REVIEW ESSAY–The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory by Philip Pilkington Marc Morgan

Book review.

American Affairs

REVIEW ESSAY–The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory by Philip Pilkington

Marc Morgan | research economist at the World Inequality Lab of the Paris School of Economics.

LarsP. Syll — Mainstream theories of income distribution

Increasing asymmetry of income and wealth, which now goes by the name "inequality" as the buzzword, arises either from the function of perfect markets or from asymmetry of power. A perfect market is one in which there is no asymmetry, that is, the agents are homogenous.

A perfect market could generate asymmetry through difference in ability that lead to differences in distribution owing based on merit and just deserts (as conventional economics assumes). However, perfect markets don't exist other than as modeling constructs. Class structure, for example, generates asymmetries. Always has and always will, to the degree that is is permitted and not compensated for.

Addressing rising inequality by addressing the causes involves addressing the asymmetries from which inequality arises. Libertarians assume that all asymmetry of power and influence is introduced by "state" (government) influence on markets. That is only partially true, however. Influence does often occur through government but this is through asymmetrical power that exists among agents, enabling capture. In addition, economies of scale produce greater efficiency but at the expense of concentration, which risks monopoly and monopsony power and monopoly and monopsony rents as a consequence. This generates "monopoly capitalism."

The upshot is that market "imperfections" lead to asymmetric power, and asymmetric power enable the extraction of economic rent as unearned gains, which in turn results in asymmetric distribution that is not based on merit and gained through competition in perfect markets.

Further elaboration of this cycle is needed to clarify for electorates what the reasons for rising inequality rather rather than appealing to models based on unrealistic assumptions that exist only in economists' brains.

This necessitates an investigation of power and its operation in a society as a social system (complex adaptive system). This was initiated by the classical economists in their investigation of economic rent, continued by Karl Marx, taken up by Veblen and the institutionalists, and subsequently shunted over to sociology ( cf. C. Wright Mills) and political science since the advent of marginalism explained economic rent away based on idealistic models of a market economy based on near perfect markets.

Conventional economists know about market imperfection, rent, rent-seeking and rent extraction but they have avoided dealing with it as a socio-economic factor. Now rising social dysfunctionality is forcing a return to investigating distribution and the causes of increasing inequality of income and wealth.

This can no longer be avoided but no one has yet grasped the "third rail" of economics — other than the Marxists and Marxians, that is, which a reason no one else dares touch it, since contemporary capitalism is based on it and argues unequal distribution is necessary because "incentive." Well then, even if this would be the actual reason, which is highly doubtful, it is a bug rather than a feature.

LarsP. Syll’s Blog
Mainstream theories of income distribution
Lars P. Syll | Professor, Malmo University

See also

Michael Roberts Blog
Invisible Leviathan – Marx’s law of value in the twilight of capitalism
Michael Roberts

Peter Taaff — Parasitic capitalism exposed [Book Review]

Mariana Mazzucato’s new book is a detailed exposé of the parasitic character of modern capitalism, drawing on Karl Marx’s theory of the source of value creation. But understanding the law of value is only a first step to providing an alternative to a system that cannot overcome its inevitable tendency for periodic crises and which needs to be overthrown, argues Peter Taaffe.

Socialism Today
Parasitic capitalism exposed

Peter Taaff | general secretary of the Socialist Party of England and Wales and member of the International Executive Committee of the Committee for a Workers' International

Nature — How to retool our concept of value – Mariana Mazzucato

Must-read in full. It's short and to the point.

The meaning of "value" is one of the most pertinent questions in economics and political economy. Michael Hudson has been emphasizing this for some time, as have Marxists and Marxian. Consideration of value of other than as price revealed in competitive markets is ruled out in conventional economics by methodological assumptions.

What we value and how we value it is one of the most contested, misunderstood and important ideas in economics. Economist Mariana Mazzucato’s comprehensive The Value of Everything explores how ideas about what value is, where it comes from and how it should be distributed have changed in the past 400 years, and why value matters now more than ever. Mazzucato emphasizes the need to reopen debate to make economies more productive, equitable and sustainable. The 2008 financial crisis was just a taste of looming problems — climate disruption, massive biodiversity and ecosystem-services decline, even the possible collapse of Western civilization — unless we learn to value what really matters.

