Definition & Reality in the General Theory of Political Economy

by Thomas Cool

End notes

[ [1] Greek ‘oikos’ = ‘estate, house’, ‘nomos’ = ‘law, custom’ and ‘polis’ = ‘city, community’. The Dutch word for ‘political economy’ is ‘staathuishoudkunde’ - with ‘kunde’ = ‘theory and art’ and ‘huishouden’ = ‘home maintenance’ (with ‘huishoudster’ = ‘cleaning lady’). See chapter 7 below and the appendix on the definition of ‘economics’.

[ [2] Gould (1980) recalls that Charles Darwin was also inspired by Adam Smith.

[ [3] An example is the debate between Heilbroner and Dasgupta, see P. Dasgupta (1998). Heilbroner regards ‘economics’ as Political Economy only, and hence neglects the other fields of economics. Dasgupta emphasises the validity of normal economics, and replies: “Economics does not encompass the whole of the social and moral sciences.” His argument apparently is that science arises from cutting up knowledge in specific approaches. But this neglects the problem of integration.

[ [4] The Economist February 19 2000 (p74) gives a review of Mancur Olson “Power and prosperity” (2000) that develops the same line of thought.

[ [5] Though I might remark that ‘management’ itself already implies some influence of some people on others - it is a recipe for stress if there would be responsibility but no influence.

[6] Holland: Centraal Planbureau (Central Planning Bureau, CPB), France: Commissariat du Plan, Germany: Sachverständigenrat. The UK apparently relies on the Treasury.

[7] Keynes here most likely borrowed Einsteins distinction between the special and general theory of relativity. See also Skidelsky (1992:487).

[8] Though see Hicks (1983:374).

[9] Remarkably, also the JEL codes have ‘Keynesian’ next to ‘neoclassical’.

[10] Vide Keynes’s very definition of ‘effective demand’: what businesses expect to sell and thus are willing to currently produce, after taking account of already available stocks. ‘Effective demand’ thus is another word for ‘production’. Key Keynesian is seeing production as an expectational variable.

[11] It must be recalled that more economists in the early 1900s turned from comparative statics to dynamics. A key figure is Tinbergen, who used the calculus of variations in his thesis and who presented the first macro-economic model that the world has seen (see e.g. Boumans (1992) and Barten (1988)). It may be noted that Tinbergen’s first national model does not contain a monetary sector. In a sense understandable, since the model was for Holland, and Holland was on the gold standard at that time, and we know - with Mundell, who refers to Tinbergen’s ‘instrument argument’ - that monetary policy in that case is ineffective. Anyway, Tinbergen clearly was more of a ‘real business cycle’ analyst, while Keynes had the feeling for monetary issues. Keynes’s approach appeared more important, primarily since money is a generic policy instrument for the whole (world) economy.

[12] An illustrative example of the statics vs. dynamics issue, and of the problems that economists continue to have in making this distinction, is page 125 of Gregory Mankiw’s 1998 “Principles of economics” edition. Concerning the payroll tax and the distribution of its burden over firms and workers, and using a diagram of elastic demand and supply, he states: “This division of the tax burden between workers and firms does not depend on whether the government levies the tax on workers, levies the tax on firms, or divides the tax equally between the two groups.” Referring to a US Congress effort to allocate the burden he concludes: “This example shows that the most basic lesson of tax incidence is often overlooked in public debate.” Well, this conclusion is only valid for the static analysis, but in dynamics, take home pay is directly affected by regulations, while wage contracts are adjusted by quite different bargaining processes. The US Congress may well have taken a right decision for the medium run.

[13] I will take the position that definitions (and thus tautologies) can be very important too. I tend to think that Samuelson in fact would not disagree if the point would be formulated as such. Indeed, Samuelson has remained more of a theorist himself, and is less known for work on collecting data and estimation.

