Piketty and the Cambridge capital controversy

5 Apr, 2014 at 17:40 | Posted in Economics | 7 Comments

Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.

17197686-abstract-word-cloud-for-cambridge-capital-controversy-with-related-tags-and-termsThe basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.

Piketty devotes just three pages to the “Cambridge-Cambridge” controversies, but they are important because they are wildly misleading. He writes:

“Controversy continued . . . between economists based primarily in Cambridge, Massachusetts (including [Robert] Solow and [Paul] Samuelson) . . . and economists working in Cambridge, England . . . who (not without a certain confusion at times) saw in Solow’s model a claim that growth is always perfectly balanced, thus negating the importance Keynes had attributed to short-term fluctuations. It was not until the 1970s that Solow’s so-called neoclassical growth model definitively carried the day.”

But the argument of the critics was not about Keynes, or fluctuations. It was about the concept of physical capital and whether profit can be derived from a production function. In desperate summary, the case was three-fold. First: one cannot add up the values of capital objects to get a common quantity without a prior rate of interest, which (since it is prior) must come from the financial and not the physical world. Second, if the actual interest rate is a financial variable, varying for financial reasons, the physical interpretation of a dollar-valued capital stock is meaningless. Third, a more subtle point: as the rate of interest falls, there is no systematic tendency to adopt a more “capital-intensive” technology, as the neoclassical model supposed.

In short, the Cambridge critique made meaningless the claim that richer countries got that way by using “more” capital. In fact, richer countries often use less apparent capital; they have a larger share of services in their output and of labor in their exports—the “Leontief paradox.” Instead, these countries became rich—as Pasinetti later argued—by learning, by improving technique, by installing infrastructure, with education, and—as I have argued—by implementing thoroughgoing regulation and social insurance. None of this has any necessary relation to Solow’s physical concept of capital, and still less to a measure of the capitalization of wealth in financial markets.

There is no reason to think that financial capitalization bears any close relationship to economic development. Most of the Asian countries, including Korea, Japan, and China, did very well for decades without financialization; so did continental Europe in the postwar years, and for that matter so did the United States before 1970.

And Solow’s model did not carry the day. In 1966 Samuelson conceded the Cambridge argument!

James K. Galbraith


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  2. Philip Arestis, Gabriel Palma
    and Malcolm Sawyer
    Capital Controversy, Post-Keynesian Economics and the History of economic thoughts
    Essays in Honour of Geoff Harcourt

    Click to access arestis972.pdf

    Revisiting the Cambridge capital theory controversies: a
    historical and analytical study / Andrés Lazzarini.

    Click to access lazzari11.pdf

  3. “…the argument of the critics was not about Keynes, or fluctuations. It was about the concept of physical capital and whether profit can be derived from a production function.”

    Lars , can you explain to me why a stake has not been driven thru the heart of the production function by heterodox economists ? First Shaikh in the ’90s and more recently , Felipe and McCombie , have shown that the classical production function is no more than an artifact – a mathematical tautology – and without value for modeling purposes. Felipe et al even piblished a book about it in 2013 :


    Felipe and McCombie have gathered all of the compelling arguments denying the existence of aggregate production functions and showing that econometric estimates based on these fail to measure what they purport to quantify: they are artefacts. Their critique, which ought to be read by any economist doing empirical work, is destructive of nearly all that is important to mainstream economics: NAIRU and potential output measures, measures of wage elasticities, of output elasticities and of total factor productivity growth.’
    – Marc Lavoie, University of Ottawa, Canada

    To my knowledge this has not been successully challenged by the orthodox crowd , so why aren’t people like you relentlessly beating them about the head about this ?

    It seems like it should be a big deal to me……

    • Yes, McCombie and Felipe’s criticisms are damning. Personally, I don’t think that the profession could ever take them seriously. Imagine admitting that decades of “empirical” work were based on regressing an accounting identity! Haha! Too funny!

      • It might be hard to get an admission from the majority of economists , but I’d view it as tremendously encouraging if , one by one , prominent economists said ” Yes , I admit , I fell for this scam , but no more – from now on , reality rules! ” Krugman , Stiglitz , Baker etc. could start the ball rolling. As with climate change denial , the last holdouts will look the most idiotic , and those will be the very thought-leaders of the economic paradigm we’re trying to displace.

        I say we should pound away at this. It provides a rope for the orthodoxy’s self-hangings , which cannot come too soon , IMO.

        ( BTW , thanks to Lars. I see he’s been doing his part lately. )

  4. Good point. More on Piketty’s problems with basic theory, in a Marxist review of his book at

  5. Nice post! I recently posted a note on Birner’s book the Cambridge controversy: http://nakedkeynesianism.blogspot.com/2014/03/two-cents-on-birners-cambridge.html

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