Early economists focused on the production of value from land (François Quesnay and the ‘physiocrats’), labour (Adam Smith to Karl Marx) and capital. In this view, value determines price (Four decades ago, I described this in terms of embodied energy: see R. Costanza Science 210, 1219–1224; 1980). By contrast, the current mainstream ‘marginalist’ concept bases value on market exchanges: price, as revealed by the interaction of supply and demand in markets, determines value, and the only things that have value are those that fetch a price.

This has major implications for ideas about the distinction between value creation and value extraction, the nature of unearned income (‘rent’) and how value should be distributed....

Nature
How to retool our concept of value — Mariana Mazzucato
Robert Costanza

Philip Pilkington — Utilitarian Economics and the Corruption of Conservatism

Weekend reading on economic and political economy. Phil always has interesting things to say as a philosophical economist or economic philosopher.

American Affairs
Utilitarian Economics and the Corruption of Conservatism
Philip Pilkington

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

A Critique of Crisis Theory — Three Books on Marxist Political Economy

Important if you are into economic theory or the history of economics. It is chiefly an exploration comparing and contrasting Anwar Shaikh's Capitalism, Competition and Crises and Paul Baran and Paul Sweezy’s Monopoly Capital.

The third book is John Smith’s Imperialism in the Twenty-First Century. It is not reviewed in this post.

The post is longish but not wonkish. It is an easy read that is well worthwhile.

A Critique of Crisis Theory
Three Books on Marxist Political Economy
Sam Williams

Here is an interesting tidbit. Walrus, who is the most single most influential economist historically as the founder of general equilibrium based on marginalism, is widely disparaged by heterodox economists for basing his theory on perfect competition theoretically and at least nearly so in practice.

Was Walrus really that naïve?

Well, it turns out that Walrus was no dummy. He understood what it would take practically — nationalization of land and zero income on wages, advocated for this as policy.

I have explained elsewhere in this blog that the term “socialism,” unlike “communism,” is imprecise. The Bolshevik Party of Lenin used the term “socialist,” but so did the bourgeois centrist Radical Socialist Party (7), which dominated the French Third Republic, which existed between 1871 and 1940. It was also used by Adolf Hitler and his extreme-right National Socialists—the Nazis. Could Leon Walras, the economist whose ideas more than any other form the basis of present-day neo-liberalism, also be a socialist? Yes! Indeed, Walras considered himself a “democratic socialist.”

Like certain radical followers of David Ricardo and Henry George and his followers in the United States, Walras believed that the land should be nationalized. The government would then depend on ground rent alone for its revenue. Walras was especially opposed to taxes on wages. If wages were not taxed and land was nationalized, Walras believed, wage workers would be able to transform themselves into self-employed individual businesspeople if they so desired. If the government followed these “democratic socialist policies,” Walras believed, the number of independent business people would explode, creating the conditions that would allow an approximation of perfect competition to be achieved in practice.

Today’s neo-liberal microeconomists, though their theoretical foundations are “Walrasian,” do not advocate the nationalization of the land nor do they oppose taxes on wages. On the contrary, they are both staunch supporters of private property in land just as they support private ownership of capital. And they support policies that attempt to shift the balance of taxation onto the shoulders of workers.

Noah Smith — A misguided attack on Land Value Taxes

Noah doubles down on the LTV after his Bloomberg View post generated some critical response.

Henry George rules. Take that John Bates Clark.

John Bates Clark (January 26, 1847 – March 21, 1938) was an American neoclassical economist. He was one of the pioneers of the marginalist revolution and opponent to the Institutionalist school of economics....

In 1888 Clark wrote Capital and Its Earnings. Frank A. Fetter later reflected on Bates' motivation for writing this work:

"The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion. ... Events were just at that time crowding each other fast in the single tax propaganda. [ Henry George's ] Progress and Poverty... had a larger sale than any other book ever written by an American. ... No other economic subject at the time was comparable in importance in the public eye with the doctrine of Progress and Poverty. Capital and its Earnings "... wears the mien of pure theory .... But ... one can hardly fail to see on almost every page the reflections of the contemporary single-tax discussion. In the brief preface is expressed the hope that 'it may be found that these principles settle questions of agrarian socialism.' Repeatedly the discussion turns to 'the capital that vests itself in land,'...[6]"

Tax away the land rent.

