Influence Of Tastes On Prices

1.0 Introduction

This post illustrates why the non-substitution theorem includes an assumption of no joint production. I have previously gone a little into the the theory of joint production in an analysis of depreciation. I have also previously illustrated the non-substitution theorem with an example in which the theorem's assumptions are met (part 1, part 2, Kurz and Salvadori on the theorem).

2.0 The Technology

Consider three islands, Alpha, Beta, and Gamma. A competitive capitalist economy exists on each island. These islands are identical in some respects and differ in others. The point is to understand how differences in tastes can be related to other differences, particularly in prices.

All three islands have the same Constant Returns to Scale technology available. They also exhibit the same rate of profits, and have fully adapted production to their conditions. The technology consists of processes to produce rye and wheat, where workers use inputs of rye and wheat to produce rye and wheat available at the end of the time period associated with each process. This time is a year. That is, each production process requires a year to complete. Each process fully uses up their inputs in producing their outputs.

The processes here exhibit joint production. A process is an example of joint production when its output consists of more than one good. The production of wool and mutton is a well-known example. With joint production, there is room in the economy for processes producing the same set of outputs in different proportions, as in this example. Table 1 shows processes, some subset of which are chosen by the firms at the ruling prices in this example. I think a better example might fully specify a larger technology from which to chose processes.

Table 1: The Technique of Production

Inputs Hired At Start Of Year	Predominately Rye Process	Predominately Wheat Process
Labor	1 Person-Year	1 Person-Year
Rye	1/8 Bushel	3/8 Bushel
Wheat	1/16 Bushel	1/16 Bushel
Outputs	1 Bushel Rye & 1/2 Bushel Wheat	1/2 Bushel Rye & 1 Bushel Wheat

Notice that the net output of the predominately rye process, for an unit level of operation, consists of 7/8 bushel rye and 7/16 bushel wheat. The net output of the predominately wheat process consists of 1/8 bushel rye and 15/16 bushel wheat. Linear combinations, in which each process is operated at some non-negative level, can produce only some ratios of rye and wheat. Hence, these processes cannot meet all possible requirements for use, where such requirements include both consumption needs and requirements for growth. If no process exhibits joint production, any ratio of outputs can be be met by some line combination of processes. This contrast in joint production leads to requirements for use being able to influence which goods are commodities, that is, positively priced.

3.0 Quantity Flows

The employed labor force grows at a rate of 100% on each island. Each island differs, however, in the mix of outputs that they produce.

The population on Alpha wants to eat only rye. They do not and will not consume wheat. Table 2 shows the quantity flows per employed laborer on Alpha. Notice that the commodity inputs purchased at the start of the year total 1/8 bushel rye and 1/16 bushel wheat. Since the rate of growth is 100%, 1/4 bushel rye and 1/8 bushel wheat will be needed for inputs into production in the following year. This leaves 3/4 bushels rye available for consumption at the end of the year per employed worker. There is also an excess output of 3/8 bushels wheat per worker, freely disposed of each year.

Table 2: Quantity Flows On Alpha Island Per Worker

Inputs	Rye Process
Labor	1 Person-Year
Rye	1/8 Bushels Rye
Wheat	1/16 Bushels Wheat
Outputs	1 Bushel Rye & 1/2 Bushel Wheat

GROSS OUTPUTS PER WORKER: (1 Bushel Rye, 1/2 Bushel Wheat)

CAPITAL PER WORKER: (1/8 Bushel Rye, 1/16 Bushel Wheat)

CONSUMPTION PER WORKER: 3/4 Bushel Rye

A linear combination of the two processes that exactly satisfies requirements for use arising for 100% growth on the Alpha island operates the predominately wheat-producing process at a negative level. This makes no economic sense. No other possibility arises other than that shown in Table 2.

The Beta population eats only wheat. Table 3 shows the quantity flows on Beta. Here the same sort of calculations reveal that Beta has 3/4 bushel wheat available for consumption at the end of the year, per employed worker.

