Murphy On Sraffa's Victory In Debates On ABCT

Robert P. Murphy has provided electronic access to his article, "Multiple Interest Rates and Austrian Business Cycle Theory". Murphy presented this paper at a Liberty Fund conference a number of years ago. (At least one other has commented on this paper. Has Murphy on his blog brought up his papers, also growing out of his PhD thesis, in the Journal of the History of Economic Thought?)

Many fanboys of so-called Austrian economics that you may meet, especially on the Internet, are ignorant of economics, including the economics of the Austrian school. For some reason, proclaiming themselves to be members of this tribe and moralizing about outsiders fills an emotional need for some. Even among academics adhering to this school, I have noticed little discussion, for example, of the distinction between Mises' Evenly Rotating Economy and Hayek's notion of plan compatibility in an intertemporal equilibrium. (I can provide caveats.)

These strictures do not apply to Murphy. He is fully aware of this distinction. And he accepts that the variation of own rates of interest among commodities outside steady states overthrows Hayek's exposition of Austrian Business Cycle Theory (ABCT) in Prices and Production. Murphy should and does acknowledge the correctness of Sraffa on this point in his debate with Hayek over ABCT.

In my critique of ABCT (on other grounds), I end up with a bibliography consisting almost exclusively of recent work by heterodox economists. Murphy's bibliography is like this, except his heterodox economists are drawn exclusively from one school.

Nevertheless, Murphy should include a selection of references from other traditions, including mainstream economics. No matter what one may think of mutualism, Kevin Carson (2004) is not a good cite for "a modern statement of classical price theory". Kurz and Salvadori (1995) is a more canonical modern statement. Debreu (1959) and Arrow & Hahn (1971) are standard references for intertemporal equilibrium. Hahn (1982) explains how own-rates of interest vary among goods in such models. Boehm (1986) strives to distinguish the mainstream concept of intertemporal equilibrium from Hayek's. Hicks (1946) and Grandmont (1977) are two canonical statements of temporary equilibrium. Samuelson (1958), Diamond (1965), Benhabib (1992 & 2008) and Geanakoplos (2008) describe Overlapping Generations (OLG) models.

Economists have established, I think, that conditions on the parameters of short-run equilibrium models (e.g., in intertemporal and temporary equilibrium models) fail to limit the dynamics of equilibrium paths in such models. I like to draw on the Cambridge Capital Controversies and on the Sonnenschein-Mantel-Debreu theorem to argue for this result.

Since the dynamics are unlimited, one should be able to construct examples in such models of cycles. Of the literature I have read, I find, perhaps because of my own limitations, too few concrete examples. It is my understanding that cycles can arise in these models, even if expectations are being fulfilled and plans continue unchanged. This may be an unduly restrictive approach to expectations, but, given the current hegemony of neoclassical economics, other approaches need an explicit motivation. Post Keynesians and, I guess, the Austrian school have such a motivation in their emphasis on historical time. But I do not see Murphy connecting up this emphasis to his story in his paper. (I need to reread his section on "Meeting Sraffa's Objection" with more attention to ensure the story is coherent.) Murphy wants agents in his story to make mistakes through responses to the monetary authority. But these are basically barter models. Introducing money into such models is challenging, and Murphy might want to examine some attempts in the literature.

I think established results should lead one to drop an insistence on methodological individualism (or microfoundations) in macroeconomic research along these lines. In any case, I fail to see what is specifically "Austrian", especially inasmuch as the Austrian school relates to the ABCT, about such a description of business cycles.

Bibliography

• Kenneth J. Arrow and Frank H. Hahn (1971). General Competitive Analysis, Holden-Day [I haven't read this].
• Jess Benhabib (editor) (1992). Cycles and Chaos in Economic Equilibrium, Princeton University Press [I haven't read this].
• Jess Benhabib (2008). "Chaotic Dynamics in Economics", in The New Palgrave Dictionary of Economics, 2nd edition. (ed. by S. N. Durlauf and L. E. Blume), Palgrave Macmillan.
• Stephan Boehm (1986). "Time and Equilibrium: Hayek's Notion of Intertemporal Equilibrium Reconsidered" in Subjectivism, Intelligibility, and Economic Unerstanding (ed. by I. M. Kirzner), New York University Press.
• Kevin A. Carson (2004). Studies in Mutualist Political Economy.
• Gerard Debreu (1959). Theory of Value: An Axiomatic Analysis of Economic Equilibrium, Yale University Press.
• Peter A. Diamond (Dec. 1965). "National Debt in a Neoclassical Growth Model", American Economic Review, V. 55, Iss. 5: 1126-1150.
• John Geanakoplos (2008). "Overlapping Generations Model of General Equilibrium", in The New Palgrave Dictionary of Economics, 2nd edition. (ed. by S. N. Durlauf and L. E. Blume), Palgrave Macmillan.
• Jean Michel Grandmont (Apr. 1977). "Temporary General Equilibrium Theory", Econometrica, V. 45, N. 3: 535-572.
• Frank Hahn (1982). "The Neo-Ricardians", Cambridge Journal of Economics, V. 6: 353-374.
• J. R. Hicks (1946). Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory, 2nd edition, Oxford University Press,
• Heinz D. Kurz and Neri Salvadori (1995). Theory of Production: A Long-Period Analysis, Cambridge University Press.
• Robert P. Murphy. "Multiple Interest Rates and Austrian Business Cycle Theory".
• Paul A. Samuelson (Dec. 1958). "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money", Journal of Political Economy, V. 66, N. 6: 467-482.

