Send A Letter

King’s College
Cambridge
14 March 1938

Dear Wittgenstein,

Before trying to discuss, probably in a confused way, I want to give a clear answer to your question. If as you say it is of “vital importance” for you to be able to leave Austria and return to England, there is no doubt – you must not go to Vienna. Whether you are a lecturer at Cambridge or not, now you would not be let out: the frontier of Austria is closed to the exit of Austrians. No doubt these restrictions will have been somewhat relaxed in a month’s time. But there will be no certainty for a long time that you will be allowed to go out, and I think a considerable chance of your not being allowed out for some time. You are aware no doubt that are now a German citizen. Your Austrian passport will certainly be withdrawn and then you will have to apply for a German passport, which may be granted if and when the Gestapo is satisfied that you deserve it.

As to the possibility of war, I do not know: it may happen at any moment, or we may have one or two more years of “peace”. I really have no idea. But I should not gamble on the likelihood of six months’ peace.

If however you decided in spite of all to go back to Vienna, I think: a) it would certainly increase your chance of being allowed out of Austria if you were a lecturer in Cambridge; b) there would be no difficulty in your entering England, once you are let out of Austria (of Germany, I should say); c) before leaving Ireland or England you should have your passport changed with a German one, at a German consulate: I suppose they will begin to do so in a very short time; and you are more likely to get the exchange effected here than in Vienna; and, if you go with a German passport, you are more likely (though not at all certain) to be let out again.

You must be careful, I think, about various things: 1) if you go to Austria, you must have made up your mind not to say that you are of Jewish descent, or they are sure to refuse you a passport; 2) you must not say that you have money in England, for when you are there they could compel you to hand it over to the Reichsbank; 3) if you are approached, in Dublin or Cambridge, by the German Consulate, for registration, or change of passport, be careful how you answer, for a rash word might prevent you ever going back to Vienna; 4) take care how you write home, stick to purely personal affairs, for letters are certainly censored.

If you have made up your mind, you should apply at once for Irish citizenship – perhaps your period of residence in England will be counted for that purpose: do it before your Austrian passport is taken away from you, it is probably easier as an Austrian than as a German.

In the present circumstances I should not have qualms about British nationality if that is the only one which you can acquire without waiting for another ten years’ residence: also you have friends in England who could help you to get it: certainly a Cambridge job would enable you to get it quickly.

I shall be in Cambridge till Friday: afterwards letters will be forwarded to me in Italy, so take care what you say, that you may be writing for the Italian censor.

My telephone is 3675: you will find me available before noon and in the evening after 10.

Yours
Piero Sraffa

Excuse this confused letter.

Profits Resulting From Exploitation Of Workers

1.0 Introduction
This post outlines a simple economic model. This model formalizes the claim that capitalists obtain their income from the exploitation of workers. The concept of exploitation illustrated in this model is supposed to formalize at least some of Marx's results in Capital.

I present results here without proof. Michio Morishima calls the theorem with which I conclude the "Fundamental Theorem of Marxism". In the 1970s, Ian Steedman showed the theorem does not apply to models with joint production, under a natural generalization of labor values. On the other hand, Morishima argues the theorem does apply to joint production under a different way of defining labor values in that case.

2.0 The Data and Quantity Relationships
I assume an economy in which n commodities are produced. Each commodity is produced from inputs of labor and produced commodities. Define a_i,j to be the quantity of the ith commodity used to produce one unit of the jth commodity. The nxn input-output matrix A contains these coefficients of production. By assumption, all commodity inputs are used up in a single production cycle (a year). That is, this is a circulating capital model. Assume the input-output matrix A is irreducible.

The net or gross quantities of commodity outputs of this economy are among the model's data. Let y be the column vector of net outputs (also known as the surplus), and let q be the column vector of gross outputs. Net and gross outputs are related by the following equation:

y = q - A q = (I - A)q

Assume A is such that all elements of y are strictly non-negative and at least one element is strictly positive. That is, in this economy, the circulating capital goods are reproduced, with some output left over. The assumptions allow one to invert the above relationship, thereby obtaining:

q = (I - A)^-1 y

The inverse is known as the Leontief inverse. It exists under these assumptions by a Perron-Frobenius theorem.

Assume the quantity of any type of labor can be expressed as a known ratio of simple (unskilled) labor. For example, one hour of a nurse's labor might be expressed as five hours of simple labor, to pick a ratio at random. Let a_{0, j} denote the hours of (simple) labor expended in producing one unit of the jth commodity. The n-element row vector a₀ is composed of these labor coefficients. The labor force employed to produce the observed surplus is then a₀ (I - A)^-1 y.

Finally, the real wage is among the data of the model. Suppose wages are expended on a commodity basket of known proportions. Let the column vector c be in these proportions. If c is also the numeraire, the real wage is wc, in terms of numeraire-units per labor hours.

Assume wages are advanced. Some of the fomulas below are usefully expressed in terms of the augmented input-output matrix A(w). The augmented input-output matrix is defined as:

A(w) = A + c a₀w

The coefficients of the augmented input-output matrix are the commodities advanced per unit output, where these commodities are needed both as inputs to production and to sustain the workers during a production cycle.

3.0 Labor Value Accounting
Let e_j be the jth column of the identity matrix. Suppose the net output of the economy were to consist of one unit of the jth commodity. Then e_j would be a column vector denoting the net output. The gross output of the economy would be (I - A)^-1 e_j. One could then calculate the labor time to produce at these levels of operation of each industry in the economy:

Definition: The labor value of the jth commodity, v_j is:

v_j = a₀ (I - A)^-1 e_j

In words, the labor value of a commodity is the amount of labor time that would be required, if Constant Returns to Scale prevailed, to increase the net output of the economy by one unit of that commodity. Some refer to the labor value of a commodity as the amount of labor embodied in that commodity.

The row vector of labor values of all commodities is easily seen to be:

v = a₀ (I - A)^-1

The labor value of any quantities of commodities is calculated by premultiplying the column vector representing those quantities by the row vector of labor values. This observation allows one to make sense of a further definition:

Definition: The rate of exploitation, e is defined by:

e = [v(I - A - c a₀ w)q]/(v c a₀ q w)

In words, the rate of exploitation is the ratio of the labor embodied in the surplus not paid out in wages to the labor embodied in the commodities purchased out of wages.

4.0 The Price System for the Maximum Wage
The maximum wage, w*, arises when the entire net output (also known as the surplus) is paid out to the workers and the rate of profits is zero. The stationary row vector of prices, p*, consistent with the maxiumum wage satisfies the following equation:

p* [A + c a₀ w*] = p*

Or:

p* A(w*) = p*

That is, an eigenvalue of unity exists for the augmented input-output matrix calculated for the maximum wage, and the prices comprise the corresponding left-hand eigenvector. The existence of unity as the eigenvalue follows from a Perron-Frobenius theorem. It also follows that the prices corresponding to the maximum wage are strictly positive.

These prices are proportional to labor values:

Theorem: There exists a k > 0 such that:

p* = k v

5.0 The Price System in General
Under the assumptions, a stationary price vector p satisfies the following equation:

p A(w) (1 + r) = p

where r is the rate of profits. (The question of the usefulness of these prices of production for understanding the dynamics of market prices is known as the "realization problem".) The following is an equivalent equation:

p A(w) = 1/(1 + r) p

1/(1 + r) is then an eigenvalue of the augmented input-output matrix, and the price vector is the corresponding left-hand eigenvector. Some manipulation yields an nth-degree polynomial equation for 1/(1 + r):

Determinant[ 1/(1 + r) I - A(w) ] = 0

For a wage less than the maximum wage, the maximum root of this equation is real and has a corresponding left-hand eigenvector with positive elements. (This claim also follows from a Perron-Frobenius theorem.) The price level is picked out by the condition that the price of the numeraire be unity:

p c = 1

Suppose that w < w*. That is, not all of the surplus is paid out in wages. Furthermore, assume that the organic composition varies among industries. ("Organic composition of capital" is Marxist jargon roughly equivalent to "capital-intensity".) Then there does not exist a k > 0 such that:

p = k v

That is, prices in the general case are not proportional to labor-values. In this sense, a simple labor theory of value usually does not hold.

