Month: June 2007

Final Comments + Thanks

To all of you who have responded to my posting on Marginal Revolution, many thanks. I have enjoyed the dialogue and the sparring.  All of us, I believe, have our country’s interests at heart even though we may come at these issues from different perspectives. My purpose in writing The Price of Liberty – which, as I have noted in several postings is a quote from Hamilton about Revolutionary War debt and not about the Iraq War – was to trace the history of wartime financing from the Revolution through the War on Terrorism to see what we can learn from the past and how we can do things better. I think even those who have taken issue with me about the current set of policy issues will enjoy the history contained in the book.  I hope that whatever you think, you will let me know your thoughts, your comments and your criticisms. I hope you at least find it interesting – even if there are parts of it you disagree with.

Thanks again to Marginal Revolution for hosting me as a guest blogger this week.

Warm regards,

Bob Hormats

author of The Price of Liberty

Robert Frank’s teaching philosophy

What we decided was that if you could commit yourself to the five or
six key ideas, the ones that do most of the heavy lifting in economics,
students really could master those after a semester, and the key device
that we’ve stumbled onto for doing that is a writing assignment.

Here is the full interview with Frank, mostly on his teaching philosophy and his excellent new book, The Economic Naturalist: In Search of Explanations for Everyday Enigmas.  My blurb for the book was:

"Smart, snappy and delightful.  Bob Frank is one of America’s best writers on economics."

The contributions of Piero Sraffa

1. Sraffa (and more here and here) wrote the seminal paper on the size of the firm under perfect competition.  If contracts are perfect, what does a firm mean anyway?  He doesn’t quite get to that point, but he did understand that if all the cost curves and demand curves are horizontal, we cannot say how small or how large an individual firm will be.  For 1926 this article was amazing.

2. He wrote an excellent 1932 review of Hayek’s business cycle theory.  First he questioned the idea of a "natural rate of interest" as a base from which the market rate might deviate.  He pointed out that there is an entire schedule of natural rates.  His deeper point was that monetary policy-induced resource shifts were not necessarily unstable and due for costly reversal.  The newly-favored sectors might simply keep the resources they had captured through seigniorage, "forced savings," and other non-neutral monetary effects.  Oddly the economic pessimists, usually on the left, have forgotten these points in recent times.

3. He wrote a beautiful introduction to the collected works of David Ricardo.

4. In 1960 he published the neo-Ricardian cult tract The Production of Commodities by Means of Commodities.  Sadly this book is almost entirely misleading.  It tries to resurrect the Ricardian idea that costs alone determine price (or perhaps I should say it cryptically hints at that idea without actually defending any real propositions at all).

At first glance cost-based theories seem plausible.  Draw a horizontal cost curve, as would arise from constant returns to scale, and demand will not matter for price.  Are constant cost such an unreasonable assumption?  Can we not in principle multiply every economic input and receive proportionate outputs?  Not really.  There are almost always fixed factors and the "pure multiplication" thought experiment is not very relevant for price in the real world.  Both Marshallian scissors matter.

Now this was not Sraffa’s argument, but Sraffa’s argument was far more complicated and also worse.  It relied on aggregation theorems which simply didn’t stick, and Mark Blaug tore it apart.

Sraffa also had important relationships with Gramsci and Wittgenstein, but those are topics for other posts, not necessarily by me.

Overall the guy’s output was quite sparse.  He was brilliant before the War but his major book was headed in the wrong direction altogether and it should be taught as a mistake, not an alternative.