Eatwell Exposition of a Sraffian Research Program

"The revival of the analytical principles of classical political economy that has gathered pace since the mid-1960s has been based on the firm foundation of a logically coherent theory of value and distribution. It was the failure to provide this foundation which for many years confined the classical approach to being, at best, a repository of useful ideas on growth and technological progress (Smith's discussion of the division of labour and Marx's dissection of the labour process being good examples), or, at worst, identified with simple-minded devotion of the labour theory of value as the 'qualitative' expression of capitalist exploitation - the position to which Hilferding retreated in the face of Bohm-Bawerk's critique of Marx, so depriving the surplus approach of any quantitative significance as a theory of value and distribution. The publication of Piero Sraffa's Production of Commodities by Means of Commodities changed all that. Sraffa not only generalized the mathematical solutions to the surplus approach which had been advanced by Dmitriev and Bortkeiwicz, but also presented the analytical structure of the surplus approach with stark clarity. Moreover, Sraffa produced a critique of the neo-classical theory of the rate of profit and so of the entire neo-classical explanation of value, distribution, and output - hence clearing the ground for the redevelopment of classical theory.

With the analytical core now secure, attention can be turned to the development of other facets of classical and Marxian theory and to the empirical insights which this theory provides. In stark contrast to the neo-classical approach, which reduces all economic activity to a single principle - the competitive resolution of individual attempts to maximize utility subject to the constraints of technology and endowment - classical theory is constructed from a number of analytically separable components. The core of the theory, the surplus approach to value and distribution, takes as data the size and composition of output, the technology in use (the conditions of reproduction) and the real wage (or, in some cases, the rate of profit). These data do not, however, lie outside the realm of economics (as,for example, the neo-classical economists' utility functions do). We need to provide theoretical explanations of their determination. Hence Smith, Ricardo and Marx advanced theories of the real wage and of the level of output (Say's law in the case of Ricardo), and Smith and Marx presented detailed analyses of technological change. Assembled around the core, these theories are the building-blocks of a general theory of the operations of the capitalist economy. There is in all this a clear danger of constructing a disjointed ad hoc collage of theories and empirical generalisations. This is avoided by enveloping the entire edifice in a general characterisation of the economic system, the clear specification, that is, of the capitalist mode of production. This serves both to cement the elements of the theory together and to eliminate propositions that do not fit.

Broadly, there are two jobs to be done in developing and extending the classical framework.

First, the classical theory itself must be developed and generalised. All the elements surrounding the core analysis of value and distribution - theories of output and employment, of accumulation, of technology, of the wage, of competition and so on - require restatement and 'modernisation' in the light both of Sraffa's results and of the many changing facets of the modern capitalist system. This will involve both theoretical development and empirical analysis, for one of the important characteristics of classical theorising is the manner in which theory is grounded in the socio-economic data of the system under consideration - the institutional environment is an essential part of the theory.

Second, the rejection of the now discredited neoclassical theory throws open a wide range of problems in international trade, development economics, fiscal and monetary policy and so forth, into which the classical approach can provide new insights. In part these will lead to the refreshing task of debunking the policy prescriptions of orthodox theory which revolve primarily around the fundamental theorem of welfare economics and the supposed 'efficiency' of competitive markets. But there is also a positive job to be done. The reconstruction of economic theory will inevitably precipitate a reinterpretation of economic policy and problems." -- John Eatwell (1987). "Foreword", in The Economics of François Quesnay, by Gianni Vaggi, Duke University Press

A Boy/Girl Thing

The American Mathematical Society catalogs resources for increasing diversity in mathematics. The Association for Women in Mathematics is concerned with female mathematicians. The Association for Computing Machinery (ACM) Committee on Women in Computing is for computer science. The American Statistical Society (ASA) Committee on Women in Statistics and the ASA Caucus for Women in Statistics focus on statistics.

Since this is an economics blog, I'll mention the International Association for Feminist Economics (IAFEE).

Note To Myself: Read Luigi Guiso, Ferdinando Monte, Paola Sapienza, and Luigi Zingales (2008) "Culture, Gender and Math", Science, 320, 1164 (30 May)

Two Roads Diverged In A Yellow Wood, And Sorry I Could Not Travel Both And Be One Traveler

1.0 Introduction
Brian Arthur and Paul David, two teachers at Stanford about a decade ago, have attracted a certain amount of popular attention with the concept of path dependence. Arthur, for example, has had a certain amount of influence on policy. This post is an attempt to explain the concept, primarily as it applies to stochastic processes. Path dependence is one way of formalizing the idea that history matters.

2.0 A Stochastic Process
Path dependence relates to events economists choose to model as random. This modeling choice does not imply that economists think such events are necessarily the result of the modeled agents acting capriciously, irrationally, or mistakenly. Consider such childhood games as Odds and Evens or Paper-Rock-Scissors. The optimal strategy for each player is to choose their move randomly. The winner of such games will vary randomly. Notice that apart from the players' choices, these games are deterministic. No dice are being rolled or cards shuffled.

A stochastic process is merely an indexed set of random variables:

{ X( 1 ), X( 2 ), X( 3 ), ... }

The index often represents time. The value of a given one of these random variables is frequently referred to as the state of the process at that time.

I consider an example of a path-dependent stochastic process that does not exhibit certain other properties. This stochastic process can be in one of eight states, {Start, B, C, D, E, F, G, H}. It begins in the Start state. State transition probabilities are indicated by
the fractions in Figure 1. For example, consider the probability distribution for the state of the process at the second time step, X( 2 ). Figure 1 shows that if the process is in the Start state, the probability that it will transition to state B is 1/2. Likewise, given that it is in the Start state, the probability that it will transition to state C is 1/2. Hence the probability distribution of X( 2 ) is:

Pr[ X( 2 ) = B ] = 1/2

Pr[ X( 2 ) = C ] = 1/2

Notice that the probabilities leading out from each state total unity. It is left as an exercise for the reader to confirm that the proability distribution of X( 3 ) is as follows:

Pr[ X( 3 ) = Start ] = 1/3

Pr[ X( 3 ) = B ] = 1/6

Pr[ X( 3 ) = C ] = 1/6

Pr[ X( 3 ) = D ] = 1/6

Pr[ X( 3 ) = G ] = 1/6

I deliberately created this example to exhibit a certain symmetry for the transient states (defined below).

Figure 1: Markov Process State Space

This process exhibits certain properties that are particularly simple, as well as some properties that complicate analysis. Notice that the state transition properties are invariant across time. Given that the process is in the Start state, the probability that it will transition to state B is 1/2, no matter at what time the process may be in the Start state. It does not matter whether we are considering the initial time step or some later time when the process happens to have returned to the Start state.

Furthermore, the process is memoryless. State transition probabilities depend only on the current state, not the history with which the process reached the current state. This property of memorylessness is known as the Markov property. This example is a Markov process.

The Markov property and the assumption of time-inavariant state transition probabilities are simplifying assumptions. One might think relaxation of these assumptions might be one way of showing that "history matters." Since, as will be explained, this example exhibits path dependence, violations of these assumptions are clearly not necessary for path dependence. And Margolis and Liebowitz are incorrect:

"In probability theory, a stochastic process is path dependent if the probability distribution for period t+1 is conditioned on more than the value of the system in period t. ... path independence means that it doesn't matter how you get to a particular point, only that you got there." -- Stephen E. Margolis and S. J. Liebowitz (1988)

An interesting classification of sets of states is available for Markov processes, that of transient and absorbing states. Consider the states {Start, B, C}. By assumption, the process starts in a state within this set. But eventually the process will lie in a state outside this set. Once this happens, the process will never return to this set. States Start, B, and C are known as transient states. On the other hand, consider the states {D, E, F}. Once the process is in a state in this set, the process will never depart from a state in the set. Furthermore, if the process is in a state in this set, it will eventually visit all other states in the set. {D, E, F} is a set of asorbing states. This is not the unique set of absorbing states for this process. {G, H} is also a set of absorbing states.

Consider the problem of estimating the probability distribution over the states at some large number of time step, say X(10,000), after the start. The probability that the process is in a transient state is negligible. One might be tempted to estimate X(10,000) by the proportion of time steps that a single realization of the process spends in each state. A realization might be:

Start, B, D, E, F, D, E, F, E, F, D

The column for the first realization in Table 1 shows the proportion of time spent in each state in this realization as the number of time steps in the realization increases without bound. (Although transient states are observed in a realization, the proportion of time spent in transient states in such an infinite sequence is zero.)