[14] Western economies suffer since the early 1970s from mass unemployment and the threat of inflation. This bad mix of bad ingredients is called “stagflation” for short. “Stagflation” in fact is a concatenation of “stagnation” and “inflation”. The word was coined around 1970 when national income growth stagnated and brought along unemployment. Since then growth has somewhat recovered, and stagflation has been redefined and now is properly understood as a bad ‘trade-off’ of both inflation and unemployment. See below.

[15] Note that Kennedy (1999) in his first six pages prominently refers to Keynes (1919).

[16] UN-WIDER Press Release “40 International Experts and Scholars Meet in Helsinki to Discuss the Wave of New Emergencies, 6 - 8 October 1996, at Hotel Marski”.

[17] Interview with Kruiderink, “Progress ? No, it is a black hole.” Volkskrant Oct. 16 1999

[18] Barro also discusses the relationship between the quality of the US CEA and US growth.

[19] http://europa.eu.int/comm/employment_social/employment_analysis/eie/eie2004_stat_annex_en.pdf

[20] Participation is taken here as the employment rate (employment in % of the population in the age bracket 15-64) plus the unemployment rate (age 15+).

[21] Kennedy (1999:241) describes the threat of Huey Long: “Roosevelt shared that assesment. ‘Long plans to be a candidate of the Hitler type for the presidency in 1936,’ he told William E. Dodd, his ambassador to Germany. ‘He thinks he will have a hundred votes in the Democratic party and put in a reactionary Republican. That would bring the country to such a state by 1940 that Long thinks he would be made dictator. There are in fact some Southerners looking that way, and some Progressives are drifting that way… Thus it is an ominous situation.’ [note] ” Also, the US already had a disputable policy with regards to its Black population, and no doubt they could be made scapegoats like the Jews in Europe.

[22] Hayek discussed ‘knowledge’ and ‘constitutional reform’, so that the current line of thought is not alien to economics - though see the appendix on Hayek.

[23] There exists still one matter to settle though. Krugman suggests that Supply-siders were no serious economists. Similarly, Mankiw (1998:29) calls it ‘fad economics’. But after they got their respective Nobel Prizes, both Lucas and Mundell told the press that they were such Supply-siders.

[24] The two major recent revisions in the US, the chained price index and the redefinition of software as investment (and thus growth), are just examples.

[25] If the Court would be scientific but would be only an island in an ocean of neglect, the Court would already be an improvement over the current situation - but less than optimally so. A wise parliament also provides for funds for independent research bodies with related objectives, that then will provide a critical working environment.

[26] The term ‘existing theory’ will be used in this volume for the tradition of research and results indicated by these references. In the light of the abundance of schools and attitudes it is a bit difficult of course to apply that term. However, those who have studied Krugman’s books and above references, should be senstive to this suggestion. As a next step, I will present a novel analysis below, that leaves much of existing economic theory intact, and only supplements it with some ‘missing links’. With this supplement it becomes even easier to recognise the ‘existing economics’.

[27] Note that this book quotes Keynes a lot, and in particular the 60 year old General Theory, and only refers to modern authors. Some readers might find this out of balance. However, in the light of the main argument, about the Trias Politica and the Economic Supreme Court, I found it rather natural to proceed like this. I think that it emphasises the enduring quality of economics per se. That, admittedly, is a matter of taste.

[28] Robert Kuttner, “Peddling Krugman”, American Prospect, 9.96 gives a nice example: “(…) Joseph Stiglitz, chair of the Council of Economic Advisors and author of a recent report that, in very delicate wording, computed that most newly created jobs were in occupations or industries that had historically paid “above median wages.” This, of course, did not mean that the newly created jobs actually paid above-median wages. Stiglitz, threading his way between the administration’s need to paint a rosy election-year picture and his own professional integrity, allowed as much.” See http://members.home.net/copernicus/28kutt.html

[29] Note that labour could (actually should) be aggregated with wage weights, but this normally isn’t done.

[30] Keynes and Tinbergen were both first-borns. Sulloway’s theory suggests that Keynes’s General Theory is a ‘conservative revolution’. It gave a theoretical base to existing ideas, helping save capitalism from the communist threat. Similar for Tinbergen. Tinbergen’s brother Nico had more radical ideas about ethology. Such interpretations are hazy of course.

