No, Productivity Does Not Explain Income — Blair Fix

Did you hear the joke about the economists who tested their theory by defining it to be true? Oh, I forgot. It’s not a joke. It’s standard practice among mainstream economists. They propose that productivity explains income. And then they ‘test’ this idea by defining productivity in terms of income.

In this post, I’m going to show you this circular logic. Then I’ll show you what productivity differences look like when productivity is measure objectively. They’re far too small to explain income differences....

Naked Capitalism
No, Productivity Does Not Explain Income

Blair Fix, a PhD student at the Faculty of Environmental Studies at York University in Toronto, Canada and author of ‘Rethinking Economic Growth Theory From a Biophysical Perspective‘ 2015)

Originally published at Economics from the Top Down; cross posted from Evonomics

David F. Ruccio — Utopia and value theory

Mainstream economists refer to it as price theory, everyone else value theory. But whatever it’s called, it’s at the center of economists’ differing explanations of what happens in (and alongside) markets.

As I see it, price/value theory serves as the framework to explain a wide range of phenomena, from how and for how much commodities are exchanged in markets through the determinants of the distribution of incomes to the outcomes—for the economy and society as a whole—of the allocation of resources and commodities through markets.

And each price/value theory has a utopian dimension. It’s not just an accounting for and an explanation of the conditions and consequences of commodity exchange; it’s also a way of thinking about the fairness and justice of markets. It therefore informs (and is informed by) a utopian horizon within and beyond markets.

Let me explain.…

Excellent short explanation of a key economic idea that functions as a political weapon in the class war.

The differences between neoclassical price theory and Marxian value theory couldn’t be more stark. The differences are even more dramatic when we compare their utopian horizons. Whereas neoclassical price theory leads to a utopian celebration of capitalist markets, Marxian value theory both informs and is informed by a utopian critique of capitalist exploitation—and therefore a movement beyond capitalism.

The question is how surplus value is created. Surplus value becomes profit (owners' share by fact of ownership), which is income that is not earned since it is the difference between proceeds and wages.

In both cases—neoclassical price and Marxian value theory—the story about commodity exchange, and therefore the analysis of the form that wealth takes under capitalism, has a utopian dimension. The two theories have that in common. Where they differ is the form that utopian dimension takes....

Occasional Links & Commentary
Utopia and value theory
David F. Ruccio | Professor of Economics, University of Notre Dame

See also

Michael Roberts Blog
Inequality and exploitation
Michael Roberts

See also

Monthly Review
The Multiple Meanings of Marx’s Value Theory

Riccardo Bellofiore

David Glasner — Wherein Hayek Agrees with DeLong that Just Because You’re Rich, It Doesn’t Mean You Deserve to Be

Short version: It's the rent, stupid.

Most people feel (rightly) that there's something wrong with capitalism distribution that violates the principle of just deserts. It's unlikely that many understand the argument behind just deserts being the result of marginal productivity, but they get the gist of the explanation and find it fishy. But they can't really say why and how.

They need to be introduced to the concept of economic rent and rent extraction through asymmetrical power in the kind of political system that prevails in the liberal countries. It's not government of the people, by the people and for the people but rather government on the principle that those who own the country should govern the country, assuming trickle down.

In other words, its about the interaction of class, power, and wealth, giving rise to privilege; whereas just deserts depends on equal opportunity. The issue really boils down to the key social fundamentals of fairness and free riding that are found even in the insect world among ants and bees.

Uneasy Money
Wherein Hayek Agrees with DeLong that Just Because You’re Rich, It Doesn’t Mean You Deserve to Be
David Glasner | Economist at the Federal Trade Commission

Lars P. Syll — New study shows marginal productivity theory has a ‘negligible’ link to reality

Those damn empirics keep getting in the way of theory. 