Table 1: Limiting State Probabilities

State	From One Realization	From Another Realization	Over All Realizations
Start	0	0	0
B	0	0	0
C	0	0	0
D	1/3	0	1/6
E	1/3	0	1/6
F	1/3	0	1/6
G	0	1/2	1/4
H	0	1/2	1/4

If the process were ergodic, the limiting distribution in the first column in Table 1 would be a good estimate of the probability distribution for the state of the process at some time after transient behavior was likely to be completed. In this case, though, another realization might yield the limiting distribution shown for the second realization in Table 1. The probability distribution, in fact, at a given time, as that time increases without bound would have positive probabilities for all non-transient states. The last column in Table 1 shows this limiting probability distribution.

In general, estimates of parameters of the underlying probability distributions can be made across multiple realizations of the process or from a single realization. In a nonergodic process, such estimates will not converge as the number of realizations or the length of the single realization increases.

Another definition of ergodicity involves what states can be eventually reached from each state. In an ergodic process, each state can be eventually reached, with positive probability. In the example, all states can be reached from the transient states Start, B, and C. But states Start, B, C, G and H cannot be reached from states D, E, and F. Suppose an external occurrence changes the state transition probabilities. If the process were previously ergodic, this change could not possibly result in states arising that were previously unobserved.

To re-iterate, a nonergodic process does not have an unique limiting probability distribution. The applicable limiting distribution of any realization of the process depends on the history of that particular realization. Thus, the process exhibits path dependence.

Another branch of mathematics deals with deterministic dynamical systems. Such systems are typically defined by systems of differential or difference equations. Sometimes the solutions of such systems can be such that trajectories in phase space diverge, no matter how close they start. This is known as sensitive dependence on initial conditions, popularly known as the "butterfly effect." (The irritating mathematican character in Jurassic Park mumbles about this stuff.) Notice that path dependence is defined above without drawing on this branch of mathematics. Here, too, Margolis and Liebowitz are mistaken:

”Path dependence is an idea that spilled over to economics from intellectual movements that arose elsewhere. In physics and mathematics the related ideas come from chaos theory. One potential of the non-linear models of chaos theory is sensitive dependence on initial conditions: Determination, and perhaps lock-in, by small, insignificant events." -- Stephen E. Margolis and S. J. Liebowitz (1988)

3.0 Conclusion
Why should economists care about the mathematics of path dependence? First, models of path dependence suggest how to construct economic models that overcome frequently criticized characteristics of neoclassical economics. Neoclassical models often depict equilibria. These equilibria are end states of path independent processes. Ever since Veblen, some economists have objected to such models as being teleological and acausal. Models in which path dependence can arise are causal and show neoclassical economics to be a special case.

This claim that neoclassical economics is merely a special case, dependent on a special case assumption of ergodicity, may lead one to wonder about connections with a theory claimed to be the "General Theory." As a matter of fact, Paul Davidson claims that a consideration of nonergodicity is useful in explicating the economics of Keynes. So a second reason economists should be concerned with nonergodicity and path dependence is to further understand possible approaches to macroeconomics.

Third, some economists, e.g. Brian Arthur, have developed specific models of technological change that exhibit nonergodicity. These models, including those of a Polya urns, show how increasing returns can act as positive feedback and lead to path dependence. Inasmuch as these models cast light on economic history, path dependence can be useful for empirical work.

The theory of path dependence raises an empirical question. Are nonergodic stochastic processes useful for modeling any, or any important, economic time series? The evolution of the QWERTY keyboard seems to be an example of a path dependent process. Apparently there were several 19th century typewriter keyboard layouts. QWERTY became the dominant one, seemingly even after the jamming problem that was the rationale for its introduction had been overcome. The historical evidence suggests that with different early choices, one of the other arrangements could have become dominant. The chances that some one or other of these early arrangements can now become dominant seems quite negligible.

This discussion has been carried out without mentioning efficiency.

References

• W. Brian Arthur (1989) "Competing Technologies, Increasing Returns, and Lock-In by Historical Events", Economic Journal, V. 99: 116-131.
• W. Brian Arthur (1990) "Positive Feedbacks in the Economy", Scientific American, 262 (February): 92-99.
• W. Brian Arthur (1996) "Increasing Returns and the New World of Business", Harvard Business Review.
• Paul A. David (1985) "Clio and the Economics of QWERTY", American Economic Review 75, 2 (May)
• Paul A. David "Path Dependence, Its Critics and the Quest for 'Historical Economics'"
• Paul Davidson (1982-1983) "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes", Journal of Post Keynesian Economics, V. 5 (Winter): 182-197.
• Stephen E. Margolis and S. J. Liebowitz (1988) "Path Dependence", The New Palgrave Dictionary of Economics and Law, MacMillan.

The Map Is Not The Territory

Suppose an orthodox economist hands you a map and says, "This is a map of New York City." You look at it and say, "It is not. It is a map of the London tube system."

Or suppose an orthodox economist hands you a map. And you look at it and say, "This cannot be right. Here are two interesecting contour lines supposedly of different elevations."

Suppose the orthodox economist responds, "Assumptions do not need to be realistic."

I have encountered several economists who distract from those pointing out the logical inconsistencies and factual errors in their theories. They make dismissive non sequiturs about methodology, as illustrated in the parables above.

Davidson And Eatwell On Current Events

This post points out some recent interventions by two leading economists in schools of thought in which I am interested.

Paul Davidson is the leader of American Post Keynesians and the editor of the Journal of Post Keynesian Economics. He argues that Sraffa's economics is not compatible with Keynes insofar as it is not set in historical time. And he advocates for the economics of Keynes over Sraffa.

His recent article "Crude Oil Prices: 'Market Fundamentals' or Speculation?" is available in the Heterodox Economics Newsletter (Issue 63, 12 June 2008). Davidson argues that "the absence of any excess supply adjustment is not ... evidence of the lack of a speculative force" driving current high oil prices.

John Eatwell, or Lord Eatwell, has contributed to attempting to synthesize the ideas of Keynes and Sraffa. I am thinking the 1983 book, Keynes's Economics and the Theory of Value and Distribution, which Eatwell co-edited with Murray Milgate. He also wrote, with Carlo Panico, the New Palgrave entry on Sraffa and has influenced my understanding on how Sraffa's standard commodity can be used to understand Marx.

In a 3 July letter in the Financial Times, Eatwell argues that regulators of financial institutions should monitor the details of the systematic risks which firms are taking on. In a 17 July comment, also in the Financial Times, Eatwell and Avinash Persaud comment on Fannie Mae and Freddie Mac and argue that markets with diverse players are thicker and more liquid.

"On Labour Demand and Equilibria of the Firm"

The above is from my 2005 Manchester School article. H/T to Crooked Timber.

In Economics Departments, Marx's Days Are Like Grass, Like A Flower Of The Field He Bloomed

Russell Jacoby asks, in the 25 July 2008 issues of The Chronicle of Higher Education, "How is it that Freud is not taught in psychology departments, Marx is not taught in economics, and Hegel is hardly taught in philosophy?"

I occasionally point out treatments of Marx using the techniques of modern mathematical economics. Lots of work has been done in this vein. I might as well mention analytical Marxism, as developed by, for example, John Roemer; Morishima's 1970s work drawing on Johnny Von Neumann; and, of course, Sraffians, such as John Eatwell or Ian Steedman. In regard to the latter, some economists have disputed Steedman's interpretation of Marx's work. I here have in mind Dumenil, Lipietz, and Foley's "New interpretation" and the Temporal Single System approach associated with such economists as Alan Freeman and Andrew Kliman. Perhaps Jacoby is aware that if economists chose to teach Marx, they have much work to draw on. After all, Jacoby notes that Wassily Leontief taught a 1936 seminar on Marx at Harvard. Duncan Foley's testimony (I believe in Colander, Holt and Rosser (204)) is just one demonstration that the ignorance of Marx among orthodox economists cannot be justified on normal scholarly or scientific norms.

I don't expect vulgar political economic monopolists to even acknowledge the existence of their suppressed competition. Orthodox economists just refuse to reference lots of literature, for example, in heterodox journals.

Reminder to myself: Read Andras Bródy's Proportions, Prices, and Planning: A Mathematical Restatement of the Labor Theory of Value (Akadémiai Kiadó, 1970) for an early analytical examination of Marx. Read Victor S. Venida's "Marxian Categories Empirically Estimated: The Philippines, 1961-1994" (Review of Radical Political Economics, V. 39, N. 1 (2007): 58-579) for recent econometric work.

Those Who Believed Shared All Things In Common

Greg Mankiw Still A Fool

Greg Mankiw presents a non-argument from authority to the readers of The New York Times.

Is what a majority of members of the American Association of Economists believe of any interest? How abut a majority of the Association For Evolutionary Economics (AFEE), the International Association For Feminist Economics (IAFFE), or the Union for Radical Political Economics (URPE)?

