Questions about price controls and consumer surplus
Doug McKee
I'm currently trying to teach myself economics by going chapter by
chapter through N. Gregory Mankiw's recent textbook "Principles of
Economics," and although it is very well written and enjoyable, I
don't have the luxury of asking a professor any questions. So I'm
hoping that some kind souls in this group will humor me:
Question #1 (Price controls):
Mankiw seems to feel strongly that price controls (like rent control)
are bad things. He says things like "Rent control may keep rents low,
but it also discourages landlords from maintaining their buildings and
makes housing hard to find." But aren't landlords incentivized by a
rent ceiling to build affordable housing instead of luxury high-rises
for Wall Street bankers? I can see how price controls could be
inefficient for commodities, in this case, the suppliers can (I think)
easily shift their resources to build products that fall under the
ceiling. When a city wants to make sure that an area contains people
from different wage brackets, I think imposing some rent control in
some areas would be one way to do that.
By the same token, doesn't a minimum wage incentivize employers to
reduce the amount of truly unskilled labor they need? And thus reduce
unemployment? In more general terms, I would expect that a market
could take care of the surplus in a positive way. Do models exist
that factor this in? Does the data support this happening? i.e.,
over time, do surpluses shrink in the face of price controls?
Question #2 (Consumer surplus):
Consumer surplus is defined as "a buyer's willingness to pay minus the
amount the buyer actually pays." And maximizing this consumer surplus
is a good thing because the people that want things the most get them.
The problem I have with this is that the amount of capital that people
have is not factored in. For example, I'll bet there are lots of 12
year old boys with very little money that would like to pay $70 for
Knicks tickets but can't and lots of wealthy folks don't want to go to
the game as much but do because $70 doesn't mean much to them. So my
question is are there other measures of economic well-being that
factor this in? Do they make sense?
Thanks for your time,
Doug McKee (dmc...@iname.com)
Ainsley Tai
> Question #1 (Price controls):
>
> Mankiw seems to feel strongly that price controls (like rent control)
> are bad things. He says things like "Rent control may keep rents low,
> but it also discourages landlords from maintaining their buildings and
> makes housing hard to find." But aren't landlords incentivized by a
> rent ceiling to build affordable housing instead of luxury high-rises
> for Wall Street bankers?
Well, his point seems to be that if landlords cannot raise rent, then
the total supply in the system will be lower than at equilibrium, so
housing will be hard to find. Furthermore, he assumes that if they can't
charge the rent they want to, they could be making enough money to cover
their variable costs, but not their fixed costs. His underlying
assumption of course, is that the market can make better decisions
rather than the government in terms of how many affordable apartments
are needed, and how consumers make the trade off between affordable
housing and cost.
Second, I personally think that affordable housing and luxury high-rises
can be considered as two different products.
> When a city wants to make sure that an area contains people
> from different wage brackets, I think imposing some rent control in
> some areas would be one way to do that.
>
> By the same token, doesn't a minimum wage incentivize employers to
> reduce the amount of truly unskilled labor they need? And thus reduce
> unemployment? In more general terms, I would expect that a market
> could take care of the surplus in a positive way. Do models exist
> that factor this in? Does the data support this happening? i.e.,
> over time, do surpluses shrink in the face of price controls?
>
If an employee thinks that the marginal benefit of a worker is $4, and
minimum wage is $5, then he won't hire or he would fire that person.
Also, you are right in that the employer will reduce the amount of
unskilled labor. They do this in two ways: train him, or buy a machine
that will do the same job. Unfortunately, employers usually just buy a
machine and fire the person.
> Question #2 (Consumer surplus):
>
> Consumer surplus is defined as "a buyer's willingness to pay minus the
> amount the buyer actually pays." And maximizing this consumer surplus
> is a good thing because the people that want things the most get them.
> The problem I have with this is that the amount of capital that people
> have is not factored in. For example, I'll bet there are lots of 12
> year old boys with very little money that would like to pay $70 for
> Knicks tickets but can't and lots of wealthy folks don't want to go to
> the game as much but do because $70 doesn't mean much to them. So my
> question is are there other measures of economic well-being that
> factor this in? Do they make sense?
>
>
I think implicit in the model is that if you can't pay for a product,
then you are not demanding it at that price. In the case of the boys,
they are not willing to pay $70 (or their parents aren't willing to
shell it out) for the ticket so in the demand curve, they are on a point
at a price lower than $70. consumer surplus theory explains the benefit
given to someone who is demanding the product, i.e. willing to pay the
price.
As for other theories on economic well-being, there is this utility
theory, where it says that people try to maximize their utility given
the budgetary constraints that they have. It snould be in the book.
--
ainsley
http://www.seas.upenn.edu/~ainsle17/
Due to financial restraints, the light at the end of the tunnel
will be turned off.
Lisa Reale
benefit of a professor. Plus, this stuff has come pretty easily to me
(the first thing that has since I got to college).
About price controls:
They are not necessarily "bad" things. They do, however, always create
inefficiency, assuming that they are set at an effective level. Look at a
price ceiling (for example, rent control). If you Draw basic supply and
demand curves, and then draw in an effective price ceiling (one below the
equilibrium price), you will see that it creates a shortage. Without that
rent control, the price would be higher, the quantity demanded would be
lower, the quantity supplied wound be higher, and the market would
regulate itself to the equilibrium price.
A price floor, on the other hand, such as minimum wage, would have to be
above the equilibrium price in order to be effective. If you graph that,
you will see that it creates a surplus. In other words, it actually
CREATES unemployment. Unemployment is simply the number of people who
want jobs (the supply curve for labor) minus the number of jobs
available. By imposing a price floor, the price has increased, the
quantity supplied has increased, and the quantity demanded has decreased.
Price controls create inefficiency. Note that this view does not address
the social concerns of keeping different classes of people in an area,
making sure people are getting paid enough, etc. But it is likely that
those are the concepts which your texkbook is trying to make clear.About
Consumer Surplus:Consumer surplus is easier to understand if you graph
it. Draw supply and demand curves. Mark equilibrium price and quantity.
Now, because demand is downward sloping, the price the consumer pays is
the price which he is willing to pay for the LAST unit purchased. For one
less unit, he would have been willing to pay more. That extra benefit,
the area between the demand curve and the equilibrium price, is consumer
surplus. It is the price the consumer would be willing to pay minus the
amount actually paid. Realize that the demand curve illustrates what the
consumer is both WILLING and ABLE to pay for a given quantity. I don't
know if you've looked at indifference curves yet, but they show strictly
what a consumer is willing to pay for a good. On the other hand, a budget
line shows what they are able to pay. The demand curve is a combination
of the two, and the consumer surplus is illustrated using that demand
curve.
I hope that helps. If any of this is unclear, feel free to email me and I
will either try to explain further or email you the graphs.
:-) Lisa Reale
Harold
wrote:
>Question #1 (Price controls):
>
>Mankiw seems to feel strongly that price controls (like rent control)
>are bad things. He says things like "Rent control may keep rents low,
>but it also discourages landlords from maintaining their buildings and
>makes housing hard to find." But aren't landlords incentivized by a
>rent ceiling to build affordable housing instead of luxury high-rises
>for Wall Street bankers?
Only if that was the only outlet for investment. It is not. The
prospective landlord might be better off buying corporate bonds,
instead of housing in a rent controlled area.
>I can see how price controls could be
>inefficient for commodities, in this case, the suppliers can (I think)
>easily shift their resources to build products that fall under the
>ceiling. When a city wants to make sure that an area contains people
>from different wage brackets, I think imposing some rent control in
>some areas would be one way to do that.
You do? It really does not matter what the commodity is (including
apartments), when the government takes some action which restricts the
profit some of the capital will be shifted to an area with better
returns.
>By the same token, doesn't a minimum wage incentivize employers to
>reduce the amount of truly unskilled labor they need?
It certainly does!
If a wage of $6.00/hour is mandated by the government and the
unskilled laborer contributes only $4.00/hour, the employer has
several options. They can fire the laborer and do without (read up on
elevator operators), they can automate the job, or they can try to
train the employee to be worth $6.00/hour.
>And thus reduce
>unemployment? In more general terms, I would expect that a market
>could take care of the surplus in a positive way. Do models exist
>that factor this in? Does the data support this happening? i.e.,
>over time, do surpluses shrink in the face of price controls?
Try to get a good apartment in Berkeley, California.
>Question #2 (Consumer surplus):
>
>Consumer surplus is defined as "a buyer's willingness to pay minus the
>amount the buyer actually pays." And maximizing this consumer surplus
>is a good thing because the people that want things the most get them.
>The problem I have with this is that the amount of capital that people
>have is not factored in. For example, I'll bet there are lots of 12
>year old boys with very little money that would like to pay $70 for
>Knicks tickets but can't and lots of wealthy folks don't want to go to
>the game as much but do because $70 doesn't mean much to them. So my
>question is are there other measures of economic well-being that
>factor this in? Do they make sense?
Well, I dearly want a 450 MHz Pentium II, and I would enjoy having a
Lexus. Don't you think you should give them to me? It would
drastically affect my economic well being, I can assure you.
It seems to me you are looking for some simple, easy way to make the
whole world rich (relatively speaking).
Regards, Harold (Capitalist Pig)
----
"He who says there is no such thing as an honest man, you may be sure
is himself a knave."
--George Berkeley
Robert Vienneau
There's been some discussion about minimum wages here. I think this
discussion may be based on unfounded theory.
This long post presents an example in which higher wages are associated
with firms choosing to employ more workers per unit output produced. The
exact numeric values used are obviously unreasonable. The example, though,
is used to make a point. Those who think the demand curve for labor *must*
slope down should answer the following question: what are your assumptions?
