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Wages, Employment Not Determined By Supply, Demand

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Robert Vienneau

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Apr 27, 2002, 7:19:26 AM4/27/02
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1.0 INTRODUCTION

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.

I assume a reader willing to follow tedious arithmetic. Skip down
to the conclusions at the end if you're curious about my point.


2.0 DATA ON TECHNOLOGY

Consider a very simple vertically-integrated firm 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 by this firm. 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

I want to consider a couple of different levels at which this
firm can operate the corn-producing process and each steel-producing
process. First, suppose the corn-producing process is used to
produce 1.208 Bushels corn and the Alpha process is used to produce
0.3717 Tons steel. The quantity flows shown in Table 3 result.

TABLE 3: THE CORN-PRODUCING TECHNIQUE USING THE
ALPHA STEEL-PRODUCING PROCESS

0.07182 Person-Years 1.0000 Person-Years
0.1301 Tons Steel 0.2416 Tons Steel
0.003552 Bushels Corn 0.2040 Bushels Corn

0.3717 Tons Steel 1.208 Bushels Corn

When the firm operates these processes in parallel, it requires
a total of 0.208 Bushels corn as input. The output of the
corn-producing process can replace this input, leaving a net
output of one Bushel corn. Notice that the total inputs of
steel is 0.1301 + 0.2416 = 0.3717 Tons steel, which is exactly
replaced by the output of the Alpha process. So Table 3 shows
a technique in which 1.072 Person-Years labor is used to produce
a net output of one Bushel corn. The firm, when operating this
technique can produce any desired output of corn by scaling
both processes equally.

Next, suppose the corn-producing process is used to produce
1.258 Bushels corn, and the Beta process is used to produce 0.2903
Tons steel. Table 4 results.

TABLE 4: THE CORN-PRODUCING TECHNIQUE USING THE
BETA STEEL-PRODUCING PROCESS

0.009752 Person-Years 1.042 Person-Years
0.03869 Tons Steel 0.2516 Tons Steel
0.04526 Bushels Corn 0.2125 Bushels Corn

The same sort of arithmetic shows that this technique uses
1.0516 Person-Years to produce one Bushel corn.


4.0 PRICES

Which technique will the firm adopt, if any? The answer
depends, in this analysis, on which is more profitable. So one
has to consider prices. I assume throughout that inputs of steel,
corn, and labor are charged at the start of the year. The price
of corn is assumed constant at $10,000 per Bushel. Two different
levels of wages are considered.

4.1 PRICES WITH LOW WAGES

Accordingly, assume wages are initially $1,338.8 per Person-Year.
By assumption, the firm neither buys nor sells steel on the market.
The firm produces steel solely for its own use. Still, the firm
must enter a price of steel on its books. I assume that the firm
sets this price so that it is making the same rate of profits in
both processes it uses.

The initial price of steel, by this criterion, is $6,013 per
Ton. Table 5 illustrates. Note that the cost of operating the
Beta process is less than the Alpha process. Because of this
cheapness, this firm will produce steel only with the Beta
process; the quantity flows shown above in Table 4 will apply.
Also notice that the rate of profits is the same in producing
corn and in producing steel, as desired. This firm is content.

TABLE 5: COSTS, WAGE $1,338.8 PER PERSON-YEAR,
PRICE OF STEEL $6,013 PER TON

INDUSTRY PROCESS COST PROFITS

Corn 0.2*$6,013 + 0.16889*$10,000
+ 0.82816*$1,338.8 = $4,000 150%
Steel Alpha 0.35*$6,013 + 0.0095553*$10,000
+ 0.19321*$1,338.8 = $2,459
Steel Beta 0.13329*$6,013 + 0.15590*$10,000
+ 0.033594*$1,338.8 = $2,405 150%


4.2 ONE SET OF PRICES WITH HIGH WAGES

Suppose this firm faces a higher wage, namely $2,932 per
Person-Year. Consider what happens if the firm doesn't
revalue the price of steel on its books. Table 6 shows this
case.

TABLE 6: COSTS, WAGE $2,932 PER PERSON-YEAR,
PRICE OF STEEL $6,013 PER TON

INDUSTRY PROCESS COST PROFITS

Corn 0.2*$6,013 + 0.16889*$10,000
+ 0.82816*$2,932 = $5,320 88%
Steel Alpha 0.35*$6,013 + 0.0095553*$10,000
+ 0.19321*$2,932 = $2,767
Steel Beta 0.13329*$6,013 + 0.15590*$10,000
+ 0.033594*$2,932 = $2,459 145%

This firm cannot continue with production with this set of
books. Why would the firm produce any corn when it can make a
greater return by producing only steel? But if nobody is
producing corn, where will the firm get the corn inputs needed
to continue production? Something must change.

4.3 ANOTHER SET OF PRICES

Perhaps all that is needed is to re-evaluate steel on the
firm's books. Higher wages have made steel less valuable. Table
7 shows costs and the rate of profits when steel is
evaluated at an accounting price of $4,499 per Ton.

TABLE 7: COSTS, WAGE $2,932 PER PERSON-YEAR,
PRICE OF STEEL $4,499 PER TON

INDUSTRY PROCESS COST PROFITS

Corn 0.2*$4,499 + 0.16889*$10,000
+ 0.82816*$2,932 = $5,017 99%
Steel Alpha 0.35*$4,499 + 0.0095553*$10,000
+ 0.19321*$2,932 = $2,237
Steel Beta 0.13329*$4,499 + 0.15590*$10,000
+ 0.033594*$2,932 = $2,257 99%

If the firm were to continue using the Beta process to
produce steel, this firm would be making the same rate of
profit in producing corn and in producing its input of
steel. But the manager of the steel-process would soon
notice that the cost of operating the Alpha process is
cheaper.

4.4 FINAL EQUILIBRIUM PRICES

So the firm would ultimately switch to using the Alpha
process to produce steel. The price the firm would enter
on its books would fall even more. Table 8 shows the accounting
with a price of steel of $4,414 per ton. The firm has adopted
the cheapest process for producing steel, and the rate of profits
is the same in both corn-production and steel-production. The
accounting for this vertically-integrated firm is internally
consistent.

TABLE 8: COSTS, WAGE $2,932 PER PERSON-YEAR,
PRICE OF STEEL $4,414 PER TON

INDUSTRY PROCESS COST PROFITS

Corn 0.2*$4,414 + 0.16889*$10,000
+ 0.82816*$2,932 = $5,000 100%
Steel Alpha 0.35*$4,414 + 0.0095553*$10,000
+ 0.19321*$2,932 = $2,207 100%
Steel Beta 0.13329*$4,414 + 0.15590*$10,000
+ 0.033594*$2,932 = $2,246

5.0 CONCLUSIONS

Table 9 summarizes these calculations. The ultimate result of
a higher wage is the adoption of a more labor-intensive technique.
If this firm continues to produce the same level of net output
and maximizes profits, its managers will want to employ more workers
at the higher of the two wages considered.

TABLE 9: PROFIT-MAXIMIZING FIRM ADOPTS MORE LABOR-INTENSIVE
TECHNIQUE AT HIGHER WAGE

STEEL-PRODUCING LABOR-INTENSITY OF
WAGE PROCESS CORN-PRODUCING TECHNIQUE

$1,338.8 Per Person-Year Beta 1.0516 Person-Years Per Bushel
$2,932 Per Person-Year Alpha 1.072 Person-Years Per Bushel

So much for the theory that wages and employment are determined
by the interaction of well-behaved supply and demand curves on the
labor market.

--
Try http://csf.colorado.edu/pkt/pktauthors/Vienneau.Robert/Bukharin.html
To solve Linear Programs: .../LPSolver.html
r c A game: .../Keynes.html
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

John Weatherby

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Apr 28, 2002, 1:43:51 AM4/28/02
to
How long did it take to cook up numbers to find this result. This is no
theory or refutation of theory. The process are just numbers there is no
substance nor a model.

> 2.0 DATA ON TECHNOLOGY
>
Data? I don't see any data just some cooked up numbers.

> TABLE 1: INPUTS REQUIRED PER BUSHEL CORN PRODUCED
>
> 0.82816 Person-years
> 0.2 Tons steel
> 0.16889 Bushels corn
>

What sort of function is driving this? Is there a function or just some
made up numbers?

> Steel is also produced by this firm. 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
>

So here you have two choices you user more labor and steel and less corn
or less labor less steel and more corn. Part of what drives your result here
is the fact the final good is also a capital good. The less labor intensive
process is going to be much more costly giving the wages and price of corn.
Hmmm doesn't make the results interesting or surprising.

> 5.0 CONCLUSIONS
>
> Table 9 summarizes these calculations. The ultimate result of
> a higher wage is the adoption of a more labor-intensive technique.
> If this firm continues to produce the same level of net output
> and maximizes profits, its managers will want to employ more workers
> at the higher of the two wages considered.
>

Part of the problem with this analysis is the price of corn is constant.
This is the downfall. The less labor intensive process also uses more corn.
For a firm to use this process would also mean bidding up the price for
corn, there is a higher demand for corn. Not taking this into account is the
fatal flaw of the model. Yes the less labor intensive process may be more
costly under these assumption however corn also sells for a higher price
raising the profits of making corn. It is unclear when this is taken into
account which process is chosen.


> So much for the theory that wages and employment are determined
> by the interaction of well-behaved supply and demand curves on the
> labor market.
>

Well if you would try putting supply and demand in the model rather than
holding prices of corn constant you would get a much different result. This
is like trying to prove that gas consumption will not increase as a car
engine goes faster while assuming that gas consumption is equal for all
speeds.

John

Robert Vienneau

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Apr 28, 2002, 7:43:04 AM4/28/02
to
In article <r_Ly8.10112$iU4.8...@newsread2.prod.itd.earthlink.net>,
"John Weatherby" <jjwea...@earthlink.net> wrote:

> How long did it take to cook up numbers to find this result. This is no
> theory or refutation of theory. The process are just numbers there is no
> substance nor a model.

Mr. Weatherby's incomprehension is no refutation. He also doesn't seem
to understand how to relate examples to theory. As for models, my
presentation is an attempt to convey a point of models like this one:

<http://csf.colorado.edu/pkt/pktauthors/Vienneau.Robert/LaborDemand.pdf>

The example relates to standard models. It is particularly ironic when
a supposed specialist in growth theory does not recognize an example
consistent with (generalizations of) the givens of the Von Neumann
model of endogeneous growth.

> > 2.0 DATA ON TECHNOLOGY

> Data? I don't see any data just some cooked up numbers.

In neoclassical economic theory, prices in competitive markets are
supposed to be determined by the interaction of supply and demand
curves. The givens in neoclassical theory are technology, tastes,
and endowments. Another term for the "givens" is the "data".

If the theory were correct, one would not be able to construct ("cooked
up numbers" in one incomprehension-revealing formulation) a specific
numeric example which meets the assumptions of the theory but has
contradictory conclusions. This is a matter of logic, not one of
running regressions on empirical data.