I care about the beliefs of the majority of AEA members as data for the sociology of economics. (I deliberately don't write here of the sociology of knowledge.) As guidance for deciding on public policy - not so much.

Insofar as Mankiw claims to believe in the distinction between positive and normative economics, he should even agree.

Better public intellectuals, please.

Ricardo And The Iron Law Of Wages

1.0 Introduction
The interpretation of classical economists by historians of economic thought is an area of intense debate that Sraffians have contributed to. Sraffians claim that Classical economics has a distinct and coherent approach to economics. And that the theory of value and distribution within this theory has a different structure and role than within so-called neoclassical theory. I want to focus here particularly on the interaction of the Classical theory of wages and the theory of value. I think Ricardo's treatment of wages is a particularly controversial topic in this interpretation. This post notes a couple of difficulties for understanding Ricardo on wages. I developed it in response to an essay on the iron law of wages that the author e-mailed me.

2.0 Contending Interpretations of Classical Political Economy
As usual, I deny much, if any, originality. But I am going to be vague on references. As I understand it, Sraffa and Dobb's introduction in Sraffa (1951) was not initially perceived as offering a novel interpretation of Ricardo. Bharadway (1989) and Garegnani (1984) offer other statements of the Sraffian interpretation. Stirati (1994) focuses specifically on the theory of wages.

Samuel Hollander, I think, has the highest stature of those today arguing, pace Sraffa, for the continuous evolution of Classical economics into Neoclassical economics. I take Hollander to be continuing the line of argument to be found in Appendix I of Alfred Marshall's Principles of Economics. Despite my respect for Hollander, I have yet to thoroughly read any of his massive tomes of scholarship (e.g., Hollander 1979). My acquaintance with Hollander's primary work is mainly in the journal literature, such as his tournament with Giancarlo de Vivo in the mid 1980s and later Cambridge Journal of Economics over de Vivo's discovery in Robert Torrens of something much like Sraffa's standard commodity.

Others have entered into this controversy, while taking positions that I think differ from both Sraffian positions and Hollander's. I mention Carvale and Tosato (1980), which, as I recall, contains dynamic models which formalize an interpretation of Ricardo's views on wages. I also like Peach (1993), which surveys other interpretations and offers Peach's own reading of Ricardo.

2.0 Sraffian Interpretation
The givens in Ricardo's theory of value include, the level of effective demand for the output of each industry and the technique in use. From these givens, the capital equipment that must be advanced in each industry is also known. The level of wages is also among the givens of the theory of value. The rate of profit then is roughly the ratio of the surplus to the advances, including wages.

A problem arises here. The surplus output of the economy, the commodities on which wages are spent, and the capital equipment are each heterogeneous collections. How can these quantities be treated as commensurate? Ricardo's corn-ratio model, the labor theory of value, and Sraffa's standard commodity are all approaches to address this issue.

So the Sraffians claim that the Classical theory of value makes sense, at least formally if the natural rate of wages is exogenous to the theory of value, albeit still to be explained within Political Economy. This is not a novel position:

"Therefore the foundation of modern political economy, whose business is the analysis of capitalist production, is the conception of the value of labour-power as something fixed, as a given magnitude-as indeed it is practice in each particular case. The minimum of wages therefore correctly forms the pivotal point of Physiocratic theory. They were able to establish this although they had not yet recognised the nature of value itself, because this value of labour-power is manifested in the price of the necessary means of subsistence, hence in a sum of definite use-values. Consequently, without being in any way clear as to the nature of value, they could conceive the value of labour-power, so far as it was necessary to their inquiry, as a definite magnitude. If moreover they made the mistake of conceiving this minimum as an unchangeable magnitude-which in their view is determined entirely by nature, and not by the stage of historical development, which is itself a magnitude subject to fluctuations-this in no way affects the abstract correctness of their conclusions, since the difference between the value of labour-power and the value it creates does not at all depend on whether the value is assumed to be great or small." -- Karl Marx (1963) p. 45

4.0 The Natural Wage Outside The Stationary State
I have pointed to a theory of the natural level of prices above, where the natural level of prices is to be contrasted with market prices. Adam Smith uses the metaphor of centers of gravitation for the natural levels. They attract market prices. Ricardo focuses his analysis on natural levels. One might think the given wage in Ricardo's theory of value and distribution must be the natural rate of wages.

This quote seems to say that the natural rate of wages is defined to be the wage that prevails in the stationary state:

"Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse, which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people." -- David Ricardo (p. 94-95 in Sraffa 1951)

And Ricardo says that the stationary state is far distant:

"But if our progress should become more slow; if we should attain the stationary state, from which I which I trust we are far distant, then will the pernicious nature of these [Poor] laws become more manifest and alarming; and then, too, will their removal be obstructed by many additional difficulties." -- David Ricardo (p. 109 in Sraffa 1951)

So Ricardo seems to be inconsistent. He thinks that the system of natural prices and wages is explanatory for empirical tendencies at any moment, that the stationary state is far distant, and the natural rate of wages is defined only for the stationary state. Maybe he has different theories for the long run and the intermediate run, so to speak.

5.0 The Iron Law of Wages and Ricardo
As I understand it, the iron law of wages is that wages tend towards the natural rate of wages, defined as physiological subsistence. Outdated teaching in the history of economic thought is that Ricardo held to this iron law.

Ricardo clearly states that natural rate of wages is not defined solely by physiological requirements. It includes habits and social norms:

"It is not to be understood that the natural price of labour, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people. An English labourer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where 'man's life is cheap', and his wants are easily satisfied. Many of the conveniences now enjoyed in an English cottage, would have been thought luxuries in an earlier period of our history." -- David Ricardo (p. 96-67 in Sraffa 1951)

Hystersis arises in this approach. If the market rate is above the natural wage for a long time, the norms and habits embodied in workers' consumption can change. In a sense, the natural level of wages moves towards the market wage, as well as vice-versa. Ricardo draws on this idea for some policy ideas:

"The friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a superabundant population. In those countries, where the labouring classes have the fewest wants, and are contented with the cheapest food, the people are exposed to the greatest vicissutudes and miseries. They have no place of refuge from calamity; they cannot seek safety in a lower station; they are already so low, that they can fall no lower..." -- David Ricardo (p. 100-101 in Sraffa 1951)

You can see the same idea later in John Stuart Mill:

"It would, however, be of little avail that either or both these measures of relief [emigration for colonization and something like homesteading] should be adopted, unless on such a scale as would enable the whole body of hired labourers remaining on the soil to obtain not merely employment, but a large addition to the present wages - such an addition as would enable them to live and bring up their children in a degree of comfort and independence to which they have hitherto been strangers. When the object is to raise the permanent condition of a people, small means do not merely produce small effects, they produce no effect at all. Unless comfort can be made as habitual to a whole generation as indigence is now, nothing is accomplished..." J. S. Mill (1848, Book II, Chapter XIII)

How can Ricardo's words be reconciled with the claim that Ricardo held the iron law? My preferred approach is to reject the claim. Ricardo did not endorse the iron law of wages.

This raises the question of who came up with the iron law of wages, if it was not Ricardo. Apparently the "Iron Law" was named by Ferdinand Lassalle. Stirati (1994) reads Marx as here saying that Malthus was the law's creator:

"It is well known that nothing of the 'iron law of wages' is Lassalle's except the word 'iron' borrowed from Goethe's 'great, eternal iron laws'. The word 'iron' is a label by which the true believers recognize one another. But if I take the law with Lassalle's stamp on it, and consequently in his sense, then I must also take it with his substantiation for it. And what is that? As Lange already showed, shortly after Lassalle's death, it is the Malthusian theory of population (preached by Lange himself). But if this theory is correct, then again I cannot abolish the law even if I abolish wage labor a hundred times over, because the law then governs not only the system of wage labor but every social system. Basing themselves directly on this, the economists have been proving for 50 years and more that socialism cannot abolish poverty, which has its basis in nature, but can only make it general, distribute it simultaneously over the whole surface of society!" - Karl Marx (1875)

As I understand it, the formal mathematics of the theory of value merely requires the wage to be given. But, as my email correspondent points out, if the wage is above subsistence, workers can save and class structure of capitalism will not be reproduced.

As I understand it, in the formal mathematics of the theory of value, the wage, for example, is taken as given. The formalism does not require the wage to be any particular value between zero and some maximum. But, as my email correspondent points out, if the wage is appreciably is above subsistence, workers can accumulate capital before retirement age and the class structure of capitalism will not be reproduced.