(Have I left out any other freak cases? Is there possibly a left-hand eigenvector for the input-output matrix such that all of its elements are positive and that eigenvector is associated with some other eigenvalue that the Frobenius root of the input-output matrix? I'd look for other freak cases where the vector of direct-labor coefficients is some such eigenvector, if such exists.)

6.0 Conclusion

Definition: Labor is exploited if and only if e > 0.

In words, labor is exploited if the labor-hours embodied in the commodities workers buy is less than the labor-hours the workers expend to earn the wages with which they buy those commodities.

Theorem: r > 0 if and only if e > 0.

In words, the rate of profits is positive in a system of stationary prices consistent with smooth growth of the economy if and only if labor is exploited. In other words, the positive returns provided to ownership of capital come from paying workers less than the value they contribute to production.

As far as I am concerned, this is solid mathematics.

Problems Mount In Application of Free Market Theory

As a footnote in a discussion of anomalies in a paradigm, in the sense of Thomas Kuhn, Pasinetti writes:

"It seems to me significant that Kenneth Arrow, himself a major contributor to the clear formalisation of the present dominant paradigm based on the Walrasian exchange model of General Economic Equilibrium analysis, would write a short newspaper article (rather than an article in a scientific journal)... While giving a proud statement of the exchange paradigm, Ken Arrow frankly gives at the same time a long list of its major points of weaknesses and downright failures, implying that the number and the seriousness of these failures are continually mounting." -- Luigi L. Pasinetti, Keynes and the Cambridge Keynesians: A "Revolution in Economics" to be Accomplished, Cambridge University Press (2007)

Pasinetti refers to:

• Kenneth Arrow, "Problems Mount in the Application of Free Market Theory", in the rubric "Debate" in The Guardian, 4 January 1994.

I could not find this article on-line by using search tools. I'm curious what Arrow could have written. Could he have explained the Sonnenschein-Debreu-Mantel results in that forum? The difficulty of developing something more realistic than the tâtonnement process?

Update (6 February 2008): I thank an anonymous commentator for posting Arrow's article in the comments.

Hyman Minsky: Man of the Moment

There has been quite a bit of talk about Hyman Minsky recently, and for good reason. In particular, this week's New Yorker leads off with an article by John Cassidy about Hyman Minsky.

Minsky was a Post Keynesian economist who I read years ago. I think in particular of his book John Maynard Keynes, which I thought quite good. I do not recall the five business-cycle stages John Cassidy mentions (displacement, boom, euphoria, profit taking, and panic). The elements I do recall lie elsewhere. I'm currently reading a couple of articles to help my recollection.

As I recall, Minsky emphasizes that Keynes' General Theory was set in a business cycle context. He thinks this context important in understanding Keynes' idea of an unemployment equilibrium. Minsky also points out the tendency under capitalism to continually evolve new financial instruments and new markets for trading in second-hand debt. (Thus, a regulatory regime will also need to evolve if a recurrence of debt-deflation is to be avoided.) In a sense, Minsky's view is that the supply of money is endogenous and non-neutral in the long run.

Minsky makes a tripartite distinction among types of finance:

• Hedge Finance: The returns to an investment both cover interest charges and allow the principal to be paid off.
• Speculative Finance: The returns cover interest charges, but the principal must be rolled over when it comes due.
• Ponzi finance: The returns do not even cover interest charges and one must take on a growing burden of debt.

Businesses take on finance for leverage.

As memories of the last downturn fade, pressure grows to become more highly leveraged. Speculative and ponzi finance grow at the expense of hedge finance. Notice that unexpected events can convert hedge finance to speculative finance and speculative finance to ponzi finance. The returns to an investment might not be as expected. Perhaps an institution from which you were expecting a cash flow goes bankrupt. So if returns were previously expected to cover more than interest charges, one might now find that returns can only be expected to cover interest charges. Or perhaps the interest rate is higher than expected when the principal comes due. A speculator can only roll over the principal in the hope that later refinancing will improve his situation. At any rate, the financial system is endogenously unstable.

Do these observations speak to the current mortage problems and their potential for affecting the broader economy?

On-Line References

• John Cassidy, "The Minsky Moment (4 Feb. 2008)
• Hyman P. Minsky, "The Financial Instability Hypothesis" (May 1992)
• L. Randall Wray, "Lessons from the Subprime Meltdown" (Dec. 2007)

A Third Way

The post title could refer to a third alternative. It has been years since I read Dutt and Amadeo's book. Their title is taken from a Keynes' quotation:

"Those, who are strongly wedded to what I shall call 'the [neo]classical theory', will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new. It is for others to determine if either of these or the third alternative is right." -- John Maynard Keynes, The General Theory of Employment Interest and Money

In politics, the "third way" is used to refer to another possibility between a laissez-faire night watchman state and Stalinist central planning. The failure of "actually existing socialism" does not imply "there is no alternative." The third way takes in a lot of possibilities. I think Sweden was referred to decades ago as embodying a third way. Likewise, the label is used to refer to ideas associated with Tony Blair and Bill Clinton. (I have not read Giddens.)

Cambridge-Italian economists constitute a school of thought within economics. They have a constructive agenda - to demonstrate an integration of classical political economy with Keynes' theory. Classical political economy refers to the approach of, for example, Adam Smith and David Ricardo. Keynes himself envisioned what he called a "monetary theory of production."

Heinrich Bortis has argued that this classical-Keynesian political economy is the socioeconomic theory of the third way. "In the Keynesian third-way view there is no automatic co-ordination of individual actions." And, he argues, the destructive criticism developed in the Cambridge Capital Controversy fits into this argument:

"...Specifically, it must be shown that under ideal conditions, i.e. perfect competition and absence of disturbing elements like uncertainty and money, one or more markets do not function properly so that, even in the long run, no tendency towards full employment exists: the problem is not about possible market failures, but about principles.

This task has been accomplished by the capital-theory debate, the main economic implications of which are set out in Garegnani (1970), Kurz (1985) and Pasinetti (1974, pp. 132-42; 1977, pp. 169-77); a comprehensive and easily understandable presentation of the crucial issues is Harcourt (1972).

...As a consequence, no regular (downward-sloping) associations between profit rates, on the one hand, and capital and output per worker and the capital-output ratio, on the other hand, exist. These relationships are, in fact, totally irregular. Since the 'capital market' does not function in the neoclassical sense and since factor markets are supposed to be interrelated, regular long-period relationships between 'factor prices' and 'factor quantities' cannot exist in general, i.e. there are no 'factor markets' at all if the long run is considered. This is the main result of the capital-theory debate...

...The fact that there are no regular relationships between 'factor prices' and 'factor quantities' is extremely damaging for equilibrium theory: the market cannot produce a tendency towards some postulated long-period equilibrium to solve the central economic problems, i.e. value, distribution and employment....

