To Read: Oxfam Study On Cotton Subsidies

This looks interesting:

"One of the first studies of its kind after the US reformed a controversial export subsidy program called “Step 2,” Paying the Price estimates how much farmer incomes in West Africa could increase after further subsidy reform, and what these gains would mean in practical terms for a typical West African cotton farming household. The report confirms that substantial reform of American cotton subsidies in the 2007 Farm Bill could lead to increased income to feed an additional million children for a year or pay school fees for at least two million children living in poor West African cotton-growing households."

"Reform" in the above, I gather, means the elimination of "counter-cyclical payments, marketing loans, and direct payments" in the U.S.

Trivia: This CD is in my collection.

Rejection

Some time ago, I submitted a paper, "Some Fallacies of Austrian Economics" to the Quarterly Journal of Austrian Economics (Fixed journal title). I received referee comments, as well as a rejection letter.

I find the references to the literature helpful. I would have liked more guidance on recent articles on Austrian Business Cycle theory in the QJAE and the Review of Austrian Economics. (Aren't there any in Critical Review or the Review Of Political Economy?) I would have also liked suggestions on where to cut. Probably like most authors, I find some of the referee's comments misguided, and he sometimes missed what I was saying. Maybe I'll be more clear in my next revision.

10 Principles of Institutional Economics

• Economics is about social provisioning, not merely choices and scarcity.
• Both scarcity and wants are socially defined and created.
• Economic systems are human creations; no particular economic system is "natural".
• Ecological literacy (economy-ecology interface) is essential to economics.
• Valuation is a social process.
• The government defines the economy; laissez faire capitalism is an oxymoron.
• The history of economic thought is critical to the study of "basic principles" of economics.
• Economic theory ("logical economics") and real world economics are often very different things.
• Race, gender, and class shape economic processes, outcomes, and policies in the real world economy.
• There are many types of economists who do not agree on many things. This reflects the fact that economics is not "value free" and ideology shapes our analyses and conclusions as economists.

From: Janet Knoedler, Jennifer Long, Reynold Nesiba, Janice Peterson, Geoff Schneider, James Swaney, and Daniel Underwood (1998). "10 Things for Economic Pedagogy", Association for Evolutionary Thought, Western Social Science Association, Denver Colorado. (See here.)

"In Bitter Polemic"

"A case has been made for the observation that the modern contributions to economic understanding have not come from marginal economic analysis, but, on the contrary, they have mainly come out in bitter polemic with and as a challenge to it. And they deal with problems of production, not with the optimum allocation of scarce resources. Here we need only mention the modern (post-Keynesian) theory of production based on an open Leontief model, the Sraffian production and value models, and the Harrod-Domar dynamic macro models with the Kaleckian distribution and pricing models. This book looks into some of these developments as it analyzes the relationship between the accumulation of capital that underpins the growth pattern and the associated phenomena of pricing and distribution." -- Stanley Bober (1992). Pricing & Growth: A Neo-Ricardian Approach, M. E. Sharpe: xii-xiii.

Jayadev: Capital Account Openness and the Labour Share of Income

This looks to be an interesting paper:

"This paper investigates the relationship between capital account openness and the share of labour in national income. Employing a new index of financial openness and a cross-country panel of labour shares available from the United Nations System of National Accounts, the author shows a robust negative correlation between the degree of openness and the labour share. Although this effect is not present for low income countries, the direct negative relationship holds for all other subsamples and in the presence of a variety of controls. A plausible explanation is that openness alters the conditions of bargaining between labour and capital. By increasing the bargaining strength of capital vis-a-vis labour, increased capital mobility raises rents accruing to capital. Thus, capital account openness may reduce labour's share of income in the firm, and thereby, at an economy-wide level, its share of national output." - Arjun Jayadev (2007). "Capital Account Openness and the Labour Share of Income", Cambridge Journal of Economics, V. 31: 423-443

My favorite comment in the TPM Cafe discussion the other week:

"So if I pick up a copy of the Cambridge Journal of Economics or the Eastern Economic Journal, I can expect to find higher-quality work than in the AER?" -- Ragout

Sraffa Angers Mussolini

And not for the first time.

Apparently Sraffa, an Italian living in England, probably only wrote the first sentence of the following letter. Angelo Tasca, an Italian communist, wrote the bulk of the letter after discussion with Sraffa. Maurice Dobb translated Tasca into english.

"Sir, - In view of the discussion which has been taking place in your columns on the methods of Fascism, it seems opportune to bring before your readers the facts of a recent case which can hardly be included within Mr. Shaw's category of crimes justified by 'necessity'.

Antonio Gramsci, a Communist deputy in the Italian Parliament and a journalist, was arrested in November, 1926, in spite of the immunity attaching to a deputy, and was banished, along with other members of the Opposition, to the Italian island of Ustica. Signor Gramsci had always been an invalid owing to a pronounced curvature of the spine, and had only been able to indulge in continuous intellectual activity - an academic study of philology at the university prior to the war and a study of Italian politics since the war - by virtue of a special regime of life and a special diet. Even the milder rigours of prision life were therefore likely to be in his case particularly serious.

A few months after his initial arrest Signor Gramsci was taken from the island and sent to Milan. This journey was by means of the extraordinarily slow and painful process by which prisoners in Italy are transferred from place to place: cramped in a small cell of a special prison coach on a crawling train all day, and breaking the journey on the way at various places - at Palermo, Reggio Calabria, Naples, Rome, Florence, Bologna, - to be housed in the dirty and vermine-infested detention cells of the local prison for days on end. In Milan he has been awaiting trial since early February. The diet of a political prisoner is usually little more than a pound of bread and soup per day. Usually this can be supplemented by gifts and by food bought in the canteen by money received from friends and deposited with the prison governor. In Signor Gramsci's case, however, this has not been allowed; both gifts of food and money from friends have been intercepted by the prison authorities and prevented from reaching Signor Gramsci. Friends have been prevented from seeing him, even though he has legally a perfect right to receive such visitors.

A delicate invalid from the first, Signor Gramsci has been reduced to a state of extreme emaciation byt the harhness of his treatment since his arrest - treatment which would have shaken the constitution of the strongest man. Unable to digest even the meagre and poor food he receives, he is in a state of literal semi-starvation. He has several times had to be removed to the prison infirmary, and the state of his helath, affecting his mouth, has caused him to lose most of his teeth in the last few weeks, so that his ability to eat the coarse prison fare is still further lessened. After nine months of such treatment this man has now to undergo a further journey to Rome to stand his trial, at which he is likely to be sentenced to a long term of imprisonment, probably twenty or thirty years, for the crime of organizing opposition to the Fascist regime. - Yours, &c,, An Italian in England" -- Piero Sraffa (1927). Manchester Guardian, (October 21)

It was at this trial that the Fascist prosecutor, pointing to Gramsci, said, "We must prevent this brain from functioning for twenty years." Sraffa opposed this.

References:

• Nerio Naldi (1998). "Some Notes on Piero Sraffa's Biography, 1917-27", Review of Political Economy, V. 10, N. 4: 493-515
• Jean-Pierre Potier (1987). Piero Sraffa: Unorthodox Economist (18989-1983): A Biographical Esay, Routledge

Sraffa's Revolution In The History Of Economics

I don't understand this:

"... and Sraffa's obscure, at least to me, Production of Commodities by Means of Commodities." -- Gavin Kennedy

It seems to me that if one is interested in interpretations of Adam Smith, in particular, or the history of economic thought, in general, one is obligated to study Sraffa's impact until his interpretation is no longer totally obscure. If one cannot understand his original works, one can always look at secondary sources.

In old Wikipedia edits to the entry on Classical Economics, I tried to go into changes in how scholars look at the history of economic thought. As usual, I recommend other writers, for example, Roncaglia (2005) or Screpanti and Zamagni (2005). (I'm having trouble reading both these books. The minor variations in textbook variations of ideas with which I am quite familiar doesn't hold my attention. In particular, I have read the first edition of Screpanti and Zamagni and previous contributions by Roncaglia (e.g., 1978a, 1978b, 2000, and 2001).) Screpanti and Zamagni are particularly good on how neoclassical general equilibrium theory has run into a dead end, for internal reasons.

