----- Original Message -----

From: Dirk Bezemer

To: gang8@yahoogroups.com

Sent: Friday, January 12, 2007 4:41 AM

Subject: Re: [gang8] samuelson on globalization

Gunnar,

Very good. I especially like the Titanic example, which I will put to
good use with my students.

In this context , we have earlier discussed the idea that credit causes
growth, and I do not intend us to repeat that. But I have been thinking
since about it, and it strike me that, although it is useful to
distinguish conceptually between per-definition equality and causality,
this does not logically exclude that some relation is a
per-definition equality BUT ALSO REFLECTS CAUSALITY. In my example, most
people using MV=PT (and let's for the moment leave the sense and
nonsensne of this equation to one side) would routinely dismiss the
possibility of causality from MV to PT 'because this is an identity, not
a behavioural equation (read: this is per-definition equality, not
causality). I am inclined to think now that this is logically flawed
reasoning. While it would be wrong to interpret correlation, or
co-movement, of real-sector credit (change in MV) and GDP (change in PT)
as proof of causality (it could be due solely to definitional equality),
it would be equally wrong to dismiss causality (either way) because we
know there is per-definition equality between MV and PT. The only
justified conclusion on the matter is that whatever causality there may
be, must be deduced from other arguments or data than from co-movement
of real-sector credit uptake and GDP (which might follow solely from
their per-definition equality). (... those other arguments can be
outlined, which I will not go into here)

There are actually many cases where two variables per definition have
equal values while one causes the other; I will give one. The output of
a firm where labour productivity is one unit of output per labour hour
is equal to labour input in hours. With constant labour productivity,
the only way to increase output is to increase labour input in hours.
Hence labour input is both per-definition equal to, and a causal factor
in, output. The reader will have no problems thinking up additional
examples.

I would value your feedback on this.

