Friday, September 19, 2014

On Deducing Faith and Redemption from Usury with the Help of Automata

"That every man is desirous to obtain, with as little sacrifice as possible, as much as possible of the articles of wealth." -- Nassau Senior, 1827
In "Expectation and Rational Conduct" (1937) Terence Hutchison argued that Senior's "first fundamental proposition" shared "one remarkable characteristic" with "almost all" formulations of the utilitarian doctrine: "they appear further to postulate, and only are applicable if the further postulate is made, that all expectations are perfectly correct."

Now, this perfect expectation postulate can be -- and has been -- shrugged off as a merely heuristic "convenient approximation" that enables the economist "to study in isolation, tendencies which in the world of reality operate with many others" (Robbins, 1935). But, as Hutchison emphasized, the consequences of such a "simplification" are not so easily waved aside. He cited Frank Knight:
"With uncertainty absent, man's energies are devoted altogether to doing things; it is doubtful whether intelligence itself would exist in such a situation; in a world so built that perfect knowledge was theoretically possible, it seems likely that all organic readjustment would become mechanical, all organisms automata."
Hutchison followed this quotation with the observation that it is misleading to attribute rationality to "this sort of conceptual marionette" because the decision process becomes superfluous when results are known beforehand. In one example, he compared the logical impossibility of perfect expectation to the liar's paradox: "A person's conduct cannot both be given to someone else who may adjust his own accordingly, and still be adjustable by the person."

1937 was a banner year for economic articles addressing uncertainty. In addition to Hutchison's article, the following were published: Coase's "The Nature of the Firm," Hayek's "Economics and Knowledge" and Keynes's response to critiques of his General Theory in The Quarterly Journal of Economics. In his article, Keynes observed that uncertainty about the indefinitely distant future renders the accumulation of wealth "a peculiarly unsuitable subject for the methods of the classical economic theory." Of course that "peculiarly unsuitable subject" happened to be none other than the very one the classical theory purported to illuminate -- with, as Senior put it, "certainty and universality."
"Exactly a year before Nassau W. Senior discovered at Manchester, that the profit (including interest) of capital is the product of the last hour of the twelve, he had announced to the world another discovery. 'I substitute,' he proudly says, 'for the word capital, considered as an instrument of production, the word abstinence.'" -- Karl Marx
Abstinence was the basis of Senior's theory of interest. Interest is a payment to the lender of money for the service of abstaining, for the time being, from consumption. According to Waterman, Senior "was the most important writer on scope and method among the classical economists, and the one whose work was most influential for the twentieth century development of economic methodology."

Some 26 years after Senior delivered his inaugural lecture at Oxford, Cardinal Newman, in his inaugural lectures at the Catholic University of Ireland, rebuked Senior for the presumptuousness of the claims he had made on behalf of political economy. Newman characterized Senior's argument as "just so far true, as to be able to instil what is false."

Newman quoted Senior's assertion that "The endeavour to accumulate the means of future subsistence and enjoyment, is to the mass of mankind, the great source of moral improvement." Newman interjected to exclaim that Senior had rated the pursuit of wealth as "not merely a source, but the great source" of not merely "social and political progress—such an answer would have been more within the limits of his art,—no, but of something individual and personal, 'of moral improvement.'"

That was only the warm up. To Senior's claim that "No institution could be more beneficial to the morals of the lower orders... than one which should increase their power and their wish to accumulate..."  Newman observed that this excluded Christianity, "for it expressly says, 'Lay not up to yourselves treasures on earth... for where thy treasure is, there is thy heart also."

"But it is not enough that morals and happiness are made to depend on gain and accumulation," Newman exclaimed, continuing:
"...the practice of Religion is ascribed to these causes also, and in the following way. Wealth depends upon the pursuit of wealth; education depends upon wealth; knowledge depends on education; and Religion depends on knowledge; therefore Religion depends on ‘the pursuit of wealth.'"
Thus did Nassau W. Senior deduce faith and redemption from usury, while redefining usury as "abstinence." Medieval canon law strictly condemned usury and prescribed excommunication as the punishment for usurers, excluding them from the sacraments of the church and the from society of other Christians. How did such a remarkable doctrinal reversal, from sin to sacrament, come about?

The history of double-entry bookkeeping offers a clue. Surely one of the motivations for early modern merchants to adopt the novel and challenging technique was to "prove an alibi" against suspicions of usury. Some of the financial instruments for evading the prohibition were complicated, to say the least:
"The canonist doctrine on usury had a profound influence on business practices, since interest could not be charged openly but had to be concealed under some form or other. As a result of the usury prohibition, bills were never discounted but were bought at a rate of exchange which fluctuated up and down according to the conditions prevailing in the money market. There is no doubt that interest was received by the banker who invested his money in the purchase of bills, for a hidden interest was included in the rate of exchange. Because of this subterfuge, the structure of the money market was such that exchange fluctuations were caused either by a change in the rate of interest or by a change in the terms of international trade."
... 
"The ledgers of medieval bankers do not contain any account called Interest Income. Nor is there any account for Interest Expense. It is true that the Italian merchant-bankers often paid interest on time deposits, but it was called deposit, discrezionedono (gift), guadagno (gain), or provedigione (commission). The use of the word 'interest' itself was avoided like the plague. 
True, interest was concealed in the exchange rates, but the presence of the interest factor was boldly denied. The merchants argued -- and the canonists agreed -- that exchange transactions did not involve a mutuum or a loan of money for certain gain. It is quite true that the profit on individual exchange transactions was uncertain.
And so, we return at last to uncertainty, this time as an alibi for the certain gain of usury. But I have interrupted de Roover's narrative. There is more:
"As the analysis of our data reveals, it did happen that occasionally the lender lost. Nevertheless, the reasoning of the canonists was fallacious: they overlooked an essential point, namely, that the presence of the time factor tipped the scales in favor of the banker. While he suffered a few losses, the banker was bound to gain on most transactions, if he was a clever and cautious manager. Losses occurred only when the exchange rates were not in a position of equilibrium. Such a condition could not persist over a long period of time, for the economic forces of the money market automatically tended toward the restoration of equilibrium."
de Roover possibly overstated the case for the automatic restoration of equilibrium. But his point remains valid that the usual tendency toward equilibrium in the foreign exchange market favored the banker "if he was a clever and cautious manager."

Sections 5 and 6 of Hutchison's article address, respectively, "Perfect Expectation and Equilibrium" and "The Assumption of a 'Tendency' Towards Equilibrium." "The position of equilibrium," he argued at the beginning of section 6, "has always been the very central concept of economic analysis." In section 5 he had cited Oscar Morgenstern's argument that the postulate of perfect expectations "may give a nonsensical indeterminate situation the very reverse of equilibrium." Conversely, Knight, Hicks and Pigou argued that the postulate of perfect expectation is necessary for equilibrium theory.

