Monday, December 31, 2007

Welcome

I study economics as a hobby. My interests lie in Post Keynesianism, (Old) Institutionalism, and related paradigms. These seem to me to be approaches for understanding actually existing economies.

The emphasis on this blog, however, is mainly critical of neoclassical and mainstream economics. I have been alternating numerical counter-examples with less mathematical posts. In any case, I have been documenting demonstrations of errors in mainstream economics. My chief inspiration here is the Cambridge-Italian economist Piero Sraffa.

In general, this blog is abstract, and I think I steer clear of commenting on practical politics of the day.

Monday, February 26, 2007

Richard Chase On Reswitching

"Thus the reswitching anomaly, along with its theoretical developments and implications, has been placed in abeyance. And so it must be, for if this criticism were taken as being no less applicable to the real world than the theoretical, then it follows, as already noted, that orthodox economics is unable to make any reliable statements concerning the relationship of production to the various input markets. That is, the neoclassical vision of a market-coordinated production system, along with derivative growth and distribution theories, are all invalidated. As a consequence, the nature of the entire traditional circular flow conception is called into question...

...It is one thing to say that this conception of indirect economic management does not satisfactorily achieve its goals because of the existence of such real-world problems as bottlenecks, power, premature inflation, inflationary expectations, random shocks, ratchet and spillover effects, and the like. In such situations, an economically coherent and consistent market-based system of production and distribution is still assumed to exist, though it is overlaid with political, institutional, and psychological factors that affect economic adjustments and performance. The basic strategy, in this case, would be to maintain the general neoclassical-synthetic emphasis on fiscal and monetary management (with perhaps somewhat greater stress on the monetary tool, if the monetarists were to have their way), and supplement these tools with finely targeted direct and specific devices - for example, stricter antitrust enforcement, more sharply focused incentive (and disincentive) taxes, expanded job training and subsidization programs - so as to allow and encourage the effective functioning of centerpiece fiscal and monetary devices.

It is quite another thing to argue that key markets in the system, particularly those in the resource or input sector, do not possess the fundamental economic characteristics necessary to the orderly systematic functioning that is postulated by mainstream theory..." -- Richard X. Chase, "Production Theory," in A Guide to Post-Keynesian Economics, (edited by Alfred S. Eichner), M. E. Sharpe, 1978, p. 79-80

Sunday, February 25, 2007

Diane Coyle for the Defense

"Would you agree with the following statement? '[Economists] should take credit for the deteriorating quality of existence. For it is their philistine notions of personal and national welfare that have helped to ruin the natural world; confused technology with culture; reduced art to money, time to interest, sexual relations to pornography, friendship to advantage, and liberty to shopping, and wasted whole generations who, because they have only been taught to think in categories of money, have, in Schopenhauer's phrase, "missed the purpose of existence".'

If so, you'd have plenty of company...

...What is truly bizarre about this persistent and frequent set of claims - economics ignores or over-simplifies reality, is based on a false conception of human nature, is only about money, thinks the world operates like a machine - is how untrue it is. Those who make the claims haven't been reading any of the economics published since about 1980. The caricature never represented reality all that accurately, but a whole generation of research has made it completely unrecognisable..." -- Diane Coyle (2007). "Economics, the Soulful Science"
What "whole generation of research" is Diane Coyle talking about? Presumably it would include literature making claims like the following:
"One thing we have learned for sure as a consequence of this programme of research is that [Expected Utility Theory] is descriptively false. Mountains of experimental evidence reveal systematic (i.e., predictable, not random) violations of the axioms of EUT, and the more we look, the more we find. This is not good news for the general economist, but there it is." - Chris Starmer (1999). "Experimental Economics: Hard Science or Wasteful Tinkering?", Economic Journal, V. 109, N. 453 (February): F5-F15
Somebody who is concerned to comment on the notion that economists "think the world operates like a machine" and emphasizes literature since, say, 1980 surely has read Philip Mirowski. (I'm fairly sure Deidre McCloskey and Paul Ormerod have, for example.) And I know Mirowski has read, for example, Starmer.

