Welcome

I study economics as a hobby. My interests lie in Post Keynesianism, (Old) Institutionalism, and related paradigms. These seem to me to be approaches for understanding actually existing economies.

The emphasis on this blog, however, is mainly critical of neoclassical and mainstream economics. I have been alternating numerical counter-examples with less mathematical posts. In any case, I have been documenting demonstrations of errors in mainstream economics. My chief inspiration here is the Cambridge-Italian economist Piero Sraffa.

In general, this blog is abstract, and I think I steer clear of commenting on practical politics of the day.

I've also started posting recipes for my own purposes. When I just follow a recipe in a cookbook, I'll only post a reminder that I like the recipe.

Comments Policy: I'm quite lax on enforcing any comments policy. I prefer those who post as anonymous (that is, without logging in) to sign their posts at least with a pseudonym. This will make conversations easier to conduct.

Elsewhere

• Ezra Klein writes about John Kenneth Galbraith's concept of countervailing power.
• Ingrid Kvangraven and Carolina Alves are busting myths about heterodox economics. I have written before about economics as a study of the reproduction of society.
• Ben Holland, of Bloomberg News, writes an article, Marco Rubio puts out a paper citing obscure left-wing economists. Rubio's position paper is here. I do not find, say, Wynne Godlay, Hyman Minsky, Mariana Mazzucato, and many proponents of Modern Monetary Theory and Stock-Flow Consistent modeling particularly obscure or left-wing.
• Perspectives on Politics, a journal of political science, has a special issue, with open access on the causes and consequences of Trump.

How To Defend Capitalism?

1.0 Summary of Defense

Last month, Mike Munger purports to "summarize the basic argument for capitalism" (emphasis added). He acknowledges his argument is superficial. I find it excessively so. Munger argues that capitalism:

• Supports the division of labor
• Provides price signals so as to direct production appropriately
• Promotes economies to scale

Ultimately, this defense is that capitalism delivers the goods. Here's a well-expressed, simple defense that, partially, argues along these lines:

It is possible to defend our economic system on the ground that, patched up with Keynesian correctives, it is, as he put it, the 'best in sight'. Or at any rate that it is not too bad, and change is painful. In short, that our system is the best system that we have got.

Or it is possible to take the tough-minded line that Schumpeter derived from Marx. The system is cruel, unjust, turbulent, but it does deliver the goods, and, damn it all, it's the goods that you want.

Or, conceding its defects, to defend it on political grounds - that democracy as we know it could not have grown up under any other system and cannot survive without it.

What is not possible, at this time of day, is to defend it, in the neoclassical style, as a delicate self-regulating mechanism, that has only to be left to itself to produce the greatest satisfaction for all.

But none of the alternative defences really sound very well. Nowadays, to support the status quo, the best course is just to leave all these awkward problems alone." -- Joan Robinson (1962). Economic Philosophy, p. 130

2.0 Division of Labor and Efficiencies of Scale

I am not sure that Munger has three principles. I think of the division of labor and efficiencies of scale as closely related. But are either specific to capitalism, as opposed to any society with large scale production? In some sense, Munger is not necessarily attacking a strawperson. Here's an expression of a wish for a post-capitalist society that is arguably not consistent with large-scale production:

"...in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic." -- Karl Marx, The German Ideology.

But, maybe with enough automation, such a society would be possible.

I find it of interest that Marx, in The Communist Manifesto and in Capital describes how capitalism brought about a remarkable increase in productivity. I find Marx, on the division of labor, much more concrete and extensive than Adam Smith, even though he is writing about the abstraction of capital in general. How much has been written about what Marx took from Charles Babbage's On the Economy of Machinery and Manufactures? This book has a lot to say about what would now be called Command, Control, Communications, and Intelligence (C3I)?

Anyways, questions arise when a defense of capitalism echoes capitalism's greatest critic.

3.0 Price Signals Consistent with Market Socialism

Munger's second principle, about price signals, draws, I assume, on Friedrich Hayek. I do not see how this is a defense of capitalism, as opposed to markets. Whatever you think of it, a large literature on market socialism exists. Private ownership of capitalist enterprises is not necessary for the existence of price signals. I suppose one could argue about incentives in this context, which I do not think Munger does.