Leaving aside some ostensively universal political economy and thinking instead in terms of Venetian merchant-bankers' interest on loans -- interest concealed within rates of exchange -- uncertainty, perfect expectation and the tendency toward equilibrium all play their roles in assuring both probable profit and usurious deniability to the bankers. The probability of gain is a qualitative one and thus not calculable. All the better to allay suspicion.

This just in: At the end of an appendix to Significance and Basic Postulates of Economic Theory, Hutchison remarked, "It must always be remembered that laissez faire and equilibrium doctrines had their origin in rationalistic Utopia-building." In the footnote to that comment, he cited the 1931 article by S. Bauer, "Origine utopique et métaphorique de la théorie du “laissez faire” et de l’équilibre naturel." Below is an abstract of that article:
9538. BAUER, STEPHANE. Origine utopique et métaphorique de la théorie du “laissez faire” et de l’équilibre naturel. [Utopian and metaphoric origin of the theory of 'laissez faire' and of natural equilibrium.] Rev. d’Êcon. Pol. 45(6) Nov.-Dec 1931: 1589-1602.
A re-examination of the origins of laissez faire gives rise to three observations: (1) the theory of laissez faire was originally conceived as a utopia; (2) it developed as an abuse of a metaphor; (3) this utopian metaphor has perpetuated itself into the 19th century in the guise of a theory of equilibrium. Economic laissez faire was utopian, i.e. far from the facts, and purely intellectual in origin, since both in France and England the corn markets of the 18th century were regulated. The metaphoric use of laissez faire carried over from the Pyrrhonean theory of medicine was current not only in Boisguillebert, d'Argenson, Gournay, and the Marquis of Casaux but is found in and old Spanish book by Balthasar Gracian, Oraculo Manual (1647) which was translated into French and was very popular in the 18th century. Indeed the whole concept of the sovereign and perfect character of nature can be traced through the Renaissance back to the Stoics. The medical analogy marks the work of the Physiocrats, of Adam Smith and of Cournot. Rodbertus protested against this point of view by setting "anthropocracy" in opposition to "physiocracy." Further protests are coming from those who explain economic phenomena in terms of economic institutions rather than in terms of deviation from a rigid system of equilibrium.

Wednesday, September 17, 2014

The "Ceteris Paribus" Assumption

From The Significance and Basic Postulates of Economic Theory by T. W. Hutchison (1938, 1960), pp. 40-46:
As an example of the use of the ceteris paribus assumption we may take the proposition "If the price at which a good is sold rises, ceteris paribus the amount of the good demanded declines." Is this an empirical generalisation which can conceivably be false without any contradiction, or is it an analytical-tautological proposition? 
This, usually, is not made clear, and perhaps such propositions are sometimes meant in one way, sometimes in another. One can only ask in each particular case whether the validity of the ceteris paribus proposition in question depends on facts, or whether, on the other hand, the denial of it simply shows that one does not understand by the terms "rise in price" and "amount demanded" what the language of economists understands. 
If the proposition "If the price at which a good is sold rises, ceteris paribus the amount of the good demanded declines" is an empirical generalisation, so it can only have a clear scientific meaning if it is indicated under what conditions it would be true, or under what false. Further, it is desirable that the difference be shown between this empirical generalisation (with ceteris paribus) and the other empirical generalisation, "If the price at which a good is sold rises the amount of the good demanded declines" (without ceteris paribus). 
Ceteris paribus propositions can be interpreted in this way. But if they are to be so interpreted—as empirical generalisations—then they are usually very vaguely and unclearly formulated. For no attempt is made, usually, to indicate under what conditions they are true and under what false, and the meaning of the vital qualification "ceteris paribus" is left hopelessly imprecise. The ceteris paribus assumption, just as much as any other, must be precisely formulated if the propositions it qualifies are to have any clear meaning. The intention of the assumption obviously is to lessen the falsifiability of the too often falsified generalisation "If the price of a good rises, the amount sold declines." But exactly how far is its falsifiability thus lessened, and if it remains an empirical proposition, what conceivable possibilities of falsification remain? 
On the other hand, it seems more probable that ceteris paribus propositions are frequently treated as analytical-tautological propositions, the example taken in this case explaining a relation between the definitions of "rise in price" and "amount demanded" at different points on a demand curve of a particular shape—a purely logical or geometrical relation. Then it is inconceivable that its truth or falsity (as against its applicability) can be established by any facts, since it is without factual content. In this case one simply determines whether, in fact, the ceteris paribus assumption is true or false, by observing whether or not the price has risen appropriately or not—a circular procedure. This appears to be the interpretation favoured by Menger, though it involves a very elastic conception of "cetera." For example, if the well-known case of poor people buying more bread when the price of it rises in no way falsifies our proposition, this involves a considerable stretching of the assumption "ceteris paribus." 
Thus interpreted the ceteris paribus clause is an accessory assumption of pure theory, and ceteris paribus propositions may be analysed in the same way as the propositions of pure theory have been. The ceteris paribus assumption makes out of an empirical proposition that is concerned with facts, and therefore conceivably can be false, a necessary analytical-tautological proposition. For a mathematical solution (by tautological transformations) the number of equations must be equal to the number of unknowns. The ceteris paribus assumption sweeps all the unknowns together under one portmanteau assumption for a logical "solution."
In Physics and Chemistry, where there are far more discovered empirical regularities, the ceteris paribus assumption is not used in the same way. For if the assumption is broadly true, or if, as is rather the case, the "cetera" in the natural sciences themselves act in accordance with known laws, then the ceteris paribus assumption is more or less a given one, and a true premise can always be dropped. For in a certain sense it is only necessary to make an assumption when one does not know it is true, or knows that it is untrue. This is the peculiar dilemma—apparently unique throughout science—of the "isolating," "assumption-making" procedure of economic theory where there are few empirical generalisations known to be true 
In the natural sciences certain fundamental propositions can be taken either to be analytical-tautological or to be empirical generalisations, exactly as the ceteris paribus propositions may be so taken. For example, originally the proposition "All gases expand on warming" was probably arrived at by empirical experiments. But if to-day an experiment was made with something which as regards the other ways in which it was tested behaved like a "gas" but did not expand on warming, one would at first be inclined to suggest that some mistake had been made in the experiment. But if after repeated experiments this "gas" did not expand, scientists would be faced with a choice. Either they must say "Our law that all gases expand on warming is destroyed, and we must find a new law," or they could say "This stuff which does not expand on warming is no 'gas ', for by definition a 'gas 'must expand on warming; we must find some other name for this." The choice of this second course on all conceivable occasions would mean that the proposition "All gases expand on warming" was not an empirical law at all, but an analytical-tautological definition which was always true because it was not allowed to be false. From the mere wording and form of the proposition one cannot say whether it is the one or the other. One can only find out by a test case when scientists are forced to choose one alternative or the other. 
According to Edgeworth, "The treating as constant what is variable [e.g., supply, margin, wages-fund] is the source of most of the fallacies in political economy,"  and it is the danger of the ceteris paribus assumption that it particularly facilitates such fallacies. It is quite probably true that in more cases than not a rise in price is in fact followed by a decrease in demand, but this of course might not be so; and whether it is so or not can only be decided by statistical investigation. Our proposition with ceteris paribus does not tell us this. In fact the ceteris paribus clause seems sometimes so to be used that one might equally significantly and correctly advance the proposition that ceteris paribus a rise in price is followed by an increase in demand, as the proposition that ceteris paribus it is followed by a decrease. "Ceteris paribus this follows that" seems to come to mean simply "In many cases this follows that," and however often it may not, the reply is that the proposition only said "in many cases" (or ceteris paribus), and this was simply one of the other cases (or "ceteris paribus" did not hold). 
In the recent developments of the "dynamic" pure theory of employment the ceteris paribus assumption appears sometimes to have been applied to propositions which standing alone (without "ceteris paribus") are quite probably more often empirically false than true, but when it is added are meant to get away with some kind of exact and significant empirical content. 
Mr. Keynes gives an example of the use of the ceteris paribus clause on these lines. He contrasts the two propositions: (1) "A decreased readiness to spend... will ceteris paribus increase investment," and (2) "A decreased readiness to spend... will ceteris paribus diminish employment." Are these empirical or analytical propositions—that is, what is the precise content of "ceteris paribus"? If they are empirical, then it is difficult to see what the qualification "ceteris paribus" can mean other than "usually." Then we have two propositions: "A decreased readiness to spend will usually" either (1) "increase investment" or (2) "diminish employment"—two rather vague impressionist generalisations; and though one may be more often true than the other, neither is of much scientific value compared with statistical investigations as to what, in fact, does follow a decreased readiness to spend in. different cases, pending the results of which it seems difficult to justify an exclusive insistence on one as against the other. 
If, on the other hand, these propositions are analytical, there is of course no question of one being "true" and the other "false," and no particular reason for contrasting them, since neither says anything about what in fact follows a decreased readiness to spend. "Ceteris paribus" is simply used differently for the two equations. In the first total outlay is included among the "ceteris" that remain the same, so that a decrease in one division of it (consumption spending) mathematically implies an increase in the other division (investment). In the second equation employment on capital goods is assumed to remain the same, so that a decrease in employment on consumption goods mathematically implies a decrease in total employment. 
Either of these interpretations is possible and there may be others. In the first place such a use of the "ceteris paribus" clause leaves it quite ambiguous as to what kind of proposition is being put forward. In the second place it appears to give to what is either simply an empirically empty analytical proposition, or a very vague and statistically unsupported empirical generalisation, an air of some kind of precise and widely valid empirical content. 
We suggest that the ceteris paribus assumption can only be safely and significantly used in conjunction with an empirical generalisation verified as true in a large percentage of cases but occasionally liable to exceptions of a clearly describable type.
Conclusion (p. 163):
That ceteris paribus propositions are frequently hopelessly ambiguous and that the ceteris paribus assumption should be used less often and more cautiously.

