Krugman’s revisionist history flimflam1 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.
There 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.
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.