Friday, January 09, 2015

Greg Mankiw, Fool Or Knave?

Greg Mankiw seems determined to continually attempt to bring his supposed profession into disrepute. Last week, at the annual meeting of American economists (the Allied Social Science Associations), Greg Mankiw chaired a session on Thomas Piketty's Capital in the 21st Century. In his draft of his prepared remarks, Mankiw writes:

"Equation (3) says that capital earns its marginal product." -- Greg Mankiw, "Yes, r > g. So what?" (24 November 2014).

Because of price Wicksell effects, the marginal product of finance capital is generally unequal, in equilibrium, to the rate of profits. Even Champernowne's chain index, which abstracts from price Wicksell effects, cannot generally be used to defend the equality in aggregate models of the rate of profits and the marginal product of capital. Economic theory imposes no restriction on the direction of price and real Wicksell effects, and the chain index is not well-defined in the presence of positive Wicksell effects. Neoclassical theory claims, at best, that the price of each capital good is equal, in equilibrium, to its marginal product. But marginal productivity is not a theory of the functional income distribution, since every point on the wage-rate of profits frontier is compatible with all valid marginal productivity conditions. Even if the returns to capital could be explained by marginal productivity, this would not justify any particular size of the tolls that capitalists are able to impose. A conceptual distinction can and should be made between the cost of capital goods and the returns to capitalists.

As far as I am concerned, the above is just good economics, agreed to by all non-ignorant economists, neoclassical or otherwise. But the confusion and general muddleheadness promoted by such as Mankiw, seems to serve a functional purpose in the sublunary world.

No comments: