Monthly Proposal No.8: try to match up legality and legitimacy

This time it once more does not seem to be an economic advice. However, in some regard lawyers and economists make the same mistake. When they have to discuss an issue and at best provide some conclusion or judgement, they choose a certain framework as given and claim their implications as positive results. Though, as long as these frameworks are built on definitions and assumptions, it is normative. So, even if their results are derived and documented by complex analytics or finest verbalism and citation, they have to be considered as normative as well.

Of course, that does not imply that these results are automatically wrong. However, it has to be accepted that they can be criticised just by normative arguments, because in the end they are not more than that too. That something is established and considered as law or common sense therefor is not a giving of evidence for its legitimacy. The latter always can and have to be taken in question.

So whether a compulsory acquisition is an illegitimate measure depends whether the property was accumulated legitimately – not just legally. Similar thoughts can be seized about the height of market based income, the sentence on tax evasion and the judgements on political corruption. No one is above the law, but in the end the stated law is not naturally given. It is nothing more than a temporary chosen framework, built on normative definitions and assumptions – just like the mainstream economic theory – and most important: it can be corrected.

Steedman’s ‘critique’ of the isoquant

Ian Steedman from Manchester Metropolitan University was in Graz this week. Yesterday he gave a paper in our research seminar. I couldn’t find the paper he presented online, but he published a shorter version of it here.

Prof. Steedman is a well-known figure in Sraffian economics, a school of economic thought initiated by Piero Sraffa’s 1960 book on production theory. (Sraffians are also known as Neo-Ricardians for reasons that need not concern us here.) The primary research agenda of Sraffians is to show that the simple neoclassical models which dominate modern textbooks are fundamentally flawed. Steedman’s presentation is a fairly typical specimen of that research program. I have long been looking for an excuse to write about Sraffians. Here it is.

The paper deals with the capital-labor isoquant in the consumer good sector in the context of simple multi-sector production models. Steedman shows that “simple models of production […] can give rise to ‘capital-labor isoquants’ in the consumer good sector that are utterly unlike those so often presented in the textbooks […].” They can slope up, bend backwards, run in circles, or else behave in almost any imaginable way. He concludes: “There really is no excuse for blithely assuming that [the isoquant is downward sloping and convex to the origin].”

What should we make of such an argument?

First, the negative slope of isoquants in neoclassical models is not an assumption, it’s a result. Take any production function F(K,L) that monotonically increases in K and L. Holding output constant K falls as you increase L and vice versa. There is no logical flaw in this theorem. Neither is there a flaw in another theorem: If F(K,L) is concave in K and L, the isoquant is convex to the origin.

Why, then, does Steedman get those weird-looking isoquants? The answer is pretty simple: What he calls isoquants has nothing to do with the homonymous curves in our beloved textbooks. They are quite different beasts.

A textbook isoquant is a purely technical relationship between physical inputs. It shows how producers can trade off one physical input against another. It’s a technical constraint in the firm’s cost minimization problem. A Steedman ‘isoquant’ is a relationship between the market value of capital goods (what Steedman calls K) and the quantity of labor (what he calls β) employed in a given sector. It shows how K varies with β as the relative cost of those inputs change. It’s an outcome of the firm’s cost minimization problem.

The strategy followed by Steedman’s paper is, as I said in the beginning, typical of the general strategy of Sraffian economics: Write down a model that is completely different from textbook models. Introduce a variable whose label is known from textbooks (‘capital’, ‘isoquant’, etc.). Show that the variable does not behave in your model as it does in the textbook model. Claim that this proves the textbook model is utterly wrong.

Imagine a schoolboy who calculates 1+2=3. Then Prof. Steedman comes along saying: “My dear boy, your 1 is really a 2, and 2+2=4!” At first, the schoolboy will be confused. Maybe he will stop adding 1+2 for a while. But eventually he will ignore Prof. Steedman’s lecture, realizing that there is no point arguing whether a 1 is really a 2 or not.