Noahpinion
A misguided attack on Land Value Taxes
Noah Smith | Assistant Professor of Finance, Stony Brook University

Yves Smith — Masaccio: Piketty Shreds Marginal Productivity as Neoclassical Justification for Supersized Pay

Yves here. One of the main agendas of neoclassical economics is to give Panglossian defenses of the current order a veneer of intellectual legitimacy. If our system is the result of individuals and businesses behaving in logical ways, at least in the minds of economists, surely the outcome is inevitable, and therefore virtuous, or else those operators would do things differently. The Big Lie in all of this is that neoclassical economics takes power completely out of the equation. While it does assume selfishness, in that everyone is out or himself to maximize his utility, it also assumes atomized actors who lack the power to influence markets. As we wrote in ECONNED: 

To put it another way: the neoclassical paradigm is that of pure competition, where providers are mere price takers and cannot influence market dynamics. But that is a profoundly unattractive business proposition.Even if one were to wave a wand and reconfigure the modern economy along those lines, it would in short order coalesce into larger units as individuals did deals (either via alliances or merging operations) to gain the advantages of greater size, and sought to distinguish their offerings to give them pricing power. And differentiation doesn’t necessarily mean having unique products, but can come through the service related to the products. For instance, convenience stores charge more for staples like milk by virtue of location (on highways where there are no alternatives nearby) or being open at 3:00 a.m.

Yet larger enterprises, or indeed anywhere group ties matter, are weirdly disturbing to neoclassical loyalists. One of the reasons they cling so fiercely to ideas like individuals as the locus of activity, along with rationality and welfare-maximizing results (despite the considerable distortions that result) is that they believe any other stance would support a restriction of personal rights. (An aside: this view is counterfactual. Societies where social bonds have broken down and many individuals are isolated are in fact much more subject to totalitarianism and manipulation by propaganda.)

One widely repeated bit of propaganda in the US is that how much people earn reflects their worth in an economic sense. Given how important business is in American society, maintaining this belief is critical to maintaining legitimacy; otherwise, more and more people would see corporate executives not as captain of enterprise but individuals by luck or connivance, got in a position where they could exploit a system that gives them control over assets and cash flows with perilous little in the way of controls over them (there is a vast literature on principal/agent issues in large corporations).

Here, Ed Walker explains how Piketty took a wrecking ball to the ideas that compensation at the top end of the pay spectrum has anything to do with the type of performance economists care about: marginal productivity. It is telling that this part of Piketty’s argument hasn’t gotten the attention it warrants.

Naked Capitalism

Masaccio: Piketty Shreds Marginal Productivity as Neoclassical Justification for Supersized Pay

Yves Smith 

Ismael Hossein-Zadeh — Class Interests as Economic Theory

Succinct explanation of the transition from classical to neoclassical economics and marginalism.

The formal theoretical shift from classicism to neoclassicism was pioneered (in the last three decades of the 19th century) by three economists: William Stanley Jevons, Carl Menger and Leon Walras. A detailed discussion of these pioneers of neoclassical economics is beyond the purview of this essay. Suffice it to say that all three categorically shunned the labor theory of value in favor of utility theory of value, that is, “value depends entirely upon utility,” as Jevons put it. 

At the heart of the theoretical/philosophical shift was, therefore, the move from labor to utility as the source of value: a commodity’s value no longer came from its labor content, as classical economists had argued, but from its utility to consumers. The new paradigm thus shifted the focus of economic inquiry from the factory and production to the market and circulation, or exchange. 

By the same token as the new school of economic thought abandoned the classicals’ labor theory of value in favor of the utility theory of value, it also discarded the concept of value, which comes from human labor, in favor of price, which is formed (in the sphere of circulation or market) by supply and demand interactions. Henceforth, there was no difference between value and price; the two have since been used interchangeably or synonymously in the neoclassical economics. 

