Wednesday, January 01, 2020

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.

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.

Thursday, December 14, 2017

A Neoclassical Labor Demand Function?

Figure 1: A Labor Demand Function
1.0 Introduction

I am not sure the above graph works. I could draw three-dimensional graphs in PowerPoint, for models specified with algebra, where relative sizes are indefinite. But, I would need to be able to draw parallel lines, and so on.

This post presents a model of extensive rent, with one produced commodity. A labor demand function, for a given rate of profits, graphs real wages versus employment. The resulting function is a non-increasing step function. Net output, in the model, varies with employment.

This post was inspired by Exercise 7.5 of Chapter 10 (p. 312) and Section 1 of Chapter 14 (pp. 428-432) of Kurz and Salvadori (1995). I gather one can advance the same sort of argument in a model with intensive rent or with a mixture of intensive and extensive rent. I conclude with some observations about generalizing this approach to models with multiple produced commodities.

2.0 Technology

Land is in fixed supply in this model. Three types of land exist. I assume tj acres of Type j land are available. Capitalists know of a single process for producing corn on each type of land. Table 1 displays the coefficients of production for each process.

Table 1: Technology
InputsCorn-Producing Processes
AlphaBetaGamma
Laborl1l2l3
Type I Landc100
Type II Land0c20
Type III Land00c3
Corna1a2a3
Outputs1 Bushel Corn

I make a number of assumptions:

  • Each process exhibits constant returns to scale.
  • All processes require a year to complete and totally consume their capital (seed corn).
  • Wages and rent are paid out of the surplus product at the end of the year.
  • All parameters (tj, aj, lj, cj) are positive.
  • Each input of corn per bushel corn produced, aj, is less than one.
  • Without loss of generality, I assume:
(1 - a1)/l1 > (1 - a2)/l2 > (1 - a3)/l3
  • In this specific case:
a1 < a3 < a2
3.0 Price Equations

Prices must be such that, for j = 1, 2, and 3, the following inequality holds:

aj(1 + r) + lj w + cj qj ≥ 1

where w is the wage, r is the rate of profits, and qj is the rent on land of Type j. When the above is a strict inequality, the corn-producing process with the given index incurs extra costs and will not be operated.

In a self-sustaining state, the above equation will be met with equality for at least some processes. For almost all feasible levels of employment, the equality will be met with one type of land, known as the marginal land, paying no rent. The marginal land will be partially in use, but some of it will be in excess supply. Other types of land, if any, that pay a rent will be fully used.

4.0 The Choice of Technique

The problem becomes to determine the order in which land is cultivated, as employment increases; the marginal land; and the corresponding wage and rents. I take the rate of profits as given in this analysis.

Consider a vertical line (not necessarily just the ones shown) on the wage-rate of profits plane, with employment set to zero. This line should be drawn at a given rate of profits. Three wage curves are drawn on this plane, each for an equality in the above equation, with rent set to zero. Each line connects the maximum wage, (1 - aj)/lj bushels per person-year, with the maximum rate of profits, (1 - aj)/aj, for the corresponding process.

The intersections of the wage curves, on this plane, with the vertical line you have drawn, working downward, establishes an order of types of land. I have given the assumptions such that this order is Type 1, Type 2, and Type 3 land when the rate of profits is zero. At the switch point, Type 2 and Type 3 land are tied in this order. For a somewhat larger rate of profits, the order is Type 1, Type 3, and Type 2.

This is the order in which lands are cultivated as output expands. Accordingly, I have drawn labor demand curves as step functions in planes parallel to the wage-employment plane. The height of these steps are determined by the wage that is paid on the marginal land. The height decreases as the rate of profits increases. The width of each step corresponds to how much employment is needed to fully use that land.

The lands for the steps higher and to the left of any point on the step function for the demand function for labor pay a rent when employment and wages are as at that point, in a self-reproducing equilibrium. The lands for the steps lower and to the right pay no rent and are not farmed. If the point is somewhere on the horizontal portion of a step, that land is marginal. Some of it lies fallow, and it pays no rent.

5.0 The Marginal Productivity of Labor

I might as well explain in what sense the wage is equal to the marginal productivity of labor at any point along the demand curve for labor. For the sake of argument, take the rate of profits, r, as fixed. I assume types of land have been re-indexed in order of cultivation, as described above. An ordered pair (L, w) on the labor demand function is either on a horizontal step or a vertical line segment between steps.