• Alessandro Roncaglia (1978a). Sraffa and the Theory of Prices (Translated by Jan Kregel), John Wiley & Sons
• Alessandro Roncaglia (1978b). "The Sraffian Contribution", in A Guide to Post-Keynesian Economics (edited by Alfred S. Eichner), M. E. Sharpe
• Alessandro Roncaglia (2000). Piero Sraffa: His Life, Thought and Cultural Heritage, Routledge
• Alessandro Roncaglia (2001). "Production of Commodities by Means of Commodities Between Criticism and Reconstruction: The Given Quantities Assumption", in Piero Sraffa's Political Economy: A Centenary Estimate (edited by Terenzio Cozzi and Roberto Marchionatti), Routledge
• Alessandro Roncaglia (2005). The Wealth of Ideas: A History of Economic Thought, Cambridge University Press
• Ernesto Screpanti and Stefano Zamagni (2005). An Outline of the History of Economic Thought (Translated by David Field and Lynn Kirby), Second edition, Oxford University Press

I Have Been On Vacation

I wonder if I might be missing something.

Saari Extends Sonnenschein-Mantel-Debreu Results

I recently found out that one can download Saari (1995). (Hat tip to Ars Mathematica.)

Before going into advanced mathematics, Saari notes a theoretically unjustified popular portrayal of economics :

"On the evening news and talk shows, in the newspapers, and during political debate we hear about the powerful moderating force of the market which, if just left alone, would steadily drive prices toward an equilibrium with the desired balance between demand and supply. The way this story is invoked to influence government and even health policies highlights its imporant critical role. But, is it true? I have no idea whether Adam Smith's invisible hand holds for the 'real world', but, then, no one else does either. This is because, even though this story is used to influence national policy, no mathematical theory exists to justify it. Quite the contrary... "

Saari considers dynamic processes in which the Walrasian auctioneer lowers prices in which supply exceeds demand and raises prices in which demand exceeds supply. The auctioneer knows about offers in all markets, and no trades are allowed unti equilibrium is achieved, if ever.

Saari does not only consider processes in which the rate at which the auctioneer changes prices is proportional to the discrepancy between demand and supply. He generalizes the problem to consider all processes which depend on both this discrepancy and the rate of change with respect to price at which agents change their offers. He finds that even when their is a stable equilibrium for some such process, some agents can upset this stability by withholding one commodity from the market.

I have thought about documenting - after having written about all the Sraffa examples I care to treat - Scarf's example of a non-stable equilibrium. Saari makes clear many more interesting examples exist. I don't know whether I am bright enough to find specific numeric examples.

I'm interested in the Arrow-Debreu model of intertemporal equilibrium, with production. Two sorts of dynamics exist in this model. Saari is talking about a tâtonnement process before the beginning of time. A question exists about how relative prices change over time in the cleared forward markets. I think one can explore the implications of Sraffa effects on the latter dynamics. I think it is still an open question whether Sraffa effects have implications for tâtonnement processes, although Mandler gives good arguments in the negative.

For Radek: I note that some editor has complained that the Wikipedia entry on General Equilibrium uses too much technical jargon. I don't know what to do about this. Compare and contrast the level of jargon in the entry on "Null set". I don't know what decides the level that is acceptable; perhaps the laity expects to be able to follow economics and not to be able to follow advanced mathematics.

• Donald Saari (1995). "Mathematical Complexity of Simple Economics", Notices of the AMS, V. 42, N. 2 (Feb): 222-230

Ludwig Changes His Mind

I had this as a draft post before the discussion on this over at Max's place.

"Wittgenstein and P. Sraffa, a lecturer in economics at Cambridge, argued together a great deal over the ideas of the Tractatus. One day (they were riding, I think, on a train) when Wittgenstein was insisting that a proposition and that which it describes must have the same 'logical form', the same 'logical multiplicity', Sraffa made a gesture, familiar to Neapolitans as meaning something like disgust or contempt, of brushing the underneath of his chin with an outward sweep of the finger-tips of one hand. And he asked: 'What is the logical form of that?' Sraffa's example produced in Wittgenstein the feeling that there was an absurdity in the insistence that a proposition and what it describes must have the same 'form'. This broke the hold on him of the conception that a proposition must literally be a 'picture' of the reality it describes." --Norman Malcolm (1966). Ludwig Wittgenstein: A Memoir. Oxford University Press: 69

(I'm quoting second-hand.)

By the way, Pierangelo Garegnani has been permitting scholars to quote Sraffa's unpublished notes for a number of years. For example, Luigi Pasinetti has examined them and reported on them. Why shouldn't Sraffa have chosen a literary executor who is as slow to publish as he was? I am looking forward to their publication, though.

• Luigi L. Pasinetti (2001). "Continuity and Change in Sraffa's Thought: An Archival Excursus", in Piero Sraffa's Political Economy: A Centenary Estimate (edited by Terenzio Cozzi and Roberto Marchionatti), Routledge

Arrow-Debreu Worth Generalizing To Model Power?

Power can be formally modeled in a framework of incomplete contracts, asymmetric information, strategic interaction, and principals and agents. Samuel Bowles & Herbert Gintis and Joseph Stiglitz, for example, have developed models of asymmetric information.

Is it worth developing models of power, as a generalization of the Arrow-Debreu model? I don't know that Stiglitz has ever addressed this question. His papers, as I understand them, do tend to be generalizations of the Arrow-Debreu model. This could be a rhetorical strategy. Bowles and Gintis (2000), however, assert that the Arrow-Debreu model is a detour. One can model power more directly.

Perhaps this contrast is an illustration of the different perspectives of economists that, until recently, would have been considered orthodox and heterodox. If so, it also illustrates that the boundary between orthodoxy and heterodoxy is murky.

• Samuel Bowles and Herbert Gintis (2000). "Walrasian Economics in Retrospect", Quarterly Journal of Economics (November)
• Samuel Bowles and Herbert Gintis (2007). "Power", University of Sienna, Working Paper number 495

Chris Hayes' Work Is Done Here

Many economics blogs were abuzz last week with comments on this discussion of Chris Hayes' Nation article on heterodox economics. I have already mentioned some of these discussions, but I thought I would do more to organize additional links. I think the following are some central questions in these discussions:

1. As a matter of the sociology of economics, are heterodox economists with worthwhile research programs being unjustly denied resources, graduate students, tenure, and publications in top-ranked journals?
2. Are heterodox economists developing ideas about economics that have not yet been adopted by mainstream economists?
3. Is this argument about something other than what policies economists should promote?

"Yes" is the correct answer to all three questions.

Anyways, contributors to Crooked Timber have commented. Gabriel Mihalache mostly emotes. Like Matt Yglesias, Unfogged contributors mistakenly think the debate is about policy opinions. Will Wilkinson and Bryan Caplan also confuse the policy question with the questions of the sociology of economics. I am not going to try to summarize what diverse posters at Max's place say.

Some have taken this discussion as an opportunity to discussion specific strains of heterodox economics. In response to Tyler Cowen's query for heterodox ideas that the mainstream neglects, Marginal Revolution went off on the Cambridge Capital Controversy and the contributions of Piero Sraffa, before returning to the value of heterodoxy. (Cowen also gives his impression of Post Keynesianism.) Brad DeLong is concerned to claim bastard Keynesianism as legimate.

Geoffrey Hodgson Defines Neoclassical Economics

I think he offers definitions in other works, too.

"Let us attempt to identify the key characteristics of neoclassical economics; the type of economices that has dominated the twentieth century. One of its exponents, Gary Becker (1967a, p. 5) identified its essence when he described 'the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly.' Accordingly, neoclassical economics may be conveniently defined as an approach which:

• (1) assumes rational, maximizing behaviour by agents with given and stable preference functions,
• (2) focuses on attained, or movements towards, equilibrium states, and
• (3) is marked by an absence of chronic information problems.

Point (3) requires some brief elaboration. In neoclassical economics, even if information is imperfect, information problems are typically overcome by using the concept of probabilistic risk. Excluded are phenomena such as severe ignorance and divergent perceptions by different individuals of a given reality. It is typically assumed that all individuals will interpret the same information in the same way, ignoring possible variations in the cognitive frameworks that are necessary to make sense of all data. Also excluded is uncertainty, of the radical type explored by Frank Knight (1921) and John Maynard Keynes (1936).

Notably, these three attributes are interconnected. For instance, the attainment of a stable optimum under (1) suggests an equilibrium (2); and rationality under (1) connotes the absence of severe information problems alluded to in (3). It can be freely admitted that some recent developments in modern economic theory - such as in game theory - reach to or even lie outside the boundaries of this definitions. Their precise placement will depend on inspection and refinement of the boundary conditions in the above clauses. But that does not undermine the usefulness of this rough and ready definition.