Once the focus of inquiry was thus shifted from how commodities are produced to how they are bought and sold, the distinction between workers and capitalists, between producers and appropriators, became invisible. In the marketplace all people appear as essentially identical: they are all households, consumers or “economic agents” who derive utility from consuming commodities, and who pay for those commodities “according to the amount of the utility/pleasure they derive from their consumption.” They are also identical in the neoclassical sense that they are all “rational,” “calculating,” and utility “maximizing” market players. 

An obvious implication (and a major advantage to the capitalist class) of this new perspective was that in the marketplace social harmony and “brotherhood,” not class conflict, was the prevailing mode of social structure. “The supposed conflict of labor with capital is a delusion,” Jevons asserted, arguing that “We ought not look at such subjects from a class point of view,” because “in economics at any rate [we] should regard all men as brothers” [8].

It should be pointed out (in passing) that the utility theory of value did not start with Jevons. The theory had already been spelled out in the late 18th and early 19th centuries by earlier economists such as Jeremy Bentham, Jean-Baptiste Say, Thomas Malthus and Claude Frédéric Bastiat. However, Jevons and his utilitarian contemporaries of the second half of the 19th century added a new concept to the received theory: the concept of marginal utility or, more specifically, diminishing marginal utility. According to this concept, the utility derived from the use or consumption of a commodity diminishes with every additional unit consumed. 

Despite the fact that Jevons’ addition of the concept of marginal utility to the received utility theory of value was conceptually very simple (indeed, the whole concept of utility and the so-called “law of diminishing marginal utility” are altogether banalities or truisms), it nonetheless proved to be instrumentally a very important notion in the neoclassical economics. For, the term “marginal” was soon extended to other economic categories such as marginal cost, marginal revenue, marginal propensity to consume, and the like; thereby paving the way for the application of differential calculus to economics. “By introducing the notion of marginalism into utilitarian economics, Jevons had found a way in which the utilitarian view of human beings as rational, calculating maximizers could be put into mathematical terms” [9].

Counterpunch
Class Interests as Economic Theory
Ismael Hossein-Zadeh | Professor Emeritus of Economics, Drake University

Matt Bruenig — The Rise of New Capitals

In his 1776 book Wealth of Nations, Adam Smith provided the classical definition of capital:

When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it. He consumes it as sparingly as he can, and endeavours by his labour to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries. 

But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it; reserving only so much for his immediate consumption as may maintain him till this revenue begins to come in. His whole stock, therefore, is distinguished into two parts. That part which, he expects, is to afford him this revenue, is called his capital

Under this classical definition, capital refers to surplus wealth employed to provide non-labor income to its owner. It is from this definition, which was repeated for centuries, that we get such political-economic dichotomies as capital versus labor, capital's share versus labor's share, and earned income (wages, salaries, farm income, self-employment income) versus unearned income (rents, dividends, interest, capital gains).…
In the last few decades, this centuries-old idea of "capital" has been stretched to the point of unrecognizability by the rapid proliferation of things being newly branded with the word capital. We have, of course, the heavy hitters among newly designated capitals: human, social, and cultural,…organizational, institutional, … intellectual, … gender capital.… 

I am not going to argue that these things aren't really capital because capital can mean whatever you want it to mean. But it's clear these things are not capital in the sense that Smith, Marx, and basically everyone prior to 1950 used the word (and the way Piketty used it). Whereas old capital referred, basically, to wealth that provided its owners passive (non-labor) income, these new capitals, taken as a whole, don't coherently describe anything more than things that provide economic advantages.… 

…one of the problems with the late 20th century academic fad of calling everything capital is that it can and does generate some serious confusion via category errors.…
…the phrase "human capital" literally swallows the entire capital versus labor distinction. 

When slaves existed, you really did have "human capital" in the old sense of assets that provided passive income to their owners. But that's not what "human capital" in the Gary Becker sense refers to. In the Gary Becker sense, "human capital" is essentially just the present value of one's future labor income. And since labor's share of the national income is greater than 50%, capitalizing labor income into the present and calling it "human capital" renders the conclusion that most capital is "human capital."…

And this is the point of the exercise — to render "capital" ambiguous if not meaningless as an economic term by making it synonymous with economic advantage. Similarly, rent is conflated with earned income.