Saturday, September 13, 2014

Tax Shaming from The Guardian

I bet Greg Mankiw really hates this:
America’s a great country. That’s why people from all over the world — including, lately and tragically, thousands of poor children from Central America — clamor to get in. So why are some of America’s wealthiest companies trying to get out? It’s simple, really — they don’t want to pay US taxes.
At this risk of having my internet name changed to ProGrowthConservative, I’m going to quibble a bit with The Guardian. I think the issue is not whether we keep the repatriation tax or not but whether we enforce the arm’s length standard. Medtronic is already getting a low effective tax rate without changing its tax domicile as is a host of the other companies noted here:
Instead, to avoid US taxes, they are parking their earnings offshore, often in tax havens like Bermuda and the Cayman Islands that levy no corporate income taxes. That tactic, which like the inversions is legal, is being employed by companies that position themselves as good corporate citizens — among them Apple, Coca-Cola, General Electric, Google, Microsoft, Nike and PepsiCo … One popular tactic is to grant patents or intellectual property rights to a subsidiary located in a tax haven, and then pay above-market royalties to that subsidiary, thus shifting profits from a high-tax jurisdiction to a low one.
Are the royalties really above the market rate? Would not the local tax authorities be able to challenge such royalties? Of course, the real issue is that these companies told the IRS that the fair market value of their intangible assets were low when the intangible assets were migrated to the low-tax jurisdictions. Are the good folks at the IRS properly enforcing section 367(d). But the real issue here is tax shaming:
But shouldn’t good citizens pay their fair share of taxes? Socially responsible investors and watchdog NGOs say tax avoidance carries risks for companies that care about their reputation, as all companies should. “It’s short-sighted,” says Adam Kanzer, general counsel and managing director of Domini Social Investments. “Companies like Walgreen’s run the risk of being seen as unpatriotic.” Just two years ago, the Illinois-based drugstore company sought and received tax breaks from the state government, and now it’s ready to leave. Domini this year filed a shareholder resolution to reform Google's tax-avoidance strategy. It said: “Even if they are within the law, aggressive tax minimization approaches pose regulatory, reputational and financial risks.”
This is the part that Greg Mankiw is going to hate. When I talked about the Walgreen proposed inversion, I wrote:
We need to do what the tax attorneys call a section 367(d) analysis. Let’s assume that the 5.5% operating margin being generated by these Walgreens stores can be decomposed into a 3% routine return versus a 2.5% royalty rate for the use of various intangibles (patents, trademarks, etc.). Hallman is suggesting that the Swiss affiliate could charge $1.8 billion per year in royalties. But under section 367(d), the Swiss affiliate would have to pay the U.S. affiliate the fair market value for the transferred intangible assets. What is a reasonable estimate of this fair market value? Is it closer to $20 billion or to $2 billion? I’m sure Walgreens could get some hack who pretends to be a valuation expert to argue for the lower figure. But if one looked at the balance sheet as well as the current market value for the equity of Walgreens and tried to deduce the market’s valuation of its intangibles, this figure would be closer to $40 billion.
Let me admit an error here – the fair market value was closer to $50 billion, which may be one reason why Walgreen did not go through with their proposed inversion. They realized that their investment bankers weren’t being straight with them in terms of the possible reduction in their effective tax rate. But let me close with a complaint about this Starbucks UK story. This story is due to Tom Bergin who was one of the few that got the Burger King story right. Tom wrote:
Like those tech firms, Starbucks makes its UK unit and other overseas operations pay a royalty fee - at Starbucks, of six percent of total sales - for the use of its ‘intellectual property' such as its brand and business processes. These payments reduce taxable income in the UK. McDonald's also charges its UK subsidiary a royalty for ‘intellectual property', although at a lower rate of 4-5 percent. The fees from Starbucks' European units are paid to Amsterdam-based Starbucks Coffee EMEA BV, described by the company as its European headquarters, although Michelle Gass, the firm's president in Europe, is actually based in London. It's unclear where the money paid to Starbucks Coffee EMEA BV ends up, or what tax is paid on it.
Let’s suppose the intercompany royalties ended up with the US parent. The IRS would argue that the 6 percent royalty rate was arm’s length as this is the rate paid by third parties. Its stores in North America are generating profit margins near 20 percent before these royalties so a 6 percent royalty rate leaves them with significant profits. The Starbucks 10-K, however, shows that operating costs in the EMEA region (mainly the UK and Germany for company owned stores) are much higher so that even under arm’s length pricing, their company owned stores will financially struggle. Besides why would a company shift income from a UK affiliate with a 20 percent tax rate to the US with its 35 percent tax rate? Tom Bergin and other reporters are doing admirable work but at times what they write does not make complete sense.

