flaw, which can only be repaired by discarding the theory in which it occurs. This is a position that has been steadfastly maintained through a half century and has only recently been broken by two Sraffians, namely, Lynn Mainwaring and Ian Steedman (2000)... Despite diligent combing through the literature, I have been unable to find more than one or two pieces of empirical work inspired by the theoretical ideals of Sraffian economics." -- Mark Blaug, "The Trade-Off between Rigor and Relevance: Sraffian Economics as a Case in Point, History of Political Economy, V. 41, N. 2 (2009): 219-247

I still don't see how empirical work is necessary to demonstrate a logical error. But confining myself to work before Mainwaring and Steedman (2000) and work in English, I find more than two: Albin (1975), Prince and Rosser (1985), and Ozanne (1996). Asheim (2008) is based on work written up long ago.

Those works, though, are looking for empirical evidence of Sraffa effects. But a plethora of empirical work is somewhat consistent with Sraffianism. I refer to work following in Leontief's wake. Blaug even acknowledges the relevance of this tradition:

"I have inadverently slipped into the language of Leontief's input-output analysis, which of course is rooted in physiocracy and classical economics, but was later adapted by Leontief himself to the mode of analysis of G[eneral] E[quilibrium] T[heory]" -- Mark Blaug, ibid

I find tendentious the assignment of Leontief to General Equilibrium Theory.

Marc Lavoie - Quite Fierce

I think I downloaded Marc Lavoie's paper, "Neoclassical Empirical Evidence: On Employment and Production Laws as Artefact" from some conference proceedings. It's downloadable from his site, but I'm not sure for which recent conference it was presented.

Lavoie summarizes the orthodox response to the Cambridge Capital Controversy and the counterexamples:

• "Neoclassical authors minimize the capital paradoxes, making an analogy with Giffen goods in microeconomics, which do not question the entire neoclassical edifice;
• They look for the mathematical conditions that would be required to keep production functions as 'well-behaved', or they claim that this is a simple aggregation problem that can be resolved;
• They claim that Walrasian general equilibrium theory is impervious to the critique;
• They claim that they have the faith, or they plead ignorance;
• Empiricism (It works, therefore it exists)."

And he also mentions how some react to the arguments of such economists as Franklin Fisher and Anwar Shaikh:

"I have discussed some of these issues with a few of my neoclassical colleagues - those that I thought would be most open to dialogue. Amazingly, their response has been to fake that they did not understand the implications of the Shaikh or McCombie papers that I emailed them. The most genuine answers have been that without these elasticity estimates they could not say anything anymore. But they would rather continue making policy proposals based on false information than make no proposition at all. In other words, they would rather be precisely wrong than approximately right."

Unsent Letter

Others have already commented on the three articles on the breakdown of macroeconomics and financial economics in the July 18-24 issue of The Economist.

SIR - You write:

"[Macroeconomists'] framework reflected an uneasy truce between the intellectual heirs of Keynes, who accept that economies can fall short of their potential, and purists who hold that supply must always equal demand. The models the epitomise this synthesis ... incorporate imperfections in labour markets ('sticky' wages, for instance, which allow unemployment to rise)..."

But the idea that persistent unemployment is the result of wages sticky downward is a pre-Keynesian idea. Keynes explicitly rejected this explanation of the cause of unemployment:

"...the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment... My difference from this theory is primarily a difference of analysis." (John Maynard Keynes, The General Theory of Employment, Interest and Money, "Chapter 19. Changes in Money Wages"

Apparently neither saltwater nor freshwater macroeconomists follow Keynes.

Woodstock Thirtieth Anniversary

They did not hold the 30th anniversary concert at Woodstock. They held it in my backyard.

Crowd for Dave Matthews. Dave Did "Watchtower"

Naked Man and Photographer

The man in the purple shirt is Ken Kesey's business partner.

Salesman

What With The Arson, That Didn't Work Out So Well, Did It?

Now, Judge, I Had Debts No Honest Man Could Pay/The Bank Was Holding My Mortage And They Were Gonna Take My House Away

1.0 Introduction
This example illustrates one aspect of how Sraffa analyzed natural resources. In this case, natural resources consist of land of various qualities or grades. The quantity of each grade is given; more land cannot be produced. Land is not destroyed either. Appropriate production processes yield as much land as a joint output as given as input. So this sort of model does not incorporate a natural resource like oil that is used up in production.

