Wednesday, December 31, 2014
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.
I've also started posting recipes for my own purposes. When I just follow a recipe in a cookbook, I'll only post a reminder that I like the recipe.
Comments Policy: I'm quite lax on enforcing any comments policy. I prefer those who post as anonymous (that is, without logging in) to sign their posts at least with a pseudonym. This will make conversations easier to conduct.
Saturday, March 01, 2014
I continue to read Kartik Athreya's supposedly popular account of contemporary macroeconomics. Today I focus on the misleading presentation of the theory of economic growth.
Athreya presents the Solow-Swan Neoclassical Growth Model (NGM) as a contrast to Malthus' model of economic growth. He briefly alludes to Real Business Cycle (RBC) theory as the result of appending random shocks to the Solow-Swan model. He then goes on to discuss what he calls the Ramsey-Cass-Koopmans model. There are two problems here. (I bracket off the grouping of the Ramsey model of a central planning authority determining an optimal savings rate with models of household savings decisions.)
First, Solow developed his model in the context of many other economists also developing growth models. This setting is totally missing from Athreya's book. Neither "Harrod" nor "Domar" appear anywhere in the book. Yet Solow's work was a neoclassical response to the Harrod-Domar model. The Post Keynesian approach to steady-state growth, associated with such economists as Richard Kahn, Nicholas Kaldor, and Joan Robinson provided an alternative at the time. (I might also mention Michal Kalecki and Frank Hahn's doctoral thesis, if I recall correctly.) Maybe this approach is missing because Athreya is not aware of its existence.
Second, Athreya does not even get classical growth theory correct, as presented by Malthus or others. According to Athreya, Malthus' theory abstracts from the existence of capital. I guess income is supposedly distributed only in the form of wages and rents. Athreya then claims to consider the effects of a technological innovation, namely, the introduction of a vaccine in Malthus' theory. Supposedly, the effect is to lower the death rate, while leaving birth rates unchanged. That is, population increases. Since the quantity of land is fixed, the theory exhibts diminishing marginal returns to labor. So Athreya misrepresents Malthus as claiming that improved technology, while increasing total output, ultimately leads to lower average income per worker.
In the classical theory of value, the natural wage is given by habit and custom. Malthus, building on his predecessors, argued that transitory wages higher than the natural wage might lead to changes in habits, through what we now might call hysteresis. This effect would be to increase the natural rate of wages. At any rate, population was expected to increase when wages exceeded the natural wage. But, maybe, the classical economists emphasized more reactions to opportunities for jobs than reactions to wages. They accepted that unemployment could be persistent and expected lower and higher periods of unemployment to encourage increases and decreases of the rate of growth of population. Anyways, Athreya is right, at least, about the response to increased productivity being an initial increase in the population of workers.But he is mistaken about the ultimate effect. Suppose the market wage falls below the natural wage, in a period in which the accumulation of capital has declined. Then the classical economists, such as Malthus, expected the rate of increase in population to fall. Emigration would increase, birth rates would fall, and workers would form families later in their lives. (It is unclear to me how the classical economists envisioned such mechanisms to kick in fast enough for their theories. At any rate, I can quote Ricardo suggesting that the stationary state was far away.) The ultimate effect of declining population would be for workers to obtain their natural wage, with the level of employment and distribution between wages, profits, and rent being consistent with technological possibilities after a change. That is, the ultimate effect, in Malthus' theory, of an improvement is not lower real wages. (I am here bracketing out any consideration of whether Malthus presented a stylized theory consistent with the empirical experience in the centuries prior to his time or overlooked the effects of the ongoing industrial revolution.)
I cannot recommend Athreya's book, either for the general reader curious about macroeconomics or for the advanced undergraduate or beginning graduate student. It is too misleading. The above is only one of many examples. I suppose some professional economists might find it of interest to catalog the misconceptions, mistakes, inconsistencies, tendentious statements, and occasional insights.
- Kartik B, Athreya (2014). Big Ideas in Macroeconomics: A Nontechnical View, MIT Press.
- Nicholas Kaldor (1956). Alternative Theories of Distribution, Review of Economic Studies, V. XXIII: pp. 83-100.