4.0 Other Arguments

I think interesting that Munger does not say anything about the efficient static allocation of resources or the first and second welfare theorems. In some sense, he is correct to put these ideas aside, since a good apologetic argument for capitalism cannot be fashioned in these terms.

On the other hand, Munger avoids all of the issues that John Quiggin brings up in his recent Economics in Two Lessons. Issues with unregulated capitalism include externalities, the assignment and distribution of property rights, and periodic bouts of widespread unemployment. (I find unpersuasive talk of "government failure" as a response to the demonstration that unregulated capitalism is bound to misallocate resources. Is a claim being made that anybody can calculate a closed-form optimal allocation at any point in time?)

5.0 What is Capitalism?

I suspect that Munger supports a fairly hierarchical version of capitalism, with widespread private, brutal, and authoritarian institutions (for example, corporations). Inspired by Chapter 9, "Security and Freedom", of Hayek's The Road to Serfdom, I would ask what is compatible with Munger's apologetics for capitalism? Widespread co-operative, syndicates, and and factory councils? Co-determination, in which union representatives are on corpation boards? Sovereign Wealth Funds, Employee Stock Ownership Plans, Universal basic income, government insurance, and social security?

So Munger's three principles do not seem to rule out either an extensive social democracy or even democratic socialism.

Positive Real Wicksell Effect, Forward Substitution Of Labor

Figure 1: Wage-Rate of Profits Curves

Consider a comparison of stationary states. Net output is taken as given, and a unit of net output is the numeraire. Technology consists of a finite set of techniques. In each technique, net output is produced from inputs of labor and produced circulating capital goods. No fixed capital is used, and land of the best quality is in such abundance that it is free. Also assume constant returns to scale.

One can find a wage-rate of profits curve for each technique. The cost-minimizing technique at is the technique its wage curve on the outer envelope, also known as the wage-rate of profits frontier, at that wage. Switch points are points at which two or more wage curves intersect (on the frontier). Suppose the same gross vector commodities are produced, albeit in different proportions, at a switch point. Generically, the techniques differ in the process in use for one industry. The same processes are in use in all other industries. (I have argued that fluke switch points in which wage curves for more than two techniques intersect at a single switch point are of importance for understanding how qualitative changes in the properties of the wage frontier can come about from, for example, technological progress.)

A generic switch point can exhibit positive or negative real Wicksell effects. And it can exhibit a forward or reverse substitution of labor.

Around a switch point with a positive real Wicksell effect, a higher wage is associated with firms wanting to employ more labor throughout the economy, per unit of net output.

Around a switch point with a reverse substitution of labor, a higher wage is associated with firms, in the industry in which the process of production varies, wanting to employ more labor per unit of gross output.

I have previously given a numerical example that illustrates switch points with:

• A positive real Wicksell effect and a reverse substitution of labor.
• A negative real Wicksell effect and a reverse substitution of labor.
• A negative real Wicksell effect and a forward substitution of labor.

Figure 1 illustrates a switch point can have a positive real Wicksell effect and a forward substitution of labor. Suppose that the wage curves for two techniques have three intersections. One intersection is between a rate of profits of negative one hundred percent and zero. The other intersections are at two feasible poisitive rates of profits. Then the switch point at the largest positive rate of profits has a positive real Wicksell effect and a forward substitution of labor. (I have not actually specified a technology, with three or more produced commodities, that generates wage curves like those illustrated.)

Since all four possible combinations are possible, the direction of real Wicksell effects and the substitution of labor are independent of of one another. The choice of technique results in variation in gross outputs in multiple industries, for given net outputs. These variations also result in variation in the amount of labor firms want to employ. This variation in aggregate employment is consistent with any direction in the variation in the labor coefficient of production in the industry with the varying process.

If somebody explains wages and employment by supply and demand for labor, they are making a political point. This holds even if they argue that a supply and demand explanation provides a baseline. They may be demonstrating that economists continue to adopt a price theory that has been known for decades to be incoherent nonsense.