Table 3: Quantity Flows On Beta Island Per Worker

Inputs	Rye Process	Wheat Process
Labor	1/4 Person-Year	3/4 Person-Year
Rye	1/32 Bushels Rye	9/32 Bushels Rye
Wheat	1/64 Bushels Wheat	3/64 Bushels Wheat
Outputs	1/4 Bushel Rye & 1/8 Bushel Wheat	3/8 Bushel Rye & 3/4 Bushel Wheat

GROSS OUTPUTS PER WORKER: (5/8 Bushel Rye, 7/8 Bushel Wheat)

CAPITAL PER WORKER: (5/16 Bushel Rye, 1/16 Bushel Wheat)

CONSUMPTION PER WORKER: 3/4 Bushel Wheat

Gamma's quantity flows, shown in Table 4, are one possible intermediate case. Gamma has 9/14 bushel rye and 3/7 bushel wheat available for consumption at the end of the year per employed worker.

Table 4: Quantity Flows On Gamma Island Per Worker

Inputs	Rye Process	Wheat Process
Labor	25/28 Person-Year	3/28 Person-Year
Rye	25/224 Bushels Rye	9/224 Bushels Rye
Wheat	25/448 Bushels Wheat	3/448 Bushels Wheat
Outputs	25/28 Bushel Rye & 25/56 Bushel Wheat	3/56 Bushel Rye & 3/28 Bushel Wheat

GROSS OUTPUTS PER WORKER: (53/56 Bushel Rye, 31/56 Bushel Wheat)

CAPITAL PER WORKER: (17/56 Bushel Rye, 1/8 Bushel Wheat)

CONSUMPTION PER WORKER: (9/14 Bushel Rye, 3/7 Bushel Wheat)

4.0 Price System

Since these economies have adapted to their requirements for use, stationary prices prevail. Assume a rate of profits of 100%, identical across all three islands. Also assume the wage is paid at the end of the year.

4.1 Prices on Alpha

Recall that there is excess production of wheat on Alpha. "If there is excess production of [wheat], [wheat] becomes a free good" (J. Von Neumann, "A Model of General Economic Equilibrium," Review of Economic Studies, 1945-1946: 1-9). Asuming the wage is paid at the end of the year, the price system given by Equation 1 will be satisfied:

(1)

where w is the wage and r is the rate of profits. I have implicitly assumed in the above equation that the price of a bushel rye is $1. The wage can be ound in terms of the rate of profits:

(2)

Since the rate of profits is 100%, the wage on Alpha is 3/4 bushel rye per person-year.

4.2 Prices on Beta and Gamma

The price system given by Equations 3 and 4 will be satisfied on Beta and Gamma:

(3)

(4)

where p is the price of a bushel wheat. The wage can be found in terms of the rate of profits:

(5)

The price of wheat, in terms of the rate of profits, is given by Equation 6:

(6)

Given a rate of profits of 100%, the wage on Beta and Gamma is 3/2 bushel rye per person-year, and the price of a bushel wheat is 2 bushels rye.

5.0 Conclusions

Under the conditions satisfied by this example, in which the economies on different islands are fully adapted to tastes, the prices shown in Table 5 prevail. Differences in tastes between Beta and Gamma are associated with unchanged prices, even in this context. Different tastes on Alpha, however, are associated with a difference in which goods have positive prices and a consequent difference in the wage.

Table 5: Summary of Prices

	Alpha	Beta & Gamma
Wheat (Bushel)	0 Bushel Rye	2 Bushel Rye
Labor (Person-Year)	3/4 Bushel Rye	3/2 Bushel Rye

Note that the quantity flows specified above show the wage entirely consumed and profits entirely invested.

Note that if only goods with a positive price were shown in the techniques chosen on the respective islands, the input-output matrices would be square in all cases (1x1 on Alpha and 2x2 on the other two islands). I think that this property can arise in some cases where wages are not entirely consumed and profits not entirely invested. As I understand it, however, it is a theorem that the input-output matrices are square under this golden-rule condition.

If wages were the same across all three islands, then the rate of profits would vary between Alpha, on the one hand, and Beta and Gamma, on the other. Since the rate of growth is equal to the rate of profits, the rate of growth for a fully adjusted economy would be determined endogeneously. The different choices of the workers on how to consume their wages would result in a difference in the rate of growth between Alpha and the Beta and Gamma islands.

Even though differences in tastes can be associated with differences in prices, it is not clear that this example illustrates a model consistent with the neoclassical (scarcity) theory of value:

"..in a production context...it makes no sense to talk of 'endowments' of given physical quantities if these physical quantities, to be carried over from one period to another, are the unknowns to be determined. It makes no sense to talk of 'scarce' resources, if these resources can be produced in whatever quantities may be needed by the economic system...

