Principals of Macroeconomics 5: Robinson and the Theory of Capital — John Weeks

In Chapter 1 of The General Theory Keynes famously refers to two “postulates of Classical economics”, one of which determines the demand for labour and the other the supply. He states that “I shall argue that the postulates…are applicable to a special case only and not to the general case”, with continuous full employment the “special case” and less than full employment the general case.

In the context of later parts of The General Theory (for example, Appendix on User Cost and Chapter 20 on “The Employment Function”) it is clear that Keynes wrote tactically in accepting the limited applicability of mainstream supply and demand for labour. With an eye to what he considered his important contributions to come later in his book, he apparently decided to not to fight a battle over the theory of the labour market.

Robinson took on this fight with her path-breaking 1953 article, “Production Function and the Theory of Capital”, which initiated what came to be called the Cambridge Capital Controversy. Superficially arcane and esoteric, this controversy goes to the heart of mainstream economics. I do not exaggerate when stating that if Robinson’s critique is correct, mainstream economic theory collapses....

Progressive Economy Forum

Principals of Macroeconomics 5: Robinson and the Theory of Capital

John Weeks

Robert Vienneau — Some Experts On The Cambridge Capital Controversy

For those interested in the CCC.

Thoughts On Economics
Some Experts On The Cambridge Capital Controversy
Robert Vienneau

Barkley Rosser — "Those Of You Who Are Old Enough Will Really Get This"

More for the record. Larry Summers and his uncles, Kenneth Arrow and Paul Samuelson, and the Cambridge capital debates and Joan Robinson.

Econospeak
"Those Of You Who Are Old Enough Will Really Get This"
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

Barkley Rosser — The Revenge Of Joan Robinson: Capital Theory Controversies Revive

It was just two years ago that Thomas Piketty's book, Capital, made the best seller lists. Right now considerable attention is being paid to Anwar Shaikh's voluminous magnum opus, Capitalism. Both of these books take as their central issue that of the underlying forces driving secular trends in income distribution, particularly the division between wage incomes and profit or interest-based incomes.

Curiously, Piketty's theory remains firmly in the neoclassical camp regarding the questions raised by the old Cambridge, England school. He notes those controversies, but more or less dismisses them, perhaps reflecting the influence of being at MIT for a long period of time, even as he mocks excessive mathematical abstraction of much of modern growth theory. Jamie Galbraith and others, including Shaikh, have taken Piketty to task for his dismissal of the issues raised by those old controversies,…

Shaikh is an old fan of Sraffa's and a participant in the original debates. While he also does not present most of his theory as drawing on these old arguments, his approach is much closer to it in flavor and atmosphere, even if he eventually draws more heavily on modern econophysics methods. These fit nicely into his more Marxist approach, even as he downplays Marx. But, of course, it was Marx who more sharply posed these questions regarding the nature of capital and how it affects income distribution, as well as power distribution, within societies.…

Econospeak
The Revenge Of Joan Robinson: Capital Theory Controversies Revive
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

Lars P. Syll — What is this thing called ‘capital’?

Cambridge capital debate revisited.

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.

Lars P. Syll’s Blog
What is this thing called ‘capital’?
Lars P. Syll | Professor, Malmo University

See also Joan Robinson, "The Meaning of Capital," in Contributions to Modern Economics, Basil Blackwell, Oxford, 1978, pp. 114-125.

Robert Vienneau — Paul Romer Confused On Capital Theory

On Romer making stuff up. Yet another smackdown. I've lost count.

Thoughts on Economics
Paul Romer Confused On Capital Theory
Robert Vienneau

Peter Radford — Why No Labor Controversy?

Surely labor is as muddled a concept as capital.…

To me, at least, the old fashioned triad of inputs into the basic economic production equation – land, labor, and capital – are all so imprecise as to leave any output from those equations subject to enormous doubt. 

What, exactly, do we mean by them? 

What capital? What labor? and what land [land includes natural resources]? 

It is no wonder, then, that even the most heroic attempts at understanding the great curve towards modern prosperity that began a couple of hundred years ago fall farcically short. They don’t take into account to drivers of such prosperity, they depend upon archaic notions and such imprecise measures that they cannot hope to succeed.…

I understand the desire to compress human endeavor into simple formulae in the attempt to trace the arc of progress, but I think we all would benefit from a clearer understanding of what needs to be compressed. For economics to fit more neatly within the same world as the more basic sciences it needs to look through the lens of energy conversion, at work, and at the flow of information that results from both. Using land, labor, and capital makes that next to impossible. Some combination of energy, raw material, and knowledge would be a step in the right direction.

