Rijken van Olst (1969:97) provides the Dutch income distribution for 1950. Here income is measured in Dfl thousands (thousand guilders) of 1950, and the observed frequency concerns males with tax obligations. A Dfl is about 0.5 €.

The Centraal Bureau voor de Statistiek (1991:47) provides an income distribution for 1988, in Dfl thousands of 1988, and the observed frequency concerns the ‘active’ population with an income, i.e. exclusive of fulltime benefit recipients, but, in this case, also exclusive of independents.

Table 21 contains both distributions. Income class c[i] means that incomes from c[i-1] < c[i] are considered, so that c[i] itself is excluded. With f[c] the frequency observed for class c, we can compute the frequency density as f[c[i]] / (c[i] - c[i-1])  or the frequency adjusted for the range concerned.

These data are not comparable, and some aspects are a bit less relevant for our objectives. Apart from the difference in independents, the 1950 distribution excludes females, and the 1988 distribution contains parttimers while the number of parttimers has strongly increased compared to 1950. In both cases it are incomes, and not just labour earnings. However, we can see how far we get.

Table 22 contains a summary review, with both the numbers of persons involved, the total and average income (in currency of the relevant year). It appears that by dropping the lowest 8 classes of the 1988 distribution we are better approximating the situation without the parttimers. This then is used for estimation of the lognormal productivity distributions that are used in the illustrations in the body of the text.

This program uses the Applied General Equilibrium routine of the Economics Pack (Colignatus (1999)), which routine is based on work of Asahi Noguchi and Silvio Levy, see the chapter in Varian (1993). It is nice to show how simple modeling actually can be made.

Needs[“Economics`Pack`”]

ResetAll

Economics[“AGE`”]

SetFunction[withl, shel] =

                               {Function ( 0.4 (1-q) hs^0.334 + 0.6 (1-q) ms^0.334 + q ls^0.334)^3,

                               CoefficientList { q 0.1}, Factors {hs, ms, ls} }

SetFunction[withl, expo] =

                               {Function

                                (( (c he^(1-1/s2) + (1-c) me^(1-1/s2))^(1/(1-1/s2)) )^(1-1/s) * (1-d) +

                                    d * le^(1-1/s) )^(1/(1 - 1/s)),

                               CoefficientList {c 0.2, d 0.01, s 1.2, s2 0.4},

                               Factors {he, me, le} }

SetModel[NumberOfSectors 2, NumberOfFactors 3, Utility CES,

                               Production {Sector[1] SetFunction[withl, shel],

                                                          Sector[2] SetFunction[withl, expo] } ]

ownpars = {Utility {Scale[Utility] 1, RTS[Utility] 1, S[Utility] 0.6,

                                               FactorE[1] 0.7, FactorE[2] 0.3},

                               Production {}, Resources {15, 75, 10}}

eq = Equilibrium[ownpars]

AllocationTable[Allocation[ownpars]]

shares = (FactorPrices /. eq) * (Resources /. ownpars) / (YEq /. eq)

cpc23 = CPCDiagram[ownpars, AxesLabel {“Sheltered”, “Exposed”},

AspectRatio Automatic]

ploteq1 = EdgeworthBowley[ownpars, Factor {1, 2}, PlotPoints 50]

(*l = 0*)

SetFunction[withoutl, shel] =

                               {Function ( 0.4 (1-q) hs^0.334 + 0.6 (1-q) ms^0.334 + q ls^0.334)^3,

                               CoefficientList {}, Factors {hs, ms} } /. {ls 0, q 0.1}

SetFunction[withoutl, expo] =

                {Function (( (c he^(1-1/s2) + (1-c) me^(1-1/s2))^(1/(1-1/s2)) )^(1-1/s) * (1-d) +

                d * le^(1-1/s) )^(1/(1 - 1/s)) /. {le 0, s 1.2, s2 0.4} // PowerExpand,

                               CoefficientList {c .2, d 0.01}, Factors {he, me}}

SetModel[NumberOfSectors 2, NumberOfFactors 2, Utility CES,

                               Production {Sector[1] SetFunction[withoutl, shel],

                                                          Sector[2] SetFunction[withoutl, expo] } ]

pars22 =  {Utility {Scale[Utility] 1, RTS[Utility] 1, S[Utility] 0.6,

                                               FactorE[1] 0.7, FactorE[2] 0.3},

                     Production {}, Resources {15, 75}}

eq22 = Equilibrium[pars22]

AllocationTable[Allocation[pars22]]

shares22 = (FactorPrices /. eq22) * (Resources /. pars22) / (YEq /. eq22)

cpc22 = CPCDiagram[pars22, AxesLabel {“Sheltered”, “Exposed”},

                                               AspectRatio Automatic]

ploteq4 = EdgeworthBowley[pars22, Factor {1, 2}, PlotPoints 50]

cpcfin = Show[cpc23, cpc22]

ebfin = Show[ploteq1, ploteq4,

FrameLabel   {“Total high pr. labour”, “Total middle pr. labour”}]

Writing this book got me to read some of Hayek (1984) - finally, and after great misgivings. As a rule, a student of economics should always read up on the Nobel laureates, but Hayek never inspired me. What I read about his work made it uninviting. In Skidelsky’s biography of Keynes he is reduced from a critic of Keynes to someone whom Keynes, exasparated from lack of progress in communication, took along to go and buy old books. Later Hayek got a following of ‘libertarians’ and that was equally unattractive (not to be confused with ‘librarians’ (;-)).