...These references to the history of the capital-theoretic discussion show that it is a discussion about fundamentals. The basic question is whether there are regular relationships between 'factor prices' and 'factor quantities' or not, i.e. normally functioning factor markets. Examining this question seriously will inevitably shape an economist's vision in a decisive way. The capital-theoretic debate is a theoretic watershed dividing two different views of looking at socioeconomic phenomena, i.e. neoclassical equilibrium theory which emphasizes behavior and classical-Keynesian political economy which starts from the functioning of the socioeconomic system, the question being which approach is more appropriate to tackle fundamental socioeconomic problems, such as value, distribution and employment. Therefore, as Geoffrey Harcourt was one of the first to perceive, the Cambridge controversies are 'not merely about the measurement of capital...but about the scientific status of neoclassical (equilibrium) theory' (Dixon 1988, pp. 251-2)...." -- Heinrich Bortis, Institutions, Behaviour and Economic Theory: A Contribution to Classical-Keynesian Political Economy (1996)

Recent Posts On John Maynard Keynes

Some prominent economist bloggers have recently commented on Keynes. Brad DeLong excoriates John Gray for asserting Keynes' view contrasts with the idea that markets are swayed by emotion, contagion, and speculation. Brad DeLong and Paul Krugman criticize Steven Landsburg for arguing as if Keynes had never overthrown Says's law.

Alex Tabarrok points out that the young Keynes kept diaries about his early (probably homo-) sexual encounters.

Some of the commentators on some of these posts are interesting. Kevin Quinn suggests that Gray's ignorance might be explained by the distorted view put forth by mainstream Keynesian teaching. Many students are not told about the ideas in Chapter 12 and their central nature to Keynes' General Theory. One commentator wonders why Krugman concentrates on the Washington Post for publishing Landsburg, but not the economic profession for producing somebody like Landsburg at a "top 20" university for economics. (That would be the University of Rochester.) That criticism could equally be directed at DeLong. Another commentator on Krugman knows the mainstream view that Keynesian theory applies in the short run, when wages and prices are supposedly sticky or slow to adjust, and classical (Say's law) theory applies in the long run. He thinks that Landsburg merely expects the short run to be much shorter than Krugman does.

It is a Post Keynesian view that mainstream (bastard) Keynesianism misses essential points in Keynes' theory, including the setting in historical time. Keynes' theory applies in all runs. (By the way, I wrote the original Wikipedia entry on Post Keynesian economics, if I recall correctly.)

I was under the impression that Maynard's bisexuality was well-known. I cannot keep straight the relations inside the Bloomsbury group. It seems they had an instance of every geometrical figure you can name.

It seems Keynes' sometime lover Lytton was called up by the draft board during World War I. Lytton claimed conscientious objector status, at least for that war. One of the members of the tribunal asked Lytton what he would do if a german were trying rape Lytton's sister. Lytton said, "Sir, I would try and interpose my own body."

Lytton's most famous work is probably Eminent Victorians. In honor of George MacDonald Fraser, I am currently reading Thomas Hughes' Tom Brown's School Days. Hughes continual lectures to the reader drive me into Lytton's camp of reacting against the Victorians.

Therefore I Ain't Got No Money To Pay The Rent

1.0 Introduction
A vulgar belief is that competitive factor prices reward factor owners for the physical contributions of their services to output, in some sense. Although David Ricardo was not a vulgar economist - he is one of the paradigms for defining Classical economics - he made a similar mistake. In particular, Ricardo treated land as capable of being ordered from high rent to low rent based on physical data (fertility) alone. He only considered a special case where the order of rentability can be read off of physical data alone, rather than the more general case where the order of rentability can be altered by differences in distribution between wages and profits. Understanding the more general case seems appropriate for one who considers economics a social science.

This post demonstrates the limitations of the Ricardian doctrine. These limitations are shown by means of an example. Since so-called Neoclassical economics is often claimed to have been developed by extending the Ricardian theory of rent, the analysis presented here may be of slightly more contemporary interest as well.

2.0 The Technology
Consider a very simple economy that produces a single consumption good, corn, from inputs of labor and (seed) corn. Corn is grown on two grades of land. All production processes in this example require a year to complete. Only one production process is known for producing corn on each grade of land. These processes require the inputs shown in Table 1 to be available at the beginning of the year for each bushel corn produced and available at the end of the year.

Table 1: Inputs Required Per Bushel Corn Produced

Grade I Land	Grade II Land
1 Acre	1 Acre
1/4 Person-Years	2/3 Person-Years
1/2 Bushels Corn	1/3 Bushels Corn

Notice that the proportions of labor and seed corn differ on the two grades of land. This idea can be generalized to a model of the choice of technique in long period positions, where this model includes both extensive and intensive rent:

"...it is very well possible that a larger output per hectare is obtained by using less (or even nothing) of some input(s) and more of some other input(s) or some positive amount of some input(s) not used at all at the smaller level of production." -- Heinz D. Kurz and Neri Salvadori

Assume that the total corn output required in this economy can be grown on some combination of both grades of land, but exceeds the amount that can be grown on either grade alone. In other words, when enough corn is produced to satisfy this economy's requirement for use, some, but not all, of one grade of land will lie fallow. Thus, rent will almost always be paid on one grade of land, and the other is free (non-scarce).

Here's how Ricardo explains the emergence of rent:

"On the first settling of a country, in which there is an abundance of rich and fertile land, a very small proportion of which is required to be cultivated for the support of the actual population, or indeed can be cultivated with the capital which the population can command, there will be no rent; for no one would pay for the use of land, when there was an abundant quantity not yet appropriated, and, therefore, at the disposal of whosoever might choose to cultivate it...

If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land...

Thus suppose land - No. 1, 2, 3, - to yield, with an equal employment of capital and labor, a net produce of 100, 90, and 80 quarters of corn. In a new country, where there is an abundance of fertile land compared with the population, and where therefore it is only necessary to cultivate No. 1, the whole net produce will belong to the cultivator, and will be the profits of the stock which he advances. As soon as population had so far increased as to make it necessary to cultivate No. 2, from which ninety quarters only can be obtained after supporting the labourers, rent would commence on No. 1; for either there must be two rates of profit on agricultural capital, or ten quarters, or the value of ten quarters must be withdrawn from the produce of No. 1, for some other purpose. Whether the proprietor of the land, or any other person, cultivated No. 1, those ten quarters would equally constitute rent; for the cultivator of No. 2 would get the same result with his capital, whether he cultivated No. 1, paying 10 quarters for rent, or continued to cultivate No. 2, paying no rent. In the same manner it might be shown that when No. 3 is brought into cultivation, the rent of No. 2 must be ten quarters, or the value of ten quarters, whilst the rent of No. 1 would rise to twenty quarters; for the cultivator of No. 3 would have have the same profits whether he paid twenty quarters for the rent of No. 1, ten quarters for the rent of No. 2, or cultivated No. 3 free of all rent." -- David Ricardo (1821)

3.0 Prices
Consider stationary prices where seed corn is paid for at the beginning of the year, and wages and rent are paid at the end of the year. Then prices must satisfy the following pair of equations:

( 1/2 )( 1 + r ) + ( 1/4 ) w + ρ(I) = 1

( 1/3 )( 1 + r ) + ( 2/3 ) w + ρ(II) = 1

where

• Corn is the numeraire
• w is the wage
• r is the (common) rate of profits
• ρ(I) and ρ(II) are the rents on the respective grades of land.

The condition that at least one grade of land be free is expressed by a third equation:

ρ(I) ρ(II) = 0

The last condition is that all rents must be nonnegative.

3.1 Case 1
Consider the case when wages are 1/2 bushel per person-year. The rate of profits is then 75%. The rent on grade II land is 1/12 bushel per acre, and grade I land is free.

3.2 Case 2
Consider the case when wages are 5/6 bushel per person-year. The rate of profits is 33.3%. The rent on grade I land is 1/8 bushel per acre, and grade II land is free.