When all inputs are themselves produced, a change in the composition of demand simply means that more of some inputs and less of other inputs will have to be produced, while the optimum technique remains the same. In other words, the process of adaptation to any given change in the composition of final demand is, in a production context, radically different from the one considered by traditional theory. Whereas, with given and fixed inputs (the traditional case), the only way to adapt is through a change of technique which may allow the substitution of some inputs for others, in a production context in which all inputs are themselves produced the obvious way to adapt is to produce the inputs which are needed and to cut down production of those which are no longer needed. There is no question of changing the technique. Input substitution, in a production context, has no role to play...

Another route which has been pursued to minimize the importance of the new results...consists in attributing the irrelevance of substitution to the 'very special' case of no joint production and constant coefficients [ = constant returns to scale -RLV ]. But the inconsistency of this contention is here brought into sharp relief by the very analysis of the previous pages...

As already pointed out...the joint production and nonconstant coefficients case is more complicated than, but not basically different from, the case concerning single products and constant coefficients. The complication arises from the fact that a change of the composition of demand may entail a change of the optimum technique and of the price structure. However, this does not enable us to say anything about the direction in which the input proportions will change.

...It is precisely the unambiguous direction in which relative prices and input proportions are related to each other that justifies talking of 'substitution.' But there is nothing of the sort in a production context. No general relation exists between the changes in the price structure and changes in the input proportions. More specifically, no monotonic inverse relation exists, in general, between the variation of any price, relative to another price, and the variation of the proportions among the two inputs to which these two prices refer. When this is so, to talk of 'substitution' among these inputs no longer makes any sense." -- Luigi L. Pasinetti (1977). Lectures on the Theory of Production, Columbia University Press: 186-188

Steven Horwitz, Confused?

"A Mengerian understanding of the market process rejects the claim that an economy can be fruitfully understood through the use of simultaneous equations and equilibrium constructs… The Austrian approach rejects equilibrium theory as a description of actual economic events (although some Austrians would retain it as the never-achieved endpoint of economic activity) in favor of other theoretical and metaphorical devices." -- Steven Horwitz (2000: 8)

I don't know why Horwitz identifies "simultaneous equations" with equilibrium.

Consider this applet. I think one can characterize the underlying mathematics as a system of (countably infinite) simultaneous equations. Yet, one can hardly say that the interest in this mathematics lies in an equilibrium point, at least above a certain value of a parameter.

And that mathematics has economic applications. A Ricardian model can yield a logistic equation (Bhaduri). So can a cobweb cycle with an affine supply function and a quadratic demand function (Goodwin).

Advocates of the Austrian school should strive to write so one cannot read them as not being able to do math, instead of as simply choosing not to do math.

References

• Bhaduri, Amit (1993). Unconventional Economic Essays: Selected Papers of Amit Bhaduri, Oxford University Press
• Horwitz, Steven (2000). Microfoundations and Macroeconomics: An Austrian Perspective, Routledge
• Goodwin, Richard M. (1990). Chaotic Economic Dynamics, Oxford University Press

Peter Klein, Mistaken?

I get this quote second-hand, from Peter Lewin (1999):

"[N]o firm can become so large that it is both the unique producer and user of an intermediate product; for then no market based transfer prices will be available, and the firm will be unable to calculate divisional profit and loss and therefore unable to allocate resources correctly between divisions." - Peter Klein (1996: 15). "Economic Calculation and the Limits of Organization", Review of Austrian Economics; V. 9, N. 2: 3-28.

I have already explained that Sraffa's price theory can be read as instructions to accountants. Klein is being too categorical; correct accounting rules can exist in some cases where he says they cannot. (I am sympathetic to the idea that accounting rules, in practice, contain a large conventional element. Sraffa's instructions to accountants need more information than is usually available, and cases may exist - joint production when the so-called Golden Rule does not hold - where the instructions cannot, even in principle, be applied.)

Ten Principles of Feminist Economics

I've previously referenced expositions of principles of institutional economics and principles of heterodox economics. Geoff Schneider and Jean Shackelford have put forth some principles of feminist economics, also. Since in keeping with an antireductionist view the first principle is that there is no such thing as a definitive list of principles, I will not reproduce the list here.