Updated 19 July 2008

References

• Krishna Bharadwaj (1989) Themes in Value and Distribution: Classical Theory Reappraised, Unwin Hyman
• Giovanni A. Caravale and Domenico A. Tosato (1980) Ricardo and the Theory of Value, Distribution and Growth, Routledge & Kegan Paul
• P. Garegnani (1984) "Value and Distribution in the Classical Economists and Marx", Oxford Economic Papers, V. LXXIII: 291-325
• Samuel Hollander (1979) The Economics of David Ricardo, Toronto: University Press
• Karl Marx (1875) Critique of the Gotha Program
• Karl Marx (1963) Theories of Surplus Value, Part I (Trans. by E. Burns), Progress Publishers
• John Stuart Mill (1848) Principles of Political Economy
• Terry Peach (1993) Interpreting Ricardo, Cambridge University Press
• Piero Sraffa (editor) (1951) The Works and Correspondence of David Ricardo: Volume I: On the Principles of Political Economy and Taxation, Cambridge University Press
• Antonella Stirati (1994). The Theory of Wages in Classical Economics: A Study of Adam Smith, David Ricardo and Their Contemporaries (trans. by Joan Hall), Edward Elgar

A Different World

Suppose that all equipment used in production were privately owned by individuals. Being fairly well-off, I might have a house with some sort of blast furnace in the back yard. Production in this imaginary world would be performed entirely by self-employed artisans.

One can allow some people in this world to perform no work. Some of these artisans would be lending or borrowing specific equipment from others. So any specific piece of capital equipment would have a rental price. If I happened to own equipment that could command high enough rents, I would be able to lend all my equipment out and live off these rents.

It seems to me that inasmuch as a neoclassical theory of value exists that is logically consistent in its assumptions, it is a map of the above sort of society. It is not even an attempt to describe a society in which one can loan out money at interest or buy and sell shares in firms that themselves own capital equipment. Given the lack of a stock market in this imaginary world, I do not see the point of introducing wage labor into the model either. One would still not end up with a model of a capitalist economy.

References

• Joan Robinson (1962) Essays in the Theory of Economic Growth, Macmillan
• Joan Robinson (1973) Economic Heresies: Some Old-Fashioned Questions in Economic Theory, Basic Books

What Has Been, That Will Be; What Has Been Done, That Will Be Done

Stiglitz has an editorial in "Egypt's only independent newspaper in English:

"Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy." -- Joseph E. Stigliz, , 7 July 2008

And some bloggers are flabbergasted. Interestingly enough, Stiglitz said the same thing last October. Maybe if enough economists say the same thing over and over and over, other economists should examine their rationale. Clearly, Stiglitz is not just saying whatever momentarily passes through his mind.

Some History of the Label 'Neoclassical"

I suppose if I want to note the origin of the term "neoclassical" in relation to economics, I should quote Aspromourgos. But I happen to have a Colander essay nearer at hand. The term grew to have a extremely general connotation:

"The term, neoClassical, was initially coined by Thorstein Veblen (1900) in his 'Preconceptions of Economic Science.'...

Hicks (1932, 1934) and Stigler (1941) extended the meaning of neoClassical to encompass all marginalist writers, including Menger, Jevons, and J.B. Clark. Most writers after Hicks and Stigler used the term inclusively. Thus it lost most of its initial meaning. Instead of describing Marshallian economics, it became associated with the use of calculus, the use of marginal productivity theory, and a focus on relative prices. As has been noted by a number of authors, while the neoClassical terminology makes some sense for Marshall, who emphasized the connection of his approach with the Classical approach, it makes far less sense for the others, such as Jevons, who emphasized the difference between his views and those of the Classicals. Some have suggested that anti-Classical would have been preferable.

...In the third edition of his principles textbook Samuelson (1955) built on Keynes' classification and turned it around on Keynes by developing the neoClassical synthesis. In the neoClassical synthesis, Keynes' dispute with Classical economists was resolved. This use of the term 'neoClassical' as an alternative to Keynesian models provides another confusion because it adds another reference point that brings to mind different elements of thought than would other comparisons." -- David Colander

By the way, shortly before World War II, Austrian economists did not see themselves as lying outside neoclassical economics or putting forth a separate doctrine:

"Referring to the usual separation of economic theorists into three schools of thought, 'the Austrian and the Anglo-American schools and the School of Lausanne', Mises (citing Morgernstern) emphasizes that these groups 'differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by substance of their teachings' (Mises 1960 [1933])." - Israel Kirzner

For completeness, I expand the references in the above quotations.

References

• Tony Aspromourgos, "On the Origins of the Term 'Neoclassical'", Cambridge Journal of Economics, V. 10, N. 3: 265-270
• David Colander, "The Death of Neoclassical Economics"
• J. R. Hicks (1932) "Marginal Productivity and the Principle of Variation", Economica (February)
• J. R. Hicks (1934) "Leon Walras", Econometrica (October)
• Israel Kirzner (1987) "The Austrian School of Economics", The New Palgrave Dictionary of Economics
• L. von Mises (1960) Epistemological Problems of Economics, Van Nostrand (translation of Grundprobleme der Nationalökonomie, 1933)
• G. J. Sigler (1941) Production and Distribution Theories, Macmillan

Marx Was Skint - But He Had Sense / Engels Lent Him The Necessary Pence

Marx may or may not be correct in these passages. But these, and expansions of these passages, certainly contain claims worth thinking about:

"Let us take England. Its political economy belongs to the period in which the class-struggle was as yet undeveloped. Its last great representative, Ricardo, in the end, consciously makes the antagonism of class-interests, of wages and profits, of profits and rent, the starting point for his investigations, naively taking this antagonism for a social law of nature. But by this start the science of bourgeois economy had reached the limits beyond which it could not pass. Already in the lifetime of Ricardo, and in opposition to him, it was met by the criticism, in the person of Sismondi.

The succeeding period, from 1820 to 1830, was notable in England for scientific activity in the domain of Political Economy. It was the time as well of the vulgarizing and extending of Ricardo's theory, as of the contest of that theory with the old school. Splendid tournaments were held... The literature of Political Economy in England at this time calls to mind the stormy forward movement in France after Dr. Quesnay's death, but only as a Saint Martin's summer reminds us of spring. With the year 1830 came the decisive crisis.

In France and in England the bourgeoise had conquered political power. Thenceforth, the class-struggle, practically as well as theoretically, took on more and more outspoken and threatening forms. It sounded the death knell of scientific bourgeois economy. It was no longer a question, whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. In place of disinterested enquirers, there were hired prize-fighters; in place of genuine scientific research, the bad consequence and the evil intent of apologetic..." -- K. Marx, Capital, Volume 1, Author's Preface to the Second Edition

"A commodity is therefore a mysterious thing, simply because in it the social character of men's labour appears to them as an objective character stamped upon the product of that labour; because the relation of the producers to the sum total of their own labour is presented to them as a social relation, existing not between themselves, but between the products of their labour. This is the reason why the products of labour become commodities, social things whose qualities are at the same time perceptible and imperceptible by the senses... With commodities... the existence of the things qua commodities, and the value relation between products of labour which stamps them as commodities, have absolutely no connection with their physical properties and with the material relations arising therefrom. There it is a definite social relation between men, that assumes, in their eyes, the fantastic form of a relation between things. In order, therefore, to find an analogy, we must have recourse to the mist-enveloped regions of the religious world. In that world the productions of the human brain appear as independent beings endowed with life, and entering into relation both with one another and the human race. So it is in the world of commodities with products of men's hands. This I call the Fetishism which attaches itself to the products of labour, so soon as they are produced as commodities, and which is therefore inseperable from the production of commodities." -- K. Marx, Capital, Volume 1, Chapter 1, Section 4: The Fetishism of Commodities and the Secret Thereof

"Capital - profit (profit of enterprise plus interest), land - ground-rent, labour - wages, this is the trinity formula which comprises all the secrets of the social production process.

Furthermore, since as previously demonstrated interest appears as the specific characteristic product of capital and profit of enterprise on the contrary appears as wages independent of capital, the above trinity formula reduces itself more specifically to the following: Capital - interest, land - ground-rent, labour - wages, where profit, the specific characteristic form of surplus-value belonging to the capitalist mode of production, is fortunately eliminated.

On closer examination of this economic trinity, we find the following: First, the alleged sources of the annually available wealth belong to widely dissimilar spheres and are not at all analogous with one another. They have about the same relation to each other as lawyer's fees, red beets and music.

Capital, land, labour! However, capital is not a thing, but rather a definite social production relation, belonging to a definite historical formation of society, which is manifested in a thing and lends this thing a specific social character. Capital is not the sum of the material and produced means of production. Capital is rather the means of production transformed into capital, which in themselves are no more capital than gold or silver in itself is money. It is the means of production monopolised by a certain section of society, confronting living labour-power as products and working conditions rendered independent of this very labour-power, which are personified through this antithesis in capital. It is not merely the products of labourers turned into independent powers, products as rulers and buyers of their producers, but rather also the social forces and the future [? illegible] [A later collation with the manuscript showed that the text reads as follows: "die Gesellschaftlichen Kräfte und Zusammenhängende Form dieser Arbeit" (the social forces of their labour and socialised form of this labour). - Ed.] form of this labour, which confront the labourers as properties of their products. Here, then, we have a definite and, at first glance, very mystical, social form, of one of the factors in a historically produced social production process.