4.0 Conclusions
A figure is useful for visualizing the analysis of rent. Figure 1 shows the wage-rate of profits curves for this example. One commodity is produced in the above example, and that commodity functions both as a capital good and as a consumption good. This leads to the wage-rate of profits curves being straight lines. In models with more goods, these curves, while still decreasing, can be of varying convexity. In models with more than two grades of land, more than two curves exist. The figure can be used to locate the grade of land at the extensive margin in working inward from the outer frontier. With a given real wage, one works from right to left. Can the grade of land associated with the rightmost curve satisfy the requirements for use? If so, all land is free, and that grade is used. Otherwise, look at the grade associated with the next curve inward. If both grades can satisfy the requirements for use, then the first grade pays rent, and the second grade is free. In the general case, the frontier associated with the extensive margin may be neither the outer nor the inner frontier formed by the curves on the graph. Furthermore, the order in which grades of land are introduced to satisfy higher requirements for use need not be the order from high-rent land to lower-rent land. If I fully understood my references, I probably could note other counterintuitive results.

Figure 1: Wage-Rate of Profits Frontier for Rent Analysis

Table 2: Summary

Wage Per Person-Year	Location of Extensive Margin
Between 0 and 2/3 Bushels	Land I Non-Scarce, Land II Scarce
Between 2/3 and 1 Bushels	Land I Scarce, Land II Non-Scarce

Table II summarizes the results from the example. The scarcity of land of the best grade is reflected in the use of both grades of land. But which land is best, and therefore scarce, varies with the distribution of income and the price system. Scarcity, then, generally cannot be simply read off of the technological data. It is determined with the price system.

Ricardo was wrong; the order of rentability may be altered by differences in distribution between wages and profits.

References

• Christian Bidard, Prices, Reproduction, Scarcity, Cambridge University Press (2004).
• Heinz D. Kurz and Neri Salvadori, "A Single Theory or Two? Walras's Critique of Ricardo".
• Alberto Quadri-Curzio, "Rent, Income Distribution, and Orders of Efficiency and Rentability", in Essays on the Theory of Joint Production (ed. by Luigi L. Pasinetti), Columbia University Press (1980).
• David Ricardo, On the Principles of Political Economy and Taxation, 3rd edition (1821).
• Bertram Schefold, Mr. Sraffa on Joint Production and Other Essays, Unwin Hyman (1989).

Is There Anything Worth Keeping In Neoclassical Microeconomics?

Bernard Guerrien has joined with Emmanuelle Benicourt in updating Guerrien's prior objections. Deirdre McCloskey chaired an URPE-sponsored session at the Allied Social Science Associations (ASSA) conference. Donald Katzner and Karl Case each defend, more or less, the textbooks.

Guerrin and Benicourt still find contradictions in the textbooks, arising from treatment of the question of how prices get changed. Examples are given from Stiglitz and Mankiw's textbooks. (Previously, Guerrin had used mistakes in McCloskey and David Friedman's textbooks.) Guerrin and Benicourt ask, "Does teaching elementary economics authorize elementary faults of logic?" The respondents put on good cases, too. I learn from Katzner that an auctioneer is not needed; all of the agents in the market can quote prices. Katzner, however, doesn't see how false trading - that is, transactions actually taking place at non-equilibrium prices - can be allowed for in the models.

A theory with logical contradictions is invalid. A theory with implications that are repeatedly falsified empirically is incorrect, no matter how useful it is empirically elsewhere. One cannot conclude, though, that a better theory is not some minor tweak of such a theory. The question of whether researchers should concentrate on such tweaks or look at radical alternatives is a matter of judgement. I think good teaching ought to point out flaws and alternatives.

I Have Only Come Here Seeking Knowledge, Things They Wouldn't Teach Me Of In College

Perhaps some would like to read more practical policy advice and less abstract arguments that I usually point to in my posts. Many organizations present papers, talks, symposia, and so. Some draw on economists I also draw on. Among these are:

• The Bernard Schwartz Center for Economic Policy Analysis (I cannot find Paul Davidson's recent papers here. I know he has one about the housing market, for example.)
• The Center for Economic and Policy Research (CEPR)
• The Center for Full Employment and Price Stability, a research center at the University of Missouri at Kansas City
• The Economic Policy Institute
• The Levy Economics Institute of Bard College
• The Political Economy Research Institute is affiliated with the University of Massachusetts at Amherst

Non-Teaching Of Empirical Superiority Of Non-Neoclassical Theory: Sources For A Case Study

Stephen Marglin is a professor of economics at Harvard. As I understand it, he was just starting out when several promising Harvard professors went on an exodus to Amherst. And Marglin became tenured before he decided that Marx had more to say than neoclassical economics.

He wrote a very interesting book, which Harvard published in 1984. It contains an extensive theoretical investigation of an open model with at least three possible closures. Here is a comment on some of that theory:

"There are, in short, two marginal-productivity theories. There is first of all a general theory that assumes nothing more controversial than continuous substitution, constant returns to scale, and competitive profit maximization. This theory, far from being unique to one school of thought, is - or at least ought to be - the common property of all three approaches ['neo-Keynesian', 'neo-Marxian', and 'neoclassical']. The second marginal-productivity theory adds the assumption that sooner or later, in the long run if not in the short, the wage rate clears the labor market and ensures full employment. This version of marginal productivity theory, the special theory, is manifestly the property of the neoclassical model. Neo-Marxians and neo-Keynesians wouldn't touch it with a ten-foot pole." -- Stephen A. Marglin (1984). Growth, Distribution, and Prices, Harvard University Press: 223.

Marglin's "Neo-Keynesian" model contains the theory of distribution developed by Richard Kahn, Nicholas Kaldor, Luigi Pasinetti, and Joan Robinson in the late 1950s and early 1960s. Marglin's neoclassical model has intertemporal utility-maximization in an overlapping generations setting, but doesn't imply Marshall's principle of substitution or that prices are scarcity indices. That is, while logically consistent, it lacks the features that make the model intuitive and easy to apply.

Marglin looks at both long-run and short-run version of the models. Here he offers a judgement on the neoclassical model:

"Observe that even in neoclassical theory full employment alone is not enough to transform marginal-productivity relationships into a long-run theory of distribution. In long-run neoclassical theory, the capital:labor ratio is endogenously determined, so that the wage rate cannot be determined solely by marginal productivity of labor at full employment - not even in Chicago. Instead, distribution must reflect household preferences with respect to present and future consumption.

Thus, it is fair to conclude that there are two marginal-productivity theories. The first is a relatively innocuous, general theory that involves nothing more controversial than competitive profit maximization - and provides correspondingly little contribution to the theory of growth and distribution under capitalism. The second is more powerful, and very special, providing by itself a theory of distribution, for the short run at least, whose 'only' defects are (1) that it assumes full employment and (2) that it begs the question of accumulation. The wonder is that it is precisely this theory that so many students come away with from their study of economics. Only slightly more wondrous is that by and large they believe it!" - Stephen Marglin, ibid: 330-331

Marglin reports on some econometric evidence. Despite the differences in mechanisms driving value and distribution in the models and the difference in policy implications, it is sometimes difficult, Marglin notes, to draw different implications on the direction of effects in certain empirical applications, such as a shock to oil prices. He does find some contrasting implications when it comes to pensions. And he finds the neoclassical model does the worst, although he thinks his empirical findings are not decisive.

A couple of years ago, some Harvard students wanted to be seriously taught introductory economics, instead of the ideological propaganda that Marty Feldstein and now Greg Mankiw apparently teach. And they wanted to be able to take this course for credit. They asked Marglin to teach this revised Ec 10 course. I'm not sure how much Marglin planned to go into alternatives, or whether he would mention his empirical results. I do know that Harvard decided (again) no way would they permit future leaders of the United States to get an education about the sources of income and property.

Update: Originally posted 5 September 2006. The update is to highlight Ekaterina's comment.