First, consider a horizontal step. An increment of labor, ∂L, results in an increased gross output of (∂L/li) bushels of corn. This increased gross output requires an increased input of (∂L ai/li) bushels of seed corn. The increased net output would be the difference between the increment of gross output and the increment of seed corn if these changes occurred at the same moment in time. Either the increased output (and the wage) must be discounted back to the start of the year or the increment in seed corn must be costed up for the end of the year. Adopting the latter alternative, an increment of labor results in a marginal increase in net output of [(∂L/li) - (1 + r)(∂L ai/li)] bushels of corn.

Second, consider a vertical drop. Then, the marginal net product of labor is specified by an interval. In linear models of production, the "equality" of the wage with the marginal product of labor is expressed by an interval bounding the wage:

(1/li) - ai(1 + r)/liw ≤ (1/li - 1) - ai - 1(1 + r)/li - 1

The marginal product of labor is not a physical quantity, independent of prices. It depends on the rate of profits, an important variable in any model of distribution.

6.0 Conclusion

The above is an exposition of a modern analysis of a special case of Ricardo's theory of extensive rent. Mainstream microeconomics can be viewed, after 1870, as (mostly) an unwarranted extension of Ricardo's theory of rent, especially his theory of intensive rent.

Explaining equilibrium prices and quantities by intersections of well-behaved supply and demand functions makes no sense, in general. In particular, wages and employment cannot be explained by supply and demand functions. The above example fails to illustrate this result.

Two limitations of this example, which do not generalize to a model with multiple produced commodities, perhaps account for this failure. First, no distinction can be drawn in the model between demand for labor in the corn-producing sector and demand for labor in the economy as a whole. Increased employment results in both increased gross and increased net output of corn. It is impossible, in this model, for another process to be adopted in an industrial sector (which does not require land as input) such that less corn is required for gross output in the corn sector, for a greater net output in the economy as a whole.

Second, corn capital and output are homogeneous with one another. Different wage levels may result in the adoption of a different process on (newly) marginal land. But no possibility arises in the model for components of capital to vary in relative price with one another. (Prices must vary for the long-period method to be applied in the analysis of labor demand. But prices, other than wages, cannot vary for (some) conceptions of the neoclassical long-period labor demand function. See Vienneau (2005).)

Oppocher and Steedman's 2015 book expands on these points. I was interested to find out that various mainstream economists had developed a new long-period theory of the firm, in the late 1960s and early 1970s, in which a variation in one price must be compensated for by a variation in other prices.

Tuesday, December 12, 2017

An Example of Bifurcation Analysis with Land and the Choice of Technique

Figure 1: A Bifurcation Diagram
1.0 Introduction

I have been looking at how bifurcation analysis can be applied to the choice of technique in models in which all capital is circulating capital. In my sense, a bifurcation occurs when a switch point appears or disappears off the wage frontier. A question arises for me about how to apply or visualize bifurcations in models with land, fixed capital, and so on.

This post starts to investigate this question by looking at a numerical example of a overly simple model with land and extensive rent.

2.0 Parameters and Assumptions for the Model

Table 1 specifies the technology for this example. One parameter, the labor coefficient a0β, is left free. Managers of firms know of two processes for producing corn from inputs of labor, (a type of) land, and seed corn. Each process is defined in terms of coefficients of production. All processes exhibit constant returns to scale; require a year to complete; and totally use up, in producing their output, the capital good required as input. Land, of the specified type, exits the production process as good as it was at the start of the year.

Table 1: Processes For Producing Corn
InputCorn Industry
AlphaBeta
Labora0α = 1 Person-Yr.a0β Person-Yr.
Landbα = 10 Acres of Type Ibβ = 20 Acres of Type II
Cornaα = (1/4) Bushelsaβ = (1/5) Bushels

Each type of land is in fixed supply:

  • LI = 100 Acres of Type I land exist.
  • LII = 100 Acres of Type II land exist.

The assumptions so far impose some limits on the quantity of net output that can be produced. If only Type I land is seeded, and that land is fully used, net output consists of:

(1 - aα) LI/bα = (15/2) bushels

Likewise, if only Type II land is seeded, net output consists of 4 bushels. If net output exceeds (15/2) bushels (that is, the maximum of 15/2 and 4 bushels), both types of land will need to be seeded. If net output is less than (23/2) bushels (that is, the sum of 15/2 and 4 bushels), at least one type of land will not be fully used. Accordingly, assume:

(15/2) bushels < y < (23/2) bushels

where y is net output. Under these assumptions, one type of land is in excess supply and pays no rent.