This example demonstrates that owners of less efficient (productive) natural resources can receive a greater rent.

By the way, Sraffa introduces a distinction between basic and non-basic commodities. Lands with positive rent are non-basic, and therefore their rent is a candidate for taxation.

2.0 Technology
This is a simple economy in which only corn is produced. Table 1 shows the available processes that have corn as an output. Each process requires the use of one grade of land, and no more than one process is known for each grade of land. (This is an example of a model of extensive rent.) Suppose this economy has available 150 acres of land of grade I, 162 acres of grade II land, and 210 acres of grade III land.

Table 1: Technology

Inputs	Process
	Alpha	Beta	Gamma
Labor (Person-Years)	2/5	1	2/7
Grade I Land (Acres)	1	0	0
Grade II Land (Acres)	0	3/2	0
Grade III Land (Acres)	0	0	1
Corn (Bushels)	2/5	1/6	4/7
Output (Bushels)	1	1	1

3.0 Prices
The question to be addressed is what prices and distribution of income are compatible with a long-period position, given the technology. The amount of corn required for net output is a parameter that must be known to answer this question.

3.1 When Only One Grade Of Land Is Cultivated
Suppose the requirements for use for corn in this economy can be satisfied by cultivating any one of the three grades of land. Two grades, and maybe some of the third grade, can lie fallow. So at most 90 bushels are produced each year, after replacinging up the seed corn.

And suppose that the wage is 1/2 bushels per person-year. The wage is paid out at the end of the year. These assumptions are enough to derive the factor-price curves shown in Figure 1. These curves are drawn under the assumption that all grades of land paid no rent.

Figure 2: Factor Price Curves

Since the beta factor-price curve is rightmost (on the outer frontier) at the given wage, all corn is produced on land of the second grade, and this land pays no rent. The wage and the rate of profits must satisfy the following equation:

(1/6)(1 + r) + w = 1

where a bushel corn is the numeraire. For a wage of 1/2 bushels per person-year, the rate of profits is 200%.

Under the given assumptions, the cost of producing a bushel corn on the first grade of land, even if that land were to pay no rent, is 7/5 bushels. Since this cost exceeds the revenues from selling a bushel of land, no capitalist would want to produce on the first grade of land. The reader can check that the cost of producing a bushel corn on the third grade of land also exceeds unity.

3.2 When Two Grades Of Land Are Cultivated
Now suppose the requirements for use are such that two grades of land must be cultivated. The net output of this economy is between 90 and 180 bushels corn. The wage remains 1/2 bushels per person-year. In this case, the first and second grades are cultivated, with the second grade paying rent. The price equations are:

(2/5)(1 + r) + (2/5)w + ρ₁ = 1

(1/6)(1 + r) + w + (3/2)ρ₂ = 1

ρ₁ ρ₂ = 0

ρ₁, ρ₂ ≥ 0

The equations specify that no land can have a negative rent and that at least one grade of land must have a rent of zero. The rate of profits is 100%, when the wage is 1/2 bushels per person-year. Land of grade I pays no rent, and the rent on land of grade II is 1/9 bushels per acre.

The cost of producing a bushel corn on the third grade of land, accounting just for outlays of seed corn and labor, is 9/7 bushels. Capitalists will not want to cultivate the third grade of land, even if it is free.

3.3 When Three Grades Of Land Are Cultivated
Finally, suppose the requirements for use for use require all three grades of land to be cultivated. The price equations are:

(2/5)(1 + r) + (2/5)w + ρ₁ = 1

(1/6)(1 + r) + w + (3/2)ρ₂ = 1

(4/7)(1 + r) + (2/7)w + ρ₃ = 1

ρ₁ ρ₂, ρ₃ = 0

ρ₁, ρ₂, ρ₃ ≥ 0

The rate of profits is 50%, when the wage is 1/2 bushels per person-year. The rent on land of grade I is 1/5 bushels per acre. The rent on grade II land is 1/6 bushels per acre

3.4 Orders Of Efficiency And Rentability
The above analysis has identified a definite order in which different grades of land will be cultivated as greater quantities of output are required to be produced. This is the order of efficiency. In this example, the order of efficiency, from most efficient to least efficient, is: Grade II, Grade I, Grade III.