Against Hegemony Of "Overton Window"

I don't see why some people are so willing to talk about the "Overton Window". Another theory is available to discuss how and why some range of ideas become hegemonic in a society. And this is a theory of politics that was formulated when the left was doing poorly.

Actually, reading more of Antonio Gramsci's prison writings has been and probably will continue to be on my to-read list for a long time.

Some More On Hayek And Sraffa

1.0 Introduction
I have previously discussed Sraffa's review of Prices and Production, Hayek's reply, and Sraffa's rejoinder. I thought I would bring up today a couple of other aspects of that debate.

2.0 Hayek Changes His Notion Of Equilibrium
The traditional neoclassical equilibrium concept, in the period roughly from 1870 to 1930, is roughly of a stationary state. Neoclassical economists in this period erroneously thought that one could define such an equilibrium, given tastes, technology, and endowments, including the endowment of capital, by some or another definition of capital. As Walras recognized, such an equilibrium can never be expected to be established. At most, actual capitalist economies can be expected to be tending towards this kind of equilibrium at any point in time.

This was Hayek's equilibrium concept in Prices and Production. He put forth another equilibrium concept in The Theory of Capital, a concept he had been developing for some time. (Hayek is very clear on this in Chapter 2.) This equilibrium concept is of plan compatibility, a concept formally equivalent in some sense to the Arrow-Debreu model of intertemporal equilibrium.

Given spot prices, a monetary interest rate, and the past history of an economy, entrepreneurs, based on their economic theories, form expectations about future prices and the expectations and plans of others. They form their plans based on these expectations. Equilibrium exists if all these plans are mutually compatible. Under this equilibrium concept, no need exists for entrepreneurs to plan to produce the same quantities period after period. Likewise, consumers might plan to consume different quantities in different periods. Furthermore, entrepreneurs and consumers will generally expect spot prices to vary over time.


Hayek's equilibrium concept of plan compatibility, as I understand it, cannot be used to ground Austrian Business Cycle Theory.

3.0 Austrian Business Cycle Theory Outside Of Historical Time
Sraffa destroyed Hayek's version of Austrian Business Cycle Theory, as Robert Skidelsky notes.

I am amused in noting part of Sraffa's critique. Keynes sets his General Theory in historical time, not logical time. I read Sraffa as pointing out that Hayek's theory, like neoclassical theory on Keynes's reading, is set in logical time:

"That the position reached as the result of 'voluntary saving' will be one of equilibrium... is clear enough; though the conclusion is not strengthened by the curious reason he gives for it.¹³

But equally stable would be that position if brought about by inflation; and Dr. Hayek fails to prove the contrary. In the case of inflation, just as in that of saving, the accumulation of capital takes place through a reduction in consumption. 'But now this sacrifice is not voluntary, and is not made by those who will reap the benefit from the new investments... There can be no doubt that, if their money receipts should rise again [and this rise is bound to happen as Dr. Hayek promises to prove] they would immediately attempt to expand consumption to the usual proportion', that is to say, capital will be reduced to its former amount; 'such a transition to less capitalistic method of production necessarily takes the form of an economic crisis'...

As a moment's reflection will show, 'there can be no doubt' that nothing of the sort will happen. One class has, for a time, robbed another class of a part of their incomes; and has saved the plunder. When the robbery comes to an end, it is clear that the victims cannot possibly consume the capital which is now well out of their reach. If they are wage-earners, who have all the time consumed every penny of their income, they have no wherewithal to expand consumption. And if they are capitalists, who have not shared in the plunder, they may indeed be induced to consume now a part of their capital by the fall in the rate of interest; but not more so than if the rate had been lowered by the 'voluntary savings' of other people.