Milton Friedman's Elegant Tombstones

"Professor Friedman's demonstration [in Capitalism and Freedom] that the capitalist market economy can coordinate economic activities without coercion rests on an elementary conceptual error. His argument runs as follows. He shows first that in a simple market model, where each individual or household controls resources enabling it to produce goods and services either directly for itself or for exchange, there will be production for exchange because of the increased product made possible by specialization. But 'since the household always has the alternative of producing directly for itself, it need not enter into any exchange unless it benefits from it. Hence no exchange will take place unless both parties do benefit from it. Cooperation is thereby achieved without coercion'...So far, so good. It is indeed clear that in this simple exchange model, assuming rational maximizing behavior by all hands, every exchange will benefit both parties, and that no act of coercion is involved in the decision to produce for exchange or in any act of exchange.

Professor Friedman then moves on to our actual complex economy, or rather to his own curious model of it:

'As in [the] simple model, so in the complex enterprise and money-exchange economy, cooperation is strictly individual and voluntary provided: (a) that enterprises are private, so that the ultimate contracting parties are individuals and (b) that individuals are effectively free to enter or not to enter into any particular exchange so that every exchange is strictly voluntary...'

...Proviso (b) is 'that individuals are effectively free to enter or not to enter into any particular exchange', and it is held that with this proviso 'every exchange is strictly voluntary'. A moment's thought will show that this is not so. The proviso that is required to make every transaction strictly volunatry is not freedom not to enter into any particular exchange, but freedom not to enter into any exchange at all. This, and only this, was the proviso that proved the simple model to be voluntary and noncoercive; and nothing less than this would prove the complex model to voluntary and noncoercive. But Professor Friedman is clearly claiming that freedom not to enter into any particular exchange is enough: 'The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal...The employee is protected from coercion by the employer because of other employers for whom he can work...'

One almost despairs of logic, and of the use of models. It is easy to see what Professor Friedman has done, but it is less easy to excuse it. He has moved from the simple economy of exchange between independent producers, to the capitalist economy, without mentioning the most important thing that distinguishes them. He mentions money instead of barter, and 'enterprises which are intermediaries between individuals in their capacities as suppliers of services and as purchasers of goods'...as if money and merchants were what distinguished a capitalist economy from an economy of independent producers. What distinguishes the capitalist economy from the simple exchange economy is the separation of labor and capital, that is, the existence of a labor force without its own sufficient capital and therefore without a choice as to whether to put its labor in the market or not. Professor Friedman would agree that where there is no choice there is coercion. His attempted demonstration that capitalism coordinates without coercion therefore fails...

...The logical humanist liberal will regret that ... and the fallacies make Capitalism and Freedom not a defense but an elegant tombstone of liberalism." -- C. B. Macpherson, "Elegant Tombstones", Canadian Journal of Political Science, March 1968.

Heterodox Economics Conference

Apparently, the Association for Heterodox Economics Conference just finished in Bristol. You and I can download drafts of papers presented.

Kaldor On Neoclassical Economics

What could Alan Blinder have meant when the N. Y. Times quoted him as saying, "Mathematics is not scientific"? Perhaps Blinder was saying something like Kaldor did a over a quarter century ago:

"...unlike any scientific theory, where the basic assumptions are chosen on the basis of direct observation of the phenomena the behaviour of which forms the subject-matter of the theory, the basic assumptions of economic theory are either of a kind that are unverifiable - such as that producers 'maximize' their profits or consumers 'maximize' their utility - or of a kind which are directly contradicted by observation - for example, perfect competition, perfect divisibility, linear homogeneous and continuously differentiable production functions, wholly impersonal market relations, exclusive role of prices in information flows and perfect knowledge of all relevant prices by all agents and perfect foresight. There is also the requirement of a constant and unchanging set of products (goods) and of a constant and unchanging set of processes of production (or production functions) over time - though neither category, goods nor processes, is operationally defined: in other words, no attempt is made to show how these axiomatic concepts are to be defined or recognised in relation to empirical material.

While this pure theory is not intended to describe reality, it is put forward as the necessary conceptual framework - the necessary starting point - for any attempt at explaining how a 'decentralised' system works; how individuals guided entirely by the market, or rather by price information, sort themselves out between different activities and thereby secure the maximum satisfaction both to themselves and, in the specific Pareto-sense, to society as a whole.

