Failure Of Neoclassical Economics

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Robert Vienneau

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Jan 3, 2006, 6:05:25 PM1/3/06
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I have been updating a demonstration of the incorrectness of
neoclassical economics:

<http://www.dreamscape.com/rvien/Economics/Essays/Sraffa3.pdf>

I wanted to go more into mainstream microdynamics. I have a long
ways to go, but I thought I would make my results available as
they stand now.

Whether one thinks it worthwhile or not to use Cambridge capital-
theoretic paradoxes to explore possibilities in mainstream
dynamics, one thing should be clear. Advanced mainstream price
theory does not support the "applied" stories neoclassical
economists preach. And it has not supported such tales for
somewhere from a quarter to a half century. But, as we have seen
on Usenet newsgroups, many mainstream economists do not understand
their own theory.

Here is somebody who doesn't think Cambridge paradoxes have much
to say about stability:

"The years between 1998 and 2003 marked a number of anniversaries
related to the controversies on capital theory that climaxed with
the debate on reswitching one generation ago. There have been
meetings, collective volumes and review articles devoted to
remember, document, and assess. Yet, they have been almost
exclusively by people whose heart is still with the 'losing'
Sraffian side. What appears slightly strange is not that a few
elderly economists may be clutching to outmoded ideas. Rather, it
is the tight silence by the 'winning' mainstream side. One might
assume that after about forty years there should be a chance to
look back at those angry exchanges with some degree of detachment.
Indeed, it is hard to believe that an argument of that intensity
may have lasted for so long, involving some of the best brains of
the profession, without producing any new knowledge at all. The
question is thus not just one of historical interest. It is a matter
of understanding what exactly is wrong with the idea that reswitching
and allied issues undermine the logical consistency of orthodox
economic theory, as some still believe. There is probably nothing
essentially new to be discovered nowadays on this subject, but this
was clearly not so forty years ago, when Paul Samuelson sponsored
Levhari's non-reswitching theorem. And even today much apparent
uneasiness may be due to the fact that what has become known between
then and now has not percolated effectively outside the specialist
field."
-- Mario Ferretti (2004). "The Neo-Ricardian Critique: An
Anniversary Assessment"

And here's somebody more sympathetic to Sraffians:

"But self-absorption and consistent policy error are just two of
the endemic problems of the leading American economists, and not
even the most serious among them. The deeper problem is the nearly
complete collapse of the prevailing economic theory--of the
structure of thought that supports their policy ideas. It is a
collapse so complete, so pervasive, that the profession can only
deny it by refusing to discuss theoretical questions in the first
place."
-- James Galbraith
http://www.prospect.org/print/V11/7/galbraith-j.html

--
Mostly economics: <http://www.dreamscape.com/rvien/#PublicationsForFun>
r c
v s a Whether strength of body or of mind, or wisdom, or
i m p virtue, are found in proportion to the power or wealth
e a e of a man is a question fit perhaps to be discussed by
n e . slaves in the hearing of their masters, but highly
@ r c m unbecoming to reasonable and free men in search of
d o the truth. -- Rousseau

Hunter Watson

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Jan 5, 2006, 3:38:58 PM1/5/06
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Thanks but it really would be better if you made your own
demonstration. We could look at the first few paragraphs and then
decide whether to read further.

Hunter Watson

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Jan 5, 2006, 3:52:47 PM1/5/06
to
BTW, Wikipedia on Sraffa is interesting. I knew little of his
biography. One thing seems certain, his geo-economic assessment of
Japan was on target:

"He became rich after a long-term investment on Japanese government
bonds, made the day after the nuclear bombing on Hiroshima and
Nagasaki; a popular story tells that he'd received a huge amount of
money which for more than a decade he'd refused to invest, waiting for
a "safe" opportunity. He correctly reasoned that Japan wouldn't remain
a poor country for long.

Robert Vienneau

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Jan 6, 2006, 4:36:26 AM1/6/06
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In article <1136493538.2...@g49g2000cwa.googlegroups.com>,
"Hunter Watson" <coaste...@yahoo.com> wrote:

> Robert Vienneau wrote:
> > I have been updating a demonstration of the incorrectness of
> > neoclassical economics:
> >
> > <http://www.dreamscape.com/rvien/Economics/Essays/Sraffa3.pdf>
> >
> > I wanted to go more into mainstream microdynamics. I have a long
> > ways to go, but I thought I would make my results available as
> > they stand now.
> >
> > Whether one thinks it worthwhile or not to use Cambridge capital-
> > theoretic paradoxes to explore possibilities in mainstream
> > dynamics, one thing should be clear. Advanced mainstream price
> > theory does not support the "applied" stories neoclassical
> > economists preach. And it has not supported such tales for
> > somewhere from a quarter to a half century. But, as we have seen
> > on Usenet newsgroups, many mainstream economists do not understand
> > their own theory.

> [snip]

> Thanks but it really would be better if you made your own
> demonstration. We could look at the first few paragraphs and then
> decide whether to read further.

Watson the knave ought to consult a doctor about that tapeworm.

Hunter Watson

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Jan 6, 2006, 6:39:30 PM1/6/06
to

Robert Vienneau wrote:
> In article <1136493538.2...@g49g2000cwa.googlegroups.com>,
> "Hunter Watson" <coaste...@yahoo.com> wrote:
>
> > Robert Vienneau wrote:
> > > I have been updating a demonstration of the incorrectness of
> > > neoclassical economics:
> > >
> > > <http://www.dreamscape.com/rvien/Economics/Essays/Sraffa3.pdf>
> > >
> > > I wanted to go more into mainstream microdynamics. I have a long
> > > ways to go, but I thought I would make my results available as
> > > they stand now.
> > >
> > > Whether one thinks it worthwhile or not to use Cambridge capital-
> > > theoretic paradoxes to explore possibilities in mainstream
> > > dynamics, one thing should be clear. Advanced mainstream price
> > > theory does not support the "applied" stories neoclassical
> > > economists preach. And it has not supported such tales for
> > > somewhere from a quarter to a half century. But, as we have seen
> > > on Usenet newsgroups, many mainstream economists do not understand
> > > their own theory.
>
> > [snip]
>
> > Thanks but it really would be better if you made your own
> > demonstration. We could look at the first few paragraphs and then
> > decide whether to read further.
>
> Watson the knave ought to consult a doctor about that tapeworm.

As you like, Robert, but I'm on topic.