One can also rank the grades of land from high rent to low rent, when all three grades of land are cultivated and the wage is 1/2 bushels per person-year. The order of rentability, from highest rent to zero rent, is: Grade I, Grade II, Grade III.

The orders of rentability and efficiency differ. It is possible for a less productive, that is, the less efficient, resource to provide its owner with a greater rent than the more efficient resource.

This example is not driven by the existence of switch points.

Reference

• Alberto Quadrio-Curzio, "Rent, Income Distribution, and Orders of Efficiency and Rentability", in Essays on the Theory of Joint Production (Edited by L. L. Pasinetti), Columbia University Press, 1980.

Elsewhere

• Benedict's encyclical letter, "Charity in Truth". (Comments on the encyclical at Open Economics.)
• James Galbraith's "No Return to Normal: Why the economic crisis, and its solution are bigger than you think", in the Spring 2009 issue of Democratic Left, the national magazine of Democratic Socialists of America (DSA).
• Steve Keen's "The Creative Destruction of G8 Economics: A plan to shift the theoretical foundations of our global system", in the current issue of Adbusters. (The September/October issue will explore alternatives to the neoclassical economic paradigm.)
• A Warning label: "This economics textbook is for entertainment purposes only..." for your mainstream economics textbook.

Labor Demand Curves Slope Down?

Consider the consequences of capital-reversing. I like to say that one is that explaining wages and employment by well-behaved supply and demand functions for labor is of doubtful logic. Here's what some others have had to say:

"the pattern of activities adopted in the face of long-run factor-price changes can be complicated and counterintuitive. Consequently, the long-run demand for factors can be badly behaved functions of factor prices." -- Michael Mandler (1999) Dilemmas in Economic Theory: Persisting Foundational Problems of Microeconomics, Oxford University Press.

"However, as was argued in Section 3 with regard to 'perversely' shaped, that is, upward sloping, factor-demand functions, this possibility would question the validity of the entire economic analysis in terms of demand and supply." -- H. D. Kurz and N. Salvadori (1995) Theory of Production: A Long Period Analysis, Cambridge University Press

"The essential point of the criticism concerns the factor demand curves. The discovery that factor demand curves may be positively sloped in the relevant range, not negatively..." -- Bertram Schefold (1990) "Joint Production, Intertemporal Preferences, and Long-Period Equilibirum," Political Economy: Studies in the Surplus Approach, V. 6, 1990, pp. 162-163.

"there is not necessarily an inverse monotonic relation between the cost-minimizing quantity of an input and its price... Figures 6.17a-6.17c can be interpreted as demand curves for labour... in Figure 6.17b, ...the sectoral demand curve is upward-sloping... I have shown in Figure 6.17c that the aggregate demand curve is not downward-sloping in the presence of reswitching: indeed, like the sectoral demand curve, it is not even monotonic. Reswitching is sufficient, not necessary, for the aggregate demand curve for labour not to be downward-sloping: to see this, consider Figure 6.18..." -- J. E. Woods (1990) The Production of Commodities: An Introduction to Sraffa, Humanities Press

It is a theme of this blog that mainstream economists have yet to integrate this challenge into their theories and teaching.

Principles of Neoliberalism

Some of these strike me as too absurd (e.g., 7, 9) to bother refuting:

1. "...contrary to classical liberal doctrine, [the neoliberal] vision of the good society will triumph only if it becomes reconciled to the fact that the conditions for its existence must be constructed and will not come about 'naturally' in the absence of concerted political effort and organization...
2. ...'the market' is posited to be an information processor more powerful than any human brain, but essentialy patterned on brain/computational metaphors... The market always surpasses the state's ability to process information...
3. ...for purposes of public understanding and sloganeering, market society must be treated as a 'natural' and inexorable state of humankind...
4. A primary ambition of the neoliberal project is to redefine the shape and functions of the state, not to destroy it...
5. ...Neoliberals treat... politics as if it were a market and promoting an economic theory of democracy...
6. Neoliberals extol freedom as trumping all other virtues, but the definition of freedom is recoded and heavily edited within their framework... Freedom can only be 'negative' for neoliberals (in the sense of Isaiah Berlin)...
7. ...capital has a natural right to flow freely across national borders. (The free flow of labor enjoys no similar right.)...
8. ...pronounced inequality of economic resources and political rights [is] not ... an unfortunate by-product of capitalism, but as a necessary functional characteristic of their ideal market system...
9. Corporations can do no wrong, or at least they are not be blamed if they do...
10. The market (suitably reengineered and promoted) can always provide solutions to problems seemingly caused by the market in the first place...
11. The neoliberals have struggled from the outset to make their political/economic theories do dual service as a moral code..."

