DAN USHER Queen’s University

Kingston, Canada

An Elephantine Theory of Depressions

In microeconomics a theory is thought to be, if not inadequate, then incomplete unless it can be interpreted as “telling a story.” Beavers and deers, perpetual plants, aging wine-these and other homely examples play a larger role in our assessment of the validity of theories than economists might want to admit. If we cannot find a plausible story, then the theory itself is often suspect. This criterion may be applied to macroeconomics too.

People consume carrots (C), ivory (I), and nothing else. These goods are required in fixed proportions so that

C/Z = k - 1, 0)

where k is invariant. No carrot can be eaten without the appro- priate amount of ivory; no ivory can be enjoyed without the ap- propriate amount of carrots. Furthermore, enjoyment of carrots or ivory requires proportionate amounts of mud (M) which will serve as the numeraire. Both goods are produced by labor alone and the alternative labor cost of ivory in terms of carrots is invariant, so that one may define quantity units to’ make both supply prices equal to 1. We can now define income (Y) such that

Y=CSZ. (2)

The demand for labor, N, is a unique function of total income

iv = g(Y) 9 (3)

where income constitutes the effective demand for goods. There is, however, an important difference between carrots and ivory. Car- rots are produced straightforwardly with labor. Ivory on the other hand, is extracted from elephants; the production function repre- senting the extraction process is just like the production function for carrots, but there can be no ivory extracted unless an elephant happens to come by.

Thus we are led to the study of the behavior of elephants.

journal of Macroeconomics, Fall 1984, Vol. 6, No. 4, pp. 477-480 477 c opyright 0 1985 by Wayne State University Press.

Dan Usher

The number of elephants appearing in the course of the year de- pends on the inducement (i), and the amount of ivory is determined accordingly.

1 = Z(i) . (4)

What is the nature of this inducement? As is well known, elephants like to wallow in mud. The inducement is therefore associated with the amount of mud leftover (L2) after the required amount (L,) has been applied to facilitate the consumption of carrots and ivory. The magnitude of the inducement-graduated like golf scores so that a low i is a high inducement-is specified implicitly by the equation

A4 = L,(Y) + L,(i) ;

where M is constant at any moment of time, though government may change the supply.

The determination of the demand for labor can now be illus- trated on a simple diagram connecting i and Y, where Y is of course a surrogate for the demand for labor because of the simple relation in Equation (3). First from Equations (1) and (2), we see that Y = c + I = (k - l)Z + I = kZ; effective demand depends entirely on the supply of ivory, for carrots and ivory are consumed in fixed proportions. Then, using Equation (4) we can connect income with the inducement to elephants, that is Y = kI = kZ(i). We might call this equation the ivory supply curve,

But i is related to Y in a second way. It is connected through the demand for leftover mud as indicated in Equation (5). We can depict both relations on a simple diagram (see Figure 1). With a fixed supply of labor, the government can generate full employment by providing more mud.

What we have here is not merely a elephantine explanation of why unemployment takes place but an infallible means to abolish it. So profound is this theory that the reader will not at once ap- preciate its full significance. A massive guide to its true meaning is now in preparation. For the moment it may be helpful to correct a few simple-minded errors in the interpretation of the theory.

The uninstructed reader, blinded by the conventional wisdom of neoclassical economics, might be led to suppose that full em- ployment could be created by lowering wages. That is not so. To be sure, the entire labor force would be employed if the mud sup- ply were sufficient or if the government could arrange for a syn-

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Elephantine Theory of’ Depressions

il

Figure 1.

thetic ivory to be produced. But if the mud supply is too small, if the appropriate number of elephants fails to appear and if synthetic ivory is not made available, then nothing on earth will allow the entire labor force to be employed because labor would need to be producing a larger proportion of carrots to ivory than anybody would be willing to consume. The effective demand would not be there.

A second error may reflect the reader’s deficient understand- ing of human nature. There are those who are so subservient to established academic hierarchy that they cannot admit to the es- sential constancy of the ratio of carrots to ivory despite the pro- spective adoption of the elephantine theory in both Cambridges, Oxford, Chicago, Stanford, Yale, and even Queen’s. To such people I can only express my sympathy and recommend a study of the new psychological economics as well as the new treatise on ele- phantine theory. They will in time come to realize that ivory, and ivory alone, can play the role of I in the theory, for no subdivision of income other than that between carrots and ivory preserves the required constancy of k over time. Value shares of other variables may be constant, as would be required by a Cobb-Douglas utility function, but that would generate no theory of the unemployment of labor, since available labor could then be used up producing car- rots which would be purchased at a sufficiently low relative price of carrots and ivory. The reader, if he contemplates the matter long enough, will come to understand that the ratio of the number of carrots to the number of pounds of ivory is always the same.

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Dan Usher

A third error arises from treating ivory as a stock rather than a flow. Ivory, as everyone knows, is like carrots in that it will rot if it is not consumed as soon as it is produced. That must be so because the elephantine theory requires it to be so. If ivory were in the nature of a stock of stuff yielding services over time and held by people to provide for themselves in their old age, then either the proportion between the consumption of carrots and the stock of ivory would be constant, in which case there would be no mul- tiplier between the quantity of ivory produced and the total in- come, or there is no such linkage to utility in which case the rel- ative price of ivory would be determined in the stock market and nothing in the model would prevent the entire labor force from producing carrots if no elephants were to appear. The interpretation of Z in the elephantine theory must be a flow consumed rather than the addition to a stock.

It is understandable, I suppose, that one might at first be so dazzled and overawed by the novelty and penetrating insights of theory that one cannot appreciate its fundamental truth and real- ism. The theory becomes clearer on greater acquaintance. The reader would be wise to stop all other research to devote himself to ele- phantine economics. He should try to modify the theory in many inconsequential ways. The number of elephants arriving in any par- ticular year may be influenced by the intervention of animal spirits or by random encounters with other beasts in the jungle. Con- sumers may be rational or irrational in their expectations of how many elephants are to appear. The efficiency of mud may vary over time depending on the rate of unemployment. Great mathematical sophistication can be employed in incorporating these modifications. The more effort that is devoted to this great undertaking, the more one will come to see the fundamental veracity of the theory itself.

Received: April 1983 Final version received: ]anuary 1984

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