¹³The reason given is that 'since, after the change had been completed, these persons [i.e., the savers] would get a greater proportion of the total real income, they would have no reason' to consume the newly acquired capital... But it is not necessarily true that these persons will get a greater proportion of the total real income, and if the fall in the rate of interest is large enough they will get a smaller proportion; and anyhow it is difficult to see how the proportion of total income which falls to them can be relevant to the 'decisions of individuals'. Dr. Hayek, who extols the imaginary achievements of the 'subjective method' in economics, often succeeds in making patent nonsense of it." -- Piero Sraffa (March 1932)

And again:

"The first question is whether, as Dr. Hayek asserts, the capital accumulated by 'forced saving' will be, 'at least party' dissipated as soon as inflation comes to an end: 'It is upon the truth of this point that my [Dr. H's] theory stands or falls'. My simple-minded objection was that forced saving being a misnomer for spoliation, if those who had gained by the inflation chose to save the spoils, they had no reason at a later stage to revise the decision; and at any rate those on whom forced saving had been inflicted would have no say in the matter. This appeal to common sense has not shaken Dr. Hayek: he describes it as 'surprisingly superficial', though unfortunately he forgets to tell me where it is wrong." -- Piero Sraffa (June 1932)

The distribution of endowments - who owns what - is a datum for traditional neoclassical theory. Disequilibria employment, production, and purchases will change this data. So one cannot expect, contrary to Hayek, the previous equilibra corresponding to previous data to be restored after the economy is on some disequilibrium path for some extended time.

Sraffa, like later Post Keynesians, suggested a coherent economic theory must be set in historic time.

References

• P. Garegnani (1976) "On a Change in the Notion of Equilibrium in Recent Work on Value and Distribution", reprinted in Keynes's Economics and Theory of Value and Distribution (edited by J. L. Eatwell and M. Milgate, 1983), Oxford University Press.
• F. A. Hayek (1935) Prices and Production, 2nd. Edition, Routledge and Sons.
• F. A. Hayek (June 1932) "Money and Capital: A Reply", Economic Journal, V. 42: 237-249.
• F. A. Hayek (1941) The Pure Theory of Capital, University of Chicago Press.
• M. Milgate (1979) "On the Origin of the Notion of 'Intertemporal Equilibrium'", Economica, V. 46, N. 1: 1-10.
• P. Sraffa (March 1932) "Dr. Hayek on Money and Capital" Economic Journal, V. 42: 42-53.
• P. Sraffa (June 1932). "A Rejoinder", Economic Journal, V. 42: 249-251.

Against The TSSI: Some Literature

The Temporal Single System Interpretation (TSSI) is a reading of Marx in which Marx's theory of value, including his approach to the transformation problem, is internally consistent. I think of Alan Freeman and Andrew Kliman, among the extensive community developing the TSSI, as the most prominent advocates. And, for me, Andrew Kliman's book, Reclaiming Marx's "Capital": A Refutation of the Myth of Inconsistency (Lexington Books, 2007) is the canonical statement, for now, of the TSSI. (I have already posted some initial reactions to Kilman's book.)

The purpose of this post is to list some literature criticizing the TSSI, often harshly. At least some of the articles in the bibliography have replies and responses. Despite the tone of some of this literature, I think the TSSI worth engaging with. On my lengthy to-do list is, some day, to carefully step through Kliman's refutation of the Okishio theorem and through refutations of Kliman's refutation. The Okishio theorem refutes Marx's law of the declining rate of profit.

If one were curious about what Marxists economists have to say today, one might browse recent back issues for some of these journals.

Bibliography

• Simon Mohun and Roberto Veneziani (Summer 2007) "The Incoherence of the TSSI: A Reply to Kliman and Freeman", Capital and Class, V. 31: 139-145.
• Gary Mongiovi (Fall 2002) "Vulgar Economy in Marxian Garb: A Critique of Temporal Single System Marxism", Review of Radical Political Economics, V. 34, N. 4: 393-416.
• Ernesto Screpanti (Jan. 2005) "Guglielmo Carchedi's 'Art of Fudging' Explained to the People", Review of Political Economy, V. 17, N. 1: 115-126.
• Ajit Sinha (Summer 2009) "Book Review: Reclaiming Marx's 'Capital'", Review of Radical Political Economics: 422-427
• Roberto Veneziani (2004) "The Temporal Single-System Interpretation of Marx's Economics: A Critical Evaluation", Metroeconomica, V. 5, N.1: 96-114.
• Roberto Veneziani (Fall 2005) "Dynamics, Disequilibrium, and Marxian Economics: A Formal Analysis of Temporal Single-System Marxism", Review of Radical Political Economics, V. 37, N. 4: 517-529.

Too Long; Didn't Read

Tom Walker mentions Paul Lafargue The Right to be Lazy. I started reading this book months ago and did not get much further than the description of the horrors of nineteenth century working conditions. Is not finishing in the spirit of the piece?

