I apologize to James Ahiakpor for sloppily writing “diminishing returns” rather than “decreasing returns to scale”.
The point is that if individual producers have non-convex production technologies (for example with positive fixed input costs) they will typically choose corner solutions at which some of the marginal first-order conditions for optimization hold as inequalities. In practical terms (which is likely the way Smith thought of it) they would tend to specialize in the production of one good, and thereby depend on exchange to reproduce. Under these circumstances there is a strong network externality in that when any producer accepts one commodity in exchange for its specialized product, this increases the incentives for other producers to accept the same commodity. The familiar result will be multiple stable equilibria differing in just which commodity is universally accepted.
Once a system of monetary exchange (Marx’s “commodity production”) emerges, however, money is not going to be a “veil” unless credit and capital markets are perfect, which we know (and Smith and Marx and Keynes knew) they are not. Sale and purchase are separated and the velocity of money can vary. The technical reasons for these effects are that the shadow prices of producers for money differ between purchase and sale, or, in more modern language, producers in general will be “liquidity-constrained”.
Duncan Foley
> On Jan 20, 2015, at 2:58 PM, James Ahiakpor <[log in to unmask]> wrote:
>
> I find Duncan Foley's demarcation of methodological traditions by convex and non-convex production technologies pretty confusing. He appears to confuse diminishing returns necessarily with diminishing returns to scale. In fact, diminishing returns (to the variable factor) is quite consistent with increasing returns to scale. If there were no diminishing returns to the variable factor, there would be no economic decision to make about how much of a variable factor to employ in any production activity. The same plot of land will generate ever increasing output as more and more human hands are employed to grow crops on it. Simply impossible!
>
> Duncan Foley's extension of his argument to the emergence of money in place of barter also appears unfounded. David Ricardo followed closely in the tradition of David Hume and Adam
> Smith in recognizing money, first as a unit of account and secondly as a convenient means of facilitating exchanges. Money being a "a veil" simply recognizes its being a means of transferring income from a purchaser to a seller or from a lender to a borrower. That is why Ricardo argued that to think the Bank of England's printing of more money to lend (at lower interest rates) would promote lasing economic growth was an "absurdity" (/Works/, 3: 92). Earlier, Adam Smith also wrote: "Money is neither a material to work upon, tools to work with; and though the wages of the workman are commonly paid to him in money, his real revenue, like that of all other men, consists, not in the money, but in the money's worth; not in the metal pieces, but in what can be got for them" (/WN/, 1:313).
>
> Regarding the emergence of money to be used in transactions, Smith writes:
>
> "In order to avoid the inconveniency of [barter], every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry" (/WN/, 1: 26-7). I have heard Austrian economists argue the same point although they attribute it to Carl Menger. David Ricardo's monetary analysis does not dispute such understanding of the emergence of money in a commercial society.
>
> Perhaps Foley meant to argue something else than I have read him to have written. If so, I would appreciate his clarifying.
>
> James Ahiakpor
>
> Duncan Foley wrote:
>> A response to the interesting exchange between Ric Holt and Matias Vernengo on the relation between “heterodox” economics and mainstream thinking.
>>
>> While economics, like other disciplines, has its own sociology and internal politics, it seems to me there are some important differences in theoretical fundamentals between the various branches of heterodox economics, including Austrian, post-Keynesian, structuralist, and Marxist traditions, and the marginalism that dominates the mainstream.
>>
>> One (surely not the only) division arises from whether production technologies are convex (diminishing returns, which leads to marginal principles of equilibrium) or non-convext (with positive fixed costs and increasing returns, which leads to multiple equilibria based on equalities of average returns). There is strong reason to believe that Adam Smith and his predecessors based their thinking on increasing returns production technologies (which provide a robust explanation of the division of labor).