For example, if the theory stated that labor-demand curves never
slope up, one would be able to construct non-upward-sloping labor
demand curves for the example. (It would be acceptable in such a
construction to include assumptions on aspects of a model not
specified in the example but consistent with the example.) Or one
would be able to specify exactly what assumptions of the theory
are violated by the example.

I don't imagine my conclusion is not a matter of standard price
theory, at least as that theory is understood among good economic
theoreticians:

"But, as economic theory has learned since the 1930s, the
pattern of activities adopted in the face of long-run
factor-price changes can be complicated and counterintuitive.
Consequently, the long-run demand for factors can be badly
behaved functions of factor prices... The principle of
variation works as an argument for long-run determinancy insofar
as the set of zero-profit activities shift in response to factor
price changes; it is not necessary that newly adopted activities
use cheaper factors more intensively or that production is more
capital intensive when r falls."
-- Michael Mandler, _Dilemmas In Economic Theory: Persisting
Foundational Problems Of Microeconomics_. Oxford, 1999.
p. 34.

This newsgroup has shown that many doctoral candidates in economics
and many professors of economics do not understand these standard
conclusions of price theory.

This lack of understanding has implications for empirical work. If
one wants to use models in which "the long-run demand for factors"
cannot "be badly behaved functions of factor prices", one should
recognize one is using, at best, special cases. Suppose one adopts
the mainstream view of the necessity for mathematical models. Then
one should be able to specify the assumptions, e.g., on technology, of
such special cases.

> > TABLE 1: INPUTS REQUIRED PER BUSHEL CORN PRODUCED
> >
> > 0.82816 Person-years
> > 0.2 Tons steel
> > 0.16889 Bushels corn

> What sort of function is driving this? Is there a function or just
> some made up numbers?

False dichotomy.

Mr. Weatherby should recognize that, if this is the only process known
for producing corn, the following production function applies here:

X = min( L/0.82816, Q1/0.2, Q2/0.16889 )

where X is bushels corn produced, L is labor input, Q1 is input of
steel, and Q2 is input of corn.

This is an example of a frequently used production function. There
are specific numeric values for the parameters (number of inputs,
coefficients of production) of the function.

> > Steel is also produced by this firm. 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

> So here you have two choices you user more labor and steel and less
> corn
> or less labor less steel and more corn. Part of what drives your result
> here
> is the fact the final good is also a capital good.

No. In the example, the final good is also a capital good, in some
sense. However, examples can be constructed with the same conclusion,
but without this property (e.g., Samuelson's example in his article
"summing up" one aspect of the Cambridge Capital Controversy).
So this property does not drive my result.

> The less labor intensive
> process is going to be much more costly giving the wages and price of
> corn.

I am not at all sure that that is a standard use of the phrase
"labor-intensive". Mr. Weatherby seems to be saying that my
results, at least qualitatively, do not depend on the specific
numeric values defining the one process known for producing
corn. I think Mr. Weatherby clearly mistaken.

(Consider prices in the example for each technique when r = 0%.
One could compare the ratio, for each process, of labor inputs
to the sum of the value of the inputs of corn and steel. Then
one could talk about one process as being more or less labor-
intensive than the other. I doubt Mr. Weatherby has done these
calculations.)

> Hmmm doesn't make the results interesting or surprising.

Well, Samuelson has said repeatedly that this result is interesting,
and that he found it surprising. Of course, all the evidence is
that Mr. Weatherby does not understand the result and its implications.

> > 5.0 CONCLUSIONS

> > Table 9 summarizes these calculations. The ultimate result of
> > a higher wage is the adoption of a more labor-intensive technique.
> > If this firm continues to produce the same level of net output
> > and maximizes profits, its managers will want to employ more workers
> > at the higher of the two wages considered.

> Part of the problem with this analysis is the price of corn is
> constant.

(A small quantity of) corn is the numeraire.

> This is the downfall. The less labor intensive process also uses more
> corn.

The above is a matter of Mr. Weatherby using equivocation. I used
"labor-intensive" in one fashion. He's using it in another.

> For a firm to use this process would also mean bidding up the price for
> corn, there is a higher demand for corn.

The price of corn would be bid up relative to what numeraire? And
what about the non-substitution theorem?

> Not taking this into account is

> the fatal flaw of the model...

Nope. Mr. Weatherby has presented no argument whatsoever that examples
cannot be constructed with my result and the inputs of processes not
connected like in my specific example.

> Yes the less labor intensive process may be more
> costly under these assumption however corn also sells for a higher price
> raising the profits of making corn. It is unclear when this is taken into
> account which process is chosen.

I read the above as a recognition that Mr. Weatherby doesn't have
an argument.

> > So much for the theory that wages and employment are determined
> > by the interaction of well-behaved supply and demand curves on the
> > labor market.

--

John J. Weatherby

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Apr 28, 2002, 2:43:19 PM4/28/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message
news:rvien-EE4968....@news.dreamscape.com...
> In article <r_Ly8.10112$iU4.8...@newsread2.prod.itd.earthlink.net>,

> Mr. Weatherby's incomprehension is no refutation. He also doesn't seem
> to understand how to relate examples to theory. As for models, my
> presentation is an attempt to convey a point of models like this one:
>
Well if the numbers are driven by some sort of function it would be nice if
you showed what that function was. Even in early game theory where the
payoffs were sort of cooked up, they still explained how and why the numbers
got there. There is no explanation here. Anyone with any idea about how
theory and data work will ask you how you got the numbers.

> The example relates to standard models.

Such as? As usually you usually loose a term standard models to imply you
are bringing down every economic model. Can you even name a model that is in
use to today that this applies to? I highly doubt it. Again I challenge you
which standard model are you trying to refute?


> In neoclassical economic theory, prices in competitive markets are
> supposed to be determined by the interaction of supply and demand
> curves. The givens in neoclassical theory are technology, tastes,
> and endowments. Another term for the "givens" is the "data".
>

Right but I see no utility functions giving preferences. I see no
functions for production. Without these you can find supply nor demand
curves for a competitive market. To have demand you have to start with
preferences and for factor demands you need production functions. There are
no utility nor production functions here just cooked up numbers that are
completely unclear how they can about. If these represent functions I highly
doubt anyone would take a linear production function seriously.

> If the theory were correct, one would not be able to construct ("cooked
> up numbers" in one incomprehension-revealing formulation) a specific
> numeric example which meets the assumptions of the theory but has
> contradictory conclusions. This is a matter of logic, not one of
> running regressions on empirical data.
>

To run a numerical simulation you have to have functions. You need to
specify the assumptions in some form instead of putting down a lot of
numbers. Again what sort of production functions allow these numbers. From
the table you gave it seems you assume a linear production function which is
absurd.

> For example, if the theory stated that labor-demand curves never
> slope up, one would be able to construct non-upward-sloping labor
> demand curves for the example. (It would be acceptable in such a
> construction to include assumptions on aspects of a model not
> specified in the example but consistent with the >example.)

Again just placing a bunch numbers is equivalent to drawing an upward
sloping demand curve and claiming it exist because I can draw it.


> This newsgroup has shown that many doctoral candidates in economics
> and many professors of economics do not understand these standard
> conclusions of price theory.
>

No I think it is you who do not understand
A. the flaws in the argument
B. The fact that these are not applicable to most modern methods.
C. What standard price theory actually concludes. This has been the biggest
problem you have read a majority of critiques and never stop to find out
what mainstream does say. You have taken the critics word for it a dangerous
thing to do.

> Mr. Weatherby should recognize that, if this is the only process known
> for producing corn, the following production function applies here:
>
> X = min( L/0.82816, Q1/0.2, Q2/0.16889 )
>
> where X is bushels corn produced, L is labor input, Q1 is input of
> steel, and Q2 is input of corn.
>

Leontif that is the problem. Again you are going back to Harrod-Domar
and the associated problems with that model. The Leontif production is not
commonly used in modern theory. It is sort of a trick question put on comps
to see if you can work out a problem when you can't use calculus. It is sort
of a test to see if you know the concept or only the math.

> > Yes the less labor intensive process may be more
> > costly under these assumption however corn also sells for a higher price
> > raising the profits of making corn. It is unclear when this is taken
into
> > account which process is chosen.
>
> I read the above as a recognition that Mr. Weatherby doesn't have
> an argument.

You mention profit maximizing at several points but fail to take into
account that a process that uses more corn will drive up the price of corn.
This means the profit function changes. You calculate profits for both
techniques assuming that corn has the same price. Corn will not have the
same price under both techniques. One technique will mean higher prices for
corn. This means that the profit calculations are different for each
technique. Without a theory of consumer demand for corn you can not
calculate what the difference in price will be. In short your calculations
are flawed because you don't take into account supply and demand. Supply and
Demand does not seem to have effect because you have not analyzed the corn
market.

John

Robert Vienneau

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Apr 29, 2002, 4:59:38 AM4/29/02
to
In article <bpXy8.11665$8p3.9...@newsread1.prod.itd.earthlink.net>,
"John J. Weatherby" <jjwea...@earthlink.net> wrote:

> "Robert Vienneau" <rv...@see.sig.com> wrote in message
> news:rvien-EE4968....@news.dreamscape.com...

> > In article <r_Ly8.10112$iU4.8...@newsread2.prod.itd.earthlink.net>,
> > Mr. Weatherby's incomprehension is no refutation. He also doesn't seem
> > to understand how to relate examples to theory. As for models, my
> > presentation is an attempt to convey a point of models like this one:

> Well if the numbers are driven by some sort of function it would be nice
> if
> you showed what that function was. Even in early game theory where the
> payoffs were sort of cooked up, they still explained how and why the
> numbers
> got there. There is no explanation here. Anyone with any idea about how
> theory and data work will ask you how you got the numbers.

Actually, that is the closest anybody has come in years to asking
how I made up these numbers. If one actually read the first post
on this thread, one might note the coefficients of production
are ugly, but I end up with "nice" numbers for interest rates
(100%, 150%) and some costs ($4,000, $5,000). Obviously, I
solved the model - and there is a model - backwards and played
around with the equations.

Where is this model? Well, there was the URL in the post Mr. Weatherby
is pretending to respond to:

<http://csf.colorado.edu/pkt/pktauthors/Vienneau.Robert/LaborDemand.pdf>

There's also:

<http://csf.colorado.edu/pkt/pktauthors/Vienneau.Robert/Sraffa3.pdf>

The Appendices in the latter and up through Figure 7 are standard models.



> > The example relates to standard models.

[>> It is particularly ironic when ]


[>> a supposed specialist in growth theory does not recognize an example]
[>> consistent with (generalizations of) the givens of the Von Neumann ]

[>> model of endogeneous growth. ]

> Such as?

Such as the model mentioned in the text Mr. Weatherby deleted
immediately following the sentence he is pretending to respond to.

> As usually you usually loose a term standard models to imply you
> are bringing down every economic model.