Mainstream economics, with its technologically determined marginal productivity theory, seems to be difficult to reconcile with reality. Although card-carrying neoclassical apologetics like Greg Mankiw want to recall John Bates Clark’s (1899) argument that marginal productivity results in an ethically just distribution, that is not something – even if it were true – we could confirm empirically, since it is impossible realiter to separate out what is the marginal contribution of any factor of production. The hypothetical ceteris paribus addition of only one factor in a production process is often heard of in textbooks, but never seen in reality.

When reading mainstream economists like Mankiw who argue for the ‘just desert’ of the 0.1 %, one gets a strong feeling that they are ultimately trying to argue that a market economy is some kind of moral free zone where, if left undisturbed, people get what they ‘deserve.’ To most social scientists that probably smacks more of being an evasive action trying to explain away a very disturbing structural ‘regime shift’ that has taken place in our societies. A shift that has very little to do with ‘stochastic returns to education.’ Those were in place also 30 or 40 years ago. At that time they meant that perhaps a top corporate manager earned 10–20 times more than ‘ordinary’ people earned. Today it means that they earn 100–200 times more than ‘ordinary’ people earn. A question of education? Hardly. It is probably more a question of greed and a lost sense of a common project of building a sustainable society.

Conventional economics as apologetics for ideology.

New study shows marginal productivity theory has a ‘negligible’ link to reality
Lars P. Syll | Professor, Malmo University

Michael Roberts — The system is broken

While Skidelsky’s arguments have more than an element of truth about them, he does not really explain why mainstream economics has become divorced from reality. This is not a mistake of education or lack of recognition of wider social sciences like psychology; it is a deliberate result of the need to avoid considering the reality of capitalism. ‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists Adam Smith, David Ricardo, James Mill and others. But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), then economics quickly moved to deny that reality. Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value and Say’s law replacing crises.

As Marx succinctly put it: “Once for all I may here state, that by classical political economy, I understand that economy, which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use, but for the rest, confines itself to systematizing in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds.”

What is wrong with mainstream economics is not (just) that economists of today are too narrowly mathematical and focused on economic models – there is nothing inherently wrong with using maths and models – or that most economists do not have the wider “erudition and multiple talents” of the classical economists of the past. It is that economics is no longer ‘political economy’, an objective analysis the laws of motion of capitalism, but an apologia for all the ‘virtues’ of capitalism.…

The Protestant ethic equated virtue with material wealth and worldly success. This was an underlying factor in the development of capitalism (economic liberalism) as a cultural norm in the West. See Max Weber's The Protestant Ethic and the Spirit of Capitalism and R. H. Tawney's Religion and the Rise of Capitalism, for example.

It is not just market fundamentalism that is the problem, according to Michael Roberts. Even Keynesianism is only a ploy to paper over the warts of capitalism when they arise cyclically, addressing the symptoms rather than the underlying etiology.

In my view, policy makers may have chosen to ignore fiscal spending to solve the ‘technical problem’ of the Long Depression partly “for political reasons”. But there are also very good economic reasons for arguing that in a capitalist economy, increased government spending and running budget deficits would not get an economic recovery if the profitability of capital is low.

If the profitability of domestic investment is low, then increased funding will flow to increases in asset prices, e.g., stock buyback that increase financial wealth but not real wealth, or investment will flow abroad where returns are more attractive.

Michael Roberts' Blog
The system is broken

Michael Roberts

See also

A study of social class — defined by annual income and by education-level — finds that “Social class rank was positively associated with essentialist beliefs [beliefs that genetics is more important than environment in explaining social class]. ... Social class rank was also positively associated with both belief in a just world ... and meritocracy beliefs, ... suggesting that upper-class ... individuals are more likely to believe that society is fair and just than are their lower-class rank counterparts.”

This study, “Social Class Rank, Essentialism, and Punitive Judgment,” was published in the Journal of Personality and Social Psychology, and was performed by Michael W. Kraus and Dacher Keltner, two leading social scientists, whose investigations of the moralities that are applied respectively by the rich and by the poor, are contributing importantly to our understanding of society, of politics, of law, and of economics.