I consider prices of production to determine rent and to find out which land is free. Since net output is taken here as a constant, no matter how much a0β may fall, I am assuming increased productivity (per worker) is taken in the form of decreased employment.

3.0 Price Equations

I take corn to be numeraire, and I assume rent and wages are paid out of the surplus at the end of the period. Prices of production must satisfy the following system of equations:

(1/4)(1 + r) + 10 ρI + w = 1
(1/5)(1 + r) + 20 ρII + a0β w = 1

where r, w, ρI, and ρII are the rate of profits, the wage, the rent on Type I land, and the rent of Type II land. All four of these distribution variables are assumed to be non-negative. The condition that at least one type of land pays a rent of zero is expressed by a third equation:

ρI ρII = 0

4.0 The Choice of Technique

I consider three solutions of the price equation, each for a different parameter value of a0β.

4.1 First Example

First, suppose a0β is (6/5) person-years per bushel. Each process yields a wage curve, under the assumption that the corresponding type of land pays no rent. Figure 1 graphs both wage curves. A simple generalization of this model would be to multiple produced commodities, with land only used in one industry. Each process in that industry would be associated with a technique, and the associated wage curve could be of any convexity, with the convexity possibly varying throughout its extent.

Figure 2: Each Type of Land Sometimes Pays Rent

In this example, in which both types of land must be used to produce the given net output, the relevant frontier is the inner frontier, shown as a solid black line in the figure. This, too, does not generalize to a multi-commodity model with more types of land. In that case, one would work from the outer frontier inward until the successive types of land could produce, at least, the given net output. This order might depend on whether the wage or the rate of profits was taken as given. Or perhaps some other theory of distribution could be analyzed.

Anyways, the type of land associated with the technique on the inner frontier, in this example, pays no rent. For low rates of profits or high wages, Type II land pays no rent. For high rates of profits or low wages, Type I land pays no rent. At the switch point, both types of land pay no rent. If the wage were given, rent on the type of land associated with the process further from the origin would come out of the super profits that would otherwise be earned on that process. If the rate of profits were given, one might see a conflict between workers and landlords. This analysis is a matter of competitive markets, inasmuch as capitalists can move their investments among industries and processes.

4.2 Bifurcation Over Wage Axis

I next consider a parameter value for a0β of (16/15) person-years per bushel. As shown in Figure 2, this is a case of a bifurcation over the wage axis. You cannot see the wage curve for the Alpha technique in the figure because it is always on the inner frontier. For any distribution of the surplus, Type I land pays no rent. If the rate of profits is zero, Type II land also pays no rent. For any positive rate of profits, landlords obtain a rent on Type II rent.

Figure 3: A Bifurcation Over the Wage Axis

4.3 Type II Land Always Pays Rent

For a final case, let a0β be one person-years per bushel. The wage curve for the Alpha technique has now rotated downwards counter clockwise so far that it never intersects the wage curve for the Beta technique. Whatever the distribution, Type I land pays no rent, and owners of Type II land receive a rent.

Figure 4: Wage Curves Never Intersect

4.4 Bifurcation Diagram

So this simple example can be illustrated with a bifurcation diagram, as seen at the top of this post. The rate of profits for the switch point is"

rswitch = (15 a0β - 16)/(5 a0β - 4)

This function asymptotically approaches the maximum rate of profits for the Alpha technique as a0β increases without bound. The wage curve for Alpha continues to become steeper and steeper. I suppose wage for the switch point approaches the wage on the wage curve for the Beta technique when the rate of profits is 300 percent.

One can also solve for the rents. When the rent on Type I land is non-negative, it is:

ρI = [(15 a0β - 16) + (4 - 5 a0β)r]/(200 5 a0β)

When the rent on Type II land is non-negative, it is:

ρII = [(16 - 15 a0β) + (5 a0β - 4)]/400

5.0 Conclusions

I am partly interested in bifurcation analysis because one can draw neat graphs to visualize the economics. For the numerical example, I would like to be able to draw three-dimensional diagrams. Imagine an axis coming out of the page for the bifurcation digram at the top of this post. I then could have a surface where the rent on one of the types of land is graphed against the rate of profits and the coefficient of production being varied parametrically.

It seems like all four of the normal forms for bifurcations of co-dimension one that I have defined may arise in examples of extensive rent. These are a bifurcation over the wage axis, a bifurcation over the axis for the rate of profits, a three-technique bifurcation, and a restitching bifurcation. They will not necessarily be on the outer frontier, however.