Some Experts On The Cambridge Capital Controversy

Many years ago, I used to argue, on Usenet, about the Cambridge Capital Controversy. Many mainstream economists used to ignorantly assert, when pretending to respond, that an application of the CCC to labor economics was my idea alone. So I used to demonstrate that this was false by quoting from the literature. As far as I can see, mainstream economists are still mostly trained into ignorance.

P. Garegnani:

"The idea that demand and supply for factors of production determine distribution has become so deeply ingrained in economic thought that it is almost viewed as an immediate reflection of facts, and not as the result of an elaborate theory. For the same reason, it is easily forgotten how comparatively recent that theory is. In the first systematic analysis of value and distribution by the English classical economists up to Ricardo, we would look in vain for the conception that demand and supply for labour and 'capital' achieve 'equilibrium' as the proportions in which those 'factors' are employed in the economy change with the wage and rate of profits. Thus, Ricardo saw no inconsistency between free competition and unemployment of labour. In his view lower wages could eliminate unemployment only by decreasing the growth of population or by favouring accumulation...

...Outputs can influence relative prices ... by affecting the relative scarcity of labour and capital, and thus the wage and rate of interest, given the supply of the two factors and the state of technical knowledge. This link between prices and outputs is one and the same thing as the explanation of distribution by demand and supply of factors of production: and it becomes untenable once that explanation is abandoned.

Thus, the separation of the pure theory of value from the study of the circumstances governing changes in the outputs of commodities, does not seem to meet any essential difficulty. On the contrary, it may open the way for a more satisfactory treatment of the relations between outputs and the technical conditions of production. Moreover, by freeing the theory of value from the assumption of consumers' tastes given from outside the economic system, this separation may favour a better understanding of consumption, and its dependence on the rest of the system.

With this, the theory of value will lose the all-embracing quality it assumed with the marginal method. But what will be lost in scope will certainly be gained in consistency and, we may hope, in fruitfulness." -- P. Garegnani, RES, 1970.

Harvey Gram:

"The intractable problems created by the effort to extend into the unobservable future the terrain over which the forces of supply and demand hold sway are somehow set aside as questions that will ultimately yield to a more sophisticated analysis. Meanwhile, the existence of an alternative framework of thought based on a revival of classical theory is denied. Certainly the critics of neoclassical theory committed a great heresy during the capital theory debate by proving false the analytical basis for the principle of substitution in so far as it affects the demand for capital and labour. Those who would defend neoclassical theory against any attack on its logical structure fail to see the significance of this result. This is because they have given up any causal claims for general equilibrium theory..., thus abandoning the traditional notion of equilibrium as a centre of gravity relative to which prices and quantities fluctuate. The revival of interest in classical theory is, in part, a revival of interest in this old-fashioned idea. It is also a revival of interest in a broadly based theory that does not presume to find the essence of all market phenomena in terms of the single principle of substitution." -- Harvey Gram, 1990.

Heinz Kurz and Neri Salvadori

"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, Theory of Production: A Long Period Analysis, Cambridge University Press, 1995.

Heinrich Bortis:

"...Specifically, it must be shown that under ideal conditions, i.e. perfect competition and absence of disturbing elements like uncertainty and money, one or more markets do not function properly so that, even in the long run, no tendency towards full employment exists: the problem is not about possible market failures, but about principles.

This task has been accomplished by the capital-theory debate, the main economic implications of which are set out in Garegnani (1970), Kurz (1985) and Pasinetti (1974, pp. 132-42; 1977, pp. 169-77); a comprehensive and easily understandable presentation of the crucial issues is Harcourt (1972).

...As a consequence, no regular (downward-sloping) associations between profit rates, on the one hand, and capital and output per worker and the capital-output ratio, on the other hand, exist. These relationships are, in fact, totally irregular. Since the 'capital market' does not function in the neoclassical sense and since factor markets are supposed to be interrelated, regular long-period relationships between 'factor prices' and 'factor quantities' cannot exist in general, i.e. there are no 'factor markets' at all if the long run is considered. This is the main result of the capital-theory debate...

