Archive for November, 2012

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Nov 7

Lope Gallego

Nikolai Kondratiev

Nikolai D. Kondratiev Nikolai Dmitrievich Kondratiev, 1892-1938, was a Russian economist and founder and first director of The Institute of Conjecture between 1920 and 1928.

Kondradiev is mainly known for his studies on business cycles, specially for his major work “The Major Economic Cycles”, 1925. Kondratieff identified a long business cycle in capitalist economies with a duration of 50 to 60 years, the so-called Kondratiev cycle. He explained that they were due to re-investment cycles, of capital goods with a long lifetime.

Nov 7

Lope Gallego

Subadditivity

Subadditivity is an important concept because it is often used to justify imperfect competition, the classic nemesis of neo-classicists. The only real way to justify less than perfect competition is the kind of sector which lends itself to natural monopolies. Natural monopolies are those where barriers to entry are so high that it is worth making the investment only once, and where one producer will operate more efficiently than two. Traditionally, natural monopolies are state-run, generally in energy or communication sectors, although current trends are leaning towards privatisation.

When a large investment is required in order to begin production, these costs must naturally be passed on to the consumer. What differentiates natural monopolies is that generally, once the investment is made, marginal costs are infinitely small. In these cases, if there is only one company in the market, prices for consumers may actually be lower than if there are rivals, because of the way average costs drop with additional users.

So what exactly is the difference between subadditivity and economies of scale? Subadditivity is a more generic concept which encompasses economies of scale. We say subadditivity exists when:

That is, when the costs function (including initial investment) for the sum of all units at a given level of production is actually smaller than the sum of the various cost functions (given multiple companies) at the same given level. If we look at the diagram, we can see the traditional long run costs functions for two companies. We only consider economies of scale when additional units provide a lower average cost, but costs per unit begin to rise after a certain level. Subadditivity simply means that it is cheaper to produce the same production level when only company one is producing, and that the same production level is more expensive when company two joins the market.

This is why subadditivity is considered a necessary but insufficient conditionfor a natural monopoly to be considered optimal, whereas if economies of scale exist, this is a sufficient but not necessary condition for a natural monopoly to be sustainable. The cyan demand curve, within the economy of scale region, indicates a viable natural monopoly. The red line would indicate a non sustainable natural monopoly. The black line indicates the frontier of a profit generating monopoly (which would attract competitors) and the green line indicates a viable duopoly.

Nov 6

Lope Gallego

Joseph Kitchin

Joseph Kitchin, 1861-1932, was a British statistician and businessman. In his “Cycles and Trends in Economic Factors”, 1923, he carried out a study on business cycles, in Britain and in the United States, between 1890-1922. Kitchin was able to identify evidences of the existence of very short business cycle, the so-called Kitchin cycle. These cycles have a duration of approximately 40 months, and he explained them as a result of psychological reactions to capitalistic production, and time lags in information, which affect the firms’ decision making process on commercial affairs. In other words, this cycle responded to the adjustment between supply and demand in terms of market necessity and firms response.

Nov 4

Lope Gallego

Clément Juglar

Joseph Clement Juglar
Joseph Clemént Juglar, 1819-1905, was, as his compatriot François Quesnay, a physician turned economist. In 1862 he published his masterpiece “Des crises commerciales et leur retour périodique en France, en Angleterre, et aux États-Unis” in which he analysed economic crises in France, England and the United States from a monetary perspective. He explained that periods of inflation and expansion are concluded when the central banking system contracts money supply. Although he was not the first to analyse and explain crises from such a point of view, he provided new ideas and perspectives.

Juglar was able to identify economic cyclical trends that helped develop the business cycle theory. He identified a medium economic cycle of between 7 and 11 years of duration, the so-called Juglar cycle. In this cycle one can identify trends in the investment levels and in unemployment.

Nov 3

Lope Gallego

Marcus Fleming

John Marcus Fleming

John Marcus Fleming, 1911-1976, was a Scottish economist and public servant who worked in many well-known international organizations, including the International Monetary Fund and the United Nations.