Third World Bourgeoisies Failing In Their Historical Role

I find that Frantz Fanon and Michal Kalecki have similar ideas on the middle classes in many underdeveloped countries. They think that these middle classes are unlikely to fulfill their historical role.

That role is to innovate and to accumulate capital embodied in a massive productive infrastructure. An impressive rate of economic growth comes about when the middle classes fill that role, as in nineteenth century Europe:

"Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call theirs very little of the cake they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice." -- Keynes (1920: 19-20)

Here is Fanon doubting that third world middle classes will play their part:

”The national middle class which takes over power at the end of the colonial regime is an undeveloped middle class. It has practically no economic power, and it is in no way commensurate with the bourgeoisie of the mother country which it hopes to replace... The university and merchant classes which make up the most enlightened section of the new state are in fact characterized by the smallness of their number and their being concentrated in the capital, and in the type of activities in which they are engaged: business, agriculture, and the liberal professions. Neither financiers nor industrial magnates are to be found within this national middle class. The national bourgeoisie of underdeveloped countries is not engaged in production, nor in invention, nor building, nor labor; it is completely canalized into activities of the intermediary type. Its innermost vocation seems to be to keep in the running and to be part of the racket. The psychology of the national bourgeoisie is that of the businessman, not that of a captain of industry... Under the colonial system, a middle class which accumulates capital is an impossible phenomenon.” -- Fanon (1963)

Fanon has much more to say long these lines.

And here is Kalecki saying something similar:

”At the time of achieving independence the lower-middle class is very numerous while big business is predominately foreign controlled with a rather small participation of native capitalists...

...a well known historical pattern – the final submission of the lower-middle class to the interests of big business. This, however, is prevented by the weakness of the native upper-middle class and its inability to perform the role of ‘dynamic entrepreneurs’ on a large scale.” -- Kalecki (1967)

Apparently, this was a quite influential essay from Kalecki.

References

• Franz Fanon (1963). The Wretched of the Earth (Trans. by Constance Farrington), Grove Weidenfeld
• Michal Kalecki (1967). "Observations on Social and Economic Aspects of 'Intermediate Regimes'", Coexistence, V. IV, N. 1: 1-5 (Reprinted in Michal Kalecki (1976). Essays on Developing Economies, Harvester Press.)
• John Maynard Keynes (1920). The Economic Consequences of the Peace, Harcourt, Brace, and Howe

Some Of Samuelson's Textbook On Reswitching

I'm not sure I've ever read any edition of Paul Samuelson's introductory textbook cover to cover. I know I haven't since I've read Sraffa. I've previously commented on Samuelson's appreciation of Robinson and Sraffa in some of his research papers. Charles would like to know how that appreciation has influenced Samuelson in his role as textbook writer. I happened to have looked into this question a number of years ago.

My local library has a copy of the tenth edition of Samuelson's Economics, from 1976 (with assistance from Peter Temin). In an early chapter, Samuelson distances himself from the notion that interest is a reward to a contribution to production, while not exactly denying this idea:

"Part Four will show that, just as wages and rent are the factor-prices of primary labor and land, the 4 or 6 or 10 per cent interest rate per annum can, in a more subtle way, be regarded by the apologists for capitalism, as the factor-price that rations and rewards society's scarce supply of various capital goods and investment projects." (Chap. 3)

Part 4 begins with the statement that the theory of distribution is controversial:

"The theory of distribution is still in an unsettled state." (Chap. 27)

Samuelson says the issue is how much of distribution can be explained by market forces and how much by power.

In Chapter 27, Samuelson explains distribution with a model with labor and land. He later introduces capital goods and argues that, in equilibrium, the marginal product of capital is equal to the "price charged for use of capital good." This is distinguished from the interest rate. Chapter 27 also presents the "aggregate american production function."

Chapter 30 is more explicitly about capital. Samuelson talks about "roundabout processes." Samuelson also says:

"At this point we can greatly simplify the exposition of the traditional theory if we agree to concentrate on the case where all physical capital goods are exactly alike and highly versatile." (Chap. 30)

An appendix to Chapter 30 has a section titled, "Reswitching and all that", with a footnote:

"This section may be skipped. Footnote 5's fine point provided an example of reswitching for a durable machine."

I don't recall that I found all these distinctions when dipping into later editions. As I recall, Samuelson deleted that appendix and all mentions of reswitching. He had firms "usually" adopting more capital-intensive techniques at lower rates of interest. I read that qualification as referring to the Cambridge Capital Controversy, but did not see how students could get that. They might read Samuelson as merely acknowledging the possibility of entrepenuers making mistakes.

On Arguments Not Of A Logical Type

"The critique of Robinson and Sraffa is more than forty years old. Yet for psychological and political reasons, rather than for logical and mathematical ones, the capital critique has not penetrated mainstream economics. It likely never will. Today only a handful of economists seem aware of it. Aggregate production function applications run rampart in studies of economic growth (new growth theory), development and convergence, and international trade (factor-price equalization and other applications of Heckscher-Ohlin). Ostensible liberals are not exempt; their arguments for higher public infrastructure investment (based on its alleged marginal productivity) are precisely of this type, as are arguments for increased investment in education based on the higher marginal productivity of human skill. To mainstream economics, Keynesianism has been reduced to a narrow doctrine relating sticky wages, public spending, and employment. The fact that there exists a Post Keynesian distribution theory, still less the reasons for it, has been mostly forgotton." -- James Galbraith, "The Distribution of Income". In A New Guide to Post Keynesian Economics, 2001.

"It should not be asked why the post-classical theory has been so determined in rejecting, or so astute in avoiding, the capital theory criticism raised against it; it should instead be asked why that criticism has been so ineffective to the point of being ultimately incapable of undermining currently dominant economic theory. Perhaps the question which should be asked is whether a purely logical critique could undermine a theory with so many ideological implications. That question – one that invites no small irony when asked about a tradition of economic theorising that prides itself on having excluded ethical values – surely deserves careful consideration." -- Guglielmo Chiodi and Leonardo Ditta (forthcoming)

Perception of Behavioral Economics

David Leonhardt, in the 2 January edition of the New York Times, describes behavioral economics as "a left-leaning academic movement that has challenged traditional neoclassical economics over the last few decades." I never thought of behavioral economics as particularly leftist.

(Peter Dorman comments on other aspects Leonhardt's article.)

Who Changes The Prices?

An assumption in neoclassical models of perfect competition is that all agents are price-takers. That is, they take prices on the market as parametric data. If everybody takes prices as given, nobody is left to change the prices. So, for example, in general equilibrium theory, one has to assume the existence of an auctioneer to oversee the tâtonnement process. No trading, consumption, and production can take place outside of equilibrium.

This is not an original criticism. Bernard Guerrien calls this problem "the logical flaw in micro theory" and "the principal bug in microeconomics". (I do not agree. Neoclassical microeconomics has so many bugs it seems hard to justify calling one, even though important, the principal bug.) Apparently Kenneth Arrow brought this problem up in 1959. ("Toward a Theory of Price Adjustment", in The Allocation of Economic Resources (edited by M. Abramovitz), Stanford University Press).

Qualms On Foreign Trade

"7.5. The idea that the opening of foreign trade bears a close resemblance to technical progress, in that in both cases additional processes of production are made available to the economy, is clearly expressed in Ricardo's Principles in the chapter 'On Foreign Trade'... Ricardo in fact compares the extension of trade to improvements in machinery, and, taking the real wage rate as given, investigates whether trade or improved machinery will have an impact on the general rate of profit. He concludes that if 'by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise,' whereas 'if the commodities obtained at a cheaper rate... be exclusively the commodities consumed by the rich, no alteration will take place in the rate of profits'...