Some further points might help clarify the question. The example
illustrates behavior that is possible under some maximizing frameworks.
Those who accept one of these frameworks, but reject the possibility
of this behavior occuring in existing economies must accept the
existence of additional special case assumptions. Those adopting this
position should clearly state their assumptions, ad hoc as they may be.
They might also try to give some rationale for why one should be
interested in this special case. If one does not accept any maximizing
model that could produce the illustrated behavior in the general case,
but does accept the use of mathematical models of maximization in
economics, one should outline an alternative model. The models in
which I am especially interested, although not exclusively so, are
those of steady state or long run prices. Along such an equilibrium
path, the needs for specific quantities of capital goods will have
been foreseen and the structure of capital goods will have been
adapted to production. I question whether equilibria of this sort
can be explained by the intersections of monotone long run supply
and demand curves. Some economists have also raised this question:
"Thus the reswitching anomaly, along with its theoretical developments
and implications, has been placed in abeyance. And so it must be, for
if this criticism were taken as being no less applicable to the real
world than the theoretical, then it follows, as already noted, that
orthodox economics is unable to make any reliable statements concerning
the relationship of production to the various input markets. That is,
the neoclassical vision of a market-coordinated production system, along
with derivative growth and distribution theories, are all invalidated.
As a consequence, the nature of the entire traditional circular flow
conception is called into question...
...It is one thing to say that this conception of indirect economic
management does not satisfactorily achieve its goals because of the
existence of such real-world problems as bottlenecks, power, premature
inflation, inflationary expectations, random shocks, ratchet and
spillover effects, and the like. In such situations, an economically
coherent and consistent market-based system of production and
distribution is still assumed to exist, though it is overlaid with
political, institutional, and psychological factors that affect
economic adjustments and performance. The basic strategy, in this case,
would be to maintain the general neoclassical-synthetic emphasis on
fiscal and monetary management (with perhaps somewhat greater stress on
the monetary tool, if the monetarists were to have their way), and
supplement these tools with finely targeted direct and specific devices -
for example, stricter antitrust enforcement, more sharply focused
incentive (and disincentive) taxes, expanded job training and subsidization
programs - so as to allow and encourage the effective functioning of
centerpiece fiscal and monetary devices.
It is quite another thing to argue that key markets in the system,
particularly those in the resource or input sector, do not possess the
fundamental economic characteristics necessary to the orderly systematic
functioning that is postulated by mainstream theory..."
-- Richard X. Chase, "Production Theory," in _A Guide to Post-Keynesian
Economics_, (edited by Alfred S. Eichner), M. E. Sharpe, 1978, p. 79-80
2.0 DATA ON TECHNOLOGY
Consider a very simple economy that produces a single consumption
good, corn, from inputs of labor, steel, and (seed) corn. All production
processes in this example require a year to complete. Only one
production process is known for producing corn. This process requires
the following inputs to be available at the beginning of the year for
each bushel corn produced and available at the end of the year:
TABLE 1: INPUTS REQUIRED PER BUSHEL CORN PRODUCED
0.82816 Person-years
0.2 Tons steel
0.16889 Bushels corn
Steel is also produced in this economy. Two processes are known for
producing steel:
TABLE 2: INPUTS REQUIRED PER TON STEEL PRODUCED
Process Alpha Process Beta
0.19321 Person-Years 0.033594 Person-Years
0.35 Tons Steel 0.13329 Tons Steel
0.0095553 Bushels Corn 0.15590 Bushels Corn
Apparently, inputs of corn and steel can be traded off in producing steel.
The process that uses less corn and more steel, however, also requires
a greater quantity of labor input.
3.0 QUANTITY FLOWS
The example is constructed by comparing equilibrium prices associated
with stationary states for producing a net output of 1,000 bushels corn.
Two stationary states are possible, corresponding to the two techniques
for producing steel. A technique is a combination of one steel-producing
process and the corn-producing process. The techniques are named after
the process used in producing steel. Table 3 shows the quantity flows for
a stationary state in which the alpha technique is used. Table 4 shows
the corresponding quantity flows for the beta technique.
TABLE 3: QUANTITY FLOWS FOR THE ALPHA TECHNIQUE
INPUTS STEEL INDUSTRY CORN INDUSTRY
Labor 71.80 Person-Years 1000 Person-Years
Steel 130.1 Tons 241.6 Tons
Corn 3.551 Bushels 204.0 Bushels
OUTPUTS 371.6 Tons Steel 1208 Bushels Corn
TABLE 4: QUANTITY FLOWS FOR THE BETA TECHNIQUE
INPUTS STEEL INDUSTRY CORN INDUSTRY
Labor 9.752 Person-Years 1042 Person-Years
Steel 38.69 Tons 251.6 Tons
Corn 45.26 Bushels 212.5 Bushels
OUTPUTS 290.3 Tons Steel 1258 Bushels Corn
Notice that 1072 person-years are employed per year when the
alpha technique is used to produce a net output of 1,000 bushels
corn. 1052 person-years are employed under the beta technique.
Hence, the alpha technique is the more labor-intensive technique
for producing corn.
3.1 AN ALTERNATIVE REPRESENTATION OF TECHNOLOGY
Net output in any year can also be represented as produced solely
by inputs of dated labor quantities. In this representation, no quantities
of steel need to be explicitly shown. Thus, endogeneous changes of
the price of steel in the analysis in section 4 can provide no objection
to any inferences one may want to draw from my initial question.
I only present a detailed analysis of the reduction of quantity flows
to dated labor inputs for the alpha technique. A parallel analysis is
possible for the beta technique.
Accordingly, consider a firm using the alpha technique
to produce 1,000 bushels of wheat for sale at the end of 1998.
As shown in Table 5, this year's output is the result of the
use of labor, steel, and corn purchased at the start of 1998.
(I later assume that the labor hired to work during a year
is paid at the end of the year.) One should note that the steel
and corn inputs used in 1998 are themselves produced by
production processes occurring in 1997. The processes used
in 1997 are specified with the choice of the alpha technique.
Table 5 shows that the production of 1,000 bushels of corn with
the alpha technique for consumption at the end of 1998 requires
that 828.2 person-years be hired in 1998 and 178.5 person-years be
hired in 1997. The alpha technique also requires that 103.8 tons
of steel and 30.4 bushels of corn be available at the beginning of
1997.
TABLE 5: TWO YEAR'S INPUTS FOR PRODUCING CORN
INPUTS INPUTS OUTPUT
USED IN USED IN AT END
1997 1998 OF 1998
828.2 Person-yrs 1000 Bushels
38.6 Person-yrs 200 Tons
70 Tons
1.91 Bushels
139.9 Person-yrs 168.89 Bushels
33.78 Tons
28.52 Bushels
One cannot stop with Table 5. The vertically integrated
firm using the alpha technique will itself produce the steel
and corn used in 1997. Accordingly, Table 6 extends Table 5
to make it clear that vertical integration for this technology
requires an infinite series of inputs. Those checking my
arithmetic should generate this table keeping track of many
more digits than is shown in the precision used in the table.
Also, finite precision sums of sorted numbers are more
accurate when summing from smallest to largest than from largest to
smallest.
TABLE 6: INPUTS USED WITH ALPHA TECHNIQUE TO PRODUCE
1000 BUSHELS FOR CONSUMPTION AT END OF 1998
YEAR LABOR STEEL CORN
1998 828.2 Person-yrs 200 Tons 168.9 Bushels
1997 178.5 Person-yrs 103.8 Tons 30.43 Bushels
1996 45.26 Person-yrs 42.41 Tons 6.132 Bushels
1995 13.27 Person-yrs 16.07 Tons 1.441 Bushels
1994 4.298 Person-yrs 5.913 Tons 0.3969 Bushels
1993 1.471 Person-yrs 2.149 Tons 0.1235 Bushels
1992 0.5165 Person-yrs 0.7768 Tons 0.04139 Bushels
1991 0.1844 Person-yrs 0.2801 Tons 0.01441 Bushels
.
.
.
SUM 1072 Person-yrs 372 Tons 208 Bushels
Notice that labor is the only non-produced input in Table 6.
Table 7 presents the labor inputs for the firm when the alpha
technique is used in a stationary state. Each row in the table
represents dated labor inputs required to produce 1,000 bushels
corn available for consumption at the end of the year in which
the row terminates. How much labor is used in 1998? The
answer is found by summing the 1998 column in the table.
The 1072 person-years used in 1998 are broken down into
labor being used to produce corn for consumption at the end
of 1998, 1999, 2000, etc.
TABLE 7: LABOR INPUTS FOR THE ALPHA TECHNIQUE
... 1993 1994 1995 1996 1997 1998 1999 2000
.
.
.
... 13.27 45.26 178.5 828.2
... 4.298 13.27 45.26 178.5 828.2
... 1.471 4.298 13.27 45.26 178.5 828.2
... 0.516 1.471 4.298 13.27 45.26 178.5 828.2
... 0.184 0.516 1.471 4.298 13.27 45.26 178.5 828.2
... 0.184 0.516 1.471 4.298 13.27 45.26 ...
... 0.184 0.516 1.471 4.298 13.27 ...
.
.
.
One could go through the same sort of analysis for the
beta technique. Table 8 presents the table for beta corresponding
to Table 6 for alpha.