I likely agree with Mark Blaug (1985:90): “In short, everyone agrees with what Hayek means in general but there is a large spectrum of answers to what he means in particular. It will take another generation to fully digest Hayek’s many and multifaceted contributions to economics and indeed social science as a whole.”

What I finally got to read of Hayek actually made me better appreciate part of his work, though the feelings remain mixed.

For starters, it appears that Hayek considers himself to be a ‘whig’ like Gladstone and de Tocqueville, and that he was not too happy with the ‘libertarians’. This is quite a relief to read, and I am sorry that I have entertained such a prejudice for so long. (And: Why can’t reporters be more accurate ?)

Secondly, Hayek is known in current economics for his early comments on the relevance of ‘knowledge’. My hesitation on this remains, though. This hesitation derives from the consideration that he apparently didn’t advance beyond Walras’s solution of assuming tatonnement, and similarly I find it hard to believe that other early economists disregarded knowledge. (Keynes for example emphasised ‘expectations’.) But ‘knowlegde’ is an issue.

Subsequently, though, I was jolted by Hayek’s discussion of the philosophical consequences of his theory of knowledge. Some of his thoughts are precisely the same as mine ! Notably (I could not have said it better!):

“The sense data, or the sensory qualities of the objects about which we make statements, thus are pushed steadily further back; and when we complete the process of defining all objects by explicit relations instead of by the implicit relations inherent in our sensory distinctions, those sense data disappear completely from the system. In the end the system of explicit definitions becomes both all-comprehensive and self-contained or circular; all the elements in the universe are defined by their relations to each other, and all we know about the universe becomes contained in those definitions. We should obtain a self-contained model capable of reproducing all the combinations of events which we can observe in the external world, but should have no way of ascertaining whether any particular event in the external world corresponded to a particular part of our model. Science thus tends necessarily towards an ultimate state in which all knowledge is embodied in the definitions of the object with which it is concerned; and in which all true statements about these objects therefore are analytical or tautological and could not be disproved by any experience. The observation that any object did not behave as it should could then only mean that it was not an object of the kind it was thought to be. With the disappearence of all sensory data from the system, laws (or theories) would no longer exist in it apart from the definitions of the objects to which they applied, and for that reason could never be disproved.” Hayek (1984:230-231)

Clearly, a fully ‘self-contained model’ might take a million years to make - and I doubt whether sense input can be really fully eliminated - but the Definition & Reality approach of using a ‘reduced form of stylized facts’ is quite along the same tracks, and differs only in digits of accuracy.

Thirdly, Hayek (1984) discusses constitutional reform. I’d rather not use this space to comment on those particular thoughts, especially on those of constitutionally allocating younger  women to older men, since I would digress on my subject. But it remains useful to note, then, that more economists have taken up the issue of the constitution. (And to be clear about it: I write these lines with lots of laughter.)

It appears (more soberly) that Hayek is mentioned a number of times by Sen (1999a) “Development as freedom”. Sen even states: “(…) my admiration for Friedrich Hayek and his ideas (he has contributed more than perhaps anyone else to our understanding of constitutionality, the relevance of rights, the importance of social processes, and many other central social and economic concepts) (...)” (Sen:257)  !

Sen’s “freedom” is Hayek’s “liberty”, see in particular p289-292 where Sen clarifies that ‘income’ has been and is a useful indicator but tends to be overvalued and mistaken for the true objectives relating to freedom. See the discussion of Sen’s book above.

Sen however rightly criticises Hayek’s misuse of the argument of ‘unintended consequences’ against social change, and in fact makes fun of it:

“The idea that unintended consequences of human action are responsible for many of the big changes in the world is not hard to appreciate. Things often do not go as we plan. Sometimes we have excellent reason to be grateful for this, whether we consider the discovery of penicillin from a leftover dish not intended for that purpose, or the destruction of the Nazi party caused by - but not intended in - Hitler’s military overconfidence. One would have to take a very limited view of history to expect that consequences match expectations as a general rule.” (Sen:254)

“If it is, as Hayek puts it, a “profound insight,” then there is something wrong with profundity.” (Sen:257)

Sen concentrates on the difference between ‘unintended’ and ‘unpredictability’. I think that the argument can even be stronger than that, but, don’t pursue that reasoning here, since it is not the topic of discussion.

