Tuesday, October 02, 2012

Nick Rowe Teaching Miasma Theory Of Plague...

...and other outdated blatherskite:
"An increase in desired saving will only affect the rate of interest slowly, over time, as the greater flow of investment slowly increases the stock of capital and reduces MPK [Marginal Product of Capital]."
"If people want to save more, the rate of interest will fall, the price of capital goods will rise, and there will be a movement along the PPF as existing resources move away from producing consumption goods towards producing investment goods." -- Nick Rowe
(Some have tried to explain.)


Nick Rowe said...

As might be expected, you totally missed the point of my post, and its relation to the Cambridge-Cambridge debate.

Three questions for you:

1. Which Cambridge US economist built a 2-sector model, with one sector producing consumption goods and the second sector producing capital goods, and assumed that both sectors had the same capital/labour ratio?

2. Which Cambridge UK economist criticised him for making that assumption, said it would be equivalent to a Marxian economist assuming the same organic composition of capital across all sectors to solve the transformation problem, and said his results would fall apart without that assumption?

(I have forgotten the answers to 1 and 2, so those were genuine questions).

3. Do you understand the relationship between: the assumption that both sectors have the same capital/labour ratio; the assumption that the PPF between C and I is a straight line; the Cambridge UK critique of the internal consistency of theories that claim that "the rate of interest is determined by the marginal product of capital"?

(OK, that third question was rhetorical.)

Robert Vienneau said...

(1) Samuelson, Parable and Realism in Capital Theory: The Surrogate Production Function (RES 1962)

(2) Pierangelo Garegnani, Heterogenous Capital, the Production Function and the Theory of Distribution, (RES 1970). (I do not think this is unique.)

(3) begs the question. An accounting identity is not a PPF. Just because I don't go on about all the mistakes in a post does not mean I do not see more.

Anyways, Rowe's quotation is wrong for many reasons, not all depending on capital reversing. Consider: "Professor Samuelson still thought that he could use a pseudoproduction function in describing a process of accumulation going on through time." -- Joan Robinson, The Unimportance of Reswitching (QJE, 1975).

Samuelson's response was not to assert that oh yes he could, but to disavow that interpretation. Mainstream economists (e.g., Burmeister) then went off in different directions, directions from which Rowe's assertions are also a farrago of balderdash.

Nick Rowe said...

Thanks for your answers to 1 and 2.

You ducked 3. Let me answer for you:

If the production of capital goods uses the same mix of resources as the production of consumption goods, then the PPF between producing capital goods and producing consumption goods is a straight line, and the slope of that PPF determines the price of capital goods. And that is a necessary condition for asserting that "the rate of interest is determined by the marginal productivity of capital". If the mix is different (as seems plausible), then the PPF is not a straight line, and so you need to make additional assumptions, such as assumptions about time preference, to determine the prices of capital goods and the rates of interest.

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