Dec 13th, 2008 at 11:51 am
Great Moments in Jargon
Tyler Cowen explains “When you cut through the terminology, Keynes says that capital heterogeneity isn’t needed to generate aggregate demand analysis and that his core mechanisms will operate in any case.”
I’d be terrified to learn what happens when you don’t cut through the terminology.
45 Responses to “Great Moments in Jargon”
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December 13th, 2008 at 11:59 am
Believe me, you would be horrified by what happens when economists start arguing about capital heterogeneity. For some reason, a small group of leftist economists (and maybe a few rightist Austrian economists too) are determined to fight this esoteric and irrelevant battle to the end.
December 13th, 2008 at 12:31 pm
Sraffa over Walras forever!!!! Death to Austrian substitution effects!!
December 13th, 2008 at 12:37 pm
Guillotine invisible auctioneers!
Sorry, I get passionate about marginalism.
I don’t know if cutting thru the terminology is such a good idea. Keynes wrote English, and chose his words with care over a period of 5+ years. All else is interpretation.
December 13th, 2008 at 12:43 pm
Actually, without capital heterogeneity, the demand curve looks different than Keynes’…just sayin’.
December 13th, 2008 at 1:00 pm
Here is about the only Sraffan I know in the common econosphere. Still discusses the CCC sometimes.
December 13th, 2008 at 1:17 pm
I think we need a prop. 8 to outlaw heterogeneity
December 13th, 2008 at 1:55 pm
The only thing I know about Sraffa is that he was a friend of Wittgenstein’s. (And the whole chin gesture story.)
December 13th, 2008 at 2:15 pm
Rabbits love cabbage the same whether it comes from the government or a hundred Farmer Browns.
December 13th, 2008 at 2:22 pm
And when you cut through that jargon, Keynes is saying that he has a general theory of the level of purchasing power in a monetary economy, it doesn’t depend on the details of the specific economy.
Sraffa showed that the original neoclassical model of interest rates being determined by the overall demand for and supply of real capital is silly, since there is no way to do the sums if you do not start out knowing the interest rate.
Sraffa’s point doesn’t interfere with Keyne’s theory, but just to keep things obscure, a number of theories that call themselves Keynesian adopt a more or less neoclassical demand and supply for capital.
Too bad for the “Keynesian” opponents of Keynes’ theory that General Equilibrium theory turned out to be a dead end, because it promised a way to side-step Sraffa’s point.
December 13th, 2008 at 2:27 pm
7:Sraffa was one of the good guys.
When you don’t cut thru the terminology, you get the Cambridge Capital Controversy From a link at the Wiki page, this article, especially toward the end, explains somewhat better what was at stake, or what was thought to be at stake. And it is kinda terrifying to think that the entire massive edifice of orthodox economics is theoretically wrong, admittedly wrong, and wrong in a particular direction that serves the upper class.
And wrong in a way that guarantees economic catastrophes. Look around.
December 13th, 2008 at 2:51 pm
This must be a fun moment in history to be a hardcore economist.
December 13th, 2008 at 3:07 pm
That book “Debunking Economics” by Steve Keen talked about Sraffa a lot. That much I remember.
December 13th, 2008 at 3:16 pm
Wow, was I disappointed when I clicked on the comment thread. I thought I’d see a stream of quotes in the same genre.
December 13th, 2008 at 4:37 pm
“Wow, was I disappointed when I clicked on the comment thread. I thought I’d see a stream of quotes in the same genre.”
I assume this is sarcastic, but good lord, I have an above-average layman’s understanding of economics and still can’t get anywhere with Cowen’s quote.
BruceMcF does boil things down to semi-edibility quite nicely, however.
December 13th, 2008 at 5:55 pm
This must be a fun moment in history to be a hardcore economist.
Actually, for some economists it must be fun indeed— those with secure positions as tenure-track university professors or government employees. Less fun for anyone, economist or not, whose job depends more directly on the general state of the economy.
December 13th, 2008 at 6:50 pm
You radically misunderstand human nature, James. Economists who don’t have secure unemployment are alternately worried about their own future and fascinated to see economic history unfold before them.
I have read a moderate amount about the capital controversy, and I still don’t understand why it’s such a big deal. Economics has all kinds of problems, and its handling of capital seems basically par for the course, rather than singularly awful. Though maybe I’m just not reading the right sources. The invocation of the Welfare Theorems of General Equilibrium theory in the real world seem to me to be a much more egregious bias in favor of capitalism than pretending there’s only one kind of capital good.
December 13th, 2008 at 9:19 pm
16:”While neoclassical economics envisions the lifetime utility-maximizing consumption decisions of individuals as the driving force of economic activity, with the
allocation of given, scarce resources as the fundamental economic problem, the “English” Cantabrigians argue for a return to a classical political economy vision.
There, profit-making decisions of capitalist firms are the driving force, with the fundamental economic problem being the allocation of surplus output to ensure reproduction and growth (Walsh and Gram, 1980). Because individuals depend on
the market for their livelihoods, social class (their position within the division of labor) becomes the fundamental unit of analysis. The potential rate of profits on
capital arises from differing power and social relationships in production, and the realization of profits is brought about by effective demand associated with saving
and spending behaviors of the different classes and the “animal spirits” of capitalists. The rate of profits is thus an outcome of the accumulation process.
Robinson argued—citing Veblen (1908) and raising the specter of Marx—that the meaning of capital lay in the property owned by the capitalist class, which confers on capitalists the legal right and economic authority to take a share of the surplus created by the production process.” …from link in #10
Walt, it is the proved-by-math efficiency argument for forced redistribution and returns to labour. It is at the heart of Minsky’s economics. It is fundamental and radical.