>>
>> This division leads to different conceptions of money. Specialized producers with increasing returns technologies are very likely through network externalities to settle on one universally acceptable medium of exchange, giving rise to a characteristically monetary economy in which purchase and sale are distinct. Producers with convex production technologies are less likely to evolve a highly specialized division of labor dependent on intensive monetary exchange, and more likely to limit exchange to less intensive barter. Thus the marginalist traditions either conflate monetary exchange into equivalence to barter (Ricardo’s “money is a veil”, for example) or abstract from money altogether in favor of models that determine relative prices.
>>
>> Both the Marxist and Keynesian traditions reproduce themselves firmly in the classical category of monetary economies based on increasing returns technologies. I am not familiar enough with the Austrian literature on money to be confident of drawing a similar conclusion in that case, but I think this issue is important in the Austrian literature.
>>
>> The sociological “mainstream” of U.S. economics embraced both these starting points up to about the 1950s. A very important figure in this discussion was Allyn Young (who is the subject of a penetrating essay by Perry Mehrling in his book “The Money Interest and the Public Interest”). The flavor of increasing-returns and a distinctively monetary form of economic interaction was important for the generation of theorists like James Tobin and Bill Vickery, who found themselves marginalized in the rational expectations “revolution” of the 1980s.
>>
>> One reason “heterodox” thinking reproduces itself despite its “subaltern” status is the re-discovery by younger thinkers of one or another aspect of this fundamental division.
>>
>> Duncan Foley
>>
>>> On Jan 19, 2015, at 6:03 PM, Matias Vernengo <[log in to unmask] <mailto:[log in to unmask]>> wrote:
>>>
>>> Hi Rick:
>>> Don't think I do raise that question really (whether heterodox remained monolithic; not sure it ever was, indeed), as much as the exam does not seem to show anything about the changing mainstream. Sure heterodox and mainstream schools do change. Garegnani famously showed how the notion of equilibrium changed in the mainstream in the 1970s. As you admit, the exam shows that Harvard was more pluralistic in the 1950s. That doesn't make it heterodox. It's a combination of the mainstream of the time (neoclassical synthesis) with alternative approaches still represented in the faculty. By the way, besides Ken Galbraith, I would add as interesting and difficult to classify scholars both Leontief and Gerschenkron, who were also on the faculty, I believe. By the late 1950s (or early 60s, perhaps), they would hire Hirschman, other difficult to classify economist. Other interesting note is that history was required for PhD candidates. All of that seems to point to a less pluralistic mainstream. Heterodox groups remain, I would suggest, as divided now as then, and yes some of them did change. Not sure what's the relevance of that point though.
>>> Best,
>>> Matías
>>>
>>> Matías Vernengo
>>> Associate Professor
>>> Bucknell University
>>> ------------------------------------------------------------------------
>>> *From:* Societies for the History of Economics [[log in to unmask] <mailto:[log in to unmask]>] on behalf of Ric Holt [[log in to unmask] <mailto:[log in to unmask]>]
>>> *Sent:* Monday, January 19, 2015 2:08 PM
>>> *To:* [log in to unmask] <mailto:[log in to unmask]>
>>> *Subject:* Re: [SHOE] Answering some questions about the Harvard exam
>>>
>>> I think Matias raises, probably inadvertently, an interesting question: Has heterodoxy remained (and is) monolithic over time or has it changed? One gets the impression from the post that heterodoxy holds certain universal characteristics that make it easily discernible over time and if they do not have those characteristics, then it is not heterodoxy -- that there is a heterodoxy "standard." -- "modern or any other..."
>>>
>>> In regard to Harvard, if one reads the questions carefully they reflect the interest and research of the faculty of that time. Schumpeter and Joe Bain had just left, but people like Ed Mason, Arthur Smithies, Ken Galbraith, Hansen and Harris were there, along with some Austrians I believe. It is hard for me to put them in the neoclassical synthesis crowd. I find them more in the institutionalist camp, which I believe reflected more the mainstream then. But that's just my opinion. Also interesting is that Ken, in a few letters, defended Hansen's work on secular stagnation and functional finance (along with Harris) from "mainstream" economists at that time.