Friday, September 12, 2014

Financial Fraud and the Business Cycle: The Chinese Case

We read this morning of another instance of financial fraud in China, this time involving payola to journalists to influence their business coverage.  In fact, there has been a stream of reports suggesting dishonest accounting and misleading disclosures are widespread in Chinese finance.

I have a theory of financial fraud, loosely derived from Veblen’s Theory of Business Enterprise with a little Minsky thrown in; it goes like this:

There is always a lot of fraud in the world of corporate accounting and finance; it is very hard to prevent.  (a) The motive is strong.  Report higher earnings, attract more investment and credit, enjoy more opportunities to launch new projects or prop up old ones, boost asset values, make money.  (b) The restraints are weak.  As Veblen pointed out, a large portion of valuation is speculative in any case, based on prognostications of future profits.  There are insiders and outsiders, and insiders among the insiders.  The booty can be shared with those, like accountants, raters and reporters, who are ostensibly there to monitor probity.  Regulators are captured, politically and cognitively.

Of course, the problem with fictitious profits is that eventually events separate fact from fiction.  Companies that coasted on inflated earnings forecasts crash against the shoals of realized losses.  But this takes time, and meanwhile there are new companies, and new amalgams and spinoffs of old companies and new investment projects whose inflated valuations can bulk up portfolios faster than past disappointments can shrink them.  Red ink can be covered over if there’s enough black, even if the black is speculative and the red is real.

This works in the boom for two reasons.  First, there are lots of real profits being made, so inflated forecasts are (temporarily) validated and occasional losses can be absorbed.  Second, the proportion of new projects, whose valuation is entirely speculative, to past projects is higher.  Reality bites less.

All booms come to an end for one reason or another, and when they do the hidden world of fraud is exposed for all to see.  It’s no longer possible to sustain the pretense: the supply of funds to those who had been losing money all along is cut off, bringing about (literally) a moment of reckoning.

I would like to distinguish between the cyclical visibility of fraud and its actual cyclicality.  Fraud is exposed in the crash, but did it peak just prior to it and cause it to happen?  The general opinion, and this includes Veblen-Minsky, is yes.  Booms become frothy, and froth foments fraud.  Perhaps.  But I suspect the conditions conducive to financial fraud are always in place, and much of the fluctuation is about what we see, not what there is.

When the dotcom bubble collapsed at the beginning of the 00's we witnessed an epidemic of accounting fraud.  Remember Enron, Global Crossing and Arthur Andersen for starters.  The CDO deceptions of the mid-decade were exposed by the financial crisis of 2008.  No doubt accounting and rating standards deteriorated during the bubble years, but this is not to say they weren’t widespread all along.  Part of what changed is that the popping of the bubble removed the buffers that normally allow a bending and stretching of the numbers.

I doubt that this is a culture-bound hypothesis, true for the US but not, say, China.  The extraordinary Chinese investment-led boom of the past twenty years can obscure a lot of malfeasance, but if and when the boom ends we’ll find out that much of the wealth creation was fictitious.  Best-sellers will be written about brazen fraud in high places, as if this were unique to China and its final go-go years.  But while it's much easier to call out corruption after the money train has stopped, this doesn't mean that an upsurge of corruption stopped the train.

(Other things being elsewhere...) "It’s a ceteris paribus thing,"

Paul Krugman:
"It’s a ceteris paribus thing, just like supply and demand."
Hans Albert, "Model Platonism: Neoclassical economic thought in critical light."  Journal of Institutional Economics (2012):
"T. W. Hutchison... called attention to the significance of ceteris paribus clauses as a form of alibi..."
I'm eagerly awaiting the delivery from interlibrary loans of Hutchison's The Significance and Basic Postulates of Economic Theory (1938). I'm neither a philosopher of science nor an economic methodologist. It's just that I like to have a good idea of "the literature" before I barge in with my two cents worth.

But I am thinking that recognizing ceteris paribus as an "alibi" is very important. Let me explain: "alibi" means elsewhere but it doesn't necessarily specify where else. It could be anywhere else. To prove an alibi, one must present a convincing narrative that offers specifics. The catch-all ceteris paribus clause invoked by economists comes closer to the lame excuse sense of alibi. Alibi assumptions immunize hypotheses against critique and falsification by empirical evidence.

While awaiting Hutchison's book, an observation in a 1935 "Note on Tautologies and the Nature of Economic Theory" caught my attention. Hutchison didn't reject tautologies. They have a role to play in logic and "pure" theory. What Hutchison objected to was "certain claims for deductive theory which... appear excessive." Specifically, Hutchison cited "a failure to distinguish between implication and inference" as giving rise to such excessive claims:
"This distinction may be summed up by saying that implications take the form 'if p, then q', and inferences the form 'since p, therefore q'. The one shows formal connections, the other states conclusions about the real world. An inevitable implication is a tautology, and can, by its nature, no more prognosticate anything than can the multiplication table. An inference, on the other hand, requires some data to be known in order to establish a 'since'."
The IS-LM "ceteris paribus thing" is an "if p, then q" thing -- a tautology -- not a "since p, therefore q" thing. One cannot draw conclusions about the real world from it.

Thursday, September 11, 2014

London Sharks the Lump

Proof that economic journalists don't need to know any economics: Peter Coy is Bloomberg Businessweek's economics editor:
"Those who say that London sucks the vitality out of other cities are committing what economists call the lump-of-labor fallacy: that the amount of work to be done is fixed, so if one person gets a job then someone else is unemployed. The truth is that the rich young City traders everyone loves to hate are buying stuff made throughout the U.K."
Note to Mr. Coy: the real truth is that... according to the fallacy claim's implicit criteria, whatever anyone said about anything could be shown to be committing the lump-of-labor fallacy. You have committed the lump-of-labor fallacy by accusing others of committing the lump-of-labor fallacy!