J. R. Hicks' Use of "Malinvestment"

In the influential Value and Capital: An Inquiry Into Some Fundamental Principles of Economic Theory (2nd edition, Oxford, 1946), J. R. Hicks writes:

"...it is the strict interpretation - divergence between expected and realized prices - which is of central importance theoretically. Whenever such a divergence occurs, it means (retrospectively) that there has been malinvestment and consequent waste. Resources have been used in a way in which they would not have been used, if the future had been foreseen more accurately; wants, which could have been met if they had been foreseen, will not be satisfied or will be satisfied imperfectly. Thus, disequilibrium is a mark of waste, and imperfect efficiency of production." -- J. R. Hicks, p. 133, my emphasis.

This passage occurs in Hicks' introduction of the method of temporary equilibrium. I think Hicks relied heavily on Hayek in developing this method¹. But I see a large difference in Hicks' use of "malinvestment" here and Hayek's account in Prices and Production.

For Hayek's version of ABCT, malinvestment occurs when entrepreneurs more or less share the same systematic expectations and plans. In explaining business cycles, he abstracts from non-systematic mistakes in capital investments. Hayek thinks entrepreneurs will invest in too capital-intensive techniques when monetary authorities set the interest rate too low. They will tend to adopt a capital structure in too many high-order goods and not enough low-order goods are produced, as compared to the capital-structure justified by consumer tastes².

Hicks, on the other hand, is considering a case in which all spot markets clear, but some ongoing production could be the result of variation among entrepreneurs in expectations or plans. Since some expectations or plans are incorrect, he characterizes this state as a disequilirium. Hicks does not posit a systematic bias in plans or expectations for his use of the term "malinvestment". Consequently, his business cycle theory is quite different from Hayek's.

Footnotes

1. Hicks mentions Hayek in his acknowledgments. I'm surprised to see he also acknowledges criticisms from Sraffa.
2. This theory cannot be sustained.

Robert Nozick, The Refutation Of Rational Choice, Etc.

"Robert Nozick has a unique place in the annals of rational choice theory: he refuted it." -- Ian Hacking (1994)

My reaction, when reading this, was, "What?" Hacking is referring to a paper by Robert Nozick¹ on Newcomb's Paradox. I'm fairly sure I've read something about this paradox, but I had to look it up.

Suppose there exists a psychic that has shown themselves to be extremely reliable in their predictions. And the psychic has presented you with a choice, based on one of their predictions. You are presented two boxes, one transparent and one wrapped such that you cannot see the contents. The rules are that you can take either:

• Just the opaque box, or
• Both boxes.

The transparent box contains $1,000, as you can plainly see. If the psychic has predicted you will pick just the opaque box, they have placed $1,000,000 in it. If they have predicted you will pick both boxes, they have ensured that the opaque box contains nothing. The prediction has been made, and the boxes have been sealed. You know all these conditions but not what the prediction was. What should you do?

Apparently many initially are very decided on what they would do. But people split half-and-half on what that is. Anyways, Hacking states that this example shows that two principles of rational decision-making are not necessarily consistent². I guess he is correct, and I'm in no position to challenge that this is of philosophical interest³. But, since no such psychic can exist, I find other examinations of rational choice theory of more practical import.

By the way, I want to give a qualified defense of Stephen Metcalfe's comments in Slate on Nozick's Wilt Chamberlin example⁴. Strictly speaking, Metcalf's confusion about which Keynes comment was on which Hayek book is irrelevant to these comments later in the article⁵. And I accept that he doesn't describe the logic of Nozick's argument⁶. Neither did I. It is perfectly legitimate to argue that the rhetorical force of the argument comes from elements of the argument extraneous to its strict logic. And that is what Metcalf does⁷.

Footnotes

1. Nozick's "Reflections On Newcomb's Paradox" (in Knotted Doughnuts and Other Mathematical Entertainments (ed. by M. Gardner), W. H. Freeman, 1986).
2. Choose dominant strategies. Maximize mathematical expected utility.
3. I find Wittgenstein perennially fascinating.
4. Metcalf's Slate followup is here.
5. So is the fact that Nozick was smoking dope during the period in which he wrote Anarchy, State, and Utopia; I was startled to find he mentions in his book his experiences while under the influence. More by Brad DeLong on Nozick is here. Even more can be found in the Delong's blog archives.
6. By the way, Yglesias is mistaken in concluding, "Since as best I can tell nobody does hold such a [patterned] theory [of distribution]". Nozick explicitly states that marginal productivity gives such a patterned theory. Nozick is confused, since marginal productivity, correctly understood, is a theory of the choice of technique, not a theory of distribution.
7. Although I am not convinced appealing to guilty regret over the history of race relations in the United States has anything to do with Nozick's rhetoric.

