Progressive Economists on the Neo Classical school

Progressive Economists on the Neo Classical school ------ >Didn't Marx cite some 19C hack who said that the interest rate was >determined by the rate of growth in a nation's forests? ------------- you're the Marx expert, but I think I would more or less stand up for said hack as having something approaching a point. Certainly this is the reverse of Hotelling's model; you manage your forest such that the first derivative of the value of your trees with respect to time is equal to the interest rate. In the 19th century I think that this would be a decent way of thinking about the long term real interest rate; the opportunity cost of cutting a tree today is how much it will grow tomorrow. Of course in the industrial age, this old-fashioned way of thinking about the fundamental basis of the long term interest rate has been replaced, by fuck-all. ------------- >When I interviewed Graciela Chichilnisky years ago about her crackpot >scheme to trade options on nature, she cited the genius of Hotelling >as her guide. When I asked her how you price, say, a call on a patch >of rain forest, since there's no trading in the underlying >instrument, she said, "That's easy. You run your model with the rain >forest, then run it without." The difference, of course, was the >value of the chunk of nature. best dd ------------- lawdy. the trouble with options theory is that it's the LSD of finance. Most of the people who take it have a moderately mind-enlarging experience and see the world in a slightly different way as a result. But there are always some poor buggers who can't get enough of it and think that they have to spread it around and change the world. Doug ------------- >J. G. Opdyke, in his "Treatise on Political Economy" (New York, 1851) makes a very unsuccessful attempt to explain the general extension of a rate of interest of 5% by eternal laws. Still more naively proceeds Mr. Karl Arnd in "Die naturgemasse Volkswirthschaft gegenuber dem Monopoliengeist und dem Kommunismus, etc., Hanau, 1845." There we may read: "In the natural course of the production of goods there is only one phenomenon, which, in the fully settled countries, seems to be destined to regulate in some measure the rate of interest; this is the proportion, in which the quantities of wood of the European forests increase through their annual new growth. This new growth takes place, quite independently of their exchange value, at the rate of 3 or 4 to 100." (How queer that the trees should arrange for their new growth independently of their exchange value!) "According to this a fall of the rate of interest below its present level in the richest countries cannot be expected." Page 124. (He means, because the new growth of the trees is independent of their exchange value, even though their exchange value may depend on their new growth.) This deserves to be called "the primordial rate of forest interest." Its discoverer has made further meritorious contributions in this work to "our science" as the "philosopher of the dog tax."< (vol. III, ch. 22, note 68; p. 485 of the Penguin/Vintage edition) Hey, it's okay as they don't start taxing cats! -- Jim Devine ------------- THE LISTMOM: The forestry example is fascinating to me. Actually, the work goes back earler than the sources Marx cited. Here are some of my notes on the subject: Lo"fgren, K. 1983. "The Faustmann-Ohlin Theorem: A Historical Note." History of Political Economy, 15: 2 (Summer): pp. 261-4. Faustmannn, Martin. 1849. "Berechnung des Werthes, welchen Walboden sowie mach nicht haubare Holzbestande fuer die Waldwirtschaft besitzen." Allgemeine Forst und Jagd Zeitung, 15, pp. 441-455, translated in M. Gane. 1968. Martin Faustmann and the Evolution of Discounted Cash Flow, Oxford Commonwealth Forestry Institute, Paper No. 42 determined that a forest should be cut down when the rate of change of its value is equal to the interest on the value of the stand plus interest on the value of the forest land. ## Faulhaber, Gerald and William J. Baumol. 1988. "Economists as Innovators: Practical Products of Theoretical Research." .Journal of Economic Literature., 26: 2 (June): pp. 577-600. 583: They show that although the theory of net present value has been known for centuries, but it was very slow in being adopted. "it may have taken the market some 4 centuries to discipline at least some of its participants into efficient discounting." 584: German foresters worked out the details of net present value more than 40 years before Bohn-Bawerk and Fisher took up the idea. The definitive work was published by Martin Faustmann (1849). Fisher (1926) also described the Phillips curve clearly 30 years before its popularization. From the founding of the .Harvard Business Review. to WWII, it never mentioned net present value. Fisher's work on net present value was largely ignored although railroad engineers commonly used the technique. 585: By the 1960s, text books commonly taught net present value of cash flows, but relatively few firms used it in their investment decisions. Thus, the idea has disseminated very slowly. ## Mitra, Tapan and Henry Y. Wan, Jr. 1985. "Some Theoretical Results on the Economics of Forestry." Review of Economic Studies, 52: 2 (April): pp. 263-82. Scott, James C. 1998. Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven: Yale University Press). 11-2: "The early modern European state, even before the development of scientific forestry, viewed its forests primarily through the fiscal lens of revenue needs. To be sure, other concerns -- such as timber for ship-building, state construction, and fuel for the economic security of its subjects -- were not entirely absent from official management." 12: "Missing, of course, were all those trees, bushes, and plants holding little or no potential for state revenue. Missing as well were all those parts of trees, even revenue-bearing trees, which might have been useful to the population but whose value could not be converted into fiscal receipts. Here I have in mind foliage and its uses as fodder and thatch; fruits, as food for people and domestic animals; twigs and branches, as bedding, fencing, hop poles, and kindling; bark and roots, for making medicines and for tanning; sap, for making resins; and so forth." 