Hunter Watson

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Jan 6, 2006, 10:46:25 AM1/6/06
to

Robert Vienneau wrote:
> In article <1136493538.2...@g49g2000cwa.googlegroups.com>,
> "Hunter Watson" <coaste...@yahoo.com> wrote:
>
> > Robert Vienneau wrote:
> > > I have been updating a demonstration of the incorrectness of
> > > neoclassical economics:
> > >
> > > <http://www.dreamscape.com/rvien/Economics/Essays/Sraffa3.pdf>
> > >
> > > I wanted to go more into mainstream microdynamics. I have a long
> > > ways to go, but I thought I would make my results available as
> > > they stand now.
> > >
> > > Whether one thinks it worthwhile or not to use Cambridge capital-
> > > theoretic paradoxes to explore possibilities in mainstream
> > > dynamics, one thing should be clear. Advanced mainstream price
> > > theory does not support the "applied" stories neoclassical
> > > economists preach. And it has not supported such tales for
> > > somewhere from a quarter to a half century. But, as we have seen
> > > on Usenet newsgroups, many mainstream economists do not understand
> > > their own theory.
>
> > [snip]
>
> > Thanks but it really would be better if you made your own
> > demonstration. We could look at the first few paragraphs and then
> > decide whether to read further.
>
> Watson the knave ought to consult a doctor about that tapeworm.

In this context ideology is the all consuming disability. I don't have
one.

Dan in Philly

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Jan 8, 2006, 9:22:30 PM1/8/06
to
"Robert Vienneau" <rv...@see.sig.com> wrote in message ...

> ... Advanced mainstream price


> theory does not support the "applied" stories neoclassical
> economists preach.

It does if you assume, e.g., that reswitching is unimporant.
Assumptions are always debatable, but should be confirmed or rejected by
empirical data. AFAIK, no one has done that.

Dan in Philly


Robert Vienneau

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Jan 8, 2006, 10:49:46 PM1/8/06
to
In article <43c1c8e4$0$10305$a826...@reader.corenews.com>, "Dan in
Philly" <dj...@aol.com> wrote:

> "Robert Vienneau" <rv...@see.sig.com> wrote in message ...

> > ... Advanced mainstream price
> > theory does not support the "applied" stories neoclassical
> > economists preach.

> It does if you assume, e.g., that reswitching is unimporant.

No. First, the failure of equilibrium prices to act as scarcity
indices (given no information asymetries, sticky or rigid prices,
etc.) does not depend on the presence of reswitching.

Second, Neoclassical assumptions are supposed to be consistent
with methodological individualism. In other words, assumptions
are supposed to be on tastes, technology, or endowments. That
one isn't.

Neoclassical economists recognize that they cannot state their
assumptions:

"Imposing some set of conditions on the technology T() should
be sufficient to assure that the real Wicksell effect is always
negative. Such a conditions would be of interest - especially
if they could be empirically tested - since they would validate
the qualitative conclusions derived from the one-good models
often used in macroeconomics without any theoretical
justification for ignoring aggregation problems... Unfortunately,
no set of such sufficient conditions is known, but the literature
on capital aggregation suggests that they would impose severe
restrictions on the technology."
-- Edwin Burmeister (1987), "Wicksell Effects", _The New
Palgrave_.

(I'm published stating that more than aggregation problems are
involved here.)

> Assumptions are always debatable, but should be confirmed or rejected by
> empirical data.

Illogic cannot be changed by running a regression. And neoclassical
economics was neither induced by nor confirmed by data.

> AFAIK, no one has done that.

Certainly, nobody has presented data showing Sraffa effects are
unimportant. But I have often pointed out applied case studies,
not all of which I've read, going the other way:

Peter Albin (1975). "Reswitching: An Empirical Observation," _Kyklos_,
Number 1, 28, pp. 149-54.

Geir B. Asheim (1980). "The Occurrence of Paradoxical Behavior in a
Model where Economic Activity has Environmental Effects," Norwegian
School of Economics and Business Administration Discussion Papers.

Trevor Barnes and Eric Sheppard (1984). "Technical Choice and
Reswitching in Space Economies," _Regional Science and Urban
Economics_, V. 14, pp. 345-352.

Han, Z. and Schefold, B. (2003). "An Empirical Investigation of
Paradoxes (Reswitching and Reverse Capital Deepening) in Capital
Theory", working paper.

John Hartwick (1976). "Intermediate Goods and the Spatial Integration
of Land Use," _Regional Science and Urban Economics_, V. 6, pp.
127-145.

Adam Ozanne (1996). "Do Supply Curves Slope Up? The Empirical
Relevance of the Sraffian Critique of Neoclassical Production
Economics," _Cambridge Journal of Economics_, Volume 20, pp. 749-762.

Raymond Prince and J. Barkley Rosser, Jr., (1984). "Environment Costs
and Reswitching Between Food and Energy Production in the Western
United States," mimeo, James Madison University.

Raymond Prince and J. Barkley Rosser, Jr., (1985). "Some Implications
of Delayed Environmental Costs for Benefit Cost Analysis: A Study of
Reswitching in the Western Coal Lands, _Growth and Change_, V. 16,
18-25.

U. Schweizer and P. Varaiya (1977). "The Spatial Structure of
Production with a Leontief Technology-II: Substitute Techniques,"
_Regional Science and Urban Economics_, V. 7, pp. 293-320.

A. J. Scott (1979). "Commodity Production and the Dynamics of Land-
Use Differentiation," _Urban Studies_, V. 16, pp. 95-104.

S. Zambelli (2004). "The 40% Neoclassical Aggregate Theory of
Production: Results of a Simulation Investigation", _Cambridge
Journal of Economics_, V. 28, Iss. 1 (Jan): 99-120.

To me, an important empirical question is one of the sociology of
"knowledge": why do mainstream economists continue to teach and
apply theories known to be logical nonsense?

dr.be...@auckland.ac.nz

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Jan 9, 2006, 9:11:21 PM1/9/06
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Because even with no clothes they live in penthouses with central
heating.

Dan in Philly

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Jan 9, 2006, 11:13:19 PM1/9/06
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"Robert Vienneau" wrote in message ...

>> > ... Advanced mainstream price
>> > theory does not support the "applied" stories neoclassical
>> > economists preach.

>> It does if you assume, e.g., that reswitching is unimporant.