This research found that “Upper-class ... individuals were more likely to endorse beliefs that social class is an inherent, stable, and biologically determined social category relative to their lower-class ... counterparts. Moreover, this pattern emerged after accounting for both political attitudes and material resource measures of social class. ... Beliefs that society is fair and just explained the tendency among upper-class ... individuals to endorse essentialist [biological] beliefs about social class.” Thus: the richer and more educated a person was, the more that he thought the world is just, and the more he attributed his being upper-class to his supposed inborn superiority, rather than to the circumstance of his having been born from rich parents who possessed the money to send him to college and perhaps to an expensive university.

Social Darwinism.

The Huffington Post
The Rich And Educated Believe Wealth Correlates With Virtue, Says Study

Eric Zuesse

Brad DeLong — Musings on “Just Deserts” and the Opening of Plato’s Republic – More

Greg Mankiw Defending the 1% proposes what he calls the “just deserts” theory of social justice:

What you have gained and hold by playing by the economic rules is yours: social justice consists in not cheating or injuring people, and not being cheated or injured in turn.

This is an old theory: we see it first in the western intellectual tradition nearly 2400 years ago, in the opening of the dialogue that is Plato’s Republic. It is advanced by Kephalos…

Socrates dismisses it out of hand.

WCEG — The Equitablog
Musings on “Just Deserts” and the Opening of Plato’s Republic
Brad DeLong

See also

Counterpunch
The Magical Invisibility Cloak Utilitarianism Wears in the Age of Neoliberal Capitalism
Fred Guerin

Scientific American
How Morality Changes in a Foreign Language

Julie Sedivy

Understanding Society
Profit and Gift in the Digital Economy
Dave Elder-Vass | Lecturer in Sociology at Loughborough University

Yanis Varoufakis — How Do the Economic Elites Get the Idea That They ‘Deserve’ More? Lessons from Game Theory

The ‘haves’ of the world are always convinced that they deserve their wealth. That their gargantuan income reflects their ingenuity, ‘human capital’, the risks they (or their parents) took, their work ethic, their acumen, their application, their good luck even. The economists (especially members of the so-called Chicago School. e.g. Gary Becker) aid and abet the self-serving beliefs of the powerful by arguing that arbitrary discrimination in the distribution of wealth and social roles cannot survive for long the pressures of competition (i.e. that, sooner or later, people will be rewarded in proportion to their contribution to society). Most of the rest of us suspect that this is plainly false. That the distribution of power and wealth can be, and usually is, highly arbitrary and independent of ‘marginal productivity’, ‘risk taking’ or, indeed, any personal characteristic of those who rise to the top. In this post I present a body of experimental work that argues the latter point: Arbitrary distributions of roles and wealth are not only sustainable in competitive environments but, indeed, they are unavoidable until and unless there are political interventions to keep them in check.…

Evonomics
How Do the Economic Elites Get the Idea That They ‘Deserve’ More? Lessons from Game Theory
Yanis Varoufakis

Matt Bruenig — “Force” arguments continue to be the rhetorical backwater of idiots

Elizabeth Stoker Bruenig has a post about Erick Erickson saying what conservatives in general believe about low-income workers. Here is Erickson, version one: 

“What’s going on here — by the way, more than 90% of Americans make more than minimum wage. The minimum wage is mostly people who have failed at life, and high school kids. I don’t mean to be ugly with you people, but…If you’re a thirty-something-year-old person, and you’re making minimum wage, you’ve probably failed at life. It is not that life has dealt you a bad hand. Life does not deal you cards. It is that you’ve failed at life.”

In respectable circles, conservatives can usually keep their discipline together and ensure that they only heap disdain on the lazy, non-working poor. But sometimes they slip up and tell you what they really think. It’s not idleness that they think makes you a garbage failure of a person. Working a hard job preparing food for people to eat, a rather important social function, does not save you from their scorn. All low-income people, whether they are working or not, are regarded as inferior trash people.