[31] With the necessary proviso that they will not easily sail over the edge of the world.

[32] Taken from Craig Marcott’s site, who refers to Pigou (1932) “The economics of welfare” 4th ed. Macmillan 1932; preface. His site is also advisable for his applications of Mathematica to economics: http://milkweed.econ.stthomas.edu/~csmarcot/index.html.

[33] See chapter 34 on the notion of a ‘moral imperative’.

[34] This analysis is taken from Colignatus (1990a) and (1994a), and since then more years have past. CPB researchers Broer c.s. (1999) recently write: “The high level of unemployment in OECD Europe remains one of the puzzles of empirical macroeconomics. (…) This is somewhat surprising in view of the considerable policy effort that has been made (…) ” See the OECD site: http://www.oecd.org around 1999-2000 contains such data on stagnation and slow improvement. One assumes the same in 2004.

[35] Taxes in this book are generally inclusive of welfare state premiums.

[36] Data: US Bureau of Labor Statistics and The Netherlands Central Planning Bureau. The US is more useful here than Europe, since it has consistent time series on a single economy.

[37] The Netherlands had a wage explosion in the early 1950s after a period of wage restraints, but this still allowed a quick return afterwards to the favourable lower left region.

[38] Data The Netherlands Central Planning Bureau. ‘Not working’ involves the Dutch programs ZW+AAW+WAO+IOAW+IOAZ+WW+Vorstverlet+ABW (sick leave, disability from birth or later, workers and independents, welfare relief and unemployment). Welfare relief was intended to be temporary but can be permanent, for example for the 55+ workers who do not have to apply for jobs any more.

[39] On p358 they discuss the Lucas supply function y =

(p - p*) for GNP y and inflation p, and remark that this is also Lucas’s explanation of the Phillipscurve. In chapter 10 they discuss some ‘useful models’, of which in p542-555 the Phillipscurve, starting out with Tobin’s 1972 discussion of price and wage dynamics.

[40] The ‘insider-outsider theory’ (Lindbeck & Snower (1988)) has the similar effect that the decisive group shifts the burden. But there the emphasis is on union membership.

[41] Borjas also states: “(…) the demand for unskilled workers declined perhaps because of technological change which favors skilled workers or because of the internationalization of the U.S. economy.” (p467)

[42] Of course, not all unemployment is caused by the minimum wage. The 25% in the graph is a result of simplifying assumptions. But it is an acceptable presentation, since Dutch official statistics grossly underestimate unemployment (and reduce the labour force).

[43] Money is denoted as MX. Perhaps unfortunate, but it keeps our formulas readable.

[44] B for Dutch “Bestaansminimum” (subsistence). English Basic Net Income or Benefit.

[45] Relation (13.1b) gives the Bentham tax function, that has exemption x and marginal rate r. We will write Bentham[y] for the Bentham tax, Tax[y] for a special nonlinear function, and T[y] for a general function.

[46] Welfare states commonly distinguish the minimum earning wage and the minimum on benefit. In Holland the latter is 70% of the former, thus some S = 0.7 B. But then there are subsidies that apply to people on benefit - and the poverty trap discussion starts. Here it suffices to take S = B. Chapter 39 deals with the argument in reduced form fashion.

[47] In chapter 28 we will develop the formula for the influence of indexation on minimum wage M.

[48] This graph gives the theoretical values for the Dutch minimum wage, if indexation since 1951 had been rigorously applied with inflation for exemption and net average income for subsistence. The actual minimum wage however was different, but within range. OECD (2000:40) Chart 2.1 graphs the observed real minimum with 1975 = 100 with for example {1970, 77}, {1978, 108}, {1996, 85}.

[49] Common themes in tax theory are merit versus demerit goods and that one would tax the less mobile factor labour rather than capital. These themes have less priority than the tax void. The main reason that remains for a VAT (or a profit tax) is that the government wants to monitor the economic process.