-- Philip Mirowski, "Postface", in The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective (edited by Philip Mirowski and Dieter Plehwe), Harvard University Press (2009)

(I've miscategorized this post since neoliberalism encompasses more than economics.)

Four Papers On Henry George

I have never been enamored of Henry George. But for those who like him, the recent History of Economics Society Annual Conference (Denver, CO, 26-29 June 2009) had a session on "Henry George and the Concept of the Commons", with four papers:

• Lew Daly, "Creation Ethics and the Distribution of Wealth from Genesis to Cyberspace"
• Neil B. Niman, "Henry George and the Intellectual Foundations of the Open Source Movement"
• William S. Peirce , "Allen Ripley Foote and the Revenues for the Progressive State"
• Francis Peddle, "Henry George and the Open Knowledge Commons"

I guess one can get the following from George: Many do not legitimately contribute to production, but merely charge those who do work a toll for access to the property with which they work. I can get the same idea, however, from P. J. Proudhon's What is Property?; Karl Marx's idea of the worker's "double freedom" (in chapter VI of Capital, Volume 1) to sell his labor power and of ownership of other commodities for sale; and of Thorstein Veblen's concept of business as sabotage, in contrast to industry. What do I need Henry George for, at least with respect to this idea?

Elsewhere

I have added the blog of some economists at the University of Missouri-Kansas City to my blogroll. That blog is more policy-oriented than this. Bill Mitchell blogs from Australia, also more about policy than I do. Grupo Lujan-Circus seems like a blog of interest to me, but I can read only the names. The same remark applies to the blog of the Italian Association for the History of Political Economy.

Occasionally I stumble across curious articles in Wikipedia. The one on Surplus economics references Paul Baron and Paul Sweezy. It doesn't describe their ideas very well, and could do with some reference to Sraffa too. The entry on Newtonian time in economics seems to have been written by Austrian fanboys who, typically, know about neither Joan Robinson's distinction between logical and historical time nor Paul Davidson's attack on the Austrian school.

Current Events Foreseen

First Instance

"[Condolences]
G.O.P.Y.T.

A letter from Ronald Reagan to Michael Jackson, dated 1 February, 1984, five days after the singer's hair was set afire by pyrotechnics during the filming of a Pepsi commercial...

Dear Michael,

I was pleased to learn that you were not seriously hurt in your recent accident. I know from experience that these things can happen on the set - no matter how much caution is exercised. All over America, millions of people look up to you as an example. Your deep faith in God and adherence to traditional values are an inspiration to all of us, especially young people searching fro something real to believe in. You've gained quite a number of fans along the road since "I Want You Back", and Nancy and I are among them. Keep up the good work, Michael. We're very happy for you.

Sincerely,
Ronald Reagan" -- Harper's Magazine (June 2009)

Second Instance
This was almost certainly not written last week:

"[James Hansen] said that he was thinking of attending another deomonstration soon, in West Virginia coal country." -- Elizabeth Kolbert, "The Catastrophist", The New Yorker (June 29, 2009): 39-45

And here we have some news:

"SUNDIAL -- Coal miners confronted environmental protesters June 23 during a sometimes tense standoff at a focal point in the battle over mountaintop mining -- a protest that attracted one of the nation's foremost experts on global warming.

NASA climate scientist James Hansen was among the protesters, and West Virginia State Police arrested him during a planned act of civil disobedience. While upstaged in the media spotlight by actress Daryl Hannah, who also was arrested, it was Hansen's presence at the rally that drew widespread interest in the event from the environmental community..." -- Walt Williams

Suppressed Empirical Results

"An overwhelming majority of the entrepreneurs thought that a price based on full average cost (including a conventional allowance for profit) was the 'right' price, the one which 'ought' to be charged...