Although neoclassical economics has dominated the twentieth century, it has changed radically in tone and presentation, as well as in content. Until the 1930s, much neoclassical analysis was in Marshallian, partial equilibrium mode. The following years saw the revival of Walrasian general equilibrium analysis, an approach originally developed in the 1870s. Another transformation during this century has been the increasing use of mathematics, as noted in the preceding chapter. Neoclassical assumptions have proved attractive because of their apparent tractability. To the mathematically inclined economist the assumption that agents are maximizing an exogeneously given and well defined preference function seems preferable to any alternative or more complex model of human behaviour. In its reductionist assumptions, neoclassical economics has contained within itself from its inception an overly formalistic potential, even if this took some time to become fully realized and dominant. Gradually, less and less reliance has been placed on the empirical or other grounding of basic assumptions, and more on the process of deduction from premises that are there simply because they are assumed.

Nevertheless, characteristics (1) to (3) above have remained prominent in mainstream economics from the 1870s to the 1980s. They define an approach that still remains ubiquitous in the economics textbooks and is taught to economics undergraduates throughout the world." -- Geoffrey M. Hodgson (1999). "False Antagonisms and Doomed Reconcilations", Chapter 2 in Evolution and Institutions: On Evolutionary Economics and the Evolution of Economics, Edward Elgar

Journalistic Comments On Economics

• David Warsh has a piece on János Kornai's challenges in pursuing a career in economics in communist Hungary. (I don't know if David Warsh reads me. If I interested him, he later did more research for his piece, from which I am grateful to learn.)
• Chris Hayes has a piece in the Nation on the last American Economic Association meeting. He writes about the unwillingness of mainstream economists to acknowledge heterodox economic ideas. Other bloggers and journalists have already commented on this article. I have yet to see anybody else in these and other discussions reference Fred Lee
• Many other bloggers have already commented on a Robert Solow review, in The New Republic, of a recent biography of Joseph Schumpeter. I might as well acknowledge I wrote the first draft of the Wikipedia entry on Schumpeter.

Update: Added some links, including reference to Fred Lee.

Greg Mankiw: Incompetent or Dishonest?

Some have assured me that mainstream economics is valid because this is not valid neoclassical economics (and mainstream economists know the invalidity of these claims):

"The neoclassical theory of distribution teaches us that a person's earnings depend on his or her productivity." -- Greg Mankiw, "How to Become Rich"

Of course, I am aware of mainstream economists who don't believe what Mankiw says:

"All optima imply marginal conditions in some form. These conditions are part of an overall solution. Neither they nor the quantities involved in them are prior to the overall solution. It reflects badly on economists and their keenness of intellect that this was not always obvious to everyone." -- Christopher Bliss, "Introduction, The Theory of Capital: A Personal Overview", in Capital Theory (edited by C. Bliss, A. Cohen, and G. C. Harcourt), Edward Elgar

"Why Do People Hate Economists?"

Ezra Klein has a series of posts on the topic. Some of the commentators seem to me to know what they are talking about. The discussion gets into the question of whether issues of efficiency can be separated from issues of equity, of whether efficiency can be discussed in a value-neutral way. (Short answer: No.)

Klein also talks about how "econ-speak" privileges attempts to raise Gross Domestic Product over attempts to pursue other goals. He illustrates this claim by discussion of vacation time. (I realize that, at the level of high theory, Klein's claim is false. I think that this objection elides questions of how economists participate in public discourse.)

I think people "hate" economists, like Democrats "hate" President Bush, or the French "hate" Americans. That is, it is just something some people disconnected from reality tell themselves to discredit other points of view.

The Meaning(lessness) Of Rationality

After many analyses, some mainstream economists acknowledge that they may not have a coherent understanding for what it means for a person to be rational:

"When these assumptions [of equilibrium, competition, and the completeness of markets] fail, the very concept of rationality becomes threatened, because perceptions of others and, in particular, of their rationality become part of one’s own rationality. Even if there is a consistent meaning, it will involve computational and informational demands totally at variance with the traditional economic theorist’s view of the decentralized economy." -- Kenneth J. Arrow (1986). "Economic Theory and the Hypothesis of Rationality" Journal of Business, V. 59, N4, Pt. 2 (reprinted in The New Palgrave)

A lot of this attempt to conceptually clarify the meaning of "rationality" uses game theory. In parallel with this theoretical work, economists and others have performed a body of experiments. These experiments found many cases in which the predictions of neoclassical theory were falsified. Daniel Hausman, in a chapter in his The Inexact and Separate Science of Economics, treats the resulting work as a case study. He tries to understand why mainstream economists retain a theory with such a poor track record in controlled experimental settings.

I have blogged on experimental economics before. (A Mark Thoma post post inspired me to put this post up.)

Daniel Hausman On One Aspect Of The CCC

"Demand theorists know there are few Giffen goods. They know why there are Giffen goods. They can successfully predict that certain goods in certain economies (potatoes in Ireland, rice in China, or yams in New Guinea) are likely to be Giffen goods. Capital theorists, on the other hand, do not know whether capital reversing is common or rare. Until recently they possessed no theory which made sense of the phenomenon. The status of that fundamental theory remains, moreover, questionable. From the perspective of the Austrian theory or of Clark's theory, capital reversing is nothing but a disconfirmation. Capital theorists are also unable to predict when capital reversing will occur. They cannot point to some feature of an economy and say, 'Ah, we can see that this is one of the exceptional cases in which we should not expect our simpler capital theories to work.' There is no justification for the claim that capital reversing demands only minor qualifications in simplified capital theories." -- Daniel M. Hausman (1981). Capital, Profits, and Prices: An Essay in the Philosophy of Economics, Columbia University Press

Hausman makes a distinction in this book between Models and Theories. Those interested in how Hausman's draws his lines are probably better advised, though, to read his later The Inexact and Separate Science of Economics.

Surowiecki Popularizes My View

Like Dean Baker, I have said before that important issues in "free" trade agreements are matters of governance, not trade. James Surowiecki makes fairly closely the same point in his weekly New Yorker column, in the 14 May 2007 edition. I read this in the dead trees version before reading comments on this column from various bloggers.

Zizek and Others

Like D-Squared, I'm dubious about some responses to continential philosophy, cultural criticism as put forth by the Frankfort school, post-structuralism, deconstruction, and other doctrines to which Alan Sokal might object. I feel that there are many blog posts and blogs that show more understanding of this stuff than I can.

I generally get whatever understanding I have of anti-foundationalism from Wittgenstein, analytical philosophers like Goodman, Putnam, American pragmatism, and even Rorty. I am not at all sure that these views are needed to effect social change. Nor do I take them as tied in necessarily with any very radical views. This may because in my random reading, I have read a limited amount of Rorty.

I am amused that this latest go around concentrates on Zizek. I have quoted bits from Zizek here before. My general impression of Zizek is that he is amusing. I feel that I am following along when I read him, but I distrust my ability to summarize what he is saying. Except, strangely enough, I think I can give some impression of his views on Lenin, if I felt like it.

I realize that not all these "post-modern" writers are doing the same thing. I think I'd get more out of my copy of one of Baudrillard's books if I hollowed it out and used it to store valuables.

I don't think I got much out of the extremely limited amount of Derrida that I have read. (I also like some of the Austin and Searle I have read - in the case of Searle, I also attended a guest lecture where he expounded his well-practiced views on strong AI.) I think I'd like to understand Foucault better, even though he can write a long time on sex without it coming close to being a turn-on.

I am interested in the history of ideas. I see the point of telling a history forward. In this case, the participants in the story may both point at measures of what they take to be the outside world as an argument for contending views. I can see the point of bracketing out how we have come to understand the world in trying to understand what participants in the story found convincing. I take this to be the strong program.

And I also understand that divisions between academic subjects, genres, etc. are not given. How some of us might group texts today may be very different from how others elsewhere and elsewhen grouped the same texts. Furthermore, on what time-scale continuity and discontinuity occurs may vary with how you look at texts. I take this to be part of Foucault's point in talking about "discursive formations."

Selected References

• Jean Baudrillard (1994). Simulacra and Simulation (Trans. by Sheila Faria Glaser), University of Michigan Press
• Fernand Braudel (1967). Capitalism and Material Life: 1400-1800 (Trans. by Miriam Kochan), Harper Colophon
• Jacques Derrida (1988). Limited, Inc. (Trans. by Samuel Weber), Northwestern University Press
• Michel Foucault (1972). The Archaeology of Knowledge (Trans. by A. M. Sheridan Smith), New York: Pantheon Books
• Richard Rorty (1991). Objectivism, Relativism, and Truth: Philosophical Papers, Volume 1, Cambridge University Press
• Ricard Rorty (1998). Achieving Our Country: Leftist Thought in Twentieth-Century America, Harvard University Press
• Slavoj Zizek (2001). On Belief, Routledge

Increasing Technorati Ratings

Whether it is realistic or not, I assume most readers of this blog probably have noticed Radek has been writing about me, sort of, lately.

