Definition & Reality in the General Theory of Political Economy

Book Vi Structural Models 87

23. A textbook macro-economic model 87

The IS-LM model 87

The production function 89

Dynamics versus statics 90

Phillipscurve 90

Macro-economic interactions 91

24. Heterogeneity and nonlinear taxation 92

Heterogeneity versus homogeneity 92

Nonlinear versus proportional taxation 93

Some literature 93

25. Summary of current views 94

A simple view 94

A complex view 96

Efficiency wages intermezzo 96

A more sophisticated view 97

Confusions 98

26. Heterogeneous labour 99

Dromedary supply 99

Dutch income distribution data 100

Definitions and formulas 102

Amendment to the textbook model on the Phillipscurve 106

27. Subsistence 106

Definitions 107

Economic literature 109

Types of indexation 109

Formal development 110

28. Phillipscurve 115

Concepts 115

A homogeneous Phillipscurve 118

On expectations 121

Heterogeneous Phillipscurves 122

More factors that cause a shift 122

Crowding out 123

Poverty 124

The submarket Phillipscurves 125

Shifting back 125

29. Tax basics 126

Taxes and premiums 126

Common structure 127

Nonlinear tax function 128

Exemption 129

The marginal rate 140

Balanced growth 143

Off balanced growth 144

30. Dynamic curvature of the tax wedge 145

Introduction 145

Formulas 145

Graphs 147

31. Differential impact of the minimum wage on exposed and sheltered sectors 149

Introduction 149

Model 151

Graphs 152

Tables 154

Conclusion 155

32. Dynamic optimality 155

The Phillipscurve revisited 155

Investment, growth and productivity 156

Book Vii Social Choice 158

33. Introduction 158

34. The solution to Arrow’s difficulty in social choice 159

Introduction 159

Basic concepts 162

Restatement of Arrow’s Theorem 165

A note on the name of APDM 167

A lemma 167

Rejection of the Arrow Moral Claim (AMC) 168

Rejection of the Arrow Reasonableness Claim (ARC) 168

Selection of the culprit axiom. 169

Examples of consistent constitutions 170

A reappraisal of the literature 170

Conclusion 172

Addendum: Sen’s restatement in “Development as freedom” 172

Addendum: Mas-colell, Whinston and Green, “Microeconomic Theory” 175

35. Without time, no morality 175

Introduction 175

Control of natural forces in the social process 176

Three traditional methods 177

Borda Fixed point 178

Relation to Saari’s work 179

Pareto 182

A note on cheating 182

Conclusion 183

36. Some notes on ethics 183

Book Viii Supportive Notions 186

37. On the nature and significance of a free lunch 186

Some quotes 186

Consumers surplus 187

Economic growth 188

Conclusion 192

38. Proper definitions for uncertainty and risk 192

Uncertainty 192

Risk 193

Example 195

Wrong use in economics 1921-2005 196

Book Ix Reduced Form 198

39. The possibility of full employment in the welfare state 198

Introduction 198

Stylized facts 198

Concepts 199

The theorem 201

Graphical presentation 205

40. The possibility of co-ordination 206

Stylized facts 206

Concepts 207

The special theorem 211

The general theorem 213

On the interaction of the reduced form theorems 214

More on chance 215

Book X Conclusions 216

41. Relating to Mankiw’s “Principles” 216

42. Relating to Krugman, Phelps, Ormerod and Heilbroner & Milberg 219

Introduction 220

Review of positions and qualities 220

Krugman: “We don’t know” 222

Phelps: “Structural slumps” 224

Ormerod: “Death of economics” 228

H&M: “Crisis of vision” 230

All authors 232

43. Relating to Sen, Galbraith and Cox & Alm 232

Sen: “Development as freedom” 232

Galbraith: “Created Unequal” 235

Cox & Alm: “Myths of rich and poor” 242

44. Relating to the OECD and some of its authors 246

The OECD in general 246

The EITC, direct payroll tax reduction and wage cost subsidies 247

45. After 35 years of mass unemployment: An advice to boycott Holland 250

Summary 250

Introduction 251

First considerations 251

The realism of my advice 254

George W. Bush and Iraq and the American economy 254

More on Paul Krugman 256

The Dutch tragedy of the murder of Pim Fortuyn in 2002 256

On the European Enlargement 259

Advice to vote NO on the current proposals for a European Constitution 260

A note on my own position 261

Appendix: After 20 years of mass unemployment: Why we might wish for a parliamentary inquiry 262

