The capital controversy

2 Sep, 2020 at 10:47 | Posted in Economics | 13 Comments

As every mainstream textbook on growth theory, most mainstream economists choose to turn a blind eye to the concept of capital and the Cambridge controversy over it and pretend it’s much fuss about nothing. But they are wrong!

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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

As Edwin Burmeister admitted already twenty 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

13 Comments

  1. As presented above, the selected quotations given above are highly misleading because they give the false impression that all neoclassical is rubbish.
    .
    Immediately following the second quote, the author (Burmeister) continues (page 310 et seq):
    “let me now turn to some results that, to me at least, still seem important enough to remember:
    1. Neither the extreme of abandoning neoclassical economics nor ignor-
    ing the complexities of heterogeneous capital goods is justified…”
    https://www.sci-hub.tw/10.1017/CBO9781139166881.008

    • Which parts of neoclassical economics do you think aren’t rubbish?

      • @ Crash Carson
        It seems that you missed some of the points made in Burmeister’s article, for example:
        p.310
        “as emphasized by Samuelson, the fundamental neoclassical proposition is that there exists a negatively sloped, concave trade-off between consumption today and consumption tomorrow – a result arising in Irving Fisher’s one-capital-good model. This proposition remains valid despite the existence of heterogeneous capital goods.”
        .
        p. 312
        “the approximate answers provided by one-capital-good models are likely to prevail, lacking both clear evidence why they should not and any viable alternative.”
        .
        More generally, you may wish to re-read:
        Alfred Marshall – Principles of Economics, 8th edition 1920
        https://b-ok.asia/book/2667475/e58f1b

        • there exists a negatively sloped, concave trade-off between consumption today and consumption tomorrow – a result arising in Irving Fisher’s one-capital-good model.
          .
          Whether something actually exists ought to be an empirical question and whether a logical existence is proven ought to be settled by valid and robust reasoning, not a cowardly retreat into oversimplification. No one should claim a logical existence for a necessarily well-behaved trade-off between consumption today and consumption tomorrow based on a severely oversimplified notion of capital as an homogenous good. That way of thinking ought to be discarded, as disproved.
          .
          Now it might be, as an empirical matter if you like, that people’s behavior in the face of continuously discovered technical or political possibilities serves to repeatedly return the trade-off between consumption today and consumption tomorrow to something like a continuous concave slope. The empirically minded might wonder at Piketty, r > g, and that strange attractor, 5%
          .
          One-capital-good models did NOT prevail. That should be a takeaway from the CCC. As for evidence, go ahead and try to engage with actual data. Seriously. No one has ever been able to cope with the fantastic heterogeneity of actual capital goods well enough to aggregate anything in any unit or index other than the unit of account, raising the ontological question: was Marx right that capital is not a motley collection of goods — commodities to be used to make more commodities — but rather political power to mobilize resources and claim income?

        • That seems rather paltry. Burmeister himself is hedging like crazy. As for reading Marshall, that’s like suggesting I read Galileo to learn about cosmology.

        • “there exists a negatively sloped, concave trade-off between consumption today and consumption tomorrow”
          .
          Doesn’t the current prevalence of negative interest rates empirically disprove this model?

      • Bruce,
        I agree about the primacy of empirical evidence.
        So it seems does Burmeister: “one-capital-good models are likely to prevail, lacking both clear evidence why they should not and any viable alternative.”
        Do you have any clear empirical evidence on reswitching etc?

        Crash,
        I agree that Marshall’s Principles is very old school, but its beautifully written and full of wisdom and insights which are often lacking in modern scholarship. The validity of most of the book, and the validity of most of neoclassical economics, doesn’t depend on the CCC.

        Robert,
        Check your maths/geometry. A negatively sloped, concave trade-off between consumption today and consumption tomorrow can have a negative interest rate.
        But if your point is that the model isn’t very interesting, I agree.

        Everybody,
        Does any important empirical or policy issue depend on the outcome of this esoteric debate?