[50] These are virtual subsidies only: while handed out, they are immediately cashed in under the tax rule.

[51] Note the bureaucratic mind-set: There is a tax system and thus people are supposed to pay taxes. Benefits are established at a net level but are recalculated to a gross level so that the Ministry of Finance is happy again that it can levy taxes. By consequence it also seems as if much more is paid on benefits.

[52] In general http://econwpa.wustl.edu. More specifically Colignatus (1996a, c) at http://econwpa.wustl.edu/months/get/9604.html, and Colignatus (1998a) at http://wueconb.wustl.edu/eprints/get/papers/9808/9808002.abs

[53] The OECD (1998) “Employment Outlook” Table 2.3 gives an international comparison of the level of the minimum wage in relation to the median wage. The situation in the Netherlands may be a yardstick to interprete these data. The table shows that the minimum wage in the Netherlands (in 1997) was 55.9% of full-time median earnings (excluding overtime and bonusses). Applying that rate to the 2002 values in Table 3 gives an estimate of the 2002 median of € 27,975. However, the proper subsistence wage should rather be € 12,516, i.e. net of taxes and premiums. The ratio thus is rather 44.7% than 55.9%. The rate could even be lower when we consider VAT and other taxes and the possibility of some employment subsidy, so that 30% could well be attainable. With this yardstick, the OECD levels of the minimum wage are strikingly high.

[54] The analysis in chapter 13 holds in theory for full time workers. In reality, only part of this Tax Void Unemployment will be on benefit, since a part will substitute for part-time work (at a wage lower than full-time subsistence). A practical question is also whether the tax statute really must, and if so can, distinguish properly between full-timers and part-timers. These questions need to be answered, and definitely so when a practical run is done with a general equilibrium model.

[55] This was actually developed in Colignatus (1992b, 1995a). Dutch readers will benefit from Colignatus (1994b).

[56] See also the appendix on this book.

[57] This was known before, and in fact it is a good hypothesis that much of Euclid’s geometric knowledge had already been developed in ancient Egypt. The Greek contribution appears to be the notion of ‘proof’.

[58] Stephen Levinson - interview in NRC-Handelsblad, December 18 1999

[59] See also the appendix on this book.

[60] My understanding of quantum mechanics benefitted much from the papers on the site of Richard Gill, at http://www.math.uu.nl/people/gill/ and Gill (1996, 1997a & b), and Barndorf-Nielsen, Gill and Jupp (1998).

[61] Rutherford seems to have said: “If you need statistics, then you have the wrong model” (or something to this effect).

[62] Physicists might object to my use of the word ‘understanding’. Their modern method is to describe the mechanism or process, and to stay far from other ways of understanding. This is considered to be an advancement compared to earlier methods, where they apparently lost a lot of time trying to understand ‘force’ instead of simply modeling and measuring. But if this is understood, there is no reason to avoid the word ‘understanding’.

[63] See chapter 34 for deontic logic on this. Note that ‘God on Earth’ would be a situation of for some T, with x the vector of allocations to the agents, both observed and the optimal SWF point. Since there is no objective SWF, the concept of eternal bliss hangs in the air as well, though.

[64] There appears to exist a strange miscommunication between physics and mathematics. Gill quotes Suppes: “For those familiar with the applications of probability and mathematical statistics in mathematical psychology or mathematical economics, it is surprising indeed to read the treatements of probability even in the most respected texts of quantum mechanics. ... What is surprising is that the level of treatment in both terms of mathematical clarity and mathematical depth is surprisingly low. Probability concepts have a strange and awkward appearance in quantum mechanics, as if they had been brought within the framework of the theory only as an afterthought and with apology for their inclusion.” (P. Suppes, 1963). Gill suggests that this is still the case in 1998.

[65] I would also advice quantum physicists (or journalists) to abstain from gibberish descriptions of ‘quantum states’. A statement like “Schrödinger’s cat is both alive and dead, or in a superposition of life and death, and only collapses to either of these once you open the box” is nonsense, basically already in terms of logic, but for certain with the scientific predisposition to determinism.

