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From: Rosser, John Barkley - rosserjb
Sent: Monday, March 03, 2014 6:24 PM
To: [log in to unmask]
Subject: RE: [SHOE] Wicksell and Stigler's Law of Eponymy
James,
I am sorry, but Mill's explanation of competitive supply and demand you provide is simply wrong. Yes, when there is an excess supply in a normal competitive market we expect [quantity] demand[ed] to increase, along with price declining. However, the explanation of the supply side is still gibberish. The proper Marshallian explanation is that as the price declines, [quantity] supply[ed] declines due to marginal units not being profitable to produce due to marginal cost exceeding price. Instead, he provides a bizarre explanation where suppliers withhold some output because they are expecting a future increase in price. This is relevant to a case where good weather leads to a bumper crop and the price falls below equilibrium. But that is a different case and is useless in explaining conventional supply and demand curves, which is what this is all about. Did Mill contribute importantly or usefully or innovatively to this? The answer is clearly no, particularly given that the first edition of his Principles was published in 1848 whereas Cournot had actual supply and demand diagrams out in 1838 and Johannes Rau had them out in 1841.
Nevertheless, as I already noted, Mill was way ahead of his time on explaining international values, a proto-general equilibrium-nonlinear-programming solution, albeit using offer curves rather than conventional supply and demand. In this regard, Tom Humphrey's position on all this is correct.
Regarding Keynes's critique of Marshall's remarks on interest, I simply note that there are many competing definitions of "capital" and it is impossible to know exactly which one Marshall was using. That said, I have repeatedly said that Keynes often misrepresented the views of his predecessors in these discusisons.
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From: James C.W. Ahiakpor [[log in to unmask]]
Sent: Monday, March 03, 2014 1:28 AM
To: Rosser, John Barkley - rosserjb
Subject: Re: [SHOE] Wicksell and Stigler's Law of Eponymy
Rosser, John Barkley - rosserjb wrote:
> James,
> Sorry, but while Mill was quite close in this quotation you provided, he is not on the money, indeed, by current views he makes errors that would get him losing points on tests in an intro course, although we could be charitable and recognize that he does not know modern usage.
> So, we could start with the opening sentence, which is, frankly, utter gibberish. He has an "increased demand, the result of cheapness." Of course, if price is below equilibrium then what we will observe is an increase in quantity demanded, not "demand." Now one could say, "oh, you are a fussy modern," but then in the next section there he is talking about "the quantity demanded and the quantity supplied." Is he using modern usage? Is he contradicting himself? Then his alternative is a "withdrawal of a part of supply," which he poses as an alternative to the "increased demand." The funny thing here is that while indeed if a price is below equilibrium in a competitive market we would expect there to be such effects. However, in most competitive markets, if we were already at such a price, then we would expect the price to rise towards the equilibrium, which would result in just the opposite effects from what he says, ignoring his failure to use the terms "quantity demanded" and "quantity demanded" in this part that he uses later, as both adjust to the new higher price.
It took my breath away to read this kind of sacrilege against J.S.
Mill's excellent efforts to turn previous explanations of price
determination in terms of the "ratio" of demand to supply to what we now
do in terms of equating supply and demand functions. My first
inclination was to ignore Barkley's inability to read a classical
explanation with care in order to understand it. But then it occurred
to me to use it to illustrate how some people erroneously think that we
moderns necessarily must know better than the "oldies."
My first quote from Mill is: "Whether the demand and supply are
equalized by an increased demand, the result of cheapness, or by
withdrawing a part of the supply, equalized they are in either case..."
Mill is here using three different factors that would bring demand and
supply into equilibrium, that is, the market price at which quantity
demanded is equal to the quantity supplied. Mill had been discussing
the case of an excess of supply [quantity supplied] over demand
[quantity demanded] at the existing price. Thus, one equilibrating
factor would be an increase of demand. The other is a decrease of the
market price --"the result of cheapness"; the third is a withholding of
"a small part of the extra supply caused by an abundant harvest" from
the market "in hopes of a higher price; or by the operations of
speculators who buy corn when it is cheap, and store it up to be brought
out when more urgently wanted." Mill was not claiming that increased
demand is the result of cheapness, as Barkley erroneously read him to
have been arguing. Perhaps, Barkley never seriously studied Mill's
chapter, "Of Demand and Supply, in their Relation to Value." I would
encourage him to do so now.
Having known Barkley as an unrepentant Keynesian over about twenty years
now, I also thought it would be good "teaching moment" to use his
careless reading of Mill to show how his patron misinterpreted Alfred
Marshall on the theory of interest -- the application of the classical
theory of value to "capital." With some luck, this may encourage
Barkley to read the classics with a little more care himself and see his
away out of the Keynesian fog.
Marshall wrote: “Interest, being the price paid for the use of capital
in any market, tends towards an equilibrium level such that the
aggregate demand for capital in that market, at the rate of interest, is
equal to the aggregate stock forthcoming there at that rate” (Quoted in
Keynes 1936, 186). Instead of interpreting "capital" as savings or
loanable funds, Keynes chides Marshall for having argued an error.
Keynes (1936, 186n; italics original) writes: "It is to be noticed that
Marshall uses the word 'capital' not 'money' and the word 'stock' not
'loans'; yet interest is a payment for borrowing /money/, and 'demand
for capital' in this context should mean 'demand for loans of money for
the purpose of buying a stock of capital-goods'. But the equality
between the stock of capital-goods offered and the stock demanded will
be brought about by the /prices/ of capital-goods, not by the rate of
interest. It is equality between the demand and supply of loans of
money, i.e. of debts, which is brought about by the rate of interest."
It was from such simple misunderstanding that the "capital" supply and
demand theory of interest explained from David Hume's "Of Interest"
(1752) through Adam Smith, Henry Thornton, David Ricardo, and J.S. Mill
got tossed out of serious macroeconomic analysis, to be supplanted by
the modern supply and demand for money alternative!
If historians of economics cannot repair the errors of interpreting
classical economic analysis, I wonder who else is better suited to do so.
James Ahiakpor
--
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542
(510) 885-3137 Work
(510) 885-7175 Fax (Not Private)
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