Indeed it is the deep underlying belief, common to all economists of the so-called 'neo-classical' school, that general equilibrium theory is the one and only starting point for any logically consistent explanation of the behaviour of de-centralised economic systems. This belief sustained the theory despite the increasing (not diminishing) arbitariness of its basic assumptions - which was forced upon its practitioners by the ever more precise cognition of the needs of logical consistency. In terms of gradually converting an 'intellectual experiment' (to use Professor Kornai's phrase) into a scientific theory - in other words, into a set of theorems directly related to observable phenomena (*) - the development of theoretical economics was one of continual degress, not progress: the ship appears to be much further away from the shore now than it appeared to its originators in the nineteenth century. The latest theoretical models, which attempt to construct an equilibrium path through time with all prices for all periods fully determined at the start under the assumption that everyone foresees future prices correctly to eternity, require far mor fundamental 'relaxations' for their applicability than was thought to be involved in the original Walrasian scheme. The process of removing the 'scaffolding,' as the saying goes, - in other words of 'relaxing' the unreal basic assumptions - has not yet started. Indeed, the scaffolding gets thicker and more impenetrable with each successive reformulation of the theory, with growing uncertainty as to whether there is a solid building underneath.

Yet the main lessons of these increasingly abstract and unreal theoretical constructions are also increasingly taken on trust - as if in the social sciences, unlike the natural sciences, the problem of verification could be passed over or simply ignored. It is generally taken for granted by the great majority of academic economists that the economy always approaches, or is near to, a state of 'equilibrium'; that equilibrium, and hence the near-actual state of the world, provides goods and services to the maximum degree consistent with available resources; that there is full and efficient utilisation of every kind of 'resource'; that the wage of every kind and quality of labour is a measure of the net contribution (per unit) of these varying kinds and qualities of labour to the total product; that the rate of profits reflects the net advantage of substituting capital for labour in production, etc., etc. - all propostitions which the pure mathematical economist has shown to be valid only on assumptions that are manifestly unreal - that is to say, directly contrary to experience and not just 'abstract'. In fact, equilibrium theory has reached the stage where the pure theorist has successfully (though perhaps inadvertently) demonstrated that the main implications of this theory cannot possibly hold in reality, but that has not yet managed to pass his message down the line to the textbook writer and to the classroom.

(*) The difference between a scientific theory and an 'axiomatic' theorem has been well put by Einstein:

'Physics consitute a logical system of thought which is in a state of evolution, whose basis cannot be distilled, as it were, from experience by an inductive method, but can only be arrived at by free invention. The justification (truth content) of the system rests in the verification of the derived propositions by sense experiences.

The skeptic will say: "it may be true that this system of equations is reasonable from a logical standpoint. But it does not prove that it corresponds to nature." You are right, dear skeptic. Experience alone can decide on truth.'
A. Einstein, Ideas and Opinions, New York, 1960, pp. 322 and 355 (quoted by Kornai...)

The difference mainly resides in this. In the case of physics, any fundamental re-consideration of the basic 'axioms' of the system is the result of observations which could not be made consistent with existing hypotheses. Examples (chosen at random) are the observation that the amount of radiation emitted by Pitchblende was greater than could be accounted for by the absorption of sunlight; that a stream of light which passed through a glass and was directed at a mirror at some particular angle is not reflected by the mirror; or that there is a 'reddening' of the spectrum observed in distant stars. In economics, observations which contradict the basic hypotheses of prevailing theory are generally ignored: the 'theorist' and the 'empiricist' operate in two isolated compartments and the challenge of anomalous observations is ignored by the theorist - as something that could be taken into account at the stage of 'second approximation' without affecting the basic hypotheses. And where empirical material is brought into conjunction with a theoretical model, as in econometrics, the role of empirical estimation is to 'illustrate' or to 'decorate' the theory, not to provide support to basic hypothesis (as for example, in the case of numerous sudies purporting to estimate the coefficients of production functions)." -- Nicholas Kaldor (1972). "The Irrelevance of Equilibrium Economics", V. 82, N. 328 (Dec.): 1237-1255.

Heterodox Economics Varietals

Austrian, Behavioral, Black, Ecological, Feminist, Institutionalist, Marxist, Post Keynesian, Post-Walrasian, Radical Political, Sraffian, and Structuralist economics. Also, Econophysics and Regulation Schools.

This list is not complete. I think a name may exist for economics drawing on Catholic social teaching. I am not sure how to label economists inspired by the mathematics of complexity, some of who might be heterodox.

Newsflash: New York Times Not Last Word On Technical Debates

The Times had an article today on heterodox economics. Some commentators do not seem to understand this sort of popularization isn't likely to be great at conveying what the argument is about. Others have more of a clue. My suggestion is that if you want to know what Fred Lee has to say about heterodox economics, read his publications on the topic.