7.6. In recent years the pure theory of trade has been reformulated, using a 'classical' approach to the theory of value and distribution and paying special attention to the fact that capital consists of produced means of production. A start was made by Parrinello (1970), followed by several contributions by Steedman, Metcalfe and Steedman, and Mainwaring... It was shown that several of the traditional trade theorems, derived within the Heckscher-Ohlin-Samuelson model, do not carry over to a framework with a positive rate of profit (interest) and produced inputs (capital goods). (As is well known, the Heckscher-Ohlin-Samuelson model of international trade assumes two countries producing the same two commodities by means of the same constant returns to scale technology, using the same two primary inputs, each of which is taken to be homogeneous across countries.) With a positive rate of interest that is uniform across countries some, though not all, of the standard theorems are undermined (including the 'factor price equalization theorem'), while with different rates of interest in different countries all standard theorems except the Rybczynski theorem turn out to be untenable. The 'gains' from trade for the single small open economy need not be positive. When in the Heckscher-Ohlin-Samuelson theory one of the two primary factors (land) is replaced by a factor called 'capital', the 'quantity' of which is represented in terms of a given total value of capital, then the theory is deprived of its logical coherence..." -- Heinz D. Kurz and Neri Salvadori, Theory of Production: A Long-Period Analysis, Cambridge University Press, 1995.

P.S. Some mainstream economists have recently expressed doubts about the empirical ability of the theory of comparative advantage and its use as a basis for policy. One can add Paul Krugman to the doubters.

Hoisted From Comments: Query On Foreign Trade

A reader asks:

"This is an unrelated discussion, but I was hoping that maybe you (or someone else reading this forum) could help me with a question that may also be of interest to you.

How does a standard neo-Walrasian CGE (computational general equilibrium) model predict economic losses from trade liberalisation?

I understand the logic behind the two goods and country case where welfare gains can be made through the elimination of trade barriers if there exists a comparative advantage (assuming the standard assumptions of perfect competition, constant returns to scale etc.), but how does the logic work with more than two countries and goods?

Is the answer simply that those countries which do not have a comparative advantage (in any or critical goods), experience welfare losses, because they are now importing more (due to lower prices abroad) and exporting less (trade is being diverted to other countries)?

Most (if not all) countries when getting the CGE treatment with full liberalisation scenarios, seem to make welfare gains. Is this because most countries have at least some comparative advantage in some goods, and the theory neglects any adjustment and transaction costs?

Some background on this question: I'm not an economist by trade, but rather study development studies, for which I'm writing a Master's Thesis. My strategy has been to use the Lakatosian methodological framework for studying the hardcore assumptions behind general equilibrium analysis. This has led me to study for example Keen's work, and Fabio Petri's (on the capital controversies) among others. Since I'm not concentrating on heuristics (and I'm not particularly mathematically inclined), I'm not familiar with all the implications of the standar neo-Walrasian theory (e.g. Arrow-Debreu) that the criticism, quite rightly it seems, is able to destroy by attacking its inconsistent or absurdly narrowed assumptions. To the standard unacquainted reader (for example my supervisor) it is however perhaps not only enough to attack the assumptions, but also be able to reduce the theory via its implications. I'm thinking that for a conclusion, I could write up a kind of characterisation of what the theory implies in the narrow sense and a wish list of what problems a perfect economic theory would be able to cover and account for as a contrast (perhaps a distant dream, but why not?)

Any ideas on the above would be appreciated.."

I don't know much about CGE models. I understand that commodities can be indexed in the Arrow-Debreu model on space, and this provides a theory of foreign trade. In the Arrow-Debreu model, the initial endowments of all commodities are taken as given data. This makes it a very short run theory. I was under the impression that the traditional argument about comparative advantage takes place in the Heckscher Ohlin Samuelson (HOS) model, which is a long run model.

Given the presence of produced capital goods and a positive interest rate, many supposed theorems in the HOS model are simply incorrect. In particular, trade according to the pattern of comparative advantage can move a country's Production Possibilities Frontier inward. Ian Steedman is a good author to read here. Perhaps your university library has a copy of the New Palgrave, and Steedman wrote the entry on "Foreign Trade". (I talked to Keen about these ideas before the publication of his book. He said that if he writes another edition, he might put in a chapter on foreign trade.)

I don't think comparative advantage explains the pattern of trade. A theory based on the Keynesian multiplier is another possibility. Literature here includes Luigi Pasinetti's Structural Economic Dynamics: A Theory of the Economic Consequences of Human Learning (Cambridge, 1993). Paul Davidson has proposed some reforms of the international monetary system. I have not read Ha-Joon Chang, neither his Bad Samaritans nor his Kicking Away the Ladder.

Two PDFs that I have downloaded from somewhere or other in the past year and have never got around to reading might be of interest. I am talking about Roberto Mangabeira Unger's Free Trade Reimagined and Robert Driskill's "Deconstructing the Argument for Free Trade".

Another body of literature that I have never explored is new trade theory, as presented by Paul Krugman. Given that comparative advantage fails to justify free trade, I don't see the point of that theory. As I understand it, new trade theory asserts incorrectly that comparative advantage would provide this justification if it were not for increasing returns or oligopoly or something. According to Barkley Rosser (in a 1996 book review in the Journal of Economic Behavior and Organization), Krugman claims more originality for his presentation than can be justified.

Anger Can Be Power

What I'm reading:

"The colonial world is a world cut in two. The dividing line, the frontiers are shown by barracks and police stations. In the colonies it is the policeman and the soldier who are the official, instituted go-betweens, the spokesmen of the settler and his rule of oppression. In capitalist societies the educational system, whether lay or clerical, the structure of moral reflexes handed down from father to son, the exemplary honesty of workers who are given a medal after fifty years of good and loyal service, and the affection which springs from harmonious relations and good behavior - all these aesthetic expressions of respect for the established order serve to create around the exploited person an atmosphere of submission and of inhibition which lightens the task of policing considerably. In the capitalist countries a multitude of moral teachers, counselors and 'bewilderers' seperate the exploited from those in power. In the colonial countries, on the contrary, the policeman and the soldier, by their immediate presence and their frequent and direct action maintain contact with the native and advise him by means of rifle butts and napalm not to budge. It is obvious here that the agents of government speak the language of pure force. The intermediary does not lighten the oppression, nor seek to hide the domination; he shows them up and puts them into practice with the clear conscience of an upholder of the peace; yet he is the bringer of violence into the home and into the mind of the native." -- Frantz Fanon, The Wretched of the Earth (1963).

Wages, Employment Not Determined By Supply And Demand

1.0 Introduction
One theme of this blog is that the introductory textbook model of the labor market is incorrect. Two recent papers make this point from the perspective of institutional economics.

2.0 The Impossibility of a Perfectly Competitive Labour Market
The abstract of the first paper under consideration states:

Using the institutional theory of transaction costs, I demonstrate that the assumptions of the competitive labour market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labour market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labour demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction costs and with zero transaction costs all labour is hired as independent contractors, implying that multi-person firms, the employment relationship and labour market disappear. With positive transaction costs, on the other hand, employment contracts are incomplete and the labour supply curve to the firm is upward sloping, again causing the labour demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price. -- Bruce E. Kaufman (2007). "The Impossibility of a Perfectly Competitive Labour Market", Cambridge Journal of Economics, V. 31: 775-787

Kaufman states that, "Institutional, post-Keynesian, radical and other heterodox economists have for many years expressed scepticism about the theoretical and empirical validity of the competitive model of labour markets." He cites the following literature:

• C. Kerr (1950). "Labour Markets: Their Character and Consequences", American Economic Review, V. 40 (May): 278-291
• G. Hodgson (1988). Economics and Institutions: A Manifesto for a Modern Institutional Economics, Philadelphia: University of Pennsylvania Press.
• D. Vickers (1996). "The Market: The Tyranny of a Theoretical Construct", in Employment, Economic Growth, and the Tyranny of the Market, (ed. by P. Aretis), Brookfield: Edward Elgar
• W. Streeck (2005). "The Sociology of Labour Markets and Trade Unions", in The Handbook of Economic Sociology (ed. by N. Smelser and R. Swedberg), 2nd edition, New York: Russel Sage
• S. Fleetwood (2006). "Rethinking Labour Markets: A Critical-Realist-Socioeconomic Perspective, Capital & Class, V. 107 (Summer): 59-89

As far as I can tell, none of these papers are about the Cambridge Capital Controversy, which is the basis of my favorite critique of the introductory textbook model of labor markets.