...the procedure can be not unfairly generalized as follows: prime (or 'direct') cost per unit is taken as the base, a percentage addition is made to cover overheads (or 'oncost' or 'indirect' cost), and a further conventional addition (frequently 10 per cent.) is made for profit. Selling costs commonly and interest on capital rarely are included in overheads; when not so included they are allowed for in addition for profits." -- R. L. Hall and C. J. Hitch, "Price Theory and Business Behavior", Oxford Economic Papers, (May 1939): 12-45

These findings motivated Milton Friedman in his badly-argued work on methodology.

Not Nostradamus

Brad DeLong still wants the attempted extrapolation of trends to be equivalent to prophecy. So I thought I'd point out another nineteenth century writer:

"There are at the present time two great nations in the world, which started from different points, but seem to tend towards the same end. I allude to the Russians and the Americans. Both of them have grown up unnoticed; and while the attention of mankind was directed elsewhere, they have suddenly placed themselves in the front rank among the nations, and the world learned their existence and their greatness at almost the same time.

All other nations seem to have nearly reached their natural limits, and they have only to maintain their power; but these are still in the act of growth. All others have stopped, or continue to advance with extreme difficulty; these alone are proceeding with ease and celerity along a path to which no limit can be perceived. The American struggles against the obstacles that nature opposes to him; the adversaries of the Russian are men. The former combats the wilderness and savage life; the latter, civilization with all its arms. The conquests of the American are therefore gained by the plowshare; those of the Russian by the sword. The Anglo-American relies upon personal interest to accomplish his ends and gives free scope to the unguided strength and common sense of the people; the Russian centers all the authority of society in a single arm. The principal instrument of the former is freedom; of the latter, servitude. Their starting point is different and their courses are not the same; yet each seems marked out by the will of Heaven to sway the destinities of half the globe." -- Alexis de Tocqueville, Democracy in America, V. 1, last page

By His Bootstraps

1.0 Introduction
One can hold savings in various forms of assets. In effect, savings is a time machine for transferring purchasing power into the future. A debt, when purchased - that is, a bond - is one such asset in which one can store savings. The relationships between bonds of various maturities and the existence of well-developed markets in which to trade bonds allows the determination of interest rates without relying on the theory of time preference, a theory which is a lot of utter hogwash anyhow.

The point of this post is to explain how, under certain institutions for selling second-hand debt, a relatively stable long-term interest rate can be maintained by beliefs in its stability. No need arises to call on the forces of thrift and productivity. This post might even be relevant to current events in the USA.

2.0 Institutions Providing a Setting in Which a Second Decision Must be Made
The model I outline here is based on Keynes' account of the two decisions a saver must make:

"The psychological time-preferences of an individual require two distinct sets of decisions to carry them out completely. The first ... determines for each individual how much of his income he will consume and how much he will reserve in some form of command over future consumption. But this decision having been made, there is a further decision which awaits him, namely, in what form he will hold the command over future consumption which he has reserved, whether out of his current income or from previous savings." -- J. M. Keynes, The General Theory of Employment, Interest and Money (1936): p. 166

Assume that the debts of the best quality available for purchase consist of Treasury bills (T-bills) that mature in three months, T-bills that mature in a year, and Treasury notes (T-notes) that mature in 10 years. These are all available in the U.S.A., along with T-bills, T-notes, and T-bonds of other maturities. In this exposition, I abstract from the existence of these other maturities. By including debts of these three maturities, the model incorporates the decision to hold money, assets that pay the short-term interest rate, or assets that pay the long-term interest rate.

In describing three-month T-bills as money, I again follow Keynes:

"...we can draw the line between 'money' and 'debts' at whatever point is most convenient for handling a particular problem. For example, we can treat as money any command over general purchasing power which the owner has not parted with for a period in excess of three months, and as debt what cannot be recovered for a longer period than this; or we can substitute for 'three months' one month or three days or three hours or any other period; or we can exclude from money whatever is not legal tender on the spot. It is often convenient to include in money time-deposits with banks and, occasionally, even such instruments as (e.g.) treasury bills." -- J. M. Keynes, The General Theory of Employment, Interest and Money (1936): p. 167

Suppose, contrary to fact, that the short term interest rate, r, was known to be constant for the next ten years, where 100 r is stated as an annual percentage. Then the long term interest rate would be established in the market at the start of the year as 100 [(1 + r)¹⁰ - 1] percent for 10 years, and the interest rate on money would be 100 [(1 + r)^1/4 - 1] percent for three months. A higher price on a bond corresponds to a lower interest rate. For example, the price of a T-bill with a face value of $1000 to be paid in a year is 1000/(1 + r) dollars.