Fourthly, it appears that Hayek in “Road to serfdom” argues in favour of a ‘guaranteed minimum income for everyone’ - which would be called a ‘basic income’ nowadays. This is actually a fairly decent approach to the poverty problem - though I would suggest that workfare at a living wage would be more appropriate. It is interesting to see that Keynes recommended that book and supported it for its ‘ethics and philosophy’ (though not explicitly for its economics).

Fifthly, Hayek (1984)’s chapter on Bernard Mandeville is advised reading.

John D. Barrow (1998) “Impossibility” gives a nice introduction into some of the topics that we encounter when developing the Definition & Reality methodology. I have taken a useful quote from one of his pages to emphasise a main point. A point of consideration however is that Barrow only provides an introduction and a starting point, and there is need for more discussion and refinement of the argument. Some points of warning are:

1.       Barrow uncritically adopts Arrow’s explanation for his impossibility theorem - and we have shown that this explanation is erroneous.

As an economic expert I advise to a parliamentary enquiry and a public debate on this issue. It are the present powers in government that must grow convinced of the need for a better balance of powers. The evidence will likely convince them, if only they study it.

The following is a text that may serve as a concept for a constitutional amendment. The text assumes the common Trias Politica. It uses the term “Parliament” for the legislative branch (e.g. US Congress), and “President” for the executive branch (e.g. the UK Cabinet). It then adds the Economic Supreme Court. The given size, terms and other properties of the Economic Supreme Court seem best to create a balance for group decision making, openness, stability and change.

This text has essentially been posted on the internet in 1996. The major current change with respect to that text is a result of Frank Sulloway’s “Born to rebel” (1996) and the subsequent reports - Van den Berg (2004) refers to Nature - that these findings are not accurate. Sulloway argues that first-borns tend to be less open to new ideas but more likely to have responsible positions. This causes the idea that, since the court should be sensitive to new discoveries and be critical to abuse of authority, it would seem wise to have some test on open-mindedness. This needs to be investigated upon. Since this is a constitution, we should formulate a general rule, and we should leave it to the practical times and state of scientific inquiry how this is implemented, by first-bornnesss or by some other verifiable criterion.

The nation has an independent and scientific Economic Supreme Court of equal status next to Parliament, the President and the Supreme Court.

1.        The task of the Court is to scientifically check the economic data, assumptions, analyses and projections underlying the government’s budget and its draft statement, and then possibly veto the official adoption and publication of the budget, if the Court finds that the information used and presented, and in particular the estimates for the deficit and national debt, are not scientifically correct. The Court will publish its findings both for Parliament and for the scientific community.

2.        Members of the Court are appointed by the Court itself, subject to a veto by a normal majority in Parliament.
The Court will inform Parliament about the name and credentials of the candidate for appointment. Parliament will have 50 days to discuss and possibly veto an appointment. The appointment of the candidate becomes effective when Parliament does not veto the appointment.

3.        The Court consists of 7 members. At least 5 members have a high likelihood of open-mindedness, by criteria generally accepted in the scientific community.

4.        Term rules are:

a)        Each member serves a term of 7 years. Each year the member with the longest term resigns, and a new member is appointed.

b)       Terms run from May 1st till April 30st, 7 years later. If a member resigns before the end of the term, then the replacement will concern only the remainder of the term.

c)       Members may only serve for two terms, which terms need not be consecutive. A part term will not count if its duration is less than 4 years.

d)       All 7 members participate in the selection of a candidate for appointment.

e)        The Court chooses its chairperson from among its members. Non-eligible are the newly appointed and the resigning member, so that only 5 members are eligible.

f)        The Court determines its modus operandi further by itself.

5.        Parliament may, if the occasion arises, decide to dismiss an existing Court and reappoint a new one, which decision requires a majority of two-thirds. Parliament may not override a veto by the Court, by any majority. It is up to the newly installed Court to decide if a wronged veto is repealed.

6.        The means of the Court are as follows:

a)        The Court can appoint a staff of maximally 150 persons. Minimally 50% of the staff shall have an appointment as scientist, and they shall operate under both common scientific standards and a special statute that has precedence. This special statute shall be established and published by the Court.

b)       The Court can instruct the President to provide information. The President may refuse information only if national security is at stake. Information that the President regards as confidential will be treated as confidential by the Court and its staff too, unless the same information can be received via independent other channels too.

c)       When State governments within the Federation install their own Economic Courts, then possible disputes shall be settled by the Economic Supreme Court.

d)       The Court can install a council of economists and other specialists from the academia. The Court can install chambers of special competence.

e)        The Court shall have a budget that compares favourably to the average budget of scientific research institutes of the same size.