tag:blogger.com,1999:blog-26706564.post115387610218583431..comments2021-05-13T07:15:40.969-04:00Comments on Thoughts On Economics: Response To Comments On Steve Keen's WorkRobert Vienneauhttp://www.blogger.com/profile/14748118392842775431noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-26706564.post-1154989820239993722006-08-07T18:30:00.000-04:002006-08-07T18:30:00.000-04:00I apologize for not responding earlier - I had to ...I apologize for not responding earlier - I had to finish my work and am currently engaged in moving across the countries. But anyways:<BR/><BR/>“But the discussion in this post only concerns two out of fourteen chapters in Keen’s book. And Radek does not even concede any virtues in those chapters.<BR/><BR/>Also, I can do without accusations that Keen is a “hack”, whether “a pretty skillful hack” or not; a “charlatan”; a liar; “dishonest and embarrassing”; “engages in” “dishonest rhetorical trick[s”<BR/><BR/>Calling Keen a “hack” etc., while not nice, is no different and in similar spirit as your “making fun of the Austrians”, “disrespecting Hazlitt” or the “so much for Solow’s “Nobel” (sic)”. It’s not like I called him a hack without substantiating it. To reiterate, I showed two instances (really, you don’t expect me to go nitpicking through the whole book? Two out of fourteen oughta be representative enough in this context) where Keen claims to have done something that he really hasn’t. He either misrepresents the work he is critisizing or he misrepresents what it is he himself is doing. Since I believe that he’s technically and intellectually competent enough, I have to conclude that he’s trying to pull a fast one (and yes, the whole book has that unpleasant feel of someone trying to sell you a replica Rolex). More specifically:<BR/><BR/>With regard to the DMS theorem I explained that:<BR/>1. Keen’s confusing (perhaps not on purpose) the DMS theorem with what looks like a version of the Gorman Polar Form theorem.<BR/>2. He misrepresents the assumptions that underly the GPF theorem making them much more stronger then need be. (He also seems to be confusing indifference curves with indirect utility functions but whatever).<BR/>3. Even under the extra strong assumptions for the wrong theorem he claims to prove something (by contradiction) that actually doesn’t follow. I mean, ok, let’s get crazy. Let’s pretend the GPF theorem really is the DMS theorem, let’s pretend that in order to “aggregate preferences” (not exactly the same thing as a represantative consumer existing, but at this point, hey, it’s too much to get into) all individuals have to have identical and homothetic preferences (which they don’t) – it still doesn’t follow that there is only one good and only one individual! You and I can have same preferences – that doesn’t make Robert Radek and Radek Robet. Simplest counter example is anything with externalities. Even without externalities the fact that we have different wealth levels could make things interesting. So identical preferences := 1 person. Also linear Engel curve, while admitadelly empirically unrealistic, do not mean there’s only one good. If spend 20% of my income on food and 80% on everything else regardless of my income level that doesn’t mean there’s only food and food. No, there’s still food and everything else. This should be blindlingly obvious.<BR/>Conclusion: Keen either doesn’t know what the hell he’s talking about or he’s lying.<BR/>Note that this holds regardless of what one thinks the implications of DMS theorem are on viability of GE models – that’s a different discussion.<BR/><BR/>“Think, for example, of Kirman’s (1992) analysis of representative agent models, which are widespread in New Classical Economics. Keen’s point is that Margaret Thatcher was wrong in asserting that “There is no such thing as society”. Would Radek accept Kirman’s claims, which I think are along the same lines: (quote)”<BR/><BR/>Man, I’m really starting to think that Kirman’s paper (BTW, first thing we read in our grad Macro class – so it’s not like this is outside the mainstream) is the most over cited and misunderstood paper by folks who want to kick around “mainstream” economics. It is a good and important paper. But again it’s mostly concerned with the Gorman Form theorem, not DMS or “representative agent” in the Ramsey sense (essentially the one in all the RBC models – not the same as the Gorman RA). I have some issues with Kirman but take his points. To say that “aggregation is hard”, which is what Kirman does, is fine – insightful even. But Keen goes much farther beyond that.<BR/>And BTW I would interpret the Gorman/Kirman point in a way precisely opposite to yours – the fact that a Representative Agent doesn’t exist in general means exactly that there is no such thing as society. After all, the whole point of constructing an RA is to talk about “society” rather than an washed multitude of individual agents.<BR/><BR/>With regard to the Cournot simulations:<BR/>1. I showed that Keen makes the thing work by sneaking in a particular assumption whereas he claimed explicitly that this was not an assumption he was making.<BR/>2. The assumption completely changes the context making Keen’s comments irrelevant<BR/>3. Keen seems to be confused with the meaning of “convergence”. Cournot theorem says that as number of firms goes to infinity quantity converges to competitive level and p converges to mc. Keen takes “converge” to mean that as TIME goes to infnity, given N, p and q converge to some level. Cournot: t fixed, N ->inf, p ->mc. Keen, N fixed, t ->inf, p->? Again, different model and one should be upfront about it.<BR/><BR/>Furthermore, after reading the Keen and Standish paper I’d like to add that<BR/><BR/>4. The “rich variety” of results they obtain have nothing to do with the “Keen equation (you know, it’s really obnoxious and pompous to name formulas after yourself ”, even if you did write them down - usually others do it for you) or the structure of competition. Nah, it all comes from the ridiculously complicated COST function they assume. I mean third-order polynomial cost function? They say that they do it in order to get increasing MC, but you only need a quadratic for that. But hey, with the quadratic you get ‘regular results’ not ‘rich results’. N (number of firms) as part of the total cost function? In quadratic form? Now you’re talking some serious spillovers between firms. No wonder it’s sensitive to the step parameter. This is looking NOTHING like a Cournot model, nevermind the fact that it’s not even a one shot game. Again, this type of exercise in and of itself can be interesting and illuminating, but they really need to leave the “Cournot was wrong” and all other ideological BS out of it.<BR/><BR/>As far as your simulation – you seem to have constant MC so step size shouldn’t matter except for the speed of convergence – this is the simulation I wrote above, you can solve it mathematically without the need for a computer. And the link to the paper don’t work.<BR/><BR/>Finally with respect to the “Stigler’s formula”, and the rest of the Keen and Standish paper which I didn’t get to before. <BR/><BR/>1. In Stigler’s paper the forumla is just a footnote – he’s writing down what he thinks everyone already knows, so it’s silly (misinformative) to name the formula after Stigler since it’s obviously common knowledge in the profession by 1952.<BR/>2. It applies to COURNOT competition, not perfect competition.<BR/>3. I wish the word “atomistic” wasn’t brought into it. It’s at best unneccesary, definetly confusing and probably falls in the “I don’t think that means what you think it means” category. The references with regard to “atomism” in K and S are to Mas-Collel. But to just parts in Mas-Collel which deal with perfect competition. The word “atomistic” doesn’t appear anywhere on those pages. And perfect competition ASSUMES price taking behavior. Price taking behavior automatically IMPLIES that a firm believes itself to be facing a flat demand schedule, even if market demand is downward sloping.<BR/>This is principles stuff. But maybe a technical explanation will make more sense. Suppose you have a continuum of firms of length “whatever”. Each firm is a point on this continuum, produces some amount of output and total market output is given by the integral over the continuum. Market price is a downward sloping function of this integral. Now, if you change any one’s firm’s output the integral doesn’t change so market quantity doesn’t change, so price doesn’t change. Consequently each firm regards price as given, acts as if it can sell all it wants at the going market price and doesn’t see itself as affecting total supply. But if each firm acts this way of course, then the total integral will change and hence market price will change. So flat demand faced by firms, downward sloping market demand. So there you go, I have no idea what Keen’s talking about - he's taking the wrong derivative I think. Wait, yes, I do, he’s talking about Cournot, go back above.<BR/><BR/>Oh yeah, your quote about increasing returns to scale is true – in general perfect competition is not compatible with increasing returns and it’s a pretty well known fact that in those cases no competitive equilibrium exists and you’re gonna get either a monopoly or a duopoly (again, Cournot). But this is a different issue. Oh and, increasing returns is downward sloping average cost curves. Perfect competition is perfectly fine with U-shaped ones.<BR/><BR/>Alright, that's it for now. Debate what DMS really means and all the other stuff some other time.Anonymousnoreply@blogger.com