Tuesday, January 15, 2008

Non-Teaching Of Empirical Superiority Of Non-Neoclassical Theory: Sources For A Case Study

Stephen Marglin is a professor of economics at Harvard. As I understand it, he was just starting out when several promising Harvard professors went on an exodus to Amherst. And Marglin became tenured before he decided that Marx had more to say than neoclassical economics.

He wrote a very interesting book, which Harvard published in 1984. It contains an extensive theoretical investigation of an open model with at least three possible closures. Here is a comment on some of that theory:
"There are, in short, two marginal-productivity theories. There is first of all a general theory that assumes nothing more controversial than continuous substitution, constant returns to scale, and competitive profit maximization. This theory, far from being unique to one school of thought, is - or at least ought to be - the common property of all three approaches ['neo-Keynesian', 'neo-Marxian', and 'neoclassical']. The second marginal-productivity theory adds the assumption that sooner or later, in the long run if not in the short, the wage rate clears the labor market and ensures full employment. This version of marginal productivity theory, the special theory, is manifestly the property of the neoclassical model. Neo-Marxians and neo-Keynesians wouldn't touch it with a ten-foot pole." -- Stephen A. Marglin (1984). Growth, Distribution, and Prices, Harvard University Press: 223.
Marglin's "Neo-Keynesian" model contains the theory of distribution developed by Richard Kahn, Nicholas Kaldor, Luigi Pasinetti, and Joan Robinson in the late 1950s and early 1960s. Marglin's neoclassical model has intertemporal utility-maximization in an overlapping generations setting, but doesn't imply Marshall's principle of substitution or that prices are scarcity indices. That is, while logically consistent, it lacks the features that make the model intuitive and easy to apply.

Marglin looks at both long-run and short-run version of the models. Here he offers a judgement on the neoclassical model:
"Observe that even in neoclassical theory full employment alone is not enough to transform marginal-productivity relationships into a long-run theory of distribution. In long-run neoclassical theory, the capital:labor ratio is endogenously determined, so that the wage rate cannot be determined solely by marginal productivity of labor at full employment - not even in Chicago. Instead, distribution must reflect household preferences with respect to present and future consumption.

Thus, it is fair to conclude that there are two marginal-productivity theories. The first is a relatively innocuous, general theory that involves nothing more controversial than competitive profit maximization - and provides correspondingly little contribution to the theory of growth and distribution under capitalism. The second is more powerful, and very special, providing by itself a theory of distribution, for the short run at least, whose 'only' defects are (1) that it assumes full employment and (2) that it begs the question of accumulation. The wonder is that it is precisely this theory that so many students come away with from their study of economics. Only slightly more wondrous is that by and large they believe it!" - Stephen Marglin, ibid: 330-331

Marglin reports on some econometric evidence. Despite the differences in mechanisms driving value and distribution in the models and the difference in policy implications, it is sometimes difficult, Marglin notes, to draw different implications on the direction of effects in certain empirical applications, such as a shock to oil prices. He does find some contrasting implications when it comes to pensions. And he finds the neoclassical model does the worst, although he thinks his empirical findings are not decisive.

A couple of years ago, some Harvard students wanted to be seriously taught introductory economics, instead of the ideological propaganda that Marty Feldstein and now Greg Mankiw apparently teach. And they wanted to be able to take this course for credit. They asked Marglin to teach this revised Ec 10 course. I'm not sure how much Marglin planned to go into alternatives, or whether he would mention his empirical results. I do know that Harvard decided (again) no way would they permit future leaders of the United States to get an education about the sources of income and property.

Update: Originally posted 5 September 2006. The update is to highlight Ekaterina's comment.

13 comments:

Gabriel Mihalache said...

Very interesting. Thanks for the reference!

I'm not all that interested in distribution (as far as I can tell, you get what you can trade) but more in models which can answer the same questions via weaker assumptions, although this is not the most important criterion.

On the other hand, it's obvious that an additional assumption of labour market clearing will degrade empirical performance simply because, over the last few hunded years, excluding plagues and such, unemployment was always significantly different from 0.

But! Values in the 2-4% range could easily be explained by frictional and seasonal movements as well as sampling and methodological error. So I wouldn't read too much into it. NAIRU estimates are very sensitive and unreliable. Except for depressions (the causes of which I won't get into), unemployment was highest during times of Keynesian mismanagement, not rampant "free-market-ism".

Returning to distribution, while I would agree with you that income is not mechanically determined to the 2nd decimal by productivity (be it individual or average), I wouldn't support you if your claim is that it has *nothing* to do with productivity.

While small deviations are to be expected (it would be strange otherwise), large and systemic deviations would eventually imply unjustifiable loses and a decrease in competitivity. (Yes, I support a sort of market selection of firms and their management procedures.)

Overall, I wouldn't agree neither with your attitude nor with that of those you criticize in connection with the stylized facts of the basic Econ 10 theory of production.