...The fact that there are no regular relationships between 'factor prices' and 'factor quantities' is extremely damaging for equilibrium theory: the market cannot produce a tendency towards some postulated long-period equilibrium to solve the central economic problems, i.e. value, distribution and employment....

...These references to the history of the capital-theoretic discussion show that it is a discussion about fundamentals. The basic question is whether there are regular relationships between 'factor prices' and 'factor quantities' or not, i.e. normally functioning factor markets. Examining this question seriously will inevitably shape an economist's vision in a decisive way. The capital-theoretic debate is a theoretic watershed dividing two different views of looking at socioeconomic phenomena, i.e. neoclassical equilibrium theory which emphasizes behavior and classical-Keynesian political economy which starts from the functioning of the socioeconomic system, the question being which approach is more appropriate to tackle fundamental socioeconomic problems, such as value, distribution and employment. Therefore, as Geoffrey Harcourt was one of the first to perceive, the Cambridge controversies are 'not merely about the measurement of capital...but about the scientific status of neoclassical (equilibrium) theory' (Dixon 1988, pp. 251-2)...." -- Heinrich Bortis, Institutions, Behavior and Economic Theory: A Contribution to Classical-Keynesian Political Economy, Cambridge University Press, 1997.

Syed Ahmad:

"The issue was settled in favour of Cambridge University when Samuelson wrote (1976) that wherever 'informed economic theory is taught', the 'paradoxes' are accepted, and their consequences for the concept of capital known. It is another matter that, on the basis of this criterion, many seats of learning in North America, as perhaps also elsewhere, do not teach informed economic theory." -- Syed Ahmad (1998)

Edward Nell:

"After Sraffa's book in 1960 the next decades saw major battles in the journals, battles which resulted in conclusions widely held today: to wit, the technical errors are conceded, but their significance is contested. This has a practical meaning: open any major journal at random today, and there will be marginal products... - with no hint that any technical error is involved. The critique is simply ignored. It can't be answered, but it is held to be unimportant." -- Edward Nell (1998)

Ian Steedman:

"Both classical and marginalist economists provided accounts of the long-period (uniform rate of profit) theory of value and distribution, but whereas a classical economist could take the real wage as a datum for the purpose of such analysis (whatever the implicit 'background' theory of wages might be), the marginalist economist had to 'close the system' in some other manner. In effect, since 'resource supplies' were often taken as given, this meant that 'the supply of capital' had to be taken as given, in one way or another. Just how the given supply of capital was to be represented was an issue that led to considerable heterogenity amongst even those marginalist economists who shared the long-period method of analysis with the classical economists and with each other. That heterogenity cannot be entered into here (see Kurz and Salvadori, 1995: 427-43) but it is now widely recognized that each version of such traditional long-period marginalist theory of value and distribution encountered insoluble problems (ibid.: 443-48)." -- Ian Steedman (1998)

Michael Mandler:

"But, as economic theory has learned since the 1930s, 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... The principle of variation works as an argument for long-run determinancy insofar as the set of zero-profit activities shift in response to factor price changes; it is not necessary that newly adopted activities use cheaper factors more intensively..." -- Michael Mandler (1999)

Luigi L. Pasinetti:

"But something even more interesting and intriguing has happened. After only a few years, even the admissions initially made no longer found any mention... The typical economics student entering university from the 1980s onwards has heard nothing of the re-switching difficulties involved in the neoclassical theory of capital and income distribution." -- Luigi L. Pasinetti (200?).

James Galbraith:

"The critique of Robinson and Sraffa is more than forty years old. Yet for psychological and political reasons, rather than for logical and mathematical ones, the capital critique has not penetrated mainstream economics. It likely never will. Today only a handful of economists seem aware of it... Ostensible liberals are not exempt; their arguments for higher public infrastructure investment (based on its alleged marginal productivity) are precisely of this type, as are arguments for increased investment in education based on the higher marginal productivity of human skill." -- James Galbraith (2001).