3.0 Professor Lester and the Neoclassicals
The abstract of the second paper follows:

"This article revisits what is remembered as the 'Marginalist Controversy' in light of its immediate context and object: the substantial late 1940s increase in the federal minimum wage. Richard Lester's critique of 'marginalist theory,' and its implication that the minimum wage would be detrimental to labor was founded upon empirical studies and surveys that supported an Institutionalist conception of the business firm, the labor market, and economic policy. His disputants, Fritz Machlup and George Stigler, countered his points on the basis of what they took to be 'economic theory'. By any measure, including those of their own intellectual allies, Machlup and Stigler faired poorly. Interestingly, they are collectively remembered as having been triumphant in this debate. The essay suggests that what triumphed was not their arguments but rather the Neoclassical school of economics that Stigler represented." -- Robert E. Prasch (2007). "Professor Lester and the Neoclassicals: The 'Marginalist Controversy' and the Postwar Academic Debate Over Minimum Wage Legislation: 1945-1950", Journal of Economic Issues, V. 41, N. 3 (September): 809-826."

I had not known that the context of the debate about full cost pricing included minimum wage policies. Prasch makes the point that neoclassicals often misrepresent their position as a defense of economic theory, instead of as of a specific theory. In addition to drawing on a specific school of thought, Institutionalist economics, Lester had survey data supporting his position that the typical firm does not operate in a region of increasing marginal cost. It is this sort of data, which has been repeatedly replicated, that Milton Friedman argued, in his famous paper on positive economics, should be ignored.

History Is A Nightmare From Which I Am Trying To Awake

Last year I bought my 12-year-old niece a novel. My sister-in-law says that as far as books goes, my niece likes memoirs and history, like The Diary of Anne Frank. I ended up buying my niece something other than a book. But I wonder what would be a good book to buy my niece.

I presented this to the salesperson at Barnes and Noble as, "Suggest a book like the Diary... about a girl growing up in troubled circumstances. She suggested Smashed: Story of a Drunken Girlhood. This does not seem a good answer to me. I haven't read Zailckas' book. From a review, I know she went to Syracuse University, and, for some reason, I think she may be a product of the Syracuse creative writing program. I have a vague impression that that program is quite good. The authors I associate with it write well about drunkenness and drugs.

I could always loan my niece a book from my collection. Perhaps my niece would like Eric Hobsbawm's The Age of Extremes: A History of the World, 1914-1991. I find the Russian names in Hope Against Hope confusing, even with the translator's or editor's appendix. Likewise, I think Antonio Gramsci's Letters from Prison is not understandable without quite a bit of knowledge of the historical setting. I seem to have mislaid my copy of Biko. I just bought The Mascot: Unraveling the Mystery of My Jewish Father's Nazi Boyhood and will not lend that away until I have read it.

I've loaned my copy of A Long Way Gone: Memoirs of a Boy Soldier to a young friend of mine. This was his choice in a selection I thought of after he told me about a somewhat autistic kid in his class: "He's even better at math than I am." I think I talked him out of The Curious Incident of the Dog in the Night Time by trying to explain the concept of a unreliable narrator. I don't seem to be able to sell Life As We Know It: A Father, A Family, And An Exceptional Child, including to my sister, who has children and a degree from University of Illinois at Urbana-Champaign.

A salesperson at Borders suggested Zlata's Diary: A Child's Life in Wartime Sarajevo. A librarian in Rome, NY, suggested Four Girls From Berlin: A Ture Story of a Friendship That Defied the Holocause and two novels: The Devil's Arithmetic and The Diary of Pelly D. Come to think of it, isn't the Speilberg film, The Empire of the Sun, based on a memoir?

Does anybody have any comments on any of the above books or any further suggestions?

Jeopardy!

The answer for 42-across in today's New York Times crossword puzzle is "Larry Summers". What do you think the clue should be? Will Shortz, the puzzle editor and an institution, is content with "Former president of Harvard". I think being former secretary of the treasury is more impressive, myself.

Rich Man Wanna Be King, And A King Ain't Satisfied 'Til He Rules Everything

I have a series of posts on the distribution of income, the distribution of wealth, income mobility, and related matters. I don't know Lane Kenworthy's work, but his blog, "Consider the Evidence", looks interesting. He describes himself as "a social scientist who studies causes and consequences of poverty, inequality, employment, mobility, economic growth, and social policy. [He] focus[es] mainly on the United States and other affluent countries."

More To Read

Apparently, Andrew Trigg has written a book Marxian Reproduction Schema: Money and Aggregate Demand in a Capitalist Economy (Routledge, 2006) on the topics of my post. He relates Marx's schemes for simple and expanded reproduction to Keynes' theory of effective demand, Kalecki's idea that capitalists "get what they spend", input-output analysis, and post-war growth models. At least a chapter discusses money and finance in this approach, including circuitist models. In my exposition, I put aside the labor theory of value. Trigg, on the other hand, discusses the transformation problem and whether or not a tendency exists for the rate of profit to decline.

I don't know if I'll purchase this book. Mike Beggs should be interested in it.

It's Never Enough Until Your Heart Stops Beating

Aaron Swartz quotes a paper by Louis Pascal posing a thought experiment. I wonder if many find this argument emotionally unsatisfying. It doesn't feel that one causes the starvation of others just by consuming one's income. And, although giving to charity may help a few, nothing is systematically changed.

But perhaps this is all self-justification. Aaron's argument reminds me of some of Blaise Pascal's mockery of the Jesuits. It is hard to approach how Pascal says they made morality all too easy to live up to:

"I mentioned, at the close of my last letter, that my good friend, the Jesuit, had promised to show me how the casuists reconcile the contrarieties between their opinions and the decisions of the popes, the councils, and the Scriptures. This promise he fulfilled at our last interview, of which I shall now give you an account.

'One of the methods,' resumed the monk, 'in which we reconcile these apparent contradictions, is by the interpretation of some phrase...'

'Take another instance: It is said in the Gospel, "Give alms of your superfluity." Several casuists, however, have contrived to discharge the wealthiest from the obligation of alms-giving. This may appear another paradox, but the matter is easily put to rights by giving such an interpretation to the word superfluity that it will seldom or never happen that any one is troubled with such an article. This feat has been accomplished by the learned Vasquez, in his Treatise on Alms, c. 4: "What men of the world lay up to improve their circumstances, or those of their relatives cannot be termed superfluity; and accordingly, such a thing as superfluity is seldom to be found among men of the world, not even excepting kings." Diana, too, who generally founds on our fathers, having quoted these words of Vasquez, justly concludes, "that as to the question whether the rich are bound to give alms of their superfluity, even though the affirmative were true, it will seldom or never happen to be obligatory in practice."'" -- Blaise Pascal, "Letter VI", Provincial Letters (trans. by Thomas M'Crie

(Letter XII is also on topic.)