Dirk
================================
Gunnar Tómasson wrote:
> Dirk,
>
> Yes, I think we have reasoned our way to an agreement!
>
> Let me elaborate on two points.
>
> 1. In Foundations of Economic Analysis, as noted earlier, Samuelson commented inter alia as follows:
>
> "In this study I attempt to show that there do exist meaningful theorems in diverse fields of economic affairs. They are not deduced from thin air or from a priori propositions of universal truth and vacuous applicability. They proceed almost wholly from two types of very general hypotheses. The first is that the conditions of equilibrium are equivalent to the maximization (minimization) of some magnitude. Part I [of Foundations] deals with this phase of the subject in a reasonably exhaustive manner.
>
> "However, when we leave single economic units, the determination of unknowns is found to be unrelated to an extremum position. In even the simplest business cycle theories there is lacking symmetry in the conditions of equilibrium so that there is no possibility of directly relating the problem to that of a maximum or minimum. Instead the dynamical properties of the system are specified, and the hypothesis is made that the system is in "stable" equilibrium or motion. By means of what I have called the Correspondence Principle between comparative statics and dynamics, definite operationally meaningful theorems can be derived from so simple a hypothesis. One interested only in fruitful statics must study dynamics."
>
> In the late 1970s, I pointed out to Samuelson that the logic of a general equilibrium system was reflected in the Laplacian construction of Newtonian Mechanics whereby every particle of matter in the universe was held to interact gravitationally with every other particle of matter at all moments in time.
>
> Hence, (a) the conditions of equilibrium would obtain in such a general equilibrium system at all points in time, and (b) allowing for vanishingly small displacements of the conditions of equilibrium within the system was the logical equivalent of allowing for the introduction of a single exogenous particle of matter into the Laplacian universe.
>
> Therefore, the proposition that real-world market economies are general equilibrium systems "in "stable" equilibrium or motion" is predicated on a concept of "equilibrium" whereby The Titanic can be said to have been "in "stable" equilibrium or motion" throughout its maiden voyage, upto and including the moment it came to rest on the ocean floor.
>
> 2. Samuelson contested my point 1.(b), suggesting that Newton's application of the differential calculus to the moon's orbital motions showed that it was incorrect.
>
> It now occurs to me that Samuelson's view-point reveals the root cause of the methodological differences between Mainstream and Friedman's Positivist Economics - namely, the (effective) construction by Samuelson/mainstream economists of the Newtonian method of science as causal rather than purely descriptive in nature.
>
> Friedman's contrary approach - "black-box" economics to mainstream scholars in the 1960s - accords with Newton's own understanding as expressed at the outset of Principia and later seconded by David Hume.
>
> In the context of Gang8 exchanges through the years, the "black-box" character of all empirical economics accounts for the sharp distinction which I routinely draw between the empirical and analytical aspects of economics as reflected in the axiomatic treatment of the Monetary Aspects of Production in Entrepreneurial Market Economies - alias the Creditary Approach to Money.
>
> Gunnar
>
>
> ----- Original Message -----
> From: Dirk Bezemer
> To: gang8@yahoogroups.com
> Sent: Wednesday, January 10, 2007 3:15 AM
> Subject: Re: [gang8] samuelson on globalization
>
>
> Gunnar,
>
> Thanks, again, for your lengthy reply.
>
> I studied 'econ 101' from another textbook and was fascinated to read
> this. Again it struck me that the 'haziness' which S. refutes is just
> what made me uncomfortable with his type of economics (and I read the
> same also at the end of your message). I fully share Walras' critique
> that in this way of thinking equilibrium is actually always there. A
> good example of where this reasoning leads to is the current discussion
> on a supposed shortage of financial assets, as in the IMF speech you
> shared. The asset price bubble - surely a disequilibrium if the term
> means anything at all - is then seen as an equilibrium outcome caused
> by lack of collateral and high demand. See also Palley's discussion of
> this (http://www.thomaspalley.com/?p=61). The true causes of asset price
> increases - excess credit creation plus market exuberance based on
> previous price rises - cannot be identified in the Samuelsonian system
> because they lie within the system itself and are not caused by outside
> fundamentals, which are the sole causal factors allowed by him. (To do
> him justice, I should note that these reasons are dynamic reasons so
> naturally he would not deal with them in a comparative statics chapter -
> but to me this throws up the question of whether there are any
> explanations that do NOT involve dynamic reasoning, and hence the
> usefulness of static analysis.)
>
> Now we come to the crux of my question to you:
>
> Q What is your fundamental objection to connecting a number of point observations into a curve, which one then takes to be an approximation of the true utility curve (which, to repeat, to me is not a helpful concept)?
>
> A "Second, the application of partial derivative analysis to a general equilibrium system is implicitly predicated on the absurd notion that vanishingly small displacements of the conditions of equilbrium are admissible for a system which is in general equilibrium at all points in time."
>
> Fully agreed - this is absurd. Hence I infer that your problem is with the application of calculus to equations WHICH ARE SUPPOSED TO BE PART OF A SYSTEM IN EQUILIBRIUM - not to equations representing economic phenomena in general.