Wednesday, September 10, 2014

Those fat monkeys

Because... Marat/Sade.
Those fat monkeys covered in banknotes
Have champagne and brandy on tap
They're up to their eyeballs in franc notes
We're up to our noses in crap
Those gorilla-mouthed fakers
Are longing to see us all rot
The gentry may lose a few acres
But we lose the little we've got
Revolution, it's more like a ruin
They're all stuffed with glorious food
They think about nothing but screwing
And we are the ones who get screwed

Durbin-Schumer Inversion Proposal

Bernie Becker reports on an interesting proposal in the Senate:
Schumer’s bill takes aim at a maneuver known as earnings stripping, a process by which U.S. subsidiaries can take tax deductions on interest stemming from loans from a foreign parent. The measure comes as Democrats continue to criticize companies, like Burger King, that have sought to shift their legal address abroad … Schumer’s bill would cut in half the amount of interest deduction that companies can claim, from 50 percent to 25 percent. It also seeks to limit companies that have already inverted from claiming the deduction in future years, requiring IRS on certain transactions between a foreign parent and U.S. company for a decade.
Had Walgreen decided to move its tax domicile to Switzerland, this proposal would limit the amount of income shifting that might take place after the inversion. But consider companies like Burger King and AbbVie. They are already sourcing the vast majority of their profits overseas. The reason that the effective tax rates are about 20 percent and not in the teens is that they have to pay taxes on repatriated earnings. An inversion would still eliminate the repatriation taxes and alas the horse has left the barn as far these two companies and their aggressive transfer pricing. The proposal is a very good one but Congress should still encourage the IRS to conduct transfer pricing reviews of what companies such as these have done in the past.

Supply Created its own Demon (other things being equal)

What Sandwichman learned on his summer vacation

Back in July, I had a 10,000 word draft addressing the question: why do defunct ideas persist? I was concerned with a specific complex of doctrines in economics that relate to the argument commonly known as Say's Law. My working hypothesis was that the doctrines made sense to those who propounded them because they rationalized and legitimated a repertoire of beliefs and behaviors, not necessarily because they were otherwise coherent, persuasive or empirically supported.

During the course of the series, the original ten or twelve posts have expanded to more than 30 and the word count has probably doubled. I'm not sure to what extent this material documents the "repertoire of beliefs and behaviors" underlying the rationalization. It has, however, probed deeper into the provenance and peculiarity of the doctrinal complex than I had anticipated. The paradoxical nature of the Say's Law - wages-fund -- lump-of-labor triad turns out to be even more convolutedly paradoxical than I had realized. Historically, the lump-of-labor was present at the creation -- of political arithmetic -- but in a more plausible form.

I chose von Kempelen's automaton chess player as the emblem for this series because it symbolizes the hoax, humbug and credulity pervasive in economic discourse on technology and employment. Even a hoax can generate genuine accomplishments. These days a machine can be programmed to simulate playing a game of chess. It can even win. But it still can't play.

The analytical device of ceteris paribus may also be thought of as arising from the operation of what John Pemberton and Nancy Cartwright call a "nomological" machine:
"Because of the way they originate, [ceteris paribus] laws are both local and fragile: they hold just where and when the relevant machine is working correctly. The successful identification and use of such laws cannot be achieved by uncontextual general principles alone, but requires messy contextual knowledge..."
Cartwright's nomological machine functions the way that Big Blue simulates the playing of chess. Each anticipated move and countermove has to be explicitly programmed into it. The general economic laws and ceteris paribus clauses of contemporary economics, however, operate more like von Kempelen's automaton. The theoretical mechanism is for show and the actual moves are executed ad hoc by a human economist concealed within the apparatus.

In his Theses on the Philosophy of History, Walter Benjamin told the story of the chess-playing automaton and concluded with the speculation:
"One can imagine a philosophical counterpart to this device. The puppet called 'historical materialism' is to win all the time. It can easily be a match for anyone if it enlists the services of theology, which today, as we know, is wizened and has to keep out of sight."
That could be updated today to read 'neo-liberalism' in place of 'historical materialism.' The theology enlisted by the neo-liberal puppet is a conservative, authoritarian theology not the messianic, redemptive mysticism that Benjamin imagined.
***********************************
A PDF of an earlier draft of the entire series can be downloaded from SCRIBD. The following table of contents lists both the designated SCIOD posts and related posts that weren't formally labeled as such. This is the initial posted draft of what will presumably end up as an articulated hypertext.
  1. Supply Creates Its Own Demon (SCIOD): The Serial!
  2. You Don't, Say!
  3. Marc Andreessen and "Textbook Luddism"
  4. Say's Law sank without trace.
  5. Pantins' Pantomime
  6. One Lesson, Ad Nauseum
  7. A Neglected Point in Connection with Crises -- N. A. L. J. Johannsen
  8. Paper Mechanisms
  9. The Automatic Left-handed Loom
  10. Chariots of the Ludds
  11. Petty Foggery and Political Arithmetick
  12. Theory of the Lump of Labour: "not as simple as it has been supposed to be"
  13. Paradox Laws
  14. Liar's Paradox
  15. Barkley Rosser Cuts Gödel's Mustard
  16. Supply Creates Its Own Demon
  17. Making Sense of Brad DeLong's "Making Say's Law True in Practice"
  18. The Pathos of Aggregate Demand Management
  19. A Trick! of the Clumsiest Description!
  20. The Frankenstein Factory
  21. Common Pools and Wage Funds -- A Reply to Simon Wren-Lewis
  22. Robots, again?
  23. The Secret Basis of Glut
  24. This Magazine of Untruth
  25. Autor's Alibi and the Lump of Jackson Hole
  26. The Fund-a-mental Thing's Supply As Time Goes "Bye!"
  27. Economists: Lawyers? Shysters? Touts?
  28. Graunt Work
  29. Lump of Labor Day Special: Advanced (Elementary) Concepts in Mathematics
  30. Continuation of Brassey by Chapman
  31. Euclidean Rhapsodies
  32. Beggars, Cranks and Feather Beds
  33. Ceteris paribus, Dr. Jekyll tans his own Hyde

Tuesday, September 9, 2014

SCIOD 14: Ceteris paribus, Dr. Jekyll tans his own Hyde

"In too many cases one is unsure of exactly what restraints are being imposed and by what authority the exercise is legitimated. Fittingly, the history of ceteris paribus is a history of studied ambiguity." – Joseph Persky
Let us not worry about too many cases. Let's focus on the paradigmatic case. Persky identified Alfred Marshall's role in "spreading the word" of ceteris paribus:
"It is very likely that Alfred Marshall picked up his use of ceteris paribus from Cairnes. Although he doesn't cite Cairnes in his methodological discussions of the phrase, Marshall does use the following quotation from Cairnes in a discussion of the wages-fund theory: 'the rate of wages, other things being equal, varies inversely with the supply of labour.' 
"Whatever its origins, the fact remains that Marshall was the one to popularize ceteris paribus."
The phrase was actually 'other things being the same,' which appears eleven times in Cairnes's Some Leading Principles of Political Economy: Newly Expounded (caeteris paribus appears six times and 'other things being equal' twice). Notice that Marshall cited Cairnes "in a discussion of the wages-fund theory." More specifically, Marshall was criticizing Cairnes's attempt to "resuscitate" the wages-fund theory, in which Cairnes avoided the old pitfalls "only by explaining away so much which is characteristic of the doctrine." Apparently, though, Marshall must not have noticed that it was precisely the infernal ambiguity of the ceteris paribus device that enabled Cairnes to explain away the pitfalls in the doctrine. Marshall went on to promote the use of the ceteris paribus "pound" in static analysis.