I agree with Mankiw that for most uses, "it still holds", especially empirically, at nation level (Yes, I saw the deduction of a Cobb-Douglas-like or CES-like function from a national accounts identity--yet I don't share your assessment of that result. I keep postponing writing about this.) Yet I also agree with you that mainstream folk tend to take a result and run with it beyond what's reasonable. (I also wouldn't read so much politics into this eagerness to have the answers.)

Anyway, good post!

John Médaille said...

I think we need to ask what "marginal productivity" marginalizes. Does it really marginalize productivity, or does it marginalize power? That is to ask, "Does the CEO earn 500 times more than the line worker because he produces 500 more or because he has 500 times as much power? Does the seamtress in a sweatshop in Dacca make a pittance because she lacks productivity or because she lacks power? Have the wages of most workers stagnated because their productivity has stagnated or because their power has stagnated?"

I see nothing in the mathematics that leads me to believe that it is productivity that is marginalized; that is merely an assumption. But an economy of marginalized power is very different from an economy of marginal productivity. Which one more accurately describes the actual situation?

John C. Médaille

"A dead thing can go with the stream...
but only a living thing can go against it."
-G. K. Chesterton
http://www.medaille.com/distributivism.htm
john@medaille.com

Ekaterina said...

"A couple of years ago, some Harvard students wanted to be seriously taught introductory economics, instead of the ideological propaganda that Marty Feldstein and now Greg Mankiw apparently teach. And they wanted to be able to take this course for credit. They asked Marglin to teach this revised Ec 10 course."...

the course exists and Marglin teaches it: SA72, Economics - a Critical Approach.

I'm taking it now, Marglin is great.

Robert Vienneau said...

ekaterina, thanks for the correction.

Does Marglin's course count as a prerequisite for the same course that Mankiw's course does? Does it fill the same requirements in programs for non-economics majors that Ec. 10 does? As I understand it, these were points of contention.

Jerry Levy said...

Speaking of Marglin, I just
received a notice the other day
that he will be presenting a talk
on "How Thinking Like An Economist
Undermines Community" [!] at the New School's 3rd Annual Robert Heilbroner Memorial Lecture on the Future of Capitalism on Tuesday, February 14. See urpe-announcement archives post for the details.

Jerry

Patch said...

"And Marglin became tenured before he decided that Marx had more to say than neoclassical economics", says Robert. That somehow contradicts what Marglin writes himself: "The wonder is that it is precisely this theory that so many students come away with from their study of economics. Only slightly more wondrous is that by and large they believe it!"

So it's no wonder that wikipedia says: "His tenure was largely based on research that attempted to combine a Marxian approach with Keynesian demand theory".

Anyway, interesting post.

Robert Vienneau said...

"Marglin insists ... that most members of Harvard's Economics Department are not 'capable of appreciating or judging the quality of work on an alternative model with which they are at best superficially familiar and almost totally unsympathetic.' Marlin himself is the only tenured radical in the Department, and received his appointment in 1967 for work he described as 'squarely in the orthodox tradition' - done, he says, before his changing political views were well known and before he had altered the orientation of his research. In 1969 there were five radical economists who held posts in the Harvard Department; by 1974 Marglin was the only one left." -- Lawrence S. Lifshultz, "Could Karl Marx Teach Economics in America?", Ramparts (April 1974).

Anonymous said...

Somewhat unrelated, but I remember well the first thing my economics professor said in my first economics class:

"None of this has any bearing to reality"

What I have read since has tended to confirm that...

Iain
An Anarchist FAQ

YouNotSneaky! said...

"he thinks his empirical findings are not decisive"

So why exactly is the phrase "empirical superiority" in the title of this post? I couldn't find any other reference to empirics other than that in the post.

YouNotSneaky! said...

Iain, you had a dumb economics professor. But I guess you took him at his word, so... what kind of an Anarchist are you, anyway? Whatever happened to Question Authority!?

http://www.youtube.com/watch?v=TYRqHqqeKVo

Anonymous said...

"Iain, you had a dumb economics professor. But I guess you took him at his word, so... what kind of an Anarchist are you, anyway? Whatever happened to Question Authority!?"

What part of "What I have read since has tended to confirm that..." is hard to understand?

Just to clarify, as I suppose I need to as some people have difficultly in understanding, I was taught neo-classical economics in class. Since then, I have read much on the subject, including the works of many distinguished economists, and this has confirmed my professor's comments.

So, from my own investigations, I have confirmed that neo-classical economics, particularly the kind students get inflicted upon them, does not have any bearing with reality.

So my professor was hardly "dumb" -- rather, quite accurate and trying to inform his students, like any good teacher, of the facts and his own knowledge of a subject.

Simple, really. I'm surprised I had to explain it...

Iain
An Anarchist FAQ

Anonymous said...

Very, really very interesting your post.
Here in Latinoamerica, for us the economic theory is very complex still. The existing theories are not suitable models to analyze our economies and for that reason we looked for other "less rational" alternatives and very near to the reality. I invite to review the statistics of Peru by example.

Regards and congratulations for the post.

Jorge Pareja

Robert Vienneau said...

Jorge, I don't know enough to say anything about Peru. I think if I had the language skills, I would find your blog of interest.