Update (12 July): Mainstream Harvard economists comment. Naturally, none of these three comment on:

• How Amherst economics acquired that tendency (mentioned in the Times’ article)
• Why Harvard won’t allow Marglin to teach a section of the intro course
• Feldstein’s refusal to modify his views on Social Security after finding his “empirical” results came from a computer programming error
• How the thief Andrei Shleifer manages to still be a Harvard economist in good standing

By the way, Patricia Cohen, the Times reporter, explicitly says (correctly) that Blinder, Card, and Rodrik are not heterodox economists. I would think the Leontief paradox, when it comes to international trade, is empirical data.

Elsewhere, Max Sawicky points out that he does not develop heterodox economic theory.

I continue to think that you cannot offer a substantial critique of heterodox economics based on what is said about it in this New York Times article.

Peter Lewin, Correct To Mistaken

Peter Lewin is influenced by Ludwig Lachmann:

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

…Production plans, considered as a whole, are typically in disequilibrium – are based, at least in part, on inconsistent expectations, not regarding the ‘rules of the game,’ but regarding the viability of the product or the productive technique. There is no way to derive an aggregate measure of capital in this situation. The net present values as (assumed to be) computed by each individual planner are based on inconsistent futures…" -- Peter Lewin (1999, p. 112-113).

Here his views are, to put it nicely, inadequately researched:

"The Neoclassicals seemed to think it was a question of the degree of substitutability between inputs, which the Neo-Ricardians assumed to be low (their models involved discrete substitutability by 'switching' from one fixed technique to another). Neither side wondered about the relevance of their framework to the market process as we know it." -- Peter Lewin (1999, p. 83)

Many Sraffians use examples of techniques with fixed coefficients. I think Austrians would be comfortable with models in which some capital goods are technique-specific. But some Sraffians were quite clear that some of their criticisms did not depend on a lack of substitutability (e.g., Pasinetti 1969 and maybe this).

And some neoclassicals have also been clear that some issues are not a matter of the degree of substitutability:

"As my exposition will reveal, the fatal flaw in question can exist even when a scalar 'leets' is the sole producible input; it can exist even when precise neoclassical marginal products do exist and do serve to pin down unequivocally the distribution of incomes between propertyless workers and affluent capitalists. The statues of Piero and Joan belong in the pantheon of neoclassicism itself." -- Paul A. Samuelson (2001).

The flaw is the belief that output per worker will be higher, given technology, when the interest rate is lower. Samuelson has been repetitive on pointing out that this belief is false, even if all microeconomic production functions are continuously differentiable (e.g., Samuelson 1976).

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

This is incorrect mathematics:

"It will not do to assume that things are only known ‘probabilistically,’ since this presumes that a finite number of possible outcomes and their distribution is known." -- Lewin (1999, p. 79)

A random variable can take on an infinite number of values and still have a probability distribution (e.g., a Poisson distribution). Lewin, in context, is trying to get at the distinction between insurable risk and Knightian/Keynesian uncertainty. Perhaps the problem with the above passage is mainly a problem of exposition, of trying to explain this distinction without going into mathematics.

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

References

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

Some Principles Of Heterodox Economics

1. Methodology (rather than just method) is important to understanding economics.
2. Human actors are social and less than perfectly rational, driven by habits, routines, culture and tradition
3. Economic systems are complex, evolving and unpredictable - and consequently equilibrium models should be viewed sceptically.
4. While theories of the individual are useful, so are theories of aggregate or collective outcomes. Further, neither the individual nor the aggregate can be understood in isolation from the other.
5. History and time are important (reflecting (3)).
6. All economic theories are fallible and, reflecting (4), there is contemporary relevance of the history of thought to understanding economics.
7. Pluralism, i.e. multiple perspectives, is advocated (following on from (3) and (6)).
8. Formal mathematical and statistical methods should be removed from their perceived position as the supreme method - but not abandoned - and supplemented by other methods and data types.
9. Facts and values are inseperable.
10. Power is an important determinant of economic outcomes.

-- Andrew Mearman (2007). "Teaching Heterodox Economics Concepts", The Economics Network (June)

(I previously posted a quotation of ten principles of institutional economics.)