Persky's article mentions the methodological critique of ceteris paribus by twentieth century philosophers of science and cites Daniel Hausman's introduction to those arguments. A subsequent ceteris paribus "industry" has blossomed in philosophy in which "hardly a year passes without the appearance of at least a few articles on this topic in major journals." Although it would be an exaggeration to call it a consensus, there are cogent arguments "that extant attempts to save ceteris paribus laws from vacuity are massive failures." In a recent article, T. V. Carey has proposed Galileo's method of successive approximation as a "partial solution to the ceteris paribus problem."

While the philosophers are busy resolving the methodological difficulties raised by ceteris paribus, I would like to turn my attention to the political consequences of this magical clause. Cairnes's attempt to revive the wages-fund doctrine was a response to William Thornton's apparently decisive repudiation of it in On Labour Its Wrongful Claims and Rightful Dues; Its Actual Present and Possible Future. The wages-fund doctrine had lent pseudo-scientific legitimation to fierce partisan polemics against trade unionism.

Cairnes's response encompassed both defense and attack. It is in his defense of the wages-fund doctrine that the passage cited by Marshall appears. In a later chapter on trades unionism, Cairnes attacked a statement by Thornton to the effect that "the quantity of industrial work to be done is… 'at any give time a fixed quantity.'" Cairnes objected to this assumption vehemently:
"...I must make bold to say that, within the range of economic reasoning, no more profound fallacy finds a place than is contained in this inference; nor, I must add, is there one more pregnant with practical consequences of a pernicious kind."
The review of Thornton's book in The Edinburgh Review for July 1869 took a more good-natured and humorous view of Thornton's gaffe:
"That the rate of wages is governed, as Adam Smith and his followers have conceived, by the proportion between the capital disposable for the payment of labour and the number of the recipients of that capital, is a notion that Mr. Thornton scouts with contempt, and he consigns the chimerical 'wages-fund' to the lowest limbo of unrealities. Yet, while attacking the name, we find him occasionally, under the pressure of facts, using language which virtually admits the thing, as when he says, 'that at any given time the whole quantity of work to be done is a fixed quantity, and the uttermost which employers can afford to pay for having it done is a fixed amount'; and in other places his language recognises the inevitable fact that employment must be limited by the amount of capital which at the time being sets it in motion, that amount being the thing to which Smith, McCulloch, Fawcett, and other writers have assigned the offensive name."
Thornton erred in "virtually admitting" the chimerical notion that he "scouts with contempt." Cairnes compounded error by not noticing that the "profound, pernicious fallacy" he bitterly denounced on page 251 of his book was none other than a restatement of the wages-fund doctrine he had stoutly defended back on page 174.

How is it possible that both Thornton and Cairnes could commit the identical errors while taking diametrically opposite positions on the question of the wages-fund? The answer lies in the ineluctable vagueness and ambiguity of the ceteris paribus clause. In the hall of mirrors (or 'kakeidoscope'*) where "other things remain the same," what "other things" are included in or excluded from the ceteris paribus pound is tacit as is exactly how they are "the same."

Adding intrigue to irony, Persky credited William Petty with introducing the term ceteris paribus into economic discourse. It is also quite possible the Petty wrote the earliest version of Thornton's "fixed quantity of work to be done." Except in Petty's version it was "a certain proportion of work to be done," not a fixed quantity. There is a world of difference between a fixed quantity and a certain proportion. No doubt part of the shape-shifting magic of ceteris paribus arises from its equivocation on whether it is quantities or proportions or both that are being the same.

Maybe ceteris vertigus (other things being dizzy) would be a better name.
-----------------------------------------
* "He diligently gathers all the pieces required for his purpose, shows them to us one by one, and announces triumphantly: All the materials are here, as you see for yourselves, gentlemen, each duly numbered and authenticated; and we expect to behold a likeness, though a glaring and composite one. But at the last moment he puts them in the kaleidoscope (or kakeidoscope) of his idiosyncrasy, gives some rapid twirls and flourishes, and no mortal can guess what strange shape they shall have taken when finally settled for exhibition."

Putin Gives Up Siberia To Get "Lugansk" Rather Than "Luhansk"

Or maybe you prefer "Novorossiya," ("New Russia") the name given to southeastern Ukraine when Russia conquered it from Turkish control under Catherine the Great, and which name has been revived to cover both of the self-declared republics in the oblasts of Donetsk and Luhansk/Lugansk.  I note that what people call this latter is a sign of whether they view it as part of Ukraine, in which case they call it "Luhansk," or part of a Russia-leaning independent or autonomous state or even part of Russia outright, in which case they call it "Lugansk."  If the new ceasefire brought about by the Russian incursion into the southeastern corner of Ukraine that has pushed Ukrainian President Poroshenko into accepting a ceasefire holds, then, in effect, the "Lugansk" outcome will be frozen in place, de facto on the ground, if not generally accepted as such by the rest of the world, which is tightening economic sanctions on Russia further for this latest "incursion."

In any case, in today's Financial Times, Guy Chazam reports that "Sanctions help Russia overcome its China paranoia," which starts out by reminding readers that 45 years ago the USSR and China fought a hot war, if only briefly, in the far eastern Amur region.  Since sanctions began after Russia annexed Crimea, Putin has already signed a natural gas deal with China at a much lower price than he had previously been holding out for, although at the time it was advertized as this great breakthrough that showed how Russia did not need the West.  So now Chazam reports on a new set of deals in which the Chinese state-owned oil company CNPC is buying portions of Russian state-owned oil companies operating in eastern Siberia, most notably Vankor, a subsidiary of Rosneft.  The Chinese had previously been allowed to purchase Siberian coal and timber, but this is the first time the Chinese have been allowed to purchase "stakes in its [Russia's] oil and gas fields."

So, maybe this is not all of Siberia, and Putin has gained willingness of most of the Russian population to suffer the economic sanctions from the rest of the world (none of which openly supports its policy in Ukraine, although some quietly do so, such as China), with his poll ratings riding high at 85%, but it is not at all obvious that the gains, if there are any, from having more political control of the coal and steel complex of the Donbass, will outweigh these longer run costs  It has been a fairly hilarious idea that the EU has somehow been champing at the bit to add yet more out-of-date coal and steel producing capacity to the surplus amounts already bogging down existing EU members.

