Nonsense In Mankiw's Introductory Textbook

Marginalist economics was shown to be incoherent about two thirds of a century ago. It collapsed just around the issues Marx investigated more than a century and a half ago. How does the ownership of capital goods result in the owner obtaining a return? Mainstream economists address their inadequacy by refusing to talk about their demonstrated inconsistencies.

Those who understand the theory have available a certain form of amusement. They can quickly locate confusion in mainstream textbooks. I happen to have available the eighth edition of N. Gregory Mankiw's Principles of Economics (2018). I may have missed something. Over the course of hundreds of pages, he confuses capital, as a factor of production supplied by households, physical capital goods, deferred consumption, and finance.

Mankiw is careful, I guess, in what he does not say. He has "capital" meaning physical goods, for a while. There seems to be no explanation of the level of interest or dividend payments to households. Households trade consumption between now and later. These savings are not related to changes in the capital stock, although a later section on savings and investment confusingly suggests that some unspecified relationship exists. An aggregate production function has an argument for physical capital, with no discussion of units of measurement. And this all falls by the wayside when he gets to macroeconomics. He presents the obsolete theory of loanable funds, even with silliness about the crowding-out effect of government deficits.

Section 2-1d is "Our first model: the circular flow diagram." With the usual confusion, in one half of the diagram, households supply firms with the factors of production. Capital is "building and machines". At this point, you have a blast furnace in your back yard, which you rent to a steel manufacturer.

Chapter 18 is "The Markets for Factors of Production", and Mankiw emphasizes labor markets. The non-wage part of the national income "went to landowners and to the owners of capital - the economy's stock of equipment and structures - in the form of rent, profit, and interest" (pp. 361-362). Mankiw does not seem to know of any difficulties raised for labor markets or the supposed marginal productivity theory of distribution by the Cambridge capital controversy. "Put simply, highly productive workers are highly paid, and less productive workers are less highly paid" (p. 37).

Capital is like land. "The purchase price of land or capital is the price a person pays to own that factor of production indefinitely. The rental price is the price a person pays to use that factor for a limited period of time" (p. 375). A box on p. 376 is titled "What is capital income?" He brings up interest, dividends, and retained earnings but has no explanation for their levels:

"In our analysis, we have been implicitly assuming that households own the economy’s stock of capital - ladders, drill presses, warehouses, and so on ... In fact, firms usually own the capital they use, and therefore, they receive the earnings from this capital... [I]nstitutional details are interesting and important, but they do not alter our conclusion about the income earned by the owners of capital. Capital is paid according to the value of its marginal product, regardless of whether this income is transmitted to households in the form of interest or dividends or whether it is kept within firms as retained earnings."

Chapter 21 is the theory of consumer choice. Mankiw has the analysis of the trade-off between leisure and work. Section 21-4c treats "How Do Interest Rates Affect Household Saving?" Figure 15 shows the budget constraint and indifference curves for an example of intertemporal choice (p. 444).

Chapter 25 is "Production and Capital" and is part of the treatment of macroeconomics. A box on the production function is on p. 523. Section 25-3a is "Savings and Investment":

"Because capital is a produced factor of production, a society can change the amount of capital it has. If today the economy produces a large quantity of new capital goods, then tomorrow it will have a larger stock of capital and be able to produce more goods and services. Thus, one way to raise future productivity is to invest more current resources in the production of capital. Because resources are scarce, devoting more resources to producing capital requires devoting fewer resources to producing goods and services for current consumption. That is, for society to invest more in capital, it must consume less and save more of its current income. The growth that arises from capital accumulation is not a free lunch: It requires that society sacrifice consumption of goods and services in the present to enjoy higher consumption in the future."

I do not know what skipping my dinner has to do with manufacturing more ladders to outfit employees of firms with orchards and apples to be picked. Neither does Mankiw, of course.

Chapter 26 treats Saving, Investment, and the Financial System. "Now the interest rate is the price that adjusts to balance supply and demand ... for funds in financial markets" (p. 542). Banks and mutual funds are "financial intermediaries" "directing the resources of savers into the hands of borrowers." Mankiw presents the usual national income accounting, with savings and investment in monetary (financial units). "In the language of macroeconomics, investment refers to the purchase of new capital, such as equipment or buildings." He has the crudest loanable funds model. He presents the argument that government deficits crowd out private investment (p. 554) as if it were scientific fact. (On page 590, a box from David Neumark has the usual archaic nonsense about minimum wages causing structural unemployment.)

Mankiw's textbook lacks an explanation of the returns to ownership and an acknowledgement of the existence of this gap. He could argue that this reflects mainstream economics, which is apologetics.