TABLE 8: INPUTS USED WITH BETA TECHNIQUE TO PRODUCE
1000 BUSHELS FOR CONSUMPTION AT END OF 1998
YEAR LABOR STEEL CORN
1998 828.2 Person-yrs 200 Tons 168.9 Bushels
1997 146.6 Person-yrs 60.44 Tons 59.70 Bushels
1996 51.47 Person-yrs 20.00 Tons 19.51 Bushels
1995 16.83 Person-yrs 6.566 Tons 6.412 Bushels
1994 5.530 Person-yrs 2.158 Tons 2.107 Bushels
1993 1.817 Person-yrs 0.7089 Tons 0.6921 Bushels
1992 0.5970 Person-yrs 0.2489 Tons 0.2274 Bushels
1991 0.1967 Person-yrs 0.07866 Tons 0.07722 Bushels
.
.
.
SUM 1052 Person-yrs 290 Tons 258 Bushels
4.0 PRICES
The argument proceeds by determining which technique is
cost-minimizing at equilibrium prices. In this context, equilibria
have the following properties:
o The corn-producing process is operated, and at least one of
of the steel-producing processes is operated.
o The cost of inputs for each process in operation, including
interest charges, does not exceed revenues.
o No process can be used to obtain pure economic profits.
I assume that steel and corn inputs are paid for at the beginning
of the year. Labor, although hired at the beginning of the year,
is paid out of the product at the end of the year.
4.1 INITIAL EQUILIBRIUM PRICES
Suppose wages are $3,347 per person year, the price of steel
is $6,013 per ton, and the price of corn is $10,000 per bushel. Also,
let the rate of interest be 150%. Consider the costs and revenues
for the steel industry if the beta technique is used. Table 9 shows
the relevant calculations.
TABLE 9: COSTS AND REVENUES FOR THE STEEL INDUSTRY
Cost of producing steel for the beta technique
= ( 38.69 x $6013 + 45.26 x $10000 )( 1 + 1.5 ) + 9.752 x $3347
= $1,746,000
Revenues for the steel industry using the beta technique
= 290.3 x $6013 = 1,746,000
Notice that the costs incurred in the steel industry equal the revenues
obtained. Thus, the cost of operating the beta process does not exceed
the revenues. Furthermore, no pure economic profits are obtained by
operating the beta process.
Now consider the costs and revenues in the corn industry. Table
10 shows that here too, the costs do not exceed revenues, and no
pure economic profits are obtained.
TABLE 10: COSTS AND REVENUES FOR THE CORN INDUSTRY
Cost of producing corn for the beta technique
= ( 251.6 x $6013 + 212.5 x $10000 )( 1 + 1.5 ) + 1042 x $3347
= $12,580,000
Revenues for the corn industry using the beta technique
= 1258 x $10000 = 12,580,000
I have not yet shown the prices under consideration are
equilibrium prices. I also need to show that the alpha process
for producing steel cannot be used to obtain pure economic
profits at these prices. Accordingly, Table 11 shows the cost
of operating the alpha process.
TABLE 11: COSTS FOR OPERATING THE ALPHA PROCESS
Cost of the alpha process per ton steel produced
= ( 0.35 x $6013 + 0.0095553 x $10000 )( 1 + 1.5 ) + 0.1932 x $3347
= $6147
Notice that the cost of producing a ton of steel with the alpha
process is $134 more than the price of the steel produced. Thus,
the alpha process will not be used at these prices, and these prices
are equilibrium prices.
4.2 ANOTHER SET OF PRICES
Next, consider higher wages, $5,864 per person-year. This cannot
be an equilibrium wage if the price of steel, the price of corn, and
the interest rate are unchanged from above. At this set of prices,
all processes will cost more than the revenue they bring in. No
process will be operated.
Accordingly, consider a different set of commodity prices and
interest rate for this wage. First, suppose the price of steel
is $4,487 per ton, and the price of corn is $10,000 per bushel.
The rate of interest is 98.9%. It turns out these are not equilibrium
prices, but the reason why is instructive. Tables 12 and 13 show
the costs and revenues in the steel and corn industries, respectively,
if the beta technique is operated. The costs of each process
comprising the beta technique do not exceed the revenues. Nor
is any pure economic profit earned in operating these processes.
TABLE 12: NEW COSTS AND REVENUES FOR THE STEEL INDUSTRY
Cost of producing steel for the beta technique
= ( 38.69 x $4487 + 45.26 x $10000 )( 1 + 0.989 ) + 9.752 x $5864
= $1,303,000
Revenues for the steel industry using the beta technique
= 290.3 x $4487 = 1,303,000
TABLE 13: NEW COSTS AND REVENUES FOR THE CORN INDUSTRY
Cost of producing corn for the beta technique
= ( 251.6 x $4487 + 212.5 x $10000 )( 1 + 0.989 ) + 1042 x $5864
= $12,580,000
Revenues for the corn industry using the beta technique
= 1258 x $10000 = 12,580,000
Why, then, are these not equilibrium prices? The answer lies
in examining the costs of operating the alpha process, as shown in
Table 14. Notice that the cost of producing a ton of steel with
the alpha technique is less than the price of steel. Hence, pure
economic profits can be earned at these prices by producing steel
with the alpha process. Firms will tend to operate the cheapest
known process at going prices.
TABLE 14: NEW COSTS FOR OPERATING THE ALPHA PROCESS
Cost of the alpha process per ton steel produced
= ( 0.35 x $4487 + 0.0095553 x $10000 )( 1 + 0.989 ) + 0.1932 x $5864
= $4447
4.3 FINAL EQUILIBRIUM PRICES
Accordingly, consider a different set of prices of outputs and
interest rates corresponding to a wage of $5,864 per person-year.
Since pure economic profits were available at an interest rate of
98.9%, the equilibrium rate of interest would be slightly higher,
namely 100%. The price of steel is $4,414 per ton, and the price of
corn is $10,000 per bushel.
These are equilibrium prices, and the alpha technique would be
adopted at these prices. Tables 15 and 16 show that costs do not
exceed revenues for any processes in the alpha technique. Nor are
pure economic profits available in any process. Table 17 shows
the cost of producing steel with the beta process exceeds its price.
So the beta technique will not be adopted.
TABLE 15: FINAL COSTS AND REVENUES FOR THE STEEL INDUSTRY
Cost of producing steel for the alpha technique
= ( 130.1 x $4414 + 3.551 x $10000 )( 1 + 1 ) + 71.8 x $5864
= $1,640,000
Revenues for the steel industry using the alpha technique
= 371.6 x $4414 = 1,640,000
TABLE 16: FINAL COSTS AND REVENUES FOR THE CORN INDUSTRY
Cost of producing corn for the alpha technique
= ( 241.6 x $4414 + 204 x $10000 )( 1 + 1 ) + 1000 x $5864
= $12,080,000
Revenues for the corn industry using the alpha technique
= 1208 x $10000 = 12,080,000
TABLE 17: NEW COSTS FOR OPERATING THE BETA PROCESS
Cost of the beta process per ton steel produced
= ( 0.13329 x $4414 + 0.1559 x $10000 )( 1 + 1 ) + 0.033594 x $5864
= $4492
5.0 CONCLUSIONS
Table 18 summarizes the results of these calculations for this
example. Clearly it is possible for cost-minimizing firms to prefer
to adopt a more labor-intensive process at a higher wage. This is
a matter of logic.
TABLE 18: LABOR USED TO PRODUCE NET OUTPUT
OF 1,000 BUSHELS CORN
Wage Equilibrium Labor Employed
$3,347 1052 person-years
$5,864 1072 person-years
Those who do not think that this possibility ever occurs in
the real world have failed to face a challenge for decades now.
What are the special case assumptions adopted so as to rule out the
possibility illustrated in the example? Furthermore, why should
a special-case model be preferred to the more general model? The
general model for analyzing the choice of technique does not imply
a less-labor intensive technique will be adopted at a higher wage.
What, then, is the rational basis for assuming downward-sloping
labor demand curves?
From long experience, I know that some are likely to make logical
mistakes at this point. So I'll conclude with a few observations. The
effect illustrated in the example can arise when there are many more
processes to choose from. In fact, it can arise when the cost-minimizing
technique varies continuously with the wage. It does not depend
on there only being one process for some industry. It can arise in
models with more than two goods being produced. It does not depend
on the existence of a produced good that is used either directly or
indirectly in the production of all goods. (Both steel and corn have
this property in the example.) It can arise if there are different types
of labor, non-produced commodities used in production ("land"),
and capital-goods that last more than one production cycle ("fixed
capital" or "machinery"). I gather that numeric examples with
reasonable values are easier to construct, in some sense, if there
are more produced goods. At least, more degrees of freedom arise.
Consequently, incorrect answers to my question are assumptions
that more goods are produced, more techniques are available,
different types of labor exist, etc. These assumptions are simply
insufficient to imply the conclusion that higher wages are
associated with a choice of a less labor-intensive technique.
Paul Samuelson seems to accept the generality of models in which
the effect illustrated by the numerical example can arise:
"Something precious I gained from Robinson's work and that of her
colleagues working in the Sraffian tradition. As I have described
elsewhere, prior to 1952 when Joan began her last phase of capital
research, I operated under an important misapprehension concerning
the curvature properties of a general Fisher-von Neumann technology.
What I learned from Joan Robinson was more than she taught. I learned,
not that the general differentiable neoclassical model was special
and wrong but that a general neoclassical technology does not
necessarily involve a higher steady-state output when the interest
rate is lower. I had thought that such a property generalized from
the simplest one-sector Ramsey-Solow parable to the most general
Fisher case. That was a subtle error and, even before the 1960
Sraffa book on input-output, Joan Robinson's 1956 explorations in
_Accumulation of Capital_ alerted me to the subtle complexities of
general neoclassicism.