It turns out that saying food service workers who are trying to pull down some of that sacred market income are categorical failures at life is generally regarded as quite heinous. So Erickson, version two, was forced to pretend that this is not what he meant:

“If you are working your tail off and doing the best you can and, perhaps you have to rely on family, friends, charity, or government to get by, as I said on Rush’s show, that’s not failing. That’s working. And work is rewarding. But if you are in your thirties, making minimum wage in a career, and standing on the street demanding the government do something about it, yes, yes you have failed at life…In fact, the people most upset with me missed the part about me specifically saying more than once that I was referring to 30 year old minimum wage workers who are blocking traffic demanding the government force their employers to pay them more. Those people have failed at life.”

For starters, surely nobody believes Erickson had any such distinction in his mind initially. The first quote is unmistakably clear. By the time people are 30, they should have gotten into a better job than food service. If they haven’t, that means they are failures. They are not failures because they are protesting. They are failures because they are not doing as well economically as they should be.…

Matt Bruenig — Politics
“Force” arguments continue to be the rhetorical backwater of idiots
Matt Bruenig

Matt Bruenig — Desert-Sacrifice-Utility Whack-a-Mole

Earlier, I explained the common argumentative strategy I call Capitalism Whack-a-Mole. People who utilize this strategy claim that they support capitalism for a specific normative reason (e.g. that it gives to each what they produce), but then, when you show that normative reason is actually inconsistent with capitalism, they shift to a totally new normative framework. For those who use the whack-a-mole, their preference for laissez-faire capitalism never changes, but their justification for it shifts rapidly from moment to moment.

Previously, I wrote about a whack-a-mole experience I had on Twitter with some fellow named Adam Blackstone. Here, I write about another whack-a-mole experience I had with on Twitter with a fellow named William Freeland. This twitter back-and-forth was very long, so I will just summarize it (you can try to work through it here though if you want).

Desert-Sacrifice-Utility Whack-a-Mole
Matt Bruenig

James Surowiecki — Moaning Moguls

Schwarzman isn’t alone. In the past year, the venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews. All three eventually apologized, but the basic sentiment is surprisingly common. Although the Obama years have been boom times for America’s super-rich—recent work by the economists Emmanuel Saez and Thomas Piketty showed that ninety-five per cent of income gains in the first three years of the recovery went to the top one per cent—a lot of them believe that they’re a persecuted minority. As Mark Mizruchi, a sociologist at the University of Michigan and the author of a book called “The Fracturing of the American Corporate Elite,” told me, “These guys think, We’re the job creators, we keep the markets running, and yet the public doesn’t like us. How can that be?” Business leaders were upset at the criticism that followed the financial crisis and, for many of them, it’s an article of faith that people succeed or fail because that’s what they deserve. Schwarzman recently said that Americans “always like to blame somebody other than themselves for a failure.” If you believe that net worth is a reflection of merit, then any attempt to curb inequality looks unfair.…

If today’s corporate kvetchers are more concerned with the state of their egos than with the state of the nation, it’s in part because their own fortunes aren’t tied to those of the nation the way they once were. In the postwar years, American companies depended largely on American consumers. Globalization has changed that—foreign sales account for almost half the revenue of the S&P 500—as has the rise of financial services (where the most important clients are the wealthy and other corporations). The well-being of the American middle class just doesn’t matter as much to companies’ bottom lines. And there’s another change. Early in the past century, there was a true socialist movement in the United States, and in the postwar years the Soviet Union seemed to offer the possibility of a meaningful alternative to capitalism. Small wonder that the tycoons of those days were so eager to channel populist agitation into reform. Today, by contrast, corporate chieftains have little to fear, other than mildly higher taxes and the complaints of people who have read Thomas Piketty. Moguls complain about their feelings because that’s all anyone can really threaten.

The New Yorker
Moaning Moguls

James Surowiecki

(h/t Mark Thoma at Economist's View)

Lars P Syll — ‘Just desert’ and neoclassical income distribution theory

John Maynard Keynes, Amartya Sen, and Robert Solow contra Greg Mankiw.