I think another type of bifurcation may be possible. Suppose productivity increases because coefficients of production decreases for land inputs or inputs of capital goods. Given net output, could such an increase in productivity result in some type of land that formerly paid rent (for some range of the rate of profits) becoming rent-free? Could all types of land become non-scarce? How would this sort of bifurcation look on an appropriate bifurcation diagram? Would the distinction between the order of rentability and efficiency be reflected in bifurcation analysis? Can I draw a bifurcation diagram with a discontinuity?

Thursday, December 07, 2017

Infinite Number of Techniques, One Linear Wage Curves

Coefficients for First Column in Leontief Input-Output Matrix

I have uploaded a draft paper with the post title to my SSRN site.

Abstract:This note demonstrates that the special case condition, needed for a simple labor theory of value (LTV), of equal organic compositions of capital does not suffice to determine technology. A model of the production of commodities, with circulating capital and all commodities basic, is analyzed. Given direct labor coefficients and labor values, an uncountably infinite number of Leontief input-output matrices yield the same wage curve under the conditions in which prices of production are proportional to labor values.

This paper is an update of a previous draft paper. I have posed the problem better that I am addressing, have deleted an error in my previously most general formulation, replaced the numerical example by algebra, and shortened my paper. I hope I am not restating something that I did not absorb decades ago in reading John Roemer or Michio Morishima. As of today, I think I am subjectively original.

Wednesday, November 29, 2017

Bifurcation Analysis of a Two-Commodity, Three-Technique Technology

Figure 1: A Bifurcation Diagram

This post expands on this previous post. The technology is the same, but the rates of decrease of the coefficients of production in the Beta and Gamma corn-producing processes are not fixed. Instead, I consider the full range of parameter values. (I find the graphs produced by bifurcation analysis interesting for this case, but I think a two-commodity example can be found with more pleasing diagrams.)

Anyways, Figure 1 shows a bifurcation diagram for the parameter space in this example. The region numbered 8 is not visible on the graph. Accordingly, Figure 2 below shows a much expanded picture of the parameter space around that region. The specific parameter values in the previous post lead to a temporal path along the dashed ray extending from the origin in Figure 1. (The numbering of regions in this post and the previous post do not correspond.) Although it is not obvious, the locus of points bifucating regions 9 and 10 eventually, somewhere to the right of the region shown in Figure 1 eventually decreases in slope and intercepts the dashed ray.

Figure 2: Blowup of a Part of the Bifurcation Diagram

As usual, each numbered region corresponds to a definite sequence of cost-minimizing techniques contributing wage curves along the wage frontier. Table 1 lists this sequence for each region. Some notes on switch points are provided. A switch point is called "normal" merely if it conforms to outdated neoclassical intuition. In other words, such a switch point exhibits negative real Wicksell effects. In the example, regions also exist where switch points exhibit positive real Wicksell effects.

Table 1: Cost-Minimizing Techniques by Region
RegionCost-Minimizing
Techniques
Notes
1AlphaOne technique cost-minimizing.
2Alpha, Beta"Normal" switch point.
3Beta, Alpha, BetaReswitching. Switch pt. at
highest r is "perverse".
4BetaOne technique cost-minimizing.
5Alpha, Gamma"Normal" switch point.
6Alpha, Gamma, Beta"Normal" switch points.
7Beta, Alpha,
Gamma, Beta
Recurrence of techniques.
Switch pt. at highest r is
"perverse".
8Beta, Alpha, Beta,
Gamma, Beta
Two reswitchings, two
"perverse" switch pts.
9GammaOne technique cost-minimizing.
10Gamma, Beta"Normal" switch point.
11Beta, Gamma, BetaReswitching. Switch pt. at
highest r is "perverse".

One can compare and contrast the above bifurcation diagram with the one in this post. The latter bifurcation diagram is for a specific instance of the Samuelson-Garegnani model, in which the basic commodity varies among techniques. (I have a more recent write-up of that bifurcation analysis linked to here.)

Saturday, November 25, 2017

Reswitching Without a Reswitching Bifurcation

Figure 1: A Bifurcation Diagram

This post presents another example of bifurcation analysis applied to structural economic dynamics with a choice of technique. This example illustrates:

  • Two reswitching examples appear and disappear without a reswitching bifurcation ever occurring, at least on the wage frontier.
  • Two bifurcations over the wage axis arise. At the time each bifurcation of this type occurs, another switch point for the same techniques exhibits a real Wicksell effect of zero. Thus, for each, a switch point transitions from being a "normal" switch point to a "perverse" one exhibiting capital-reversing.
  • Each of the four types of bifurcations of co-dimension one that I have identified have no preferred temporal order. For example, a bifurcation over the wage axis can add a switch point to the wage frontier. And another such bifurcation can remove a switch point, as time advances.
  • The maximum rate of profits approaches an asymptote from below as time increase without bound.