One can react in various ways to the raw need that prevails so much throughout the world. I don't think I am very charitable, but you would think otherwise based on the organizations that feel it is worth their while to send me solicitations. A friend of mine adopted several children and founded his own charity. I never asked him his motivation.

Simple and Expanded Reproduction

1.0 Introduction
This post presents a model in which a capitalist economy smoothly reproduces itself. The purpose of such a model is not to predict that capitalist economies will converge to some such path as illustrated in the model. Rather, the model provides a basis for the analysis of where things can go wrong.

This sort of model has a long history. My exposition is close to Marx (1956), with the difference that Marx sets out the conditions of simple and expanded production in terms of labor values, not in terms of prices of production. Rosa Luxemburg (1951) and Michal Kalecki (1969) used Marx's department break-down to develop a Keynes-like model of the long run and the short run. Shigeto Tsuru (1942) apparently exposed this model to english-speaking academics when few were looking at Marx's analysis. Joan Robinson (1962) drew on these ideas, among others, in her models of metallic ages. Goodwin's generalization (1949) of Keynes to a multisectorial model and Pasinetti's (1981, 1993) analyses of vertically integrated sectors also seem to me to bear family resemblances to this model. Doubtless, my references could be extended in many directions.

Table 1: Definition of Variables

Variable	Definition
	The person-years of labor hired per unit output (e.g., ton steel) in the first sector.
	The person-years of labor hired per unit output (e.g., bushel corn) in the second sector.
	The capital goods used up per unit output in the first (steel-producing) sector.
	The capital goods used up per unit output in the second (corn-producing) sector.
	The price of unit output in the first sector.
	The price of unit output in the second sector.
	The rate of profits.
	The savings rate out of profits.
	The wage, that is, the price of hiring a person-year.
	The number of units (tons steel) produced in the first sector.
	The number of units (bushels corn) produced in the second sector.

2.0 Two Departments
This model considers a capitalist economy with no government and no foreign trade. The outputs of this economy are grouped into two great departments. In the first department, capitalists direct workers to produce means of production (also known as capital goods) with the means of production in that department. In the second department, the workers are directed to produce means of consumption (also known as consumption goods) with the means of production in that department.

For ease of exposition, I make certain additional simplifying assumptions. The workers consume all of their wages. Only the capitalists save, and they save only in the case of expanded reproduction. All capital is circulating capital. That is, there is no fixed capital, such as long-lived machinery. In other words, all capital goods are totally used up each year in producing the yearly output. No technological innovations are introduced.

I think introducing technological innovations and fixed capital makes the possibility of smooth reproduction more incredible. A govenrment can be introduced as a third department, or perhaps by dividing government output among the two departments shown. Foreign trade introduces the possibility of correcting imbalances in domestic demand from outside the domestic economy. But then one could recast the model as of the world economy.

3.0 Prices
A necessary condition for smooth reproduction of a competitive capitalist economy is that the same rate of profit be made in all departments. Otherwise, some capitalists are finding that the expectations on which investments were made are being unfulfilled. They would want to have contracted some departments and expanded others. I also impose the condition that spot prices remain stationary. Equations 1 and 2 express these conditions:

(1)

(2)

I suppose one could put time indices on the prices in Equations 1 and 2, thereby defining a dynamic system for prices. Suppose distribution and the ratios of physical quantity flows remain unchanged year after year. Then the steady-state prices expressed in Equations 1 and 2 (without time indices) would be a limit point of the dynamic process so defined. It is this caveat, I think, that allows me to ignore that constant prices are, perhaps, not a necessary condition for smooth reproduction.

Table 2: Values of Outputs By Department and Distribution

Department	Capital	Wages	Profits
Capital Goods
Consumption Commodities

4.0 In Balance
4.1 Simple Reproduction
The economy is in simple reproduction when it is replicated on the same scale year after year. A necessary condition for an economy in simple reproduction is that the production of capital goods each year be equal to the capital goods used up each year. In the model shown here, the value of the capital goods used up each year must equal the value of the output of the first department:

(3)

Equation 3 can be simplified:

(4)

Equation 4 is easily summarized in words. It states that the value of capital goods demanded from the second department matches the demand for consumption goods from the first department. In a sense, Equation 4 is a generalization of Keynes' idea of effective demand. The condition that all workers looking for a job are able to find one at the going wage is a separate condition, not stated here. In a sense, this model generalizes Keynes' theory, in some sense, to the long-run.

An alternate method of deriving Equation 4 is available. Start from the equation of the value of total demand for consumption goods and the value of the output of the department producing consumption goods. This condition, when simplified, also yields Equation 4.

4.2 Expanded Reproduction
The economy experiences expanded reproduction when it consistently expands each year. In this case, the demand for capital goods from the second department includes the savings of the capitalists receiving profits from that department. Likewise, the demand for consumption goods from the first department excludes the savings of the capitalists in that department. Observing these qualifications, it is easy to mathematically express the condition that the demand for capital goods from the second department match the demand for consumption goods from the first department:

(5)

Or:

(6)

Focus on the left-hand side of Equation 6. Is it apparent that the rate of growth in expanded reproduction in this model is the product of the capitalists' saving propensity and the rate of profit? In other words, the rate of profit along a warranted growth path is the quotient of the rate of growth and the saving propensity of the capitalists. So this model points to a Post Keynesian theory of distribution.

5.0 Conclusion
In the model, capitalists independently decide on what department to enter, and how much to produce in that department. A collective result of those decisions is the total output of each department. For those decisions to be validated, the value of consumer goods demanded by workers and capitalists in the department producing capital goods must match the value of capital goods demanded by the capitalists in the department producing consumption goods.

The model is silent on how such an equality can come about. Supply and demand seems like an inadequate answer to me.

References

• Richard M. Goodwin (1949). "The Multiplier as Matrix", Economic Journal, V. 59, N. 236 (Dec.): 537-555
• M. Kalecki (1969). Theory of Economic Dynamics: An Essay on Cyclical and Long-Run Changes in Capitalist Economy, Second Edition, Augustus M. Kelly
• Rosa Luxemburg (1951). The Accumulation of Capital (Trans. by Agnes Schwarzschild), Yale University Press
• Karl Marx (1956). Capital, Volume 2, Progress Publishers
• Luigi L. Pasinetti (1981). Structural Change and Economic Growth: A Theoretical Essay on the Dynamics of the Wealth of Nations, Cambridge University Press
• Luigi L. Pasinetti (1993). Structural Economic Dynamics: A Theory of the Economic Consequences of Human Learning, Cambridge University Press
• Joan Robinson (1962). Essays in the Theory of Economic Growth, Macmillan
• Shigeto Tsuru (1942). "On Reproduction Schemes", Appendix A in Paul Sweezy's The Theory of Capitalist Development, Monthly Review Press [This reference I haven't read]

Judge Friedman's Advice To Pinochet Yourself

Naomi Klein makes available Milton Friedman's 21 April 1975 letter to mass murderer Augusto Pinochet.

Microeconomics Required By Implementation Of Federal Law

President Bush's Executive Order 13422, dated 18 January 2007, further amends President Clinton's EO 12866, of 4 October 1993. These EOs are part of a family of EOs. This family defines a process for performing and reviewing cost-benefit analyses before any Federal agency promulgates any new regulations. As I understand it, President Reagan set up the Office of Information and Regulatory Affairs (OIRA), within the Office of Management and Budget (OMB), to review and approve these analyses. Here's an excerpt from the amended EO:

Section 1. Statement of Regulatory Philosophy and Principles.

(b) The Principles of Regulation.

(1) Each agency shall identify in writing the specific market failure (such as externalities, market power, lack of information) or other specific problem that it intends to address (including, where applicable, the failures of public institutions) that warrant new agency action, as well as assess the significance of that problem, to enable assessment of whether any new regulation is warranted.