Mirowski is always quotable. Here are some quotations from one Mirowski essay:
"Because I am not a product of a successful socialization into the economics profession, lots of things that economists say strike me as funny. The idea we are paid according to our marginal productivity, for instance, rocks me as risible; the tendency to suggest the economy 'overheats' is a richly wrought satire. The doctrine that the market maximizes the freedom of a set of agents identical in all relevant respects is a joke worthy of Nietzsche...

...Asking me now to write on how I feel about economics journals is like asking a lamppost to write a memoir on dogs...

...when I read a particular economist's advocacy of regarding children as consumer goods, or another insists that Third World countries should be dumping grounds for toxic industrial wastes since life is cheap there, or a third proclaims that no sound economist would oppose NAFTA, or a fourth asserts confidently that some price completely reflects all relevant underlying fundamentals in the market, or a fifth pronounces imperiously that no credible theorist could recommend anything but a Nash equilibrium as the very essence of rationality in a solution concept, I do not view this as an occasion to dispute the validity of the assumptions of their 'models'; rather, for me, it is a clarion call to excavate the archaeology of knowledge which allows such classes of statements to pass muster, as a prelude to understanding what moral presuppositions I must evidently hold, given that I find them deeply disturbing..." - Philip Mirowski (1997). "Confessions of an Aging Enfant Terrible"

Friday, February 23, 2007

Maintaining Housing Capital

Wednesday, February 21, 2007

Roger Garrison, Correct to Mistaken

Roger Garrison knows that one concerned with the theory of interest better not be confused about units of measurement:
"The price of any factor is measured in terms of dollars per unit of the factor. Land rent is measured in $/(acre-year); the wage rate in $/(worker-hour); the service price of a capital good, say a machine, in $/(machine-hour). The interest rate is measured in frequency units, in inverse time. That is, the dimensions of the interest rate are 1/year - e.g. 10% per year. Any attempt to recast the interest rate as the price of a factor must be squared with this dimensional characteristic.

It can be seen immediately that the interest rate cannot be the price - or even the service price - of capital goods. The dimensions of $/machine - or of $/(machine-hour) - are not the same as the units of the interest rate." - Roger Garrison (1988, p. 50)
And he knows the textbooks to be misleading to wrong:
"The Fisherian analytics are simple enough, but the basic construction is conceptually flawed. Again, the issue of dimensions comes into play. The slope of the indifference curves has the dimensions of the interest rate (1/year). The slope of the opportunity curve must be dimensionally the same if the point of tangency is to have any intelligible meaning at all. If the slope is a marginal value product, then it must be the marginal value product of waitings not of capital. But as demonstrated in the previous section, the quantity of waiting is itself dependent upon factor prices, which in turn are dependent upon the interest rate. It cannot legitimately be argued, then, that the rate of interest has two independent co-determinants; one of those co-determinants is dependent upon the magnitude it supposedly helps to determine.

Modern textbook writers have attempted to skirt this problem by using a one-good model. In all such models, questions of value, which may be affected by changes in the rate of interest, simply do not arise. Value productivity and physical productivity are indistinct; productivity is modelled as the rate of increase in the quantity of the good. The phenomenon of interest is being analogized once again to sheep that reproduce or to plants that grow. But, as Professor Rothbard often reminds us, the rate of interest is a ratio of values, not of quantities. This modelling technique unavoidably conflates growth rates with interest rates and fails thereby to shed any light on the phenomenon of interest." - Roger Garrison (1988, p. 52-53)
Garrison knows that dimensional analysis has implications about the theory of capital:
"Suppose the current rate of interest (the price of waiting) is 5 per-cent and that the equilibrium quantity of waiting supplied and demanded is 1000 $-years, which consists of owning durable machines, whose current value is $1000, for one year. Now suppose that the demand for waiting increases. Simple supply-and-demand analysis would allow us to predict that the interest rate will rise, say from 5 to 10 percent, and that the quantity of waiting supplied and demanded will increase.

