Wednesday, July 11, 2007

Peter Lewin, Correct To Mistaken

Peter Lewin is influenced by Ludwig Lachmann:
"In a world in which the production and sale of outputs was part of a plan that was assumed to be consistent with all the other related plans, so that there were no disappointments in production schedules or, most notably, in the sale of output, the value of the resources that were part of the plan would clearly be certain. And if everyone shared in the knowledge of the value of the output and the contribution of each input, then, in some sense, these values would be reflected in the price of the inputs. In such a situation of perfect plan coordination, a meaningful capital aggregate could then be obtained…

…Production plans, considered as a whole, are typically in disequilibrium – are based, at least in part, on inconsistent expectations, not regarding the ‘rules of the game,’ but regarding the viability of the product or the productive technique. There is no way to derive an aggregate measure of capital in this situation. The net present values as (assumed to be) computed by each individual planner are based on inconsistent futures…" -- Peter Lewin (1999, p. 112-113).
Here his views are, to put it nicely, inadequately researched:
"The Neoclassicals seemed to think it was a question of the degree of substitutability between inputs, which the Neo-Ricardians assumed to be low (their models involved discrete substitutability by 'switching' from one fixed technique to another). Neither side wondered about the relevance of their framework to the market process as we know it." -- Peter Lewin (1999, p. 83)
Many Sraffians use examples of techniques with fixed coefficients. I think Austrians would be comfortable with models in which some capital goods are technique-specific. But some Sraffians were quite clear that some of their criticisms did not depend on a lack of substitutability (e.g., Pasinetti 1969 and maybe this).

And some neoclassicals have also been clear that some issues are not a matter of the degree of substitutability:
"As my exposition will reveal, the fatal flaw in question can exist even when a scalar 'leets' is the sole producible input; it can exist even when precise neoclassical marginal products do exist and do serve to pin down unequivocally the distribution of incomes between propertyless workers and affluent capitalists. The statues of Piero and Joan belong in the pantheon of neoclassicism itself." -- Paul A. Samuelson (2001).
The flaw is the belief that output per worker will be higher, given technology, when the interest rate is lower. Samuelson has been repetitive on pointing out that this belief is false, even if all microeconomic production functions are continuously differentiable (e.g., Samuelson 1976).

I think Sraffians were always clear that the analysis of the choice of technique is a theoretical thought experiment. Joan Robinson (e.g., 1974, 1975, 1983) is an example of a Cambridge-Italian economist who worried about the relevance of this thought experiment to the analysis of market processes.

This is incorrect mathematics:
"It will not do to assume that things are only known ‘probabilistically,’ since this presumes that a finite number of possible outcomes and their distribution is known." -- Lewin (1999, p. 79)
A random variable can take on an infinite number of values and still have a probability distribution (e.g., a Poisson distribution). Lewin, in context, is trying to get at the distinction between insurable risk and Knightian/Keynesian uncertainty. Perhaps the problem with the above passage is mainly a problem of exposition, of trying to explain this distinction without going into mathematics.

By the way, the anonymous referee who directed me to Lewin's book can be read as mischaracterizing it. Lewin does not present an exposition of Austrian business cycle theory. His book, however, does contain much of interest to my topic.

  • Peter Lewin (1999). Capital in Disequilibrium: The Role of Capital in a Changing World, Routledge
  • Luigi L. Pasinetti (1969). "Switches of Technique and the 'Rate of Return' in Capital Theory", Economic Journal, V. 79, N. 315 (Sep.): 508-531
  • Joan Robinson (1974). "History versus Equilibrium", Indian Economic Journal, V. 21 (Mar.): 202-213
  • Joan Robinson (1975). "The Unimportance of Reswitching", Quarterly Journal of Economics, V. 89 (Feb.): 32-39
  • Joan Robinson (1983). "Garegnani on Effective Demand", in Keynes's Economics and the Theory of Value and Distribution (Ed. by J. Eatwell and M. Milgate), Oxford University Press
  • Paul A. Samuelson (1976). "Interest Rate Determinations and Oversimplifying Parables: A Summing Up", in Essays in Modern Capital Theory (Ed. by M. Brown, K. Sato, and P. Zarembka), North Holland Publishing
  • Paul A. Samuelson (2001). "A Modern Post-Mortem on Bohm's Capital Theory: Its Vital Normative Flaw Shared by Pre-Sraffian Mainstream Capital Theory", Journal of the History of Economic Thought, V. 23, N. 3: 301-317

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