Demos
The Rise of New Capitals

Matt Bruenig

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

Jared Bernstein — Inequality and Pay: “Rents” vs. Merit

In the age of Piketty, it is increasingly recognized that historically high levels of economic inequality are a serious and growing problem in many economies across the globe. The problems caused by this phenomenon range from stagnant incomes and sticky poverty rates for the majority on the “have-not” side of the divide, to skewed political power (especially, given all the money in politics, here in the US), to possibly slower macroeconomic growth, self-reinforcing wealth accumulation, and a tendency toward terribly damaging bubbles.

The causes of increased inequality are generally viewed to be increased competition through globalization, technological change, diminished union power, lower minimum wages, and persistent slack in the job market, which has the effect of significantly lowering the bargaining power of most workers.

But there’s another alleged cause: there’s a lot more inequality, especially in earnings, because in this day and age, really talented people are finally able to get paid what they’re actually worth (and note that it is rising high-end earnings that explain most of the growth in inequality in recent decades). Some of the factors listed above play a role here, as technology and trade have created access to broad new markets where millions more consumers can interact with producers of entertainment, apps, and clever financial instruments. These forces have helped to unleash the earning power of a small number of individuals who are simply and legitimately earning their “marginal product,” i.e., the true value of their contribution to the world (hereafter MP).

Now, I happen to think that’s wrong, but contrary to popular opinion, it’s actually the first assumption made by economics in evaluating pay. The average person looks at figures showing more wealth or income inequality than ever and sees something out of whack. In economic terms, they see evidence of “rents:” people who are, by dint of some economic inefficiency, being paid well beyond their MP. But the economics textbook sees, by assumption, fair remuneration....

It’s both interesting and important to think about why that’s wrong.

This is the nub of it. Neoclassical economics is marginalist economics, and it eliminates consideration of institutions, power, and rents. As a consequence, it is an oversimplification that doesn't not accord with the real world situation. It can be argued that neoclassical economics and marginalism are economic liberalism's "answer" to Marx by ruling out factors that show how economic liberalism tilts the playing field. As such it is chiefly performative rather than descriptive.

"The rent is too damn high."

On the Economy
Inequality and Pay: “Rents” vs. Merit
Jared Bernstein

Philip Pilkington — The Sraffian Versus the Marginalist Worldview: A Strong Case For Academic Pluralism

An economic model is a sort of parable. Intuitively, every economist should know this. You lay out assumptions — that is, a framework for a logical narrative — and then you follow these assumptions through to the narrative endpoint. But the assumptions are not arbitrary. Indeed, I would argue that they are key to the whole model and to what it conveys.

Think of this like a film script. The assumptions give the story a narrative structure. Thus they determine whether the model is Sraffian or Marxist or marginalist, in the case of economics, and whether the film is a horror, a comedy or a romance, in the case of a film script. The different narrative structures — or genres, if you like — convey different things to the people who use them.

Key observation. Constructing mathematical models does not mean that they are not narratives based on a POV determined by the assumptions.

Fixing the Economists
The Sraffian Versus the Marginalist Worldview: A Strong Case For Academic Pluralism
Philip Pilkington

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

Philip Pilkington — Marginalist Microeconomics: The Path to Totalitarian Tyranny

Fortunately the totalitarian tendencies of marginalist microeconomics are kept in check in Western democracies to a very large extent. But one can imagine the social chaos that might be unleashed were a government ever to get in that allowed to microeconomists free-reign. Given the opportunity — especially by an authoritarian government — their attempts to impose their bizarre notions of rationality on the population could quickly turn into something out of a dystopian science-fiction novel.

Of course, the microeconomists will say that I’m misrepresenting them and that their doctrines are based on the idea of individual choice. This is entirely untrue, of course, because, as I have written before, in marginalist economics people are nothing but calculating machines — not actual decision-makers. But then, tyranny always comes selling itself as the path to greater freedom, now doesn’t it? And the harbingers of this tyranny often come wearing the frocks of the scientist and insisting on the ‘total objectivity’ of the evils that they do.

Marginalism is another name for neoclassical economics. It pretends to be descriptive, but it is normative and prescriptive — not so much science as ethics, and bad ethics at that, where "efficiency" is the criterion of good. The way to efficiency is by reducing waste, and "waste" is defined as anything that does not meet the criterion of being "rational" in terms of pursuit of maximum utility.