> No. First, the failure of equilibrium prices to act as scarcity
> indices (given no information asymetries, sticky or rigid prices,
> etc.) does not depend on the presence of reswitching.

But it depends on _something_. All useful models have some assumptions.

The alternative is a truly complete model: lots of consumers with
well-defined utility functions, lot of firms with well-defined production
functions, specific endowments, etc. And such a model can prove: nothing. It
yields multiple equilibriums, instability, and so forth.

So if you want to 'prove' something, you have to make simplifying
assumptions. But the final model is so simplified, that it can't be
verified empirically.

Dan in Philly


Robert Vienneau

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Jan 10, 2006, 5:26:22 AM1/10/06
to
In article <43c33459$0$10332$a826...@reader.corenews.com>, "Dan in
Philly" <dj...@aol.com> wrote:

> "Robert Vienneau" wrote in message ...

> >> > ... Advanced mainstream price
> >> > theory does not support the "applied" stories neoclassical
> >> > economists preach.

> >> It does if you assume, e.g., that reswitching is unimporant.

By the way, it would not surprise me if Dan is incapable of
defining "reswitching". He could easily prove me wrong.



> > No. First, the failure of equilibrium prices to act as scarcity
> > indices (given no information asymetries, sticky or rigid prices,
> > etc.) does not depend on the presence of reswitching.

> But it depends on _something_. All useful models have some assumptions.

The failure of equilibrium prices to act as scarcity indices is the
general case under neoclassical assumptions. Examples arise in models
in which all the assumptions are neoclassical.



> The alternative is a truly complete model: lots of consumers with
> well-defined utility functions, lot of firms with well-defined production
> functions, specific endowments, etc.

And, under such assumptions, equilibrium prices are, in the
general case, not scarcity indices. As I have shown time and time
again.

> And such a model can prove: nothing.
> It
> yields multiple equilibriums, instability, and so forth.

What has been proven is, say, that the uniqueness of equilibria
does not follow from standard neoclassical assumptions. Likewise,
equilibrium prices are not scarcity indices, under standard
neoclassical assumptions.

But this won't keep mainstream economists from teaching
outdated nonsense to their students.



> So if you want to 'prove' something, you have to make simplifying
> assumptions. But the final model is so simplified, that it can't be
> verified empirically.

If Dan wants a model to yield equilibrium prices that are scarcity
indices, he would need to introduce special case assumptions. But
he cannot and will not tell us any such assumptions. As I noted,
good neoclassical economists know they don't know what their
assumptions are (see Burmeister quote in previous post that
Dan clipped without comment).

And, it would seem that if Dan understood the logic of these models,
he would be saying above that neoclassical economics cannot be
verified empirically.

I noticed that Dan also clipped without comment my citations of
empirical evidence. Dan seems interested in neither getting his
logic correct, empirical evidence, nor how the sociology of
economics perpetuates ignorance. So I don't see his point.

By the way, suppose one found none of those empirical studies
convincing. Still...

"...the absence of empirical results either way cannot be used as
a defence of the orthodox position that the absence of reverse
capital deepening is the 'general case'. Orthodox analysis has no
a priori basis on which to presume that what it considers to be
the general case is in fact the general case. Such a defence would
require a logically coherent argument as to why one should expect
technologies admitting reverse capital deepening to be less likely
than those that do not. No such argument has been provided by
orthodox theorists."
-- Graham White (2001). "The Poverty of Conventional Economic
Wisdom and the Search for Alternative Economic and Social
Policies", _The Drawing Board: An Australian Review of
Public Affairs_, V. 2, N. 2 (Nov): 67-87. (available on
the net somewhere.)

"The critique of Robinson and Sraffa is more than forty years old.
Yet for psychological and political reasons, rather than for logical
and mathematical ones, the capital critique has not penetrated
mainstream economics. It likely never will. Today only a handful of
economists seem aware of it. Aggregate production function applications
run rampart in studies of economic growth (new growth theory),
development and convergence, and international trade (factor-price
equalization and other applications of Heckscher-Ohlin). Ostensible
liberals are not exempt; their arguments for higher public
infrastructure investment (based on its alleged marginal productivity)
are precisely of this type, as are arguments for increased investment
in education based on the higher marginal productivity of human skill.
To mainstream economics, Keynesianism has been reduced to a narrow
doctrine relating sticky wages, public spending, and employment. The
fact that there exists a Post Keynesian distribution theory, still
less the reasons for it, has been mostly forgotton."
-- James Galbraith, "The Distribution of Income". In _A New
Guide to Post Keynesian Economics_, 2001.

ruet...@outgun.com

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Jan 10, 2006, 9:39:32 AM1/10/06
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>The alternative is a truly complete model: lots of consumers with
>well-defined utility functions, lot of firms with well-defined production
>functions, specific endowments, etc. And such a model can prove: nothing. It
>yields multiple equilibriums, instability, and so forth.

What should economic models try to "prove"? Why should they try and
prove anything rather than simply describe reality? What is the
obsession with trying to prove a unique and stable equilibrium in GE
models when such a state does not exist in the real world? Why
continue to make further unrealistic assumptions for no reason other
than to defend the conclusion the model provides?

Eventually, astronomers abandoned the epicycle, chemists abandoned the
phlogiston, and physicists abandoned the aether. It's time for
economists to abandon general equilibrium theory and probably all of
the artifices of comparative static analysis across the board.

Dan in Philly

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Jan 10, 2006, 10:18:22 AM1/10/06
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"Robert Vienneau" <rv...@see.sig.com> wrote in message ...

>> >> It does if you assume, e.g., that reswitching is unimporant.

> By the way, it would not surprise me if Dan is incapable of
> defining "reswitching".

Something to do with the Cambridge Capital Controversy (I thought you'd
enjoy the reference). I arises when you assume multiple goods.

> The failure of equilibrium prices to act as scarcity indices is the
> general case under neoclassical assumptions. Examples arise in models
> in which all the assumptions are neoclassical.

Depends on exactly what you mean by neoclassical assumptions.
In grad school, I learned the "interest rate equals marginal productivity of
capital (minus depreciation)" result. The prof obtained that result by
analyzing a one-good model (ie the good was both a consumption good and a
capital good). If you accept that assumption - that a one-good model yields
insights about reality - then you'll accept the result. If not, then you
don't.

Dan in Philly

Dan in Philly

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Jan 10, 2006, 10:20:22 AM1/10/06
to
<ruet...@outgun.com> wrote in message ...