Really, Really Free Market

I stumbled upon this idea recently. Not that I've ever physically seen such a market.

Elsewhere

• Alejandro Nadal asks, "Whatever happened to stability analyisis?" (h/t: Brad DeLong).
• A blogger with the pseudonym of "Lord Keynes" critiques Austrian Business Cycle Theory, based on Sraffa's demonstration of the non-uniqueness of the "natural" rate of interest in an intertemporal equilibrium.
• Jayati Ghosh provides access, from here, to an essay surveying Michal Kalecki's contributions to development economics.

A Popular Exposition Of Post Keynesianism

I have stumbled across a commentator, Tim Bending, at Open Democracy has been explaining some practical implications of Post Keynesianism. I particularly like this exposition of the theoretical incoherence of marginal productivity as a theory of the distribution of income.

Numeraire-Free Tests Of The Labor Theory Of Value

A reminder to my self - the following article belongs on this list.

• Mariolis, Theodore and George Soklis (2011) "On Constructing Numeraire-Free Measures of Price-Value Deviation: A Note on the Steedman-Tomkins Distance" Cambridge Journal of Economic, V. 35, N. 3: 613-618.

Three Routes To Choice

A theme of this blog is the incorrectness of the neoclassical textbook description of how agents choose. The assumptions of this view can be stated as:

1. An agent knows the complete list of choices from which they must select.
2. Given any two elements from this space of choices, the agent knows whether one of these elements is not preferred to the other.
3. Any element from this space is not preferred to itself.
4. The ranking obtained from the preference relation is transitive.
5. If the space of choices is a continuum, a certain continuity assumption must hold for the preference relation so as to rule out lexicographic preferences.

These assumptions supposedly imply the claim that utility attains at most an ordinal measurement scale level¹. And they allow one to derive the demand for consumer goods and the supply of factors of production.

Economists have transcended this framework. I have previously pointed out models of agents as consisting of multiple selves. I think this approach exhibits a consilience with theories in, for example, cognitive psychology. I have recently stumbled upon two other ways of modeling choice, generalizing the textbook view to an approach more consistent with empirical evidence from behavioral economics and that cannot be justifiably characterized as "irrational".

Nadeem Naqvi has developed an approach of incorporating tertiary information into choice. In the outdated neoclassical theory, one might represent the relationship y is not preferred to x for agent i by:

x R_i y

Naqvi and his colleaques introduce the relation R_i(V_i^j), where V_i^j is the background set for agent i. Parametric variation in the agent’s background set can alter the agent’s preferences. That is, one can have, for l ≠ m:

x R_i(V_i^l) y

and

y R_i(V_i^m) x

One interesting consequence of this modeling strategy is that racial discrimination is formally consistent with Pareto optimality. This "is a surprising, though serious, indictment of relying exclusively on the Pareto principle in social evaluation."

Gul and Pesendorfer consider choice among menus. They consider an agent who is a vegetarian for health reasons, but who is tempted to choose hamburgers, if available. In choosing a restaurant at noon, they would prefer a restaurant with hamburgers on the menu. But in choosing in the morning a restaurant to visit at noon, they will select one with an all-vegtable menu. I hope you can see how this approach allows one to analyze time-consistency of choices.

How long do you think before such approaches are presented in mainstream textbooks in widespread use?

Footnotes:
¹ Nominal, ordinal, interval, and ratio are well-known measurement scale level, where a level is defined up to a set of transformations. I find curious the claim that the expression of the marginal rate of transformation as a ratio of marginal utilities is consistent with an ordinal scale. Mirowski, in More Heat Than Light has also raised questions about the claim that utility only attains an ordinal scale level. I recently stumbled upon Mandler (2006), where he suggests, not necessarily for related reasons, utility be considered to attain a measurement scale level between ordinal and interval.

References

• George A. Akerlof and Rachel E. Kranton (2010) Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being, Princeton University Press (TO READ).
• Arian Berdellima and Nadeem Naqvi (2011) "Existence of a Pareto optimal social interaction with non-binary preferences".
• Frank Gul and Wolgang Pesendorfer (November 2001) "Temptation and Self-Control", Econometrica, V. 69, N. 6: 1403-1435.
• Michael Mandler (September 2006) "Cardinality versus Ordinality: A Suggested Compromise", American Economic Review, V. 96, N. 4: 1114-1136.
• Nadeem Naqvi (2010) "On Non-binary Personal Preferences, Economic Theory and Racial Discrimination".

