Thomas Piketty has power that heterodox economists never had

by Ingrid Robeyns on September 22, 2014

Long-time readers of this blog know that I am an apostate of the economics discipline. When I was 17, I wanted to study something that would be useful to help make the world a better place. I thought that economics would meet that requirement, and it also seemed natural since I always had a strong interest in politics, in particular the question how to organize society. For reasons explained here, I eventually gave up the hope that economics (as I studied it in the 1990s) could give me that knowledge, and diverted to political theory/philosophy and later also ethics, where I’ve been happy ever since.

But for the first time since many years, I felt a shiver of regret for having left economics – and that was when in April this year I started reading Capital in the Twenty-first Century, the best-selling book by Thomas Piketty. Reading Capital was a great intellectual adventure, while at the same time enjoyable to read (many have said the translator, Arthur Goldhammer, deserves part of the latter credits). It is hard for academic economics to evoke positive feelings in its readers, but Capital did so with me for at least two reasons.

One is that the book is extremely interesting and rich, as by now many have pointed out. It brings economics back to the wider public, and gives the reader a true sense of what is at stake in studying the economy and hence engaging with economics. It opens up economics to all those for whom the study of economics is relevant – that is, all of us.

The second source of excitement came from my sense of what this book could do to change the economics discipline. Students of economics have been advocating for years that economics is too narrow, too much focussed on elegance and mathematical beauty, insufficiently rooted in both history of economic thought and empirical economic history, and insufficiently aware of the institutional and cultural context. None of this applies to Capital. In fact, I think that by putting forward such a strong, historically-based, empirically-grounded, and theory-rich account of the workings of capitalism and the resulting inequalities, Piketty is offering us a concrete alternative for how to do economics.

Heterodox economists have tried for years to say how economics as a discipline should change. In my view, overall they have failed to make much of a difference (that is not the same as saying that their arguments were bad or unconvincing!). Economics by now is a science where the mainstream is extremely powerful; other social sciences are much more internally pluralistic/heterogenous. Hence, it is hard to be a happy heterodox economist working in an economics department (with the exceptions of the handful of heterodox departments that are left). So I am not surprised that many heterodox economists left the economics discipline – and moved to economic history, development studies, economic geography, political theory, even philosophy.

Thomas Piketty has the power that heterodox economists never had. He has shown how economics can be done differently. He is a professor of economics at a prestigious university, hence he is situated squarely within the center of the economics discipline. He hasn’t used elaborate meta-theoretical critiques to show why mainstream economic models and methods fall short, but simply put into practice a different way of doing economics – while en passant noting that some of his findings are beyond the radar screen of mainstream economics because of their built-in assumptions. Sure, he’s not the first to have worked with such methodological commitments, but with the success of Capital, and building on the academic credibility gained by his earlier scholarly articles and books, Piketty may have the power to make a real difference to how the economics discipline in the near future will look like.

{ 127 comments }

1

Kevin Donoghue 09.22.14 at 8:29 pm

One reason why Piketty makes conservative economists a bit flustered is that he’s coming from an unexpected direction. Traditionally, left-leaning economists have stressed the imperfections of markets and the adjustment problems which interested Keynes. Piketty thinks more like a Classical economist, emphasizing how well markets adjust over long periods of time. The whole kerfuffle about the elasticity of substitution comes down to that. In Piketty’s view, capital is incredibly versatile if you think in terms of generations rather than quarters. When I first studied economics we heard a lot about “elasticity pessimism” and it was usually the leftists who were the pessimists. But Piketty is a rather extreme elasticity optimist. I’m not sure that he’s right, but he’s the first writer to make me regret that I didn’t study Solow’s growth theory more carefully.

