An immortal fumble by Mark Witte (7-Feb-2004)

It could be that the model is just wrong

Oh, not this is at once hilarious (to me) and very sad for someone
else.

To replay this "Math Too Advanced for Mainstream Economists" thread,
it began with:

> I have written up a demonstration that wages and employment need 
> not be determined by the intersection of well-behaved supply and 
> demand curves for labor:
>  http://www.dreamscape.com/rvien/Sraffa4/Sraffa4.html


OK, while supply and demand is a simple framework that explains most
of the labor market behavior we observe, as has been richly documented
on this group by the many examples posted by Patrick Sullivan, there
certainly are examples of labor market behavior that are quite complex
and require different approaches, such as the Becker and the labor
matching/search examples I cited.  I asked the originator of this
thread, "what serious model does this work improve upon, and what does
it tell us about the observed world that we did not already
understand?"

His response?  

""Here's one example of empirical and applied work in the literature
drawing on Sraffa.
   Raymond Prince and J. Barkley Rosser, Jr., "Some Implications
   of Delayed Environmental Costs for Benefit Cost Analysis: A
   Study of Reswitching in the Western Coal Lands, _Growth and
   Change_, V. 16, 18-25, 1985."

He goes on to cite several other papers that all, weirdly, have to do
with environmental issues rather than the simple labor market question
he addresses in his original post.  Regardless of whatever quality
there may be in the cited papers, my question was not, "Is there any
empirical work out there about anything at all?" but rather, "Is there
any support in the observed world about what you are trying to say
about labor markets?"

When no support if found for a model, it could be that the model is
simply irrelevant, or it could be that the model is just wrong in its
construction, that it contains a serious mistake of logic or a
mathematical error.  An incorrect model wouldn't be expected to be
able to explain anything.  That's likely what's going on here. 
Consider:

In the given example, the wage rate is multiplicatively separable, and
so has no effect on the choice of technique and thus on the amount of
labor chosen.  As such, overlooking other flaws, this model does not
test the relationship between wages and the quantity of labor
employed.  It is hard to understand why its author would think it did.


>> Against my better judgment, I took the chance that this might become
>> an interesting exchange of serious thought concerning whether there
>> was a real contribution to our understanding of how wages and
>> employment are determined in the world in which we live.

> However much Mark Witte likes to fantasize otherwise, the post
> to which he is pretending to respond contained the following:

>>> And one
>>> might want to address the empirical examples in the literature.
>>> Some empirical examples are vaguely alluded to at the above URL, but
>>> have been more fully cited in the past on this newsgroup.
>>> 
>>> My consistent opinion is that interesting empirical issues related
>>> to the far-ranging controversy upon which I draw lie in another
>>> dimension, namely between competing theories of distribution. In
>>> other words, I'm more interested in how one would empirically
>>> determine which theory - for example, the Kahn-Kaldor-Pasinetti-
>>> Robinson Post-Keynesian theory, a monetary theory of distribution,
>>> or a modernized Classical theory - best fits the data in some
>>> economy at a particular time.