December 13th, 2008 at 9:40 pm
You refer to GE theory as if that’s unrelated to the Cambridge Controversies. The Cambridge Controversies forced the retreat to GE Theory, for which it was shown in the 1970’s that while a GE may exist, under reasonable premises there are an arbitrarily large number of them and any given general equilibrium can have arbitrarily chaotic dynamics.
Capital is central to marginalist models of long term economic growth, so without aggregate capital, and given that General Equilibrium Theory is still dead, marginalist economics can’t validly model long term economic growth. This is a rather embarrassing lacunae for marginalism, and certainly not something for a marginalist to discuss in public.
Of course, with respect to the Welfare Theorems of GE Theory, all utilitarian Welfare analysis is invalidated once the defense of utility theory becomes that its not saying that people actually decide that way, but that it effectively emulates decision making … the “as if” defense … because utilitarian Welfare analysis is only valid if the utility functions actually represent people’s preferences, as opposed to just being accurate predictors of their behavior. So its not just that GE theory is dead, but also that the justification of utilitarian welfare theory is often abandoned as part of the process of defending marginalist utility models against critique.
December 14th, 2008 at 1:30 am
Bob, all that may be true, but that would be true even if there was only one kind of capital good. Maybe the two Cambridges fought on many fronts simultaneously, and those sorts of questions and the capital aggregation question ran together.
Bruce, I don’t believe that version of history at all. GE was invented by completely different people than those involved in the capital controversy.
December 14th, 2008 at 10:22 am
Walt, different approaches are almost always developed by different people … research programs take time to develop and involve substantial investment of time and effort.
When there are swings in the profession on the time scale of years to a decade or two, its mostly a shift in prominence of bodies of work in the literature … for example, consumers of an approach in the literature coming under pressure from peer reviewers raising issues have an incentive to work out how to use a different approach that can fill much the same role, and citation counts of one body of work drops while citation counts of another body of work rises.
Of course, there is less pressure when it seems that there is no strong alternative available, and sooner or later a work-around rationalization is developed that people can reference as a get out of jail free card since, after all, a referee that never recommends publication in a particular topic will sooner or later stop getting papers for review on that topic.
Sraffa’s first body of critique was against the Marshallian system, and the recourse to the critiques of partial equilibrium analysis that emerged was appeal to general equilibrium.
However, while Using Things to Make Things turned out to be useful in continuing the assault on those like Samuelson who had borrowed from the General Theory while building a neo-Marshallian macroeconomic system, the death blows against on General Equilibrium theory were dealt from within, as the neat trick of turning a low-dimension model from physics into an economic model by allocating a dimension to each good and service trade at each place and time turned out to have unexpected formal consequences.
December 14th, 2008 at 11:31 am
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December 14th, 2008 at 11:32 am
Cowen:
“Hayek argued that an economic downturn should be understood as a discombobulation of the capital structure.”
dicombobulate: To throw into a state of confusion.
“In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities.”
So yeah things got discombobulated. The question is why and how.
Turns out the masters of the universe aren’t so masterful, which to me argues for more progressive taxation and a stronger safety net.
As Dean Baker pointed out:
“Goldman, Once Warning Of $200 Oil, Sees $45 In 2009
SINGAPORE/LONDON (Reuters) – Goldman Sachs’ energy equity research team, which predicted a crude oil spike to $200 a barrel earlier this year, slashed on Friday its 2009 forecast to just $45 as demand deteriorates.”
http://www.nytimes.com/reuters/2008/12/12/business/business-us-oil-goldman-price.html?_r=1
December 15th, 2008 at 10:26 am
Walt,
I don’t think that Bruce is saying GE was invented to respond to the CCC. I think he is saying that it became more popular, at least among theorists, as a reaction to the CCC.
That said, Arrow did have some involvement with capital controversies. He was at Cambridge, UK, sometime in the late 1950s or early 1960s. I thinked he may have even attended the “secret seminar” in which Kaldor, Kahn, and Robinson, for example, were working out their growth theories. And one can read Arrow’s paper on “learning by doing” as fitting into this tradition. At least, Kaldor immediately did.
I somewhere downloaded a MP3 interview with Arrow where he talked about being influenced by Hicks’ book on Value and Capital. He wanted to do it right. Some have read Hayek and Hicks, among others, as responding to capital-theoretic problems in developing models of intertemporal and temporary equilibrium. Walras was logically inconsistent in that he took all produced commodities as having the same own-rate of interest and also took the initial endowments of capital goods as arbitrary givens.
But Arrow has indeed had little to say explicitly about the CCC.
Thanks, Bob, for the link.
December 15th, 2008 at 12:58 pm
The first time I met Paul Samuelson (1971) I asked him about the CCC. His reply was to fall back on GET, “Of course there is heterogeneity of capital, with each form having its own rate or return.”
The later Hicks went sort of semi-Austrian, although his analysis of the traverse in Capital and Growth has been more picked up the Post Keynesians than by the Austrians, who have tended to ignore Hicks in all his manifestations.
I do not know about the secret seminar, but Arrow’s main link to the CCC ran through Frank Hahn, with whom he coauthored an influential, but now mostly forgotten book, in 1971. Hahn was always very reasonable, but liked to engage the Cantabridgian PKs in polemics over capital, posing as the defender of neoclassical orthodoxy, even as he wrote papers about the saddle-path (in)stability in models with heterogeneous capital. Some defense.
Of course the real problem with GET, that came from the inside, was the Sonnenschein-Mantel-Debreu Theorem (or theorems), that really blew it apart for being particularly useful at an aggregate level, although we are plagued with half-baked DSGE models all over the place these days.
BTW, when the question of heterogeneity of agents is brought up to Arrow (I once did so in person a few years ago), he will defend GET as allowing at least heterogeneity of preferences.
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