And now alongside of this we have the land, inorganic nature as such, rudis indigestaque moles, [Ovid, Metamorphoses, Book I, 7. - Ed] in all its primeval wildness. Value is labour. Therefore surplus-value cannot be earth. Absolute fertility of the soil effects nothing more than the following: a certain quantity of labour produces a certain product - in accordance with the natural fertility of the soil. The difference in soil fertility causes the same quantities of labour and capital, hence the same value, to be manifested in different quantities of agricultural products; that is, causes these products to have different individual values. The equalisation of these individual values into market-values is responsible for the fact that the 'advantages of fertile over inferior soil ... are transferred from the cultivator or consumer to the landlord'. (Ricardo, Principles, London, 1821, p.62.)

And finally, as third party in this union, a mere ghost - 'the' Labour, which is no more than an abstraction and taken by itself does not exist at all, or, if we take... [illegible], the productive activity of human beings in general, by which they promote the interchange with Nature, divested not only of every social form and well-defined character, but even in its bare natural existence, independent of society, removed from all societies, and as an expression and confirmation of life which the still non-social man in general has in common with the one who is in any way social." -- K. Marx, Capital, Volume 3, Part Seven, "Revenue and Theirs Sources", Chapter 48: The Trinity Formula

"The form of revenue and the sources of revenue are the most fetishistic expression of the relations of capitalist production. It is their form of existence as it appears on the surface, divorced from the hidden connections and the intermediate connecting links. Thus the land becomes the source of rent, capital is the source of profit, and labour the source of wages. The distorted form in which the real inversion is expressed is naturally reproduced in the views of the agents of this mode of production. It is a kind of fiction without fantasy, a religion of the vulgar. In fact, the vulgar economists - by no means to be confused with the economic investigators we have been criticizing - translate the concepts, motives, etc., of the representatives of the capitalist mode of production who are held in thrall to this mode of production and in whose consciousness only its superficial appearance is reflected. They translate them into a doctrinaire language, but they do so from the standpoint of the ruling section, i.e., the capitalists, and their treatment is therefore not naive and objective, but apologetic. The narrow and pedantic expression of vulgar conceptions which are bound to arise among those who are the representatives of this mode of production is very different from the urge of political economists like the Physiocrats, Adam Smith and Ricardo to grasp the inner connection of the phenomena." -- K. Marx, Theories of Surplus Value, Part III, Addenda, "Revenue and Its Sources. Vulgar Political Economy", 1.

It's Herd Behavior, Uh Huh, It's Evolution, Baby

Anybody interested in institutional economics should be interested in evolutionary theory, a theory that I can stand to learn more about. The interest in evolution among institutionalists goes back to Veblen. A more-or-less mid twentieth expression of interest can be seen in Ayres's biography of Thomas Huxley, also known as "Charles Darwin's bulldog". Geoffrey Hodgson is a current institutialist interested in evolution. What evolves in economies? I suggest organizational forms, business processes, and technology, at least.

I never saw anything interesting when operating Tierra on my old computer. Perhaps I understand neither the assembly language nor the visualization well-enough. Or perhaps I should have designed experiments and let it operate for more generations. I was never into Core Wars either. John Conway's Game of Life was more my speed. I don't seem to have executables for any of these for my OS X Macintosh.

But I think Thearling and Ray (1994) describe a neat idea. In Tierra, programs composed of machine instructions reproduce, perhaps with mutations. Memory is not protected, and programs can overwrite one another's code. An ability to more successfully protect one's own code and data and overwrite others is selected for.

One can do repeatable experiments with a computer program. Each generation can be saved, and the simulation can be rerun from any point in time, with random number generators restarted with new seeds. Lenski et al (2003) report such experiments with Avida, a computer simulation much like Tierra. In Avida, evolving computer programs collect energy to run their code. Programs that can do advanced logical operators are more fit. Lenski et al show that the evolution of a complex feature may depend on the prior evolutionary history of an organism providing the potential of the last few steps, even if previous mutations do not increase fitness.

I was surprised to find last week not only that repeatable experiments with evolution have been performed on simulations, but that Richard Lenski has been performing such a repeatable experiment on real-world organisms - namely, E. Coli - since 1988. (I must have missed Carl Zimmer's article, of 26 June 2008 in The New York Times, on the Long Term Evolution Experiment (LTEE).) Anyway, Blount, Borland, and Lenski's 2008 article reports on recent results.

In the LTEE, populations of each generation are isolated in a solution containing glucose for the E. Coli to eat. The isolated solution, I guess, acts like the simulated core memory in Tierra. And the E. Coli of any generation and evolutionary history can be frozen and restarted, just as an image of the computer core memory in a simulation run can be saved and reloaded. One run yielded a mutation that seems to have surprised Linski. This mutation allows the E. Coli to thrive on citrate, whatever that is, in the solution even "under oxic conditions". The ability to sample previous generations and look at other isolated population histories starting from the same initial conditions allows Linski and his colleagues to understand something about this mutation even before genetic sequencing. It is not the result of a single gene mutating, but is dependent on prior mutations in the history. These prior mutations may not have increased fitness themselves, but prepared the E. Coli to become dramatically more well-adapted for their specific environment after a couple more mutations. History matters.

References

• Ayres, Clarence (1932) Huxley, W. W. Norton
• Blount, Zachary D., Christina Z. Borland, and Richard E. Lenski (2008) "Historical Contingency and the Evolution of a Key Innovation in an Experimental Population of Escherichia Coli", Proceedings of the National Academy of Sciences V. 105, N. 23 (June 10): 7899-7906
• Hodgson, Geoffrey (2008), "Interview" Revue de la Régulation (January)
• Lenski, Richard E., Charles Ofria, Robert T. Pennock and Christoph Adaml (2003) "The Evolutionary Origin of Complex Features", Nature, V. 423 (8 May): 139-144
• Thearling, Kurt and Thomas S. Ray (1994) "Evolving Multi-celluar Artificial Life, Artificial Life IV, MIT Press

Conversations Elsewhere

Over at the Austrian Economists' blog, the comments on one post are mostly about Sraffa versus Hayek. The defenders of Hayek want to redefine the "natural rate" of interest to be the rate that would prevail in a monetary economy if the financial system did not "distort" prices somehow. This definition is opposed to the definition as the interest rate that would prevail in a barter economy. The defenders don't seem to realize that this redefinition addresses neither Sraffa's 1930s point that there are as many natural rates as there are commodities in an intertemporal equilibrium nor the 1960s reswitching results.

A Yahoo group is about Sraffa. Spanish-language discussions do me little good since I am limited to English.

Update: Gabriel Mihalache has a discussion about General Equilibrium theory that ends up overlapping with a discussion of Sraffa.

Brouhaha Over Marglin

I have been thinking about whether I want to read Stephen Marglin's new book, The Dismal Science: How Thinking Like an Economist Undermines Community. It sounds to me too much like Duncan Foley's recent book, Adam's Fallacy. A couple of reviews of Marglin's book are now available. Deirdre McCloskey has a generally positive review in the 27 March issue of the Times Higher Education. E. Roy Weintraub has a negative review in Science.

A couple of bloggers have posted on Weintraub's review. I find these posts fairly useless for clarifying either Marglin or Weintraub's perspective.

Brad DeLong comments on Weintraub's review, too. DeLong uses a German term that is not in my vocabulary:

"The gemeinschaft that is the professional community of Ivy League economists in which Marglin has been embedded for the past forty years has not treated him with 'reciprocity, altruism, and mutual obligation' but has--rather--in a very gemeinschaftlich way done what gemeinschaften traditionally do to corral their deviant members and to discourage others from imitating them. It has not been pretty.

But it seems to have had no effect on Marglin's thinking, none at all, for reasons I do not understand." -- Brad DeLong

I've had something to say about the ugliness in Harvard's economics department. Some highlights: Harvard denied tenure to those among Marglin's colleagues who could provide useful feedback on his ideas. I doubt very few in the Harvard department have anything useful to say about Marglin's ideas on unemployment and inflation, some of which he developed in collaboration with Amit Bhaduri. More recently, Harvard has refused to let Marglin to teach a section of the intro course for credit as a prerequisite and as a counter to Mankiw's lies.