If the value of the machines could be assumed not to change, this prediction would be valid. But a rise in the interest rate will cause the value of the machines, which is simply the discounted value of the machines' future output, to fall. More specifically, the doubling of the rate of interest, which serves as the basis for the discounting, will cause the value of the machines to decrease from $1000 to $500. Owning those same machines for a year now constitutes only half the waiting. It is possible, then, that in the subsequent equilibrium, more machines will be owned for a longer period of time yet the amount of waiting, which is now based on a lower machine price, may be less than in the initial equilibrium." - Roger Garrison (1988, p. 51)
Here Garrison is just wrong:
"There is no ambiguity, however, about the direction of change in the rate of interest given a particular shift in supply or in demand. An increase in the demand for waiting, which is the same thing as a rise in time preferences, will cause the rate of interest to rise." - Roger Garrison (1988, p. 51)
  • Garrison, Roger W. (1988). "Professor Rothbard and the Theory of Interest", in Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard (edited by Walter Block and Llewellyn H. Rockwell, Jr.), Ludwig von Mises Institute

Monday, February 19, 2007

Hayek Versus Sraffa

I think Piero Sraffa talks his friend Friedrich Hayek into an absurd position here:
"Mr. Sraffa denies that the possibility of a divergence between the equilibrium rate of interest and the actual rate is a peculiar characteristic of a money economy. And he thinks that 'if money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might, at any moment, be as many "natural" rates of interest as there are commodities, though they would not be equilibrium rates.' I think it would be truer to say that, in this situation, there would be no single rate which, applied to all commodities, would satisfy the conditions of equilibrium rates, but there might, at any moment, be as many 'natural' rates of interest as there are commodities, all of which would be equilibrium rates; and which would all be the combined result of the factors affecting the present and future supply of the individual commodities, and of the factors usually regarded as determining the rate of interest. There can, for example, be very little doubt that the 'natural' rate of interest on a loan of strawberries from July to January will even be negative, while for loans of most other commodities over the same period it will be positive." -- F. A. Hayek (1932)

"I have only a few words to add on the second cardinal question, that of the 'money' and the 'natural' rates of interest. Dr. Hayek's ideal maxim for monetary policy, like that of Wicksell, was that banks should adopt the 'natural' rate as their 'money' rate for loans... I pointed out ... that when saving was in progress there would at any one moment be many 'natural' rates, possibly as many as there are commodities; so that it would be not merely difficult in practice, but altogether inconceivable, that the money rate should be equal to 'the' natural rate... Dr. Hayek now acknowledges the multiplicity of the 'natural' rates, but he has nothing more to say on this specific point than that they 'all would be equilibrium rates'. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates."-- Piero Sraffa (1932b)
So what does this victory of Sraffa over Hayek amount to? It's very puzzling, and you won't find any help here. This defeat for Austrian business cycle theory puzzled contemporaries too:
"I wish [Hayek] or someone would try to tell me in a plain grammatical sentence what the controversy between Sraffa and Hayek is about. I haven't been able to find anyone on this side who has the least idea." - Frank Knight to Oscar Morgenstern (as quoted by Caldwell)
Update: Some additional quotations for commentators' amusement:
"The starting-point and the object of Dr. Hayek's inquiry is what he calls 'neutral money'; that is to say, a kind of money which leaves production and the relative price of goods, including the rate of interest, 'undisturbed', exactly as they would be if there were no money at all...

...But the reader soon realizes that Dr. Hayek completely forgets to deal with the task which he has set himself... Being entirely unaware that it may be doubted whether under a system of barter the decisions of individuals would have their full effects, once he has satisfied himself that a policy of constant money would achieve this result, he identifies it with 'neutral money'; and finally, feeling entitled to describe that policy as 'natural', he takes it for granted that it will be found desirable by every right-thinking person. So that 'neutral' money ... in the end becomes 'our maxim of policy'.

If Dr. Hayek had adhered to his original intention, he would have seen at once that the differences between a monetary and a non-monetary economy can only be found in those characteristics which are set forth at the beginning of every textbook on money. That is to say, that money is not only the medium of exchange, but also a store of value, and the standard in terms of which debts, and other legal obligations, habits, opinions, conventions, in short all kinds of relations between men, are more or less rigidly fixed. As a result, when the price of one or more of these commodities changes, these relations change in terms of such commodities; while if they had been fixed in commodities, in some specified way, they would have changed differently, or not at all..