Play It Cool, Daddy-O

1.0 Introduction "Is Von Neumann Square?" is one of my favorite titles for an article in economics¹. This post is about a case in which Von Neumann is more hep². Sraffa’s book presents a succession of models in which, after the second chapter, the system of price equations have one degree of freedom. This is usually taken to be a trade-off between wages and the rate of profits. Once the distribution of the surplus product is exogenously specified, prices are determined. Some, such as Michael Mandler and Paul Samuelson, have criticized Sraffian economics on the basis that this number of degrees of freedom is arbitrary. Cases can arise in which the system of price equations has either more or less than one degree of freedom. This post illustrates a case in which more than one degree of freedom exists. 2.0 The Example 2.1 Technology and Quantity Flows Consider a very simple economy in which laborers produce corn from seed corn on lands of definite types. Two types of land are available. Assume that this economy has 100 acres of land of each type available. Two Constant-Returns-to-Scale processes are known for producing corn. As shown in Table 1, each process requires inputs of a single type of land, as well as labor and seed corn. The technology is such that the order in which types of land will be rented can be read off directly from the technology. As I have previously pointed out, this is not a general property in long period models analyzing rent. I think this special case property, however, is not what drives the existence of possibly more than one degree of freedom.

Table 1: The Technology

	α Process	β Process
Labor	1 person-year	1 person-year
Type I Land	1 acre	0 acre
Type II Land	0 acre	1 acre
Corn	1/5 bushels	1/4 bushels
Outputs	1 bushel corn	1 bushel corn

Under the assumptions, anywhere from zero to 200 bushels of corn can be produced as gross output in this economy. Assume that the gross output of this economy is 100 bushels of corn. Then cost-minimizing firms will cultivate all of type I land, and all of type II land will lie fallow. 2.2 The Price System For stationary-state prices, no process can earn pure economic prices. This condition imposes the following inequalities:

(1/5)(1 + r) + ρ₁ + w ≥ 1

(1/4)(1 + r) + ρ₂ + w ≥ 1

• w is the wage (bushels per person-year), paid at the end of the year
• r is the rate of profits
• ρ1 is the rent (bushels per acre) on type I land, paid at the end of the year
• ρ2 is the rent (bushels per acre) on type II land, paid at the end of the year

An equality applies for any process in use. Land of a given type can be modeled, in an alternative specification of the technology, as jointly produced at the end of the period from the inputs of labor, seed corn, and that type of land³. As long as less than 200 bushels of corn are produced, at least one type of land will pay no rent:

ρ₁ ρ₂ = 0

2.2.1 First Special Case Consider what would happen if the gross output was infinitesimally less. Both types of land would be in excess supply. The rent on both would be zero:

ρ₁ = ρ₂ = 0

The solution in this case is:

0 ≤ r ≤ 4

w = (1/5)(4 - r)

Only type I land is cultivated. The number of processes in use is equal to the number of produced commodities, that is produced goods with a positive price. The system of price equations has one degree of freedom.

(1/5)(1 + r) + ρ₁ + w = 1

(1/4)(1 + r) + ρ₂ + w > 1

2.2.2 Second Special Case Consider, however, what would happen if the gross output was infinitesimally more. Both types of land would be cultivated. Type I land would not be able to produce all the output quantity needed for the requirements for use, and it would have a positive rent:

ρ₁ > 0

Type II land would be in excess supply, and it would have a rent of zero.

ρ₂ = 0

The price system becomes:

(1/5)(1 + r) + ρ₁ + w = 1

(1/4)(1 + r) + ρ₂ + w = 1

The solution is:

0 ≤ r ≤ 3

w = (1/4)(3 - r)

ρ₁ = (1/20)(1 + r)

Two produced commodities with positive prices exist: corn and the first type of land. And two processes are activated. 2.2.3 The Case With Two Degrees of Freedom But type II land does not need to be cultivated in the case under consideration. Thus, the costs of cultivating type II land can exceed the revenues, and the rent on Type I land is not determined by the price equations. Only the first equation in the system of equations for prices need obtain.

(1/5)(1 + r) + ρ₁ + w = 1

The second process is still characterized by an inequality:

(1/4)(1 + r) + ρ₂ + w ≥ 1

This system has the solution:

0 ≤ r ≤ 4

0 ≤ ρ₁ ≤ (1/20)(1 + r)

ρ₂ = 0

w = (1/5)(4 - 5ρ₁ - r)

Figure 1 illustrates one projection of this solution into two dimensions. The lines closer to the origin are drawn for a higher rent on the first type of land.

Figure 1: Variation in the Wage-Rate of Profits Frontier with Rent

3.0 Conclusions I am loath to argue that the extra degree of freedom in this example is negligible since it arises only for a knife-edge. If the quantity produced is a hair larger or a hair smaller, the input-output matrices for commodities with positive prices are square. But in a larger model, the quantity produced is a choice variable. I also don't see why Sraffian models must not have more than one degree of freedom. Footnotes ¹ If I’ve actually read this article, it must have been in a reprint in some collection. ² Some posts take me a while to write. I began this one the day after Arthur Laurents died. ³ I don't here show the derivation of rent from such a model. References

• Christian Bidard (1986) "Is Von Neumann Square?" Journal of Economics, V. 46: pp. 407-419.
• Michael Mandler (20xx) "Sraffian Economics (new developments)" New Palgrave, 2nd edition.

Austrian Welfare Economics Confused

In my critique of Austrian Business Cycle Theory, I cite some critiques of the Austrian school. Hill (2004) and Gloria-Palermo & Palermo (2005) critiques I do not cite.

Palermo and Palermo focus on how Austrian school economists reach normative conclusions. They put aside the influence of values in, for example, choosing the questions one addresses in one's positive analysis. For Austrian school economists, the idea of coordinated plans acts as a bridge from their positive theory to their normative claims. A state in which all agent's plans are coordinated is thought to be a desirable state by Austrian school economists. They claim that a market system has a tendency towards such a state without ever reaching it. Since then market systems are always in an undesirable state in which some agents' plans are mutually inconsistent and uncoordinated, why do Austrian school economists, in their nascent normative analysis, not conclude that market systems are undesirable?

• Greg Hill (2004). "From Hayek to Keynes: G.L.S. Shackle and Our Ignorance of the Future". Critical Review.
• Sandye Gloria-Palermo & Giulio Palermo (2005). "Austrian Economics and Value Judgements: A Critical Comparison with Neoclassical Economics". Review of Political Economy, V. 17, N. 1 (Jan.): pp. 63-78.

Quiggin's Optimism Of The Intellect

Quiggin says much in Zombie Economics: How Dead Ideas Still Walk Among Us I agree with. I see no reason, however, to believe that economists will follow this recommendation or that this is the best way for economists to model actually-existing more-or-less capitalist economies:

"A new project in the D[namic] S[tochastic] G[eneral] E[quilibrium] framework will typically, as Blanchard indicates, begin with the standard general equilibrium model, disregarding the modifications made to that model in previous work examining the other ways in which the real economy deviated from the modeled ideal.

By contrast, a scientifically progressive program would require a cumulative approach, in which empirically valid adjustments to the optimal general equilibrium framework were incorporated into the standard model taken as the starting point for research. Such an approach would imply the development of a model that moved steadily further and further away from the standard general equilibrium framework, and therefore became less and less amenable to the standard techniques of analysis associated with that model." -- John Quiggin, Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton University Press, 2010)

I was inspired by this Crooked Timber thread to post this.

Picoeconomics: A New Vocabulary Word For Me

I have previously described models of agents divided in mind. And I have noted that akrasia is defined as the phenomenon of acting against one's own best judgement.

I find that George Ainslie uses the term picoeconomics to describe the study of the interaction of components of a mind in individual behavior and decision-making. Microeconomics is, in some sense, the study of the interactions of individuals in determining economic behavior. Picoeconomics is an analysis on an even smaller scale. I also found a website for this subject¹.

By the way, picoeconomics is not necessarily a non-mainstream field of economics. For example, Glen Weyl (2009), a very young mainstream economist trained at some of the most prestigious economics departments in the United States, adopts a model of an agent as a community. He uses this model to examine political individualism. If a community cannot have group rights and cannot have an unique ordering of choices², how can an individual have such rights when he may be just as divided in mind as a community?

One criticism of mainstream economists relates to their treatment of the literature. A mainstream economist can ignore long-established analytical tools to treat their subject, introduce some related analysis into orthodox models in an ad-hoc way, and never reference the previously-existing heterodox literature. I do not feel I have enough understanding of picoeconomics to say whether this criticism applies to mainstream and non-mainstream contributions to the field³.

Footnotes

• ¹ Is this Ainslie's website? I could not quickly find a name associated with the site?
• ² See the Arrow impossibility theorem.
• ³ I'm not even sure I know the field boundaries. My blogs posts on divided minds build on some literature by Amartya Sen. Some recent papers from Nadeem Naqvi and others build on later literature from Sen. They analyze agent decision-making, but, as I understand it, do not model the mind as composed of subagents. Does this literature fall within picoeconomics?

