Showing posts with label Samuelson. Show all posts
Showing posts with label Samuelson. Show all posts

Friday, May 2, 2014

More on flimflam and lack of understanding of the capital debates

Paul Krugman has responded to Tom's article and here is his reply. Let me just add my two cents. Krugman says that:
New Keynesians assert — as Keynes did, although I don’t think it matters for this debate what he said — that both liquidity preference and loanable funds are true. There are conditions under which one or the other is the main one to focus on — at full employment, loanable funds are crucial, in a liquidity trap, liquidity preference.
Oh Lord. Paul can you send us the quote were Keynes says that Loanable Funds is correct? And again this is NOT about irrelevant exegesis. If you do have that Investment and Savings are equilibrated by a natural rate of interest, then that means that you must, with interest rate flexibility, reach a point at which investment would equate the full employment level of savings. Krugman and other New Keynesians argue then for a version of what they call a Liquidity Trap (actually a zero lower bound problem), in which the monetary rate of interest (of the Liquidity Preference Theory) is not capable of equating the natural rate (of the Loanable Theory).

Note that here Keynes has a problem. Although Keynes clearly rejected the concept of a natural rate of interest (Keynes, 1936, pp. 242-4), and said very clearly that savings are equated to investment by changes in the level of activity (Effective Demand), his acceptance of the notion of the marginal efficiency of capital implies that there is a sufficiently low interest rate that would be associated with an investment that would produce the full employment level of savings, very much like Krugman. Excluding imperfectionist arguments related to the downward rigidity of the interest rate, or the possibility that a negative interest rate would be required to increase investment to its full employment savings level, it would seem that the acceptance of the marginal efficiency of capital is in contradiction with the notion of a “highly conventional” rate of interest (ibid., p. 203).*

So as noted here you do need to abandon the notion of a natural rate of interest and the marginalist theory of distribution (besides the evidence is that investment does not react to cost of capital, but it does to expected sales, that is expected demand). Here Krugman's comments are disingenous at best. He says:
I think, is a fairly desperate attempt to claim that the Great Recession and its aftermath somehow prove that Joan Robinson and Nicholas Kaldor were right in the Cambridge controversies of the 1960s.
As I noted it is logically required to get rid of the idea of the natural rate, and there is no need to argue that in the 1960s capital debates Robinson and Kaldor (Sraffa really, dude) were right, since Samuelson (1966; subscription required) already did.

* The capital debates show that there is no correspondence between the intensity of the use of capital and its remuneration. No natural rate of interest that would lead to more intensive use (full utilization) of capital. And that's what Samuelson admited. To understand the capital debates go here, and to get its relation to Keynes' theory go here.

PS: Krugman also gets a bit testy suggesting that: "as for wage and price inflexibility as the cause of unemployment — grrr. I’ve written again and again on this subject, pointing out that in a liquidity trap price flexibility probably makes things worse, not better." Yes, grr. Dude, first it's not a liquidity trap that you're talking about, but a lower limit to nominal rates of interest. And debt-deflation and negative effects of income distribution discussed in chapter 19 of the GT occur even if you are not at the lower bound (or the real liquidity trap). And Keynes said that the liquidity trap was irrelevant to explain the Great Depression, it's worth noticing, since really it seems you never read the GT (even though you wrote a preface to one edition). So price flexibility in a world with extensive debt contracts and where income distribution affects spending is always kind of bad. That's Keynes' message. Tom is correct on that one too.

Sunday, February 16, 2014

On principles courses, DeLong, Krugman and the limits of the mainstream

'cause it has no implications...

In a previous post, Anonymous commented: "Brad DeLong has been posting slides from one of his classes going over supply and demand (and quotas and price ceilings, market equilibrium, etc.) on his blog. They're pretty entertaining and filled with pop-cultural references. I was wondering what a Post-Keynesian perspective on them might be."

I promised to check Brad's posts and provide a short answer. So here it is. In fact, this semester I am teaching an intro course, something I haven't done since my time in Kalamazoo College. This is not a regular course for me to teach, in other words, like say intermediate macro. At Bucknell all intro courses provide more than the neoclassical (marginalist) perspective. While Brad starts with a neoclassical version of supply and demand (see here) on the basis of Krugman's intro textbook, we start with history and history of ideas, based on a discussion of the classical authors and Marx (here, here and here) and only then get to the supply and demand approach (here). In fact, I am also using Krugman's textbook, together with Heilbronner and Milberg's The Making of Economic Society and additional readings.

