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Saturday, May 3, 2014
Matthew Stoller — Important Economist Piketty’s Important Book “Capital” Is Important
Matt Stoller puts his finger on a paradox of capitalism. Capital is measured in terms of marginal price of equity in the market, which is volatile. Change in price at the margin may have little or nothing to do with the actual value of capital or even the return, which do not fluctuate moment to moment but rather are much more static.
The market price is determined by other factors than underlying fundamentals, including expected return discounted at some unspecified points in the future under conditions that are uncertain, as well as matters like inflation expectations, anticipation of interest rate changes, and "market sentiment," bullish or bearish at the moment. In addition, markets prices are nominal and obtaining real values by adjusting for inflation is tenuous in that inflation is not an observable quantity but an estimate gleaned from arbitrary indices.
In spite of these obstacles, in a monetary production economy, economic data is reported in nominal terms. The performance record of an economy is a record of transactions entered into journals, ledgers and reports, and then aggregated. What is the best way to make sense of this? There are competing solutions, roughly divided into the orthodox core and the heterodox periphery. Which is right? What would the criteria for judging this be?
Can an answer based on the neoclassical production function be correct when capital is not defined operationally in a satisfactory manner (Cambridge capital controversy)? Doesn't use of historical data over a long period call into question whether it is even possible to obtain accurate data and ensure that the same thing is being measured? To what degree do historical conditions count and how is it possible to reconcile data from different economic and financial systems? Does Piketty's work suffer from any of the faults of Reinhart and Romer?
Stoller doesn't go into this, but simply suggests a broad question about Piketty's importance. Is the importance of the work the fact that it uses the neoclassical orthodox approach that allows its consideration by the core of the economics profession, unlike profuse work in this field and on this subject by heterodox economists? Is the importance of Piketty's book the hype surrounding it?
I don't think that asking these kinds of questions takes away from the importance of Piketty's work historically. This is a historical turning point in the debate about capitalism and inequality and Piketty and colleagues' work is the catalyst for it. However, this could not have happened without the attendant circumstances that make the publication of Capital for the 21st Century the right book at the right time.
Now let the real debate begin.
Observations on Credit and Surveillance
Important Economist Piketty’s Important Book “Capital” Is Important
Matthew Stoller
(h/t Jose Guilherme in the comments)
"Can an answer based on the neoclassical production function be correct when capital is not defined operationally in a satisfactory manner (Cambridge capital controversy)?"
ReplyDeleteWhat does that mean? What does it mean to measure capital according to a method based on the neoclassical production function?
On the concept of capital
ReplyDeleteDuring the 1950s, '60s, and '70s there was a lively debate about the theoretical soundness of production functions. (See the Capital controversy.) Although the criticism was directed primarily at aggregate production functions, microeconomic production functions were also put under scrutiny. The debate began in 1953 when Joan Robinson criticized the way the factor input capital was measured and how the notion of factor proportions had distracted economists.
According to the argument, it is impossible to conceive of capital in such a way that its quantity is independent of the rates of interest and wages. The problem is that this independence is a precondition of constructing an isoquant. Further, the slope of the isoquant helps determine relative factor prices, but the curve cannot be constructed (and its slope measured) unless the prices are known beforehand.
On the empirical relevance
As a result of the criticism on their weak theoretical grounds, it has been claimed that empirical results firmly support the use of neoclassical well behaved aggregate production functions. Nevertheless, Anwar Shaikh[5] has demonstrated that they also have no empirical relevance, as long as alleged good fit outcomes from an accounting identity, not from any underlying laws of production/distribution.
Natural resources
Often natural resources are omitted from production functions. When Solow and Stiglitz sought to make the production function more realistic by adding in natural resources, they did it in a manner that economist Georgescu-Roegen criticized as a "conjuring trick" that failed to address the laws of thermodynamics, since their variant allows capital and labour to be infinitely substituted for natural resources. Neither Solow nor Stiglitz addressed his criticism, despite an invitation to do so in the September 1997 issue of the journal Ecological Economics.[1] For more recent retrospectives, see Cohen and Harcourt [2003] and Ayres-Warr (2009).[2][6]
Criticisms of the production function theory
So is the emerging heterodox position that the rich have not been getting richer because capital can't be measured, and therefor the concepts of "richer" and "poorer" don't apply?
ReplyDeleteNot at all. The fear is that that if the neoclassical model is allowed to pass muster then the solutions will be neoclassical ones. The heterodox claim that only by shifting the universe of discourse in the direction of reality can the problem be adequately specified and addressed.
ReplyDeleteI think that Matt Rogiie's criticism of Piketty shows where the issue wrt "capital" and production function stands with the mainstream.
ReplyDeletehttp://marginalrevolution.com/marginalrevolution/2014/04/more-matt-rognlie-on-piketty.html
I would propose henceforth that when people criticize the arguments of Piketty or others they try to be specific about precisely what premises they are objecting to, and don't resort to generic verbal crutches like "neoclassical models", "orthodox" and "mainstream".
ReplyDeleteDan, I submit that if Piketty's work did not pass the test, the mainstream would not be seriously discussing it. Krugman would not be praising it and appearing with Piketty, and even taking up the cause of inequality. It would just not happen. Moreover, Krugman assiduously avoids the work of heterodox economists that would bolster the case.
ReplyDeleteThen you have the curious case of Austrian economist Arnold Kling ready to throw the neoclassical production function under the bus. Could that have something to do with Piketty's work suddenly becoming the topic of the day?
Economists from Ricardo to Piketty have wanted to describe the relationship between economic growth and income distribution in terms of simple laws. For the past fifty years or so, the NPF has been the go-to tool for economists trying to do this. Mathematically, it is very elegant for that purpose.
But thinking of the economy in terms of an aggregate NPF has many problems....
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