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Thomas Piketty and the Ghost of Joan Robinson

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Thursday, 01 May 2014 20:16

Okay, I really did not want to spend more time arguing about methodology but there seems to be some simple points getting lost in cyberspace. Paul Krugman picks up on the debate between Simon Wren-Lewis and Tom Palley, coming down clearly on the side of the former.

I won't go through the blow by blow, but I do want to deal with the point Paul raises at the end of his post.

"And what’s going on here, I think, is a fairly desperate attempt to claim that the Great Recession and its aftermath somehow prove that Joan Robinson and Nicholas Kaldor were right in the Cambridge controversies of the 1960s. It’s a huge non sequitur, even if you think they were indeed right (which you shouldn’t.)"

Hmm, I don't quite see it that way. To me there is a very specific issue that Piketty raised that relates directly to the Cambridge controversies. He argued that the elasticity of substitution between capital and labor was greater than one. Therefore even as the amount of capital increased relative to labor, there was no reason that the rate of profit had to fall proportionately. This raises the prospect of an increasing capital share as economies get richer.

This relates to the Cambridge controversies since the Cambridge U.K. people argued that the idea of an aggregate production function did not make sense. They pointed out that there was no way to aggregate different types of capital independent of the rate of return. The equilibirum price of any capital good depended on the rate of return. Therefore we can't tell a simple story about how the rate of return will change as we get more capital, since we can't even say what is more capital independent of the rate of return.

The takeaway from this, or at least my takeaway, is that we don't have a theoretical construct that we can hope more or less approximates how the economy actually works. The theoretical construct doesn't make sense. This means if we want to determine the rate of return to capital we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit. 

The debate touched off by Piketty's claim about the elasticity of substitution will inevitably be a fruitless one. We are not going to find a technical relationship in past data that will tell us how profit shares will change as the ratio of capital to labor increases.

Does any of this mean that the Great Recession proved Joan Robinson and Nicholas Kaldor right? Not as far as I can see. Although it is pretty damning of the state of the economic profession that almost no one recognized the growth of housing bubbles in the United States and much of the rest of world, and that their collapse would create a hole in demand that would be extremely hard to fill.

I will say that I am a bit at loss to understand the meaning of Simon Wren-Lewis's comment that:

"As I said in my original post, I would like to make students aware of heterodox critiques, but I want to point out where in my mainstream account that critique would enter. (I think what I teach is pretty close to how many central bankers think, if not the rest of 'my tribe'!)"

It certainly is worthwhile to know what central bankers think, but is this supposed to be a source of legitimation? After all, even by the I.M.F.'s measures the wealthy countries are losing well over $2 trillion a year due to economies operating below potential GDP. The cumulative losses to the rich countries from the Great Recession are virtually certain to exceed $20 trillion and could well top $30 trillion. Is it supposed to be some sort of validation that the folks who got us here share your view of the world?

Comments (12)Add Comment
...
written by Squeezed Turnip, May 01, 2014 10:51
PK also mentioned J.K. Galbraith's panning of the Piketty book. But I do think Galbraith's pointing out that Piketty's policy suggestions are not well thought out, which I take you agree with ("This means if we want to determine the rate of return to capital we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit.") But if Piketty's book stirs the VSPs out of their slumber, then that's still a good thing.
Ruin lives and families through long-term unemployment
written by dannyc, May 01, 2014 11:05
Simon Wren-Lewis thinks in order to prepare future Prime Ministers to think like today's technocratic central bankers they must learn to misunderstand the role of effective aggregate demand and ignore the human destruction left in the wake of unnecessary unemployment.

He's teaching the School of Secular Stagnation
It depends on what Krugman means by "which you shouldn't"...
written by Sandwichman, May 02, 2014 12:34
It gets pretty complicated. Piketty casually misrepresents, in passing, the outcome of the Cambridge capital controversy. I don't think that's a big deal. He also gets things wrong about Marx. So what? He eviscerates marginal productivity theory (not to mention Cobb-Douglas, Kuznets Curve, Gini coefficient, representative agent and math fetishism).

With all that on the line, it seems like a rear guard action for Krugman to be gunning for the "heterodox." If Krugman wants to rumble, I'll take him on. He never replied to my open letter of three years ago.
Behold, The Predator State Has Arrived
written by Last Mover, May 02, 2014 6:02
Krugman says,
There’s a long if bizarre tradition among some left-leaning economists that sees the notion that factors of production are paid their marginal products — or even that this is a useful first cut when thinking about the factor distribution of income — as somehow implying an acceptance of the moral right of capitalists to keep their spoils. This doesn’t really make sense, but you do see attacks on marginal productivity theory cropping up in weird places — e.g., in Jamie Galbraith’s oddly off-center attack on Thomas Piketty.


But it does make sense as explained by this commenter to Krugman,
Merijn Knibbe, Leeuwarden 51 minutes ago

Hmmm... Imagine two kinds of physical 'capital': land (in the shape of 'oil') and an oil drilling platform. Demand for oil rises with 1% which leads to a 2% increase of oil prices. Does this mean that the marginal productivity of 'physical' capital rises? Of course not. Productivity is defined as unit of output (oil) per unit of input (per drilling platform or, at sea, in fact per cubic meter of platform) - which does not change. We calculate this productivity using entries on the asset side of the balance sheet. The *profitability* of *financial* capital (the liability side of the balance sheet) however does increase, due to Ricardian rents. Who gets this windfall profit? The owner of the drilling platform? The owner of the oil? Who owns the oil anyway? The state, as in (like in most countries) the Netherlands? Or the owner of the land (Texas)? Future generations? Using 'marginal productivity' as an explanation for income distribution is a mirage, based upon mixing up the asset and the liability side of the balance sheets, which leaves 'land', i.e. non-produced inputs, ownership rights and changing relative prices (Ricardo!) out of the picture. See http://rwer.wordpress.com/2014...d-the-d...