- Antonella Stirati (1994). The Theory of Wages in Classical Economics: A Study of Adam Smith, David Ricardo and their Contemporaries, Edward Elgar,
Wednesday, February 26, 2014
The following is reproduced from "An Essay on Post-Keynesian Theory: A New Paradigm in Economics", Al Eichner and Jan Kregel's 1975 Journal of Economic Literature article. Of course, the table being a summary, all entries are highly stylized.
|Aspect||Post Keynesian Theory||Neoclassical Theory|
|Dynamic properties||Assumes pronounced cyclical pattern on top of a clearly discernible growth path||Either no growth, or steady-state expansion with market mechanisms assumed to preclude any but a temporary deviation from that growth path|
|Explanation of how income is distributed||Institutional factors determine a historical division of income between residual and non-residual shareholders, with changes in that distribution depending on changes in the growth rate||The distribution of income explained solely by variable factor inputs and the marginal productivity of those variable factor inputs|
|Amount of information assumed to be available||Only the past is known, the future is uncertain||Complete foresight exists as to all possible events|
|Conditions that must be met before the analysis is considered complete||Discretionary income must be equal to discretionary expenditures||All markets cleared with supply equal to demand in each of those markets|
|Microeconomic base||Imperfect markets with significant monopolistic elements||Perfect markets with all micro units operating as price takers|
|Purpose of the theory||To explain the real world as observed empirically||To demonstrate the social optimality if the real world were to resemble the model|
Monday, February 17, 2014
In this passage, Roxana is preparing to move from Paris to Amsterdam. She liquidates her possessions, and uses jewelry and bills of exchange as money to carry with her.
"I could not but approve all his measures, seeing they were so well contrived, and in so friendly a manner, for my benefit; and as he seemed to be so very sincere, I resolved to put my life in his hands. Immediately I went to my lodgings, and sent away Amy with such bundles as I had prepared for my travelling. I also sent several parcels of my fine[Pg 181] furniture to the merchant's house to be laid up for me, and bringing the key of the lodgings with me, I came back to his house. Here we finished our matters of money, and I delivered into his hands seven thousand eight hundred pistoles in bills and money, a copy of an assignment on the townhouse of Paris for four thousand pistoles, at three per cent. interest, attested, and a procuration for receiving the interest half-yearly; but the original I kept myself.
I could have trusted all I had with him, for he was perfectly honest, and had not the least view of doing me any wrong. Indeed, after it was so apparent that he had, as it were, saved my life, or at least saved me from being exposed and ruined—I say, after this, how could I doubt him in anything?
When I came to him, he had everything ready as I wanted, and as he had proposed. As to my money, he gave me first of all an accepted bill, payable at Rotterdam, for four thousand pistoles, and drawn from Genoa upon a merchant at Rotterdam, payable to a merchant at Paris, and endorsed by him to my merchant; this, he assured me, would be punctually paid; and so it was, to a day. The rest I had in other bills of exchange, drawn by himself upon other merchants in Holland. Having secured my jewels too, as well as I could, he sent me away the same[Pg 182] evening in a friend's coach, which he had procured for me, to St. Germain, and the next morning to Rouen. He also sent a servant of his own on horseback with me, who provided everything for me, and who carried his orders to the captain of the ship, which lay about three miles below Rouen, in the river, and by his directions I went immediately on board. The third day after I was on board the ship went away, and we were out at sea the next day after that; and thus I took my leave of France, and got clear of an ugly business, which, had it gone on, might have ruined me, and sent me back as naked to England as I was a little before I left it." -- Daniel Defoe, Roxana: The Fortunate Mistress (1724).
Defoe's novel, Robinson Crusoe, is more well-known among economists. For example, one can read Stephen Hymer's "Robinson Crusoe and the secret of primitive accumulation" (Monthly Review, 1971).
Thursday, February 13, 2014
I am of the opinion that talk of more or less government intervention in markets is incoherent in, for example, the United States today. It is not as if some configuration of property rights, contract law independent of the state, corporations with limited liability, and markets of various types are all natural constructs, existing prior to all human interventions. I have gone on about this before. I might also note Philip Mirowski's view that sophisticated neoliberals recognize that a capitalist market order must be constructed; it does not come about naturally. I do not know that he would now think that all those in, for example, think tanks inhabiting the outer layers of the russian doll structures that neoliberals have build for propagandizing would recognize the role of government in constructing a market order.