But economics is too path dependent to make such a shift. So we are stuck with pointless controversies, and inputs so vague that they obscure rather than illuminate the basic economic process called growth.

Peter Radford takes the business school approach to economics. Like what are the numbers actually, and what do they mean for meeting objectives according to plan.

The Radford Free Press

Why No Labor Controversy?
Peter Radford

Lord Keynes — What Determines Profits in Neoclassical Theory?

Important now in relation to Peter Thiel's monopoly theory of the entrepreneur versus commodity producer, where commodity producers compete profit away but savvy entrepreneurs that dominate their niche can extract economic rents. Thiel cites neoclassical profit theory to prove his point. 

Thom Lambert, Wall Chair in Corporate Law and Governance at the University of Missouri School of Law, explains in Peter Thiel on the Virtues of Monopoly that the neoclassical model is so 19th century. Now we realize that successful capitalism is based on monopoly rather than competition. So those anti-trust laws are so 19th century too. Government has finally come around to support monopoly capitalism institutionally. 

And it goes with out saying that entrepreneurial incentive is unlimited wealth extraction. So wealth and income inequality is virtuous. QED.

Social Democracy For The 21St Century: A Post Keynesian Perspective
What Determines Profits in Neoclassical Theory?
Lord Keynes

Peter Dorman — Piketty and the Capital Theory Dustup

Anyone who has studied this debate knows that this summary bears no relation at all to what was actually argued over. Piketty seems like a smart, open-minded guy, so I would have to assume that he hasn’t read the original documents; his take must have been formed by what he was told in grad school. If so, this passage can be read as a reflection of how the Two Cambridges battle has been turned into official history. That’s a discouraging thought.

As for myself, I think I disagree with both sides.

EconoSpeak

Piketty and the Capital Theory Dustup
Peter Dorman

Robert Vienneau — A Sophisticated Neoclassical Response To Cambridge Capital Controversies

One way of reading the Cambridge Capital Controversy (CCC) is an internal exploration of and debate about neoclassical price theory1. Both sides agreed to concentrate on the case of perfect competition, with no principal agent problems, no asymmetric information, etc. The Cambridge-Italian critics thought themselves to have demonstrated that neoclassical economists could not consistently with their theory claim that equilibrium prices were indices of relative scarcity. Such a claim is not well-founded in the theory, and economists should turn away frombiotechnological determinism and turn toward developing price theories in which class power matters. 

In this post, I want to outline the sophisticated neoclassical response, in the 1970s, to the Cambridge-Italian critics.

This neoclassical response asserted that price theory was best expressed in terms of General Equilibrium Theory (GET). Capital theory involves production over time. Models of intertemporal and temporary equilibrium have been developed in GET. And these models, it is claimed, are both logically consistent and unaffected by Cambridge-Italian criticism2.

Thoughts on Economics
A Sophisticated Neoclassical Response To Cambridge Capital Controversies
Robert Vienneau

Steven Pressman — Live-Blogging Piketty: Reading Pt. II

Pressman is conducting a pretty in depth analysis in comparison with most others. Here are some of the highlights.

Part II of Capital in the Twenty-First Century focuses on the functional distribution of income—how income gets divided up between labor and capital; or to be more precise, this part of the book is about how income is divided between labor income and non-labor income. Piketty groups all non-labor income together and refers to it as “capital income”; he also calls it “income from wealth.” He thinks this division between income from working and income from owning is important because the ownership of wealth is distributed so much more unequally than income, because non-labor income has been rising as a share of total income, and because non-labor or capital income earns a high rate of return. These trends push up income and wealth inequality. Capital Part II documents this.

One thing that continually impresses me is the care Piketty takes when presenting data. He seeks to explain the sources of his numbers, their limitations, and then tries to find additional support for his empirical results (through literature or through other sources)....