Levy and Temin Should Reference Galbraith

From Dani Rodrik, I learn that Frank Levy and Peter Temin have out a new working paper, “Inequality and Institutions in 20th Century America” (1 May 2007). I haven't finished reading their paper, but I do not believe they reference James K. Galbraith’s Created Unequal: The Crisis in American Pay (Free Press, 1998) or Galbraith's later work. If not, they should.

János Kornai

Harvard has an economist on their faculty who understands how the hardness or softness of budget constraints varies among institutional structures.

János Kornai is a Hungarian who, as I understand it, published his first article on economics in 1956. During the 1960s, he researched a planning methodology in parallel with the official Hungarian planning; the official planning was based on Leontief input-output analysis. Kornai's methodology consisted of sectorial planning, addressed by Linear Programming, and a "central problem" of allocating resources, based on a game-theoretical formulation (Kornai and Liptak 1965).

Among the Post Keynesian economists I read, though, I think some of Kornai's later work is more frequently cited. In this work (Kornai (1971 and 1970), Kornai and Martos (1973)), he compares and contrasts certain institutional characteristics of actually existing capitalism and socialism. If I understand correctly, Kornai found that he had to create a lot of terminology because his observations did not fit into economic theory as he found it. In particular, neoclassical price theory ignores the institutional detail and non-price signals Kornai thinks important. Frank Hahn thought well enough of this work to engage it.

Lately Kornai (1990 and 2000) has been writing about post-communist transition economies.

I would like to be more familar with Kornai's work than I am. I would have trouble sumarizing his major points more than above.

References

• F. H. Hahn (1973). "The Winter of Our Discontent", Economica, New Series, V. 40, N. 159 (Aug.): 322-330
• J. Kornai and T. Liptak (1965). "Two-Level Planning", Econometrica, V. 33, N. 1 (Jan.): 141-169
• J. Kornai (1971). Anti-Equilibrium, Amsterdam: North Holland
• J. Kornai and B. Martos (1973). "Autonomous Control of the Economic System", Econometrica, V. 41, N. 3 (May): 509-528
• J. Kornai (1979). "Resource-Constrained versus Demand-Constrained Systems", Econometrica, V. 47, N. 4 (Jul.): 801-820
• J. Kornai (1990). The Road to a Free Economy: Shifting from a Socialist System: The Example of Hungary, New York: W. W. Norton
• J. Kornai (2000). "What the Change of System from Socialism to Capitalism Does and Does Not Mean", Journal of Economic Perspectives, V. 14, N. 1 (Winter): 27-42

Blinder, Once Again, On "Free" Trade

Alan Blinder has an op-ed in the Washington Post, and a lot of blogs are commenting. Brad DeLong merely echoes out Blinder's essay. Mark Thoma echoes some questions knzn has for Blinder. I've already pointed out an earlier Blinder comment on Globalization.

In related news, Max Sawicky doesn't appreciate Lou Dobb's support. Dani Rodrik has also been asking some questions about globalization in a dialog with, for example, Tyler Cowen. Ezra Klein has figured out that many economists ostracise those who deviate on free trade, whether they have anything serious to say or not.

Let me consider a couple of paragraphs in Blinder's essay:

"We economists assure folks that things will be all right in the end. Both Americans and Indians will be better off. I think that's right. The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest. There's nothing new here theoretically.

But I would argue that there's something new about the coming transition to service offshoring. Those two powerful forces mentioned earlier - technological advancement and the rise of China and India - suggest that this particular transition will be large, lengthy and painful." -- Alan Blinder

Notice the lengthly (dis-equilibrium) transition between two end states. Blinder's analysis is not set in an Arrow-Debreu model of intertemporal equilibrium, which some assure us is not vulnerable to a Cambridge capital critique. Rather, it seems to be set in the exploded Heckscher-Ohlin-Samuelson model, which is logically invalid if production uses capital goods [and the rate of interest is positive - I added this clause in an update]. Where else can you find an acknowlegement that, where Blinder accepts the orthodoxy, he gets his sums wrong?

Rymes Measures Productivity

I have previously referenced some papers providing empirical evidence that capital-reversing and other Sraffa effects can be seen in practice.

The Cambridge Capital Controversy has other implications for applications. In particular, one should be sceptical about the Solovian framework for measuring Total Factor Productivity (TFP). One might ask how one should analyze national accounts at an aggregate level instead. I have read very little of his work, but Thomas K. Rymes has pursued a research program directed at that question. He is also apparently interested in the Post Keynesian theory of endogenous money. I provide a list of some of his papers, most of which I recently downloaded. I don't have access to the book listed below.

References

• Thomas K. Rymes (2006). "On National Income", Carleton University Working Paper (9 October)
• T. K. Rymes (2004). "Modern Central Banks Only Have Real Effects", Carleton University Working Paper
• René Durand and Thomas K. Rymes (2000). "On Capital and Productivity: Harrodian and Keynesian Measures", 26th General Conference of the International Association for Research in Income and Wealth, Cracow, Poland
• T. K. Rymes (2000). "On the Cambridge Correction to the Measurement of Productivity in Manufacturing" CSLS Conference on the Canada-U.S. Manufacturing Productivity Gap (21-22 January)
• Colin Rogers and T. K. Rymes (1998). "On 'Money' in ISLM and AD/AS Models", Carleton University Working Paper (February)
• Alexandra Cas and Thomas K. Rymes (1991). On Concepts and Measures of Multifactor Productivity in Canada, 1961-1980, Cambridge University Press

Aristotle Manuscript Found

Exciting, for those interested in old writings. I haven't read the book this quotation is from:

"Of everything which we possess there are two uses: both belong to the thing as such, but not in the same manner, for one is the proper and the other the improper or secondary use of it. For example, a shoe is used for wear, and is used for exchange; both are uses of the shoe." -- Aristotle, Politics

That sounds like Smith's distinction, for example, between use value and exchange value.

Böhm-Bawerk on Surplus Value

It's easy enough to find on the Internet simple people (e.g., commentators here on the side of their host) ignorant of clarifications over a century old:

"The first question is, 'What is meant by saying, "Capital is productive"?'

In its commonest and weakest sense, the expression may be taken to mean merely that capital serves for the production of goods, as distinguished from serving for the immediate satisfaction of wants. In that event we are conferring upon capital the rank of a 'productive' entity only in one particular sense. I mean the same sense which appears in our general division of all goods into 'producers' and consumers' goods.' And even if that degree of productive effect were so slight that the value produced failed to equal the value of the capital expended in the producing, yet even that slight degree would justify us in conferring the title of 'productive.' But it is clear from the first, that a power which has productivity in this sense alone is completely incapable of accounting for the rise of originary interest.

The adherents of the productivity theories do, as a matter of fact, invest the term with a stronger meaning. Expressly or tacitly they understand it as meaning that, by the aid of capital, more is produced, that is to say, that capital is the cause of a special productive surplus result.

But this meaning is further subdivided. The words 'to produce more' or 'a productive surplus result' may mean one of two things. They may mean either that capital produces more goods or that it produces more value, and these are by no means identical. To keep the two as distinct in name as they are in fact, I shall designate the capacity of capital to produce more goods as its physical or technical productivity, and its capacity to produce more value as its productivity of value. It is perhaps not unnecessary to say that, at the present stage, I am leaving the question entirely open, as to whether capital actually possesses such capacities or not. I am merely recording the different meanings which may be given, and have been given, to the statement that 'capital is productive.'

Physical productivity manifests itself in an increased quantity or, possibly, in an improved quality of the product. I might illustrate it by the well-known example given by Roscher: 'Let us imagine a nation of fisher-folk without private ownership or capital, dwelling naked in caves, and living on fish caught by hand in pools left by the ebbing tide. All the workers here may be considered equal, and each man is presumed to catch and eat 3 fish per day. But now one prudent man limits his consumption to 2 fish per day for 100 days, lays up in this way a stock of 100 fish, and makes use of this stock to enable him to apply his whole labor-power for 50 days to the making of a boat and a net. With the aid of this capital he catches 30 fish a day from that time on.'

In this instance the physical productivity of capital manifests itself in the fact that the fisher, with the aid of capital, catches more fish than he would otherwise have caught, namely, 30 instead of 3. Or, to put it more correctly, he catches somewhat fewer than 30 instead of 3. For the 30 fish which are now caught in a day are the result of more than one day's work. To calculate properly, we must add to the labor of catching fish a quota of the labor that went into the making of boat and net. If, for instance, 50 days of labor were required to make the boat and the net, and if the boat and the net last for 100 days, then the 3,000 fish which are caught in the 100 days, appear as the result of 150 days labor. The surplus production then, due to the employment of capital, is represented for the whole period by 3,000 - 450 = 2,550 fish, or for each single day by 20 - 3 = 17 fish. This surplus production is a manifestation of the physical productivity of capital.