2

Bruce Wilder 09.22.14 at 8:36 pm

I’m going to put a plug in for JW Mason’s recent post, titled
Piketty and the Money View
http://slackwire.blogspot.com/2014/09/piketty-and-money-view.html

Piketty does not take a heterodox theoretical view — though he’s highly critical of the scholarly habits of the mainstream — and takes care to respect the conservative conventions regarding the marginalist analysis of the returns to capital, and the correspondence of financial “capital” claims to physical capital resources. JW Mason notes how this gives the book’s narrative something of a split-mind quality, with a lightly-committed theoretical frame at unremarked odds with the descriptive summary of painstakingly established facts.

I think the book’s enthusiastic reception by the mainstream rests on this odd split. Paul Krugman would never have reviewed it so favorably, if Piketty had challenged the textbooks. Jamie Galbraith, by telling contrast, took a more critical view of Piketty’s conservative conceptualizations of “capital”.

Still, I think Piketty’s view has the seeds for significant subversion of our economic primitives, particularly the common view that wealth is socially and politically a good thing. It is pretty easy to adopt as an anodyne sentiment, the idea that wealth is good thing, but the increasing concentration of wealth may be a bad thing. Piketty, it seems to me, has planted the seed for the idea that wealth and the concentration of wealth cannot be conceptually separated, and wealth may be a bad thing for society, which we should prefer to discourage.

It would be quite revolutionary, should we move from a neoliberal era, in which reducing taxes and other impediments to the accumulation (and concentration) of wealth has led the political agenda, to an era in which reducing wealth — recognized as a debilitating parasite on the body politic and economic — was a prime desideratum. Introducing that idea, in the Trojan Horse of Piketty’s magisterial, but mild tome, could be an historical achievement.

3

afinetheorem 09.22.14 at 8:53 pm

I’m not so sure. Piketty is, despite his protestations, firmly within the mainstream both in methodology and content; how strange is it for someone to get hired at MIT at 22, then move to a leading European social science department, publish many many papers in the very top journals, win the prize for Best Young European Economist, have his coauthor win the prize for Best Young American Economist, and then be seen as challenging the mainstream?

In the past 40 years, economics as a discipline has smoothly integrated game theoretical reasoning (totally absent in the economics of someone like Samuelson), behavioral (everything from high theory like Epstein-Zin to experiments), non-standard finance including lots of EMT deviations, a bunch of tools using networks developed by sociologists, history-laden political economy in the Acemoglu vein, the strong empirical turn toward quasi-experimental evidence, etc. This doesn’t look like a discipline that resists new ideas to me – indeed, the huge majority of what is published today in top journals would have been unpublishable in 1974.

True, most of this is work is done using mathematical theory, but this type of path dependence is reasonable: we have lots of existing models whose benefits and flaws are well known, and we have lots of stylized facts, so why would it make sense to avoid situating new work within that existing literature? Research doesn’t stand alone – it contributes – and the nature of the contribution depends on the existing base.

If you look at the response to Piketty within economics, his historical data-collection has always been very well-received. He was publishing in top journals with theoretical papers on redistribution right after doing his PhD (his 1995 QJE) and was publishing empirical/descriptive papers on the same topic a few years later (his influential papers on income distribution in France and the US). This gave him his reputation within the field. The problem with a book like Capital, though, is that the leap from this historical data to a projection as to what will happen in the rest of the century is much less well-founded. There simply isn’t enough theoretical or rigorous empirical evidence to support the claims Piketty makes about growing wealth inequality in the future, as tons of commentators within economics have pointed out.

The Lucas Critique – that a mechanism based on preferences, technology or constraints (institutional or other) must underlie any claim – is the most core of all core beliefs in econ. The parts of the book that do not appear to take that critique seriously – i.e., historical case study without reference to an underlying model extracting the causal factors – are not going to be influential within economics, period.

4

William Timberman 09.22.14 at 9:07 pm

Bruce Wilder @ 2

I second the applause for J.W. Mason’s Piketty and the Money View, and for his follow-up reply to a commenter here.