Steve Keen:

"Of course, the average economist would never tell you that economic theory has suffered such a devasting blow. This is because the average YOUNG economist doesn't even know that this intellectual bout took place - the concepts in this debate don't make it onto the curriculum for either undergraduate or postgraduate students. Older economists cannot avoid some knowledge of the war, but they erroneously believe that their camp won, or they dismiss the issue completely.

Today economic theory continues to use exactly the same concepts which Sraffa's critique showed to be completely invalid...

There is no better sign of the intellectual bankruptcy of economics than this." -- Steve Keen (2001)

Neri Salvadori:

"Reswitching debate is relevant for...theories which determine income distribution on the basis of demand and supply of all factors including labour and 'capital'."

Fabio Petri:

"The arguments necessary to surmount these confusions started becoming available in English only with Garegnani (1976), which was quickly followed by a number of other papers and books among which Petri (1978, 1991, 1998, 1999), Garegnani (1978-9, 1989, 1990, 2000), Eatwell (1979, 1982), Milgate (1979, 1982), Eatwell and Milgate (1983), Schefold (1985, 1997), Kurz (1987). This wave of contributions finally started clarifying the difference between long-period and neo-Walrasian versions of the marginalist/neoclassical approach, as well as the different roles of the conception of capital as a single factor, roles some of which were argued to be present even in the neo-Walrasian versions... The neoclassical reaction was striking: no reply at all. Some of the neoclassical assessments of the Cambridge controversies (e.g. Blaug, 1974; Stiglitz, 1974; Bliss, 1975b) antedate the writings of this second critical wave, but other ones do not (e.g. Dougherty, 1980; Burmeister, 1980, 1991; Hahn, 1982) and yet contain no reference to any of the post-1975 critical writings just mentioned. One possible interpretation ... is that no reply came forth because a satisfactory reply was not easy to find. Be that as it may, the fact is that up to now (end 2002) none of the post-1975 critical writings just remembered is mentioned in any of the writings of Hahn or Solow or F. M. Fisher or Burmeister even when they return on the themes of the Cambridge controversy. No wonder that considerable misunderstandings persist, which is what prompted me to write the present essay." -- Fabio Petri

Gramsci Should Be Difficult To Understand

Fact: If you use the word "carceral" instead of "prison" your argument immediately becomes more persuasive.

Good praxis is to use words like "praxis" that nobody understands. -- Matthew Yglesias (5 April 2019, on Twitter)

A large academic literature exists around Antonio Gramsci's Prison Notebooks. Topics discussed include the relationship of civil society to the state, hegemony, the contrast between consent and coercion, class alliances in political parties, Fordism, the contrast between a "war of position" and a "war of movement", the contrast between organic intellectuals and traditional intellectuals, and the concept of a passive revolution.

When writing his notebooks, Gramsci had to be concerned with Fascists guards reading them and tearing them up in displeasure. Thus, he wrote in a kind of code. The communist party becomes the "modern prince". Machiavelli wrote to advise the ruler of Florence how to obtain rule over Italy; Gramsci was thinking about how communists could rule with the consent of the governed. Marxism or Marxist-Leninism becomes "the philosophy of praxis." As I understand it, praxis is practice informed by theory or theory embodied in practice, in some sense. Gramsci is referring to the last of Marx's Theses on Feuerbach:

The philosophers have only interpreted the world, in various ways; the point is to change it. -- Karl Marx

As you can see, these code words are not a mechanical substitution. To understand Gramsci, one would want to think about these choices.

Gramsci never thought of his notebooks as complete. You can find him often writing about what a study on some topic should contain. I saw this in the selection titled, "The Modern Prince", for example. Gramsci could order books. Piero Sraffa provided an unlimited account at some bookstore. Nevertheless, he hoped to complete his work, which was to be "for forever", sometime in the future. Given the circumstances of their writing, the Notebooks were not required to be internally consistent.

Despite the abstractions used by Gramsci, his writing is often quite concrete. But to appreciate it, one would need to know about Italian intellectuals before he entered prison. Myself, I am no expert on Amadeo Bordiga, Benedetto Croce, Giovanni Gentile, Antonio Labriola, or Achille Loria. Nor can I easily check claims about arguments on how to standardize Italian, whether focused on the dialect in Florence or also allowing for influence of other dialects. I suppose to understand Gramsci, one should also know about Giuseppe Garibaldi, Sardina and the southern question, and lots more about Italian history.