> >The alternative is a truly complete model: lots of consumers with
>>well-defined utility functions, lot of firms with well-defined production
>>functions, specific endowments, etc. And such a model can prove: nothing.
>>It
>>yields multiple equilibriums, instability, and so forth.

> What should economic models try to "prove"? Why should they try and
> prove anything rather than simply describe reality?

I agree. That's why I only work with macro-econometric models. They're far
from perfect, but better than the hyper-theoretic stuff.

Dan in Philly

ro...@telus.net

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Jan 10, 2006, 10:31:05 AM1/10/06
to
On Mon, 9 Jan 2006 23:13:19 -0500, "Dan in Philly" <dj...@aol.com>
wrote:

>"Robert Vienneau" wrote in message ...


>
>>> > ... Advanced mainstream price
>>> > theory does not support the "applied" stories neoclassical
>>> > economists preach.
>
>>> It does if you assume, e.g., that reswitching is unimporant.
>
>> No. First, the failure of equilibrium prices to act as scarcity
>> indices (given no information asymetries, sticky or rigid prices,
>> etc.) does not depend on the presence of reswitching.
>
>But it depends on _something_. All useful models have some assumptions.
>
>The alternative is a truly complete model: lots of consumers with
>well-defined utility functions, lot of firms with well-defined production
>functions, specific endowments, etc. And such a model can prove: nothing. It
>yields multiple equilibriums, instability, and so forth.

IOW, something similar enough to reality to be of scientific interest.

>So if you want to 'prove' something, you have to make simplifying
>assumptions. But the final model is so simplified, that it can't be
>verified empirically.

I.e., it does not describe reality, even to a useful approximation.
Right.

Proof is a mathematical concept, not a scientific one. Any
"economics" that deals in proofs is not an empirical science but a
formal exercise, like doing sudoku puzzles.

-- Roy L

ruet...@outgun.com

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Jan 10, 2006, 11:50:20 AM1/10/06
to
>In grad school, I learned the "interest rate equals marginal productivity of
>capital (minus depreciation)" result. The prof obtained that result by
>analyzing a one-good model (ie the good was both a consumption good and a
>capital good). If you accept that assumption - that a one-good model yields
>insights about reality - then you'll accept the result. If not, then you
>don't.

How can you build a distribution theory around a single factor model?
If there's only one factor by definition, then it gets everything it
produces. That's tautological.

Ron Peterson

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Jan 10, 2006, 4:50:07 PM1/10/06
to

ruet...@outgun.com wrote:

> What should economic models try to "prove"?

In any field of study, a model is an abstraction that might have
correspondence to reality. For an economic model, mathematical and
computational techniques try to show the existence of certain economic
phenomena.

> Why should they try and prove anything rather than simply describe reality?

Describing reality only consists of mountains of observations. The
purpose of a model, is to be able to describe and change a real economy
with much less information.

--
Ron

Les Cargill

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Jan 10, 2006, 8:07:58 PM1/10/06
to
ro...@telus.net wrote:

They are not totally disjoint. Various symmetries in formulae
about particles in physics suggested that some previously
unobserved particles existed. And they did.

Any
> "economics" that deals in proofs is not an empirical science but a
> formal exercise, like doing sudoku puzzles.
>
> -- Roy L


Yes, but it's possible to string together previously proven
empirical facts to arrive at another conjecture. That conjecture
has to withstand empirical testing, but it's much more likely
to be valid than random statements.

And this totally ignores Bayesian methods.

--
Les Cargill

Robert Vienneau

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Jan 10, 2006, 9:16:17 PM1/10/06
to
In article <43c3d037$0$10309$a826...@reader.corenews.com>, "Dan in
Philly" <dj...@aol.com> wrote:

> "Robert Vienneau" <rv...@see.sig.com> wrote in message ...

> >> >> It does if you assume, e.g., that reswitching is unimporant.

> > By the way, it would not surprise me if Dan is incapable of
> > defining "reswitching".

> Something to do with the Cambridge Capital Controversy (I thought you'd
> enjoy the reference). I arises when you assume multiple goods.

The above is not a definition. I don't know why Dan should think
I would enjoy evidence that he is talking shite, rather than
addressing my posts.

> > The failure of equilibrium prices to act as scarcity indices is the
> > general case under neoclassical assumptions. Examples arise in models
> > in which all the assumptions are neoclassical.

> Depends on exactly what you mean by neoclassical assumptions.
> In grad school, I learned the "interest rate equals marginal productivity
> of
> capital (minus depreciation)" result. The prof obtained that result by
> analyzing a one-good model (ie the good was both a consumption good and a
> capital good). If you accept that assumption - that a one-good model
> yields
> insights about reality - then you'll accept the result. If not, then you
> don't.

I would expect those teaching introductory students would introduce
heuristic assumptions that simplify their teaching, for example,
differentiability. If teachers were honest, they would not use
these simple models to prove results that are known not to
generalize, in some sense or another, when those heuristic
assumptions are relaxed without pointing out this failure to
generalize.

These are not assumptions of an economic theory or model:

o "A one-good model yields insights about reality"
o "Reswitching is unimporant"

These are examples of assumptions of canonical neoclassical models:

o Preference relations are transitive.
o The production set representing the technology is convex.

Mainstream price theory does not support the "applied" stories
neoclassical economists preach. In general, equilibrium prices
are not scarcity indices, and Marshall's principle of
substitution does not apply.

In stating the above, I am not challenging the "realism" of
neoclassical assumptions, but simply pointing out the widespread
adoption of mathematical error by neoclassical economists.

Hunter Watson

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Jan 10, 2006, 10:50:40 PM1/10/06
to

Robert Vienneau wrote:
> In article <43c3d037$0$10309$a826...@reader.corenews.com>, "Dan in
> Philly" <dj...@aol.com> wrote:
>
> > "Robert Vienneau" <rv...@see.sig.com> wrote in message ...
>
> > >> >> It does if you assume, e.g., that reswitching is unimporant.
>
> > > By the way, it would not surprise me if Dan is incapable of
> > > defining "reswitching".
>
> > Something to do with the Cambridge Capital Controversy (I thought you'd
> > enjoy the reference). I arises when you assume multiple goods.
>
> The above is not a definition. I don't know why Dan should think
> I would enjoy evidence that he is talking shit, rather than
> addressing my posts.