For me the money quote (snicker) is this:

To own a piece of land means you have certain legal rights with respect to other people — to exclude them from the use of that land, to receive some equivalent from them if you do permit use of the land, to transfer those rights to someone else — and that no one else has those rights with respect to you. However, that’s only the first step. Next, we have to recognize that what constitutes “use” of piece of an asset is not a physical fact, but a social one. (As in the old story, the baker can exclude others from eating his rolls, but not from enjoying the smell of them.) So it would be more accurate to say that ownership of a piece of property is simply a form of social authority — a bundle of rights over other people. Indeed, if we want to relate the world of money flows to broader social reality, the most fundamental fact is probably this: The person who receives a money payment labeled “profit” gives orders, and the people who receive money payments labeled “wages” have to follow them. To say you own a piece of property is simply to say there is a set of commands that, if you issue them, other people are compelled to obey. Those rights are metonymously referred to by a label which bears a picture of some tangible good, just like the insignia on an officer’s uniform bear a picture of a leaf or a bird.

Having come to economics late in life, after a long detour through politics, history and philosophy, it has continued to puzzle me how economists could so comfortably ignore the fact that their assumptions about what governs human behavior are only one possible set of assumptions, that there are others which might be equally viable. Why, for example, was Samuelson considered serious, and Veblen somehow not? Well, yes, the success of capitalism in raising us from slightly haphazard animals to world-dominating ones — the exponential rise of productivity, an end to scarcity, drudgery, etc., all in one fell swoop, yadda-yadda. There’s no arguing with success, I suppose, even a success which isn’t quite so unqualified as its advocates assert.

I was reminded of the first time I read Milovan Đilas’ The New Class, which, it seemed to me, was lauded in the West for all the wrong reasons. See, the pundits at the time said, this proves that state socialists have feet of clay. They care no more about the common folk than we do. In fact, they’re even more rigid in their domination of the common folk than we are. True enough, but irrelevant, or at least it seemed so to me.

What Djilas’ book proved to me, if it proved anything, was that control over shared resources is far more important than the ownership of them. If we want the proverbial freedom and justice for all, we need to think more seriously about control mechanisms, and the relationship of means to ends, and stop worrying about the concentration of wealth, which, as a form of oppression, is only one among many kinds that a broader view of the problem must concern itself with.

5

William Timberman 09.22.14 at 9:14 pm

Sigh. No, we shouldn’t stop worrying about the concentration of wealth — sorry about that — but we should see it as one manifestation of a flaw in our makeup which has many possible manifestations. At some point, sooner rather than later I would say, needs to be taken far more seriously than a focus on economics alone allows.

6

Sandwichman 09.22.14 at 9:16 pm

I hate to sound like Cassandra but I think economics has had and assimilated its Piketty moment and moved on to its enduring preoccupations with economic growth and Itself as the ultimate arbiter of what is Important (with a capital “I”).

7

Peter K. 09.22.14 at 9:53 pm

As an amateur I’ve found the discussion surrounding K21 to be fascinating.

I wonder if part of it isn’t the timing along with the data and history. The Cold War has been over for a while. The good guys won. Now we could have Kuznets’s prosperity. Instead we had Reagan/Thatcher/Clinton/Blair, the triumph of neoliberalism and increasing inequality. Then we had the epic housing bubble and financial crisis at the capitalist center. It does appear that increasing wealth concentration causes instability and it didn’t clean up after itself in a very fair or thorough way. I believe Piketty’s suggestions about the future are open questions. Could see Keynes’s euthanasia of the rentier? Could wealth concentration cause a political reaction which leads to policies like a global wealth tax?

8

mud man 09.23.14 at 12:41 am

William Tmberman @4: Well, yes, the success of capitalism in raising us from slightly haphazard animals to world-dominating ones

Actually even as hunter-gatherers we humans spread to every clime and place, and we have often done all right as sedentary gardeners and pastoralists. Capitalism has been the world dominating us.

That’s like what you said @5, I suppose …

9

sPh 09.23.14 at 12:47 am

“… For reasons explained here, I eventually gave up the hope that economics (as I studied it in the 1990s) could give me that knowledge, and diverted to political theory/philosophy and later also ethics … “

Fascinating to read back through that thread from mid-2007, observing who is defending what segment of the economics profession, knowing as we know now that the Great Recession and associated financial crises are bearing down on the real world of human beings.

