Re: Why Heterodox are subject to be losers.

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:



> "mathematical (economic) models are rigorous (and 'true' in the only
> useful scientific sense of the word) if they are built on a cogent
> axiom base - like von Neumann and Morgenstern, and Debreu."
> (Weintraub, How Economics Became a Mathematical Science, p. 100)



Comment:



Here is an extract from an old working paper of mine on von Neumann's "axiom
base".



Gunnar





(i)                 General equilibrium



The mathematical genius, John von Neumann, is recognized as the foremost
pioneer in the construction of general equilibrium models in the twentieth
century.  In a recent book, his model was summarized briefly as follows:



"In a new [1937] breakthrough John von Neumann first formulated a balanced
and steady-state growth of a general economic equilibrium and proved the
existence of a solution.  The breakthrough did not lie in the subject
matter, which was still allocation and relative price in general equilibrium
using maxima and minima.  Indeed, all economists can appreciate the simple
beauty, yet high degree of generality, characterizing the von Neumann model.
There is substitution in both production and consumption.  The model "can
handle capital goods without fuss and bother," as Dorfman-Samuelson-Solow
put it.  There is explicit optimization in the model: the solution weeds out
all but the most profitable process or processes.  There are free and
economic goods, indeed the solution tells us which will be free and which
economic." [106]



Economists in the modern mainstream macroeconomics tradition have analyzed
von Neumann's model from the point of view of mathematics, neglecting to
test it for analytical coherence and consistency along the following lines:



1.                  von Neumann assumed "that the natural factors of
production, including labour, can be expanded in unlimited quantities."
[107]

2.                  He also defined a "free good" to be one whose supply
exceeds the need for it.

3.                  Thus, "free goods" within von Neumann's model may be
"free" one day and "non-free" the next, although he did not make that point.

4.                  Since all factors of production "can be expanded in
unlimited quantities" by assumption, von Neumann's model has built into its
premises the conclusion that all goods may in time become "free" goods.

5.                  Since time is not an essential feature of any general
equilibrium model, why should only one or some rather than all goods be held
to be "free" and not "economic"?

6.                  Speaking of a mathematical equation relating to the
subject matter, von Neumann said: "[Its] meaning is: it is impossible to
consume more of a good G in the total process than is being produced.  If,
however, less is consumed, i.e., if there is excess production of G, G
becomes a free good and its price y = 0." [108]

7.                  von Neumann recognized that there was mathematically
nothing to preclude all goods from being available in infinite supply so
that all goods would be "free."

8.                  von Neumann declared this mathematical possibility to be
"meaningless." [109]

9.                  In principle, a mathematical model can only yield
conclusions, which are already implied by its premises.

10.             Therefore, when von Neumann found it "meaningless" that all
goods could be "free goods," he effectively declared the premises of his
model to be "meaningless."



In von Neumann's case, therefore, a "necessary element [was] omitted to be
taken into account: and thus the only effect of the operation [was] to
mislead," as Bentham had cautioned (see p. 19 above).





----- Original Message -----
From: "Ted Winslow" <egwinslow@xxxxxxxxxx>
To: "Forstater, Mathew" <ForstaterM@xxxxxxxx>
Cc: "Bruce McFarling" <Bruce.McFarling@xxxxxxxxxxxxxxxx>;
<pkt@xxxxxxxxxxxxxxxx>
Sent: Wednesday, March 19, 2003 12:25 PM
Subject: Re: Why Heterodox are subject to be losers.