These complexities have naught to do with *finiteness* of the number
of alternative activities, and naught to do with the phenomenon in
which, to produce a good like steel you need directly or indirectly
to use steel itself as an input. In other words, what is wrong and
special in the simplest neoclassical or Austrian parables can be
completely divorced from the basic critique of marginalism that Sraffa
was ultimately aiming at when he began in the 1920s to compose his
classic: Sraffa (1960). To drive home this fundamental truth, I
shall illustrate with the most general Wicksell-Austrian case that
involves time-phasing of labor with no production of any good by means
of itself as a raw material.
As in the 1893-1906 works of Knut Wicksell, translated in Wicksell
(1934, Volume I), let corn now be producible by combining labor
yesterday, labor day-before-yesterday, etc):
Q( t ) = f( L(t - 1), L(t - 2), ..., L(t - T) ) = f( L ) (1)
Q = f( L(1), L(2), ..., L(T) ) in steady states (2)
Q = L(1) * f( 1, L(2)/L(1), ..., L(T)/L(1) ),
1st-homogeneous and concave (3)
Q = L(1) * del f( L )/del L(1) + ...
+ L(T) * del f( L )/del L(T), Euler's theorem (4)
del f/del L( j ) = fj( L ),
del del f/(del L(i) * del L(j) ) = fij( L )
exist for L >= 0 (5)
fj > 0, (z1, ..., zT)[ fij( L ) ](z1, ..., zT)' < 0
for zj <> b*L( j ) > 0 (6)
[Symbols are somewhat changed because of ASCII limitations - RLV ]
Nothing could be more neoclassical than (1)-(6). *If* it obtained
in the real world, a Sraffian critique could not get off the ground.
Yet it can involve (a) the qualitative phenomena much like
'reswitching', (b) so-called perverse 'Wicksell effects', (c) a
locus between steady-state *per capita* consumption and the interest
rate, a( i, c ) locus, which is *not* necessarily monotonically
negative once we get away from very low i rates. This cannot
happen for the 2-period case where T = 2. But for T >= 3, all
these 'pathologies' can occur, and there is really nothing
pathological about them. No matter how much they occur, the marginal
productivity doctrine does directly apply here to the general
equilibrium solution of the problem of the distribution of income...
...This monotone relation between (W/Pj, i ) was obscurely glimsped
by Thunen and other classicists and by Wicksell and other
neoclassicists. But the *factor-price trade-off frontier* did not
explicitly surface in the modern literature until 1953, as in
R. Sheppard (1953), P. Samuelson (1953), and D. Champernowne (1954).
One can prove it to be well-behaved for (1)-(3), or any
convex-technology case, by modern duality theory. Before Robinson
(1956), I wrongly took for granted that a similar monotone-decreasing
relation between ( i, Q/( L(1) + ... + L(T) ) ) must also follow
from mere concavity - just as does the relation
- del del C(t + 1)/( del C( t ) )^2 = del i(t)/del C(t) > 0. But
this blythe expectation is simply wrong! I refer readers to my
summing up on reswitching: Samuelson (1966).
I realize that there are many economists who tired of Robinson's
repeated critiques of capital theory as tedious and sterile naggings.
I cannot agree. Beyond the effect of rallying the spirits of
economists disliking the market order, these Robinson-Sraffa-
Pasinetti-Garegnani contributions deepen our understanding of how a
time-phased competitive microsystem works."
-- Paul A. Samuelson, "Remembering Joan", in _Joan Robinson and
Modern Economic Theory_ (edited by G. R. Feiwel), New York
University Press, 1989.
Some comments may help clarify some implications of the above quote.
Under reswitching, the same choice of technique (or coefficients of
production) can be associated with widely different distributions of
income between interest and wages. Thus, Samuelson is implying that
the "marginal productivity doctrine" does not imply that the
distribution of income is determined by the technology and the
chosen technique. If the interest rate i is higher in a steady
state, the real wage W/Pj will be lower. Samuelson accepts that.
Since output per worker, Q/( L(1) + ... + L(T) ), need not be
lower with a higher i, the labor-intensity, ( L(1) + ... + L(T) )/Q
of the cost-minimizing technique can be lower with a lower real wage
in a comparison of steady-states.
The final questions posed by this example are a matter of the
sociology of knowledge. Similar examples have been available
in the literature for over three decades. Many economists,
including specialists in labor economics, seem to be unaware of
this possibility. Why do so many economists have logically
mistaken beliefs about their subject? Why do they continue to
teach exploded dogma?
--
Robert Vienneau
r
v
i
e m
n o Whether strength of body or of mind, or wisdom,
@ c or virtue, are always found...in proportion to
d . the power or wealth of a man [is] a question
r e fit perhaps to be discussed by slaves in the
e p hearing of their masters, but highly unbecoming
a a to reasonable and free men in search of the
m c truth.
s -- Rousseau
Doug McKee
Ainsley Tai wrote in message <36733E91...@wharton.upenn.edu>...
>Well, his point seems to be that if landlords cannot raise rent, then
>the total supply in the system will be lower than at equilibrium, so
>housing will be hard to find. Furthermore, he assumes that if they can't
>charge the rent they want to, they could be making enough money to cover
>their variable costs, but not their fixed costs. His underlying
>assumption of course, is that the market can make better decisions
>rather than the government in terms of how many affordable apartments
>are needed, and how consumers make the trade off between affordable
>housing and cost.
OK, I think I understand this, but does a free market result in a
diversified community? In my mind this this would be a desirable result,
and I'd be willing to pay an efficiency penalty to get it.
>
>Second, I personally think that affordable housing and luxury high-rises
>can be considered as two different products.
Agreed, but I don't know the details of how rent control is implemented -- I
assume New York does not have one flat rent ceiling for all of Manhattan.
How do they decide which buildings are rent controlled and which aren't?
>> By the same token, doesn't a minimum wage incentivize employers to
>> reduce the amount of truly unskilled labor they need? And thus reduce
>> unemployment? In more general terms, I would expect that a market
>> could take care of the surplus in a positive way. Do models exist
>> that factor this in? Does the data support this happening? i.e.,
>> over time, do surpluses shrink in the face of price controls?
>>
>
>If an employee thinks that the marginal benefit of a worker is $4, and
>minimum wage is $5, then he won't hire or he would fire that person.
>Also, you are right in that the employer will reduce the amount of
>unskilled labor. They do this in two ways: train him, or buy a machine
>that will do the same job. Unfortunately, employers usually just buy a
>machine and fire the person.
Maybe this encourages the person to get more education/job training and
that's a good thing.
>> Question #2 (Consumer surplus):
>As for other theories on economic well-being, there is this utility
>theory, where it says that people try to maximize their utility given
>the budgetary constraints that they have. It snould be in the book.
Thanks for the reference -- it is indeed in the book in the chapter on
Distribution of Income. They sure don't say much about it, but I've got
another book (Nicholson: MicroEconomic Theory) that has more -- I just have
to do some calculus review before I dive into that one.
doug
Shawn Wilson
Robert Vienneau wrote in message ...
>1.0 INTRODUCTION
>
> There's been some discussion about minimum wages here. I think this
>discussion may be based on unfounded theory.
>
> This long post presents an example in which higher wages are associated
>with firms choosing to employ more workers per unit output produced. The
>exact numeric values used are obviously unreasonable. The example, though,
>is used to make a point. Those who think the demand curve for labor *must*
>slope down should answer the following question: what are your
assumptions?
Damn, are you going to waste our time with this crap again?
(BIG snip)
Yep.
Robert, reswitching is an artifact of one particular method of aggregating
capital. It doesn't reflect anything about reality.
Robert Vienneau
<wils...@worldnet.att.net> wrote:
> Robert, reswitching is an artifact of one particular method of aggregating
> capital. It doesn't reflect anything about reality.
Reswitching is only mentioned in some of my quotes. How does Shawn think
my example relates to reswitching?
Aggregation of capital is not discussed *anywhere* in my post, including,
for instance, the Samuelson quote. Shawn's understanding of the issues
is clearly flawed.
A combination of one steel-producing process and the corn-producing
process in my example can be used to construct a Leontief input-output
matrix (despite the fact that the steel-producing technology is not
a Leontief (fixed coefficients) production function). Leontief
input-output models are widely applied empirically.
Besides, I have previously given Shawn a list of references where
the applicability of some of these curious effects were explored.
I have only read one of those papers, since I don't think that's
the issue when proving that economists' beliefs about neoclassical
theory are logically inconsistent.
Grinch
>
> Hello,
>
> I'm currently trying to teach myself economics by going chapter by
> chapter through N. Gregory Mankiw's recent textbook "Principles of
> Economics," and although it is very well written and enjoyable, I
> don't have the luxury of asking a professor any questions. So I'm
> hoping that some kind souls in this group will humor me:
>
>
> Mankiw seems to feel strongly that price controls (like rent control)
> are bad things. He says things like "Rent control may keep rents low,
> but it also discourages landlords from maintaining their buildings and
> makes housing hard to find."
Lindbeck, former chairman of the Nobel Prize committee for economics:
"Next to bombing, rent control seems in many cases to be the most
efficient technique so far known for destroying cities."
> But aren't landlords incentivized by a
> rent ceiling to build affordable housing instead of luxury high-rises
What's the incentive? Rent control reduces rents. That's a
disincentive to supply housing.
> I can see how price controls could be
> inefficient for commodities, in this case, the suppliers can (I think)
> easily shift their resources to build products that fall under the
> ceiling.
You've got it backwards. Low rents are always controlled. So the
incentives to supply low-income housing are reduced. In some places,
like NYC, very high rents are not controlled so the incentives to supply
high-income housing remain in place.
> When a city wants to make sure that an area contains people
> from different wage brackets, I think imposing some rent control in
> some areas would be one way to do that.
You're making a very naive mistake here. You are assuming that the low
rents protected by rent control go to low-income people.