Weintraub is part of a trend in the history of ideas that tends to see more discontinuities and at a lower level than previously:

"in the disciplines that we call the history of ideas, the history of science, the history of philosophy the history of thought, and the history of literature (we can ignore their specificity for the moment), in those disciplines which, despite their names, evade very largely the work and methods of the historian, attention has been turned, on the contrary, away from vast unities like 'periods' or 'centuries' to the phenomena of rupture, of discontinuity. Beneath the great continuities of thought, beneath the solid, homogeneous manifestations of a single mind or of a collective mentality, beneath the stubborn development of a science striving to exist and to reach completion at the very outset, beneath the persistence of a particular genre, form, discipline, or theoretical activity, one is now trying to detect the incidence of interruptions. Interruptions whose status and nature vary considerably. There are the epistemological acts and thresholds described by Bachelard: they suspend the continuous accumulation of knowledge, interrupt its slow development, cut it off from its empirical origin and its original motivations, cleanse it of its imaginary complicities; they direct historical analysis away from the search for silent beginnings, and the never-ending tracing-back to the original precursors, towards the search for a new type of rationality and its various effects. There are the displacements and transformations of concepts: the analyses of G. Canguilhem may serve as models; they show that the history of a concept is not wholly and entirely that of its progressive refinement, its continuously increasing rationality, its abstraction gradient, but that of its various fields of constitution and validity, that of its successive rules of use, that of the many theoretical contexts in which it developed and matured..." -- Michel Foucault (1972) The Archaeology of Knowledge, Pantheon Books.

I do not know the historians of ideas Foucault references, but his descriptions could perhaps characterize aspects of "thick histories".

Along with embracing these standards, Weintraub thinks they should be professionalized. Historians of economics should be writing for and to the standards of historians of science. The history of economics should not to be done by dilettantes in history taking a break from their professional work as modern economists. History is not to be done by hopping from one great book to another, ignoring all the minor thinkers of the time that contextualizes the contents of each book. And the story should be told forward, without imposing on the actors in the story a desire to get to where they ended up after much stumbling. One should look for what standards evolved in the protangonists' milieus. Historians of economics should not be in the business of rating past economists by current ideas and current standards of argument.

Weintraub also doesn't like the classification of the history of economic thought as heterodox economics. For him, history is not supposed to be a morality tale. Weintraub non-judgemental approach to history raises some questions. What is the usefulness of history? Why should economists, as part of their professional training, receive any information about the history of their discipline? Should university economics departments devote any resources to studying that history? I am not providing answers to these questions here. Obviously I find Weintraub's writings of enough interest to think I can assign views to him without giving any specific citations.

Without having read Marglin's book, let me finally turn to a substantial point in Weintraub's review. I can see how one might doubt that the ideas Weintraub says are engaged by Marglin were all grown up in the nineteenth century. But I have noted how some are in embryo in J. S. Mill.

I am disappointed that Weintraub cites Coleman's book positively.

For reference, here is Weintraub's review:

"ECONOMICS: First, Kill the Economists",

"The prophet Jeremiah is alive and well and teaching economics at Harvard. It is not often that a scholar with no particular historical or philosophical expertise trashes the Western enlightenment in order to stomp on the discipline of economics as a manifestation of all that was lost in creating the modern world. Stephen A. Marglin's argument in The Dismal Science is that economics--with its focus on an individual's preferences, the freedom to engage in activities to promote his or her well-being, and the pursuit of self-interest variously construed--perverts a natural moral order: 'the foundational assumptions of economics are in my view simply the tacit assumptions of modernity. The centerpiece in both is the rational, calculating, self-interested individual with unlimited wants for whom society is the nation-state.' And what modernity shunned was 'community.'

His main line is that 'The market undermines community because it replaces personal ties of economic necessity by impersonal market transactions.... The ambivalent relationship between noneconomists and economics reflects the ambivalence with which modernity is regarded.' To be sure, sociologists deal with community, as do anthropologists, as do political scientists, and so on. But economics, for Marglin, is different: 'Economics is not only descriptive; it is not only evaluative; it is at the same time constructive--economists seek to fashion a world in the image of economic theory.' Economics and thinking like an economist are bad for the health of the world. Indeed, he closes his volume stating that 'There are many ways of resolving the tensions between individualism and holism, between self-interest and obligation to others, between algorithm and experience, between the claims of various communities on our allegiance, between material prosperity and spiritual health. Economics offers one way, but as presently constituted, economics is hobbled by an ideology in which these tensions are replaced by a set of pseudo-universals about human nature. A dismal science indeed.' The argument about the proper way to do economics is an old one. An 1832 complaint in The Eclectic Review charged the work of Thomas Malthus and David Ricardo with leading the public far from 'the true path of inquiry' and making political economy 'a hideous chain of paradoxes at apparent war with religion and humanity.' In the past century or two, we have heard this lamentation from time to time from both secular and religious figures.

In much of Europe, what we now call economics developed in order to understand various matters of business law, contracts, taxation, international trade, and project management. Issues like tariff policy and currency management were discussed by individuals who were variously lawyers, engineers, politicians, managers, and business people, and training in such expertise developed pari passu.

The professionalization of economics was a late 19th century phenomenon. Cambridge's Alfred Marshall, in attempting to construct a scientific economics, was not able to establish economics as a separate discipline until the death of Henry Sidgwick, the university's professor of moral philosophy, under whose direction lectures in political economy had been organized. In the United States at that time, economics was growing from different sources. One stream followed from individuals who had obtained Ph.D.'s in Germany, where social policy issues--labor unions, socialism, the nascent welfare state, etc.--were galvanizing the universities. But a second stream nurturing the American progressive economists grew from the social gospel movement, which sought to promote the kingdom of God on Earth through enlightened social policy and the kind of market interventions that Adam Smith in fact quite welcomed.

The kind of economics from which Marglin recoils is, however, not of the sort that was present in writings of individuals (e.g., Smith, Ricardo, John Stuart Mill, Marshall, and John Commons) who have been claimed as ancestors by modern economists. It is instead what developed in the post-World War II stabilization of economic discourse and the final professionalization of the discipline. It was during that postwar period, not in the Enlightenment, that economic science became normal in Thomas Kuhn's sense.

Marglin's account appears confused by this history. Moreover, he appears to believe that the ideas he engages and then casts aside (ideas about the economic agent, preferences, equilibrium, models, and markets) all grew up not in the 20th century but hundreds of years earlier--and that those ideas have had stable meanings ever since: 'For four hundred years, economists have been active in the enterprise of constructing the modern economy and society, both by legitimizing the market and by promoting the values, attitudes, and behaviors that make for economic success. No apology is due for this--except for the pretense of scientific detachment and neutrality and the unwillingness to confront the ideological beam in our collective eye.' The ahistoricity of such a statement is startling; for instance, it assumes wrongly that there were individuals called economists 400 years ago and that science in 1600 meant the same thing as it does in 2008.

In his critique, Marglin moves back and forth between moralizing about the loss of community and contempt for the economists' tools and models. He claims, 'By promoting market relationships, economics undermines reciprocity, altruism, and mutual obligation, and therewith the necessity of community. The very foundations of economics, by justifying the expansion of markets, lead inexorably to the weakening of community.' He complains that 'it is difficult to tell a plausible story of how individuals acquire meaningful preferences between consumption today and consumption a decade or two hence, in the way one can imagine learning about peaches today and pears today.' But is not Marglin's Harvard College teaching an instruction of the young designed to shape their preferences, especially preferences about long-term versus short-term goals?

From the first times economic arguments were parsed and markets described, there were those who found both contemptible, and this was well before the Enlightenment. Attacks on money lending at interest go back even earlier than Jesus on the temple steps. Recall Aquinas's ideas about the 'just price.' One mustn't forget Shakespeare's Shylock, either. Tax collecting for kings and emperors requires economic management skills, but no one likes to pay taxes. In a prize-winning book (1), William Coleman showed how over the centuries the very idea of economics has been loathed by left, right, and center; Christian, Jew, and anti-Semite; pope and communist dictator; lawyer and business mogul; and scientist and humanist.

In this same tradition of anti-economics, Marglin sees the future of the field as bleak, with the current generation of economics students avoiding large questions in their search for career advancement. And the problems that economics creates will only get worse, he claims, because globalization will make the national community as obsolete as the market has made the local community.

I note in closing that the lead dust-jacket blurb for this volume was provided by the noted economist and social theorist Bianca Jagger (sic). Whatever was Harvard University Press thinking?" -- E. Roy Weintraub,

Real Utopias

I haven't begun to explore this "Real Utopias" project. It seems to me to have a flavor of Analytical Marxism.

Hat tip to taavi

The Moving Finger Writes...