His contributions to Economics are mostly in the field of welfare economics, trade and exchange policies. Fleming and Robert Mundell both presented researches on stabilization policy in open economies, and about at the same time, which would end up forming the Mundell-Fleming model. Fleming´s model, depicted in his article “Domestic Financial Policies under Fixed and under Floating Exchange Rates”, 1962, was more realistic as it assumed imperfect capital mobility, and thus made this one a more rigorous and comprehensive model. However, nowadays, his model has lost cogency, as the actual world situation has more resemblance with total capital mobility, which corresponds better to Mundell’s view.

Nov 2

Lope Gallego

Eugen Slutsky

Eugen Slutsky, 1880-1948, was a Russian mathematician, statistician and economist. In economics he is best known for his formulation of the Slutsky’s equation. Slutsky found an equation that splits income and substitution effects based on Hicksian and Marshallian demand curves. He developed this equation on his “On the Theory of the Budget of the Consumer”, 1915.

Slutsky did not produce any other significant contribution to economics, but he did produce fruitful works regarding mathematical statistics and probability theory. He took special interest in the concept of asymptotic convergence in probability.

Video – Income and substitution effects:

Nov 2

Lope Gallego

Étienne Laspeyres

Etienne Laspeyres Ernst Louis Étienne Laspeyres, 1834-1913, was a German economist, statistician and Professor in various universities. His most notable contribution to economics was the development of the Laspeyres index, used for the formulation of weighted indexes, so that each product that are included in them, have their own weight according to their real importance in the production, consumption, etc. He wrote about it in his “Die Berechnung einer mittleren Warenpreissteigerung”, 1871.

Laspeyres also wrote quite an amount of papers in the fields of economic history, the history of economic thought and on economic issues concerning his time.

Video – Laspeyres index:

Nov 1

Lope Gallego

Say’s law

Say´s Law is a classical economics‘ principle attributed to the French economist Jean-Baptiste Say, and it holds the apparently simple statement that “products are paid for with products”, as Say puts it in his “Traité d’économie politique”, 1803. One of the implications of this statement is that there can be neither overproduction nor unemployment. Later, in 1808, Scottish economist James Mill (father of the renowned John Stuart Mill), rephrased it as “production of commodities creates […] a market for the commodities produced”, and J. M. Keynes would rephrase it (although whilst making a point against it) in his “General Theory”, 1936, as “supply creates its own demand”, which is the better known restatement.

This law became a central piece of the classical economics doctrine and even more important in neoclassical economics. However, Say’s Law was criticized by many. One of the first to refute this law was Robert Malthus, who found that capitalists did not reinvest all their profits, but instead tend to keep them. Keynes thoroughly criticized it during 1930s when it was clear that the law was not being satisfied, indicating that a preference for hoarding money on consumption could occur, in what was called as liquidity preference. This law would then be retaken by monetarism and in the New Classical Macroeconomics.

Nov 1

Lope Gallego

Jean-Baptiste Say

Jean Baptiste Say, 1767-1832, was a French economist and businessman, and considered as the French disciple of Adam Smith and one of the exponents of mercantilism and classical economics.

Say’s chief work “Traité d’économie politique”, 1803, gathered up many of the ideas of his French predecessors and Adam Smiths, systematizing this masterful treatise, which nevertheless includes many original contributions. Thanks to it he gained recognition in Europe and at the other side of the Atlantic.

However, Say’s most important contribution to Economics was his apparently simple formulation of the Say’s Law (1803) that states, “products are paid for with products”. Later, in 1808, Scottish economist James Mill (father of the renowned John Stuart Mill), rephrased it as “production of commodities creates […] a market for the commodities produced”, and J. M. Keynes would rephrase it (although whilst making a point against it) in his “General Theory”, 1936, as “supply creates its own demand”, which is the better known restatement.

Jean-Baptiste Say was in touch with many economists of his era and carried out moderate debates with them, he distinguished himself as a more policy-oriented economist rather than a model-builder like David Ricardo.