Now how would the production by capital of 'more value' be manifested? The expression 'to produce more value' is, in its turn, ambiguous because the 'more' may be measured by various standards. It may mean that, by the aid of capital, a value is produced which is greater than the value which could be produced without the aid of capital. In the foregoing illustration it may mean that the 20 fish caught in a day's labor with the aid of capital are of more value than the 3 fish which were got when no capital was employed. But the expression may also mean that, with the aid of capital, a value is produced which is greater than the value of the capital itself. In other words, it may mean that the capital gives a productive return greater than its own value, so that there remains a surplus value over and above the value of the capital consumed in the production. To put it in terms of our illustration, the fisher equipped with boat and net catches 2,700 more fish in 100 days than he would have caught without boat and net. These 2,700 fish are to be termed the (gross) return of the employment of capital and, according to this alternative interpretation of the expression, these 2,700 fish are of more value than the boat and net themselves, so that after boat and net are worn out, there still remains a surplus of value.

Of these two possible meanings those writers who ascribe to capital a productivity of value usually have the latter in mind. When, therefore, I use the expression 'productivity of value' without qualification, I shall mean the capacity of capital to produce value exceeding its own value.

Thus we have for the apparently simple proposition that 'capital is productive,' no fewer than four interpretations which are clearly distinguishable from each other. In order to place them in proper perspective, I should like to array them side by side. The proposition may signify any of the following:

1. Capital has the capacity of serving to produce goods.
2. Capital has the power of serving to produce more goods than could be produced without it.
3. Capital has the power of serving to produce greater value than could be produced without it.
4. Capital has the power to produce value greater than that which it possesses itself.

It should be self-evident that such widely differing ideas, even if they can, perchance be designated by identical terms to summarize them, must not be considered identical. Even less permissible would it be to consider them interchangeable in one or more given syllogisms. For instance, it should be self-evident that even though I may have demonstrated a capacity on the part of capital to produce goods at all, or to produce a greater quantity of goods, I am still not entitled to consider that I have established its power to produce more value than could have been produced without its assistance, or to produce a value in excess of that which the capital itself possesses. To substitute the latter two concepts in a demonstration which may have established the correctness of a syllogism involving the former two would obviously be tantamount to proffering a sophism, where a logically sound proof cannot be found..." -- Eugen von Böhm-Bawerk, Capital and Interest, V. I: "History and Critique of Interest Theories"; Chapter VII: The Productivity Theories, Section A. Preliminary Survey, Part 1. Ambiguity of the Term, 'Productivity of Capital'

Of course, Sraffa showed Böhm-Bawerk's answers to his questions to be logically invalid.

Irrelevant Aside On Friedman's Methodology

You may sometimes read (neoclassical) "Economic theory shows" p. Often these claims are untrue. One can prove this falsity by constructing examples in which the assumptions of (neoclassical) economic theory hold, but not p results. So the statement you have read is logically flawed.

I sometimes encounter people who respond with the non sequitur, "Assumptions do not need to be realistic." If this response made sense, those who propound it would be able to specify which assumption is claimed to be unrealistic in these examples. Good neoclassical economists understand this logic.

Anyways, those economists that insist that assumptions do not need to be realistic - that, in fact, unrealistic assumptions are actually desirable - probably take their position from Milton Friedman. From Steve Keen's Debunking Economics, I found a response by Alan Musgrave to this idea. Musgrave, perhaps when combined with a later Uskali Mäki comment, seems to me perceptive. From these two authors, one can get a taxonomy of assumptions. Here's Musgrave's, albeit with the first reworded following Mäki's suggestion:

• Negligibility: "The hypothesis that some factor", or combination of factors "has an effect upon" "the phenomenon under investigation" "small enough to be neglected relative to a given purpose".
• Domain: A specification of the domain of applicability of a theory.
• Heuristic: An assumption for developing a theory in a simple form that can be removed in later approximations.

The same wording might be used to express an assumption in all categories. For example, a model assumption might be "The government has a balanced budget". This might mean that the effects of budget imbalances have a negligible effect on the results of the model, that the model only applies when the budget is balanced, or that the model can be developed in a more complicated fashion with no assumption on the balance of the budget. Pace Friedman, assumptions, properly paraphrased, better be true ("realistic") in applications.

Update: Radek doubts some economists write "Economic theory shows..." As far as I am concerned, this is close enough:

"These observations should not be puzzling, for they are what standard economic theory predicts." -- Edward C. Prescott (1986). "Theory Ahead of Business Cycle Measurement", Quarterly Review, Federal Reserve Bank of Minneapolis (Fall): 9-22

References

• Milton Friedman (1953). "The Methodology of Positive Economics", in Essays in Positive Economics, University of Chicago Press
• Uskali Mäki (2000). "Kinds of Assumptions and Their Truth: Shaking an Untwisted F-Twist", Kyklos, V. 53, Fasc. 3: 317-336
• Alan Musgrave (1981). "'Unreal Assumptions' in Economic Theory: The F-Twist Untwisted", Kyklos, V. 34, Fasc 3: 377-387

Now war means seizing here and there the bread the tender Father would deny to none

I have an interest in both physiocracy and the distribution of income and wealth in the United States.

A vignette from Marguerite Kuczynski, co-editor (with Ronald Meek) of Quesnay's Tableau Economique surprised me. She rediscovered a copy of the "third edition" in the Du Pont library in the United States. Why would a manuscript from an eighteenth century French school of economics be in a twentieth century U.S. private library, that is the Eleutherian Mills Historical Library?

DuPont de Nemours was not only a great promoter of Quesnay and his ideas. He also founded the American chemical company. Apparently the company and other family businesses made his descendants wealth beyond the ken of most mortals. Here we are two centuries later, and, as I understand it, family members still live off their ancestors in the lap of luxury.

I had understood this connection when the mentally disturbed John E. Du Pont made the news for murder. Another appearance of the family name is in DuPont Circle, in Washington, D.C., named after a Civil War admiral.

I find the discovery of old books amazing, whether they are the Gnostic gospels, a version of the Morte d'Arthur that Caxton had not edited, various of Ricardo's manuscripts and his letters to James Mill, or an edition of the Tableau.

Marxists in Wikipedia Edit Wars

You can see internal squabbles among Marxists in recent edit wars over Wikipedia entries on the Temporal Single System Interpretation of Marx's theory of value and on David Laibman. I find Alan Kliman neutral in his modifications of the TSSI entry, and I do not see why Laibman should not keep reference to the TSSI out of his entry. Apparently he feels that its inclusion will make the description of his work in economics unbalanced.

In the discussion on the TSSI, I find Kliman asserting that the Fundamental Theorem of Marxism is due to Okishio, not Morishima. Apparently, I get it wrong in my LTV FAQ.

I disagree with the TSSI. But I find TSSI advocates amusing, even when they mock views I find more congenial:

"We can discern at least the following variants

Variant 7b.I: philosophico-mystical

The determination of price by value takes place behind our backs. It is part of the internal workings of the capitalist system which are ever so mysterious and can only be understood by reciting das Kapital six times before breakfast and joining my group. There is no such thing as the transformation problem and it doesn't matter that the figures don't add up, but you wouldn't understand that because you are a bourgeois revisionist.

Variant 7b.II: pseudo-dialectical

The determination of prices take place as the Sraffians describe it, and the determination of values takes place as Marx describes it. This can only be understood by reciting das Kapital twelve times before breakfast and joining my study circle. It is true that the figures don't add up, but that is because capital is inherently contradictory, and you should learn to live with it. You can't understand this because you haven't read Hegel.

Variant 7b.III: fake materialist

As Marx explains, the forces of production determine everything. This as Plekhanov explains is the basis of historical materialism. What Marx meant by the determination of value by labour time was the determination of value by technology as you will realize if you read Sraffa and buy my newspaper. The figures do add up. You do not understand this because you are not a worker." - Alan Freeman (1996).

I earlier mentioned that I was reading Andrew Kliman's recent book. And I posted about one narrow point in the book. Some have complained about my use of numerical examples on this blog. Such examples may help those uncomfortable with math, but they may not make the reasoning as clear to others as the use of algebra would. When I began Kliman's book, I worried that his numerical examples would suffer from the same problem. I needn't have worried; his explanations are generally clear. I was impressed with Kliman's refutation of the Okishio theorem. I didn't think that was possible, and I couldn't see any mistakes in his refutation.