Mr. Weatherby reads as well as he writes. I am explaining rigorous
price theory, not the outdated mystical mush that some economists
seem to believe and teach.

> Can you even name a model that is
> in use to today that this applies to?

References are provided in those URLs. Some are textbooks. I consider
1995 to be the date of a contemporary reference, for example.

> I highly doubt it. Again I
> challenge you
> which standard model are you trying to refute?

See above.

> > In neoclassical economic theory, prices in competitive markets are
> > supposed to be determined by the interaction of supply and demand
> > curves. The givens in neoclassical theory are technology, tastes,
> > and endowments. Another term for the "givens" is the "data".

> Right but I see no utility functions giving preferences.

I don't need utility functions for my point. But because I am used
to this sort of incomprehension, I provided utility functions in
Section 2.4 of Sraffa3.pdf at the URL given above.

> I see no functions for production.

I gave one below for the corn process. In the other
thread "Maximize Production", I describe how to construct a
production function out of the steel processes.

> Without these you can find supply nor demand
> curves for a competitive market. To have demand you have to start with
> preferences and for factor demands you need production functions. There
> are
> no utility nor production functions here just cooked up numbers that are
> completely unclear how they can about. If these represent functions I
> highly
> doubt anyone would take a linear production function seriously.

The "cooked-up numbers" yield production functions. Production
functions for my example exhibit common assumptions, e.g., constant
returns to scale and diminishing marginal returns. (No, I am not
interested here in discussing increasing returns to scale in the
endogeneous growth models Mr. Weatherby is familiar with.)


> > If the theory were correct, one would not be able to construct ("cooked
> > up numbers" in one incomprehension-revealing formulation) a specific
> > numeric example which meets the assumptions of the theory but has
> > contradictory conclusions. This is a matter of logic, not one of
> > running regressions on empirical data.

> To run a numerical simulation you have to have functions. You need to
> specify the assumptions in some form instead of putting down a lot of
> numbers.

To construct and solve a numerical example, you need to have some
understanding of what you are talking about.

> Again what sort of production functions allow these numbers.
> From
> the table you gave it seems you assume a linear production function which
> is absurd.

I make standard assumptions. Mr. Weatherby, of course, is free to
reject the assumptions of some versions of mainstream theory.



> > For example, if the theory stated that labor-demand curves never
> > slope up, one would be able to construct non-upward-sloping labor
> > demand curves for the example. (It would be acceptable in such a
> > construction to include assumptions on aspects of a model not
> > specified in the example but consistent with the example.)

> Again just placing a bunch numbers is equivalent to drawing an upward
> sloping demand curve and claiming it exist because I can draw it.

Nope. That's not what I did.



> > This newsgroup has shown that many doctoral candidates in economics
> > and many professors of economics do not understand these standard
> > conclusions of price theory.

> No I think it is you who do not understand
> A. the flaws in the argument

There are none in the initial post in this thread. Responses, such as
Mr. Weatherby's, merely say something about the sociology of economics.

"Modern-day economics students...are insufficiently numerate
because the material which establishes the intellectual
weaknesses of economics is complex. Understanding this
literature in its raw form requires an appreciation of some
quite difficult areas of mathematics - concepts which require
up to two years of undergraduate mathematical training to
understand.

Curiously, though economists like to intimidate other social
scientists with the mathematical rigour of their discipline,
most economists do NOT have this level of mathematical
education."
-- Steve Keen

Has any mainstream economist acknowledged here that the example in
my first post is correct?

> B. The fact that these are not applicable to most modern methods.

See below after Mr. Weatherby's comment about the Harrod-Domar
model.

> C. What standard price theory actually concludes.

What economists like Paul Samuelson, Edwin Burmeister, Michael Mandler,
Franklin Fisher, and Frank Hahn says it says, for example. Which
is what I have been saying.

Notice whenever I quote some economist saying what I am saying
about price theory, many respondents delete such quotes without
ever commenting on why they disagree with this economist, or why
that quote is saying something different than I am saying. Of
course, when Mr. Weatherby comments on Samuelson, say, he makes
a hash of it.

> This has been the biggest
> problem you have read a majority of critiques and never stop to find out
> what mainstream does say. You have taken the critics word for it a
> dangerous thing to do.

The above is simply untrue. I was TAUGHT mainstream theory at an
institution where every student is assumed to understand, at least,
calculus after their frosh year. Furthermore, I have obviously read
the responses of mainstream economists to my favorite critique. For
that matter, I don't know why Mr. Weatherby assumes Michael Mandler,
for example, is not mainstream or an internal critic. I don't know,
though I know he is insightful.



> > Mr. Weatherby should recognize that, if this is the only process known
> > for producing corn, the following production function applies here:
> >
> > X = min( L/0.82816, Q1/0.2, Q2/0.16889 )
> >
> > where X is bushels corn produced, L is labor input, Q1 is input of
> > steel, and Q2 is input of corn.

> Leontif that is the problem.

Hogswallop. The above production function is, indeed, Leontief. But
that does not drive the results.

Consider Figure 1 in LaborDemand.pdf, which was drawn for the
numerical example with which I began this thread. Look at the
boundary around the region in which X1( alpha ) is positive.
I am considering the rightmost intersection of this boundary
with the boundaries of the regions in which X1( beta ) and X2 are
positive. Suppose other processes were known for producing corn.
They would result in straight lines dividing the region in which
X2 is positive. Obviously, lots of lines can be drawn, and the
point which I am considering would still, by construction, appear
on the relevant locus. Likewise, we could divide up the region
above the piecewise curved locus with a lot more straight lines.
(These divisions would replace pieces of the curved locus with
different curves.)

When there are choices of processes for producing corn and steel,
the production functions are not Leontief. Furthermore, they are
variable-coefficient, not fixed coefficient production functions.

Apparently Mr. Weatherby is asserting that the special case of
non-Leontief production functions will rule out the results I
am highlighting. The above shows he is clearly wrong.

Is there a theorem asserting the special case assumption of
production functions differentiable everywhere (and not
merely non-differentiable only on a set of measure zero) will
rule out these results? If there were such a theorem in the
literature, I think I would know about it. And I don't think
there is any such theorem. Furthermore, several economists
say otherwise. In fact, Steedman provides a proof showing
how to construct reswitching with "smooth" production functions.
Since he presumes certain knowledge of price theory, I won't even
bother giving the URL here.

> Again you are going back to Harrod-Domar
> and the associated problems with that model. The Leontif production is
> not
> commonly used in modern theory. It is sort of a trick question put on
> comps
> to see if you can work out a problem when you can't use calculus. It is
> sort
> of a test to see if you know the concept or only the math.

Early neoclassical theory after the development of marginal
productivity theory tended to assume differentiability. The
post-war (WWII) western economists, however, turned toward
topological models. These topological arguments, as in canonical
presentations of the Arrow-Debreu model, are supposed to
apply indifferently to Leontief production functions, other
production functions that are not differentiable everywhere,
and "smooth" production function. There may have been a turn
lately back to calculus-based arguments. I wonder if mainstream
economists think that they have lost the supposed rigor of
this postwar turn.

Anyway, Mr. Weatherby acknowledges above that my example is
logically consistent with the assumptions of mainstream theory.
He's seems to be making a mistaken assertion that the result
I highlight is not possible under the special-case assumption
of production functions differentiable everywhere.



> > > Yes the less labor intensive process may be more
> > > costly under these assumption however corn also sells for a higher
> > > price
> > > raising the profits of making corn. It is unclear when this is taken
> > > into
> > > account which process is chosen.

> > I read the above as a recognition that Mr. Weatherby doesn't have
> > an argument.

> You mention profit maximizing at several points but fail to take into
> account that a process that uses more corn will drive up the price of
> corn.

[ >> (A small quantity of) corn is the numeraire. ]

So the following has already been shown to be nonsense:

> This means the profit function changes. You calculate profits for both
> techniques assuming that corn has the same price. Corn will not have the
> same price under both techniques. One technique will mean higher prices
> for
> corn. This means that the profit calculations are different for each
> technique. Without a theory of consumer demand for corn you can not
> calculate what the difference in price will be.

This here is nonsense for other reasons as well:

> In short your
> calculations
> are flawed because you don't take into account supply and demand. Supply
> and
> Demand does not seem to have effect because you have not analyzed the
> corn
> market.

My assertion was about the (absence of) well-behaved supply and
demand functions in the labor market, particularly a demand
function for labor.

If Mr. Weatherby actually wanted to construct an argument, he is
always free to append additional assumptions and show how to construct
a (well-behaved) labor demand function in my example.

Of course, I construct a complete equilibrium in Sraffa3.pdf.

maximus

unread,
Apr 29, 2002, 9:30:38 AM4/29/02
to
I am afraid that I agree more with John than with Robert (author of the
post).

Even though I may accept the *point* and the case, or even
thousands of the points, altogether they can not make a rejection
of a theory.

max

-------
"John J. Weatherby" <jjwea...@earthlink.net> wrote in message
news:bpXy8.11665$8p3.9...@newsread1.prod.itd.earthlink.net...

John J. Weatherby

unread,
Apr 29, 2002, 2:35:19 PM4/29/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message
news:rvien-FF5CB0....@news.dreamscape.com...

>(No, I am not
> interested here in discussing increasing returns to scale in the
> endogeneous growth models Mr. Weatherby is familiar with.)
>
Of course not you still do not know what a scale effect refers to in
these models. If you did you realize the scale effect deals with the effect
of population on growth not the standard idea of size of the firm affecting
output.


> There are none in the initial post in this thread. Responses, such as
> Mr. Weatherby's, merely say something about the sociology of economics.
>

Yes there are you hold the price of corn constant. You use this constant
price to calculate profits for each process. This is clearly wrong. I do not
know what the results would be if you fixed nor do I have time to work them
out. I am after all working on things to be published and not just bitching
on some newsgroup.

> "Modern-day economics students...are insufficiently numerate
> because the material which establishes the intellectual
> weaknesses of economics is complex. Understanding this
> literature in its raw form requires an appreciation of some
> quite difficult areas of mathematics - concepts which require
> up to two years of undergraduate mathematical training to
> understand.
>
> Curiously, though economists like to intimidate other social
> scientists with the mathematical rigour of their discipline,
> most economists do NOT have this level of mathematical
> education."
> -- Steve Keen
>

Hogwash. A good number of people in this field hold undergraduate Math
degrees. Many studied physics and other sciences as an undergraduate. Some
of the nobel prize winners have even thought physics in their spare time. I
have not had many professors that did not at least have a minor in math.
That is part of the reason they got in a top ten school in the first place.

> Has any mainstream economist acknowledged here that the example in
> my first post is correct?
>

I don't think too many care much about a Leontif function with two
production processes. Rarely is more than one production process used in any
model.

> > B. The fact that these are not applicable to most modern methods.
>
> See below after Mr. Weatherby's comment about the Harrod-Domar
> model.
>

Harrod-Domar is pre-modern. It is a terrible model that has a fatal flaw
of assuming that the average product of capital is constant for every level
of capital. Much like your assumption that the price of corn is constant for
every level of corn production.