Table 1 specifies the technology for this example, in terms of two parameters, σ and φ. Managers of firms know of one process for producing iron and of three processes for producing corn. Each process is defined in terms of coefficients of production, which specify the quantities of labor, iron, and corn needed to produce a unit output for that process. All processes exhibit constant returns to scale; require a year to complete; and totally use up, in producing their output, the capital goods required as input. I consider the special case in which the rate of decrease of the coefficients of production in the Beta corn-producing process, σ, is 5 percent, and the rate of decrease of coefficients in the Gamma corn-producing process, φ, is 10 percent.

Table 1: Processes For Producing Iron and Corn
InputIron
Industry
Corn Industry
AlphaBetaGamma
Labor10.899650.71733 et1.28237 et
Iron0.450.0250.00176 et0.03375 et
Corn20.10.53858 et0.13499 et

Three techniques are available for producing a net output of, say, corn, while reproducing the capital goods used as input. The Alpha process consists of the iron-producing process and the corn-producing process labeled Alpha. And so on for the Beta and Gamma techniques.

The choice of technique is analyzed in the usual way. I assume that labor is advanced, and wages are paid out of the surplus product at the end of the year. Corn is taken as numeraire. A wage curve can be drawn for each technique, given the coefficients of production prevailing at a given moment in time. Figure 1 illustrates a case of the recurrence of techniques in the example. The cost-minimizing technique is found by constructing the outer frontier of the wage curves. In Figure 2, the cost-minimizing techniques are Beta, Alpha, Gamma, and Beta, in that order. The switch point at approximately 57 percent exhibits capital-reversing. Around the switch point, a higher wage is associated with the adoption of a more labor-intensive technique. If prices of production prevail, firms will find it cost-minimizing to hire more workers at a higher wage, given net output.

Figure 2: Wage Curves in Region 4

Figure 3 illustrates the analysis of the choice of technique for all time. Switch points along the frontier and the maximum rate of profits are plotted versus time. Figure 1, at the top of this post, is a blowup of Figure 3 from time zero to a time of five years. These pictures show which technique is cost-minimizing at each rate of profits, at each moment in time. Bifurcations are also shown. Table 2 lists the cost-minimizing techniques in each region between the bifurcations.

Figure 3: An Extended Bifurcation Diagram

Table 2: Cost-Minimizing Techniques by Region
RegionCost-Minimizing
Techniques
Notes
1AlphaOne technique cost-minimizing.
2Alpha, Beta"Normal" switch point.
3Beta, Alpha, BetaReswitching. Switch pt. at
highest r is "perverse".
4Beta, Alpha, Gamma, BetaRecurrence of techniques. Switch
pt. at highest r is "perverse".
5Beta, Gamma, BetaReswitching. Switch pt. at
highest r is "perverse".
6Gamma, Beta"Normal" switch point.
7GammaOne technique cost-minimizing.
Maximum r approaches an
asymptote.

I suppose I can extend this example to partition the complete parameter space, as in this example, with an updated write-up here. That analysis will demonstrate, by example, that this sort of bifurcation analysis applies to cases in which multiple commodities are basic in multiple techniques. It is not confined to the special case of the Samuelson-Garegnani model. I am also thinking that I could perform a bifurcation analysis where parameters that vary include the ratio of the rates of profits in various industries, as in these examples of a model of oligopoly. Maybe such an analysis will yield an empirically relevant tale of the evolution of economic duality (also known as segmented markets).

Wednesday, November 22, 2017

Bifurcation Analysis Applied to Structural Economic Dynamics with a Choice of Technique

Variation of Switch Points with Technical Progress in Two Industries

I have a new working paper - basically an update of one I have previously described.

Abstract: This article illustrates the application of bifurcation analysis to structural economic dynamics with a choice of technique. A numerical example of the Samuelson-Garegnani model is presented in which technical progress is introduced. Examples of temporal paths through the parameter space illustrate variations of the wage frontier. A single technique is initially uniquely cost-minimizing for all feasible rates of profits. Eventually, the technique for which coefficients of production decrease at the fastest rate is always cost-minimizing. This example illustrates possible variations in the existence of Sraffa effects, which arise during the transition between these positions.