Economists as Tools

I've been reading Tiago Mata's award-winning 2005 PhD. thesis, Dissent in Economics: Making Radical Political Economics and Post Keynesian Economics, 1960-1980 (hat tip to Peter Klein).

Here's a statement read, at the 1969 American Economic Association business meeting, by a spokesperson for a group of about 25 radical economists:

"Economists in the United States work as a group and work contrary to the interests of the masses of people. The affluence and the power of the economists derive from their support of the elite, the elite which controls the institutional structure and the sources of power that perpetrate and reproduce the oppression of millions – the economists are the sycophants of inequality, alienation, destruction of environment, imperialism, racism, and the sub jugation of women.

...economists do not merely praise the system; they also supply the tools – indeed, they are the tools – instrumental to the elite’s attainment of its unjust ends. They show how to manipulate people so that the system’s hinges are smoothly oiled.

... the A.E.A. plays directly destructive roles in our society. It serves to insure the perpetuation of professionalism, elitism, and petty irrelevance. It serves to inhibit the development of new ideas, ideas which are reflective of social reality.

...Our conflict with the A.E.A. is not simply an intellectual debate. The A.E.A. cannot lessen our condemnation by their willingness to partake in debate, or by their willingness to provide a room to radical economists at this meeting. Our conflict is a basic conflict of interests. The economists have chosen to serve the status quo. We have chosen to fight it." (quote in Mata, p. 82)

Although I find the above amusing, I find myself more sympathetic to the Post Keynesians chronicled in part III.

P.S.: This week's Nation has letters responding to Chris Hayes' article about heterodox economics. The letter-writers point out the existence of feminist and ecological economics and the non-existence of a Nobel prize in economics.

Quoting Joan Robinson

I might as well note that Mark Thoma puts up a long quotation from Joan Robinson.

Gabriel Mihalache, with his confusion of methodological individualism and political individualism, makes the comments, basically, all about him.

Gavin Kennedy cannot seem to handle that a leftist like Joan Robinson is quite aware of the contrast between popular portrayals of Adam Smith and what Smith actually said. He assigns Joan Robinson's words to Mark Thoma.

This should further explode Gavin Kennedy's head:

"I didn't do any research at all on Smith. I just read him. There's no research. Just read it. He's pre-capitalist, a figure of the Enlightment. What we would call capitalism he depised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn them into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceedings to its limits...

[A mixture of stuff that I agree is a good interpretation of Smith and stuff I don't think is all that good an interpretation]

The version of him that's given today is just ridiculous. But I didn't have to do any research to find this out. All you have to do is read. If you're literate you'll find it out. I did do a little research in the way it's treated, and that's interesting. For example, the University of Chicago, the great bastion of free market economics, etc., etc., published a bicentennial edition of the hero, a scholarly edition with all the footnotes and the introduction by a Nobel Prize winner, George Stigler, a huge index, a real scholarly edition. That's the one I used. It's the best edition. The scholarly framework was very interesting, including Stigler's introduction. It's likely he never opened The Wealth of Nations. Just about everything he said about the book was completely false. I went through a bunch of examples in writing about it, in Year 501 and elsewhere..." -- Noam Chomsky (1996). Class Warfare: Interviews with David Barsamian, Common Courage Press.

Don't Believe A Word Greg Mankiw Says

Others have noticed that Greg Mankiw is untrustworthy and unprofessional.

Update: Others are commenting on Mankiw's untrustworthiness, I think on different grounds.

A Sequence: Civil Rights, Political Rights, Social Rights

Another reminder to myself: The following teleological story is told by T. H. Marshall:

• In the eighteenth century, the British obtained civil rights (e.g., free speech, freedom of religion)
• In the nineteenth century, they acquired political rights (e.g., the right to vote)
• The twentieth century is about the struggle for social rights (e.g., the right to be able to use your talents and skills to provide for yourself and your family, also known as, the right to a job)

The original source for this story is:

• T. H. Marshall (1950). Citzenship and Social Class, Cambridge University Press.

Economists Refusing To Do Math

Tyler Cowen doesn't seem to know that this discussion of the Marginal Product of Capital is nonsense.

Tyler Cowen also doesn't know that Austrian Business Cycle theory is mistaken.

Robert Barro seems to mistakenly think that one can legimately express production functions as functions of capital goods, measured in numeraire units.

Notice that Tyler Cowen and Robert Barro seem to be using these mistakes in applied and policy-oriented models. I do not see why I should pretend such nonsense has any credibility whatsoever.

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