> Here's one example of empirical and applied work in the literature
> drawing on Sraffa:
> 
>    Raymond Prince and J. Barkley Rosser, Jr., "Some Implications
>    of Delayed Environmental Costs for Benefit Cost Analysis: A
>    Study of Reswitching in the Western Coal Lands, _Growth and
>    Change_, V. 16, 18-25, 1985.
> 
> And here's a silly comment:
> 
>    "Whew, this weak piece is basically just a replay of Samuelson's
>    present value model of reswitching of labor without capital.  And
>    again, zero empirical content."
>       -- Mark Witte, 03 May 1996
> 
> Samuelson (1966) does not present a model without capital. In fact,
> Samuelson graphs the capital-output ratio against the interest
> rate. Nobody else, as far as I am aware, has ever referred to
> "reswitching of labor". It is techniques that reswitch.
> 
> Prince and Rosser's paper is not "basically a replay" of Samuelson's
> "summing up" article. Samuelson gives a theoretical example; he
> doesn't pretend that his specific numbers are applicable to any
> specific case. Prince and Rosser give a specific application. When
> they present specific numbers, they reference applied work which
> they claim yields their numerical values.
> 
>   The following summarizes Raymond Prince and J. Barkley Rosser, Jr.,
>   "Some Implications of Delayed Environmental Costs for Benefit Cost
>   Analysis: A Study of Reswitching in the Western Coal Lands," Growth
>   and Change, April 1985, vol. 16, no. 2, pp. 18-25.  This paper is
>   also discussed in my 1991 book.
> 
>      So, the paper compares reasonable numbers for that time period for
>   a comparison of strip mining of coal versus sustainable cattle grazing
>   in the U.S. Southwest. Cattle grazing was assumed to have constant net
>   benefits over time (certainly debatable).  Strip mining of coal was
>   assumed to have up front costs and then delayed environmental costs. 
>   This profile of comparisons in a straightforward b-c framework set up
>   the reswitching case, with coal mining having higher expected present
>   value (no speeches about ergodicity here, please) for discount rates
>   (constant over time, not any of that new fangled hyperbolic stuff)
>   below 4.5% and above 8.6%. For discount rates between those switch
>   points, cattle grazing was optimal.
> 
>      I note that this is a single sector, essentially micro, comparison
>   that someone like Gary Mongiovi can declare to be not "true
>   reswitching," which presumably involves macroeconomic steady state
>   level comparisons. This point was noted in the original article.
> 
>      Of course this general phenomenon of "multiple roots" was first
>   noticed by Irving Fisher.  Although they made no links with the
>   capital theory debates, the following sources also prior to Ray and me
>   noted the general problem for benefit-cost analysis of environmental
>   issues.
> 
>     Orris C. Herfindahl and Allen V. Kneese, _Economic Theory of
>     Natural Resources_, 1974, Columbus, OH: Charles Merrill.
> 
>      W. Kip Viscusi and Richard J. Zeckhauser, "Environmental
>      Policy Choice under Uncertainty," Journal of Environmental
>      Economics and Management, Sept. 1976, vol. 3, no. 3, pp. 97-112.
> 
>      Anthony C. Fisher, _Resource and Environmental Economics_,
>      1981, London: Cambridge University Press.
> 
>      Richard C. Porter, "The New Approach to Wilderness through Benefit
>      Cost Analysis," Journal of Environmental Economics and Management,
>      March 1982, vol. 9, no. 1, pp. 59-80.
> 
>      Also, there is the still unpublished, but excellent, paper on
>    delayed environmental costs of nuclear power:
> 
>      Geir B. Asheim, "The Occurrence of Paradoxical Behavior in a Model
>      where Economic Activity has Environmental Effects," 1980, Norwegian
>      School of Economics and Business Administration Discussion Papers,
> 
>    which does explicitly bring up the capital theory debates, possibly a
>    reason it has never been published.
> 
>      Sorry I don't seem to have the number of that one.  Geir is still
>    there and accessible for anybody who is curious (last time I checked).
>      -- Barkley Rosser


>> So, what serious model does this work improve upon,
>> and what does it tell us about the observed world that we did not
>> already understand?

> I remain of the opinion that descarding theories about the world
> that are self-contradictory improves one's understanding of the world.
> 
>    "A few years ago I was a member of the dissertation committee
>    judging a thesis on 'Structural Unemployment in Spain'. The speech
>    made by one of the members was surprisingly short: 'I am afraid to
>    say that I was unable to get further than the second page of your
>    Dissertation. You claim that many factors cause unemployment and
>    that they are all equally important. You must be aware that the
>    fundamental cause of unemployment is just one, wages are too
>    high. You should also be aware that there is just one way to solve
>    this problem, making the labor market flexible enough so that it
>    can reach the full employment wage.'"
>      -- Oscar De Juan, "Wages, Labor Segmentation, and Employment:
>         Can Full Employment Be Achieved By Lowering Wages?", 
>         Economics For the Future, Cambridge (UK), 17-19 September
>         2003.
 Fumble Index  Original post & context: acec624d.0402070449.2d2191c1@posting.google.com