...and, having writ,
Moves on: nor all your piety nor wit
Shall lure it back to cancel half a line,
nor all your tears wash out a word of it.

1.0 Introduction
Neoclassical economics emphasizes equilibria, for example in General Equilibrium models. In equilibria, all agents are optimizing and their plans are all pre-coordinated. But no reason exists for economists to expect actually existing more-or-less capitalist economies to ever be in such equilibria.

This post demonstrates that economies need not be near equilibria by means of an example. This example has been available for almost a half century (Scarf 1960) and is often referenced (e.g., Ackerman 1999, Hahn 1961 and 1970, McCauley 2004, Saari 1995, Sonnenschein 1972). The example is of a pure exchange economy. Since no production occurs in the example, it cannot be considered an example of a Sraffian model. Furthermore, the example is of brain-dead tâtonnement dynamics. No trading occurs at any prices other than equilibrium prices. Since the example has one locally unstable equilibrium, equilibrium prices are never achieved.

Neoclassical economic theory imposes almost no restriction on excess demand functions. The most substantial restriction is the unfounded conservation law expressed by the symmetry of the Slutsky matrix. This lack of any empirical implications of neoclassical theory for market behavior is an implication of the Sonnenschein-Mantel-Debreu results. Another implication is that any price dynamics are possible in a tâtonnement process, including chaos. So this example does not even represent the most general or complex dynamics possible in neoclassical models.

2.0 Data
This example economy consists of three individuals, each endowed with one unit of a different commodity (Table 1). The individuals also differ in tastes, as expressed by the utility functions in Table 2. Our problem is to determine equibrium prices for this simple economy and the price dynamics.

Table 1: Agents' Endowments

Agent	Endowment
	Apples	Bananas	Cantalopes
Mary	1	0	0
Nancy	0	1	0
Olivia	0	0	1

Table 2: Agents' Preferences

Agent	Utility Function
Mary	UM = min( xA, xB )
Nancy	UN = min( xB, xC )
Olivia	UO = min( xA, xC )

3.0 Demand Functions
Each agent maximizes their utility, subject to their budget constraint. Consider a single agent, for example, Mary. Mary chooses non-negative x_A, x_B, x_C to maximize

U_M = min( x_A, x_B )          (1)

such that

p_A x_A + p_B x_B + p_C x_C ≤ p_A          (2)

Since Mary derives no utility from cantalopes, she will not consume any of them. Thus, Mary's problem can be graphed in a two-dimensional space (Figure 1). The graph also shows the quantities Mary demands of apples and bananas. These quantities are on the intersection of the budget constraint with a particular isoquant of the utility function. Symbolically:

x_A^* = x_B^* = p_A/(p_A + p_B)          (3)

x_C^* = 0          (4)

Figure 1: Mary's Utility Maximizing Problem

One can find Nancy and Olivia's demand functions by symmetrical arguments. Aggregate excess demand functions are the difference between aggregate demands and aggregate supplies. Aggregate demands are individual demand functions summed across the individuals. Aggregate supplies, in this pure exchange economy, are endowments summed across individuals. In fact, the aggregate supply of each commodity is one unit here. A bit of algebra yields:

z_A = p_C/(p_A + p_C) - p_B/(p_A + p_B)          (5)

z_B = p_A/(p_A + p_B) - p_C/(p_B + p_C)          (6)

z_C = p_B/(p_B + p_C) - p_A/(p_A + p_C)          (7)

where z_B, z_B, and z_C are the aggregate excess demand functions for apples, bananas, and cantelopes, respectively.

The numeraire is arbitrary. One can confine prices to lie on the unit sphere:

p_A² + p_B² + p_C² = 1          (8)

4.0 Equilibrium

In equilibrium, aggregate excess demand functions are zero. The only equilibrium is one in which all prices are equal:

p_A^* = p_B^* = p_C^* = (1/3)^1/2          (9)

5.0 Tâtonnement Dynamics
I postulate that when the aggregate excess demand for a particular commodity is positive, the price of that commodity rises. Likewise, when aggregate excess demand is negative, the price falls. The simplest dynamical system with these properties is one in which the rate of change of prices with respect to time is equal to the aggregate excess demands:

dp_A/dt = p_C/(p_A + p_C) - p_B/(p_A + p_B)          (10)

dp_B/dt = p_A/(p_A + p_B) - p_C/(p_B + p_C)          (11)

dp_C/dt = p_B/(p_B + p_C) - p_A/(p_A + p_C)          (12)

Under these dynamics, the equilibrium is unstable. Solutions around the equilibrium spiral out on the unit sphere to a limit cycle. Figure 2 shows a two-dimensional projection of that limit cycle.

Figure 2: Two-Dimensional Projection of Dynamics

6.0 Conclusion
The failure of General Equilibrium Theory to limit dynamics, I gather, is intrinsic to methodological individualism, in which independent agents can have arbitrary preferences and endowments. Attempts to explain economies seem to need to postulate influences on tastes and income above the level of the individual, for example, by others in one's social class or through some sort of structuralist theory. In other words, there is too such a thing as society. I take Kirman (1989) to point in this direction.

I might as well mention that the arbitrary dynamics implied by orthodox economic theory undermines a certain political outlook. I refer to the idea that we ought to loosen restrictions on trade, but ensure some sort of redistribution so as to ensure that everybody participates in the supposedly enlarged pie. I take the second welfare theorem to be the basis for this view. But that redistribution doesn't necessarily lead to the economy converging to the original equilibrium, as altered by free trade.

References

• Frank Ackerman (1999) "Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory", Global Development and Environment Institute, Working Paper No. 00-01
• Frank H. Hahn (1961) "A Stable Adjustment Process for a Competitive Economy", The Review of Economic Studies, V. 29, N. 1 (October): pp 62-65.
• Frank H. Hahn (1970) "Some Adjustment Problems", Econometrica, V. 38, N. 1 (January): 1-17
• Alan Kirman (1989) "The Intrinsic Limits of Modern Economic Theory: The Emperor Has No Clothes", Economic Journal, V. 99, N. 395: 126-139
• Joseph L. McCauley (2004) Dynamics of Markets: Econophysics and Finance, Cambridge University Press
• Donald Saari (1995) "Mathematical Complexity of Simple Economics", Notices of the AMS, V. 42, N. 2 (February): 222-230
• Herbert Scarf (1960) "Some Examples of Global Instability of the Competitive Equilibrium", International Economic Review, V. 1, N. 3 (September): 157-172
• Hugo Sonnenschein (1972) "Market Excess Demand Functions", Econometrica, V. 40, N. 3 (May): 549-563

George Rickey

What Is Apathy? I Don't Care.

As far as I can see, Varian implies in the following combination of quotations that the student need not care about vast chunks of his textbook:

"...we show that the theory of utility-maximization implies certain testable restrictions on the observed choices of consumers. Such restrictions have several sorts of uses. For example, one can use these observed restrictions to test the model against actual behavior of economic units. Given some data, one can ask if it could have been generated by a maximizing unit..." -- Hal R. Varian (1978) Microeconomic Analysis, Second Edition, W. W. Norton & Company, p. 2

"...the utility maximization hypothesis imposes certain observable restrictions on consumer behavior. In particular, we know that the matrix of substitution terms... must be a symmetric, negative semidefinite matrix." -- Hal R. Varian (1978) Microeconomic Analysis, Second Edition, W. W. Norton & Company, p. 135-136

"It can be shown that any continuous function that satisfies Walras' law is an excess demand function for some economy; i.e., the utility maximization hypothesis places no restrictions on aggregate demand behavior... Thus, any dynamical system on the price sphere can arise from our model of economic behavior." -- Hal R. Varian (1978) Microeconomic Analysis, Second Edition, W. W. Norton & Company, p. 246

In other words, the empirical content of the "utility maximization hypothesis" on the level of the theory of markets is close to empty.

The Influence of Chris Hayes?

A couple of weeks back, The Nation notes Hillary Clinton's statement: "I'm not going to put my lot in with economists." I gather that Clinton's gas tax holiday is not a good idea. But, "Clinton had a point, though, not about the gas tax but about the undue influence of a certain brand of mainstream economists who dominate prestigious universities." The Nation editorialist further says:

"Hillary Clinton ... also apparently thinks the economists she knows--the ones who had her husband's ear--represent the totality of solid and relevant economic thought. In fact, many good economists have different views on trade and fiscal policies and cannot get a hearing."

Susan Jacoby, in an editorial for the New York Times has a different take:

"Senator Hillary Clinton's use of the phrase 'elite opinion' to dismiss the near unanimous opposition of economists to her proposal for a gas tax holiday was a landmark in the use of elite to attack expertise supposedly beyond the comprehension of average Americans. One might as well say that there is no point in consulting musicians about music or ichthyologists about fish."