[66] The NRC-Handelsblad April 4 2000 reports about research by Lene Hau. The so-called Bose-Einstein Condensation arises at zero Kelvin: when speed is zero, and thus is known, then apparently atoms ‘merge’ into ‘one amorf collective’, the BEC. Hau says that she can actually see it, and she uses it to slow down light to human speeds. She explains that her results are not statistical but ‘honest raw data’. This approach seems on the right track.

[67] I found, to my surprise, that Hayek has a similar approach. See the appendix on Hayek.

[68] The importance to recognise a ‘regime switch’ cannot be emphasised enough. Perhaps the Edmund Burke statement can help here: “Though nobody can draw a line between the boundaries of day and night, it is still possible generally to distinguish light and dark fairly well.” (quoted in Gould (1980) - translated back from the Dutch again).

[69] Real transfer income TRF will later be taken as B/P U. In practice there are also non-unemployment transfers.

[70] Later chapters will re-use S for some general supply function.

[71] Note that M is the minimum wage. Our formulas are better readable this way.

[72] Note that Y is nominal GDP if NX = 0.

[73] Then LE follows from LE =

Y / W, and KE follows from {LE, YR and the production function}, and P_K follows from {KE and KE = (1 -

) Y / (i P_K)}.

[74] For example as follows. Regard LE =

Y / W of above. Substitute Y = P YR, and rework: P = (W LE) / (

YR) =

W if labour and output are proportional.

[75] This means that causality runs from money to inflation, to unemployment, to the wage.

[76] The short run is defined as the period in which there is no capacity effect from investments on the stock of capital. After a year there generally is such an effect. The medium run is about 5 years, and the long run might be taken as 10 years or more.

[77] This relationship now is dropped from the model, however. While Graafland & Huizinga (1999) include the marginal tax rate, Broer c.s. (1999) don’t, and only use the average tax rate. From a personal conversation with Broer, I understand that this is because their relationship is to be used in a smaller model that will be used for policy simulations (and that has to drop some variables in order to be smaller). This again shows that some choices can be irrational even though circumstances may make them seem rational.

[78] (I) Professor Oort is indeed related to the discoverer of the astronomical “Oort cloud”. Perhaps we might speak about an “Oort Cloud” in economics too: big misconceptions and misunderstandings flying about in professorial minds, occasionally hitting Earth to great disaster. (II) A member of the Oort commission was professor dr. C.A. (Flip) de Kam, who was also an assistant to the social-democratic fraction in Parliament at the time of the ‘Duisenberg Disaster’, see chapter 14. Around 1997 we had a chat, and he still didn’t understand the issue - and thus it doesn’t help to explain it. De Kam is now at the OECD, it seems in an important position. I highly appreciate some his work, like De Kam & Van Herwaarden (1989), and I regret his misunderstanding. Should he once understand it, he would become a welcome and powerful ally in explaining matters to a larger audience. Still, De Kam’s omnipresence reminds one of Ira Magaziner’s, vide Barro (1996:xii), Krugman (1994b:298) and Galbraith (1998:201), to apparently similar destructive effect.

[79] We don’t perform a statistical test though. We just plot these graphs, and are satisfied by a rough lognormal approximation. For real tax experiments, we would use the original income class data.

[80] Lambert (1985:31) mentions that a Pareto distribution - close to the lognormal - has a nice property with regards to taxes. This should be investigated.

[81] An alternative interpretation of ms and md is to take them as the minimal levels for which the density shows positive values. The table then remains the same - though of course with a different interpretation.

[82] Borjas (1996:167) notes that the US minimum wage may have a noncompliance of 40%.

[83] From discussion with others I understand that Juliet Schor has made an issue of the high Dutch percentage of parttime work, presenting it as a social advancement. It likelier comes from the distortions of the tax system and social laws that force people into less working hours and lower wages. I have not read Schor, so my comment here is only a hypothesis, something to be surely checked.