Lars P Syll's Blog

‘Just desert’ and neoclassical income distribution theory
Lars P. Syll | Professor, Malmo University

Brad DeLong — Hoisted From The Internet Archives: The Last Word On The "Just Deserts" Theory Of Distribution Brad DeLong

I remember that I found this, by Amartya Sen, totally convincing when I first read it 32 years ago. And I still find it totally convincing today

Grasping Reality

Hoisted From The Internet Archives: The Last Word On The "Just Deserts" Theory Of Distribution

Brad DeLong

(h/t y in the comments)

Brad DeLong — Amartya Sen 32 Years Ago Had the Last Word on “Just Deserts” Theories of Distribution

… marginal product accounting, when consistent, is useful for deciding how to use additional resources… but it does not “show” which resource has “produced” how much…. The alleged fact is, thus, a fiction, and while it might appear to be a convenient fiction, it is more convenient for some than for others….

WCEG — The Equitablog
Morning Must Read: Amartya Sen 32 Years Ago Had the Last Word on “Just Deserts” Theories of Distribution

Brad DeLong

Brad DeLong — Unjust Deserts

We would have a much clearer discussion of issues of inequality and distribution if we would simply stick to considerations of human wellbeing and useful incentives. The rest is meritocratic ideology; and, as the reception of Piketty’s book suggests, that ideology may now have run its course.

Project Syndicate
Unjust Deserts
J. Bradford DeLong | Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research

Tim Bending on productivity, labor, Keynes, effective demand, fairness, and equality

A couple of older posts worth visiting in present context.

Open Democracy — Open Economy
Productivity does not explain wage differentials
Tim Bending 7 July 2010

A close look at labour markets, Keynes and effective demand shows that low demand is very bad for equality
Tim Bending 10 January 201

 

Josh Hendrickson — What is Fair?

Josh Hendrickson weighs in on Piketty.

Notice how his argument assumes methodological individualism based on ontological individualism that ignores that human being are situated in society, culture, and institutions, so that individual action is entirely free of social influence. Which is absurd from the point of view of the life sciences, social sciences, history, and psychology.

I am not picking on Professor Hendrickson here, since he does not put this forward as his own view personally. Rather, he presents it as how economists think about these things.

These economists whom he mentions appear to be without a clue about how life actually works in the real world outside their heads. I remember the day when this was said about philosophers, but now economists have taken it over.


The Everyday Economist
What is Fair?

Josh Hendrickson | Assistant Professor of Economics, University of Mississippi

Gaius Publius — Neoliberalism, “just deserts” and the post–climate crisis economy

This is an important post about where neoliberalism is taking us. It's well worth reading in its entirety. To summarize, the "just deserts" ethical theory justifies rationalizes growing inequality of income and wealth distribution upwards. Under the rational, given increasing scarcity from the consequences of climate change food, water, energy and other vital resources are becoming scarcer, at least in part owing to negative externalities along with the m.o. of capitalizing gains and socializing losses by passing the cost of fouling the nest and disrupting the ecology on to society. 

The "makers are also acquiring the sources of viral resources, since they foresee reaping huge profits and usurious rents as monopolists. To ensure that the "takers" don't object effectively, the world is being turned into a security and surveillance super-state by the owners of governments, chiefly the US government. Anyone who objects in a way that is deemed to active is defined as a terrorist and "removed." Welcome to the future. It's already here.

America Blog
Neoliberalism, “just deserts” and the post–climate crisis economy
Gaius Publius

Lars P. Syll on how amorality implies morality in the minds of market fundamentalists

Amorality of markets = individual morality and social justice? Depends on the assumptions, like "just deserts." Which is, of course, circular reasoning that assumes the conclusion.

Lars P Syll's Blog
Greg Mankiw — the inequality defender
Lars P. Syll | Professor, Malmo University

See also Paul Krugman's and Dean Baker's responses to Mankiw's "just deserts" at Economist's View, 'It's Not Just Talent and Hard Work' by Mark Thoma