In other words, while there is a need to teach the basics of what the mainstream of the profession thinks it is relevant, it is also important to provide critical alternatives to the mainstream. The liberal arts education in the US allows for a lot of flexibility and for the introduction of alternative perspectives. The textbooks (almost all neoclassical) tend to fudge the fact that the notion that economics is about rational choices of individuals faced with scarcity is relatively new (the Marginalist Revolution of the 1870s)*, and quite different from the old classical (or surplus approach) tradition of the material reproduction of society.

* Interestingly enough, in the US the profession was not dominated by neoclassical economics until the 1930s and 1940s, when the rise of Keynesian economics, in the Neoclassical Synthesis version, brought it to the forefront of research, teaching and policy influence. Samuelson's 1948 Economics, the forerunner of all mainstream textbooks, did probably more than any other book to make neoclassical economics the dominant view. Before that the profession in the US was dominated by a potpourri of eclectic and institutionalists authors that held the main teaching positions and were at the head of key institutions like the American Economic Association and the National Bureau of Economic Research (NBER).

Tuesday, January 14, 2014

George Stigler and the labor theory of value

George Stigler, author of the famous The Theory of Price, winner of the Sveriges Riksbank Prize (aka the Nobel) and Friedman's best friend at Chicago, suggested  long ago that: "the professional study of economics makes one politically conservative." His reasons for that particular view are extensive, but one factor was associated with the decline of the dominance of the labor theory of value and the rise of the supply and demand (marginalist) approach, that he embraced. In his words:
"It could be argued that there is one powerful factor making for conservatism: the inability of a very radical young economist to get a desirable university post. It is indeed true that a believer in the labor theory of value could not get a professorship at a major American university, although the reason would be that the professors could not bring themselves to believe that he was both honest and intelligent, and I hope they are not improper in their demand that a professor be at least tolerably honest and presumptively intelligent."
Funny thing is that the following year a little monograph was published that demonstrated that the basic propositions of the labor theory of value could be retained. By using the device of the standard commodity, Sraffa reveals that the profit rate can be determined as a physical ratio independently from relative prices, and that the rate of profit is determined by the objective conditions of production and the need of reproducing the system (for more on the standard commodity go here).

Also, the capital debates led to the conclusion (admitted by Samuelson) that the neoclassical (marginalist) theory was unable to show that relative scarcity determined relative prices and income distribution. In other words, while it is possible to hold a version of the labor theory of value, at least the Smithian labor commanded (in terms of the standard commodity, as suggested by Sraffa), it is not possible to say that supply and demand explain value and distribution.

So Stigler got it all backwards. We are left with the alternative that radical young economists have a hard time finding desirable university posts for purely ideological reasons. Actually lack of honesty and/or intelligence might be an asset rather than a handicap in the economic profession.

Friday, August 16, 2013

Krugman on Friedman, Austrians, and Paradise Lost

I was a bit busy this week and did not weigh in on Krugman's latest incursion (and here too) on the history of economic ideas. He correctly dismisses Conservative economists in pre-Keynesian times, and particularly Hayek (and Austrians), who suggested that recessions and depressions were useful, as not relevant. And also, notes Friedman was more sophisticated. He also notes correctly (as was pointed out here before), that Friedman used when he was forced to present a complete model and ISLM with a Phillips Curve, that was not very different from the more Keynesian versions of the model done by the Neoclassical Synthesis authors.

He is more positive about Friedman because:
"He [Friedman] was willing to give a little ground, and admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve... [But Krugman does not ] want to put Friedman on a pedestal... [since] the experience of the past 15 years, first in Japan and now across the Western world, shows that Keynes was right and Friedman was wrong about the ability of unaided monetary policy to fight depressions."
Note that Krugman also notes Friedman's critique of Austrian business cycle theory (see here), which shows that in spite of being marginalist and part of the mainstream, still the extreme laissez faire view makes them part of the fringes  of the profession. In other words, Austrians stand for the mainstream as the Tea Party stands for the more moderate right wing.