[84] See Barro (1996:96-98) for some entertaining pages. That chapter also throws some useful light on the US CEA. Curious his statement however: “(…) we are still waiting for the first sighting of the Keynesian demand multiplier.” (p111), i.e. curious in the light of the structure of macro-economic models.

[85] This indeed seems to be happening in Holland 1990-2005.

[86] I have considered to use the word ‘stable’ instead of ‘constant’, as so many authors write ‘stable inflation’. But again, as ‘accelerating inflation’ is not correct, so is ‘stable’ not correct. A constant rate of inflation can be the only constant in a sea of instability. To allow for a later definition of a ‘stable rate’, it is advisable to pronounce CIRU and CWIRU as KIRU and KWIRU, and not as SIRU and SWIRU.

[87] In a dynamic setting u[-1] will have a greater weight. The equation used here can be regarded to some extent as a longer run relation.

[88] Use

* =

, solve (28.2) for f[u] and solve (28.3) for f[E[u]; and the rhs’s are equal.

[89] Remember that

=

* in the final equation, and then use (28.1).

[90] Conceivably even, the government uses its instruments such as to create some surprise element deliberately. However, a statement like this is a typical result of modeling. Reality is full of surprises, so the need for governments to create some more does not seem realistic. The literature on ‘credibility’ similarly has a high academic content.

[91] Which is a nice spot to again emphasise the limitations of the linear assumption.

[92] In empirical analysis we might approximate demand by next period’s employment, but then we must be aware that this already includes some crowding out effect.

[93] Please be aware of the intellectual risk that I am taking here: I only know (a) the Dutch situation, (b) the OECD (1986) report on indexation practices, (c) that European minimum wages are quite high and that the US has more poverty. The rest is a matter of logic and economics. From this I forecast the foreign situations and these stylized facts: and it will be fun to hear others confirm these.

[94] Chapter 27 uses q for natural public goods, but for lack of symbols we re-employ q here.

[95] See the note above on the Oort Commission: They created this; though many Dutch nowadays think that it has been around ‘forever’.

[96] In terms of Table 7, we now interprete ms and md as the first values for which the densities have a positive value. Note: we need not add that M

0 since obviously B

0.

[97] Proponents for the NIT generally don’t understand that home partners produce something, and could be taxed for that.

[98] My thoughts this were stimulated by Ate Nieuwenhuis’s research on oligopoly.

[99] Note that this ‘dynamic M’ concept differs from the ‘dynamic marginal’ concept. Note too that these concepts are only defined for M.

[100] Holland provides an empirical example. The real wage index rose from 1 in 1950 to 3.7 in 1980, and has been stagnant since then. But there have been tax reductions since 1990.

[101] It is to be noted though that director C.A. van den Beld read about the vintage approach in a German article, and asked Den Hartog to further investigate it, already in the years before. The model choice was not propelled by the Oil Crises, and, indeed, the theoretical link is weak - if not to say ‘nonexistent’.

[102] Higher fuel costs also translated into a higher CPI and thus higher wage demands, giving another reason to be worried about wage costs. But this is another chain of reasoning.

[103] Much of the wage of high salaried persons will derive from custom and bargaining skill, but there will also be a serious part ‘productivity’.

[104] It is essential to read Hueting (1980) and Van Ierland et al. (2001) for a proper understanding of the issue of growth.

[105] Vide the ‘proof of God’ paragraph in chapter 19.

[106] This is not without problem, since there are many logics, such as standard, threevalued, fuzzy, intuitionistic logic, and my own scheme of ‘the logic of exceptions’ (that I use to solve the liar paradox, and Russells and Gödels problems). However, here it suffices to presume standard logic. Note that the earlier version of this chapter (article) used a ‘quantor free logic’, where the use of a variable indicates the ‘for all’ quantor, and a constant indicates the ‘there is’ quantor. A subtlety is that this distinguishes between “Not p

q”, that is equivalent to “p₀ & ~q₀”, and “~(p

q)”, that is equivalent to “p & ~q”.