Behave yourself, Robert. I've just finished an analysis of your entire
usenet career. Sooner or later you insult every person you speak
to---it makes no difference how civil he or she has been. You need to
recognize this pattern as pathological.


>
> > > The failure of equilibrium prices to act as scarcity indices is the
> > > general case under neoclassical assumptions. Examples arise in models
> > > in which all the assumptions are neoclassical.
>
> > Depends on exactly what you mean by neoclassical assumptions.
> > In grad school, I learned the "interest rate equals marginal productivity
> > of
> > capital (minus depreciation)" result. The prof obtained that result by
> > analyzing a one-good model (ie the good was both a consumption good and a
> > capital good). If you accept that assumption - that a one-good model
> > yields
> > insights about reality - then you'll accept the result. If not, then you
> > don't.
>
> I would expect those teaching introductory students would introduce
> heuristic assumptions that simplify their teaching, for example,
> differentiability. If teachers were honest, they would not use
> these simple models to prove results that are known not to
> generalize, in some sense or another, when those heuristic
> assumptions are relaxed without pointing out this failure to
> generalize.

More of the same, Robert: "You, Dan, were an "introductory" student
back then in graduate school and your prof was, therefore, required to
use "heuristic" assumptions because "simplification" was needed for
such simpletons as you. Your teacher was dishonest to boot because he
didn't have the prescience to agree with me."


>
> These are not assumptions of an economic theory or model:
>
> o "A one-good model yields insights about reality"
> o "Reswitching is unimporant"
>
> These are examples of assumptions of canonical neoclassical models:
>
> o Preference relations are transitive.
> o The production set representing the technology is convex.
>
> Mainstream price theory does not support the "applied" stories
> neoclassical economists preach. In general, equilibrium prices
> are not scarcity indices, and Marshall's principle of
> substitution does not apply.
>
> In stating the above, I am not challenging the "realism" of
> neoclassical assumptions, but simply pointing out the widespread
> adoption of mathematical error by neoclassical economists.

Mere assertions, the sort of thing you absolutely never support in the
here and now.

william...@hotmail.com

unread,
Jan 11, 2006, 11:21:20 AM1/11/06
to
Robert, elsewhere you wrote:

"I have already shown, repetitively, how Marx can claim that the source
of profits is in the exploitation of workers while correctly
maintaining that prices are not proportional to labor values."

It appears that the purpose of your repeated attack on neo-classic
theory is to lend credence to Marxian theory. Is that not correct?

And would it not follow that if the "source of profits" is the
"exploitation of workers," then it would be necessary to confiscate or
prohibit profits? And if that is the case, would that not require a
command economy with bureaucrats setting prices "proportional to" the
"labor values" that they judge is necessary for the production of the
various goods and services. In other words, you are decidedly
anti-market, are you not?

If so, I will have to conclude that you are not aware that
neo-classical theory is not the only theoretical (certainly it is far
from the best) justification for the system of free enterprise as
opposed to the (been there done that) alternative that you prefer?
-

Hunter Watson

unread,
Jan 11, 2006, 3:42:00 PM1/11/06
to

william...@hotmail.com wrote:
> Robert, elsewhere you wrote:
>
> "I have already shown, repetitively, how Marx can claim that the source
> of profits is in the exploitation of workers while correctly
> maintaining that prices are not proportional to labor values."

He is certainly repetitive but it's limited to mere assertions. He
commits himself to nothing beyond the making of a few citations which
often turn out to bear no resemblance the assertions.

> It appears that the purpose of your repeated attack on neo-classic
> theory is to lend credence to Marxian theory. Is that not correct?

He won't answer that candidly so I'll do it for him: yes, obviously,
Robert's purpose is to lend credence to Marxian theory. This is shown
clearly by his vague yet persistent attacks on the arguments of all
critics of Marxist theory. It is also shown by the verbal violence and
ad hominem arguments he directs at everyone who displayes the most mild
disagreement with him on these subjects. He's done it again in this
thread.


>
> And would it not follow that if the "source of profits" is the
> "exploitation of workers," then it would be necessary to confiscate or
> prohibit profits?

Which is precisely what was done in practice during the been there done
that period.

And if that is the case, would that not require a
> command economy with bureaucrats setting prices "proportional to" the
> "labor values" that they judge is necessary for the production of the
> various goods and services. In other words, you are decidedly
> anti-market, are you not?

He certainly won't admit this. He works at ITT. The mavens of corporate
culture would be aghast.

>
> If so, I will have to conclude that you are not aware that
> neo-classical theory is not the only theoretical (certainly it is far
> from the best) justification for the system of free enterprise as
> opposed to the (been there done that) alternative that you prefer?

All Marxists seem to believe that they belong to a superior generation,
that the theory is not in need of reconsideratiion, that the mistakes
made by previous generations won't be repeated and that the bright,
shining city on the hill is still just around the next corner.

Robert Vienneau

unread,
Jan 11, 2006, 3:40:21 PM1/11/06
to
In article <1136996480.8...@g43g2000cwa.googlegroups.com>,
"william...@hotmail.com" <william...@hotmail.com> wrote:

> Robert, elsewhere you wrote:
>
> "I have already shown, repetitively, how Marx can claim that the source
> of profits is in the exploitation of workers while correctly
> maintaining that prices are not proportional to labor values."
>
> It appears that the purpose of your repeated attack on neo-classic
> theory is to lend credence to Marxian theory. Is that not correct?

Incorrect and irrelevant to the validity of anything I have had
to say on this thread.

> [More ignorant strawpersons - deleted.]

Hunter Watson

unread,
Jan 11, 2006, 4:28:13 PM1/11/06
to

Robert Vienneau wrote:
> In article <1136996480.8...@g43g2000cwa.googlegroups.com>,
> "william...@hotmail.com" <william...@hotmail.com> wrote:
>
> > Robert, elsewhere you wrote:
> >
> > "I have already shown, repetitively, how Marx can claim that the source
> > of profits is in the exploitation of workers while correctly
> > maintaining that prices are not proportional to labor values."
> >
> > It appears that the purpose of your repeated attack on neo-classic
> > theory is to lend credence to Marxian theory. Is that not correct?
>
> Incorrect and irrelevant to the validity of anything I have had
> to say on this thread.
>
> > [More ignorant strawpersons - deleted.]

Delightful. As I was in the act of writing my post, you were hard at
work confirming it.