If the elasticity of substitution of capital to labor is greater than one, not only does profit to capital not necessarily fall in a diminishing return sense - it can increase in a monopoly rent context, the same way Joan Robinson said it could.

This is a key point on how productivity gains were taken from labor and redistributed to capital over the last 40 years - because capital gradually became overpriced in the sense of excess monopoly rent profit, not just normal (competitive) profit.

In the end the overpricing of capital produced the 1%, the .1%, .01% and so on as would be predicted by an economist like Dean Baker who points out regularly, that's what should be expected from the incentives associated with overpricing.

This is what James Gailbraith was talking about when he wrote The Predator State in 2008, which is now in full bloom for all to see as the economic oligarchy who literally runs America from the top down.
...
written by LSTB, May 02, 2014 7:54
Good explanation, Dean. I think Krugman's calling the Cambridge controversies a "non-sequitur" is an evasion. Piketty's book raised it and misrepresented its outcome (apparently); therefore it's relevant.

I've also noticed that Krugman has brought up the alleged belief among lefty economists that marginal product theory leads to a just-desserts ideology for capital's share (and labor's poverty). He's never explained why he disagrees, much less acknowledged that MPT was developed for just that purpose. It's disappointingly vague for someone who says economics isn't a morality play.
next post on WaPo and Clinton's record
written by Peter K., May 02, 2014 8:52
I'd think Wren-Lewis and Krugman would agree with your post about the WaPo and Clinton's record and how the economy works. The establishment seems to say the Fed can boost consumption and investment when it needs to by lowering rates, or QE. No need for fiscal policy. Krugman argues you need fiscal policy when the Fed hits the zero bound. The heterodox are for more fiscal policy (and political action increase bargaining power) all of the time. They never worry about inflation or government debts. Krugman et al argue at some point you will have to, but we are far, far away from that point.

The establishment argue that at full employment, labor gets its fair share, but we haven't been there in a while and it took a bubble the last time. Wren-Lewis's central bankers haven't been in a rush to get us back to it. We'll see how Yellen does.
marginal productivity
written by rob urie, May 02, 2014 8:53
What is the marginal productivity of the office manager in the Des Moines sales office of IBM? How about the service station attendent at exit 8 on the NJ Turnpike? How then could they be paid according to it when it can't be calculated? Mr. Krugman has turned an antique hallucination into a talking point like it means something.
...
written by liberal, May 02, 2014 9:38
rob urie wrote,
How then could they be paid according to it when it can't be calculated?


There are limited instances in which one could suppose it can be calculated: e.g. a craftsman working for himself. But for almost all firms, the notion that it's remotely possible to calculate it (or that the firm does a good job of calculating some proxy) is a joke.
Bankruptcy of economics
written by Charles A, May 02, 2014 2:05
"We don't have a theoretical construct that we can hope more or less approximates how the economy actually works. ... we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit."

Some choice: self-contradictory theory or mere narrative -- because the labor theory of value is verboten.
request for background reading
written by David, May 02, 2014 2:28
As a faithful reader, and a highly literate non-economist (PhD in Philosophy, actually), I wonder if there is a good primer on the following point of view and the surrounding debate:

"The takeaway from this, or at least my takeaway, is that we don't have a theoretical construct that we can hope more or less approximates how the economy actually works. The theoretical construct doesn't make sense. This means if we want to determine the rate of return to capital we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit."
Central bankers are myopic
written by Dave, May 02, 2014 3:48
Regarding the last paragraph, I agree with the sentiment. Unfortunately, I think most people involved in banking, including central banking, have been taught upon dogma rather than understanding. The system of banking is very rigid, automatic, and few people even deeply embedded within the system actually understand it.

So everything we hear from bankers tends to be dogma they learned as dogma. Granted that banking is a critical part of our modern economic infrastructure, and that few people think about very often, we have to be careful when rethinking the dogma.

As an outsider, it is obvious to me that there are some very major problems in macroeconomics that result from a flawed banking system. There are also a lot of layers of policy that originated from reactionary measures instead of design.

Wouldn't this be a good time to sit down and rethink some major elements of our system with regard to banking, investment and economic performance with an eye towards design? We have incredibly technology today that could enable a complete redesign, and I think this is the right time to do it.

I'm not giving up. I think it will happen, and I intend to do what I can to help it happen.
elastic growths I do not understand
written by Viewer II, May 03, 2014 11:52
big time, I really can't get a grip on the long-term prosperity of any economy theoretically or empirically
as a laymen. What's next to come as price changes demand
or as supply seems to come from other land because its cheaper due to low wages in another country and change in the US dollar.
Long-term planning seems like it would have to be based on practical and highly informed policy initiatives.
Seems like for most of my life capital loves capital
much more than sound economic policy.
As a laymen I'm talking mainly about basic R&D that only an effective government can do well.
I think as Dave points out, design is a critical element,
and one thing we should keep track of well so as to understand just where we went wrong and where we got it right once upon a time.

I do know advertisers and propagandist can certainly sell, and the markets do move in strange ways, yet a concentrated group of billionaires is not my idea of any real progress.



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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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