> When there are choices of processes for producing corn and steel,
> the production functions are not Leontief. Furthermore, they are
> variable-coefficient, not fixed coefficient production functions.
>

Well again this is far from standard assumptions that the coefficents in
a production function change. This is like saying the Solow model is
completely wrong because I can write down an endogenous growth model. The
Solow model is wrong because it lacks micro foundations and does not match
the data well on certain points like speed of convergence.


> [ >> (A small quantity of) corn is the numeraire. ]
>
> So the following has already been shown to be nonsense:
>

Look at this table:


TABLE 5: COSTS, WAGE $1,338.8 PER PERSON-YEAR,
PRICE OF STEEL $6,013 PER TON

INDUSTRY PROCESS COST PROFITS

Corn 0.2*$6,013 + 0.16889*$10,000
+ 0.82816*$1,338.8 = $4,000 150%
Steel Alpha 0.35*$6,013 + 0.0095553*$10,000
+ 0.19321*$1,338.8 = $2,459
Steel Beta 0.13329*$6,013 + 0.15590*$10,000
+ 0.033594*$1,338.8 = $2,405 150%

Under both process you calculate the cost using the same price for corn.
Under process Beta the corn used is about 17 times as much as the corn used
in process alpha. You can not convince me that the price of corn will be the
same under each process when process beta uses 17 more of the input!!! The
prices will be different under the two processes meaning different cost and
different profits for corn produced. If the factor demand of corn is
increasing by a factor of 17 you can not convince me that this will not a
significant impact on :
A. the price of corn
and
B. the production of corn.
Without taking this into account you can not see which process the firm
will use period. That is the flaw of the model. If you rerun with the
numbers with some sort of demand for corn and see what will the difference
in prices and how that affects production decisions for corn when process
Beta is used and then compare the profits you might have something. Until
you do that this analysis is meaningless. Your cost functions are wrong
because they assume the same price on corn even when its demand as been
multiplied by a factor of 17. This is clearly wrong.

> This here is nonsense for other reasons as well:
>

Really, you mean the supply of corn and the price of corn are completely
unresponsive to the demand for corn. So if I am a firm and the demand for my
production is 17 times more I still charge the same price?
I do not think this is nonsense. It is something that needs to be fixed.
You find that supply and demand do not affect the model simply because left
out the supply and demand for a key input.


> If Mr. Weatherby actually wanted to construct an argument, he is
> always free to append additional assumptions and show how to construct
> a (well-behaved) labor demand function in my example.
>

The argument has nothing to do with the labor demand function. The
argument is that you hold prices for a small quantity of corn constant even
though process B demands 17 times the amount of corn of process alpha. This
is why the model is wrong. The increase in price from process B will have
significant implications for the production of corn and also the cost
function you state. In fact the process B will be much more costly. However,
the price of corn has risen. One would expect under process B the production
of steel drops and the production of corn rises.
I did not run the numbers to see if profits were higher under this
choice of technique. It may be that you don't find more labor hired to make
steel when wages rise. Instead production of steel drops and production of
corn rises. Again these results come from the fact you have an integrated
firm. It may be different if the corn industry and steel industry are
seperate. Your cost and profit calculations are way off. Honestly I haven't
looked further that so I can't comment on the rest of the model. Fix the
first part and maybe we can talk.

John

Robert Vienneau

unread,
Apr 29, 2002, 5:53:10 PM4/29/02
to
In article <aajhvg$710$1...@newsflood.osaka.att.ne.jp>, "maximus"
<madv...@about.com> wrote:

> I am afraid that I agree more with John than with Robert (author of the
> post).
>
> Even though I may accept the *point* and the case, or even
> thousands of the points, altogether they can not make a rejection
> of a theory.

You, of course, are free to reject logic.

In Euclidean geometry, one can show that the sum of the angles
of a triangle add up to 180 degrees. If I were to correctly show how
to construct a triangle with compass and straightedge, such that
the angles of the triangle add up to something different from
180 degrees, one with a command of logic would have to
reject Euclidean geometry or realize that it needs modification.

But am I arguing for a rejection of mainstream theory?

"But, as economic theory has learned since the 1930s, the
pattern of activities adopted in the face of long-run
factor-price changes can be complicated and counterintuitive.
Consequently, the long-run demand for factors can be badly
behaved functions of factor prices... The principle of
variation works as an argument for long-run determinancy insofar
as the set of zero-profit activities shift in response to factor
price changes; it is not necessary that newly adopted activities
use cheaper factors more intensively or that production is more
capital intensive when r falls."
-- Michael Mandler, _Dilemmas In Economic Theory: Persisting
Foundational Problems Of Microeconomics_. Oxford, 1999.
p. 34.

My assertion was about the (absence of) well-behaved supply and


demand functions in the labor market, particularly a demand
function for labor.

--

Robert Vienneau

unread,
Apr 29, 2002, 5:55:19 PM4/29/02
to
In article <Hngz8.107$Zj4...@newsread2.prod.itd.earthlink.net>, "John
J. Weatherby" <jjwea...@earthlink.net> wrote:

> "Robert Vienneau" <rv...@see.sig.com> wrote in message
> news:rvien-FF5CB0....@news.dreamscape.com...
> >(No, I am not
> > interested here in discussing increasing returns to scale in the
> > endogeneous growth models Mr. Weatherby is familiar with.)

> Of course not you still do not know what a scale effect refers to in
> these models. If you did you realize the scale effect deals with the
> effect
> of population on growth not the standard idea of size of the firm
> affecting
> output.

The above is irrelevant. So, then, is the following quote:

"If A is productive as well, it follows that F cannot be a
concave production function because
F(lambda A, lambda X) > lambda F( A, X )."
-- Paul Romer (1990), p. S 76.

Though, of course, it is relevant to Mr. Weatherby's irrelevancy.



> > There are none in the initial post in this thread. Responses, such as
> > Mr. Weatherby's, merely say something about the sociology of economics.

> Yes there are you hold the price of corn constant. You use this
> constant
> price to calculate profits for each process. This is clearly wrong.

Mr. Weatherby is being silly. 1/10,000 bushel corn is the numeraire
in the model. By definition of a numeraire, its price is constant
(unity).

> > Has any mainstream economist acknowledged here that the example in
> > my first post is correct?

> I don't think too many care much about a Leontif function with two
> production processes. Rarely is more than one production process used in
> any model.

Mr. Weatherby's response is silly. If there is only one production
process, the production function is Leontief. He told us in a
previous post (with a comment directed to no cognitive values)
that the modern economists he is familiar with are not interested
in Leontief functions. In the above comment (which is also
directed to no cognitive values), he tells us that economists
do not care about models with more than one production process.
So he contradicts himself. With two production processes available,
the production function is not Leontief. So he also makes a
mistake in his comment.

But, of course, I explained how to increase the number of processes
available in the model to any number you like. Mr. Weatherby
snipped that part without comment.


Has any mainstream economist acknowledged here that the example in my
first post is correct?

> > > B. The fact that these are not applicable to most modern methods.

> > See below after Mr. Weatherby's comment about the Harrod-Domar
> > model.

> Harrod-Domar is pre-modern. It is a terrible model that has a fatal
> flaw
> of assuming that the average product of capital is constant for every
> level
> of capital.

Mr. Weatherby's comment is a non-sequitur. I have made no comment
in this thread whatsoever on the Harrod-Domar model.

> > When there are choices of processes for producing corn and steel,
> > the production functions are not Leontief. Furthermore, they are
> > variable-coefficient, not fixed coefficient production functions.

> Well again this is far from standard assumptions that the coefficents
> in a production function change.

> [ Irrelevancy about the Solow model - deleted. ]

Consider the following URL:

<http://homepage.newschool.edu/~foleyd/GECO6200/ps1.html>

Apparently, this is the first problem set in a course that Duncan
Foley, a well-known contemporary economist, is teaching this Spring.
Consider problem 1-2:

"1-2. (Adapted from Problem 8.6, Kurz and Salvadori, ch. 3.) In an
economy with two commodities, corn and iron, there are two techniques
for producing a unit of corn, (0, 1/2, 1) and (3/8, 1/9,1) (where the
first number indicates the corn input, the second the iron input, and
the third the labor input), and two techniques for producing iron,
(1/4, 0, 2) and (1/4, 1/4, 2). For each of the four possible
combinations of these techniques that will define a simple circulating
capital model where wages are paid at the beginning of the period
calculate the wage-profit rate relation, assuming that the wage
consists only of corn."

(Foley uses "technique" to mean what I call a "process".)

So much for Mr. Weatherby's knowledge of what are standard assumptions.

> You can not convince me that the price of corn will be
> the
> same under each process when process beta uses 17 more of the input!!!

"You cannot convince me" is argument from ignorance.

The price of a numeraire is set to a constant. That's what it means
to be a numeraire.

> > If Mr. Weatherby actually wanted to construct an argument, he is
> > always free to append additional assumptions and show how to construct
> > a (well-behaved) labor demand function in my example.

[>>Of course, I construct a complete equilibrium in Sraffa3.pdf.]

[ More nonsense already addressed - deleted. ]

> It may be different if the corn industry and steel industry are
> seperate. Your cost and profit calculations are way off. Honestly I
> haven't
> looked further that so I can't comment on the rest of the model. Fix the
> first part and maybe we can talk.

Let's see. I've addressed this issue in the referenced PDF files.
Mr. Weatherby deleted all references to such files and arguments. Why
would he think I would want to talk to him, given his behavior?

maximus

unread,
Apr 29, 2002, 10:14:13 PM4/29/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message
news:rvien-C70A30....@news.dreamscape.com...

I can assume that the functions you use are arbitrary, as well as all
parameters.

But there are many functions that are not well-behaved, in whatever meaning
you
may mean here.

As long as you do not show the functions you use, an example cannot make the
case here.

In addition, since you want to show the higher-wage is associated with
higher employment
per unit produced, or higher L/Y, simply speaking so. This means high wage
is associated
with lower Y/L. This is opposite to observed data and casual observation.

You setting up the mechanism of price, especially for steel, is unrealistic.
If firms can set up
their prices as they like, why don't they set up a price that they can show
higher profit ?
This profit may be infinite even, in your case.

If you can find two prices that one gives profit, another shows loss, then
how firms will
decide ?

Probably you can use your time better.

I am afraid that I will not continue to follow this issue, since I am too
busy with some
paper lying around to be finished.

Good luck

max

John Weatherby

unread,
Apr 29, 2002, 10:32:49 PM4/29/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message
news:rvien-6AE0AC....@news.dreamscape.com...