Perhaps the most important point in Krugman's reflection on the state of the profession is his confession that he used to consider himself "a free-market Keynesian — basically, a believer in Samuelson’s synthesis. But [he is] far less sure of that position than [he] used to be." Good enough. Note, however, that what he means by a 'free market' Keynesian is a peculiar mix.

The Neoclassical Synthesis, was based on Hicks ISLM and Modigliani's fixed wages. The fundamental idea is that with wage flexibility the system would lead to full employment, a proposition that Keynes denied in the General Theory. In addition, the capital debates have shown, and Samuelson admitted in 1966, two years before Friedman re-introduced the Wicksellian notion of a natural rate, that the neoclassical parable in which substitution led to full employment of factors of production does not hold.

So, beyond the ideological stance (which made more sense at the time of the Old Neoclassical Synthesis, during the Cold War) Free Market Keynesianism was always kind of a misnomer. Remember that Keynes in 1926 suggested that Liberalism (in the traditional European sense of Laissez Faire) was dead.

Friday, July 26, 2013

The meaning of short and long-term and the natural rate

From a history of economic thought point of view the turning point in the demise of the Keynesian Consensus based on the Neoclassical Synthesis was Friedman's rediscovery of Wicksell's natural rate. It was peculiar, in a sense, that it happened in the 1960s when the capital debates demonstrated (and was accepted by Samuelson, the High Priest of the Neoclassical Synthesis) that the natural rate made no theoretical sense. That led to a more significant and insidious change in economics. The abandonment of the notion of long-term equilibrium method, as noted by Garegnani.

Briefly stated, what the process entailed is that confronted with the fact that there is no possible way to relate some measure of capital with its remuneration (the idea that abundant capital would lead to a low level of remuneration, i.e. a low rate of interest, and the analogous one that full employment of capital could be obtained with a sufficiently low rate of interest) the mainstream reverted to the Arrow-Debreu (AD) notion that different types of capital had different remunerations and there was no tendency to a uniform rate of profit (interest). That, as noted by Garegnani, was a departure from the traditional method of economics. Up to the 1930s all economists, including the marginalists (neoclassical) ones did follow it.

Note that the long-term, associated with the uniform rate of interest (or profit), is a methodological instrument, not a particular period of chronological time. The long-term is just a period in which no variables are constant or fixed, and the process of competition, that allows for new entrants in every sector (with perfect competition) to lead to a uniform rate of interest. The short-term is by symmetry a situation in which something precludes the long-term situation to be achieved. For example, a typical short-term macroeconomic assumption is to assume a given level of productive capacity. The demand effect of investment (demand for equipment and installations) is taken into account, but not the capacity effect (the increase in the number of machines and plants).

That's why this comment by Miles Kimball (a supply-side liberal, talk about oxymoron) is so revealing of the confusion that now dominates the mainstrem. He says:
"To think clearly about economic fluctations at a somewhat more advanced level, I find I need to use these four different time scales:
  • The Ultra Short Run: the period of about 9 months during which investment plans adjust—primarily as existing investment projects finish and new projects are started—to gradually bring the economy to short-run equilibrium. 
  • The Short Run: the period of about 3 years during which prices (and wages) adjust gradually bring the economy to medium-run equilibrium.
  • The Medium Run: the period of about 12 years during which the capital stock adjusts gradually to bring the economy to long-run equilibrium. 
  • The Long Run: what the economy looks like after investment, prices and wages, and capital have all adjusted. In the long run, the economy is still evolving as technology changes and the population grows or shrinks."
Yes, that now passes for clarity of thinking. Short-term is a period of chronological time, long-term is conceptual methodological position. The confusion is compounded by the fact that he is trying to clarify what he sees as "a lot of confusion about the natural interest rate ... [and] the main source of confusion is that there is both a medium-run natural interest rate and a short-run natural interest rate." The natural rate is by definition a long-term position.

Old marginalists, like Wicksell or Marshall didn't think the system was at the natural rate in the short-run. It gravitated around it in the long-term. This idea of a short-run natural rate, derives from the AD short-run notion of a system that is always in equilibrium. And then he does use an aggregative version of an ISLM model (which is a long term sort of equilibrium notion). But he has no clue about the capital debates and its consequences. Oh well.