46. Final conclusion 263

Epilogue 264

Appendices 266

On the definition of economics 266

Biographical note on Montesquieu 270

Price inflation and wage growth in Holland 1950-2002 272

Income distribution in Holland 1950 and 1988 273

Program used in the analysis on exposed and sheltered sectors 275

A note on Hayek 276

A note on Barrow’s “Impossibility” 278

A constitutional amendment for an Economic Supreme Court 279

A parallel argument on the Central Bank 281

About the US Council of Economic Advisers 282

From the “Employment Act of 1946” 282

Martin Feldstein on the US Council of Economic Advisers 283

Commenting on this 288

Presentation for the National Press in Washington 1993 289

Clinton administration EITC plans for 2000 293

Summaries of additional papers 298

A note on the New Economy (2000) 299

On the 2005 edition of this book 300

Autobiographical note 303

What is new in this analysis ? 305

Abstract 306

Literature 311

Index 323

Book I. Introduction

Introduction

1. Order of presentation

The basic idea of this book is that Keynes’s General Theory is generalised even further by including endogenous government in the model so that we arrive at a truly general Political Economy. The argument can be presented in a top-down fashion, for example by repeating the IS-LM model before the amendments are introduced. This order appears to be uninviting and therefor the argument is presented in a bottom-up fashion. We better discuss the amendments before we look at the consequences for theory as a whole. We start with the new economic synthesis and the argument for the Economic Supreme Court, since these motivate the book.

2. The general theory

Political Economy is the science of the management of the state. More in general, ‘economics’ is Greekish for ‘management theory’.

Marshall already explained that ‘economics’ is wider than ‘political economy’, see his “Principles of economics” (1947:43). The proper definitions are:

· Economics ‘in a narrow sense’ puts the approach, methods and tools, of the discipline central, and looks at a variety of subjects.

· Political Economy puts the subject, the management of the state, central.

· Economics ‘in a broad sense’ joins the ‘narrow sense’ and Political Economy.

One way to view these distinctions is to visualize a matrix with the sciences in the rows and the subjects in the columns. The common economist may to some extent neglect the inputs of the other disciplines, but the political economist must draw on the resources of philosophy, history, law, sociology, politicology, social psychology, biology, physics and so on. Political Economy is, just by definition, the study that tries to integrate all human knowledge about the management of the state. Political Economy is, in that respect, the proper continuation of ancient philosophy on that subject matter.

Confusions easily arise when these definitions are not understood.

The reasons to adopt these definitions are rather mundane. The King - and the ruling elite - can derive their wealth (a) from exploitation or (b) from general productivity growth. The latter is more advantageous in the longer run. Productivity can be increased in basically two ways: by technology or by management. For example, computers can add to our wealth, and we must have technology to be able to have computers. But a room full of computers does not present much value if we don’t manage their use. So technology and management are the two sides of the coin of human wealth. Though no study should neglect either side, there of course is advantage in some specialisation of those studies. The engineers take one side, the economists the other.

Psychologists and artists might object to that view, and argue that proper training in enjoyment and in particular the arts could teach people to enjoy life so much more, requiring neither additional engineering nor economics. In a sense, this viewpoint would seem to be correct. In another sense, it apparently isn’t sufficient. Human beings get used to levels of wealth, and require more wealth. It would be economics again to study why people are not happy eating bananas and watching sunsets. And dealing with issues like this, is management again.

Also, when writing this in 2000, and again 2004, there are some rumours about the ‘end of the state’ and the ‘loss of power of existing nation-states’. This clarifies that the definition of ‘Political Economy’ subsequently requires a definition of the ‘state’. I will not try to give that here. For the purposes of this book it suffices to take the existing nation-states, and international governmental bodies, and we can reconsider that assumption when they all drop their constitutions.

Then: The economic process can be understood much better if economic policy making itself is included as one of the factors, and then is studied from the Public Choice perspective. The basic proposition of this book hence is that we can extend the current ‘neoclassical synthesis’ by including endogenous government in the model, so that we arrive at a truly general Political Economy.

This extension causes the subsequent proposition that it would be advisable for a democratic society to create an Economic Supreme Court as a separate power in the constitution next to ‘Trias Politica’ of the Legislative, Executive and Judicial branches.

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