The capital controversy

16 Dec, 2018 at 11:50 | Posted in Economics | 3 Comments

joanThe 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 The Production Function and the Theory of Capital (1953)


  1. And, that’s arguably just scratching the surface of what is conceptually wrong-headed with the production function.
    The production function was historically proposed not as a theory of production, but as a theory of income distribution. K and L are not simply “inputs” — they represent factors of production, in a throwback to notions of classical economics. As part of the Marginal Revolution, neoclassical economics was proposing to re-visit the pre-occupation of Classical Economics with the way income was distributed among such “factors”. Where the Classical economists were implicitly and sometimes explicitly attacking the legitimacy of the out-sized claims on income of idle landlords, who were not incidentally nearly the entire ruling class in the U.K. at the beginning of the 19th century, the Neoclassical economists wanted to justify (low) wages and make power and the political disappear from economics: “political economy” would become simply, “economics”.
    The relation is not even a mathematical function. Economists get around that by the dodge of defining the relation as one involving the maximum of output or the minimum of inputs, without considering how “maximum” or “minimum” can be defined under conditions of uncertainty. The assumption of “maximum output” is used to excuse the omission of organizational management or technical process engineering as well and with them any notion of control or learning.
    And, then there’s the problem of energy. There can be no production without an expenditure of energy. It is a necessary element and omitting it wrecks any theory of production. And, energy entails waste. That’s the second law of thermodynamics. There can be no theory of production without waste. Neoclassical economics concedes “externalities” but insists that these are exceptional instances of “market failure” rather than acknowledging that waste is inherent to any process of production.

    • Good points, Bruce 🙂

    • Fukuoka writes of recycling the plant waste as mulch, using no-till agriculture, and improving the soil each year in his production:
      “Grow a soft, fat rice plant in a flooded field and you get a plant easily attacked by insects and disease. If “improved” seed varieties are used one must rely on the help of chemical insecticides and fertilizer.
      “On the other hand, if you grow a small, sturdy plant in a healthy environment, these chemicals are unnecessary.
      “Cultivate a flooded rice field with a plough or tractor and the soil becomes
      deficient the soil. Structure is broken down, earthworms and other small animals are destroyed, and the earth becomes hard and lifeless. Once this happens, the field must be turned every year. But if a method is adopted in which the earth cultivates itself naturally, there is no need for a plough or cultivating machine.”
      Fukuoka claimed yields comparable to the industrialized rice farms around him. His production function required less labor and capital, and produced re-usable waste …

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