Anyways, I have recently stumbled on Antonio Gramsci making a closely related point:
"The ideas of the Free Trade movement are based on a theoretical error whose practical origin is not hard to identify; they are based on a distinction between political society and civil society, which is made into and presented as an organic one, whereas in fact it is merely methodological. Thus it is asserted that economic activity belongs to civil society, and that the State must not intervene to regulate it. But since in actual reality civil society and State are one and the same, it must be made clear that laissez-faire too is a form of state 'regulation', introduced and maintained by legislative and coercive means. It is a deliberate policy, conscious of its own ends, and not the spontaneous, automatic expression of economic facts. Consequently, laissez-faire liberalism is a political programme, designed to change - in so far as it is victorious - a State's leading personnel, and to change the economic programme of the State itself - in other words the distribution of the national income." -- Antonio Gramsci, Prison Notebooks, "The Modern Prince", Some Theoretical and Practical Aspects of 'Economism'
Given the current conjuncture in, say, the United States, that bit about income distribution is of contemporary relevance. I think a study comparing and contrasting the ideas of Michel Foucault and Antonio Gramsci on how ideas become dominant in society would be interesting to read.
Tuesday, February 04, 2014
- Greg Hill describes issues in getting into (Arrow-Debreu) equilibrium.
- I want to remember to sometime read Wolfgang Eichert's article, Long-period Positions in Multi-sectoral Cobb-Douglas Economies. The abstract sounds like an extension of two posts of mine.
- I also want to remember to sometime read Saverio Fratini's article Real Wicksell Effect, Demand for Capital and Stability.
- Robert Paul Wolff has posted a series critiquing game theory.
- Here is another article on rethinking economics.
- Unlearning Economics says the Cambridge Capital Controversy still matters.
- J. W. Mason is teaching international trade.
Update: On 6 February, completed series for R. P. Wolff, added an Unlearning Economics link, and added a link for J. W. Mason.
Wednesday, January 29, 2014
I have been trying to read Kartik Athreya's Big Ideas in Macroeconomics: A Nontechnical View. I find it quite dry. So far, it is all theory. (I guess some might quibble with that, given the overview of results from experimental economics.) There is no history of ideas and no context suggesting that those who might have developed these ideas were any more than disembodied consciousnesses. And no hint is given that whole groups of economists would find these views controversial. (Caveat: he does mention, for example, Ariel Rubinstein and Ricardo Caballero.) For Athreya, Paul Davidson, Wynne Godley, Alan Kirman, and Lance Taylor, for example, just do not exist.
I think Athreya might have misjudged his audience. He says that he is attempting to target two audiences:
- Advanced undergraduates considering graduate school and beginning graduate students.
- Popular readers with an interest in macroeconomics.
But the lack of any leavening from a presentation of details of theory will make this book a hard sell for the second audience. Maybe my opinion will change as I read further.
But I want to point out a display of ignorance of the logic of prices in general equilibrium:
"...notice there are likely to be many types of laborers involved in the production of barstools... Thers are also many possible input materials, and different possible production processes. Importantly, the myriad ways in which various inputs can be substituted for each other in barstool production is knowledge that can only be acquired through experience in the field.
In our W[alrasian] C[learing]H[ouse], each furniture maker will, at various prices, carefully consider all the ways in which inputs can be substituted for each other. If, for example, walnut is particularly expensive relative to oak, and oak can easily be substituted for walnut because it won't also necessitate the use of harder-tipped and more expensive saw blades, for instance, the oak will be used. In this way, the experience and almost-inevitably accumulated wisdom of those who have specialized in the production of any given product are brought to bear fully in the industry's use of inputs even though no firms are assumed to communicate with any others within the industry..." [emphasis in original]
As I pointed out many times, prices are not indices of relative scarcity, and neoclassical economists, such as Christopher Bliss, Frank Hahn, and Paul Samuelson have noted the logic of general equilibrium is not that of substitution. (Andreu Mas-Colell has an accessible overview of capital theory.) When will (some) mainstream economists accept their own logic?