But rent control is not means tested. The rich are just as eligible for
below-market rents as the poor. And they have much more ability to
"manage" the system.
In reality, rent control subsidizes the rich at the expense of the poor.
Two thirds of all the "below market" rent subsidies in NYC, with its
eight million people, go to the relatively small population of
Manhattanites who live below 96th street -- NY's wealthiest people,
indeed one of the wealthiest areas of population in the entire nation.
The poor in the outer boroughs and "uptown" pay for this.
Price controls are never means tested -- so why would you think they
help the poor? They reduce prices for the rich too, and the rich are
much better positioned to take advantage of regulated prices than the
poor are.
Think for a minute about what price controls do.
Say the free market price of "gizmos" is $10, but you decide to pass a
law setting their price at $7 to help the poor. Remember that the free
market price still exists. People still want to buy and sell gizmos
freely at $10, but you are using the law to stop them.
You are prescribing an immediate shortage. First, lots of people are
going to want to try to buy for $7 what is worth $10 -- so demand goes
up. Second, few people are going to want to sell for $7 what is worth
$10 -- so they are going to hoard gizmos, keeping them for their own use
or holding them off the market until they can sell or trade on better
terms. So supply goes down. Suddenly you are living in shortage city.
Now, with a shortage, the real price people are willing to pay for
gizmos (the "shadow price") goes up -- to maybe $12 -- but you have to
stop people from buying at this price to enforce your price controls.
So you need a regulatory Gizmo Pricing Administration to draw up all
kinds of rules regulating trade in gizmos, and you need the Gizmo Police
to enforce them. Somebody has to pay the cost of these, of course. If
you impose the administration cost on the gizmo industry, the price of
production goes up and supply is reduced further. This pushes further up
the shadow price that people are actually willing to pay for gizmos.
Note that you have also politicized the pricing of gizmos, since it is
politically administered. Lobbying groups form and money goes to the
politicians who set gizmo prices, who offer "hardship exemptions" and
loopholes in rules and promises to crack down on "gizmo profiteers".
(Who do you think benefits most from such lobbying, the rich or poor?)
Need I say you also have created a situation ripe for "favor trading"
and corruption. If I have gizmos that are now worth, say, $12, if I
sell one for $7 I'm going to want $5 of something else in return -- cash
under the table, favors, a no-show job for my cousin, something. And if
I'm only paying $7 for something that I'd willingly pay $12 for, I'm
going to be willing to provide that extra $5 one way or another. (Simple
bribery of the Gizmo Police and GPA administrators is always an option.)
Does this sound like a situation that helps the poor? Are the poor best
able to arrange "favors" and game regulations?
If this sounds fanciful or cynical, examine rent control in NYC (where I
live), which is probably the US's largest "price control" system.
Rent control applies to rents at all levels (except very high) by
allowing only a government-set percentage increase in rent each year (in
a below-market amount, obviously, or the system wouldn't be needed).
There is no "means testing". The rich fully qualify for low rents --
and they get the bulk of them.
Because rent control freezes or slows down rent increases to
below-market levels, the longer one is in an apartment the greater one's
subsidy is. People who have been in an apartment a long time, 15, 20,
30 years, can get really big subsidies. Manhattan is full of
rich-and-famous celebrities paying bargain-basement rents they've had
since their youth.
Landlords try to get this money back from new renters, people just
moving into apartments. So "vacant apartment" rental fees are high.
Those moving into these apartments tend to be young people who are
starting careers and families, and (in NYC) immigrants.
Empircal studies confirm that in NY and other markets with rent control,
"vacant apartment" rental fees are higher relative to the market average
rent, and long-term rental fees lower, than in cities without rent
control. Which is what one would expect. To see a graphic
representation of vacant-apartment rents in rent controlled and
free-market cities, look at graphs for adverstised apartment rents in
"free market" Philadelphia at
http://www.cato.org/pubs/pas/images/pa-2741.gif versus rent-controlled
New York, at http://www.cato.org/pubs/pas/images/pa-2742.gif
Now just a little familiarity with demographics informs one that income
rises for most people over their working years, so the people who have
been in an apartment for 15 or more years and who are receiving the
biggest subsidies through below-market rents are wealthier as a group
than the young people and immigrants who as a group are seeking vacant
apartments or have recent rentals, and who are paying increased rents.
So the rich benefit at the expense of the poor.
This is very clear in the politics of rent control in NYC. Rent control
here was instituted as a "temporary emergency measure" during World War
II and has been renewed as such every few years since. The "preserve
rent control" political alliance is centered in the richest
neighborhoods of Manhattan, which are also the politically best
organized. Opposition comes from the outer boroughs with poorer
populations (Bronx, Brooklyn) but is feebly organized. A consideration
of rent control could be nicely supplemented with a quick look at Public
Choice Economics, to see how a small group of incentivized voters can
manage to get themselves a subsidy at the expense of the larger voting
population.
The other faults of price controls I mentioned above are all clearly
evident in the NYC rent control system:
[] Shortages -- the apartment vacancy rate in the US typically ranges
from 7% to 15% or more. In NYC it's about 3% and hasn't been above 5%
since WWII, when controls went into effect.
Hoarding of apartments by the rich (legally and illegally) and
rentals "frozen" by regulation are everywhere. I'm just one person in
NYC, and here are cases I know of personally :
* A retiree who lives in Florida but keeps a $125/month five-room
apartment (market rent: $1,500 - so why give it up?) that he uses when
he comes back a couple times a year to visit friends.
* A Professor at New York University who lives on Long Island but who
keeps a $300 rent control four-room apartment just off Fifth Ave at
Washington Square (market rent $2,000) where he stays when he comes into
the city to teach.
* A fellow with two rent stabilized apartments, one for himself and the
others in the name of his son, who nobody has seen in ten years, which
he rents out illegally for profit.
* A waiter who pays about $500 a month for an eight-room Central Park
West apartment that would probably rent for $4,000 to $5,000. He
inherited the apartment from his parents (rent control lets apartments
be inherited). He has four of the rooms blocked off because it's too
much trouble to clean them. He feels bad about wasting the space, but if
he moved he'd have to pay more rent.
* A building in which an 80-year old widow lives on the fifth floor by
herself in a six-room apartment with two bathrooms, paying $150/month
rent, while on the first floor a couple with two young children live in
a four-room apartment with one bath paying $1,750. The widow and the
family asked to switch apartments while continuing to pay their current
rents -- that way the family would get extra space while the widow would
end having to travel up and down to the fifth floor. The landlord
agreed. The Rent Stabilization Board said no, it is illegal.
I could go on and on. The point is that regulations freeze market
movement and encourage hoarding, which both reduce supply.
Of course the resulting low vacancy rate drives up the rent rate on
vacant apartments, which punishes the young and poor.
But the rich escape. Very high rents are exempt from rent control, so
the market provides rich rental housing. Also, rent control has given
landlords the incentive to sell off individual apartments to remove them
from rental status and escape rent control, so there's been a mass
conversion of upper-scale apartments from rental to condominium or
cooperative status in NYC. When upper-income types in NYC now need a
new apartment they are quite likely to buy at a market price instead of
rent at an inflated administered one. The poor do not have this option.
[]Administration and policing at great cost --- NYC spends over a $1
billion a year on administering its rent system, including an entire
justice system: enforcement agents and a separate court system.
[]Politicization of pricing - Do an AltaVista search on "rent contol"
and "New York", and you'll get about a hundred hits last year's
political war about renewing it. Every year when the Rent Stabilization
Board presents the year's percentage rent increase, it is protected by
riot police. Heck, read this NY Times story about what's going on in
just one building,
http://tenant.net/Alerts/Guide/press/nyt/fb041397.html
[]Corruption: "Key money" for the landlord or agent is synonymous with
getting an apartment in NYC. Tenants demand bribes from landlords
before moving. Housing court judges are indicted for corruption every
year. I won't even mention housing inspectors. And tenants illegally
hoarding apartments.
I could go on and on, but you should have the picture by now. Rent
control increases market costs, which is bad for everyone generally.
But it is worst for the poor, because they bear the brunt of it. The
rich either benefit from long-time subsidized rentals (and often "game
the system") or have the option of opting out of the rental market
entirely.
As I said previously, I suggest reading a little Public Choice Economics
to see how all this is politically possible - even expected.
You get the same kinds of results from all kinds of price controls. They
are a bad thing.
Regards
Grinch
> assume New York does not have one flat rent ceiling for all of Manhattan.
> How do they decide which buildings are rent controlled and which aren't?
>
See my other post.
For a view other than mine about rent control, see this NY Times
Magazine article about how rent control functions in NYC:
http://tenant.net/Alerts/Guide/press/nyt/jt050497.html
SUSUPPLY
[All kinds of things about the effects of price controls]
Let me second the analysis. I lived in Manhattan in the 1970's. Grinch has
captured it perfectly. I even spent one day in landlord-tenant court observing
the nature of "justice", a very eye-opening experience.
I too have friends who are living in ridiculously under-priced apts all the
while enjoying 6 figure incomes. One of the key elements in the novel Bonfire
of the Vanities, is the possession of a rent controlled apt. Tom Wolfe knows
his city.
I also hope Lauchlan MacKinnon is reading. This is what I was talking about
when I said that government can have only the most limited information about
transactions, thus being unable to discriminate between what is in the interest
of consumers and what is not.
Thanks to Grinch for taking the time to spell it out. Talk about a
demonstration of the predictive value of models in the "real world", this is
it...in spades.
Patrick
Grinch
>
> Hello,
>
> I'm currently trying to teach myself economics by going chapter by
> chapter through N. Gregory Mankiw's recent textbook "Principles of
> Economics," and although it is very well written and enjoyable, I
> don't have the luxury of asking a professor any questions. So I'm
> hoping that some kind souls in this group will humor me:
>
> Question #1 (Price controls):
> Mankiw seems to feel strongly that price controls (like rent control)
> are bad things.