> The above is irrelevant. So, then, is the following quote:
>
> "If A is productive as well, it follows that F cannot be a
> concave production function because
> F(lambda A, lambda X) > lambda F( A, X )."
> -- Paul Romer (1990), p. S 76.
>
> Though, of course, it is relevant to Mr. Weatherby's irrelevancy.
>
Is determined by the amount of human capital devoted to research. Later
models used population. The scale effect is that countries with higher
populations have bigger growth rates. Not the scale effect you are trying to
portray it to be.


> Mr. Weatherby is being silly. 1/10,000 bushel corn is the numeraire
> in the model. By definition of a numeraire, its price is constant
> (unity).
>

Then why do you set the price of corn to $10,000.


"I assume throughout that inputs of steel,
corn, and labor are charged at the start of the year. The price
of corn is assumed constant at $10,000 per Bushel. Two different
levels of wages are considered."

I don't care if you make 1/10,000 of a bushel of corn the numeraire this
price is not constant when talk about increasing factor demands by 1,700
percent. Even a normal factor demand function derived from Cobb Douglas will
not be able to handle a change this big easily. You can not increase the
demand for any good 1700 percent and expect prices to stay constant. There
is no getting around this.

> > > Has any mainstream economist acknowledged here that the example in
> > > my first post is correct?
>

> Mr. Weatherby's response is silly. If there is only one production


> process, the production function is Leontief.

No a fixed coefficent Cobb Douglas does not assume several discrete
processes.


> capital model where wages are paid at the beginning of the period
> calculate the wage-profit rate relation, assuming that the wage
> consists only of corn."
>
> (Foley uses "technique" to mean what I call a "process".)
>

Also in his model the price of corn changes. Read carefully.

> So much for Mr. Weatherby's knowledge of what are standard assumptions.
>

Really do think someone from the new school whose faculty were
presenting Post-Keynesian papers at the AEA is representive of mainstream
economics or standard assumptions.

> > You can not convince me that the price of corn will be
> > the
> > same under each process when process beta uses 17 more of the input!!!
>

> "You cannot convince me" is argument from ignorance.
>

Well then excuse me for answering ignorance with ignorance. The point is
the same you can not increase fact demands by a factor of 17 and not have an
effect on the price of the factor.

> The price of a numeraire is set to a constant. That's what it means
> to be a numeraire.
>

This is the error. You can not have a constant price when demand will
increase by a factor of 17 from one process to another. Choosing this as a
numeraire is bad choice unless you scale wages according to the price of
corn, if you do that it changes your results.

> Let's see. I've addressed this issue in the referenced PDF files.
> Mr. Weatherby deleted all references to such files and arguments. Why
> would he think I would want to talk to him, given his behavior?
>

Again when you are proven wrong it suddenly the other guy is not playing
right. If you can not answer the questions here I need not look at the
documents. If these did answer the question you would explain it here rather
than posting a URL. You did construct this site did you not? Then why can't
you explain what is on it?

John


Robert Vienneau

unread,
Apr 30, 2002, 5:27:22 AM4/30/02
to
In article <aakun5$bsp$1...@newsflood.osaka.att.ne.jp>, "maximus"
<mad...@about.com> wrote:

> > "But, as economic theory has learned since the 1930s, the
> > pattern of activities adopted in the face of long-run
> > factor-price changes can be complicated and counterintuitive.
> > Consequently, the long-run demand for factors can be badly
> > behaved functions of factor prices... The principle of
> > variation works as an argument for long-run determinancy insofar
> > as the set of zero-profit activities shift in response to factor
> > price changes; it is not necessary that newly adopted activities
> > use cheaper factors more intensively or that production is more
> > capital intensive when r falls."
> > -- Michael Mandler, _Dilemmas In Economic Theory: Persisting
> > Foundational Problems Of Microeconomics_. Oxford, 1999.
> > p. 34.

> > My assertion was about the (absence of) well-behaved supply and
> > demand functions in the labor market, particularly a demand
> > function for labor.

> I can assume that the functions you use are arbitrary, as well as all
> parameters.

This is silly. Suppose the theory stated that, given

o Technology as represented by a production function with constant
returns to scale and diminishing marginal returns to each factor

o Profit-maximizing firms

Firms adopt a no more labor-intensive technique at a higher wage.

If the theory stated this and were logically consistent, I would
not be able to describe a technology, no matter how arbitrary,
in which the assumptions are met and the conclusion wasn't.



> But there are many functions that are not well-behaved, in whatever
> meaning you may mean here.
>
> As long as you do not show the functions you use, an example cannot make
> the case here.

There are no functions I use that I haven't shown, e.g., in PDF
files whose URL I have already given.

> In addition, since you want to show the higher-wage is associated with
> higher employment
> per unit produced, or higher L/Y, simply speaking so. This means high
> wage is associated
> with lower Y/L. This is opposite to observed data and casual observation.

If you think that, you have identified a problem for theory. State
special-case assumptions on technology that rules out the effect
illustrated by my example.

The claim about supposed data is irrelevant to the logical flaw I
have identified in certain beliefs. It also reveals an ignorance about
what is being claimed. See the fifth footnote in:

<http://www.econ.usyd.edu.au/drawingboard/journal/0111/white.pdf>

I can provide a list of case studies illustrating the relevant
effect in my example. I have not read all of the papers I would
list, since I think such studies irrelevant to the logical point.



> You setting up the mechanism of price, especially for steel, is
> unrealistic.
> If firms can set up
> their prices as they like, why don't they set up a price that they can
> show
> higher profit ?
> This profit may be infinite even, in your case.

Nonsense. The firm needs, by assumption, to adopt both a corn-producing
process and one of the steel-producing processes in my example. That
constrains the price of steel to be as shown.

> Probably you can use your time better.

I'm free to choose to give certain people a platform with which to
amuse our readers, if there are any.



> I am afraid that I will not continue to follow this issue, since I am too
> busy with some paper lying around to be finished.

You, of course, are free to remain ignorant of textbook results in
price theory.

Robert Vienneau

unread,
Apr 30, 2002, 5:30:25 AM4/30/02
to
In article <lnnz8.687$Wd5....@newsread1.prod.itd.earthlink.net>,
"John Weatherby" <jjwea...@earthlink.net> wrote:

> "Robert Vienneau" <rv...@see.sig.com> wrote in message
> news:rvien-6AE0AC....@news.dreamscape.com...

> > The above is irrelevant...

> > Mr. Weatherby is being silly. 1/10,000 bushel corn is the numeraire
> > in the model. By definition of a numeraire, its price is constant
> > (unity).

> Then why do you set the price of corn to $10,000.
> "I assume throughout that inputs of steel,
> corn, and labor are charged at the start of the year. The price
> of corn is assumed constant at $10,000 per Bushel. Two different
> levels of wages are considered."

price of 1/10,000 bushel corn = 1

Multiply both sides by 10,000.

price of 1 bushel corn = 10,0000

What is Mr. Weatherby's question?

> I don't care if you make 1/10,000 of a bushel of corn the numeraire
> this
> price is not constant when talk about increasing factor demands by 1,700
> percent.

Mr. Weatherby apparently doesn't know the meaning of the term
"numeraire".

> Even a normal factor demand function derived from Cobb Douglas
> will
> not be able to handle a change this big easily. You can not increase the
> demand for any good 1700 percent and expect prices to stay constant.
> There
> is no getting around this.

Apparently Mr. Weatherby has never seen the non-substitution theorem
explained.

> > > > Has any mainstream economist acknowledged here that the example in
> > > > my first post is correct?

Has any mainstream economist acknowledged here that the example in
my first post is correct?

> > Mr. Weatherby's response is silly. If there is only one production
> > process, the production function is Leontief.

> No a fixed coefficent Cobb Douglas does not assume several discrete
> processes.

I think an uncountably infinite number is more than several. A
Cobb-Douglas production function assumes an infinite number of
production processes. (Each process is characterized by definite
values for coefficients of production.) A Cobb-Douglas is not
fixed coefficient.


1-2. (Adapted from Problem 8.6, Kurz and Salvadori, ch. 3.) In
an economy with two commodities, corn and iron, there are
two techniques for producing a unit of corn, (0, 1/2, 1) and
(3/8, 1/9,1) (where the first number indicates the corn input,
the second the iron input, and the third the labor input), and
two techniques for producing iron, (1/4, 0, 2) and (1/4, 1/4, 2).
For each of the four possible combinations of these techniques
that will define a simple circulating

> > capital model where wages are paid at the beginning of the period
> > calculate the wage-profit rate relation, assuming that the wage
> > consists only of corn."
> >
> > (Foley uses "technique" to mean what I call a "process".)

> Also in his model the price of corn changes. Read carefully.

Mr. Weatherby's interpretation is highly idiosyncratic, to say
the least. I think it convenient to use corn as numeraire in
solving the above problem. Since Foley knows what he is talking
about, he would agree.

Appendix A, for example, of Sraffa3.pdf explains analytical tools
for solving the above problem.



> > So much for Mr. Weatherby's knowledge of what are standard assumptions.

> Really do think someone from the new school whose faculty were
> presenting Post-Keynesian papers at the AEA is representive of mainstream
> economics or standard assumptions.

Foley used to teach at Stanford and Columbia.

I think there is no disagreement among competent economists

o On how to solve the problems in that problem set

o That the assumptions on technology are standard.

I think the set of competent economists relevant here
includes many mainstream economists.

"The Kurz-Salvadori 'Theory of Production' is a tour de force
that provides a needed authoritative survey of modern
competitive theory on technology and prices. It seems a golden
mean between mathematical complexities, policy alternatives,
and historical geneses. I expect to wear out a copy every two
years from extensive use."
-- Paul A. Samuelson (obviously, an extremely heterodox
economist)

> > The price of a numeraire is set to a constant. That's what it means
> > to be a numeraire.

> This is the error. You can not have a constant price when demand will
> increase by a factor of 17 from one process to another. Choosing this as
> a
> numeraire is bad choice unless you scale wages according to the price of
> corn, if you do that it changes your results.

I hope some are amused by such nonsense.

Since 1/10,000 bushel of corn is the numeraire in the example, wages
in the example ARE scaled by the price of 1/10,000 bushel corn.

> > Let's see. I've addressed this issue in the referenced PDF files.
> > Mr. Weatherby deleted all references to such files and arguments. Why
> > would he think I would want to talk to him, given his behavior?

> Again when you are proven wrong

Only in Mr. Weatherby's uncomprehending mind.

> it suddenly the other guy is not playing
> right. If you can not answer the questions here I need not look at the
> documents. If these did answer the question you would explain it here
> rather
> than posting a URL. You did construct this site did you not? Then why
> can't
> you explain what is on it?

Mr. Weatherby's incomprehension is not my problem.

