Wednesday, July 14, 2010

Impact of Capital Controversies On Labor Economics

I think some with some exposure to economics might not be impressed by the Cambridge Capital Controversy because of the abstractness of capital. "Capital" can refer to finance, and it can refer to the means of production. And even if one thought that interest rates were determined by supply and demand, what quantity would be supplied or demanded? Loanable funds? Savings? One might expect capital theory to be complicated, even in the view of the defenders of mainstream theory. So why, some might rationalize, should one be surprised by aggregation problems?

I like to emphasize the labor market. This market might seem more concrete to many. (This is one of the illusions created by competition.) Consider cases in which firms have adapted their capital equipment and production techniques to the prices prevailing on both product and factor markets. A logical implication of capital reversing is that, given the level of output, such firms employ more workers at a higher wage. (I have deliberately worded the above to avoid saying, "Increasing wages lead to greater employment" - which is a claim about dynamics.) The sort of example I have in mind doesn't seem to depend on aggregating labor. I often motivate discussion of these matters with the introductory neoclassical textbook story on minimum wages, which is theoretically unfounded and only taught by bad economists. (Nose counting as a refutation of the above statement is a fallacy.)

I realize lots of literature backs up my position; I am not being original. I like to cite Graham White (2001) and Tony Aspromourgos (2001). I recently stumbled upon another economist who forcefully states a similar position.

John Weeks has been updating his 1989 book, A Critique of Neoclassical Macroeconomics. Two parts of the update-in-progress are currently available online: part I, part II. I extract some random quotes from the relevant chapter in part II:
"Reswitching implies an unexpected conclusion: theory tells us that in general capitalists will not necessarily select more labour-intensive techniques when wages fall.

This result is a potential disaster for the neoclassical macro model and its parable about real wages and employment."

"In the introduction to this book a quotation from The Times was cited, which ventured the assertion that '...few economists would argue with the general proposition that lower real wages will mean higher employment...' If it refers to theoretically competent neo-classical economists, this statement is false."

"One can conclude that when referring to actual economic outcomes, there is no theoretical basis for the generalization that lower real wages will stimulate more employment. The opposite conclusion has equal theoretical merit. The neoclassical parable, upon which so many policy prescriptions are based, is a false guide to real economies."


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