While the main argument here is convincing, this part of the book is not nearly as good as the first part of the book. One problem is that Piketty throws too many numbers at his reader without providing sufficient breaks, or support from literary or other sources, or at the least a little bit of humor. Another problem is that despite great efforts to come to terms with very complex data, I have concerns regarding his numbers.

Nonetheless, Part II of Capital is an empirical tour de force....

Cambridge Capital Controversy

One final word concerning Part II seems necessary. The Cambridge Controversy has been nagging at me while I have read this book. At the bottom of page 201, Piketty makes it clear that he gets his data from national income accounts, which merely add up the incomes from non-labor income (e.g., rents and profits), and also the value of capital or wealth from the best sources available containing this information (e.g., published data land values and stock prices). As such, Piketty does not fall prey to the theoretical problems identified in the Cambridge Controversy. There is no vicious circularity in trying to measure capital in order to get its rate of return by relying on rates of return to measure capital. Piketty has measured wealth given the best available data and then compared these figures to measured income using the national income accounts.

Having said this, Piketty does not do a very good job of defending himself against the Cambridge critique. When Piketty does address the Cambridge Controversy directly (p. 232), and kudos to him for attempting to do this, he gets things wrong by claiming the problem was really due to the lack of empirical data to resolve the issue. To repeat what I have already said, the Cambridge Controversy was a theoretical debate about the ability to measure something called “capital” in order to determine its rate of return for economic theory and analyze its economic role. All the data in the world could not help resolve this issue, since it is not an empirical issue. This is why Piketty’s work is safe from the Cambridge Controversy. He is doing empirical work and not theoretical work; he is relying on standard measures of income and wealth and examining their relationship over time. There may be flaws with some of these measures (as I noted above), but this only means we must be even more careful with the data than Piketty and even more modest in the sorts of conclusions we draw from the data. It does not mean that the whole attempt is nonsense or that Piketty is caught up in some sort of vicious circle. And Piketty is open to the criticism that he has no theory of what determines the rate of return to capital; but he is not guilty of doing meaningless work because of not understanding the lessons of the Cambridge Controversy.

Dollars and Sense
Live-Blogging Piketty: Reading Pt. II
Steven Pressman | Professor of Economics and Finance at Monmouth University in West Long Branch, NJ, co-editor of the Review of Political Economy, Associate Editor and Book Review Editor of the Eastern Economic Journal, and member of the Editorial Advisory Board of the journal Basic Income Studies

Dean Baker — Thomas Piketty and the Ghost of Joan Robinson

Mostly about the Cambridge capital controversy.

This relates to the Cambridge controversies since the Cambridge U.K. preople argued that the idea of an aggregate production function did not make sense. They pointed out that there was no way to aggregate different types of capital independent of the rate of return. The equilibirum price of any capital good depended on the rate of return. Therefore we can't tell a simple story about how the rate of return will change as we get more capital, since we can't even say what is more capital independent of the rate of return.

The takeaway from this, or at least my takeaway, is that we don't have a theoretical construct that we can hope more or less approximates how the economy actually works. The theoretical construct doesn't make sense. This means if we want to determine the rate of return to capital we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit.

Like Marx said.

Finishes strong.

I will say that I am a bit at loss to understand the meaning of Simon Wren-Lewis's comment that:

"As I said in my original post, I would like to make students aware of heterodox critiques, but I want to point out where in my mainstream account that critique would enter. (I think what I teach is pretty close to how many central bankers think, if not the rest of 'my tribe'!)"

It certainly is worthwhile to know what central bankers think, but is this supposed to be a source of legitimation? After all, even by the I.M.F.'s measures the wealthy countries are losing well over $2 trillion a year due to economies operating below potential GDP. The cumulative losses to the rich countries from the Great Recession are virtually certain to exceed $20 trillion and could well top $30 trillion. Is it supposed to be some sort of validation that the folks who got us here share your view of the world?

CEPR
Thomas Piketty and the Ghost of Joan Robinson
Dean Bake

J. Barkley Rosser — Paul Krugman Really Blows It

It is in his parenthetical aside, that "you shouldn't" think that Robinson and Kaldor (who was not one of the main participants in that debate from the Cambridge, UK side, and I say that as one who has recently been labeled a "Kaldorian") were right in the debate. The problem is that Paul Samuelson agreed that in fact Robinson and Piero Sraffa (and Garegnani and Pasinetti) were in fact right. The possibility of reswitching does undermine profoundly the marginal productivity theory of factor income distribution, especially for capital. He did so in his "Summing Up" paper after the symposium on reswitching in the QJE in 1966. His final sentence of that paper, after going through the arguments in several papers was "The foundations of economic theory are built on sand."

