Sunday, April 26, 2009

Why Oh Why Can't We Have Better Mainstream Economists?

The answer to the question in the post title is obvious to a certain extent. Mainstream economists are part of a larger system that is served by obfuscation. If (some) economists become too penetrating in their examination of a capitalist economy, their colleagues simply purge them from the profession. (I seem to recall reading somewhere that Fred Lee is indeed writing a book.)

Anyways, I want to know whether mainstream economists, such as Brad DeLong, understand price theory - never mind whether they understand Karl Marx (which they don't). Consider this passage:
"Marx believed that capital is not a complement to but a substitute for labor. Thus technological progress and capital accumulation that raise average labor productivity also lower the working-class wage. Hence the market system simply could not deliver a good or half-good society but only a combination of obscene luxury and mass poverty. This is an empirical question. Marx's belief seems to me to be simply wrong." -- Brad DeLong
I see here an incorrect belief that income can be determined by technical relationships. Given DeLong's reference to complements and substitutes, he is, I think, drawing on his (mis)understanding of marginalism. He probably believes something like the following: in a market economy, agents receive (or should receive) the value of the marginal products of the services of the factors or production that they own. (By mentioning ownership, I am already being more careful than many might be; capitalists do not have a marginal product, even if the services of capital goods were to each have one.) To reinforce my point that some believe this, I quote some comment on a blog somewhere:
"And then you can have a simple theory of exploitation where it happens if somebody somewhere doesn't get their marginal product." -- Radek

I have pointed out before that marginal productivity, when correctly stated, is a theory of the choice of technique, not a theory of distribution. And, by quoting Duncan Foley, I acknowledged the unoriginality of my understanding. I now take the opportunity of my recent exposition of a reswitching example to re-iterate the non-existence of the marginal productivity theory of distribution. Figure 1 illustrates that example, and it is consistent with all correctly formulated conditions on marginal products for the example.
Figure 1: Wage-Rate Of Profits Curves

I want to consider what data about production the observing economist must know to calculate the value of marginal products. First, suppose he knows the technique in use. In each (non-vertically integrated) industry, the inputs purchased by each firm and the outputs are known. In a circulating capital model of competitive markets, this data determines wage-rate of profits surfaces, of which two are shown in the figure. But the observing economist cannot use this data to determine the equilibrium distribution; any point on the surface corresponding to the observed technique is consistent with the data.

But marginal products are defined in terms of counterfactual experiments. Accordingly, suppose an economist knows all available production processes, as well as the technique in use. One can use this data to construct the wage-rate of profits frontier, which is the outer envelope of the wage-rate of profits curves constructed for each technique. For the sake of argument, suppose an uncountably infinite number of techniques happen to exist, and these techniques vary continuously along the frontier. So the frontier contains no switch points, where more than one technique is cost minimizing. Nevertheless, if the rate of profits (or wages) varies an infinitesimal amount from the value corresponding to a location on the frontier, a different technique would be cost-minimizing in a long-run equilibrium.

Reswitching shows this data is not necessarily enough to determine distribution. In the example, the alpha technique corresponds to two discrete ranges of equilibrium wages. It may be that if wages were set to a completely different level, firms would want to employ the same number of people, purchase the same resources, and use the same processes in production. The quantity flows within the firms would be unchanged, although who would purchase what on consumption markets could be vastly different. And yet for some level of wages between these two values, firms would want to adopt other processes. Thus, one's income in a capitalist economy cannot be a reward for physical productivity. The belief that income rewards productivity in a capitalist economy is an element of vulgar political economy, contradicted by rigorous price theory.
"...one who believes technology to be ... like my 1966 reswitching example ... will have a more sanguine view about how successful militant power by organized labor can be in causing egalitarian shifts in the distribution of income away from property even in the long run." -- Paul A. Samuelson, "Steady-State and Transient Relations: A Reply on Reswitching", Quarterly Journal of Economics, V. 89, N. 1 (Feb. 1975): 46

Suppose you run into an economist who refers to the marginal product (or the value of the marginal product) of some factor of production, perhaps in explaining why, regrettably, wages for somebody cannot easily be made higher. That economist simply does not know what he is talking about.

10 comments:

Anonymous said...

I'd imagine most economists regard the marginal productivity theory of income distribution as a useful guiding principal, and no more than a rule of thumb in practice.

Don't considerations like increasing returns to scale render it inoperable anyway, if taken literally? Don't most econ text books saying something along the lines of: "let's think about a much simplified world with X assumptions; in such a world we would expect factor incomes to be determined in this way. But remember the real world is a bit more complicated than that."

I'd have thought the mainstream theory of income distribution in the profession nowadays is something like "bargaining over match surplus" - lots of things determine bargaining power, and the nature of matches, but something not too distant from marginal product is probably part of the equation. If you can leave, and nobody would really miss you, your bargaining strength is weak. If you make a big contribution to output, conditional on the choice of production process, you're bargaining power is strong.