It would be idle to rehearse these platitudes had not Dr. Hayek completely ignored them... The money which he contemplates is ... used purely and simply as a medium of exchange. There are no debts, no money-contracts, no wage-agreements, no sticky prices in his suppositions..." -- Piero Sraffa (1932a)
References
  • Hayek, F. A. (1932). "Money and Capital: A Reply", Economic Journal (reprinted in Hayek 1995), V. 42 (June): 237-249
  • Hayek, F. A. (1995). The Collected Works of F. A. Hayek: Volume 9: Contra Keynes and Cambridge: Essays, Correspondence (edited by Bruce Caldwell), University of Chicago Press
  • Sraffa, Piero (1932a). "Dr. Hayek on Money and Capital", Economic Journal (reprinted in Hayek 1995), V. 42 (March): 42-53.
  • Sraffa, Piero (1932b). "A Rejoinder", Economic Journal (reprinted in Hayek 1995), V. 42 (June): 249-251

Friday, February 16, 2007

Andrew Kliman's Latest

I have just started reading Andrew Kliman's new book, Reclaiming Marx's "Capital": A Refutation of the Myth of Inconsistency. I haven't read the earlier The New Value Controversy and the Foundations of Economics, but I have read the even earlier Marx and Non-Equilibrium Economics and numerous journal and conference papers. The literature on the Temporal Single System Interpretation (TSSI) is large. Some of it consists of criticism by Sraffians. The New Interpretation (NI) of Gérard Duménil and Duncan Foley is also at play in recent literature on Marx's transformation problem. And some contributions have been made by scholars who might not self-identify with the interpretations put forward by any of these three schools.

I think I might have first read Alan Freeman in his contribution to Ricardo, Marx, Sraffa. I know I did not appreciate that essay as a developed interpretation of Marx's mathematical economics. It is only with later works that I saw something in the TSSI to agree or disagree with.

And generally I do disagree. I think both Freeman and Kliman write clear and amusingly, unlike the Hegelese some of their colleagues sometimes use. I can see how Marx was interpreted as consistent in his analysis of the transformation problem, even prior to the development of the TSSI. Unlike Kliman's claims for the TSSI, Eatwell's Sraffian interpretation does not maintain the law of the falling rate of profit. I thought Kliman was just wrong in his claim to refute the Okishio theorem, but I see that he has not conceded a mistake.

I did think about taking a pass on Kliman's book, since I think I may be familiar with the argument. I am interested in what textual evidence he put forwards for the TSSI interpretation. I suspect he will not address the question of whether Ricardo had a dual system. Marx criticizes confusion in Ricardo and other classical economists. Some of these criticisms are well taken; Ricardo doesn't always clearly distinguish between labor values and natural prices. Can one read those criticisms as putting forward the TSSI as the proper way to relate values and prices? It will not surprise me if Kliman does not address this question. (I don't think this question has been formulated in this way in the literature.)

I append a bibliography of some criticisms of the TSSI. I don't recall the substance of most of these criticisms. I gather that advocates of the TSSI have responded to most of these articles.

Maybe I'll write more when I get further along in Kliman's book.
  • Laibman, David (2000). "Rhetoric and Substance in Value Theory: An Appraisal of the New Orthodox Marxism", Science & Society, V. 64, N. 3 (Fall): 310-332
  • Mohun, Simon (2003). "On the TSSI and the Exploitation Theory of Profit", Capital and Class (Autumn): 85-102
  • Mongiovi, Gary (2002). "Vulgar Economy in Marxian Garb: A Critique of Temporal Single System Marxism", Review of Radical Political Economics, V. 34: 393-416
  • Screpanti, Ernesto (2005). "Guglielmo Carchedi's 'Art of Fudging' Explained to the People", Review of Political Economy, V. 17, N. 1 (January): 115-126
  • Veneziani, Roberto (2004). "The Temporal Single-System Interpretation of Marx's Economics: A Critical Evaluation", Metroeconomica, V. 55, N. 1: 96-114
  • Veneziani, Roberto (2005). "Dynamics, Disequilibrium, and Marxian Economics: A Formal Analysis of Temporal Single-System Marxism", Review of Radical Political Economics, V. 37, N. 4 (Fall): 517-529