John J. Weatherby

unread,
Apr 30, 2002, 9:05:06 AM4/30/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message
news:rvien-A5A6C5....@news.dreamscape.com...
> In article <lnnz8.687$Wd5....@newsread1.prod.itd.earthlink.net>,

> Mr. Weatherby's interpretation is highly idiosyncratic, to say
> the least. I think it convenient to use corn as numeraire in
> solving the above problem. Since Foley knows what he is talking
> about, he would agree.
>

It is not convenient to use corn as the numeraire it is wrong. You
completely ignored the demand for corn and its effect on price. The
difference in prices of corn under the two processes will marked change your
results. It has significant effects on cost and profits. Your choice of
technique hinges on the price of corn being the same. The profit functions
will be different under the different processes becuase they are different
prices to the input. This will also effect the profit maximizing level of
corn production.
You can not assume that prices are unchanging. Even if you adjust wages
for the price of corn all other prices are affected by this as well. The
problem is you have not taking into account the change in price and how that
will affect the profit maximizing level of corn. Your assumption is that the
level of corn production is the same under both processes this is completely
wrong and I don't care who cite to try to prove differently. Any competent
economist will realize this is a short coming in the analysis even if they
still use the model to try to prove a point. When you increase demand for
corn by a factor of 17 prices will rise and production of corn will rise as
well.
Regardless it is pretty obvious from the numbers posted that you had to
spend months finding an example that actually worked. You use these numbers
only because they are the only numbers you could find to make this work.
Lets face it here you have to show extremely large differences in technique
to make the theory work. You have to require 1/6 of the labor in the B
process and 17 times the corn before you even get a slightly higher amount
of profit under alpha when wages rise.
This is just ridiculous to think that 2 process may be this divergent.
Is it somewhat interesting to show what happens when you have a choice of
technique? Perhaps. Samuelson say that these cases were different from
mainstream theory and it might be interesting to look at different cases.
Does this extreme case disprove that factor demands are downward sloping or
horizontal? No. It is a special case that has very extreme assumptions. Even
if you did this model and did not make corn the numeraire, it might be
somewhat interesting but it does not destroy an entire body of work.
Especially when there is no empirical evidence to show there case actually
exist. This is like saying the fact Giffen goods exist means that Utility
theory is completely wrong.

John


John J. Weatherby

unread,
Apr 30, 2002, 9:14:22 AM4/30/02
to
Another note your URL says you are holding the price of steel constant. How
can you do this if corn is the numeraire? The price of steel will also be
affected by the changing price of corn. Your URL was not very helpful
either. I don't know how you think you can adequately explain a complex
concept in 4 pages. It takes more than righting down a function and placing
graphs. As usual you try to let the math do all your talking. This is your
biggest communication problem.

John

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

news:rvien-6AE0AC....@news.dreamscape.com...

John J. Weatherby

unread,
Apr 30, 2002, 1:14:51 PM4/30/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in
> Foley used to teach at Stanford and Columbia.
>
That does not make him mainstream. Look at his page. The first selected
writing is about survival strategies for non-mainstream economist. This
guy's course actually takes Marx seriously. This is supposed to be a course
about macro but there is no mention of business cycle theories or even
modern growth models. This is not a mainstream approach.
From his publications it looks as though he was very mainstream until
1978, the time he went to Columbia then started publishing about Marxian
models. I am surprised at the switch. Then again that may be why he long is
at Columbia, since 1982 he only has one publication in mainstream journals.
I find it very strange that someone with such a distinguished record early
on would suddenly have a fascination with Marx and seeming throw away a
very promising career.

John

maximus

unread,
Apr 30, 2002, 1:21:53 PM4/30/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message
news:rvien-BED076....@news.dreamscape.com...

> In article <aakun5$bsp$1...@newsflood.osaka.att.ne.jp>, "maximus"
> <mad...@about.com> wrote:
>
> > > "But, as economic theory has learned since the 1930s, the
> > > pattern of activities adopted in the face of long-run
> > > factor-price changes can be complicated and counterintuitive.
> > > Consequently, the long-run demand for factors can be badly
> > > behaved functions of factor prices... The principle of
> > > variation works as an argument for long-run determinancy insofar
> > > as the set of zero-profit activities shift in response to factor
> > > price changes; it is not necessary that newly adopted activities
> > > use cheaper factors more intensively or that production is more
> > > capital intensive when r falls."
> > > -- Michael Mandler, _Dilemmas In Economic Theory: Persisting
> > > Foundational Problems Of Microeconomics_. Oxford, 1999.
> > > p. 34.
>
> > > My assertion was about the (absence of) well-behaved supply and
> > > demand functions in the labor market, particularly a demand
> > > function for labor.
>
> > I can assume that the functions you use are arbitrary, as well as all
> > parameters.
>

Robert

> This is silly. Suppose the theory stated that, given
>
> o Technology as represented by a production function with constant
> returns to scale and diminishing marginal returns to each factor
>
> o Profit-maximizing firms
>
> Firms adopt a no more labor-intensive technique at a higher wage.
>
> If the theory stated this and were logically consistent, I would
> not be able to describe a technology, no matter how arbitrary,
> in which the assumptions are met and the conclusion wasn't.
>

Economists are among some who are silly in their assumptions. But we learn
more from such silliness.

Robert


> Nonsense. The firm needs, by assumption, to adopt both a corn-producing
> process and one of the steel-producing processes in my example. That
> constrains the price of steel to be as shown.
>

But you never give what constrains the choice. When the mechanism is not
clear, assertion of anything may be only a hasty conclusion from jumping too
quick.


> > Probably you can use your time better.
>
> I'm free to choose to give certain people a platform with which to
> amuse our readers, if there are any.
>
> > I am afraid that I will not continue to follow this issue, since I am
too
> > busy with some paper lying around to be finished.
>
> You, of course, are free to remain ignorant of textbook results in
> price theory.
>

I never call my students silly or ignorant, even if they are truly so.
Calling people stupid, silly, ignorant does not make me more intelligent
or knowledgeable. Furthermore, knowledge changes also. If they are ignorant
or silliy, I invite them to take time to look into the issues, and think.


I am ignorant of many theories, no doubt. Yet your argument does not make
much
sense to me.

max


Robert Vienneau

unread,
May 1, 2002, 5:09:37 AM5/1/02
to
In article <aamn3f$2ud$1...@newsflood.osaka.att.ne.jp>, "maximus"
<mad...@about.com> wrote:

> > This is silly. Suppose the theory stated that, given


> >
> > o Technology as represented by a production function with constant
> > returns to scale and diminishing marginal returns to each factor
> >
> > o Profit-maximizing firms
> >
> > Firms adopt a no more labor-intensive technique at a higher wage.
> >
> > If the theory stated this and were logically consistent, I would
> > not be able to describe a technology, no matter how arbitrary,
> > in which the assumptions are met and the conclusion wasn't.

> Economists are among some who are silly in their assumptions. But we
> learn more from such silliness.

Non sequitur.

None of the above is about (un)realism of assumptions. It is about
what and what are not the logical implications of standard assumptions
in mainstream theory.

> > There are no functions I use that I haven't shown, e.g., in PDF
> > files whose URL I have already given.

> > > You setting up the mechanism of price, especially for steel, is


> > > unrealistic.
> > > If firms can set up
> > > their prices as they like, why don't they set up a price that they
> > > can
> > > show
> > > higher profit ?
> > > This profit may be infinite even, in your case.

> > Nonsense. The firm needs, by assumption, to adopt both a corn-producing


> > process and one of the steel-producing processes in my example. That
> > constrains the price of steel to be as shown.

> But you never give what constrains the choice.

I do, even in the paragraph above.

> When the mechanism is not
> clear, assertion of anything may be only a hasty conclusion from jumping
> too quick.

> > > I am afraid that I will not continue to follow this issue, since I am


> > > too
> > > busy with some paper lying around to be finished.

> > You, of course, are free to remain ignorant of textbook results in
> > price theory.

> I never call my students silly or ignorant, even if they are truly so.
> Calling people stupid, silly, ignorant does not make me more intelligent
> or knowledgeable. Furthermore, knowledge changes also. If they are
> ignorant
> or silliy, I invite them to take time to look into the issues, and think.

You will not find me calling any PERSON silly above. You will
find me only characterizing STATEMENTS by somebody who says
he is not interested in looking into textbook results in price
theory. I read many responses to my posts as containing a large
non-rational component.

Nor do you see me calling anybody ignorant, without qualification.

> I am ignorant of many theories, no doubt.

And you are free to remain ignorant of many things, including


textbook results in price theory.

> Yet your argument does not make much sense to me.

I do not dispute that my argument does not make sense to you. That
has nothing to do with whether my argument is sensible, as far as
I can see.

Has anybody acknowledged here that the example in my first post
is correct?

--

John J. Weatherby

unread,
May 1, 2002, 10:23:42 AM5/1/02
to
It is funny here that you are arguing that long run decisions are difficult.
However your "long-run" model is only one period. This was part of the
confusion arising in our argument. A dynamic model will completely change
your results.
Second your model does not profit maximizing as you say it is cost
minimizing. You also provide no constraint. Any cost minimization problem
assume that cost is minimized for a given level of output. It is obvious
looking at the model that the given level of output differs according to
which technique is chosen. In a dynamic model the level of output of corn
and steel would be different according to the technique chosen. It is
therefore misleading to show cost minimization assuming that the outputs
under either technique are the same. In this case the static choice for
output does affect the time path for output. You can therefore not seperate
the static allocation from the dynamic allocation. You will get different
answers. If you want to see what happens to factor demands in the long run
you need dynamics.
If you want to see what the short run choice of technique is you still
need to solve the dynamic model. The given level of output will be different
under each technique you need to know that given level of output to
determine which process is the least costly.
BTW Foley's problem set is dynamic it calls for finding growth rates.
You can not discuss growth rates in a static model.

John

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

news:rvien-BED076....@news.dreamscape.com...

John J. Weatherby

unread,
May 1, 2002, 10:26:38 AM5/1/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message news:rvien-
> Has anybody acknowledged here that the example in my first post
> is correct?
>
No because it is incorrect. If you do not believe me send the original post
to Foley and see what he has to say about it. I am sure he will point out
similar issues about the dynamics of the problem. I would send the post and
not the PDF. The PDF looks incomplete, because it is. The post is actually
easier to follow.

John

maximus

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May 1, 2002, 1:03:24 PM5/1/02
to

"John J. Weatherby" <jjwea...@earthlink.net> wrote in message
news:OTSz8.1690$nY5....@newsread1.prod.itd.earthlink.net...

While Robert attempts to show a case to his favorite, his construction of
the model
might make him confused later on with many things left out unspecified or
only by
implicit assumptions which also mystify readers.

John's effort to explain to Robert about construction of (dynamic) model is
good enough,
and with details I seldom see in textbooks. In the first post, Robert
appears as if he tries
to raise doubts on economic theory, but then he changed into only a point in
the
production function, which is the "whole" model here, since there is nothing
else.

At least, this construction of model appears to me as "unconventional".