<snip of rent control, discussed in other post>
> By the same token, doesn't a minimum wage incentivize employers to
> reduce the amount of truly unskilled labor they need?
Yup. Sure does.
> And thus reduce unemployment?
More likely increase it. Two guys with brooms get replaced by one guy
with a vacuum cleaner.
Increasing the minimum wage rate does not increase the value to the
employer of getting a job done. It only increases the cost to the
employer of getting the job done with minimum wage labor. If as a result
some other method of getting the job done becomes relatively less
expensive, they employer can be expected to switch to using that method
instead.
> In more general terms, I would expect that a market
> could take care of the surplus in a positive way. Do models exist
> that factor this in? Does the data support this happening? i.e.,
> over time, do surpluses shrink in the face of price controls?
I don't know what you mean by "surplus".
Nor do I see how you expect markets to operate effectively to take care
of anything in a positive way to the extent that you replace market
prices with administered prices -- and you do this quite thoroughly in
the case of rent control.
Regards
Grinch
>Question #2 (Consumer surplus):
>Consumer surplus is defined as "a buyer's willingness to pay minus the
>amount the buyer actually pays."
OK
>And maximizing this consumer surplus
>is a good thing because the people that want things the most get them.
Well, consumer surplus is the buyer's equivalent of "profit" for a
seller, that's all.
Profit = sale proceeds received minus cost of goods sold.
Consumer surplus = value of purchased goods to the consumer minus sale
price paid.
Other things being equal, businesses like to make profits and
consumers like to make purchases at bargain prices. But these are
dollar amount accounting numbers, that's all. Don't read any more into
them than that. They aren't any kind of direct measure of general
welfare.
>The problem I have with this is that the amount of capital that people
>have is not factored in.
Why should it be?
When you consider the definition of "business profits" are you
similarly troubled by the fact that it doesn't factor in the amount of
capital businesses have? Some have much more capital than others,
some have very little. Does this invalidate the concept of what
business profit is? It's an analagous situation.
>For example, I'll bet there are lots of 12
>year old boys with very little money that would like to pay $70 for
>Knicks tickets but can't and lots of wealthy folks don't want to go to
>the game as much but do because $70 doesn't mean much to them. So my
>question is are there other measures of economic well-being that
>factor this in? Do they make sense?
Sure, there all kinds of measures of "welfare". Household wealth,
health, education, life expectancy, etc. What are you interested in?
Doug McKee
First, thanks very much for taking the time to answer my questions -- it's
much appreciated. Like I said, this is all pretty new to me, so I hope you
don't expect that to be my last "naive" post!
> Price controls like rent control are a *very* bad thing. To quote Assar
> Lindbeck, former chairman of the Nobel Prize committee for economics:
> "Next to bombing, rent control seems in many cases to be the most
> efficient technique so far known for destroying cities."
Mankiw includes the same quote in the book I'm reading. And I'm not even
saying I didn't agree with it before posting my questions; I just wanted to
understand the issues more.
> > But aren't landlords incentivized by a
> > rent ceiling to build affordable housing instead of luxury high-rises
> > for Wall Street bankers?
>
> What's the incentive? Rent control reduces rents. That's a
> disincentive to supply housing.
What happens when new housing is built, is the rent capped at that point and
subject to a board-controlled limit on how much rent can go up? Because if
that's the case, then clearly that's a disincentive to supply housing. I
still want to know the best way to encourage diversity in Manhattan
though -- maybe through zoning? William Tucker (author of that Cato
Institute paper you pointed me to) references another of his papers (Zoning,
Rent Control, and Affordable Housing) which I couldn't find on the Cato
site. I think it could be worth paying an efficiency penalty to get
diversity. Unfortunately rent control is the worst of all possible
worlds -- less diversity _and_ an efficiency penalty. What if NYC did add
means-testing to its current rent control system?
<Lots of good stuff snipped>
> As I said previously, I suggest reading a little Public Choice Economics
> to see how all this is politically possible - even expected.
I'll definitely take a look, although maybe you can answer if Public Choice
predicts that according to William Tucker () "But the trend in recent years
has been toward removal of rent control."
doug
Doug McKee
Grinch wrote in message <756krq$bso$1...@camel18.mindspring.com>...
>"Doug McKee" <dmc...@iname.com> wrote:
>
>>Question #2 (Consumer surplus):
>
>>Consumer surplus is defined as "a buyer's willingness to pay minus the
>>amount the buyer actually pays."
>
>OK
>
>>And maximizing this consumer surplus
>>is a good thing because the people that want things the most get them.
>
>Well, consumer surplus is the buyer's equivalent of "profit" for a
>seller, that's all.
>
>Profit = sale proceeds received minus cost of goods sold.
>Consumer surplus = value of purchased goods to the consumer minus sale
>price paid.
>
>Other things being equal, businesses like to make profits and
>consumers like to make purchases at bargain prices. But these are
>dollar amount accounting numbers, that's all. Don't read any more into
>them than that. They aren't any kind of direct measure of general
>welfare.
Ah, OK, I may have been reading too much into Mankiw's statement that "The
equilibrium of supply and demand in a market maximizes the total benefits
received by buyers and sellers." This statement says nothing about the
distribution of these benefits (i.e., the "equity," right?) and nothing
about the benefits to non-market participants in society ("externalities").
>>The problem I have with this is that the amount of capital that people
>>have is not factored in.
>
>Why should it be?
I thought Mankiw was saying that maximization of total surplus was a good
single goal of a society.
>When you consider the definition of "business profits" are you
>similarly troubled by the fact that it doesn't factor in the amount of
>capital businesses have? Some have much more capital than others,
>some have very little. Does this invalidate the concept of what
>business profit is? It's an analagous situation.
>
>>For example, I'll bet there are lots of 12
>>year old boys with very little money that would like to pay $70 for
>>Knicks tickets but can't and lots of wealthy folks don't want to go to
>>the game as much but do because $70 doesn't mean much to them. So my
>>question is are there other measures of economic well-being that
>>factor this in? Do they make sense?
>
>Sure, there all kinds of measures of "welfare". Household wealth,
>health, education, life expectancy, etc. What are you interested in?
Any of these would seem to be a better measure of society welfare than total
surplus in a market. BTW, if you think I'm ignorant of microeconomics, I
haven't even cracked the part of the book on macro yet!
doug
Gary Forbis
>Doug McKee wrote:
>>
>> By the same token, doesn't a minimum wage incentivize employers to
>> reduce the amount of truly unskilled labor they need?
>
>Yup. Sure does.
>
>> And thus reduce unemployment?
>
>More likely increase it. Two guys with brooms get replaced by one guy
>with a vacuum cleaner.
Is this a bad thing? I think it's a good thing. Afterwards the second guy
can be put to work doing something else of lower priority.
>Increasing the minimum wage rate does not increase the value to the
>employer of getting a job done. It only increases the cost to the
>employer of getting the job done with minimum wage labor. If as a result
>some other method of getting the job done becomes relatively less
>expensive, they employer can be expected to switch to using that method
>instead.
Again, I think this a good thing. We're heading into a time where a lot
of our labor market will be retiring. The shift to labor saving methods is
important.
There's another interesting point. Cost and value are not synonyms.
You've assumed the job continues to be done after minimum wage
has been raised. This happens because value to the employer exceeds
costs. There's something wrong with the labor market that labor costs
can be so far below labor value.
Shawn A. Wilson
Robert Vienneau wrote in message ...
>Reswitching is only mentioned in some of my quotes. How does Shawn think
>my example relates to reswitching?
Robert, ALL your examples relate to reswitching. It's your God.
>
>Aggregation of capital is not discussed *anywhere* in my post, including,
>for instance, the Samuelson quote. Shawn's understanding of the issues
>is clearly flawed.
No Robert, it's you that doesn't understand.
>
>A combination of one steel-producing process and the corn-producing
>process in my example can be used to construct a Leontief input-output
>matrix (despite the fact that the steel-producing technology is not
>a Leontief (fixed coefficients) production function). Leontief
>input-output models are widely applied empirically.
Not even close Robert. I've done a fair amount of empirical research. I've
read even more. NO ONE uses Leontieff technology.
>
>Besides, I have previously given Shawn a list of references where
>the applicability of some of these curious effects were explored.
>I have only read one of those papers, since I don't think that's
>the issue when proving that economists' beliefs about neoclassical
>theory are logically inconsistent.
You keep harping on that. Actually, all you've proved is that the CCC died
for a damn good reason. Here's a challenge for you: show reswitching in an
environment where capital is NOT measured by cost or price. You'll get
bonus points for NOT using Leontieff production functions.
Robert Vienneau
> Robert Vienneau wrote in message ...
> >Reswitching is only mentioned in some of my quotes. How does Shawn think
> >my example relates to reswitching?
> Robert, ALL your examples relate to reswitching...
Nonresponsive. I don't exhibit reswitching in my example in this thread.
Furthermore, untrue. The examples in my FAQ on the Labor Theory of Value
are not examples of reswitching. Nor is my example in my explanation
of how non-zero price Wicksell effects usually lead to a deviation of
the interest rate from the marginal product of capital an example of
reswitching. Nor is my example in my explanation of why the interest
rate is taken as given in calculating the marginal product of labor
in long run theories of production an example of reswitching.
Context restored:
[ > > > Robert, reswitching is an artifact of one particular method of ]
[ > > > aggregating capital... ]
> >Aggregation of capital is not discussed *anywhere* in my post, including,
> >for instance, the Samuelson quote. Shawn's understanding of the issues
> >is clearly flawed.
