Friday, April 18, 2014

Peter Radford — Capital: Piketty and such

I will not pile on any more: the Piketty book is required reading. Enough said.
What strikes me is that his data set is so comprehensive that it ought to end many of those lingering debates within economics. I doubt it will, but it ought to.
I have a few comments I want to make because of his book and the reaction to it.
Context is everything.
First: it confirms, in my mind, my argument that economic systems cannot ever be carved out of their historical, social, and political contexts. Not, at least, if the analyst wants to be left with anything at all useful. Studying economics as some abstracted other-worldly stand alone entity is entirely pointless. Pretending that everyday people act in an economic sense without reference to a whole slew of cultural, institutional or other relationships and pressures is just nonsense. Of course they do. We all know that.
I understand that distilling some uniquely “economic” regularities is useful. I understand that establishing certain cause and effects relationships can help us understand society, but, ultimately it is society we are understanding, not just some economic agents roaming about absent any other influences. So anything understood within the domain of economics must then be converted to, or fitted within, the larger picture before it is thought of as having any relevance. Particularly policy relevance.
So it is not enough to build upon micro foundations unless those foundations extend across a diverse realm that includes all the elements at the base of the society being studied. To avoid such an extension is to display an extraordinary and willful narrow mindedness.
Revisiting the Cambridge Capital Controversy
I disagree with Piketty with respect to the outcome of the so-called Cambridge or Capital controversies of the 1950′s and 60′s. He is wrong when he says that the Samuelson/Solow side won the debate. They didn’t. Indeed they acknowledged their loss. The problem is that their loss never resulted in a suitable revision of theory. They simply ignored the consequences of the loss and plowed on as if nothing had happened. The result is that despite being an epic review of capital and the role it plays in creating massive inequalities in society, Piketty’s book glosses over any detailed look at the way in which capital becomes part of the production process. It is not his intention to delve too deeply into such matters. I concur with his omission on that score, but someone, somewhere, needs to re-visit those controversies in the light of Piketty’s revelations and produce a more modern and helpful notion of capital that can then be incorporated into contemporary theory. Until the clutter is removed from around the subject of what, exactly, capital is, talking about substitution with labor is meaningless. We don’t know what is doing the substituting. Nor can we properly compute a return to capital if it remains such a slippery almost chameleon like entity. Perhaps we are afraid we will just end up realizing that returns to capital are socially constructed as some have argued all along. Such a conclusion would unravel orthodoxy at warp speed. Deservedly so.
It's really about power.
To me, both capital and labor are references to power and social relationships not to actual production inputs.
We need to rethink the factors.
Come to think of it the classical trio of Land, Labor, and Capital all need to be put aside and replaced with a more precise set of basic inputs. Energy, Primary Knowledge, Secondary Knowledge and Physical Resource are my suggested alternative. Where Primary Knowledge is that reducible into code and thus amenable to embedding in machinery; and Secondary Knowledge is that which enables adaptive reaction to novelty, and which is thus the source of future code.
Real-World Economics Review Blog
Capital: Piketty and such
Peter Radford


Detroit Dan said...

So Piketty's book on capital gets capital wrong, as the critics have argued...

Tom Hickey said...

I guess one reason of that is he takes a neoclassical (conventional) stance — he thinks Samuelson won the CCC even though he conceded. This may be a limitation from the heterodox POV, but it makes him more acceptable in the mainstream.

Whatever, his book is rocking the world as a best seller, and he turning into an instant celebrity in a media world in which celebrity is everything.

As far as I can gather, Piketty's notion of capital is very close to the ordinary meaning, which gives his narrative broad appeal. The ordinary meaning of "capital" includes productive (real) capital and financial capital (savings) as a single stock. In this sense all assets are "capitalized" on someone's balance sheet. Then its just a matter of looking at the balances sheet in terms of levels of concentration. The outline is simple enough for most to get. So simplifying the generalizing of capital is an advantage in the presentation.

Since the share of capital is greater than the labor share, inequality increases since it is the top that owns productive capital, hence benefits from rising asset prices as well as real capital formation through investment. Additionally, saving as a % of income increases with income level and so the top saves the largest % of its income. Doh.

The outline is simple enough for most to get, and generalizing capital can be viewed as a feature of the presentation rather than a bug. The important thing is that reporters are able to understand it will enough to write about and the word on capitalism implying inequality is getting out as a meme. What a difference a few days make.

But the clincher for economists seems to be the data set. I haven't seen the book yet, but the data is blowing a lot people away. This seems to be a major factor in the rush to acclaim.

Unknown said...

"To me, both capital and labor are references to power and social relationships not to actual production inputs."

I don't buy this. It's metaphysics.

Unknown said...

"Perhaps we are afraid we will just end up realizing that returns to capital are socially constructed as some have argued all along. Such a conclusion would unravel orthodoxy at warp speed. Deservedly so."

The problem is that the post-Keynesians and others are really quite obscure about all this.

Whilst the neo-classicals have simple slogans like "people are paid according to their marginal product", post-Keynesians talk about obscure things like "reswitching" and vaguely suggest that maybe not all income is earned and maybe some people are exploited.

The post-Keynesian/ heterodox explanation needs to be clearer and more widely propagated so that there is a comprehensive alternative to the neoclassical dogma, out there in the public sphere.

You need arguments that counter the fundamental neoclassical tenets in a clear and concise way. So when someone says, for example, "people are paid according to their marginal product, therefore poor people are poor because they aren't productive and rich people are rich because they are super productive" or some such garbage, people are aware of clear counter arguments.