Krugman makes a lot of good points, but he really needs to get it together about what went down during the Cambridge capital theory controversies. Robinson and Sraffa were right, and Paul Samuelson said so. Period.

Smacking down the revisionists.

Econospeak
Paul Krugman Really Blows It
J. Barkley Rosser | Professor of Economics at James Madison University in Harrisonburg, Virginia

Philip Pilkington — The Capital Controversies Rise Once More

Phil explains how the issues raised in the Cambridge capital controversy are relevant today in light of the debate around inequality.

The capital debates were, it should be said, about rather a lot of things. But the most immediate concern was with income distribution. The mainstream marginalist argument tried to show that income is passed over to the factors of production — that is, capital and labour — in line with their marginal productivities. This implies that under free-market conditions the income received by each factor is in line with what it should be for maximum efficiency. There is an implicit notion here that income distribution is thus fair.

Of course, marginalists do not (always) take this argument literally. There are plenty of ways of protesting against the levels of income distribution from within this framework. The most obvious that comes to mind — and that which was put forward by a key player in the debates Robert Solow — is that income inequality can arise due to past levels of income inequality.

That is all well and good but the theory still gets away from an obvious truth: a key component of income distribution is due to the relative power of labour and capital. Anyone who denies this basic fact is either blind, politically motivated or… a marginalist economist....

Economists need to stop telling themselves these silly little stories and chasing chimeras. If they are interested in what accounts for investment, technical change and capital accumulation then they should go and study it. Not through their silly little models. But by examining the facts and studying companies as institutions. Do surveys. Look for empirical correlations. Engage in some corporate anthropology. Just stop building stupid models.

Fixing the Economists
The Capital Controversies Rise Once More
Philip Pilkington

Lars P. Syll — Krugman’s gadget interpretation of economics

Where does all this leave us? Well, I for one, is not the least impressed by Krugman’s gadget interpretation of economics. Krugman — still — hasn’t come up with a tenable explanation to why mainstream economics goes on as if the capital controversy has never occurred, or why he and other leading neoclassical economists — still — treat ‘capital’ as if it was a well-defined and consistent concept — which it is not, as admitted by Samuelson et consortes almost fifty years ago.

Krugman’s gadget interpretation of economicsLars P. Syll | Professor, Malmo University

Matias Vernengo — Krugman on Palley's Gattopardo Economics

Matias Vernengo contra Krugman.

Naked Keynesianism
Krugman on Palley's Gattopardo Economics
Matias Vernengo | Associate Professor of Economics, University of Utah

Lars Syll — Krugman’s misleading trivialization of the capital controversy

Historical revisionist Paul Krugman takes another swipe at James K. Galbraith, who criticized Piketty's neoclassical assumption about the production function, and "leftist" economists, i.e., Post Keynesians, who inconveniently the Cambridge capital controversy and agree with Joan Robinson and Piero Sraffa.

Krugman’s misleading trivialization of the capital controversy
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Economics textbooks on ‘capital’ — how to get away with scientific fraud

In the United States, on the other hand, mainstream economics goes on as if the [Cambridge Capital] 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

Economics textbooks on ‘capital’ — how to get away with scientific fraud

Lars P. Syll | Professor, Malmo University

Unlearningecon — Yes, The Cambridge Capital Controversies Matter

I rarely (never) post based solely on a quick thought or quote, but this just struck me as too good not to highlight. It’s from a book called ‘Capital as Power’ by Jonathan Nitzan and Shimshon Bichler, which challenges both the neoclassical and Marxian conceptions of capital, and is freely available online. The passage in question pertains to the way neoclassical economics has dealt with the problems highlighted during the well documented Cambridge Capital Controversies:

Yes, The Cambridge Capital Controversies Matter
Unlearningecon

George Stigler and the labor theory of value

Stigler got it all backwards.

George Stigler is a neoliberal ideologue and gets paid well for it.

Naked Keynesianism

George Stigler and the labor theory of valueMatias Vernengo | Associate Professor of Economics, University of Utah