Ron Peterson

unread,
Jan 11, 2006, 4:44:27 PM1/11/06
to

Robert Vienneau wrote:

> Neoclassical economists recognize that they cannot state their
> assumptions:

Wikipedia states that Weintraub says that neoclassical economics rests
on three assumptions:
People have rational preferences among outcomes that can be identified
and associated with a value.
Individuals maximize utility and firms maximize profits.
People act independently on the basis of full and relevant information.


Are those assumptions inadequate to create an economic model and
theory? Or, do those assumptions conflict with reality?

--
Ron

Robert Vienneau

unread,
Jan 11, 2006, 8:19:57 PM1/11/06
to
In article <1137015867.4...@g44g2000cwa.googlegroups.com>,
"Ron Peterson" <r...@shell.core.com> wrote:

Ron comments often seem to me to have a weird twist. (Sometimes
I think he is quite correct.) For an example of a twist, "H.
Economus" wrote:

"A number of proofs are normative in nature (e.g. the welfare
Theorems regarding the efficiency of markets) and have a dubious
relationship to any kind of 'reality'..."

Ron's response:

"I don't see any problem in creating a model for markets and
determining what are the tradeoffs of various market strategies..."

This response shows that Ron did not take Economus's point. I'd be
interested in whether Ron thinks the Wikipedia entry on "General
Equilibrium" helps him out. (That entry is linked to from the
Wikipedia entry on "Neoclassical economics.")

That set of questions I find weird. I wouldn't use a term like
"conflict with reality". Whether or not a supposed theory is
empirically false is totally independent of the question of
whether or not some set of assumptions is sufficient to derive
a theory. The latter question is more one of logical validity.

(Anyways, mainstream theorists have tried to relax some of those
assumptions. In some theories, agents "satisfice", not maximize.
And then whole bodies of literature treat incomplete information
and information asymmettries. The distinction between those theories
and "neoclassical economics" is independent of my point".)

I like Roy Weintraub, and don't have too much of a problem with
his popularization. I might later quote a Frank Hahn summary
which is more directed towards this thread topic.

One should recognize that neoclassical economics is associated
with mathematical formalism. So neoclassical economists speaking
among the clergy would prefer the language of topology and the
algebra of relations for stating their assumptions.

The point of neoclassical economics is to build a theory on
those assumptions which emphasizes equilibrium, characterizes
economics as the allocation of scarce resources, and justifies
supply and demand reasoning. I have already refered to this
point in this thread when I have raised the issues of whether
or not:

o Equilibrium prices are scarcity indices
o Marshall's principle of substitution is generally applicable

Neoclassical economists ARE UNABLE TO STATE ASSUMPTIONS THAT
JUSTIFY SUCH REASONING. Weintraub's assumptions, suitably
formalized, don't succeed.

Just to show you that others characterize neoclassical economics
in the same way as I do:

"The [Demand-and-Supply-based Equilibrium] theory visualizes
the economy as an aggregate of atomistic individuals (producers
and consumers) making their decisions autonomously, with no
interference from the influence of 'externalities'. Relative
prices and quantities are determined simultaneously in equilibrium
as an outcome of the interplay of 'forces of demand and supply',
generated by the optimizing behavior of individuals subject to
their resource constraints. A certain symmetry characterizes the
behaviour of producers and consumers. Each producer, given the
technological possibilities, chooses the profit-maximizing
activities and outputs, at the going prices; each consumer, given
his budget constraints and scales of preferences, maximizes
satisfaction at the going prices. It is through the operation of
the 'fundamental' and 'universal' principle of substitution that
individuals adjust their chosen quantities in response to the
parametrically given prices...

Further, the notion of 'change' in the DSE theory gets restrictively
predetermined by the theory in the following ways. First, all changes
in quantities within the system are seen as the outcome of the
ever-active principle of substitution. Thus the changes are primarily
in relative quantities involving allocational variations. The role of
prices as a scarce-resource allocator, given the resources, dominates
the theory as contrasted with the resource-creational role of
prices in classical theory... Secondly, all changes are explained as
induced by changes in relative prices and operate through the
decisions of individuals who are only 'quantity adjusters'; that is,
all influences affecting quantities have to be necessarily mediated
through relative prices or changes on the market and are outcomes of
the atomistic responses of individuals. The relative prices acquire
the all-powerful role of resource-allocation and the 'market' becomes
the 'arena' of action."
-- Krishna Bharadwaj (1989). _Themes in Value and Distribution:
Classical Theory Reappraised_, London: Unwin-Hyman.

Here's a couple of examples of the incorrect reasoning to which I
object:

"It is indeed the great contribution of the Pure Logic of Choice
that it has demonstrated conclusively that even such a single mind
could solve this kind of problem only by constructing and constantly
using rates of equivalence (or 'values' or 'marginal rates of
substitution'), that is, by attaching to each kind of scarce resource
a numerical index which cannot be derived from any property possessed
by that particular thing, but which reflects, or in which is
condensed, its significance in view of the whole means-end
structure...

Fundamentally, in a system in which the knowledge of the relevant
facts is dispersed among many people, prices can act to co-ordinate
the separate actions of different people in the same way as
subjective values help the individual to co-ordinate the parts of a
plan. It is worth contemplating for a moment a very simple and
commonplace instance of the action of the price system to see what
precisely it accomplishes. Assume that somewhere in the world a new
opportunity for the use of some raw material, say, tin has arisen,
or that one of the sources of tin has been eliminated. It does not
matter for our purpose ­ and it is significant that it does not
matter ­ which of these two causes has made tin more scarce. All that
the users of tin now need to know is that some of the tin they used
to consume is now more profitably employed elsewhere and that, in
consequence, they must economize tin. There is no need for the great
majority of them even to know where the more urgent need has arisen,
or in favor of what other needs they ought to husband the supply...
The whole acts as one market, not because any of its members survey
the whole field, but because their limited individual fields of
vision sufficiently overlap so that through many intermediaries the
relevant information is communicated to all. The mere fact that there
is one price for any commodity ­ or rather the local prices are
connected in a manner determined by the cost of transport, etc. -
brings about the solution which (it is just conceptually possible)
might have been arrived at by one single mind possessing all the
information which is in fact dispersed among all the people involved
in the process."
-- F. A. Hayek (1945). "The Use of Knowledge in Society", _American
Economic Review_, V. 35, N. 5 (Sep): 519-530.