I must be confused, not amused.

max

Robert Vienneau

unread,
May 1, 2002, 3:43:19 PM5/1/02
to
In article <6Ewz8.1662$Wd5.1...@newsread1.prod.itd.earthlink.net>,
"John J. Weatherby" <jjwea...@earthlink.net> wrote:

> "Robert Vienneau" <rv...@see.sig.com> wrote in message
> news:rvien-A5A6C5....@news.dreamscape.com...
> > In article <lnnz8.687$Wd5....@newsread1.prod.itd.earthlink.net>,

<http://homepage.newschool.edu/~foleyd/GECO6200/ps1.html>

"1-2. (Adapted from Problem 8.6, Kurz and Salvadori, ch. 3.) In an

economy with two commodities, corn and iron, there are two [processes]


for producing a unit of corn, (0, 1/2, 1) and (3/8, 1/9,1) (where the
first number indicates the corn input, the second the iron input, and

the third the labor input), and two [processes] for producing iron,


(1/4, 0, 2) and (1/4, 1/4, 2). For each of the four possible

combinations of these [processes] that will define a simple circulating


capital model where wages are paid at the beginning of the period
calculate the wage-profit rate relation, assuming that the wage
consists only of corn."

> > Mr. Weatherby's interpretation is highly idiosyncratic, to say
> > the least. I think it convenient to use corn as numeraire in
> > solving the above problem. Since Foley knows what he is talking
> > about, he would agree.

> It is not convenient to use corn as the numeraire it is wrong. You
> completely ignored the demand for corn and its effect on price.

The context here was comments on a problem from Foley's problem set,
not my example.

I will now show you how to begin solving this problem. This will
demonstrate that Mr. Weatherby's comments on the numeraire are
outlandishly mistaken.

Define four techniques in terms of the processes:

CORN-PRODUCING IRON-PRODUCING
TECHNIQUE PROCESS PROCESS
Alpha (0, 1/2, 1) (1/4, 0, 2)
Beta (0, 1/2, 1) (1/4, 1/4, 2)
Gamma (3/8, 1/9,1) (1/4, 0, 2)
Delta (3/8, 1/9,1) (1/4, 1/4, 2)

In the remainder, I consider only the Alpha technique.

Let

p1 = price of a unit of corn
p2 = price of a unit of iron
w = wage
r = rate of profits

Foley's students know to write down the following price equations:

( 1/2 p2 + 1 w )( 1 + r ) = p1 (1)

( 1/4 p1 + 2 w )( 1 + r ) = p2 (2)

No numeraire has been specified as yet.

Given the last clause in Foley's statement of the problem,
the ratio of the wage to the price of corn is of particular
interest:

(1/2 P + 1 W )( 1 + r ) = 1 (3)

( 1/4 + 2 W )( 1 + r ) = P (4)

where

P = ( p2/p1 ) (5)

W = ( w/p1) (6)

Alternatively, one can set the price of corn in equations
(1) and (2) to unity. This, too, will yield equations
(3) and (4).

One can solve Equations (3) and (4) to get:

W = ( 7 - 2r - r^2 )/[ 8 ( r + 1 )( r + 2 ) ] (7)

P = ( r + 9 )/[ 4 ( r + 2 ) ] (8)

Equation 7 is the desired wage-profit rate relation for the
alpha technique.

> Your assumption is that
> the
> level of corn production is the same under both processes this is
> completely
> wrong and I don't care who cite to try to prove differently.

I do not assume that the level of corn production is the same.

> Any competent
> economist will realize this is a short coming in the analysis even if
> they
> still use the model to try to prove a point. When you increase demand for
> corn by a factor of 17 prices will rise and production of corn will rise
> as
> well.

Consider any levels of output of the two processes in the alpha
technique above such that enough corn is produced net to cover
wages. Notice that the price equations (1) and (2) are independent
of the variations in the levels of output in this set.

This is the non-substitution theorem. Clearly Mr. Weatherby is
mistaken.

> Regardless it is pretty obvious from the numbers posted that you had
> to
> spend months finding an example that actually worked.

It's been years since I developed this case. I don't remember how
long it took. I have presented other examples here, some of which
I developed. Mr. Weatherby's claim is a fantasy that he cannot
know.

How long would it take me to figure out how to use a compass and
straight-edge to construct a triangle with angles that sum up to
more than 180 degrees?

> You use these numbers
> only because they are the only numbers you could find to make this work.

My example meets constraints that are non-obvious. It has to be
consistent with an internal solution, so to speak, for the utility
maximization problem in Sraffa3.pdf. It has to contradict the
Blaug quote there; it cannot be a three good model where which
one of two capital goods is used varies with the technique.

> Lets face it here you have to show extremely large differences in
> technique
> to make the theory work. You have to require 1/6 of the labor in the B
> process and 17 times the corn before you even get a slightly higher
> amount
> of profit under alpha when wages rise.
> This is just ridiculous to think that 2 process may be this
> divergent.

Why would one think adjacent techniques on a wage-profit rate frontier
would not have processes that differ dramatically in coefficients
of production? I don't know of any such reason. Continuity along
the frontier need not imply continuity in the chosen coefficients
of production.

> Is it somewhat interesting to show what happens when you have a choice of
> technique? Perhaps.

When one writes down a production function (other than Leontief)
one is postulating a problem of the choice of technique. When one
assumes the existence of land in one's models, one is postulating
a problem of the choice of technique. When one assumes the existence
of fixed capital, one is postulating a choice of technique.

On the other hand, technology evolves through time in my model
Bukharin, but there is no interesting problem of the choice of
technique.

> Samuelson say that these cases were different from
> mainstream theory and it might be interesting to look at different cases.
> Does this extreme case disprove that factor demands are downward sloping
> or
> horizontal? No. It is a special case that has very extreme assumptions.

The above is pure assertion. Mr. Weatherby has not stated what
assumptions on, say, technology he thinks would rule out my
result and related results. He has not shown in any sense that
they only arise in "extreme" cases, nor characterized what he
means by "extreme". He has no theory or model.

> Even
> if you did this model and did not make corn the numeraire, it might be
> somewhat interesting but it does not destroy an entire body of work.
> Especially when there is no empirical evidence to show there case
> actually exist.

Barkley Rosser, for instance, would say there are case studies
that show examples like mine can exist. He's written some. (I
haven't read much of the empirical references I can produce; I
think the point is one of logic.)

> This is like saying the fact Giffen goods exist means that Utility
> theory is completely wrong.

"Demand theorists know there are few Giffen goods. They know why
there are Giffen goods. They can successfully predict that certain
goods in certain economies (potatoes in Ireland, rice in China,
or yams in New Guinea) are likely to be Giffen goods. Capital
theorists, on the other hand, do not know whether capital reversing
is common or rare. Until recently they possessed no theory which
made sense of the phenomenon. The status of that fundamental theory
remains, moreover, questionable. From the perspective of the Austrian
theory or of Clark's theory, capital reversing is nothing but a
disconfirmation. Capital theorists are also unable to predict when
capital reversing will occur. They cannot point to some feature of
an economy and say, 'Ah, we can see that this is one of the
exceptional cases in which we should not expect our simpler capital
theories to work.' There is no justification for the claim that
capital reversing demands only minor qualifications in simplified
capital theories."
-- Daniel Hausmann

Robert Vienneau

unread,
May 1, 2002, 3:44:46 PM5/1/02
to
In article <OMwz8.1666$Wd5.1...@newsread1.prod.itd.earthlink.net>,
"John J. Weatherby" <jjwea...@earthlink.net> wrote:

> Another note your URL says you are holding the price of steel constant.

I believe that Mr. Weatherby is referring to this:

<http://csf.colorado.edu/pkt/pktauthors/Vienneau.Robert/LaborDemand.pdf>

> How
> can you do this if corn is the numeraire? The price of steel will also be
> affected by the changing price of corn.

I give a version of a standard proof in an appendix there. I explain
what that proof is about. That proof holds the price of steel constant,
while considering the response of the firm at different levels of
wages.

The point of my paper, though, is to argue that the firm can only
be in equilibrim on the curved locus in the figures. On that
curve, the price of steel is non-constant. So I reject the idea
that a good analysis of the amount of labor this firm wants to hire
at different levels of wages should be conducted with the price
of steel held constant.

But it would be untrue to say, "The price of steel will also
be affected by the changing price of corn." Corn, being the numeraire,
does not have a changing price.

So Mr. Weatherby's comment is very muddled.

> Your URL was not very helpful
> either. I don't know how you think you can adequately explain a complex
> concept in 4 pages.

What do I claim is original about that paper? Only the figures for
illustrating this analysis when applied to a very low-dimensional
problem. The analysis itself is textbook, and I give a reference to
a standard textbook. I suppose there might be some originality in
my interpretation of the analysis.

I assume a reader with some ability to read mathematics. I suppose
I might have taken some time to explain why the last column of
Table 3 is obvious when you think about it. (It helps if the
reader has seen a standard notation for coefficients of production
before.) I also assume a reader that is able to think about what
happens when the problem is generalized in various ways, e.g.,
if more production processes are known.

> It takes more than righting down a function and placing
> graphs. As usual you try to let the math do all your talking. This is
> your
> biggest communication problem.

"Writing" is not spelled "righting". Mr. Weatherby is in no position
to blame his lack of understanding on a problem I have with
communication, while always making these sorts of mistakes.

When my response to something technical I am reading is basically,
"Huh", I do not assume the problem must lie with the author.

Robert Vienneau

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May 1, 2002, 3:45:52 PM5/1/02
to
In article <yWSz8.1694$nY5....@newsread1.prod.itd.earthlink.net>,

I would expect Folely would find my original post in this thread
correct, trivial, obvious, and well-known. Thus, I will not bother
him with it. The only point he might find interesting is the
interpretation of the price of steel as an accounting price in
a vertically integrated firm.

Robert Vienneau

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May 1, 2002, 3:50:04 PM5/1/02
to
In article <OTSz8.1690$nY5....@newsread1.prod.itd.earthlink.net>,
"John J. Weatherby" <jjwea...@earthlink.net> wrote:

> It is funny here that you are arguing that long run decisions are
> difficult.
> However your "long-run" model is only one period. This was part of the
> confusion arising in our argument. A dynamic model will completely change
> your results.

This is not arguing that "long run decisions are difficult",
whatever that is supposed to mean. The reason my one-period
model is arguably long-run relates to its structure and
what variables are endogeneous and exogeneous.

> Second your model does not profit maximizing as you say it is cost
> minimizing.

Profit maximizing and cost minimization are related by duality
arguments in these sort of models. You cannot have one without
the other.

> You also provide no constraint. Any cost minimization problem
> assume that cost is minimized for a given level of output. It is obvious
> looking at the model that the given level of output differs according to
> which technique is chosen.

The proportions of gross levels of the output of corn and steel are
different according to the technique chosen. I showed that.

But levels of gross outputs have no effects on prices in this
model. That's the so-called non-substitution theorem that Mr.
Weatherby doesn't seem to be able to grasp.

