Krugman’s misleading trivialization of the capital controversy

24 Apr, 2014 at 17:56 | Posted in Economics | 16 Comments

Paul Krugman today comments on some “leftist” critiques of Piketty:

(T)hey’re disappointed that Piketty’s book relies mainly on conventional, mainstream economics.

And it’s mostly true. For the most part Piketty works with an “aggregate production function” in which labor works with a stock of capital to produce output, and both labor and capital are paid their marginal product …

There are a few economists on the left who seem to believe that:

1. You need to believe in the existence of a perfectly well-defined aggregate measure of capital to believe in the marginal productivity theory of income distribution;
2. If you believe in, or even use, marginal productivity theory, you are conceding that capitalists deserve their income.

Neither of these things are true. Nothing about marginal productivity theory depends on the exact truth of a simple aggregate production function with capital defined by a single number. And saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get.

On the inequality issue, Krugman is absolutely right. It would be preposterous to allege that mainstream economics couldn’t explain it or consider it bad. And I doubt if any serious “leftist” economist really maintains such a view.

But — as so often — Krugman trivializes the more theoretical point. In this case it’s the concept of capital and the Cambridge controversy over it. As every mainstream textbook on growth theory and most neoclassical economists, Krugman just chooses to turn a blind eye to it and pretend it’s much fuss about nothing. But Krugman et consortes are wrong!

The production function has been a powerful instrument of miseducation. The student of economic theory is taught to write Q =
f(L, K) where L is a quantity of labor, K a quantity of capital and Q a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labor; he is told something about the index-number problem in choosing a unit of output; and then he is hurried on to the next question, in the hope that he will forget to ask in what units K is measured. Before he ever does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.

Joan Robinson

And as Edwin Burmeister admitted already fifteen years ago:

It is important, for the record, to recognize that key participants in the debate openly admitted their mistakes. Samuelson’s seventh edition of Economics was purged of errors. Levhari and Samuelson published a paper which began, ‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false’ … Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives … However, the damage had been done, and Cambridge, UK, ‘declared victory’: Levhari was wrong, Samuelson was wrong, Solow was wrong, MIT was wrong and therefore neoclassical economics was wrong. As a result there are some groups of economists who have abandoned neoclassical economics for their own refinements of classical economics. In the United States, on the other hand, mainstream economics goes on as if the controversy had never occurred. Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all econometric work.

Edwin Burmeister