        • Kingsley, the problem with a negatively-sloped trade-off between consumption today and consumption tomorrow is that Reagan was not making that trade-off in the 1980s. Reagan consumed as many military goods as he desired, yet consumption today has not suffered. Indeed, the cost of borrowing today is much lower than Reagan paid. So there was no negatively-sloped concave trade off for Reagan: he consumed as he wanted, and the US continues to consume as it wants several decades later. On what time frame is the negative concave trade-off supposed to manifest?
          .
          Note: Reagan in the 1980s used economists as props to justify cutting social spending which he really wanted to do for ideological reasons. Today Trump, who seems less ideologically driven to cut welfare, has found other economists to justify consuming way beyond our means, yet again. There is no consequence to kicking the can down the road, which violates the idea of a negatively-sloped concave trade-off between consumption today and consumption tomorrow.
          .
          Without that foundation, a lot of the reasons for not printing money for a basic income disappear. We can keep printing money faster than prices rise, as long as we are the reserve currency; and we can solidify central bank unlimited currency swap lines to ensure that we can continue getting whatever currency supplants the dollar, if that should happen. The Bank of England today has an unlimited currency swap line with the Fed, thus giving it guaranteed access to the reserve currency that replaced Sterling …

        • Burmeister is a sore loser. The “clear evidence” that one-capital-good models are a gross oversimplification is the fantastic heterogeneity of actual capital goods, which span structures and ideas, mechanisms and location, tangible and intangible, inventories of unique treasures and standardized parts and perishable goods. If he cannot make the logic work in a two-capital-good model, he does not get to claim the one-capital-good logic somehow magically prevails in the n-capital-good real world.
          .
          Before he ever got to something as arcane as reswitching, the casual empiricist would have to establish the prior conditions that capital intensity is related to financial interest rates, or that gross substitution obtains such that capital intensity can vary smoothly. It is not an issue whether “reswitching” is “important empirically”. The issue is whether this bit of clear logical incoherence calls into question the entire logical edifice of neoclassical ” capital”. And, it does. Or, it should. The evidence in many lines of production is that capital intensity cannot vary much, but the share of income allocated to capital can. As Pareto observed, a farm tractor only has one seat. There is no way to combine two drivers with one steering wheel just to satisfy an economist’s preference for smooth convexity. But lots of ways to make the tractor expensive and farm labor underpaid.

          • For those coming in late, I should explain that the production function is an analysis of income distribution. It is not a theory of production, but neoclassical economics likes to pretend that it is, and that pretense is the origin of the CCC, as Joan Robinson is laboring to make clear in the passage quoted in the OP. Trying to rescue the production function is what Burmeister is trying to do by restoring the pretense with nonsense “empiricism”.

    • Burmeister commits himself to the post-CCC ideology of neoclassical modeling: the art of the economist is in choosing which model properly answers which question. No model is simply wrong, only wrongly applied to answering a particular question. So, a proliferation of models is inevitable since none are discarded as disproved, but that proliferation is a good thing because it enables the artful economist to answer more questions because more models.
      .
      Burmeister calls for interesting questions and “empirical content” with no apparent sense of irony. The question, what is the nature of “capital”? seems to me among the most interesting in economics. What is the nature of this thing called, capital, and what is its function in production? Production ought to be regarded as the most important process in an economy, superior in interest to processes of exchange even. But neoclassical economics ignores it completely. Completely!
      .
      The production function — a faulty concept at the center of the CCC — is not a theory of production, it is not even a function! But, an aggregate(!) production function is good enough if labor’s share of income does not change much — see how easily one can justify using a bad model to answer a question so narrowly drawn that it does not matter that the answer is wrong! Post CCC, neoclassical economists’ whole methodology seems to come down to this sort of furious hand waving.
      .
      It might be radical for a neoclassical economist, but if any social science is to claim to be in the truth business, it must inquire into the fundamental nature of its chosen objects of study and it must stand ready to reject disproven notions and models, not hoard bad models like old clothes against the day they might return to fashion sufficiently to answer the ephemeral question, what am I to wear today?

      • Bruce,
        .
        I don’t agree with everything you say but I do get a kick out of the way you say it.

  2. Capital Controversy, Post Keynesian Economics and the History of Economic Thought Essays in Honour of Geoff Harcourt, Volume One

    Edited by Philip Arestis, Gabriel Palma, Malcolm Sawyer

    “Harcourt has made substantial and wide-ranging contributions to economics in general, and to post Keynesian economics in particular. In this volume more than forty leading economists pay tribute to and critically evaluate his work. The contributors represent a wide range of schools in economics, and include Nobel Laureates Paul Samuelson and Robert Solow.”
    https://www.yumpu.com/en/document/read/44827982/capital-controversy-post-keynesian-economics-and-the-free


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