References

• George Ainslie (1992) Picoeconomics: The Strategic Interaction of Successive Motivation States within the Person, Cambridge University Press. (I haven't read this.)
• George Ainslie (2001) "Breakdown of Will" , Cambridge University Press. (I haven't read this.)
• G. Ainslie (October 2005) "Précis of Breakdown of Will" Behav. Brain Sci., V. 28, N. 5: 650-673.
• Arian Berdellima and Nadeem Naqvi (2011) "Existence of a Pareto optimal social interaction with with non-binary preferences".
• E. Glen Weyl (May 2009) "Whose rights? A critique of individual agency as the basis of rights" Politics, Philosophy & Economics, V. 8, N. 2: 139-171.

Monetarism And Marxism

I want to draw a parallelism between monetarism and marxist economics. I do not refer to the attempt by the United States Federal Reserve to implement Marx's theory of the reserve army of the unemployed. Rather, I think an analogy may exist between money and productive labor and their relationships to available empirical data.

If monetarists have a rigorous definition of money that picks out one unique time series, I do not know of it. Suppose they find some correlation between, say, M2 and a price level. And suppose that correlation subsequently breaks down. They need not take this as evidence against their theory. For they can always search for another time series for the quantity of money and a different price deflator.

Likewise, economists building on Marxism, as I understand it, have not settled upon a rigorous theoretical definition of the distinction between productive and non-productive labor. For example, I don't think Marx - especially in the first volume of Theories of Surplus Value - argues that all services are unproductive of surplus value. Rather, his distinction is between labor that produces surplus value and other labor. Duncan Foley finds a tighter correlation between real national income, excluding services, and non-farm employment than he does between all national income and non-farm employment. By my argument, I do not take this as dispositive evidence for Marx's distinction. I worry that which correlation works best can vary by time period and time series.

Nevertheless, I find Foley's analysis of interest. Finance, Insurance, and Real Estate (FIRE) certainly seems to need more analysis by economists in these days.

References

• Duncan K. Foley (2011) "The Political Economy of Output and Employment 2001-2010"
• James K. Galbraith, Olivier G. Giovannoni, and Ann J. Russo (2007) "The Fed's Real Reaction Function: Monetary Policy, Inflation, Unemployment, Inequality - and Presidential Politics"

Galbraith On Sociology Of Economics

I thought this short comment was interesting:

Figure 1: James Galbraith on Sociology of Economics

Provenance is, of course, no guarantee of the quality of art. But one thing that strikes me about dissenters and non-mainstream economists is that many have doctorates in economics from elite schools (e.g., Harvard, Yale, Cambridge), have taught at such elite schools, or might even be professors at such places. Is there any other discipline in which members treated as on the fringe have so many with such credentials?

Elsewhere

With the exception of the first two, these links seem more closely related than most I list. I ought to add something about the flash crash.

• Richard Thaler compares utility to aether, an imaginary substance that 19th century scientists thought existed.
• Matthew Yglesias misunderstands; he thinks Thaler’s comments apply only to macroeconomics.
• Donald MacKenzie describes the effects of automated trading algorithms on microsecond variations in stock market volumes:. Some of this sounds like network security applications. You have sniffers detecting what bots are doing, spoofers attempting to fool the sniffers, etc.
• Kieran Healy reviews MacKenzie's book describing finance theory as performative.
• A news story reports "Some Users Find the Speed of Light Too Slow for Their Networks", (IEEE Computer, V. 44, N. 4 (Apr. 2011): 18-19). These users are ones trying to decide where to locate their automated trading algorithms.
• K. J. Ray Liu describes how radio devices will use game theoretical algorithms to allocate spectrum. ("Cognitive Radio Game", IEEE Spectrum, V. 48, Iss. 4, Apr 2011: 40-56)

Models Building On Minsky

Some recent resources on Hyman Minsky:

• Gauti B. Eggertsson and Paul Krugman (2010) "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach"
• Steve Keen (15 March 2011) "The Debt Krugman Would Rather Forget", Business Spectator.
• Steve Keen (2011) "A Monetary Minsky Model of the Great Moderation and Great Recession", Journal of Economic Behavior & Organization
• Thomas I. Palley (April 2010)"The Limits of Minsky's Financial Instability Hypothesis as an Explanation of the Crisis", Monthly Review, V. 61, Iss. 11.
• Thomas I. Palley (2011) "A Theory of Minsky Super-Cycles and Financial Crises", Contributions to Political Economy.
• Lance Taylor and Stephen A. O'Connell (1985) "A Minsky Crisis", Quarterly Journal of Economics, V. 100, Supplement: pp. 871-885.

With some work, one can find downloadable copies of the above papers containing the formal models. In the more popular paper above, Keen criticizes Krugman for retaining flawed assumptions of mainstream macroeconomics. Why should anyone care at this point how a Dynamic Stochastic General Equilibrium (DSGE) model can be tweaked? Palley's Monthly Review article is also deliberately designed to generate controversy. He argues that Minsky's approach needs to be supplemented by more structuralist explanations.