I do have some problems with Kliman's book. I am not at all sure that Kliman adequately addresses Veneziani's claim that the Monetary Expression of Labor Time (MELT) is not defined. In arguing that the TSSI is a reasonable interpretation of Marx's texts, Kliman concentrates on those parts in which Marx puts forth quantitative theories. I would like to see more about Theories of Surplus Value and other texts in which Marx engages previous developers of political economy. I find that Marx, while appreciative of Ricardo and Smith, tends to read his own distinctions - e.g., between value and prices of production - back into, for example, Ricardo. Yet I do not find Marx criticizing Ricardo for not having temporal dynamics in Ricardo's treatment of natural prices. I assume TSSI advocates do not think Ricardo had Marx's supposed TSSI theory. What do they have to say about Marx's treatment of Ricardo? As far as I am aware, this is a gap in the literature.

By the way, the positions that Sraffa and the Sraffians take on Marx's theory of value are not uniform. Of course, Steedman's 1977 work is a classic in this literature. But I draw more on Eatwell, who is more approving of Marx's theory. Bellofiore, who has seen Sraffa's unpublished notes, recently argues that Sraffa came to be more accepting of Marx's theory as his research evolved. Sraffa's use of the standard commodity seems to have taken him to a position much like the "New Interpretation" of Foley and Lipietz.

References

• Riccaro Bellofiore (2007). "Sraffa after Marx: An Open Issue" New School seminar, (22 Feb)
• John Eatwell (1975). "Mr. Sraffa's Standard Commodity and the Rate of Exploitation", Quarterly Journal of Economics, V. 89, N. 4 (Nov): 543-555
• Duncan K. Foley (1986). Understanding Capital: Marx's Economic Theory, Harvard University Press.
• Alan Freeman (1996). "The Psychopathology of Walrasian Marxism", in Marx and Non-Equilibrium Economics (Ed. by Alan Freeman and Guglielmo), Edward Elgar
• Alan Kliman (2007). Reclaiming Marx's "Capital": A Refutation of the Myth of Inconsistency, Lexington Books
• Alain Lipietz (1982). "The So-Called 'Transformation Problem' Revisited", Journal of Economic Theory, V. 26, N. 1 (Feb): 59-88
• Ian Steedman (1977). Marx After Sraffa, NLB
• Roberto Veneziani (2004). "The Temporal Single-System Interpretation of Marx's Economics: A Critical Evaluation", Metroeconomica, V. 55, N. 1: 96-114
• Roberto Veneziani (2005). "Dynamics, Disequilibrium, and Marxian Economics: A Formal Analysis of Temporal Single-System Marxism", Review of Radical Political Economics, V. 37, N. 4 (Fall): 517-529

Binmore and Mirowski Going at It Hammer and Tongs

In 2004, the Journal of Economic Methodology sponsored a symposium on Philip Mirowski's Machine Dreams: Economics Becomes a Cyborg Science. The exchange between Kenneth Binmore and Mirowski is amusing for those who prefer lots of heat, whether or not there is any light. (I read them as not having any personal dislike.) Mirowski is particularly critical of this passage from Binmore:

"...Mirowski thinks that only computable mathematics should be used in economic modeling. He is particularly scathing about the fact that the Walrasian correspondence is non-computable, and rejects out of hand the response that Scarf has provided a computable algorithm for finding approximate Walrasian equilibria. If I understand him correctly, the reason is that an approximate Walrasian equilibrium may not be an approximation to an exact Walrasian equilibrium. But this is to misunderstand how mathematical modeling works - not only in economics, but in physics as well.

The equilibria of physics are no more computable than those of economics. It is not just that Scarf cannot think of an algorithm that computes them, but that there is nothing whatever the universe as a whole can do to instantiate them. So how come the non-computable models of physics work? The reason is that they provide mathematically tractable approximations to the way the universe really is. Similarly, in economics, it is wrong-headed to reject Scarf's algorithm because it does not adequately approximate the Arrow-Debreu model. On the contrary, we need to elaborate the Arrow-Debreu model so it approximates better whatever the real-world analogue of Scarf's algorithm happens to be in any particular context. Whether the elaboration turns out to be computable or not matters not in the least. If you think it does, consistency also demands that you advocate abandoning the use of calculus and most other mathematical tools in physics."

References

• Kenneth Binmore (2004). "A Review of Philip Mirowski's Machine Dreams", Journal of Economic Methodology, V. 11, N. 4 (Dec.): 477-483
• John B. Davis (2004). "Economists' Dreams: Machine Dreams", Journal of Economic Methodology, V. 11, N. 4 (Dec.): 483-488
• Matthias Klaes (2004). "Algorithmic Economics: A Plea for Natural Economic History", Journal of Economic Methodology, V. 11, N. 4 (Dec.): 489-498
• Philip Mirowski (2004). "Philosophizing with a Hammer: Reply to Binmore, Davis and Klaes", Journal of Economic Methodology, V. 11, N. 4 (Dec.): 499-513

Lord Eatwell Celebrates Sraffa

"...But Sraffa's most dramatic scholarly achievement went further than mere correction of perspective. His reconstruction of Ricardo's surplus theory, presented in but a few pages of the introduction to his edition of Ricardo's Principles, penetrated a hundred years of misunderstanding and distortion to create a vivid rationale for the structure and content of surplus theory, for the analytical role of the labor theory of value, and hence for the foundations of Marx's critical analysis of capitalist production...

...But the greater achievement was yet to come. Neoclassical orthodoxy survived the attacks on Marshall by retreating to the less persuasive but apparently secure general equilibrium theory. By the late fifties the neoclassical resurgence was well under way, overwhelming the Keynesian critique, armed, as it was, with seemingly invincible algebraic weapons. Sraffa punctured the balloon. He demonstrated in Production of Commodities that the foundations of neoclassical theory are logically unsound, and, remarkably, demonstrated simultaneously that the old surplus approach to problems of value and distribution, which had been cast aside with ascent of neoclassical theory, was logically sound and, indeed, was the ideal basis on which to develop a satisfactory analysis of market economies.

At first sight, these precise logical exercises, dramatic though their influence may have been in theoretical circles, might seem to be the very stuff of arid academic debate. But on the contrary, they represent the very nucleus of the interpretation and evaluation of the operation of capitalism. Sraffa's demonstration that price formation and the distribution of income cannot be the outcome of the forces of supply and demand, as believed by the orthodox theorists, eliminates the case for the market system as a mechanism which brings about an efficient allocation of scarce resources. Thus the theoretical arguments which are commonly claimed to support so many of today's economic policies, including those of the monetarists, are revealed to be the utterly unfounded claims of sectional interests...

...The objective analysis which Sraffa sought he found in the surplus theories of Ricardo and Marx. The classical theory of value and distribution takes as its starting point quantities which are all, in principle, objectively measurable, and behind those quantities lie the objective characteristics of social institutions. There is no place for utility or disutility. For example, labor requires a given quantity of commodities as wages, and this must be replaced from the product. The wage is a set of physical magnitudes, its determination rooted in the character of contemporary society. It is not a measure of how the worker subjectively feels about working. Orthodox theory asks us to believe that real cost is the sum not only of the disutility of labor, but also of the subjective pain suffered by the capitalists, who must be induced to sacrifice their wealth to engage in the acquisition of profit." -- John Eatwell (1984). "Piero Sraffa: Seminal Economic Theorist", Science and Society, V. 48, N. 2 (Summer): 211-216.

Other Perspectives On Ergoditicy

I've recently noted that the Post Keynesian economist Paul Davidson thinks economic theory should not impose a priori the special case assumption of ergodicity.

Brian Arthur and Paul David also have argued that economics should have room for non ergodic processes. They discuss such processes under the rubric of "path dependence". "Path Dependence - A Foundational Concept for Historical Social Science" is an example of a 2006 statement of Paul David's.

One can see that others thought neoclassicalism contained an assumption of ergodicity:

"Finally, there was an even more interesting third assumption implicit and explicit in the classical mind. It was a belief in unique long-run equilibrium independent of initial conditions. I shall call it the 'ergodic hypothesis' by analogy to the use of this term in statistical mechanics. Remember that the classical economists were fatalists (a synonym for 'believers in equilibrium'!). Harriet Martineau, who made fairy tales out of economics (unlike modern economists who make economics out of fairy tales), believed that if the state redivided income each morning, by night the rich would again be sleeping in their comfortable beds and the poor under the bridges. (I think she thought this a cogent argument against equilitarian taxes.)