Fixing the Economists
Marginalist Microeconomics: The Path to Totalitarian Tyranny
Philip Pilkington

Lord Keynes — Keynes and Marginalism

The subsequent history of the emergence of Post Keynesianism as a school is of course complicated but, fundamentally, involves rejecting the last mistaken marginalist ideas of Keynes, along with superior theories of capital, prices and distribution.

Social Democracy For The 21St Century: A Post Keynesian Perspective

Keynes and Marginalism
Lord Keynes

Lord Keynes — Lee’s Post Keynesian Price Theory: Chapter 6

Short account of why marginalism is wrong. Business does not operate in terms of marginal price since it is inefficient, contrary to what neoclassical economics, which is defined by marginalism, holds, as well as to Hayek's market approach to information economics.

Social Democracy For The 21St Century: A Post Keynesian Perspective

Lee’s Post Keynesian Price Theory: Chapter 6

Lord Keynes

David Ruccio — Rent-seeking and the 1 percent

I’m intrigued by the increasing references to rent-seeking as a way of making sense of the groteque unequal distribution of income in the United States. What explains this trend?We now have Joseph Stiglitz, Josh Bivens and Lawrence Mishel, and Paul Krugman all referring to rents or rent-seeking in order to analyze how the 1 percent has managed to capture a larger and larger share of the income generated within the U.S. economy. It seems that, within “polite company” (or at least what passes for polite company within mainstream economics), it’s now permissible to invoke and describe the rent-seeking behavior of the economic elite (in a manner analogous to the way rent was originally used, to describe what landlords received for the use of their land, as the return obtained by virtue of ownership, not because of anything they actually did or produced).Here’s my sense: the obscene amounts of income going into the pockets of the top 1 percent and the fact that much of that income is associated with what are increasingly seen as economically useless activities (such as returns to stock ownership, serving as Chief Executive Officers of large corporations, and the financial sector) have put the final nail in the coffin of neoclassical marginal productivity theory. It’s simply become increasingly difficult to square the concentration of income among those at the very top (and the stagnation of incomes for pretty much everyone else) with the idea that everybody gets what they deserve, according to their marginal contributions to production.

OCCASIONAL LINKS & COMMENTARY on economics, culture and society
Rent-seeking and the 1 percent
David Ruccio | Professor of Economics, University of Notre Dame

Marginalism is the basis of neoclassical economics), whose public agenda was formalization of theory and focus on efficiency through marginal analysis. It can be argued that there was also a hidden agenda of deflecting attention away from economic rent, which is inherently extractive.

Rent extraction had been central to the classical economics of Smith and Ricardo that culminated in Marx, and marginalism was successful in bring that project to a close. Now some major voices in economics are beginning to rethink that position, as we have been harping on for some time.

Economic rent includes land rent as extraction from land ownership as in feudalism, monopoly rent from productive capital as in industrial capitalism, and financial rent from finance capital as in financial capitalism. Economic rent is a market imperfection that creates friction and leads to distortion, of which inequality is one prominent manifestation. Inequality also creates friction and leads to further distortion. Generally, the recommended antidotes for economics rent are taxation and regulation.

Professor Ruccio does not think that the rent explanation gets to the core of the issue, however, nor does he see the remedies as sufficient to correct the problem, which is structural. He sees the issue as being centered on extraction of surplus value owing to class power. So while rent is not "wrong," it is an insufficient analysis in that it doesn't take the whole into account. Unless the issue of power is addressed, the problem cannot be solved since the foundation remains untouched.

Matias Vernengo — Garegnani on Sraffa, Ricardo and Marx

Note that Sraffa suggested that his solution, based on the standard commodity, could be interpreted as akin to Smith's labor commanded theory of value, and as such could (and I would say should) be seen as a logically coherent version of the labor theory of value (discussed in this previous post).

Naked Keynesianism
Garegnani on Sraffa, Ricardo and Marx
Matias Vernengo | Associate Professor of Economics, University of Utah

Sraffa as a bridge from classical economics including Marx to Post Keynesianism.