10

LSTB 09.23.14 at 1:52 am

For all Piketty’s criticisms of orthodox economics with its math-heavy models, I’m not persuaded he’ll reform economics as an discipline. His premises are no more radical than those of the reactionaries that formed neoclassical economics in the 1890s. If anything, he’s as conservative as John Bates Clark, which isn’t very generous.

My newest favorite review of Capital is Mason Gaffney’s—someone who knows his history of economics—which readers can find here.

11

notsneaky 09.23.14 at 2:50 am

Gaffney’s review is pretty good, and I say that as someone who’s coming in from a completely different perspective. In particular, it’s not that I dislike the book it’s just that there’s all kinds of little inaccurcies, mistakes and misrepresentations all over the place. It’s neither precision and rigor, nor is it “a strong, historically-based, empirically-grounded, and theory-rich account “. History’s mostly wrong (see the big debate 20+ year old in Econ history on when wages began rising during industrial revolution). He gets Ricardo wrong (for reasons Gaffney mentions, and some others). He switches blithely between *returns* on a factor (say land rent) and the *shares* of a particular factor in income in a bit of sleight-of-hand-kind of way (paraphrase part on Ricardo: “growing income raised the demand for land so return to land rose. Something something something else, this growth in land’s share in income …” – wait a minute! If it’s income that’s raising demand for land and hence rent, then the share is not growing!) Misses all the other instances in economic theory where r vs g matters (Diamond and Samuelson?). And so on.

Admittedly I’m only about a half way through it, but so far it’s like I’m being promised that some great revelation is just around the corner but as I turn the page, it’s just more stuff about how important this revelation will be, when it’s revealed. Maybe my expectations were just too high going in.

12

notsneaky 09.23.14 at 2:55 am

Oh yeah, and an accounting identity is not a “law”. It’s. Just. Not.

13

William Timberman 09.23.14 at 3:21 am

mud man @ 8

I’m never sure when I haven’t chosen my words carefully enough. Then again, it’s hard to be sure until you see the reactions to them. I suppose that’s what conversations are all about.

It’s certainly true that the trend of human development has been toward more complex forms of social organization, and that economics broadly defined has always been part of that development. And, mea culpa, I suppose I was somewhat unconsciously echoing Marx in my characterization of capitalism. My point, though, was not to deny that we were mere foraging apes prior to 1740 or thereabouts, but only that what’s happened since, even if it hasn’t amounted to a genuine discontinuity, has seemingly reached an critical mass in the sense that, for the first time, human beings are in a position to determine the future of all life on the planet.

Pretty clearly, as a bundle of atavisms glued together by information and techniques laboriously compiled over centuries, we aren’t really masters of this technological genie we’ve let out of the bottle. While economists genuflect dutifully with the rest of us at that pious observation, few of them seem to really believe it, or to understand its relevance to their own discipline, even at this late date.

14

William Timberman 09.23.14 at 3:25 am

Damn, how I do hate saying the opposite of what I mean. …my point was not to assert that… This has not been my day, but I’m going to call it one, beginning now….

15

Collin Street 09.23.14 at 4:40 am

It’s certainly true that the trend of human development has been toward more complex forms of social organization

Random walks started near hard limits look like that, yes.

16

John Quiggin 09.23.14 at 5:56 am

Piketty has pursued, much more successfully, the strategy I advocated here: roughly speaking, orthodox methodology + radical content.

17

JW Mason 09.23.14 at 12:46 pm

I think I speak on behalf of heterodox economists in general and say: We are going to keep on doing our work. You can read it, and perhaps be influenced by it. Or not. That’s up to you.

Anyway, since you just read the book, maybe you can help me with something I’ve been struggling with. Why does it matter if the profit rate is greater or less than the growth rate? What is it that will be true of an economy when r > g, that will not be true when g > r?

