Monday, June 17, 2019

Lewin and Cachanosky on Neo-Ricardian Economics [Citation Needed]

This post is about the misrepresentation of Sraffian capital theory in Lewin and Cachanosky (2019). I cannot recommend this short book. Presumably, it is meant as an introduction. But I do not see it as succeeding. I do not see what a more advanced audience would get out of it that is not available in a few recent papers by Lewin and Cachanosky.

Before proceeding to my main theme, let me note that I agree with some parts of this book, mainly where Lewin and Cachanosky draw on Ludwig Lachmann, to parallel themes in Joan Robinson's emphasis on historical time. They state that no physical measurement of capital exists and that capital is not a factor of production, with a demand function. They state, probably as influenced by Jack Birner, that Hayek never set out a coherent and internally valid theory of capital. His triangles are only useful as an expository device. I am also ignoring certain gaps. For example, the text at the bottom of page 30 suggests, incorrectly, that the economic life of a machine would be the same as its physical life in equibrium, where such disequilibrium phenomena as the introduction of new and better vintages and changes in tastes and technology do not arise.

Citations are needed for these passages:

"Lachmann's capital theory provides the definitive understanding of the nature and working of the capital structure for Austrians today. Rather than conceiving of production as involving a homogeneous mass of 'capital' as a stock (as in both the neoclassical and modern Ricardian conceptions), Lachmann sees it as involving an ordered structure of heterogeneous multispecific complementary production goods. This structure is ever changing as entrepreneurs combine and recombine productive resources in accordance with their assessments of profitability." -- Lewin and Cachanoksy, p. 35.

Where do the neo-Ricardians reject the analysis in Sraffa's book?

"The Keynesian revolution established macroeconomics as [a] legitmate sub-branch of economic inquiry focusing on the relationship betwenn aggregates... [The] neoclassical production function is the workhorse of much of modern literature...

"...its ability, using the marginal productivity theory, to explain the distribution of output (income) between capital and labor... During the 1960s and following, the neoclassical production function was the object of attack by the 'Cambridge Marxists' UK (neo-Ricardians) against the 'Cambridge Massachusetts' neoclassicals, on the presumption that it was essential to the validity of the marginal productivity explanation of the distribution of income ... and that demolishing the notion of capital upon which the aggregate production function depended, they would, at the same time, demolish the marginal productivity theory of distribution." -- Lewin and Cachanoksy, p. 46-47.

Where do the neo-Ricardians assert the non-existence of disaggregated, microeconomic neoclassical theory?

"These paradoxes consist of cases in which it is alleged, for example, ... a fall in the interest rate may first lead to the adoption [of] a more 'capital-intensive' productive technique, and then switch, paradoxically, to a less 'capital-intensive' technique, and then switch back again as the interest rate continues to fall. These are alternative techniques, characterized by their physical capital labor ratios. In other words, switches may occur, as well as reswitches and reversals..." -- Lewin and Cachanoksy, p. 68.

Even Joan Robinson's "real capital" is measured for a given interest rate. Techniques of production are characterized by a complete list of inputs and outputs. These inputs can include produced means of production, unproduced natural resources, and various kinds of labor. When deciding on which technique to adopt, managers of firms, in Sraffian and in any other reasonable analysis of a capitalist system, coompare costs and revenues, with inputs and outputs evaluated at prices.

"The neo-Ricardians identify all 'capital' as intermediate goods, such as machines, tools, or raw materials. They are goods-in-process from the original labor that constructed them, to the emergence of the final consumer good. So all capital goods (can be and) are reduced to dated labor. In this way, we get a purely physical measure of 'capital', one that, by construction, does not vary with the interest rate." -- Lewin and Cachanoksy, p. 69, footnote 3.

Where do the neo-Ricardians assert that, in all interesting cases of joint production, all intermediate goods can be expressed as produced by inputs consisting only of a stream of dated labor? Where do they put forth a measure of capital that does not vary with the interest rate?

"Also important, the neo-Ricardians identify the price of capital as the rate-of-interest which they regard as synonymous with the rate of profit. But neither is correct... The market interest rate is, indeed, the price of capital as we understand it. It is the cost of borrowing 'capital' for the employment of any valuable resource or for any other reason. It is the price of credit and is determined by the time prefernces of borrowers and lenders and the production possibilities available. (The neo-Ricardians have no discussion of what determines interest rates.)" -- Lewin and Cachanoksy, p. 72.

Post Keynesians have considered a theory of growth and distribution in which the interest rate is set by the monetary authorities and the rate of profits exceeds the interest rate by a conventional markup. They have considered other theories in which the wage is given by forces outside the theory of value. They have developed theories of inflation in which conventions on both the rate of profits and wages conflict. In the late 1950s and early 1960s, Richard Kahn, Nickolas Kaldor, Luigi Pasinetti, and Joan Robinson pointed out that savings propensities out of wages and profits constrained functional income distribution along a steady state growth path. Kaldor (1966), in this tradition, developed a model in which the interest rate and the rate of profits are distinguished. I provide two textbooks, in the references, that survey this large body of work.

  • Duncan K. Foley, Thomas R. Micl, Daniele Tavani (2019). Growth and Distribution, Second edition. Harvard University Press.
  • Peter Lewin and Nicolas Cachanosky (2019). Austrian Capital Theory. Cambridge University Press.
  • Stephen A. Marglin (1984). Growth, Distribution, and Prices, Harvard University Press.

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