Some brief observations:
- Simon Wren-Lewis is asked to define K. His answer: "It is normally K(t) = δ K(t - 1) + I(t)." In times past, Wren-Lewis has seemed like he genuinely was interested in what heterodox economists have to say. But, with that kind of answer, he really needs lots more study to get up to speed.
- Noah Smith tries to provide an overview of contemporary economics. Many groups of economists I pay attention to do not exist for Smith, and I doubt he knows much about even the recent history of his subject. What would he make of, for example, Philip Mirowski's Machine Dreams?
- Matthew Yglesias alerts his readers to the existence of the Cambridge Capital Controversy. For Yglesias, the central question is the origin of returns to capital and the validity of marginal productivity parables organized around the idea of relative scarcity. I think this is a good account, given how terse this is.
I understand why Post-Ausitic Economics Review had to become Real World Economic Review, but Wren-Lewis is a good example of why the original name made sense. It is hard to think of a better word than autistic for his inability to imagine an economic reality outside of the orthodox formalism. It's like he can't imagine that the models could refer to anything but themselves.
ReplyDeleteI think many economists do not even understand their own models. That particular treatment of depreciation is a special case. So even on its own terms, that response needs clarification.
ReplyDeleteIf responding in that thread, I probably would not have answered that capital is a social relation that allows owners to collect tolls from engaging in or refraining from sabotage.
For the record, I spent my first year as an undergraduate studying the capital controversies. My answer was entirely appropriate. In most models capital is a device for letting investment contribute to future production. And the question is, how else do you capture this?
ReplyDelete«So even on its own terms, that response needs clarification.»
ReplyDeleteUhm interesting exchange, and I am in favour of putting the best possible interpretation on SimonWL's position as he seems a reasonable person but very aware of the constraints of what is "acceptable" in the paradigms of his tribe (establishment advisors).
His definition of "capital" (tellingly) does not have units on K and I, and whether it it about productive capital, land, or financial capital, or all of them, and even better whether that is ex-ante or ex-post (a very important distinctions that most Economists are rather reluctant to do).
The two obvious choices for units are "dollars" (in the JClark style) and "vector of physical quantities" (in the PSraffa style).
If SimonWL meant "dollars" then his formula makes some sense for quite small "t" units, so that during the time interval the price-weights under which "K" *and* "I" have been aggregated into a single "dollars" value. That probably requires pretty strong assumptions too, but a time interval of perhaps a week or even a month (but not as long as one year) probably makes that formula somewhat credible.
If "K" and "I" are vectors of physical quantities than the definition is hard to object to, but it is also difficult to imagine it being measurable in a practical sense and not very useful.
(I'll pass over the type of capital and the ex-ante/post issues).
But in a sense the above is the conclusion of the capital controversies with which SimonWL is familiar, and probably ourselves too.
But as we know once the fatuousness of the JClark way of aggregating "capital" (of any type ex-post) as "dollars" was conclusively demonstrated in the Cambridges controversy (and for more reasons than mere reswitching) nothing happened.
It is still paradigmatic for establishment Economists of any flavor to do that, because without that the central truthiness of Economics cannot be "proven", and thus Economics loses its main purpose (and sponsors).
In the USA being on the "right" side of the Cambridges controversy and upholding the central truthiness of Economics can be worth a lot: not just a much easier career in more prestigious and better paying institutions, but also becoming significantly wealthy via corporate earnings; people like Summers, Mankiw, Hubbard, ... seem to have made fortunes of dozens of millions of dollars, thanks to their extraordinary "productivity".
http://chronicle.com/article/Larry-Summersthe/124790/
http://www.capitalismwithoutfailure.com/2012/10/charles-ferguson-standing-behind-every.html
I stand sometimes surprised that New Keynesian modeling is considered "acceptable" by the USA Economics establishment when it concedes that there can be multiple equally valid equilibrium states and thus equally "deserved" but rather different distributions of income depending on the interest rate; a position that verges on Communist propaganda for "right" thinking Economists.
I guess the redeeming features of New Keynesian modeling overcome that point:
* only one of those equilibrium states and thus distributions of income is "optimal" as only one achieves full employment, thus the "optimal" distribution of income is unique;
* to push the economy from one inferior equilibrium state (and distribution of income) to the optimal one all that it takes is to boost asset prices via low interest rates, to create a wealth effect delivering capital gains to property rentiers, and some of that will trickle down, thus counteracting the natural tendency of demand to be insufficient because of nominal rigidities.
PS: I am out of touch and I don't know whether anybody has actually "proved" that given carefully chosen assumptions in New Keynesian models only one of the equilibrium states gives full employment; or which particular nominal rigidities cause demand to be insufficient.
A propos of the items on Noah Smith and the Cambridge Capital Controversies: as recently as earlier this year Mr Smith did not even know what they were, nor did he recognize that they formed part of the critique of the neoclassical aggregate production function, so I would presume that your suspicion of his knowledge of economic history is spot-on.
ReplyDeleteSimon, thanks for the response.
ReplyDeleteI think that that equation also expresses depreciation, with δ lying somewhere between zero and one. If one were to take this as a definition of capital, then, apparently, circulating capital is not included in this definition of capital.
I also suspect that that equation is evaluating capital in financial/nominal units. Are the expectations with which capital goods were constructed being satisfied in the time period covered by this equation? If so, whose expectations? What happens if different people have had different expectations?
If a government creates an immunization program, is that an investment? If a nurse buys their own uniform or an auto mechanic his own tools, is that an investment? I suspect accounting measures are based on a large array of social conventions.
Wren-Lewis' equation perhaps can be defended as an engineering approximation in a more or less rough macro model that should not be taken too seriously. I fail to see how such an approximation can serve as a definition, albeit I can see one wanting to be terse in a comment.
Blissex, I am agreeing that the equation Wren-Lewis used needs additional assumptions or clarification. I do not think he is thinking in terms of vectors of physical quantities.
ReplyDeleteTT, can you provide a link to Noah Smith being puzzled about the CCC?
«the equation Wren-Lewis used needs additional assumptions or clarification.»
ReplyDeleteOne of these I may be able to provide here... :-)
If that is the *definition* of capital, it embodies some very powerful political points:
* All capital is the result of "investment".
* Therefore there is no such thing as "land" or natural resources in general, stuff that produces income largely without "investment" or "depreciation".
* That since "capital" is soley the result of "investment" minus "depreciation", then income from capital is "deserved" by that "investment". There is no such things as economic rent at least in relation to capital.
The politics of the definition above are those of the neoclassical reaction to the classics.
Interestingly there is a good argument here that the neoclassical reaction was against Georgism rather than Marxism or socialism:
http://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf
The thesis is that Georgism was a defense of profit on capital actively invested against rent on property passively owned, and JClark created neoclassical Economics in order to erase the distinction between "land" and productive capital. As in the *definition* above.
«it embodies some very powerful political points:»
ReplyDeleteOops I forgot one of the most important "benefits" of that definition of capital:
* There is no question as to initial or current endowments. It vanishes from the model.
«There is no such things as economic rent at least in relation to capital.»
This BTW is the gateway to Rand/Mankiw/... style economics.
Because then only labor may receive economic rent, and thus exploit investors who create capital.
Because any income for labour that exceeds subsistence is economic rent, and only the creative and capitalists "deserve" income higher than subsistence level, because they create all value.
I think Noah is incredibly optimistic, in part because he only got the mainstream education. Not sure I agree with Mankiw's metaphor of scientists and engineers, but the notion that economics is less about free markets now than it was in the past, say with the Neoclassical Synthesis even, is preposterous.
ReplyDelete