>>>
>>> Ric Holt
>>>
>>>
>>>
>>>
>>>
>>> On Sun, Jan 18, 2015 at 7:14 PM, Matias Vernengo <[log in to unmask] <mailto:[log in to unmask]>> wrote:
>>>
>>> Hi Rick:
>>> Not sure the questions prove that the mainstream is changing.
>>> Very fast read, but these are my impressions. First, most
>>> questions seem to be compatible with the neoclassical synthesis,
>>> which was by then the mainstream, and it might be an outdated
>>> version of the mainstream now, but is certainly not heterodox by
>>> modern or any other standard. Further, some questions seem to
>>> discuss old classical (Ricardian) views, and perhaps have some
>>> institutionalist influences. I would guess that Harvard was not
>>> monolithic in 1953 (not all neoclassical synthesis), and there
>>> were other views represented in the department, like Ken
>>> Galbraith, which might explain the broader range of the
>>> questions. Unless you're suggesting the questions display somehow
>>> a coherent representation of the mainstream, and that Harvard
>>> provided in this exam a sample of these views. If anything, the
>>> exam seems to suggest that a wider range of approaches might have
>>> been acceptable at Harvard by the early 1950s, and that the
>>> mainstream has become less pluralistic and open to dissent, and
>>> institutionalist, Marxists and other eclectic authors have
>>> vanished from mainstream departments, including Harvard. And that
>>> was a 1960/70s phenomenon.
>>> Best,
>>> Matías
>>>
>>> Matías Vernengo
>>> Associate Professor
>>> Bucknell University
>>> ------------------------------------------------------------------------
>>> *From:* Societies for the History of Economics [[log in to unmask]
>>> <mailto:[log in to unmask]>] on behalf of Ric Holt [[log in to unmask]
>>> <mailto:[log in to unmask]>]
>>> *Sent:* Sunday, January 18, 2015 7:15 PM
>>> *To:* [log in to unmask] <mailto:[log in to unmask]>
>>> *Subject:* [SHOE] Answering some questions about the Harvard exam
>>>
>>> I have received a number of private e-mails about the Harvard
>>> economics exam that I sent out last week, dated April 29, 1953.
>>> Most people wanted to know if it was an undergraduate or graduate
>>> exam. This was the general written examination for undergraduate
>>> students. The exam was for three hours, broken down into two
>>> areas. At the option of the examiner, an oral examination could
>>> be given, "if the mark of the student is in doubt." Requirements
>>> for the economics major in the early 1950s included: 1) the
>>> completion of a certain number of courses in economics,
>>> government and history; 2) To choose a concentration in a special
>>> field of economics and take a number of courses in that area.
>>> There were five major "special fields" the student could choose
>>> from: a) Economic Theory, b) Economic History, c) Money and
>>> Finance, d) Market Organization and Control and e) Labor
>>> Economics and Social Reform; 3) To submit a plan of study for
>>> general courses, one's special area of concentration and to
>>> participate in the tutorial program; 4) pass the general written
>>> examination in economics at the end of the senior year. For
>>> Honors besides answering more questions on the general exam the
>>> student had to hand in a thesis. What's interesting with the
>>> questions is that they would be considered to be heterodox today,
>>> and probably could only be passed in a heterodox economics
>>> department, but at that time they were considered to be very
>>> mainstream questions. This supports my view that the mainstream
>>> is constantly changing -- for the better that's up for
>>> interpretation.
>>> Ric Holt
>>>
>>>
>>>
>>
>
>
> --
> James C.W. Ahiakpor, Ph.D.
> Professor
> Department of Economics
> California State University, East Bay
> Hayward, CA 94542
> 510-885-3137
> 510-885-7175 (Fax; Not Private)
Duncan K. Foley
Leo Model Professor
New School for Social Research
Department of Economics
6 East 16th Street, D-1127
New York, NY 10003
(212)-229-5717 x 3177
fax: (212)-229-5724
e-mail: [log in to unmask]
alternate: [log in to unmask]
webpage: https://sites.google.com/a/newschool.edu/duncan-foley-homepage/home
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