[OPE-L:5547] Re: Humbug Aggregate Price-Value Correlations

Tsoulfidis Lefteris (lefteris@macedonia.uom.gr)
Mon, 29 Sep 1997 05:36:18 -0700 (PDT)

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In a recent post I wrote that the different indexes of dispersion of
price value deviations (MAD, MAWD, Eucledian Norm, and R2) must be used
in conjuction in an effort to determine the magnitude of deviations of
values, prices of production, market prices etc. Clearly, no index by
itself gives an undisputed idea of the true magnitude of these
deviations. Efforts to devise new indexes such as Klimans suggestion of
shift share analysis are welcome, however it seems that do not improve
the situation in any substantial way. To my view there must be a
*subjective* element in determining whether the deviations are large or
small and this *subjective* element is based on experience. I will try
to explicate this position below:

Let us think for a moment the indexes of concentration or income
distribution, and ask if there is any single index which will tell us
whether an industry is concnentrated enough or not? Take for example the
concnetration ratio of the top four firms or the Herfindahl index (HI)
both appart from the values of zero and 1 are not of much help. Hence is
where the subjective judgment comes into play, the Courts for example in
the US (used to) decide on the basis of specific values of HI about the
possibility of a merger. Similarly, neoclassical economists claim that
if for example the CR>80 in a 3-digit industry we have oligopoly and if
CR< 40 we have competion etc. Also with respect to the equality of
income distribution on the basis of say the Gini coefficient alone
(except the values of 0 and 1) we cannot say much about intertemporal
and international comparisons.

The findings of the MAD and the other measures of
deviation should be judged in similar fashion. In my joint and
incomplete as of now research for the Greek economy I find the MAD to
be in the range of the 20 %. However, in the 33 sector input/output
table that I use I find that the 20% MAD is due to a large extent to
what can be called peculiar industries, such as the oil industry that
I find its value to be much lower to its market price, a result
so common with studies for other
countries, see for example the results of Alejandro Valle, Paul
Cockshott et al. and the associated exlpanations, and Ochoa. Also some
other sectors government owned or regulated enterprises give much larger
deviations. If for instance we restrict the analysis to the
manufacturing sector alone where clealy there is competition and
tendency for equalization of profit rates, better data etc. The results
are substantially improved (i.e., the deviations are smaller) and this
is reflected in the much lower MAD etc.

Returning now to Klimans suggestion for the shift share
analysis, I am not sure it differs qualitatively from the other indexes.
It seems to me, intuitively (I must admit though that I haven't done any
particular research) that appart from the extreme values of 0 and
1 suffers from the same limitations of the other indexes, and also
(at first sight) does not have any clear economic meaning.

From the discussion so far, which I find extremely good and
constructive, I especially liked the idea of running regressions of the
short that Kliman has suggested. That is to run regressions of the ratio
of prices of production to values as the dependent variable and an
expression of composition of capital as the independent variable in an
effort to determine the direction of price value deviation. I have some
comments on that

- there is some theoretical work on that published in CJE
(1989?) by Beilefield and also by Van Parys in AER (1983?).
Seton also claims that in a 3x3 sector economy one can verify
Marxs claims about the
direction of price-value deviations but not in n sectors and
also does Pasinetti (1977).

-The big trouble with Klimans regressions is (of course) that
he uses only 9 observations (sectors) as he says, and these are
considered (I would say by the majority of economists) too few
to accept their regression results.

- The other problem is that in his regressions does not really
test the value composition of capital for that he needs data on
capital stock, which presumeably are not available.

- My joint (with Th. Maniatis) paper that I mentioned
above, uses the vertically integrated value composition of capital
and gave the following results

a=0.824 (17,4) b=1,212 (9.94) and R2 =76,1%
# of observations 33.

which are robust to alternative definitions of the vertically
integrated composition of capital. The results, however, do not
hold in case where the plain capital labor ratio is used as the
index of the composition of capital, the R2 in this case is roughly

One final point has to do with (Kliman's) numerical examples,
which in my view must be representative or typical of the situation
investigation, one should not use extreme cases (no matter their number)
and then say well this conclusion does not hold, because of my

In solidarity

Lefteris Tsoulfidis