Matt Nolan

Neo-classical factor shares

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Note:   I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂

Just as a starting point here, if anyone comes on and goes “those neo-classical neo-liberals, like Friedman, this is all ideology – I’ve read Klein”, I am not likely to reply.  The key reason for this is because you’ve already shown a complete unwillingness to debate on reasonable terms, and are trying to base the discussion on prejudiced definitions that aren’t appropriate for this definition of neo-classical economics.

In this context, neo-classical is a description of economists who applied a certain set of methods at a  point in time – economics is a discipline with “many models”, and the development of these tools is of huge value.  The start of this method came with the “marginalist revolution”.

The Marginalists in this case were Jevons, Walras, and Menger.  Those who work in certain areas will recognise some of the names (eg Walras law, Menger as a founder of the Austrian school of Economics).  Fundamentally, the purposefully use of the concept of “marginal” gains and losses (rather than average) allowed us to consider individual choice more directly.  More than that, value switched from having “objective” value in its labour time/cost of production to having “subjective” value (potentially on the basis of “satisfaction” or “utility”).  Note:  This is not to say classical economists didn’t think in this way as well, John S Mill was a student of Bentham and wrote a book called utilitarianism!  But the change in focus did help to “solve” many of the perceived paradox of classical economics (eg Giffen goods).

It is no coincidence that at this time sociology and psychology were ramping up as disciplines.  With the growing acceptance of the idea of a “science of society” a number of ways of discussing social facts were being described.  Within economics, the recognition that it may be useful to think about action stemming from individual choice had found its time, and the mechanistic tools of calculus had a place to help us consider certain assumptions about this choice (methodological individualism) – this compares to the classical use of factor shares, and some prices (wages) being set by social convention.

You will find me say critical things in here, and talk about this literature as a “starting point” to real analysis.  So let us consider it in this way. Read more

Matt Nolan

Discussion Tuesday

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Mixing up some religion and history into our economics

Jesus was an early applied economist

Once again, remember that these are points for discussion – I am not saying I agree or disagree with them.

Matt Nolan

Marx’s factor share

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Note:   I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂

Last time out we discussed some points on classical factor shares.  The next essay in this book is on Marx’s theory of income distribution – so what are some of the points here.

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Infometrics

Is the ‘Chicago Plan’ the way forward?

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David Grimmond writes about the old Chicago Plan, written up following the Great Depression (Infometrics link).  Given the way it is described by the IMF he believe it:

There are many other examples of low lying fruit in the policy domain where a combination of entrenched interests and innate conservatism inhibits movements to welfare enhancing changes (eg a flat tax/guaranteed minimum income tax benefit system, redesigning GST on a origins basis, and global free trade).

The claimed benefits of adopting the Chicago Plan are truly profound, and if true would have a larger impact on the welfare of New Zealanders than most other issues that dominate political debate.

It would seem to be a good use of government resources to have this issue investigated thoroughly to, either put to bed the claims if they are illusory or to begin implementing a change if they are indeed genuine.

The potential benefits David notes are:

1. Having to obtain outside funding rather than being able to create it themselves would reduce the ability of banks to cause business cycles due to potentially capricious changes in their attitude towards credit risk.

2. Having fully reserve-backed bank deposits would completely eliminate bank runs, thereby increasing financial stability and allowing banks to concentrate on their core lending function without worrying about instabilities from the liabilities side of their balance sheet.

3. Allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances.

4. Allowing a reduction in private debt levels as money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets.

5. It generates long term output gains from a lower interest rate profile, lower tax rates (as the government can earn more from seigniorage), and lower credit monitoring costs for banks.

6. It can allow steady state inflation to drop to zero without posing problems on the conduct of monetary policy. A critical underpinning to this result is the greater ability to avoid liquidity traps as the quantity of broad money would be directly controlled by policy makers and not dependent on bank’s willingness to lend, and because the interest on Treasury credit would not be an opportunity cost of money for asset investors, but rather a borrowing rate for a credit facility that is only accessible to banks for the specific purpose of funding physical investment projects, it could become negative without any practical problems.

This does sound to good to be true.  Hence why, as always, there are trade-offs.

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Matt Nolan

Classical factor shares

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Note:   I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂

As I have pointed out in the past factor shares are not an area of special interest for me, even though I’m spending a bit of time looking into the income distribution field.  This field is the child of Ricardo and his functional distribution of income over factors of production, my interest lies more in the field started by Pareto which involves starting from individual household units – these “macro” and “micro” fields inform each other but I had hoped not to go too far down the “rabbit hole” of what is essentially a different discipline.

However, (I’m assuming) the Piketty book is about factor shares, and as a result anyone talking about income distribution needs to at least be able to answer questions on this – hence why I’ve been doing some reading.

As a sidenote, this isn’t completely new stuff for me – given that factor share work is a large part of both macro and international economics, and given that as an employee I have spent a bit of time with GDP and household earning data.  So if I skip over ideas a bit quickly my apologies, these are sort of just reading notes I’ve written for myself that I hope you will also enjoy 🙂 Read more

Matt Nolan

Factor shares

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By the time this post is up, I should have finished Capital in the 21st Century.  However, I write my posts well in advance – so this isn’t really about it.

For the next three weeks (starting Monday) I am going to have different posts up about historic “schools” of looking at factor shares, all based on the book Theories of Income Distribution.  I wrote the eight essays on the same day as I read the book (Thursday 20 March), so they are more like book notes than anything else.  As these posts come out I want you all to be highly critical of my posts – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂

After that, I will have a review of Capital up, and then hopefully a document describing how to look at different income inequality/distribution indices.  That is what I will be doing while these posts are going up.

Anyway I thought I should quickly say what factor shares “are”. <!–more> A factor is a factor of production – so you can think about this in terms of capital, labour, and land at its base level.  Factors of production go into the production process to form output.  Furthermore, of that output/income factors of production will be paid – this is (to stick to the same type of distinction) through interest/profit, wages, and rent.  Factor shares is the share of income that accrues to this factor of production.

So note here that when we are talking about factor shares, we are talking about a nominal value (quantity of that factor times its price) and then we are comparing it to a nominal income (quantity of output from factor times the price of output).  This is a useful way to conceptualise things early on, when we treat a number of prices as “fixed” – but hopefully the posts will make clear that factor shares get harder to say much about (or interpret) as we start moving prices and having to talk about elasticities.

From those who are used to GDP/Value added, remember that we can have GDP in expenditure terms, production terms, or income terms.  Factors shares are essentially income GDP shares.

My impression is that Capital relies strongly on this characteristation, which is why my notes on the book are going up.

One note I will make about factor shares is that factors of production do not define themselves neatly into “individuals” or “households”.  We, and our asset holdings, are all part labour, land, and capital.  The purpose of the characterisation is to shed light on a specific way of viewing the economic process and its evolution – and factors shares are used constantly in macroeconomics and international economics (as well as income distribution) as a result.  Many of the stylized facts and/or assumptions about shares Piketty is likely to attack or agree with (from Ricardo to Marx to Kuznets to Okun) are the same facts used or disputed in macroeconomic and international economic analysis.  You don’t see the open economy dudes calling things “factor models” for nothing, and you don’t see macroeconomists describing GDP as C+I+G+X-M (capturing the accumulation of capital out of current income) for kicks 😉