Tuesday, November 29, 2011

Krugman Wrong, Robinson Correct

In last Friday's column in the New York Times, Paul Krugman writes:
"After all, in an idealized market economy each worker would be paid exactly what he or she contributes to the economy by choosing to work, no more and no less. And this would be equally true for workers making $30,000 a year and executives making $30 million a year." -- Paul Krugman
Elsewhere, Rod Hill and Tony Myatt quote Joan Robinson:
"There is the problem of the relative levels of different types of earned income. Here we have the famous marginal productivity theory... The real wage of each type of labour is supposed to measure its marginal product to society. The salary of a professor of economics measures his contribution to society and the wage of a garbage collector measures his contribution. Of course this is a very comforting doctrine for professors of economics but I fear that once more the argument is circular. There is not any measure of marginal products except the wages themselves. In short, we have not got a theory of distribution. We have nothing to say on the subject which above all others occupies the minds of the people whom economics is supposed to enlighten." -- Joan Robinson
I like to refute the existence of the so-called marginal productivity theory of distribution with reswitching examples. In such examples, at least two vastly different distributions of income between wages and profits are associated with a single technique. Presumably in Krugman's morality play, the owner of each factor of production would be making the same "contribution" to the economy, whichever income distribution happened to prevail. Furthermore, it can be the case that a higher wage results in more labor being hired by cost-minimizing competitive firms. A similar point can be made with models with heterogeous labor.

I welcome Krugman's support for (some) good policies - including in the referenced newspaper column, despite his archaic knowledge of economics.


dcomerf said...

You're misrepresenting Krugman here somewhat: his post said that IF you believe in free market economics (as his rightwing targets profess to doing) THEN margin product theory suggest that no special dispensation need be given to the 'wealth-creators'.

At no point does he say that he believes paying factors their marginal product is a perfect model of the real worl.

Robert Vienneau said...

I am not misrepresenting Krugman. Nowhere do I say that Krugman claims the competitive model more or less describes the real world. What I say (along with Joan Robinson) is that even if it did, marginal productivity would NOT be a theory of income distribution.

We are agreed that no special dispensation need be be given to those I'll describe as most successful in exploiting others.

Blissex said...

Note that the marginal productivity theory of income distribution can be refused in an even quicker way or two:

* Ask "and what determines the interest rate on which the distribution of income critically depends?"

* Ask "and what is your theory of capital on which the distribution of income critically depends?"

Because in Arrow-Debreu-Lucas style models there is no explanation of the interest rate or of capital formation. They are just assumed away.

Of course the interest rate and formation of capital are related, and in the real world they are primarily "exogenous", that is the result of political decisions (or "animal spirits"), and they largely shape the distribution of income.

BTW I like that you have sraffing with passion; I hope that you appreciate that his book was a prologue to a critique precisely because it is just about building and examining a neoclassical model without interest rates or theory of capital as in "commodities by means of commodities".

One that actually works, instead of one that where all the difficult problems (even for the simple case it describes) are just assumed away.

It was a toy exercise :-) to see what one would get if one actually took the neoclassical ideas and general equilibrium seriously. The reswitching and multiple equilibria are just well expected ironic moments. :-)