[107] If we were to put the question to Arrow, my bet is that he likely prefers incompleteness to inconsistency.

[108] That there should be at least 3 topics is actually an axiom that we have taken for granted.

[109] Discussion (evaluation and thus eventual publication) of (1990c) was blocked by the CPB directorate with the comment ‘this issue exceeds the CPB intelligence’ - which was inconsistent since I worked there. The EER referee reports of (1997b) are nonsense too.

[110] Thus there is a subtle distinction between:
(A) The risk, that is single (i.e. non-plural), and gives the expected value of the valued risks
(B) The risks, that thus is plural and gives the list of the the o_i that are losses. For a single outcome, we would have the difference between o and {o} (element and singleton). With a list of outcomes O = {o₁, o₂, ..., o_n} we also have lists of prices P = {P₁, P₂, ..., P_n}, and probabilities Pr = {p₁, p₂, ..., p_n}, and a utility function u. (Continued next page.)

The money valued risks are X = {x₁, x₂, ..., x_n} = O * P = { P₁ o₁, , ..., P_n o_n}.

The utility valued risks are U = { u(o₁), .., u(o_n)}. The expression U* = u(o₁, .., o_n ) is less appropriate since the outcomes are mutually exclusive. However, since one might consider cases where one has some utility about ‘the whole situation’, the U* might still be useful.

[111] Thus

stands for the expected value and

for the standard deviation (spread), and

the risk. Then, use R for the coefficient of correlation. Note that the use of ‘spread’ facilitates translation from learned journals to popular audiences that are less familiar with ‘standard deviation’. Authors that use the word ‘spread’ for the difference between a futures and a spot price, should relabel to ‘time premium’.

[112] In a personal discussion, Richard Gill (University Utrecht, KNAW) had doubts about my shorthand notation, and preferred E[x * I_x<0[x] where I_A[x] is the indicator function with value 1 if x

A and 0 else. Gill’s notation no doubt increases definitory clarity, but the shorthand is not bad and has the advantage of being short.

[113] Alternatively, relative risk can be seen as proportional to another level. What is important in the present discussion is the distinction with conditional risk.

[114] For (relative) risk we don’t want to use the conditional distributions. For example, if there would be a small loss with a small probability p, the conditional might turn this in a large ‘risk’, since 1/p is would be a large number. So for risk we have a proper measure in the ‘probable value’ (loss * probability).

Risk is concerned with one’s worry that bad information might arrive while it may not arrive. The conditional applies only if indeed new information arrives that the returns will remain below that target level. (Though the conditional might remain hypothetical.)

[115] If people would work on welfare, we would speak about workfare. Workfare generally is more efficient, since people on benefit will not have the utility of idleness.

[116] In a purely mathematical tract, the Lemma would be the theorem, and the Theorem would be a corrollary.

[117] This is a strong claim of course. Policy makers are overloaded with data, and they have a hard time turning this into information. But this is often used as a cheap excuse too. They say ‘I didn’t know’ while they should have said ‘I hired an assistant who knew that he had to keep sensitive information from me so that I could later say ‘I didn’t know’.’ The crux of the argument is that policy makers are responsible, by definition, for structuring the information process such that they know the relevant facts. It is up to the jury whether they can be excused for real human mistakes and external errors.

[118] This is a crucial part of the Definition & Reality methodology. In mathematical economics the theorems depend on axioms that are only hypothetical. In Political Economy that concerns reality, we also accept facts. On availability, see also the appendix on the presentation of the analysis for the US National Press in Washington 1993.

[119] If ‘animal spirits’ is not properly explained, it generates confusion. As this confusion exists, perhaps I need to provide this explanation here as well: Medieval philosophy distinguished between dead matter, plants and objects with a spirit - and the Latin word for spirit/mind is ‘animus’. So Keynes’s reference is not to wild beasts, though Mankiw suggests such with his mention of ‘irrationality’ and ‘arbitrary changes in attitude’. As I understand it, Keynes entertains the consideration that beings with a mind by definition develop conceptions about reality, and act and take decisions in a state of uncertainty.