3.0 The Individual
In this model, federal authorities set the interest rate on money. The short term interest rate provides a market consensus on monetary policy is likely to be over the next year. If the annual interest rate embodied in the price of one-year T-bills is higher than the annualized interest rate on money, the market price of T-bills is predicting a tightening of monetary policy. The individual allocates his savings partly on his opinion of this consensus. If he thinks, for example, that the monetary authority is not going to tighten that much, he would sell three-month T-bills and buy one-year T-bills, so as to make a profit from speculation when the price of the latter rises.

The individual, one assumes, has some idea of what is a normal long-term interest rate. He expects that over a long enough period, the federal authority's monetary policy will average out, thereby achieving this normal rate. The individual expects the price of T-notes to eventually rise when the current long-term interest rate is above that normal long-term rate and to fall when the current long-term rate is below that normal rate. Here, too, the possibility for speculative gains influences the individual in his allocation of his savings between T-notes and T-bills.

3.0 Markets
Consider a range of the price of T-notes. For a high enough price, those who are bears on this market (who expect the long term interest rate to rise) would dominate the bulls (who expect the long term interest rate to fall). More would be selling than buying, and the price would fall. The opposite is true for a low enough price. The equilibrium price at an instant of time balances bulls and bears:

"In the Treatise [Keynes] pictures the Bulls and Bears of the gilt-edged market going into and out of bonds as they individually come to think that the next price movement will be up or down. In this speculative market the price of bonds and thus their yield, the interest rate, can only settle if opinion is divided, so that those who wish to sell for fear of a fall find their offers matched by the bids of those who wish to buy in hope of a rise. It is thus, as Keynes says, a variety of opinion in the gilt-edged market which gives stability to the interest rate and some control over it to the monetary authorities." -- G. L. S. Shackle, "Simplicity in Keynes's Theory of Money and Employment", The South African Journal of Economics, v. 51, n. 3 (1983): 357-367

Elsewhere Shackle talks about equilibrium in such a speculative market as inherently restless.

4.0 Conclusions and a Policy Implication
I suppose one could express the above model in mathematics, if one were so inclined. One might start with some distribution of agents' beliefs about the conventional long term interest rate, and allow each agent to slowly update their view, maybe with the addition of random noise. (One might draw on Shackle's "The Bounds of Unknowledge" (in Beyond Positive Economics (ed. by J. Wiseman) Macmillan, 1983) in specifying this updating.) And the agents would decide on the distribution of their savings based on their views. Maybe the model should have more types of assets. One would want a model in which a diversity of opinion is maintained among agents, and in which time series for stock equilibria exhibit hysteresis and non-ergodicity. It wouldn't surprise me if somebody has already published such a model.

Keynes had something to say about policy based on this sort of analysis:

"Thus a monetary policy which strikes public opinion as being experimental in character or easily liable to change may fail in its objective of greatly reducing the long-term rate of interest... The same policy, on the other hand, may prove easily successful if it appeals to public opinion as being reasonable and practicable and in the public interest, rooted in strong conviction, and promoted by an authority unlikely to be superseded." -- J. M. Keynes, The General Theory of Employment, Interest and Money (1936): p. 203

Weird Science

I'm not sure I had heard of the Voynich Manuscript before this xkcd cartoon. But it did remind me of a couple of other artifacts whose existence I think extremely curious:

• The Antikythera Mechanism is a mechanical computer for calculating astronomical positions, and it dates from classical Greece.
• Piri Reis map dates, maybe, from before the Europeans had explored the New World, but yet shows the coast of South America and Anartica under the ice sheet.
• The Nazca lines are a series of drawings on a plateau in Peru dating from before Columbus and that make the most sense when viewed from the air.