BTW, that Putin justifies taking effective control of the Donbass by invoking the name it was given when Catherine the Great took control of it should give pause to those who insist that the expansion of NATO in 1999 to include Poland and the Baltic states was part of a plot by western countries.   In fact Poland began requesting to join NATO as early as 1996, largely as a result of watching what Russia was then doing in Chechnya, which of course makes Putin's complaints about the Ukrainian government shelling Donetsk look like the rank hypocrisy it is.  It was Catherine the Great who took control of Warsaw and most of central and eastern Poland also in the late 1700s when that nation was partitioned between Russia, Prussia, and Austria, holding on to it until the end of World War I, with the Baltic states having been conquered earlier by Peter the Great, although they also gained independence at the end of World War I, only to be retaken by Stalin during World War II, that former Soviet leader whom Putin is reported to admire, along with (hack, cough) Peter the Great and Catherine the Great.  That Russia is now invading and annexing territory of neighbors and justifying it on the basis of actions carried out under Catherine the Great only shows that the Poles and the Balts had very good reason to want to join NATO (and I am one who would have been fine with NATO dissolving when the Warsaw Pact did, but, it did not...).

Barkley Rosser

Interest Rates Go Nominally Negative In Europe

While I have only seen it reported in small print deep in an article in the Financial Times, evidence of the newly expansionary monetary policy by the European Central Bank is now visible in the reappearance of the peculiar phenomenon of negative nominal interest rates, most prominently for two-year government notes in Ireland, France, Belgium, the Netherlands, Finland, and Germany.  I am mystified why when we see this phenomenon it seems to be most prominent at the two-year time horizon, which means that there is a V-shaped yield curve out there, also something plenty peculiar.  When we saw negative nominal interest rates in the US economy a few years ago briefly, they also seemed to be concentrated at the two-year time horizon.

In any case, given the stagnant state of the eurozone economy, I guess this must be viewed as being a Good Thing, at least for now.

Barkley Rosser

Sunday, September 7, 2014

Financing the Reforestation Hype

Today’s New York Times has a great article on the funding of Washington think tanks by foreign governments.  It seems that some of the “objective expertise” provided by these outfits is simply special interest pleading in pseudo-academic clothing.  The treatment of Middle Eastern policy is especially interesting.

But the article opens with a surprising example, the payment of $5 million by the government of Norway to the Center for Global Development, whose mission, according to its website, is to “to reduce global poverty and inequality”.  Sounds good, but the fine print is what counts here.  The specific purpose of Norway’s contribution was to enlist the Center in a lobbying campaign for a doubling of US funds in support of global reforestation as a means to combat climate change.

This caught my attention because a few months ago I posted a critique of the notion that planting or not cutting trees could offset fossil fuel burning as a way to forestall the buildup of greenhouse gases.  The scientific basis for forestation as climate change mitigation is full of holes, but there is more action on that front than any other aspect of carbon policy.  How to explain this?

Money.  Norway doesn’t want its oil to become a stranded asset.  Their idea of carbon policy is to drill and burn and then plant a bunch of trees.  They are willing to pay pliable “experts” to convince the rest of us that this makes sense.  And with billions of dollars in the balance, other fossil fuel interests, forest investors and countries eager to sell offsets to them all have a stake in this game.  Weak arguments backed by lots of money win out against strong ones with few sponsors.  This is a problem in virtually every area of economics.

And, in case you were wondering, which I’m sure you weren’t: no one paid me to write this.

Reforming the Economics Curriculum: Some Initial Perspectives on Fresh Start versus CORE

The first fruits of the CORE project are now available for sampling, and of course I had to taste it for myself.  This is an international initiative that, using INET (Institute for New Economic Thinking) funding, brought together 25 economists to mold a set of open-access resources that would put a new spin on undergraduate teaching.  They are collectively producing a sort-of textbook, The Economy, which is free for one and all.

So how does CORE compare to my own textbooks (here and here) that have a parallel goal?  Since only the first two chapters are up on the CORE website it’s too soon to tell, but here are my first impressions:

1. CORE wants to overcome the conventional distinction between micro- and macroeconomics.  I regard the split as mostly useful and representative of the way the profession organizes and thinks about itself.  I think it’s OK to spend one term on micro and another on macro, although I admit that there are topics in each that benefit enormously from exposure to the other.  I can see the value of CORE’s approach too.

2. CORE is “big theory”.  It’s about the vast sweep of history, the nature of economic development, the roles of competition and cooperation, participation and hierarchy, and all that.  What I’ve read so far is quite stimulating, and many students will be excited by it.  My approach is much more applied.  While I spend a bit of time contextualizing economics in a manner similar to CORE, for the most part my attention is much more on the nuts and bolts of how economics is used and abused in everyday problem-solving.  Compared to CORE, I think my texts better lend themselves to the use of case studies, research projects on specific policy questions and the use of online data sources to see how well theory matches current reality.  (I’m more of an applied economist than most of the CORE people I’m familiar with.)  The balance between social theory and practical tool-building is a difficult question, however, and there's no single right answer.

3. CORE has a message.  Or, to be more precise, it has many messages, and it is written to tell students how they should think about a variety of topics.  (I agree with most of what I have read so far, but this is not the point.)  I have gone out of my way, on the other hand, to distance my texts as much as possible from my own positions on disputed economic questions.  I am more concerned to promote critical thinking—developing the student’s ability to make analytical assessments of competing arguments, increasing her tolerance for ambiguity—than promulgating “correct” thinking.  (I do break down from time to time, especially in the macro volume when I become exasperated.  You’ll see what I mean.)  I don’t want to say that CORE is doctrinaire; certainly it is far less authoritarian in its approach than the typical textbook.  But its tone is distinctly different from mine.

4. CORE wants to redefine not only the teaching of economics but also its subject matter.  The Economy appears to leave out a lot of what traditional textbooks cover and most economists still think are important pieces of the discipline.  In effect it says, here’s what economics should look like today.  My books are, at least on the surface, far more modest.  They take the topic elements of the mainstream of the profession as given and devote themselves to reformulating how they are framed, organized and presented.  More or less the entirety of the conventional economic sequence can be found in the Fresh Start books, and this can’t be said for CORE.  On a deeper level, however, one of the main intentions behind my books is to demonstrate that you can keep the pieces the same, but reframing them and placing them in the context of more recent developments change how you view economics as a whole.  But I should also emphasize again that the books are not preachy about this, since the goal is critical thinking, not a new catechism.

5. CORE has high production values.  It looks great and finds a nice balance between narrative and pastiche.  (Most introductory textbooks are too pastiche-y for my taste; mine probably err on the side of excessive narrative.)  There are lots of elegantly executed graphics.  They obviously drew on some pretty serious talent.  I can hardly claim to be in that company.  I think my texts look OK, and they have been vetted for clarity and effectiveness by many cohorts of guinea pigs students, but you can’t help but notice that far fewer resources went into their creation.

All of these observations are provisional, since CORE has just begun unspooling.  I may come back in a week or two with a completely different assessment.  We shall see.