Now, Paul Samuelson, aged 20 a hundred years later, was not Harriet Martineau or even David Ricardo; but as an equilibrium theorist he naturally tended to think of models in which things settle down to a unique position independently of initial conditions. Technically speaking, we theorists hoped not to introduce hystersis phenomena into our model, as the Bible does when it says, 'We pass this way only once' and, in so saying, takes the subject out of the realm of science into the realm of genuine history." -- Paul A. Samuelson, "What Classical and Neo-Classical Monetary Theory Really Was," Canadian Journal of Economics, V 1., # 1, pp. 1-15, 1968. (Reprinted in Monetary Theory: Selected Readings, edited by Robert W. Clower, Penguin, 1969.)

What Are Your Assumptions?

Neoclassical economic theory, correctly understood, imposes no restrictions on the direction of real Wicksell effects. Paul Samuelson's student Edwin Burmeister writes:

"Imposing some set of conditions on the technology T(.) should be sufficient to assure that the real Wicksell effect is always negative. Such conditions would be of interest - especially if they could be empirically tested - since they would validate the quantitative conclusions derived from the one-good models often used in macroeconomics without any theoretical justification for ignoring aggregation problems... Unfortunately, no set of such sufficient conditions is known, but the literature on capital aggregation suggests they would impose severe restrictions on the technology." -- Edwin Burmeister (1987). "Wicksell Effects", The New Palgrave: A Dictionary of Economics (edited by John Eatwell, Murray Milgate, and Peter Newman)

So, from the point of view of the M.I.T. side of the Cambridge Capital Controversy, economists should either (1) Develop economic theory compatible with real Wicksell effects going in any direction, or (2) Recognize that we don't know special-case assumptions that are consistent with methodological individualism and that restrict real Wicksell effects to be always negative.

Anarchists Not For Property

"Anarchists don't believe property is, or should be, the ultimate value of society... Private property is not more important than human life, and it is not more important than individual freedom." -- Eric Laursen, as quoted by Colin Moyhihan, in "Book Fair Unites Anarchists. In Spirit Anyway", New York Times (16 April 2007): B3

Prescott on the Cambridge Capital Controversy

"I will argue that much of the failure of monetary economics to progress over the last 25 years is the failure to construct models that provide guidance on how the national accounts should be extended to include production of 'financial services'. In the 1960s there was the famous Cambridge capital controversy. This controversy bears on the issue 'What is money?' The Cambridge capital controversy was a silly one, as pointed out so clearly by Arrow (1989). Arrow, being a general equilibrium theorist, pointed out that there are multiple types of capital goods and with multiple capital goods only under very special conditions is there an aggregate capital stock. I emphasize that this does not mean that a model with a single capital good, which is matched to the value of some capital good statistic, is not useful in drawing scientific inference. I use such models along with other national accounts statistics to draw quantitative inference concerning a variety of phenomena, including business cycle fluctuations, secular movements in output and hours worked in the market sector, depressions and prosperities, and even in the behavior of stock prices. Rather, it means that for some purposes this single capital stock abstraction is not a good one for drawing inference." -- Edward Prescott (2005). "Comments on 'Inflation, Output, and Welfare' by Ricardo Lagos and Guillaume Rocheteau", International Economic Review, V. 46, N. 2 (May): 523-531

Some Post Keynesian Propositions on Inflation

James Galbraith and Barkley Rosser, for example, are familar with this view.

Inflation is not always and everywhere a monetary phenomenon. In the United States in the 1970s, it was a matter of cost-push. When nominal claims on income add up to more than real income, inflation can result.

An incomes policy is one approach to attacking inflation that might have been tried. For example, a tax-based incomes policy could have been implemented. Institutions matter. For example, in an economy with large unions, major labor contracts could be coordinated to be renegotiated at once, or they could be staggered. The latter is likely to lead to more inflation.

Monetary policy is not impotent. In a modern industrial economy, the supply of money is endogenous. The Federal Reserve in the U.S., for example, sets an important interest rate but, generally, does not have control over the amount of money in circulation. Lowering the interest rate (pushing on a string) may not be effective, but raising interest rates can be a defacto incomes policy. When combined with union-busting, as in Ronald Reagan's foul policy, one can expect inflation to moderate.

Compare And Contrast...

...this quotation from Aumann and the following:

"T. C. Koopmans, perhaps the greatest defender of the use of the mathematical tool in economics, countered the criticism of the exaggeration of mathematical symbolism by claiming that the critics have not come forward with specific complaints. The occasion was a symposium held in 1954 around a protest by David Novick. But, by an irony of fate, some twenty years later one of the most incriminating corpora delicti of empty mathematization got into print with the direct help of none other than Koopmans. R. J. Aumann had already published in Econometrica an article dealing with the problem of a market in which there are as many traders as the real numbers, that is, as many as all the points on a continuous line. In 1972, Koopmans presented to the National Academy of Sciences a paper by Donald Brown and Abraham Robinson for publication in its official periodical. The authors assumed that there are more traders even than the elements of the continuum. Now, since the authors of both these papers and Koopmans are well versed in mathematics, they must have known the result proved long ago by George Cantor, namely, that even an infinite space can accommodate at most a denumerable infinity of three-dimensional objects (as the traders must necessarily be)." -- Nicholas Georgescu-Roegen, "Methods in Economic Science". Journal of Economic Issues, V. XIII, N. 2. June 1979. pp. 317-328.

Brian Doherty: Completely Wrong and Nothing New

I'm trying to decide if I want to purchase Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement. I've skimmed through two chapters in my local Barnes and Noble.

The book begins with a falsehood. On the first page of the introduction, Doherty states that Social Security is unsustainable in its current form. Not too further into the introduction, he has "libertarians" building on classical liberals. In this context, Doherty makes the false statement that classical economists depicted markets as bringing about social harmony. No, neither Adam Smith nor David Ricardo depicted members of different classes as having harmonious interests.

I also looked at the chapter on the Austrian economists. My problem here was that I know this story in too much detail. I doubt I would learn much new from Doherty's account.

So I'm leaning against purchasing Doherty's book.

Old Ideas Ramifying Into Every Corner Of Our Minds

Mark Thoma, Bruce Bartlett, and Paul Krugman, for example, are discussing how "supply-side economics trickled down". The frame of reference, as I understand it, is MIT-style Keynesianism circa 1970, including Solovian growth theory; macroeconomics after Lucas; and policy entrepreneurs in the United States. Real Business Cycle theorists and New Keynesians (that is, "New Pigouvians") are among groups I think of as following macroeconomics after Lucas.

As far as I have seen in the post and comments, Bartlett, Krugman, and Thoma do not acknowledge that their framework seems to be, at least, based on empirically doubtful special case assumptions. At worst, their approach is just incoherent and mistaken. At any rate, supposed empirical results in the literature are a matter of fitting an accounting relationship. Other approaches are possible.

In the early 1960s, Paulo Sylos Labini, an applied Sraffian economist, discussed supply-side economics with others. But that was in another country. As I understand it, Sylos Labini got on well politically with Franco Modigliani, one of the inventors of bastard Keynesianism.

Business as Sabotage

I once somewhere described Veblen as America's greatest economist. (I always exempt living people in such comparisons, since, I think, we don't have enough historical perspective on them).

"It was then still true, in great measure, that the undertaker was the owner of the industrial equipment, and that he kept an immediate oversight of the mechanical processes as well as of the pecuniary transactions in which his enterprise was engaged; and it was also true, with relatively infrequent exceptions, that an unsophisticated productive efficiency was the prime element of business success. A further feature of that precapitalistic business situation is that business, whether handicraft or trade, was customarily managed with a view to earning a livelihood rather than with a view to profits on investment...

...The economic welfare of the community at large is best served by a facile and uninterrupted interplay of the various processes which make up the industrial system at large; but the pecuniary interests of the business men in whose hands lies the discretion in the matter are not necessarily best served by an unbroken maintenance of the industrial balance. Especially is this true as regards those greater business men whose interests are very extensive. The pecuniary operations of these latter are of large scope, and their fortunes commonly are not permanently bound up with the smooth working of a given Sub-process in the industrial system. Their fortunes are rather related to the larger conjunctures of the industrial system as a whole, the interstitial adjustments, or to conjunctures affecting large ramifications of the system. Nor is it at all uniformly to their interest to enhance the smooth working of the industrial system at large in so far as they are related to it. Gain may come to them from a given disturbance of the system whether the disturbance makes for heightened facility or for widespread hardship, very much as a speculator in grain futures may be either a bull or a bear. To the business man who aims at a differential gain arising out of interstitial adjustments or disturbances of the industrial system, it is not a material question whether his operations have an immediate furthering or hindering effect upon the system at large. The end is pecuniary gain, the means is disturbance of the industrial system, - except so far as the gain is sought by the old-fashioned method of permanent investment in some one industrial or commercial plant, a case which is for the present left on one side as not bearing on the point immediately in hand. The point immediately in question is the part which the business man plays in what are here called the interstitial adjustments of the industrial system; and so far as touches his transactions in this field it is, by and large, a matter of indifference to him whether his traffic affects the system advantageously or disastrously. His gains (or losses) are related to the magnitude of the disturbances that take place, rather than to their bearing upon the welfare of the community.