12: "In state "fiscal forestry," ... the actual tree with its vast number of possible uses was replaced by an abstract tree representing a volume of lumber or firewood." 13: "Gone was the vast majority of flora: grasses, flowers, lichens, ferns, mosses, shrubs, and vines. Gone, too, were reptiles, birds, amphibians, and innumerable species of insects. Gone were most species of fauna, except those that interested gamekeepers." "From an anthropologist's perspective, nearly everything touching human interaction with the forest was also missing from the state's tunnel vision. The state did pay attention to poaching, which impinged on its claim to revenue in wood or its claim to royal game, but otherwise it typically ignored the vast, complex, and negotiated social uses of the forest for hunting and gathering, pasturage, fishing, charcoal making, trapping, and collecting food and valuable minerals as well as the forest's significance for magic, worship, refuge, and so on." 18: "How much easier it was to manage the new, stripped-down forest. With stands of same-age trees arranged in linear alleys, clearing the underbrush, felling, extraction, and new planting became a far more routine process. Increasing order in the forest made it possible for forest workers to use written training protocols that could be widely applied. A relatively unskilled and inexperienced labor crew could adequately carry out its tasks by following a few standard rules in the new forest environment. Harvesting logs of relatively uniform width and length not only made it possible to forecast yields successfully but also to market homogeneous product units to logging contractors and timber merchants. Commercial logic and bureaucratic logic were, in this instance, synonymous; it was a system that promised to maximize the return of a single commodity over the long haul and at the same time lent itself to a centralized scheme of management. 19: "the German model of intensive commercial forestry became standard throughout the world. Gifford Pinchot, the second chief forester of the United States, was trained at the French forestry school at Nancy, which followed a German-style curriculum, as did most U.S. and European forestry schools. The first forester hired by the British to assess and manage the great forest resources of India and Burma was Dietrich Brandes, a German. By the end of the nineteenth century, German forestry science was hegemonic." 19: The Germans planted monocultural stands of Norway spruce. 20: The first generation produced high yields, but the second rotation fell by 20 to 30 percent because the trees were mining the soil of the old forest. 20: "It took about one century for them [the negative consequences] to show up clearly. Many of the pure stands grew excellently in the first generation but already showed an amazing retrogression in the second generation. The reason for this is a very complex one and only a simplified explanation can be given .... Then the whole nutrient cycle got out of order and eventually was nearly stopped .... Anyway, the drop of one or two site classes [used for grading the quality of timber] during two or three generations of pure spruce is a well known and frequently observed fact. This represents a production loss of 20 to 30 percent." Plochmann, Richard. 1968. Forestry in the Federal Republic of Germany, Hill Family Foundation Series (Corvallis: Oregon State University School of Forestry): pp. 24-25. 21: "Utilitarian simplification in the forest was an effective way of maximizing wood production in the short and intermediate term. Ultimately, however, its emphasis on yield and paper profits, its relatively short time horizon, and, above all, the vast array of consequences it had resolutely bracketed came back to haunt it." 21: "One further drawback, which is typical of all pure plantations, is that the ecology of the natural plant associations became unbalanced. Outside of the natural habitat, and when planted in pure stands, the physical condition of the single tree' weakens and resistance against enemies decreases." Plochmann, Richard. 1968. Forestry in the Federal Republic of Germany, Hill Family Foundation Series (Corvallis: Oregon State University School of Forestry): p. 25. 21: The Germans "invented the science of what they called "forest hygiene." In place of hollow trees that had been home to woodpeckers, owls, and other tree-nesting birds, the foresters provided specially designed boxes. Ant colonies were artificially raised and implanted in the forest, their nests tended by local schoolchildren. Several species of spiders, which had disappeared from the monocropped forest, were reintroduced." 21: "Having come to see the forest as a commodity, scientific forestry set about refashioning it as a commodity machine." Lo"fgren, K. 1983. "The Faustmann-Ohlin Theorem: A Historical Note." History of Political Economy, 15: 2 (Summer): pp. 261-4. Faustmannn, Martin. 1849. "Berechnung des Werthes, welchen Walboden sowie mach nicht haubare Holzbestande fuer die Waldwirtschaft besitzen." Allgemeine Forst und Jagd Zeitung, 15, pp. 441-455, translated in M. Gane. 1968. Martin Faustmann and the Evolution of Discounted Cash Flow, Oxford Commonwealth Forestry Institute, Paper No. 42 determined that a forest should be cut down when the rate of change of its value is equal to the interest on the value of the stand plus interest on the value of the forest land. ## Michael Perelman Economics Department California State University Chico, CA 95929 ------------- It seems to me that Lord Kelvin (William Thompson) used discounted cash flow in his calculation of choosing the size of a conductor on an electric system -- but I can't find my notes about it. Gene Coyle -------------