>
> Mathew wrote:
>
> > Minsky used to say that Keynes's theory was a Special theory, not a
> > General Theory--a theory of capitalism, "one in which private ownership
> > of the means of production results in incomes to owners that in each
> > case depends upon how a particular set of capital assets, organized in
> > firms, performs in some markets."  For Minsky, Keynes's theory was even
> > more specific than this, because it also reflected the particular type
> > of capitalism that ruled at Keynes's time, i.e., "a small government
> > economy with a sophisticated and evolving financial structure that had
> > Central Banks that were reluctant to intervene" as opposed to
> > "today's...big government economies with even more sophisticated
> > evolution prone financial structures which have Central Banks that are
> > willing to intervene." (H. P. Minsky, "The Endogeneity of Money," in
> > Nicholas Kaldor and Mainstream Economics, ed. by Nell and Semmler,
> > 1991.)
> >
>
> It is a "special" theory in this sense i.e. a theory of capitalism, but
> according to Keynes what makes it "special" is capitalism's "essential
> characteristic": "the dependence upon an intense appeal to the
> money-making and money-loving instincts of individuals as the main
> motive force of the economic machine. (IX, p. 293)"  As he immediately
> goes on to say, this is not true of all "phases of social
> organisation": "historians can tell us about other phases of social
> organisation in which this motive has played a much smaller part than
> it does now" (p. 293).  He regarded this "in itself" of "capitalism" as
> "in many ways extremely objectionable" and set as the problem for the
> long term future the working out of "a social organisation which shall
> be as efficient as possible without offending our notions of a
> satisfactory way of life.  (p. 294)"
>
> Through his "three fundamental psychological factors" he provides a
> framework for analyzing any economy that is "capitalist" in this sense,
> so from this perspective it isn't "more specific" in the way suggested
> by Minsky.  But, so generalized, these psychological factors through
> which Keynes's embodies "the essential characteristic of capitalism" in
> his economics are mere "dry bones".  To fit them to a specific
> capitalist economy in a specific time and place requires the use of
> "human logic" to add the flesh that will capture the particular form
> they take in a particular time and place.  This is one key aspect of
> the "Big Deal" that issues from treating social relations as "internal
> relations."
>
> So it isn't just the "atomism" of the premise that all economies are
> "composed of individual, self-interested agents - both
> utility-maximizing households and profit-maximizing firms - pursuing
> their own self-interest" that Keynes rejects.  It's also the
> utilitarianism.  He rejects it both as a description of how real
> persons do or could behave and of how they should behave.
>
> He is particularly scathing in many contexts about its shortcomings as
> a basis for ethics, i.e. as a rational conception of "self-interest,"
> of how people should behave.
>
> In "My Early Beliefs" he calls the "Benthamite tradition" "the worm
> which has been gnawing at the insides of modern civilisation and is
> responsible for its present moral decay.  We used to regard the
> Christians as the enemy, because they appeared as the representatives
> of tradition, convention and hocus-pocus.  In truth it was the
> Benthamite calculus, based on an over-valuation of the economic
> criterion, which was destroying the quality of the popular Ideal." (“My
> Early Beliefs” in Collected Writings, vol. X, pp. 445-6)
>
> He claims a true conception of the Ideal would emphasize “non-economic
> interests”:
>
> "Up to a point individual saving can allow an advantageous way of
> postponing consumption.  But beyond that point it is for the community
> as a whole both an absurdity and a disaster.  The natural evolution
> should be towards a decent level of consumption for every one; and,
> when that is high enough, towards the occupation of our energies in the
> non-economic interests of our lives.  Thus we need to be slowly
> reconstructing our social system with these ends in view." (XXI, p. 393)
>
> In "The End of Laissez-Faire" he says that: "One can sympathise with
> the view of Coleridge, as summarized by Leslie Stephen, that 'the
> Utilitarians destroyed every element of cohesion, made Society a
> struggle of selfish interest, and struck at the very roots of all
> order, patriotism, poetry, and religion." (X, p. 277)
>
> Even if we ignore the content of the "utility function," its form
> remains, according to Keynes, incompatible with a true conception of
> the Ideal because it is incompatible with "the ethical doctrine of
> organic unity."
>
> "He found Abba Lerner's The Economics of Control a 'grand book',
> deploring only its reliance on 'Benthamite arithmetic', which led
> Lerner to advocate income equality.  'The whole complication and
> fascination (and truth) of the ethical doctrine of organic unity passes
> you by ...' he wrote to him, in a half-remembered echo of the debates
> of his youth." (Skidelsky, vol. 3, p. 361)
>
> Keynes's assumptions about capitalist motivation are also not
> "utilitarian" i.e. he doesn't regard utilitarian psychology as a
> realistic description the motivation dominant in capitalism.
>
> "it was, I think, an ingredient in the complacency of the nineteenth
> century that, in their philosophical reflections on human behaviour,
> they accepted an extraordinary contraption of the Benthamite School, by
> which all possible consequences of alternative courses of action were
> supposed to have attached to them, first a number expressing their
> comparative advantage, and secondly another number expressing the
> probability of their following from the course of action in question;
> so that multiplying together the numbers attached to all the possible
> consequences of a given action and adding the results, we could
> discover what to do.  In this way a mythical system of probable
> knowledge was employed to reduce the future to the same calculable
> status as the present.  No one has ever acted on this theory.  But even
> today I believe that our thought is sometimes influenced by some such
> pseudo-rationalistic notions." (XIV, p. 124)
>
> I don't think he would have been surprised, however, that
> utilitarianism has become even more dominant in economics, so dominant
> in fact that his own economics is interpreted as grounded in
> utilitarianism,  This fact is explainable by the psychology on which
> his economics is actually based (as is suggested by his description of
> economists who treat utilitarian premises as self-evidently true as
> "Bedlamite economists").
>
>
> Ted
>