The outcome of this management of industrial affairs through pecuniary transactions, therefore, has been to dissociate the interests of those men who exercise the discretion from the interests of the community. This is true in a peculiar degree and increasingly since the fuller development of the machine industry has brought about a close-knit and wide-reaching articulation of industrial processes, and has at the same time given rise to a class of pecuniary experts whose business is the strategic management of the interstitial relations of the system. Broadly, this class of business men, in so far as they have no ulterior strategic ends to serve, have an interest in making the disturbances of the system large and frequent, since it is in the conjunctures of change that their gain emerges. Qualifications of this proposition may be needed, and it will be necessary to return to this point presently.

It is, as a business proposition, a matter of indifference to the man of large affairs whether the disturbances which his transactions set up in the industrial system help or hinder the system at large, except in so far as he has ulterior strategic ends to serve. But most of the modern captains of industry have such ulterior ends, and of the greater ones among them this is peculiarly true. Indeed, it is this work of far-reaching business strategy that gives them full title to the designation, 'Captains of Industry.' This large business strategy is the most admirable trait of the great business men who with force and insight swing the fortunes of civilized mankind. And due qualification is accordingly to be entered in the broad statement made above. The captain's strategy is commonly directed to gaining control of some large portion of the industrial system. When such control has been achieved, it may be to his interest to make and maintain business conditions which shall facilitate the smooth and efficient working of what has come under his control, in case he continues to hold a large interest in it as an investor; for, other things equal, the gains from what has come under his hands permanently in the way of industrial plant are greater the higher and more uninterrupted its industrial efficiency.

An appreciable portion of the larger transactions in railway and 'industrial' properties, e.g., are carried out with a view to the permanent ownership of the properties by the business men into whose hands they pass. But also in a large proportion of these transactions the business men's endeavors are directed to a temporary control of the properties in order to close out at an advance or to gain some indirect advantage; that is to say, the transactions have a strategic purpose. The business man aims to gain control of a given block of industrial equipment - as, e.g., given railway lines or iron mills that are strategically important - as a basis for further transactions out of which gain is expected. In such a case his efforts are directed, not to maintaining the permanent efficiency of the industrial equipment, but to influencing the tone of the market for the time being, the apprehensions of other large operators, or the transient faith of investors. His interest in the particular block of industrial equipment is, then, altogether transient, and while it lasts it is of a factitious character.

The exigencies of this business of interstitial disturbance decide that in the common run of cases the proximate aim of the business man is to upset or block the industrial process at some one or more points. His strategy is commonly directed against other business interests and his ends are commonly accomplished by the help of some form of pecuniary coercion. This is not uniformly true, but it seems to be true in appreciably more than half of the transactions in question. In general, transactions which aim to bring a coalition of industrial plants or processes under the control of a given business man are directed to making it difficult for the plants or processes in question to be carried on in severalty by their previous owners or managers. It is commonly a struggle between rival business men, and more often than not the outcome of the struggle depends on which side can inflict or endure the greater pecuniary damage. And pecuniary damage in such a case not uncommonly involves a setback to the industrial plants concerned and a derangement, more or less extensive, of the industrial system at large.

The work of the greater modern business men, in so far as they have to do with the ordering of the scheme of industrial life, is of this strategic character. The dispositions which they make are business transactions, 'deals,' as they are called in the business jargon borrowed from gaming slang. These do not always involve coercion of the opposing interests; it is not always necessary to 'put a man in a hole' before he is willing to 'come in on' a 'deal.' It may often be that the several parties whose business interests touch one another will each see his interest in reaching an amicable and speedy arrangement; but the interval that elapses between the time when a given 'deal' is seen to be advantageous to one of the parties concerned and the time when the terms are finally arranged is commonly occupied with business manoeuvres on both or all sides, intended to 'bring the others to terms.' In so playing for position and endeavoring to secure the largest advantage possible, the manager of such a campaign of reorganization not infrequently aims to 'freeze out' a rival or to put a rival's industrial enterprise under suspicion of insolvency and 'unsound methods,' at the same time that he 'puts up a bluff' and manages his own concern with a view to a transient effect on the opinions of the business community. Where these endeavors occur, directed to a transient derangement of a rival's business or to a transient, perhaps specious, exhibition of industrial capacity and earning power on the part of one's own concern, they are commonly detrimental to the industrial system at large; they act temporarily to lower the aggregate serviceability of the comprehensive industrial process within which their effects run and to make the livelihood and the peace of mind of those involved in these industries more precarious than they would be in the absence of such disturbances. If one is to believe any appreciable proportion of what passes current as information on this head, in print and by word of mouth, business men whose work is not simply routine constantly give some attention to manoeuvring of this kind and to the discovery of new opportunities for putting their competitors at a disadvantage. This seems to apply in a peculiar degree, if not chiefly, to those classes of business men whose operations have to do with railways and the class of securities called 'industrials.' Taking the industrial process as a whole, it is safe to say that at no time is it free from derangements of this character in any of the main branches of modern industry. This chronic state of perturbation is incident to the management of industry by business methods and is unavoidable under existing conditions. So soon as the machine industry had developed to large proportions, it became unavoidable, in the nature of the case, that the business men in whose hands lies the conduct of affairs should play at cross-purposes and endeavor to derange industry. But chronic perturbation is so much a matter of course and prevails with so rare interruptions, that, being the normal state of affairs, it does not attract particular notice." == Thorstein Veblen (1904). The Theory of Business Enterprise (Chapter 3)

The Veblenian dichotomy is an aspect of institutional analysis.

"Not In Your Lifetime"

"I was walking to a classroom with Nicky Kaldor in 1971, and Cambridge had just won the capital controversies-reswitching debate with MIT Cambridge Mass. And Kaldor said to me, ‘How long do you think it will be before people in the United States stop teaching the marginal productivity theory?’ And my response to him was, ‘Nicky, not in your lifetime and not in my lifetime, because there are a million other ways of justifying the marginal productivity theory as long as the basic neoclassical theory remains as the microfoundations of macroeconomic theory.’” -- Paul Davidson in Colander, David (2001). “An Interview with Paul Davidson”, Eastern Economic Journal (Winter)

This Is Rocket Science

Mark Thoma has recently been trying to justify the hypothesis of rational expectations.

Rational expectations characterize a model of the economy in which the agents in the model know the model, including model parameters. Presumably agents learn the parameters of the underlying model from looking at past realizations of the time series generated by the model. A better estimate of model parameters might come from looking at many realizations at a single moment in time (say, one lag ago). But, since the world has only one history, the latter estimate is not available.

Which estimate is used does not matter for some stochastic processes. Estimates across realizations and from past values of a single realization converge, in some sense, as the number of realizations and the number of time lags increase, respectively, without bound. This property is known as ergodicity. So rational expectations only makes sense if economic time series are ergodic.

Non-stationarity is a sufficient, but not necessary, condition for non-ergodicity. Since some time series in economics (for example, output per person-hour) are non-stationary, rational expectations cannot abide in a general theory for economics.

I provide some random references examining different aspects of macroeconomics after Lucas. Sent's award-winning book documents how this macroeconomics draws on the mathematics invented by the likes of Claude Shannon and Norbert Wiener. The above application of ergodicity to critiquing rational expectations is due to Paul Davidson, who offers a formalization of Joan Robinson's contast of history with equilibrium.

References

• Davidson, Paul (1982-82). "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes", Journal of Post Keynesian Economics, V. 5, N. 2 (Winter): 182-198
• Hartley, James E. (2006). "Kydland and Prescott's Nobel Prize: the Methodology of Time Consistency and Real Business Cycle Models", Review of Political Economy, V. 18, N. 1 (Jan.): 1-28
• Hoover, Kevin D. (1988). The New Classical Macroeconomics: A Sceptical Inquiry, Basil Blackwell
• Sent, Esther-Mirjam (1998). The Evolving Rationality of Rational Expectations: An Assessment of Thomas Sargent's Achievements, Cambridge University Press