Tuesday, July 23, 2013

Galbraith on the myth of consumer sovereignty and Big Corporations

From the old, but still essential, The Age of Uncertainty by John Kenneth Galbraith. The myth of consumer sovereignty, created by Paul Samuelson, unmasked and the fact that mainstream economics (as all economic education) is there to protect Big Corporations made clear by Galbraith.

Wednesday, December 26, 2012

Technological Progress and the Capital Labor Ratio

So Krugman is again trying to make sense of his marginalist theory of distribution and the choice of technique. He suggests the following graph, which I slightly modified, to express the possibilities available to the firm.
The profit maximizing firm will choose the 'labor-intensive' technique to the left of the intersection level between the two techniques. For example, at L/Y=0.4, where there is a vertical dotted line, now the firm needs less capital per unit of output (around half, approximately 0.3, rather than 0.6) to produce one unit of output. To the right of the intersection the opposite applies.

Note correctly that, as is well known by Krugman, the neoclassical theory of distribution applies here. The slope of the techniques is given by the negative of the capital to labor ratio, and relative remuneration of capital and labor are associated to the intensity of the use of the factors of production. In his words:
"and if you’re worried, yes, workers and machines are both paid their marginal product."
That is why the firm uses the labor intensive technique as real wages fall, and technical progress is associated with worsening income distribution. There is only one problem. The linear technologies of his example presume that all sectors have the same capital to labor ratio. That is a very peculiar assumption (the same needed for production prices to be determined by the amount of labor directly and indirectly incorporated in production, or what Marx referred to as the same organic composition of capital, by the way). If that proposition is dropped the whole thing is incorrect (see here).

Samuelson (1966; subscription required) was well aware of the problems brought about by the special assumption of his Surrogate Production function. It's time Krugman reads some of Samuelson's classic papers.

PS: Note that Krugman's point here is that maybe worsening income distribution was caused by technical progress, something he has been trying to deny in his recent research, suggesting that the increase in inequality was caused by political factors (conflict) and not skill biased technical change (technology). Make up your mind dude!

PS': Might be good to quote Samuelson directly. According to him (1966, pp. 582-83):
"There often turns out to be no unambiguous way of characterizing different processes as more 'capital-intensive,' more 'mechanized,' more 'roundabout,' except in the ex post tautological sense of being adopted at a lower interest rate and involving a higher real wage. Such a tautological labeling is shown, in the case of reswitching, to lead to inconsistent ranking between pairs of unchanged technologies, depending upon which interest rate happens to prevail in the market."
A tautology that may lead to mistakes. That's what marginalism produces when you want to understand income distribution and technical change.

Thursday, September 20, 2012

Nick Rowe's misconceptions about Sraffians II

As promised here are my additional responses to Nick Rowe’s assumptions (here) on the Sraffian or Cambridge UK side of the capital debates. I had agreed to comment also on assumptions 3 and 4, which stated that:

3. But they still couldn't explain the rate of interest. Because it's hard to explain the rate of interest if you don't want to talk about time preferences. And all the other prices depend on the rate of interest, as well as on technology. So they assumed the rate of interest was exogenous;

4. Some economists in Cambridge US made a very special assumption that let them explain the rate of interest without talking about time preferences. They assumed that there was only one good, and it could be converted back and forth between the consumption good and the capital good by waving a wand.
Before we get to why Sraffa argued that the rate of interest is exogenously determined by the monetary authority, let me discuss the neoclassical assumptions behind Nick’s proposition. I would argue that point 3 is exactly in reverse, that is, it is impossible (not hard) to explain the rate of interest on the basis of subjective preferences.

Böhm-Bawerk famously argued that there are three conditions for the determination of the rate of interest, namely: (1) the differences between wants and provision in different periods of time; (2) the systematic underestimation of future wants and the means available to satisfy them; and (3) the technical superiority of present compared with future goods of the same quality and quantity. The first two are related to subjective preferences, and are behind the supply of savings or abstinence from consumption, while the third is related to productivity. With both thriftiness and productivity one gets a version of the neoclassical loanable funds theory of the natural rate of interest.*

Note that the subjective basis for the determination of the rate of interest is incredibly shaky. The marginalist approach suggests that there is a positive rate of time preference, that is people prefer to consume now rather than latter, and are willing to part with consumption now in order to get more at some future date. That is why there must be a positive rate of interest to convince consumers to postpone the immediate fruition of pleasure. Yet it is far from clear that the positive time preference precedes the positive rate of interest. It seems rather more logical to assume that given a positive rate of interest some people might be willing to postpone consumption. The neoclassical subjective analysis is no more than a tautology with very dubious assumptions about causality, to say the least. It is hard to see why one could base a theory of interest on such uncertain foundations.

