Xiaokai Yang & New Classical Economics (3)

(Part 1 | 2)

Xiaokai Yang, Economics: Neoclassical Framework versus New Classical, Blackwell Publishers (2001)

In the previous post of this series I described how the author outlined a schemata for representing the emergence of proto-firms from a hypothetical universe of self-employed workers, all autonomous but for the price system. The interesting point about this section is Prof. Yang’s determination to represent as an endogenous part of the model the emergence of an optimal firm size. He begins with the simplest possible production functions (Yang, 2001, pp.196-202),
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Xiaokai Yang & New Classical Economics (2)

(Part 1)

Xiaokai Yang, Economics: Neoclassical Framework versus New Classical, Blackwell Publishers (2001)

The normal economic system works itself. For its current operation it is under no central control, it needs no central survey. Over the whole range of human activity and human need, supply is adjusted to demand, and production to consumption, by a process that is automatic, elastic, and responsive..

J.A. Salter, Allied Shipping Control, p.16; quoted in D.H. Robertson (p.84)

Here and there, it is true, we have found islands of conscious power in this ocean of unconscious co-operation, like lumps of butter coagulating in a pail of buttermilk.

D.H. Robertson, The Control of Industry, Harcourt Brace (1923) p.84

For purposes of comparison, Prof. Yang explains the concept of neoclassical equilibrium (which he thinks is conceptually inferior to new classical analysis).  The system of equations consists usually of a single representative agent who can chose between two goods, each of which has a representative production function.  The need for a mathematically coherent solution imposes a lot of constraints, so that the production function nearly always takes the same form (these conditions, by the way, are known as the Sonnenschein-Mantel-Debreu conditions (Yang 2001, pp.101-103; see Rizvi 2006 for online explanation).¹

Usually, when neoclassical textbooks introduce utility functions, they go on to explain how students can derive demand functions from them. This textbook is not neoclassical, and it does not separate out consumers from producers (Yang, 2001, p.38).  Instead, each consumer is also a producer who faces multiple possible production functions (for each possible good).  In fact, Yang’s outline is a simplified version of Sraffa’s [classical] general equilibrium, although Yang includes the production functions so students have something to solve.

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Xiaokai Yang & New Classical Economics (1)

Xiaokai Yang, Economics: Neoclassical Framework versus New Classical, Blackwell Publishers (2001)

This is not a review, since I’m not claiming to provide an authoritative critique of the work in question. What follows is my working out what Prof. Yang is trying to say.

Policy initiatives are predictable: the author makes familiar arguments on behalf of the free market (or “invisible hand of the market”) whenever possible, which is generally what economists do. His examples are abstract; there are no detailed examples, such as how to match a system of equations describing an economy to an actual economy or portion thereof. In some of his other works, e.g., Yang 🙵 Sachs (2008) he lists prominent economic historians as being conceptually allied with his opinions.

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