> In a dynamic model the level of output of corn
> and steel would be different according to the technique chosen. It is
> therefore misleading to show cost minimization assuming that the outputs
> under either technique are the same. In this case the static choice for
> output does affect the time path for output. You can therefore not
> seperate
> the static allocation from the dynamic allocation. You will get different
> answers. If you want to see what happens to factor demands in the long
> run
> you need dynamics.
> If you want to see what the short run choice of technique is you
> still
> need to solve the dynamic model. The given level of output will be
> different
> under each technique you need to know that given level of output to
> determine which process is the least costly.
> BTW Foley's problem set is dynamic it calls for finding growth rates.
> You can not discuss growth rates in a static model.

Growth rates can be discussed in my example in the same way
they can be discussed in Foley's problem set. Does this make
my model or the problems in Foley's set dynamic? What dynamics
means is a contested subject among economists. Burmeister, who
seems to prefer an analysis based on a sequence of temporary
equilibria, would not call Foley's problem set, for example,
dynamic.

Suppose technology would lead to something like the effect
illustrated by my example in a long-run model. How would this
effect be manifested in something like Burmeister's dynamics
or in Arrow-Debreu intertemporal equilibra? As I understand it,
this is a research question. Economists who have made statements
on this question include Burmeister, Garegnani Hahn, Mandler, and
Schefold. But I don't think the question is settled.

Mr. Weatherby needs to do a lot of work before he will
understand what's being discussed.

Robert Vienneau

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May 1, 2002, 4:01:48 PM5/1/02
to
I really don't need to answer this post since there is no point
of substance here. But I will.


In article <aap726$sh8$1...@newsflood.osaka.att.ne.jp>, "maximus"
<madv...@37.com> wrote:

> While Robert attempts to show a case to his favorite, his construction of
> the model
> might make him confused later on with many things left out unspecified or
> only by
> implicit assumptions which also mystify readers.

Not readers who are familiar with the completely unoriginal point of
my example and the large literature upon which I draw. I specified
everything needed to make my point.

> John's effort to explain to Robert about construction of (dynamic) model
> is
> good enough,
> and with details I seldom see in textbooks. In the first post, Robert
> appears as if he tries
> to raise doubts on economic theory,

You still don't see that I am agreeing with correct economic theory,
e.g., as in that Michael Mandler quote.

> but then he changed into only a point
> in
> the
> production function, which is the "whole" model here, since there is
> nothing
> else.

I'm not sure what you are trying to say. It's probably wrong.

You might notice that the structure of the data in that problem
I quoted from Folely's problem set is the same as in my example.
The numbers, including the number of processes for producing one of
the commodities, differ. That's all.



> At least, this construction of model appears to me as "unconventional".

If you say well-established results appear unconventional to you,
I cannot disagree.

> I must be confused...

You are. For one thing, you don't notice John Weatherby's assertions
are mostly mistaken.

maximus

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May 2, 2002, 12:08:34 PM5/2/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message
news:rvien-8D0E33....@news.dreamscape.com...

Since John and you (Robert) have some other related discussions not directly
at your
original post, I would avoid to participate.

Rather, as your origianl post with tables and nothing else, in my view, such
results and
parameters can be viewed as predetermined by some "blackbox" technology of
the
production process, which is exogenous.

Yet, in the setting price for steel, here is an excerpt of your original
post:

****** QUOTE *****
4.1 PRICES WITH LOW WAGES

Accordingly, assume wages are initially $1,338.8 per Person-Year.
By assumption, the firm neither buys nor sells steel on the market.
The firm produces steel solely for its own use. Still, the firm
must enter a price of steel on its books. I assume that the firm
sets this price so that it is making the same rate of profits in
both processes it uses.
******* END QUOTE ******

John has had long discussion on the process of corn price, where he raises
doubt
on the lack of market response.

In contrast, I pay more attention on price for steel. The above paragraph
offers no
other information about how and why firm can set the price only to make a
profit,
but not enough to explain why firm cannot set the price at other values.

That is where the function form must be addressed, no matter how general it
can be.

Lack of elementary information, your argument lacks persuasiveness. Economic
models
may look silly but they must make some sense, otherwise, it can be a toy for
fun until
one can derive from it/them something useful.


max

John J. Weatherby

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May 2, 2002, 2:19:24 PM5/2/02
to
Let me turn on Rob Vienneau mode here.

"Robert Vienneau" <rv...@see.sig.com> wrote in
> I would expect Folely would find my original post in this thread
> correct, trivial, obvious, and well-known. Thus, I will not bother
> him with it.
I suppose or I expect is not an argument it is only statement of blind
belief. You have no idea what Foley would say about using this model for
this question. His problem set does not use this model for this question.


>The only point he might find interesting is the
> interpretation of the price of steel as an accounting price in
> a vertically integrated firm.
>

So your model is uninteresting then. You said it not I.

John

John J. Weatherby

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May 2, 2002, 2:42:36 PM5/2/02
to

"Robert Vienneau" <rv...@see.sig.com> wrote in message
news:rvien-8D0E33....@news.dreamscape.com...

> In article <OTSz8.1690$nY5....@newsread1.prod.itd.earthlink.net>,
> "John J. Weatherby" <jjwea...@earthlink.net> wrote:
> This is not arguing that "long run decisions are difficult",
> whatever that is supposed to mean. The reason my one-period
> model is arguably long-run relates to its structure and
> what variables are endogeneous and exogeneous.
>
Then why post a quotation saying that Long-run decisions are difficult
to make to support your model. This is in fact what you did. Again you need
to learn to communicate and not blindly post quotations to blow smoke around
the real issues.

> > Second your model does not profit maximizing as you say it is cost
> > minimizing.
>
> Profit maximizing and cost minimization are related by duality
> arguments in these sort of models. You cannot have one without
> the other.
>

Yes but the assumption of cost minimization is that it gives you the
same factor demands as profit maximization. The problem you present has a
different profit maximizing output under each technique. Therefore it is
wrong to set up a cost minimizing framework and assume that the given level
of output will be the same for either process. Adding a simple resource
constraint that shows that labor allocated to corn + labor allocated to
steel must be less than some number will show that the profit maximizing
outputs are different.

> The proportions of gross levels of the output of corn and steel are
> different according to the technique chosen. I showed that.
>

However you table shows the cost for the same level of outputs with each
process. In both cases you assume 10,000 units of corn are produced.

> How would this
> effect be manifested in something like Burmeister's dynamics
> or in Arrow-Debreu intertemporal equilibra? As I understand it,
> this is a research question.

You can not research it without first providing the theoritical basis.

> Mr. Weatherby needs to do a lot of work before he will
> understand what's being discussed.
>

On the contrary I beleive you need to do a lot of work to understand how
to correct set up these models and quit just saying this technique is
standard. Nothing is standard for any one question. The question I have had
and still have is if you understand the techniques and how they are used. I
still have question if you understand the application of the techniques.
Your complete inability to explain the technique and why you are using it in
your own words, as opposed to smatter a collection of quotations all over
the net, leads me to seriously doubt if you understand anything. Your
communication skills are lacking.
I don't know sometimes you may have a point but with inability to
explain conclusion and offer anything more than math in your own words
leaves me doubtful that you have a clue as to what you are doing. Instead of
explaining you post a lot of non-arguments that essentially calls your
critics idiots. This is not getting you anywhere. You have to understand
initial discussion of anything in this profesion is somewhat harsh.
Questions are often asked just to see if the author really understands his
material and can explain it. Throwing up your hands and saying you that your
critics do not understand only makes it look like you have no idea what you
are doing and can not explain your methods or your results.
No, this is not done just to those outside of mainstream economics.
Trust me when I presented New Atlantis the last time. I got a host of
questions about why the model was set up that and what drove the results.
Even the "standard" assumption of imperfect competition was commented on.
Yes I did answer them with the reason why this was chosen and did not
automatic assume they knew nothing about the literature. In some cases this
was true, yet even those who specialized in fields far away from mine have
made some valuable comments. No one in this profession is comfortable with
presenting something as standard and leaving it at that. You have to know
why you are using these techniques explain your model and explain your
results. Not copy something out of someone else's work half-way modifying it
and assuming just because Dr. X used this model to answer question Y people
will suddenly just accept that the model explains question Z, at least not
without heavily questioning it and making sure things are done right.
In short you need to learn how to take criticism and use it
constructively rather than throwing your hands up and calling the other
person incompetent, ie. any competent economist knows how to solve this,
instead of actually explaining the work. You remind of someone who took a
long time to finish their doctoral dissertation for the exact same reason.
You can not learn nor prove your models but starting off with the assumption
that you know more than everyone else and commenting on this beleif every
time you encounter criticism.

John

Robert Vienneau

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May 2, 2002, 7:08:30 PM5/2/02
to
In article <aaro7b$on1$1...@newsflood.osaka.att.ne.jp>, "maximus"
<madv...@37.com> wrote:

> Since John and you (Robert) have some other related discussions not
> directly
> at your
> original post, I would avoid to participate.

You are, of course, free to drop out of any aspect of this thread
at any time.



> Rather, as your origianl post with tables and nothing else, in my view,
> such
> results and
> parameters can be viewed as predetermined by some "blackbox" technology
> of
> the
> production process, which is exogenous.

The first two tables define the technology. Obviously, I chose the
numbers to make the results I wanted come out, at least qualitatively.
Technology is widely treated as exogeneous in economics, including in
my example. That's a problem for economic theory which some have
tried to address, but this problem does not threaten my point.



> Yet, in the setting price for steel, here is an excerpt of your original
> post:
>
> ****** QUOTE *****
> 4.1 PRICES WITH LOW WAGES
>
> Accordingly, assume wages are initially $1,338.8 per Person-Year.
> By assumption, the firm neither buys nor sells steel on the market.
> The firm produces steel solely for its own use. Still, the firm
> must enter a price of steel on its books. I assume that the firm
> sets this price so that it is making the same rate of profits in
> both processes it uses.
> ******* END QUOTE ******
>
> John has had long discussion on the process of corn price, where he
> raises doubt on the lack of market response.

When John complains that I don't take into account how supply and
demand will change the price of the numeraire, doubt about the
correctness of my arithmetic is not what is raised in my mind.



> In contrast, I pay more attention on price for steel. The above paragraph
> offers no
> other information about how and why firm can set the price only to make a
> profit,
> but not enough to explain why firm cannot set the price at other values.

In context it does. I go through specific arithmetic calculations in
that original post showing how the price of steel must adjust to make
the internal rate of return the same in both the corn-producing
process and a steel-producing process.

> That is where the function form must be addressed, no matter how general
> it
> can be.

And I have shown the form of the relevant price equations on this
thread (see my start on a problem from Foley's problem set)
and provided various justifications for them in more detail
in PDF files.

> Lack of elementary information, your argument lacks persuasiveness.

You forgot to say it lack persuasiveness TO YOU.

> Economic models
> may look silly but they must make some sense, otherwise, it can be a toy
> for
> fun until
> one can derive from it/them something useful.

I think showing certain common beliefs lack logical validity
is useful.

Robert Vienneau

unread,
May 2, 2002, 7:09:52 PM5/2/02