"Let us then suppose that... there is a strike on the part of one
group of workers, say the plasterers, or that there is some other
disturbance to the supply of plasterers' labour... The rise in
plasterers' wages would be checked if it were possible either to
avoid the use of plaster, or to get the work done tolerably well
and at a moderate price by people outside the plasterers' trade: the
tyranny, which one factor of production of a commodity might in some
cases exercise over the other factors through the action of derived
demand, is tempered by the principle of substitution."
-- Alfred Marshall (1920). _Principles of Economics: An
Introductory Volume_, Eighth edition.

Hayek and Marshall were writing before it was known that the
assumptions of neoclassical economics could not justify their
reasoning.

Here is an ignorant neoclassical economist perpetuating ignorance
to another generation:

"Suppose the number of carpenters suddenly increases, due to the
immigration of thousands of new carpenters from Mexico. Both before
and after the change, carpenters receive their marginal revenue
product... But the wage after the migration is lower than the wage
before. Since the supply of carpenters is higher than before, the
equilibrium wage is lower.

...an increase in the supply of an input I own drives down its price
(and marginal revenue product) and so decreases my income. The same
is true for an increase in the supply of an input that is a close
substitute for an input I own. If I happen to own an oil well, I will
regard someone else's discovery of a new field of natural gas--or a
process for producing power by thermonuclear fusion--as bad news."
-- David D. Friedman (1990). _Price Theory: An Intermediate
Text_, Second Edition.

David cannot state his assumptions. Here is a quote from a refereed
paper:

"This note considers a linear programming (LP) formulation of the
theory of the firm. A neoclassical non-increasing labour demand
function is derived from the solution of the LP. It is argued that
only a small number of points on this curve, one or two in the
examples provided, are equilibria of the firm. Equilibria are
characterized by decisions of the managers of the firms that
allow the same decisions to be made in successive periods. Hence,
one can explain the quantity of labour that firms desire to hire
either by a traditional neoclassical labour demand function or by
an analysis of equilibria of the firm, but generally not both.
Explaining wages and employment by well-behaved supply and demand
functions for labour is of doubtful logic."
-- R. L. Vienneau (2005). "On Labour Demand and Equilibria of
the Firm", _Manchester School_, V. 73, N. 5 (Sep): 612-619.

I once had that article publicly available. Copyright restrictions
later constrained me into taking it down. But not before "Dan in
Philly" revealed his inability to discuss the issues. See:

<http://www.dreamscape.com/rvien/Fumbles/AssumptionsYouUsed.html>

Ron Peterson

unread,
Jan 12, 2006, 1:26:16 AM1/12/06
to

Robert Vienneau wrote:
> In article <1137015867.4...@g44g2000cwa.googlegroups.com>,
> "Ron Peterson" <r...@shell.core.com> wrote:

> Ron comments often seem to me to have a weird twist. (Sometimes
> I think he is quite correct.) For an example of a twist, "H.
> Economus" wrote:

> "A number of proofs are normative in nature (e.g. the welfare
> Theorems regarding the efficiency of markets) and have a dubious
> relationship to any kind of 'reality'..."

> Ron's response:

> "I don't see any problem in creating a model for markets and
> determining what are the tradeoffs of various market strategies..."

> This response shows that Ron did not take Economus's point. I'd be
> interested in whether Ron thinks the Wikipedia entry on "General
> Equilibrium" helps him out. (That entry is linked to from the
> Wikipedia entry on "Neoclassical economics.")

My point was that the market is one aspect of economics, and as long as
the model is addressing that aspect, it is useful for solving those
types of problems.

The Wikipedia article helps me to understand the "politics" of the
various models.

> > Robert Vienneau wrote:

> > > Neoclassical economists recognize that they cannot state their
> > > assumptions:

> > Wikipedia states that Weintraub says that neoclassical economics rests
> > on three assumptions:
> > People have rational preferences among outcomes that can be identified
> > and associated with a value.
> > Individuals maximize utility and firms maximize profits.
> > People act independently on the basis of full and relevant information.

> > Are those assumptions inadequate to create an economic model and
> > theory? Or, do those assumptions conflict with reality?

> That set of questions I find weird. I wouldn't use a term like
> "conflict with reality". Whether or not a supposed theory is
> empirically false is totally independent of the question of
> whether or not some set of assumptions is sufficient to derive
> a theory. The latter question is more one of logical validity.

I don't think that a theory can be judged to be empirically false
because it depends on the scope of the theory. Newton's theory of
gravitation isn't 100% accurate, but it was adequate for most uses of
the time.

> The point of neoclassical economics is to build a theory on
> those assumptions which emphasizes equilibrium, characterizes
> economics as the allocation of scarce resources, and justifies
> supply and demand reasoning. I have already refered to this
> point in this thread when I have raised the issues of whether
> or not:

> o Equilibrium prices are scarcity indices
> o Marshall's principle of substitution is generally applicable

I am not inclined to believe that a complex system is about to have any
equilibrium.

In order for substitution to take place, there has to be an implied
change in technology where a new product is found or created for a
particular use and that would disrupt any equilibrium that may occur.

> Neoclassical economists ARE UNABLE TO STATE ASSUMPTIONS THAT
> JUSTIFY SUCH REASONING. Weintraub's assumptions, suitably
> formalized, don't succeed.

Why don't Weintraub's assumptions succeed? Can they be modified to get
a reasonable theory?

Sorry, I don't have time to comment on the quotes you made of other
writers.

--
Ron

con...@email.rahul.net

unread,
Jan 12, 2006, 2:07:54 AM1/12/06
to
Robert Vienneau writes:
>
> Neoclassical economists ARE UNABLE TO STATE ASSUMPTIONS THAT
> JUSTIFY SUCH REASONING. Weintraub's assumptions, suitably
> formalized, don't succeed.
>
> Just to show you that others characterize neoclassical economics
> in the same way as I do:
>
> "The [Demand-and-Supply-based Equilibrium] theory visualizes
> the economy as an aggregate of atomistic individuals (producers
> and consumers) making their decisions autonomously, with no
> interference from the influence of 'externalities'. Relative
> prices and quantities are determined simultaneously in equilibrium
> as an outcome of the interplay of 'forces of demand and supply',
> generated by the optimizing behavior of individuals subject to
> their resource constraints. A certain symmetry characterizes the
> behaviour of producers and consumers. Each producer, given the
> technological possibilities, chooses the profit-maximizing
> activities and outputs, at the going prices; each consumer, given
> his budget constraints and scales of preferences, maximizes
> satisfaction at the going prices. It is through the operation of
> the 'fundamental' and 'universal' principle of substitution that
> individuals adjust their chosen quantities in response to the
> parametrically given prices...
> -- Krishna Bharadwaj (1989). _Themes in Value and Distribution:
> Classical Theory Reappraised_, London: Unwin-Hyman.

