Monday, March 31, 2008

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.

Saturday, March 29, 2008

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.

Monday, March 24, 2008

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.

Friday, March 21, 2008

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.

Thursday, March 13, 2008

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.

Tuesday, March 11, 2008

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.

Monday, March 10, 2008

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.

Sunday, March 09, 2008

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?

Thursday, March 06, 2008

Meme Response

It took me a while to notice this tag:
  1. Pick up the nearest book (of at least 123 pages).
  2. Open the book to page 123.
  3. Find the fifth sentence.
  4. Post the next three sentences.
  5. 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.)

Wednesday, March 05, 2008

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.

Monday, March 03, 2008

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.

Sunday, March 02, 2008

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?