Jacoby doesn't approve of elite-bashing. I think this point would work better if we were not talking about economists.

Steven Horwitz and Post Keynesians

Steven Horwitz has kindly made his papers available online. I find that Horwitz has engaged in a couple of controversies with Post Keynesians, broadly defined. I refer to these interchanges:

• Hill (1996a), Horwitz (1996c), Hill (1996b), and Horwitz (1998)
• Horwitz (1996a), Cottrell (1996?), and Horwitz (1996b)

What worries me about these is whether I need to add to my already-too-long critique of Austrian Business Cycle Theory (ABCT) in yet another revision. (The latest publicly available version of my critique of ABCT is here. I have submitted an even more recent version to some journal.) Luckily, nobody in these interchanges seems to bring up my points from capital theory. I already reference his later book, Horwitz (2000). I hadn't known that he developed these ideas partly by arguing with Post Keynesians. In the remainder of this post, I illustrate some deficiencies of Horwitz's arguments.

Horwitz clearly states the mistaken Austrian view that, in a coordinated state, the length of production processes is inversely related to the interest rate:

"The capital structure ... reflects ... 'roundaboutness,' of production... Recent developments of Austrian capital theory have abandoned Böhm-Bawerk's emphasis on the 'average' period of production, the idea of the capital structure as reflecting roundaboutness remains. ... At higher rates of interest we would expect shorter processes of production ... Conversely, lower rates of interest should lengthen the capital structure, as the lower cost of time will make more roundabout, and hence more productive, processes more feasible... The capital structure needs to embody some notion of intertemporal coordination, i.e., the lengths of current processes of production should correspond to the willingness of consumers to wait for the availability of consumer goods. If the capital structure is not intertemporally coordinated, ...then there is avoidable economic waste." -- Horwitz (1996a)

Allin Cottrell takes Horwitz to task for ignoring established criticisms of ABCT and for simplifying Hayek to the point of misrepresentation. One of these criticisms is a Cottrell paper, which I do cover in my critique. Cottrell's comments are focused on monetary theory, not on the capital-theoretic analysis I write about.

Consider an imaginary coordinated state of the economy in which the expectations and plans of all agents are largely consistent and in which those expectations are being fulfilled. In such a coordinated state, must all markets clear? Must the labor market clear? Keynes answers these questions in the negative. He argues that if agents' plans and expectations were being more-or-less achieved, the level of unemployment would not need to be zero or whatever level is consistent with frictional unemployment. By the way, it is along these lines that I think a synthesis of Keynes and Sraffa can be achieved. Jan Kregel probably puts this better. Horwitz, in his responses to Hill, begs these questions. I refer to Horwitz discussion of savings, investment, interest rates, and banking. To me, Keynes and the Post Keynesians are more perceptive than Austrians both about what is seen and what is not seen in a capitalist economy. Since Horwitz does not understand the argument, he cannot credibly dispute me.

Here's another example of Horwitz's lack of understanding of Keynes: he attacks Keynes with a strawperson:

"Cash is not fundamentally different than other goods or services; if the public wishes to hold more of it, there is no reason that the laws of supply and demand should take a holiday. Keynes assumed that cash is 'barren' because it provides no yield to the holder, such that holding cash was socially wasteful. If one defines 'yield' to be some sort of financial return, then Keynes was right, but the same is true of any other good or service. Compact disc players do not yield a pecuniary return, yet people choose to hold 'stocks' of them because they provide a service - the playing of music. Cash is no different, in that it provides the service of being available to buy things. By Keynes's logic, fire trucks standing in fire stations are 'doing nothing' and yield no benefits. But they provide the benefit of being available for use when needed." -- Horwitz (1996c)

This is wrong for at least two reasons. First, for Keynes, money does not necessarily have no financial yield. In chapter 13 of the General Theory, Keynes states that one can

"draw the line between "'money' and 'debts' at whatever point is most convenient for handling a particular problem... It is often convenient to include in money time-deposits with banks and, occasionally, even such instruments as (e.g.) treasury bills." -- John Maynard Keynes (1936)

Second, and more seriously, Keynes is quite aware that money is liquid, that is, available to buy things. In chapter 17 of the General Theory, Keynes states that the expected return from the ownership of an asset is "equal to its yield minus its carrying cost plus its liquidity premium".

Horwitz seems to miss the point here too:

"Hill notes that 'to hold cash is to take refuge from uncertainty.' He then quotes G. L. S. Shackle, who argues that taking refuge from uncertainty (presumably by holding cash) means that we also take refuge 'from enterprise, from the giving of employment.' In the short run, my decision to hold more money in the form of bank deposits redistributes employment among different people, but does not reduce 'the giving of employment.' And in the long run, my uncertainty-induced decision to hold more bank deposits will generate increased employment.

In really existing capitalism with central banks, an increased relative demand for currency due to uncertainty can indeed touch off a decline in aggregate demand (assuming anything less than perfectly flexible prices) if the central bank does not react properly. However, in a banking system where individual banks were allowed to create their own currencies in the same manner as their deposits, this would not be the case. Where currency is a liability of the banking system, taking refuge from uncertainty in currency is no different from taking refuge in bank deposits and the effects are the same: an increase in wealth over time, due to the increase in saving... By making currency a bank liability rather than a reserve medium, a 'free banking' system would allow one less way for the public to withdraw bank reserves and cause a major contraction in credit and aggregate demand. The problem with contemporary central-bank-controlled capitalism is the very fact that when the public wants more of certain kinds of money, private enterprise cannot legally 'produce more of it.' Such a prohibition is not an irremediable fact of the world, but a particular institutional condition of modern capitalism that could be changed by ending government control over money." -- Horwitz (1998)

Whether or not the supply of money is endogenous, the demand for money does not directly give employment (excluding data entry for those changing some bits on a computer in some bank). This contrasts for the demand for an illiquid asset which must be manufactured to be supplied. As for the indirect effects, I find nothing but argued assertion in Horwitz.

I'm not even sure that Horwitz understands his own theory. Consider this assertion of the consistency of time preference and liquidity preference theories:

"Hill is implying that ... that cash trades off against such securities, ... that the demand for money is caused by interest rates and that, therefore, the interest rate is ... overwhelmingly a function of the supply and demand for money. However, the fact that I prefer the present to the future is intimately linked with the fact that the future is uncertain. ... I never denied that people hold money due to uncertainty. In fact, that is precisely why they hold it, as I have argued elsewhere ... The desire for liquidity or availability services is a manifestation of the more fundamental concept of time-preference. If I choose to sell bonds and acquire cash, this suggests that I am worried about the future and want cash so as to leave my options open. My time preferences have shifted toward the present. When I sell my bonds, bond prices fall and interest rates rise, as they should to reflect my concerns about the future. There is no contradiction between recognizing money's liquidity or availability services and a time preference theory of the interest rate." -- Horwitz (1998)

Time preference relates to time profile of ones desired consumption stream, to whether one wants to consume goods now or later. A change in what assets one holds for transferring purchasing power in the future is not a manifestation of a change in time preference. When the financial value of my savings and income stay unchanged, but I change the assets in which my savings are held to be more liquid, my time preferences have not not shifted, toward the present or otherwise.

By the way, Horwitz points out in his second reply to Hill that he is not arguing about theories that describe actually existing economies. He is explaining how the world would work if his utopian blueprint, especially for the banking system was adopted. I like how supposed fans of Hayek exhibit no appreciation for Popper.

References

• Allin Cottrell (1996?) "Comment on Horwitz's Article", Journal of the History of Economic Thought, V. 18, N. 2 (Fall): 308-313
• Greg Hill (1996a) "The Moral Economy: Keynes's Critique of Capitalist Justice", Critical Review, V. 3: 411-434 [I need to read this]
• Greg Hill (1996b) "Capitalism, Coordination, and Keynes: Rejoinder to Horwitz" Critical Review, V. 10, N. 3: 373-387 [I need to read this]
• Steven Horwitz (1996a) "Capital Theory, Inflation, and Deflation: The Austrians and Monetary Disequilibrium Theory Compared", Journal of the History of Economic Thought, V. 18, N. 2 (Fall): 278-307
• Steven Horwitz (1996b?) "Reply to Cottrell", Journal of the History of Economic Thought, V. 18, N. 2 (Fall): 314-318
• Steven Horwitz (1996c) "Keynes on Capitalism: Reply to Hill", Critical Review, V. 10, N. 3 (Summer): 353-372
• Steven Horwitz (1998) "Keynes and Capitalism One More Time: A Further Reply to Hill", Critical Review, V 12, N. 1/2 (Winter-Spring): 95-111
• Steven Horwitz (2000) Microfoundations and Macroeconomics: An Austrian Perspective, Routledge