For me, there is a language issue. I rely on Quentin Hoare and Geoffrey Nowell Smith's Selections from the Prison Notebooks, not Joseph Buttigieg's comprehensive translation. The literature on Gramsci also contains attempts to translate his concepts to times and places, other than the Italy of Gramsci's day.

The FAA Process For Certifying Flightworthy Software

1.0 Introduction

This post is on current events. The plane crashes of the Boeing 737 Max 8 airplane is arguably about more than a software bug. I point out in this post that you can read about how the United States' Federal Aviation Administration (FAA) is supposed to certify software and electronic hardware in airplanes yourself. In some sense, this post is not about software bugs, but rather about software engineering certification processes that fit into a larger systems engineering perspective.

2.0 FAA Resources

The FAA provides lots of resources associated with DO-278C, Software Considerations in Airborne Systems and Equipment Certification, the primary document of interest in this context.

• You can find an overview of the FAA Airplane Certification Service here.
• Position papers from the Certification Authorities Software Team (CAST) are available here.
• I was particularly interested in some of these Research Reports.

3.0 Conclusion of Recent FAA Research on Software Reliability Models

For historical reasons, I am interested in software reliability models. These models address an important problem. One could mandate that software be developed by rigourous processes, by some defined model or another. And one could require that developers produce certification arguments along with delivered software. But how does the variability of rigor relate to quantitative measures of software reliability and availability, as needed for system reliability? A recent report looks at software reliability and, as I understand, concludes the technology is not mature enough yet:

"the current position is that methods for estimating probabilities of software errors have not yet provided a level of confidence acceptable for software assurance purposes. Since the publication of the report and DO-178C document, work on software reliability has improved the level of confidence. However, the multiplicity of available models and absence of quantified performance objectives contribute to the confidence issue remaining open and added the issue of guidelines on selecting an adequate reliability method." Final Report for Software Service History and Airborne Electronic Hardware Service Experience in Airborne Systems (DOT/FAA/TC-16/18, Section 7.5.4, p. 102)

I don't know that I disagree with this conclusion. One important issue is not mentioned in that summary statement. If enough catastrophic or hazardous failures exist for estimating model parameters, the software is unlikely to ever meet reliability goals. One might apply the models to less severe failures, though. I do not think the range of models is quite as diverse as suggested. For example, the Goel-Okumoto model is a continuous version of the Jelinski-Moranda model. But no sign exists of settling down on a single model. I think there are a number of quantified performance objectives for these models: the LaPlace test for a decreasing failure rate, measures of the stability of parameter estimates, and Bev Littlewood's U and S tests of goodness of fit. Of course, one would have to agree to adopt some convention for confidence intervals or some such.

4.0 Further Thoughts

It is my impression that the FAA takes certification very seriously. Cost pressures and the evolution of technology lead to developers continually wanting to introduce new technology. And FAA-sponsored research has looked at the desirability of such introductions. For example, does the possibility of model checking make formal verification more practical? How should code coverage metrics be applied in testing object-oriented software? How should software developed with Model-Based Design be certified? Do MBD tools need to be certified and accredited, perhaps as installed on specific platforms? Should both the inputs and generated software be assessed?

Some of these considerations and developments in software technology are not all that new. The FAA should be conservative in what they will allow. For example, I like Java, but do not think it should be used for mission-critical software, with hard real-time and performance requirements. It might be used on an airplane for delivering consumer services, like music and movies to passengers, but in isolation from flight software.

At any rate, certification and accreditation by the FAA requires insight into engineering processes and cooperation with certification teams within developer organizations and their subcontractors. Even in an ideal world, decisions about who does what must be made here. Software technology is an important driver here, orthogonal to the need to align incentives.

But it does not matter how thoroughly certification and accreditation are defined if the FAA does not have the resources to provide oversight. And certification authorities must be willing to refuse to allow a plane to fly, with both commercial and government entities accepting such a decision. This is not a responsibility that I would want to have.