Also, I don’t want to convey the impression that I am arguing that my approach is “right” and CORE’s isn’t.  There isn’t a single right approach, nor even necessarily a best way of implementing any single approach.  The conventional textbook market is better served by offering instructors a choice of materials, and the movement to reset the undergraduate curriculum has a similar interest in diversity.  If anything, the need is greater because there is less clarity about the way forward.  I should add that, from the start (and we’re talking now about 2003 when I began the actual writing), I regarded my books as stepping stones on the way to new thinking about the teaching of economics and not the final word.  I’m looking forward to reading more of the CORE materials and seeing how they approach the same puzzles I had to grapple with.

ps: For those interested in acquiring an exam copy of either of my textbooks (or actually purchasing one for that matter), be advised that Springer takes about a month to ship physical copies.  If time matters, go for the e-version.

UPDATE: I'm wrong.  There are ten chapters of The Economy available for online reading (but not downloading).  I'll have to plunge into the whole thing and see if my initial impressions have to be revised.

Saturday, September 6, 2014

Explaining the "other things equal" clause to Nick Rowe

At Worthwhile Canadian Initiative, Nick Rowe writes:
"Those of us who teach Intro Economics know we have to spend some time carefully explaining the "other things equal" clause, and why it matters. Because the students won't get it unless we explain it. We tend to take it for granted that the silent "other things equal" clause is understood, but it might not be understood by all."
Other things being equal, there's been a raging debate in philosophy of science over the past couple of decades regarding the legitimacy of "CP-laws" -- that is to say "laws" hedged by a ceteris paribus clause. The 'other things equal' clause may be headed in the same direction of a Santa Claus, something we let children believe in that we know doesn't exist. 

Anyway, there's a hilarious exchange in the 19th century between William Thornton and John Cairnes where they each respectively denounce and uphold and uphold and denounce seemingly "contrary" principles that are in fact simply different statements of the same principle. The secret to the debacle is the kakeidoscopic versatility of their respective ceteris paribus clauses. 

Just yesterday, I posted "Ceteris paribus, Dr. Jekyll tans his own Hyde" at Ecological Headstand. It's scheduled to publish on EconoSpeak next Tuesday as the penultimate installment in the supply-creates-its-own-demon series. But rather than send readers clicking all over the place, I'll just paste it again below:

"In too many cases one is unsure of exactly what restraints are being imposed and by what authority the exercise is legitimated. Fittingly, the history of ceteris paribus is a history of studied ambiguity." – Joseph Persky
Let us not worry about too many cases. Let's focus on the paradigmatic case. Persky identified Alfred Marshall's role in "spreading the word" of ceteris paribus:
"It is very likely that Alfred Marshall picked up his use of ceteris paribus from Cairnes. Although he doesn't cite Cairnes in his methodological discussions of the phrase, Marshall does use the following quotation from Cairnes in a discussion of the wages-fund theory: 'the rate of wages, other things being equal, varies inversely with the supply of labour.' 
"Whatever its origins, the fact remains that Marshall was the one to popularize ceteris paribus."
The phrase was actually "other things being the same," which appears eleven times in Cairnes's Some Leading Principles of Political Economy: Newly Expounded. Notice that Marshall cited Cairnes "in a discussion of the wages-fund theory." More specifically, Marshall was criticizing Cairnes's attempt to "resuscitate" the wages-fund theory, in which Cairnes avoided the old pitfalls "only by explaining away so much which is characteristic of the doctrine." Apparently, though, Marshall must not have noticed that it was precisely the infernal ambiguity of the ceteris paribus device that enabled Cairnes to explain away the pitfalls in the doctrine. Marshall went on to promote the use of the ceteris paribus "pound" in static analysis.

Persky's article mentions the methodological critique of ceteris paribus by twentieth century philosophers of science and cites Daniel Hausman's introduction to those arguments. A subsequent ceteris paribus "industry" has blossomed in philosophy in which "hardly a year passes without the appearance of at least a few articles on this topic in major journals." Although it would be an exaggeration to call it a consensus, there are cogent arguments "that extant attempts to save ceteris paribus laws from vacuity are massive failures." In a recent article, T. V. Carey has proposed Galileo's method of successive approximation as a "partial solution to the ceteris paribus problem."

While the philosophers are busy resolving the methodological difficulties raised by ceteris paribus, I would like to turn my attention to the political consequences of this magical clause. Cairnes's attempt to revive the wages-fund doctrine was a response to William Thornton's apparently decisive repudiation of it in On Labour Its Wrongful Claims and Rightful Dues; Its Actual Present and Possible Future. The wages-fund doctrine had lent pseudo-scientific legitimation to fierce partisan polemics against trade unionism.

Cairnes's response encompassed both defense and attack. It is in his defense of the wages-fund doctrine that the passage cited by Marshall appears. In a later chapter on trades unionism, Cairnes attacked a statement by Thornton to the effect that "the quantity of industrial work to be done is… 'at any give time a fixed quantity.'" Cairnes objected to this assumption vehemently:
"...I must make bold to say that, within the range of economic reasoning, no more profound fallacy finds a place than is contained in this inference; nor, I must add, is there one more pregnant with practical consequences of a pernicious kind."
The review of Thornton's book in The Edinburgh Review for July 1869 took a more good-natured and humorous view of Thornton's gaffe:
"That the rate of wages is governed, as Adam Smith and his followers have conceived, by the proportion between the capital disposable for the payment of labour and the number of the recipients of that capital, is a notion that Mr. Thornton scouts with contempt, and he consigns the chimerical 'wages-fund' to the lowest limbo of unrealities. Yet, while attacking the name, we find him occasionally, under the pressure of facts, using language which virtually admits the thing, as when he says, 'that at any given time the whole quantity of work to be done is a fixed quantity, and the uttermost which employers can afford to pay for having it done is a fixed amount'; and in other places his language recognises the inevitable fact that employment must be limited by the amount of capital which at the time being sets it in motion, that amount being the thing to which Smith, McCulloch, Fawcett, and other writers have assigned the offensive name."
Thornton erred in "virtually admitting" the chimerical notion that he "scouts with contempt." Cairnes compounded error by not noticing that the "profound, pernicious fallacy" he bitterly denounced on page 251 of his book was none other than a restatement of the wages-fund doctrine he had stoutly defended back on page 174.

How is it possible that both Thornton and Cairnes could commit the identical errors while taking diametrically opposite positions on the question of the wages-fund? The answer lies in the ineluctable vagueness and ambiguity of the ceteris paribus clause. In the hall of mirrors where "other things remain the same," what "other things" are included in or excluded from the ceteris paribus pound is tacit as is exactly how they are "the same."

Adding intrigue to irony, Persky credited William Petty with introducing the term ceteris paribus into economic discourse. It is also quite possible the Petty wrote the earliest version of Thornton's "fixed quantity of work to be done." Except in Petty's version it was "a certain proportion of work to be done," not a fixed quantity. There is a world of difference between a fixed quantity and a certain proportion. No doubt part of the shape-shifting magic of ceteris paribus arises from its equivocation on whether it is quantities or proportions or both that are being the same.

Maybe ceteris vertigus (other things being dizzy) would be a better name.