Sunday, April 03, 2011

Joe Stiglitz As Cambridge Economist?

Joseph Stiglitz has an article, "Of the 1%, By the 1%, For the 1%", in next month's Vanity Fair. In analyzing America's increasingly ridiculous unequal society, he writes:
"Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called 'marginal-productivity theory.' In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards 'performance bonuses' that they felt compelled to change the name to 'retention bonuses' (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin."
Stiglitz had negative reviews in 1974 and 1975 of books by Harcourt and Pasinetti. Nevertheless, the idea that marginalism was formulated to justify those with high income echoes certain ideas from Sraffa and others. Likewise, finding marginal productivity theory to be "all bosh" is a long-standing Cambridge idea.

I can think of three ways to attack a theory
  • To claim, as above, that the premises and conclusions of the theory are empirically false.
  • To argue that, even given all the premises of the theory, the conclusions do not follow.
  • To argue that the premises of the theory are mutally inconsistent.
I guess it is a matter of taste which approach you think is strongest. I have a preference for the second.


zopolan said...

I guess Stiglitz' Position does not show that he has changed into the Cambridge camp - his position will rather be that marginal prod theory is irrelevant for income distribution because there is no perfect competition anywhere.

For another example for irrelevance of competitive economies analysis, google for "spatial", "impossibility", and "starrett"

Robert Vienneau said...

I guess the suggestion is that I and others should read Starrett, D. (1978). "Market Allocations of Location Choice in a Model with Free Mobility", Journal of Economic Theory, V. 9: 418-448.

Emil Bakkum said...

You are absolutely right. The worst lot of any theory is to have an error somewhere between the premises and the conclusions.
And the error is even quite obvious: capital is based on prices and prices depend on the income distribution, so capital will react in an unpredictable way under a change in the income distribution.
The marginal productivity theory is clearly overvalued, and from a scientific and practical point of view its applicability is restricted.
It seems immoderate, that critics of marginalism usually augment the error of capital aggregation with other (less powerfull) objections. This suggests that the error of capital aggregation is not a conclusive argument.
Still, it s understandable, since so many of the premises and conclusions are ilusory. Personally I find it surprising that the conclusion of zero entrepreneurial profits is hardly ever criticized. For where does the the reserve capital of the enterprise come from?
Probably we are simply too indignant about the undeserved position of marginalism.