Krugman’s revisionist history flimflam

1 May, 2014 at 23:41 | Posted in Economics | 5 Comments

Paul Krugman rides out on his blog today, defending his “New Keynesian” Oxford buddy Simon Wren-Lewis against the nasty attacks from heterodox villains like yours truly, Thomas Palley and Jamie Galbraith:

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.) But that’s what seems to be happening.

So now Krugman not only trivializes the concept of capital and the Cambridge controversy. He obviously wants to rewrite the history of economics. A small problem though — Krugman’s history revisionism is completely wrong!

So I thought I should refresh Krugman’s memory by quoting two non-heterodox economists that even he can’t ignore:

Pathology illuminates healthy physiology. Pasinetti, Morishima, Bruno-Burmeister-Sheshinski, Garegnani merit our gratitude for demonstrating that reswitching is a logical possibility in any technology, indecomposable or decomposable. Reswitching, whatever its empirical likelihood, does alert us to several vital possibilities:

Lower interest rates may bring lower steady-state consumption and lower capital/output ratios, and the transition to such lower interest rate can involve denial of diminishing returns and entail reverse capital deepening in which current consumption is augmented rather than sacrificed.

capitalThere often turns out to be no unambiguous way of character-izing different processes as more “capital-intensive,” more “mechanized,” more “roundabout,” except in the ex post tautological sense of being adopted at a lower interest rate and involving a higher real wage. Such a tautological labeling is shown, in the case of reswitching, to lead to inconsistent ranking between pairs of unchanged technologies, depending upon which interest rate happens to prevail in the market.

If all this causes headaches for those nostalgic for the old time parables of neoclassical writing, we must remind ourselves that scholars are not born to live an easy existence. we must respect, and appraise, the facts of life.

Paul Samuelson

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

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5 Comments »

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  1. In order for Krugman’s statement that the criticism of marginal productivity theory is unrelated to the Great Recession, and that this contrast is unrelated to the Cambridge Controversy, to make sense, he should explain the causes of unemployment and low wages in the current climate of lean production policies under the pressures of increasing imperfect competition. From the subprime ‘sale’ to tranching and credit default swaps, all marginal products, it does seems clear that piece-rate banking practices led to the crisis. Krugman could at least offer an estimate of global capital, say 80T, or of a geographical sector in relation to GDP.

  2. […] I wrote yesterday, I think Krugman’s answer to the critique put forward by  Thomas Palley, Jamie Galbraith and […]

  3. Talking about Cambridge Capital Controversy,i think it´s worth to remember that at least when it comes to Paul Samuelson,he had the honorarble dignity to admit that he was wrong on central parts, ( a rarely seen character feature in dealing with “facts of life”, among current neoclassical economists,,at least what i have exprienced!!!)

    Samuelson’s seventh edition of Economics had errors that Samuelson later admitted was wrong and corrected.

    David Levhari and Paul 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. We are grateful to Dr. Pasinetti…
    and ‘ Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives.”

    ( Paul Samuelson David Levhari in Quarterly Journal of Economics. 1966).

    Futher could be read in :
    Edwin Burmeister, “The Capital Theory Controversy”, in Critical Essays on Piero Sraffa’s Legacy in Economics (edited by Heinz D. Kurz), Cambridge: Cambridge University Press, 2000.

  4. Great post! I too couldn’t believe the flippancy with which Krugman dismissed the Cambridge issues for his unsuspecting readers.

  5. I don’t understand what the Capital controversy has to do with short-run macro. Productions functions and the related aggregation problem only appear in long-run macro. For the folks who think that this stuff is important, how would you substitute an agg. PF? You must have an alternative after all, saying that a model has issues (which model does not) without offering an alternative is hardly constructive.


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