Krugman’s misleading trivialization of the capital controversy
Lars P. Syll | Professor, Malmo University
Thursday, April 24, 2014
Lars Syll — Krugman’s misleading trivialization of the capital controversy
Krugman’s misleading trivialization of the capital controversy
Lars P. Syll | Professor, Malmo University
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Tom, is it possible the desire to be pragmatic tipped economists' opinion in favor of the Cambridge, Massachusetts view?
Here is an anecdote told by Robert Solow suggesting that even Joan Robinson saw the practical merit in her opponents' view:
"I spent the year 1963–4 in Cambridge, England, engaged in one interminable and pointless hassle with Joan Robinson about some of these issues. Interminable is bad enough, pointless is bad enough, and putting them together is pretty awful. The details are too lurid to be told to young people. At one point, however, I realized that the discussion had become metaphysical and repetitive, and I decided to try a new tack. So I buttonholed Joan in her office one day and said: ‘Imagine that Mao Tse-Tung calls you in’—she was in her Chinese period then—‘and asks a meaningful question. The People’s Republic has been investing 20 per cent of its national income for a very long time. There is now a proposal to increase that to 23 per cent. To make a correct decision, we need
to know the consequences of such a change. Professor Robinson, how should we calculate what will happen if we increase our investment quota and sustain it?’
‘So what will you tell Chairman Mao?’ I asked Joan. She baulked and bridled and dodged and changed the subject, but for once I was relentless. ‘Come on, Joan, this is Chairman Mao asking a legitimate economic question; the future of the People’s Republic and possibly of mankind may depend on the answer. What do you tell him?’ Finally, she grumbled: ‘Well, I guess a constant capital–output ratio will do.’ It made my day; I knew I could do better than that, and I knew she had been forced by practicality, even imaginary practicality, to give up the metaphysical ghost...One of her major contentions had been that it was illegitimate to think of ‘capital’ as a factor of production with a marginal product. Yes, a single capital good (or its services) was a productive input. But aggregating those goods, whose services are yielded over their remaining lifetimes, introduces all sorts of complications. It is always a problem in economics to navigate between pure and abstract conceptions (how would a concept like ‘capital’ fit into a complete and formal description of an economy) and the needs of practical calculation (Mao’s hypothetical question). It can (almost) never be done perfectly. I thought that Joan Robinson had been unfairly playing on that difficulty in order to undermine the ‘neoclassical’ attempt to construct a usable model of investment and growth. Faced with the need to be pragmatic, she had no recourse but the kind of statement that she had criticized in others."
I know some readers will criticize Solow for trying to outsmart Joan by using a hypothetical scenario. Some will also dismiss this anecdote as being a one-sided account of the event. Regardless, I find it difficult to deny that Solow has a point. The real world of policy-making is different from the sometimes abstract world of academic debate. It seems that at times there is no other choice but to settle on a concept for the sake of moving on.
I recently read a book on the history of national accounting. The book highlights similar examples where the need to settle on a definition on practical grounds trumped the desire to spend more time and effort trying to refine our understanding of an abstract concept in the hope of attaining something close to perfection.
All model are simplifications unless they are replicas. All aggregates are estimates unless they are actual inventories of the items aggregated. All common nouns are ambiguous unless technically defined. The question is always what degree of simplification, estimation and ambiguity is minimally acceptable as a solution to a design problem in modeling.
It's not the heterodox people that are reluctant to admit heuristic imprecision but rather the neoclassical people. as shown by the more narrative style and institutional approach of heterodox economists, including Keynes even through he was a mathematician by training, in comparison with the econometric approach of orthodox economists and orthodox economists pretending to be "Keynesian."
It's usually the heterodox economists what are criticized by the orthodox as being sloppy and lacking a model. But when their assumptions and definitions are shown to lack the degree of precision that they represent their conclusions as having, then they come back as say they are being asked to be too precise.
Sorry, that argument doesn't fly logically. If the orthodox will admit that their conclusions are not more precise than their assumptions and some assumptions are not specified precisely so that the conclusions cannot be more precise that that, I'm OK with it. But that's not what they want to hold.
As Robinson and Sraffa pointed out, either K is specified or it is not. If it is, what is it. MIT Cambridge admitted that K was not precisely defined.
So Solow is asking Robinson to ballpark a figure for policy purposes, on the assumption that an educated guess is preferable for policy purposes than an uneducated one. I would agree with that. But orthodox economists don't put out their own policy advice as educated guesses but as "scientifically" precise. That's just BS.
So I call Solow a hypocrite here.
Yes, that all sounds perfectly sensible to me, particularly your take on the institutional vs orthodox approach. But is it really the case that neoclassicals all describe their craft as scientific and precise? Solow would be the first to say you don't need the sort of microfoundations that were introduced in the 1970s. Instead he argues that the ad hoc Keynesian 'microfoundations' based on behaviorally determined parameters such as individuals' marginal propensity to save and consume are perfectly adequate.
Anyway, I interpret Solow in this quote as admitting that his opponents have a good point but also suggesting that there is probably a workable middle position.
Someone like George Akerlof is a good example of an orthodox economist who sees merit in adopting this kind of approach. As many institutionalists do, he introduces 'norms' into his models, which results in findings that are very different from models that apply a utility-maximizing rational agent.
I don't think that there is difficulty in finding a middle position. The question is then what degree of descriptive precision it has and what reliability over time in changing circumstances.
I'm willing to cut Piketty some space in that he has managed to get the attention the heterodox economists haven't been able to. In many ways he has put his finger on the problems.
However, we see already in the criticisms that there is divergence on how to interpret Piketty's findings, whether his argument is to loose to hold water in important respects, and whether his argument leads to the kind of policy conclusions he want to draw. He is getting flak on this from both left and right.
The criticism of DeLong from the neoclassical side, and Galbraith, Naidu, Mason and others on the left brings in important matters that Piketty either doesn't deal with or leaves unclear.
So I would say that Piketty presents something of a middle position that is hopefully the beginning of debate in which all side will engage each other.
However, I tend to doubt that orthodoxy will do that, since defending orthodoxy depends on ignoring, marginalizing, or demonizing heterodoxy.
As Cameron Murray and others opine, orthodoxy is just going to obfuscate and avoid the issues, so that there will be no substantial change in economic thinking or policy advice, and the class and power structure will remain in place, still supported by the rationale of neoliberal orthodoxy — TINA and trickle down.
I agree with those who are saying that until "the little people" organize themselves against the domination of the ruling class that holds the bulk of wealth and therefore the levers of political and institutional power, nothing will change materially. Unless there is a real resistance to extraction, the best response that can be expected is crumbs from the table of the rich in the form of bread and circuses to kept the bellies of the masses filled and their senses occupied.
If history is any guide, the masses very rarely get organized enough to make a difference and when they do, the levers of power are soon seized by a new ruling elite.
Absent a shift in the level of collective consciousness, not much is going to happen — as Marx recognized. As a sociologist and dialectician, he realized that this was a matter of historical development. As a political activist, he tried to speed up the process. That project was a dismal failure, as Bakunin foresaw, resulting in the excesses of the "communism" that was totalitarian dictatorship and despotism rather than actual communalism or communitarianism.
"All model are simplifications unless they are replicas."
Tom, models are illustrations of something that is going to be created, a replica is an illustration of something that has all ready been created...
rsp,
"I'm willing to cut Piketty some space"
Tom, beware that Piketty is a closet right winger...
rsp,
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