> No Robert, it's you that doesn't understand.
Nonresponsive. And Shawn's restored statement is irrelevant to this
thread for the reason I gave.
> >A combination of one steel-producing process and the corn-producing
> >process in my example can be used to construct a Leontief input-output
> >matrix (despite the fact that the steel-producing technology is not
> >a Leontief (fixed coefficients) production function). Leontief
> >input-output models are widely applied empirically.
> Not even close Robert. I've done a fair amount of empirical research. I've
> read even more. NO ONE uses Leontieff technology.
Nonresponsive. Shawn's habit of making authoritarian pronouncements based
on his own ignorance is hardly compelling.
The International Input-Output Association has a Web page at:
<http://web.mit.edu/krp/www/iioa/>
_Economic Systems Research_, their journal, has a Web page at:
<http://www.carfax.co.uk/esr-ad.htm>
I only know about this organization and this journal from looking at
parts of their Web.
> >Besides, I have previously given Shawn a list of references where
> >the applicability of some of these curious effects were explored.
> >I have only read one of those papers, since I don't think that's
> >the issue when proving that economists' beliefs about neoclassical
> >theory are logically inconsistent.
> You keep harping on that. Actually, all you've proved is that the CCC died
> for a damn good reason. Here's a challenge for you: show reswitching in an
> environment where capital is NOT measured by cost or price. You'll get
> bonus points for NOT using Leontieff production functions.
Whatever. One wonders what Shawn Wilson thinks that quote from Paul
Samuelson I gave was about. I am aware that Samuelson does not give a
proof or refer one to Tatsuo Hatta's _Review of Economic Studies_ paper,
where Shawn's misunderstanding is answered in more detail.
Grinch
>
> Grinch wrote in message <3676C3B0...@mindspring.com>...
> >Doug McKee wrote:
> >>
>
> >> By the same token, doesn't a minimum wage incentivize employers to
> >> reduce the amount of truly unskilled labor they need?
> >
> >Yup. Sure does.
> >
> >> And thus reduce unemployment?
> >
> >More likely increase it. Two guys with brooms get replaced by one guy
> >with a vacuum cleaner.
>
> Is this a bad thing? I think it's a good thing. Afterwards the second guy
> can be put to work doing something else of lower priority.
It's good that he's unemployed so he can do something of lower priority
than minimum wage work?
> >Increasing the minimum wage rate does not increase the value to the
> >employer of getting a job done. It only increases the cost to the
> >employer of getting the job done with minimum wage labor. If as a result
> >some other method of getting the job done becomes relatively less
> >expensive, they employer can be expected to switch to using that method
> >instead.
>
> Again, I think this a good thing. We're heading into a time where a lot
> of our labor market will be retiring. The shift to labor saving methods is
> important.
Which makes unemployment a good thing?
> There's another interesting point. Cost and value are not synonyms.
> You've assumed the job continues to be done after minimum wage
> has been raised. This happens because value to the employer exceeds
> costs. There's something wrong with the labor market that labor costs
> can be so far below labor value.
There's something wrong in a labor market where labor costs are mandated
to be *above* labor's value. That thing is unemployment.
In a competitive market employers will bid up the price of labor until
it reaches labor's value.
Whenever the price of labor is below the return it provides to
employers, an employer can increase profits by paying a higher wage to
steal employees from the other guy.
Grinch
>
> Grinch wrote in message <756krq$bso$1...@camel18.mindspring.com>...
> >Sure, there all kinds of measures of "welfare". Household wealth,
> >health, education, life expectancy, etc. What are you interested in?
>
> Any of these would seem to be a better measure of society welfare than total
> surplus in a market.
They are. But you'll also find there's a very strong correlation between
increasing consumer surplus and increasing welfare. After all, if you
increase your consumer surplus you are buying more things that you want
-- food, clothing, housing, health care, recreation, entertainment -- at
what you consider to be better prices. So the odds are pretty good
you're feeling better off.
But that doesn't make consumer surplus the same thing as welfare. A drug
addict might increase his consumer surplus without increasing his
welfare by making a score at a good price. You might improve your
welfare without increasing your consumer surplus by going on an exercise
program that improves your health, reading a good book, or meeting the
perfect woman.
It's like the much discussed confusion between GDP and welfare. They're
not the same thing at all. It's child's play to find examples of things
that add to one that don't add to the other, or which may subtract from
the other.
But there's a strong correlation between the two. When GDP is
declining, there's always widespread agreement that's a problem with
welfare implications. When you measure absolute levels of GDP in
different nations or periods of time against measures of welfare such a
life expectancy, education, nutrition, and so on, there's a very strong
correlation.
But that doesn't make them the same thing.
>BTW, if you think I'm ignorant of microeconomics, I
> haven't even cracked the part of the book on macro yet!
You're already ahead of most people. Economics is fun, informative and
practical too. Enjoy!
> doug
Grinch
>
> Hey Grinch,
>
> First, thanks very much for taking the time to answer my questions -- it's
> much appreciated. Like I said, this is all pretty new to me, so I hope you
> don't expect that to be my last "naive" post!
>
> > Lindbeck, former chairman of the Nobel Prize committee for economics:
> > "Next to bombing, rent control seems in many cases to be the most
> > efficient technique so far known for destroying cities."
>
> saying I didn't agree with it before posting my questions; I just wanted to
> understand the issues more.
>
> > > rent ceiling to build affordable housing instead of luxury high-rises
> > > for Wall Street bankers?
> >
> > What's the incentive? Rent control reduces rents. That's a
> > disincentive to supply housing.
>
> subject to a board-controlled limit on how much rent can go up? Because if
Remember what I said about how when prices are set by legislators,
there's an immense incentive for lobbying by every interested party?
The rules are amazingly complex. It's a whole field of law, with its own
court system and big law firms specializing in it. All an extra cost
paid by the housing sector, tenants and landlords alike.
Remember that NYC rent control was *not* started with any thought of
helping the poor. It was part of the nation's general price control
system during WWII. After the war it was extended purely through the
politics of there being more voting renters than landlords.
After a while it was realized that new housing construction was being
suffocated by the rules, so new housing was exempted from rent control.
But after a few years the tenants in new housing started saying, "How
come our rents are going up and everybody else's aren't?" So the City
started talking about extending rent control to them. To which the
owners of new housing replied "You promised you wouldn't!". So to be
"fair" to both, the City created *another* program called "rent
stabilization" with a whole different set of rules for the newer
housing. So now there are two parallel rent control programs, each has
been modified a zillion times over the decades, landlords often have
tenants of both types in a single building and so have to comply with
two different legal systems.
Predictably, housing starts in NYC now are at a lower level than during
the Great Depression. To get those, the City provides major tax
incentives for new housing construction -- another cost to the
taxpayer.
Also, to make up for the housing shortage, NYC has itself constructed
and owns more housing than all the public housing in the rest of the US
combined, IIRC. Another major cost to the taxpayer. And the City is an
infamously bad landlord, a notorious slumlord. After all, it's not a
real estate management company.
I could go on, but ...
> I still want to know the best way to encourage diversity in Manhattan
> though -- maybe through zoning?
If you want to subsidize something, the efficient (and honest) way to do
it is with a subsidy, on budget.
Say "we want these people X to live in Manhattan, so we propose to pay
$Y from taxpayer revenue towards their rent for them".
If the voters say "yes" then fine. You get what you want, preserve the
market, and the whole Kafkaesque nightmare described above is avoided.
And the cost will be a very small portion of the total costs of the
whole rent control system.
If the voters say "no", too bad, the people have spoken.
But if you fear the voters will say "no", and so instead work to enact a
"rent protection" scheme that you sell as protecting everyone, while
it's really just protecting your favored interests, then you're just
another special interest trying to fool people to benefit at the
public's expense.
BTW, converting "protections" to taxes was the method used to reduce the
trade barriers that existed everywhere after WWII, to restore
international trade.
After the war every nation had big trade barriers to protect its
workers. Of course, the general populations of all nations supported
this. Then under the GATT agreements these trade barriers (quotas, etc.)
were converted into their tariff (tax) equivalents. The population of
each nation then saw that everyone in the nation was paying taxes to
benefit a selected, protected few. That changed the politics of
protectionism, and the tariff walls came tumbling down, generally.
If the regulations of NYC rent control were repealed and instead
everyone in NYC was forced to pay a tax equivalent of the cost they
incur under it, with the proceeds visibly being remitted to the rich
people living below 96th St. in Manhattan, rent control would be gone in
a month.
> William Tucker (author of that Cato
> Institute paper you pointed me to) references another of his papers (Zoning,
> Rent Control, and Affordable Housing) which I couldn't find on the Cato
> site. I think it could be worth paying an efficiency penalty to get
> diversity.
You'll never find a more diverse population than in Manhattan, believe
me.
Just what do you mean by "diversity"? How much of a penalty do you
think average voters should pay for it, in dollars? Do you think you
could sell it to them?
> Unfortunately rent control is the worst of all possible
> worlds -- less diversity _and_ an efficiency penalty. What if NYC did add
> means-testing to its current rent control system?
How to do that?
(*Add* more rules to the current rent control system? Arghhh .....)
> <Lots of good stuff snipped>
>
> > As I said previously, I suggest reading a little Public Choice Economics
> > to see how all this is politically possible - even expected.
>
> I'll definitely take a look, although maybe you can answer if Public Choice
> predicts that according to William Tucker () "But the trend in recent years
> has been toward removal of rent control."
Buchanan got a Nobel for Public Choice. Mankiw doesn't mention it?