Remember that classical authors were very skeptical of subjective individual behavior. They actually referred to social utility when they talked about preferences. In that sense, Sraffa, not only thought that the foundations for subjective theories were unsound, but also from a methodological point of view were not particularly relevant. Interest rates were not positive because some individual preferred things now rather than latter, but they had an institutional foundation, associated to the fact that certain social groups could extract a surplus from society as a whole.

What about the productivity part of the marginalist/neoclassical argument? That’s the part that the capital debates disqualified, as was accepted by no other than Paul Samuelson. I’m not going to discuss the whole issue again, but it suffices to say that there is no logical way to determine the quantity of capital independently of the rate of interest, which implies circular reasoning.

Sraffa had determined very early in his investigation of the determination of relative prices, as early as his first equations in 1927 (with the help of Ramsey) that he could solve the system of simultaneous equations simply with the technical coefficients of production and an exogenous rate of interest (see DeVivo, 2003; subscription required). Sraffa after several changes and developments of his basic equations eventually settled (by the 1940s) on the notion that the rate of profit was determined exogenously by the monetary rate of interest (a proposition not unlike that of certain classical authors, in particular Thomas Tooke, and similar to Keynes idea of a conventional normal rate of interest in the General Theory), in the famous paragraph 44 of PCMC.

Note that classical authors for the most part assumed that the real wage was the exogenously determined distributive variable. The reasons for why Sraffa settled with a monetary theory of distribution require a different post. However, it should be clear that the exogenous rate of interest is not an arbitrary assumption as Nick suggests, but is required for the logical solution of the system of simultaneous equations (which demand the rate of profit to be determined independently of relative prices, something that the marginalist theory is unable to do in a system with a uniform rate of profit). Finally, the important part of the exogeneity of the rate of interest, besides the fact that it fits the historical/institutional framework of the capitalist economies that we live in, where central banks actually do determine the rate of interest, is that institutions play a role in the classical-Keynesian theory of distribution. As noted above, it is class and power that are behind a positive rate of interest and not you aunt's preferences for chocolate cake tomorrow.

Regarding point 4, there is an incredible confusion in the comment by Nick. Sraffa’s system never assumes any aggregate production or a one good economy. There is a composite commodity in the construction of the standard commodity and system, but production is a circular process. Even if it has similar properties as the Ricardian corn model, it is actually composed of several commodities. It is in fact the neoclassical theory, including the disaggregate Walrasian (in its Arrow-Debreu version) model, that requires a one commodity world to bring about the equilibrium of investment (the demand for a quantity of capital) to full employment savings. It is the marginalist theory of the natural rate of interest that lacks any logical foundation.

* Irving Fisher was critical of the limitations of Böhm-Bawerk’s theory even within the neoclassical paradigm. For the debate between them see Avi Cohen (2011).

Monday, August 20, 2012

More on Sraffa and the theory of value and distribution

Two posts by Alejandro Fiorito, at the Revista Circus blog, and Robert Vienneau follow up my previous post on Sraffa and the Labor Theory of Value (LTV). The former is on the debate between Garegnani and Samuelson, just published in a book edited by Heinz Kurz. Garegnani, who debated with Samuelson since the latter's seminal paper on the production function as a parable back in the early 1960s, basically argued against the notion that Sraffa's system can be seen as a special case of Walrasian General Equilibrium, which was ultimately Samuelson's position.

Vienneau discusses several issues. One that I think it's particularly relevant is Steedman's view that one might have a positive profit rate and negative aggregate surplus value. Serrano and Lucas (not that Lucas!) have written a paper on the subject which suggests that Steedman's counterintuitive results are basically irrelevant. At any rate, as noted by Robert, "Marxist political economy should remain a live and exciting field of scholarly research," and this is to a great extent possible because of Sraffa's legacy.

Tuesday, June 5, 2012

Phrase of the week: The Age of Lack of Innocence

"In this age of Leontief and Sraffa there is no excuse for mystery or partisan polemics in dealing with the purely logical aspects of the problem."