Deja Vu:

http://groups.google.com/group/sci.econ/browse_thread/thread/b054809b9831e890/f2567ff20248f680?q=%22Sonnenschein-Mantel-Debreu%22&rnum=1#f2567ff20248f680

is a discussion on the lack of uniqueness, (or instability of,)
general equilibrium of the aggregate from this news group in 1999-and
its implications on modern economics. The entire diatribe, (in all its
heated detail,) can be found by searching Google's news groups for
"Sonnenschein-Mantel-Debreu", including the double quotes.

At best, the neoclassical economic philosophies have an empirical
problem, and at worst, an intellectual catastrophe, on their hands.

Depending on who is telling the story, of course.

John

--

John Conover, con...@email.rahul.net, http://www.johncon.com/

Robert Vienneau

unread,
Jan 13, 2006, 5:19:04 AM1/13/06
to
In article <1137047176.5...@z14g2000cwz.googlegroups.com>,
"Ron Peterson" <r...@shell.core.com> wrote:

> > > Wikipedia states that Weintraub says that neoclassical economics
> > > rests
> > > on three assumptions:
> > > People have rational preferences among outcomes that can be
> > > identified
> > > and associated with a value.
> > > Individuals maximize utility and firms maximize profits.
> > > People act independently on the basis of full and relevant
> > > information.

> > The point of neoclassical economics is to build a theory on


> > those assumptions which emphasizes equilibrium, characterizes
> > economics as the allocation of scarce resources, and justifies
> > supply and demand reasoning. I have already refered to this
> > point in this thread when I have raised the issues of whether
> > or not:
>
> > o Equilibrium prices are scarcity indices
> > o Marshall's principle of substitution is generally applicable

> [snip]

> > Neoclassical economists ARE UNABLE TO STATE ASSUMPTIONS THAT
> > JUSTIFY SUCH REASONING. Weintraub's assumptions, suitably
> > formalized, don't succeed.

> Why don't Weintraub's assumptions succeed?

Because one can construct examples with these assumptions in
which the negation of neoclassical claims hold. I and others
have done this. This is a matter of logic.

You also have "H. Economus"'s explanation of some difficulties.

ro...@telus.net

unread,
Jan 14, 2006, 12:00:24 AM1/14/06
to
On 11 Jan 2006 13:44:27 -0800, "Ron Peterson" <r...@shell.core.com>
wrote:

All are known to be false.

-- Roy L

daveb...@yahoo.com

unread,
Jan 14, 2006, 6:08:59 AM1/14/06
to
How tedious. This is after all a Trotskyist group. Wouldn't it be
surprising for those here not to think marxism superior to
neo-classical economics? The anti-marxists on this discussion group
thrash around with ideological models of the capitalist economy as it
appears at the level of exchange, or even more simply at the level of
distribution. It was not incidental that Marx talked about this
inverted perception of capitalism in religious terms - The Holy
Trinity.

But all of this presupposes capitalist production of value discovered
by Marx. Marx proved in the 1840s in the case of Wakefield's 'Modern
Theory of Colonisation' that capital and modern landed property cannot
generate value let alone a profit without the existence of wage labour.
These conditions did not arise ready made from the market, but had to
be created by primitive accumulation. The market accounts for the
exchange of commodities but not their production.

Nothing that history has thrown up has disproved Marx's theory. Trotsky
didnt think so before he was killed, and there is all th more reason
not to think so now.

Nor does it follow that socialists rely on a command economy to
redistribute the social product. The type of economy that resulted in
the SU, China etc was not socialist, but an economy distorted and
deformed by backwardness and isolation and by the consequent attempts
of the state bureaucracy to transcend this backwardness and isolation
by command planning. This failed as Trotsky foresaw very early on.

Capitalism has proven itself resilient, forceful and highly destructive
in its drive to survive, but the signs of the end are looming.
Increasingly the US ruling class is thrashing out at home and abroad to
maintain its competitive advantage against a rampant China and against
a hostile world proletariat.

At home the patriotic front that sustained US imperialism for over a
century is in decline now that US bosses are forced to steal back the
privileges of middle class US workers won over generations of struggle.
US workers are not only turning against Bush invading other countries
to steal their resources, but at home, like the auto-workers or NY
transit workers, they are fed up with the joint corporate/union pillage
of their wages and conditions.

It is class struggle that determines the relative disequilibrium of the
capitalist economy, the onset of crisis and overproduction of capital.
Unless you can talk about this with some modicum of intelligence or
interest you should fuck off this list.

Dan in Philly

unread,
Jan 14, 2006, 10:08:55 AM1/14/06
to
"Robert Vienneau" wrote in message ...

<snip>

What we have here is a failure to communicate.
Seriously. I looked at
<http://www.dreamscape.com/rvien/Fumbles/AssumptionsYouUsed.html>
and couldn't figure out what Robert objected to.

Beyond that: I can't understand why Robert can't understand what the rest of
us do understand: that the results of a model depend on the assumptions.
IIRC, Robert made a 3-good model that, by imposing a certain structure,
yielded multiple equilibriums, one of which featured a higher wage and
higher employment. That's fine. And different models will yield different
results.

Robert claims that 'neoclassical' models don't necessarily deliver
neoclassical results. But again, this depends on those 'neoclassical'
assumptions. Anyone can make a simple model in which prices do reflect
scarcity, or the interest rate equals the MPK.

Lastly, the claim that pro-neoclassical-results people are somehow
lying/dishonest/misinformed is just wrong. E.g. when economists say that i =
MPK, they are assuming that reswitching, corporate power, etc, have no
significant effect.
I guess Robert assumes these things _do_ have serious effects. Fine again.
But it's just opinion, since AFAIK there has been no empirical verification
or rejection of models with these assumptions.

Regarding that last point, here's what Stiglitz said in 1974 regarding the
Cambridge UK position in the CCC:
"There has been a remarkable absence of an attempt at empirical verification
of any of the underlying hypotheses at any but the most casu