Here's an entire book on it on the web.
http://www.fortunecity.com/meltingpot/barclay/212/votehtm/cont.htm
Regards
Robert Vienneau
> > Grinch wrote in message <3676C3B0...@mindspring.com>...
> > >Doug McKee wrote:
> > >> By the same token, doesn't a minimum wage incentivize employers to
> > >> reduce the amount of truly unskilled labor they need?
> > >More likely increase it. Two guys with brooms get replaced by one guy
> > >with a vacuum cleaner.
> There's something wrong in a labor market where labor costs are mandated
> to be *above* labor's value. That thing is unemployment.
> In a competitive market employers will bid up the price of labor until
> it reaches labor's value.
> Whenever the price of labor is below the return it provides to
> employers, an employer can increase profits by paying a higher wage to
> steal employees from the other guy.
Grinch's opinions seem to be without logical foundation and of
doubtful empirical validity. He seems to be incorrectly jumping from
an analysis of the demand for unskilled labor in a (non-vertically
integrated) industry to an analysis of the demand for unskilled labor
as a whole. The value of the (marginal product of) labor does not
exist independently of variations in the distribution of income.
What happens to the price of brooms and the vacuum cleaner if unskilled
labor is used in producing each? Suppose an increase in the minimum
wages succeeds in raising real wages. Then income distribution and
the general pattern of equilibrium prices is changed as a whole. There
is no reason to believe that the equilibrium prices of labor-intensive
commodities necessarily rise relative to the equilibrium prices of
less labor-intensive commodities. Nor is it necessarily the case
that when choosing among known techniques, less labor-intensive
techniques will be relatively cheaper at new prices associated with
a higher minimum wage. My long example, previously posted on this
thread, proves this lack of necessity.
Why doesn't Grinch address this argument, instead of posting exploded
theoretical claims?
I'll let somebody else explain how recent empirical work has cast
doubt on the beliefs about economics typically held by opponents
of the minimum wage.
The beginning student of economics, though, should be aware that
Grinch's unsupported views are generally what the teacher wants
from the student, at least in many introductory classes in America.
Shawn A. Wilson
Robert Vienneau wrote in message ...
>> employers, an employer can increase profits by paying a higher wage to
>> steal employees from the other guy.
>
>Grinch's opinions seem to be without logical foundation and of
>doubtful empirical validity.
No, Robert, you've mistaken Grinch's opinions with yours.
> He seems to be incorrectly jumping from
>an analysis of the demand for unskilled labor in a (non-vertically
>integrated) industry to an analysis of the demand for unskilled labor
>as a whole. The value of the (marginal product of) labor does not
>exist independently of variations in the distribution of income.
And, yet again, Rober can't get out one full sentence without uttering
perfect nonsense. Since I've tried and failed in the past to break Robert's
inpenetrable veil of ignorance, I won't bother this time.
SUSUPPLY
>And, yet again, Rober can't get out one full sentence without uttering
>perfect nonsense. Since I've tried and failed in the past to break Robert's
>inpenetrable veil of ignorance, I won't bother this time.
While intellectually coherent sentences are indeed rare from Robert--perhaps
his way of refuting the laws of supply and demand--it is not due to ignorance,
but arrogance. Robert knows he's making a fool of himself, and revels in it.
Patrick
SUSUPPLY
dropping his handkerchief:
>Grinch's opinions seem to be without logical foundation and of
>doubtful empirical validity.
As Hamlet said, "Seems, madam?".
> He seems to be incorrectly jumping from
>an analysis of the demand for unskilled labor in a (non-vertically
>integrated) industry to an analysis of the demand for unskilled labor
>as a whole. The value of the (marginal product of) labor does not
>exist independently of variations in the distribution of income.
Robert Vienneau, Supply-Sider, and kindred spirit of Henry Ford.
>
>What happens to the price of brooms and the vacuum cleaner if unskilled
>labor is used in producing each?
The price of brooms and vacuum cleaners might drop. There may be heretofore
undiscovered economies of scale.
If the manufacturers of such devices need to increase production then the wages
of their employees will tend to rise. All other things remaining equal. But
you knew that already.
> Suppose an increase in the minimum
>wages succeeds in raising real wages.
Which it won't, but increasing demand will. Thanks to market forces.
> Then income distribution and
>the general pattern of equilibrium prices is changed as a whole.
The same will be true if an increase in minimum wage laws leads to a decrease
in real wages. In a famous example, an increase in the minimum wage led to an
economist hiring a maid--whose other options had been foreclosed.
> There
>is no reason to believe that the equilibrium prices of labor-intensive
>commodities necessarily rise relative to the equilibrium prices of
>less labor-intensive commodities. Nor is it necessarily the case
>that when choosing among known techniques, less labor-intensive
>techniques will be relatively cheaper at new prices associated with
>a higher minimum wage. My long example, previously posted on this
>thread, proves this lack of necessity.
Actually it just proved what we have known all along abou you, Robert. That
you are lost in the fantasy world of the CCC. How about giving Dungeons and
Dragons a try, or if you'd like to venture into reality, a pizza and beer.
>
>Why doesn't Grinch address this argument, instead of posting exploded
>theoretical claims?
He has to hang tinsel on his Christmas tree?
>
>I'll let somebody else explain how recent empirical work has cast
>doubt on the beliefs about economics typically held by opponents
>of the minimum wage.
And if they do, I'll have a few laughs about the methodology at their expense.
>
>The beginning student of economics, though, should be aware that
>Grinch's unsupported views are generally what the teacher wants
>from the student, at least in many introductory classes in America.
>
I hope so, those students are paying through the nose for their education,
simple fairness should dictate that they actually learn something useful.
Have yourself a Merry Little Christmas,
Patrick
Gary Forbis
>Gary Forbis wrote:
>>
>> Grinch wrote in message <3676C3B0...@mindspring.com>...
>> >Doug McKee wrote:
>> >>
>>
>> >> By the same token, doesn't a minimum wage incentivize employers to
>> >> reduce the amount of truly unskilled labor they need?
>> >
>> >
>> >> And thus reduce unemployment?
>> >
>> >with a vacuum cleaner.
>>
guy
>> can be put to work doing something else of lower priority.
>
>It's good that he's unemployed so he can do something of lower priority
>than minimum wage work?
I'd like to reframe this a bit. Without considering wages, when two guys
with brooms gets replaced by one guy with a vacuum cleaner one guy's
labor is freed for other purposes. The issue of compensation isn't relavant
when dealing with this, only the freeing up of labor.
The move to greater productivity leads to short term losses for some
but in the long run more goods and services are available as resources
are reallocated.
>> >Increasing the minimum wage rate does not increase the value to the
>> >employer of getting a job done. It only increases the cost to the
>> >employer of getting the job done with minimum wage labor. If as a result
>> >some other method of getting the job done becomes relatively less
>> >expensive, the employer can be expected to switch to using that
>> >method instead.
>>
>> Again, I think this a good thing. We're heading into a time where a lot
>> of our labor market will be retiring. The shift to labor saving methods
is
>> important.
>
>Which makes unemployment a good thing?
Retired people are unemployed, yes. Finding ways to get along without
them is a good thing since the alternative is to prevent them from retiring.
>> There's another interesting point. Cost and value are not synonyms.
>> You've assumed the job continues to be done after minimum wage
>> has been raised. This happens because value to the employer exceeds
>> costs. There's something wrong with the labor market that labor costs
>> can be so far below labor value.
>
>There's something wrong in a labor market where labor costs are mandated
>to be *above* labor's value. That thing is unemployment.
>
>In a competitive market employers will bid up the price of labor until
>it reaches labor's value.
What if there is an excess supply of laborers? Will the price of labor
still be bid up until it reaches labor's value (where value here means
the value for which the employer can sell the laborer's labor or products?)
>Whenever the price of labor is below the return it provides to
>employers, an employer can increase profits by paying a higher wage to
>steal employees from the other guy.
Not necessarily. One only has a need for so many janitors no matter
what their wage. If you can get all you need at minimum wage their
value to you doesn't matter. You can't increase profits by increasing
the number of employees beyond your needs.
All of this is very complex and is affected by the increased demand
generated by increased minimum wage. If there's no productivity
increasing means that becomes economically viable based upon
the increased minimum wage and can already get as many laborers
as one needs at minimum wage and one's receiving excess value from
minimum wage laborers then there's no reason to believe an increase
in minimum wage will lead to greater unemployment.
John F. Opie
<swi...@uic.edu> wrote:
<snip>
>
>>
>>A combination of one steel-producing process and the corn-producing
>>process in my example can be used to construct a Leontief input-output
>>matrix (despite the fact that the steel-producing technology is not
>>a Leontief (fixed coefficients) production function). Leontief
>>input-output models are widely applied empirically.
>
>Not even close Robert. I've done a fair amount of empirical research. I've
>read even more. NO ONE uses Leontieff technology.
>
Hi there Shawn and everyone else -
I just finished a 109 sector model of the Austrian economy, where we
made extensive use of input-output tables to model demand for sectors
of the economy where we had no meaningful data apart from a single
year of structural data. Very, very useful as a proxy for extending
the one year of structural data into a time series.
Further, you might want to take a look at the work that the Austrian
Chamber of Commerce (Wirtschaftskammer) has been doing with
input-output analyses. They took the rather nice IO of the Austrian
Central Office for Statistics (ÖSTAT) with a 228*232 matrix and
extended for each year thereafter. Of course, they stopped doing it
when the Austrians joined the EU, since the NACE rev 1 isn't
compatible at this level with the good old Betriebssystematik from
1968.
Out in the real world, people are more interested in usable results
than in peer-reviewed niceties. That's why you won't find much
published work: people are too busy making money instead.
<snip>
Yours,
John F. Opie
Senior Economist
FERI GmbH