So OK, as you say, the notion of marginal product is really only meaningful once the choice of production process is made. This strikes me as a qualification to the theory, rather than completely undermining mainstream economics and rendering all mainstream economists idiots for not paying much attention to it as you think they ought to. I could imagine an undergrad text book including a section on reswitching, without the rest of the book requiring re-writing. It'd just be an addition to the list of ways in which the real world may differ from the simple text book world.

YouNotSneaky! said...

I didn't refer to the marginal product of a factor of production. I referred to the marginal product of somebody. I was actually thinking of the Shapley Value (and exploitation being the deviation from what you would get under the Shapley Value cooperative solution) when I wrote that - the point being that the idea of a marginal product is much more general then your contrived example makes it seem.

Patch said...

http://books.global-investor.com/books/63769/Frederic-S.-Lee/Post-Keynesian-Microeconomic-Theory/

Maybe you meant that book.

Robert Vienneau said...

Patch, that looks like an interesting book. But I thought Lee was writing a book on heterodox economics and the non-professional behavior of mainstream economists, what with their purges of, for example, Harvard, Rutgers, and, now, Notre Dame.

Anonymous writes, "as you say, the notion of marginal product is really only meaningful once the choice of production process is made". I think I said the opposite. Even given the chosen technique and all processes from which techniques are formed, one cannot necessarily calculate the value of marginal products. And he says, "I'd imagine most economists regard the marginal productivity theory of income distribution as a useful guiding principal, and no more than a rule of thumb in practice." Of course, he presents no argument for the existence of a coherent "marginal productivity theory of income distribution". Assertions about simplified assumptions are just not relevant. Since Anonymous is not brave enough to give a name, we cannot tell if his strawperson, question-begging, non sequiturs, and innumeracy are representative, in any sense, of economists.

I thought I was going to have to agree with Krugman's column yesterday. But he does seem to have a contrast between how things are now and how they would be in a genuine free market. So maybe he isn't objecting to the apologetics of so many mainstream economists.

BruceMcF said...

Thanks for the heads-up. My reaction is more to DeLong than to your blog, so I responded there in detail.

Anonymous said...

Oof!

I think it's best to regard my strawperson, question-begging, innumeracy as representative of no more than my cowardly anonymous econ graduate student self.

"I think I said the opposite."

Ah well, my bad; I misunderstood you.

"he presents no argument for the existence of a coherent "marginal productivity theory of income distribution"

that's because I don't have any, and wasn't making any claims for such. Fine, say there isn't a coherent theory, let's refer to "whatever incoherent theory is presented in text books" and call that something that's best regarded useful guiding principal and rule of thumb rather than bullet-proof, universal theory of production that is capable of generating unique predictions in all settings.

An Okay, "even given the chosen technique and all processes from which techniques are formed, one cannot necessarily calculate the value of marginal products" - as I suggested, you can add that to the long list of problems with the text book theory, such as it is, a theory which I maintain is a useful way to start thinking about
production and income distribution.

Whether observations like that are non-sequiturs ... again, okay, if you say so. Although perhaps you are confusing the fact that not everybody shares your monomaniacal perspective on this question, with everybody else being wrong and you right.

Robert Vienneau said...

In my original post, I wrote, "by quoting Duncan Foley, I acknowledged the unoriginality of my understanding." In the midst of other stupid blather, Anonymous writes, "Although perhaps you are confusing the fact that not everybody shares your monomaniacal perspective on this question, with everybody else being wrong and you right." I do not consider constantly stating falsehoods about what others say to be well-mannered.

Anonymous said...

Ill-mannered? What, in comparison to your delightfully generous spirited response to me?

Funny, I'd taken "not everybody does" to be consistent with "some do"; being so fundamentally confused, no wonder I am constantly spouting falsehoods.

I had, evidently ineptly, been trying to argue that while what you say is correct, it isn't necessarily the problem for mainstream economists that you give every impression of thinking. Rather, I see it, as a qualification or restriction, that should not be ignored but which need not be debilitating, and I had tried to argue that if textbook theory is seen as an illuminating 'parable' (to borrow an idea I found in a paper cited below) then such qualifications are less problematic. (This is a different point to the one I made earlier about mainstream economics having moved on to a different model of income distribution, in any case). Now I could be wrong about this, but for you such arguments are "stupid blather". I suggest that responding to arguments at variance with your point of view in this fashion is perhaps not the best way to exonerate yourself from the charge of monomania*.

I have encountered a different but related argument to the one I have been attempting to make (in this case, relating to aggregation problems), in this paper:

http://www.econ.iastate.edu/tesfatsi/AggregProdFunctionsDontExist.Temple.pdf

That is a far more informed and numerate argument than anything I am capable of presenting so it's perhaps disingenuous of me to co-opt the author to my cause, but can you perhaps see where I'm coming from?

* okay, introducing a personal criticism to this argument is not helpful, but hey, you give it out, you can take it.

Robert Vienneau said...

Previously, Anonymous falsely suggested that I believe "everybody else [is] wrong and [I'm] right". Now he pretends he did not. I do not find such constant falsehoods charming. And I've recently noted Luigi Pasinetti's point that those who try to confine the Cambridge Capital Controversy exclusively to questions of aggregation have never put forward a convincing argument.

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