>
> Then we have no difference of opinion.
>
> Dirk
>
> My impression was that
>
> Tómasson wrote:
> > Dirk,
> >
> > The logical proposition "that one can[not] create a function from a number of point observations" has devastating implications for the foundations of economic analysis set forth by Samuelson in his book by that title in the following passages:
> >
> > "In every problem of economic theory certain variables (quantities, prices, etc.) are designated as unknowns, in whose determination we are interested. Their values emerge as a solution of a specified set of relationships imposed upon the unknowns by assumption or hypothesis. These functional relationships hold as of a given environment and milieu. Of course, to designate this environment completely would require specification of the whole universe; therefore, we assume implicitly a matrix of conditions within which our analysis is to take place.
> >
> > "It is hardly enough, however, to show that under certain conditions we can name enough relations (equations) to determine the values of our unknowns. It is important that our analysis be developed in such terms that we are aided in determining how our variables change qualitatively or quantitatively with changes in explicit data. Thus, we introduce explicitly into our system certain data in the form of parameters, which in changing cause shifts in our functional relations. The usefulness of our theory emerges from the fact that by our analysis we are often able to determine the nature of changes in one or more parameters. In fact, our theory is meaningless in the operational sense unless it does imply some restrictions upon empirically observable quantities, by which it could conceivably be refuted."
> >
> > [...]
> >
> > "It is not to be thought that the content of systems as described above must be restricted to variables usually considered in price and value theory. On the contrary, one employs such constructions throughout the whole field of theoretical economics including monetary and business cycle theory, international trade, etc. It goes without saying that the existence of such systems in no way hinges upon the employment of symbolic or mathematical methods. In fact, any sector of economic theory which cannot be cast into the mold of such a system must be regarded with suspicion as suffering from haziness.
> >
> > "Within the framework of any system the relationships between our variables are strictly those of mutual interdependence. It is sterile and misleading to speak of one variable as causing or determining another. Once the conditions of equilibrium are imposes, all variables are simultaneously determined. Indeed, from the standpoint of comparative statics equilibrium is not something which is attained: it is something which, if attained, displays certain properties.
> >
> > "The only sense in which the use of the term causation is admissible is in respect to changes in external data or parameters. As a figure of speech, it may be said that changes in these cause changes in the variables of our system. An increase in demand, i.e., a shift in the demand function due to a change in the data, tastes, may be said to cause an increased output to be sold. Even here, when several parameters change simultaneously, it is impossible to speak of causation attributable to each except in respect to limiting rates of change (partial derivatives)." (Ch. II, "Equilibrium Systems and Comparative Statics", p. 7 and pp. 9-10)
> >
> > Briefly, the two bold-faced segments are logically incoherent with respect to an economic universe of point observations viewed as a general equilibrium system - a fact reflected in Walras' statement late in life to the effect that insofar as the economic universe is so viewed, then it must be held to be in equilibrium at all points in time:
> >
> > First, the "certain properties" of which Samuelson wrote would be "displayed" at all points in time - and the question of equilibrium being "attained" would not arise.
> >
> > Whence it follows that "our theory is [necessarily] meaningless in the operational sense".
> >
> > Second, the application of partial derivative analysis to a general equilibrium system is implicitly predicated on the absurd notion that vanishingly small displacements of the conditions of equilbrium are admissible for a system which is in general equilibrium at all points in time.
> >
> > Whence it follows that "operationally meaningful theorems" cannot in principle be "cast into the mold of such a system" and that all "sector[s] of [mainstream] economic theory must be regarded with suspicion as suffering from haziness."
> >
> > The late New York Times economic columnist Leonard Silk - whose generous words of encouragement and support for my "heretical" ideas many years ago remain much appreciated - once commented as follows:
> >
> > "Once regarded as a brash, arrogant opponent by the pillars of the economics establishment, he has lived to embody that establishment in his own person. The attack on - or defense of - contemporary economics must begin with Paul Samuelson, whom time and his own talent and industry have endowed with fame, wealth, and respectability. He has become the leading practitioner of what may be called bourgeois economics." (The Economists, Basic Books, 1976, pp. 3-4)
> >
> > And, I submit, author of his own epitaph:
> >
> > "...a scholar in economics who is fundamentally confused concerning the relationship of definition, tautology, logical implication, empirical hypothesis, and factual refutation may spend a lifetime shadow-boxing with reality." (Preface to Foundations of Economic Analysis, Atheneum, 1964, p. ix)
> >
> > For, as Samuelson observed at the time:
> >
> > "In a sense, therefore, in order to earn his daily bread as a fruitful contributor to knowledge, the practitioner of an intermediately hard science like economics must come to terms with methodological problems."
> >
> > Gunnar
> >
> >
> >
>
>
>
>
>