[120] Krugman though allows for a temporary adverse development in technology. This chapter was basically written as the paper Colignatus (1997a), and since then Krugman has seen more scope for the technology argument.

[121] I can understand your misgivings about having to read five books before allowed to continue. Personally, I already knew most of what Krugman is writing about, and this may also be the case for you. But it was a useful refresher, lots of fun reading, and when everybody reads them then there is some common ground.

[122] That is, most economists don’t know yet, but I do, and thus ‘the economics profession’ knows it. In the same way, if a murderer knows that someone in the room knows that he is the villain, he is tempted to kill all in the room. This someone is going to tell !

[123] It is good to see that James Galbraith (1998) takes up this issue too. See below.

[124] Note that the reason why I am quite certain about my own approach is that I have given a mathematical theorem and proof based upon readily acceptable premisses. I also use a reduced form, but, deduction beats econometric testing.

[125] In 1997 I also wrote “(…bargaining…) has more to do with the level of wages than the (inflationary) rate of change.” I have to retract that statement. I temporarily forgot my very own analysis on the Phillipscurve ! Yes, I must have been irritated.

[126] And indeed, it must be feared that mainstream economists will not be interested much in inequality, so that they will also miss out on the interesting ‘tract’. We may presume, however, that Galbraith will take another occasion to repair that error.

[127] Palley is assistant director of Public Policy for the AFL-CIO, and author of a book “Plenty of Nothing”, that I have not read yet but that seems like a good buy.

[128] Galbraith does not refer to Bruno & Sachs (1985), but it is useful to note that this B&S analysis would be a major part for the explanations of the ordeal in the 1970s - which analysis apparently was insufficiently understood by Carter and Volcker. Also, a reference for the Volcker years is Hadjimichalakis (1984).

[129] Also Paul Krugman remarks, and expresses regret, that many of the poor become the victims of the Fed’s anti-inflation policy: but he doesn’t add that policy can be different.

[130] In May 2004 my employment concerned a cost-effectiveness analysis of population based screening for cervical cancer and its precursors: which indicates the job flexibility required.

[131] There were problems of bankruptcy of the distributer Gopher Publishers during most of 2003-2004, though interested readers could get the PDF of DRGTPE from my website.

[132] Saramago’s new book speaks about a town where 83% of the population decides, silently and without any voiced protests, to vote a blank. The number 83% is a masterly stroke since it sounds much more realistic than 80% or 75% or 51%. But, is there any link with Fortuyn’s 17% result or is it just coincidence ?

[133] “niet gewoon rechts, maar extreem rechts”

[134] “Hij gaat een grens over die je niet mag passeren. Nederland, word wakker !” and “Je wordt wakker, en je ziet Le Pen. Je wordt wakker en je ziet Fortuyn.”

[135] “een gevaarlijk man”

[136] “het leiderstype-Mussolini”

[137] “buitengewoon minderwaardig mens”

[138] “haat en tweedracht te zaaien”

[139] “(…) kan worden gedocumenteerd dat Fortuyn door politici als Melkert, Rosenmöller en Zalm werd gedemoniseerd.”

[140] In the same way, Tony Blair had his responsibility of leadership towards Iraq. Where Blair saw danger, he was right to warn for it and take some action. But Blair said “there are WMD” while he should have said “I wholeheartedly believe that there are or will be WMD, even though the current evidence shows there aren’t and will not likely be there in the future as well”.

[141] A theory laden question, since in Marx’s original theory socialism required internationalism, while it was the ‘great theorist’ Lenin who dropped that, creating ‘Marxist-Leninism’.

[142] A recent paradox of greater fun is that Queen Beatrix, Dutch Head of State and Head of the Dutch government, recently stated: “The lie governs.” She thought of newspapers and obviously did not intend to refer to herself, but her choice of words allow this interpretation.

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To professor Michael S. Hart
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