18

JW Mason 09.23.14 at 12:49 pm

Bruce and William – thanks.

19

Sandwichman 09.23.14 at 1:46 pm

I’ve just started reading “Empire of Value” by Andre Orlean. Just translated this year. Much better than Capital in the 21st.

“In lucid, accessible language, André Orléan resurrects and explores the vital (but neglected) problem of value, grappling along the way with some fundamental defects of conventional theory. Through his mimetic hypothesis, the role of money emerges in the central role that both classical political economy and neoclassical economics denied to it. The Empire of Value is a bold argument, and a deep rejection of the justification for reliance on markets, except as a device for obtaining consent.” -James K. Galbraith

20

Peter K. 09.23.14 at 2:26 pm

@17

“What is it that will be true of an economy when r > g, that will not be true when g > r?”

Money is free speech and power so that when r > g, the political culture, political economy and economic policies will move to the right, concentrating wealth further. They have more money to spend on propaganda, politics, bread and circuses. I believe that there are possible consequences of this that are not caught in the formula, like the euthanasia of the rentier and a political reaction to new levels of wealth concentration.

21

Sandwichman 09.23.14 at 2:53 pm

“The economics profession is presently experiencing a grave crisis of legitimacy.” First sentence in the introduction to Empire of Value. This proves to be an understatement, not a hyperbole.

22

J Thomas 09.23.14 at 3:27 pm

Why does it matter if the profit rate is greater or less than the growth rate?

You can’t necessarily measure the things that would be most important to measure.

If profit rate is high, and distributed profit rate is high, and owners who get the distributed profits then spend them so their consumption of consumer goods is rising faster than the growth of production of consumer goods, that means that in terms of every day life — how people live — the rich are getting richer and the poor are getting poorer.

But if profits are high and get re-invested to increase productivity, but production does not actually go up much, what does that mean? Productivity goes up, but production does not go up. The same work produces more, but more is not produced … less work done. Employment down. I’m not sure where to go with that.

23

Peter K. 09.23.14 at 3:36 pm

@ 22

To me Piketty is saying that throughout Capitalism’s brief history, r has been about 5 percent consistently, which is kind of a weird political economical data point. But growth rates have varied (and per Sandwichman as have the quality of growth). As wealth concentrates, inequality increases and politics move towards the right, we find growth slowing and (per Sandwichman) the quality of growth and production slows, concentrating wealth and power further.

24

JW Mason 09.23.14 at 4:46 pm

I guess I should have been clearer in my question for Ingrid. What is it that Piketty thinks will happen when r > g, but will not happen when g > r?

25

Bruce Wilder 09.23.14 at 5:46 pm

JW Mason @ 24

I think what makes it interesting is that the abstract blandness of projecting an asymptote into some distant shapeless future becomes kind of a rorschach test for economists. It is a subtle challenge to the ol’ law of diminishing returns, especially as applied to capital investment, and various other conceptualizations of capital that rattle around people’s cages. Gaffney (cited in a comment above) is sure that if only Piketty had been more careful in his definitions, land rent would pop out. (And, it would — Gaffney is not wrong.) It’s almost more interesting to read the reviews to see what people will do with it (and, often, how they will embarrass themselves).

Me, I go for apocalypse: something like North Carolina:
http://digbysblog.blogspot.com/2014/09/a-north-carolina-bridgegate-by.html

26

que_es 09.23.14 at 5:58 pm

William Timberman @4

If you like the Mason bit you quoted you might also like a classic article by the philosopher and legal scholar Morris Cohen, written in 1927. Some quotes:

“Whatever technical definition of property we may prefer, we must recognize that a property right is a relation not between an owner and a thing, but between the owner and other individuals in reference to things. A right is always against one or more individuals.”
“If then somebody else wants to use the food, the house, the land, or the plow which the law calls mine, he has to get my consent. To the extent that these things are necessary to the life of my neighbor, the law thus confers on me a power, limited but real, to make him do what I want.”
“The character of property as sovereign power compelling service and obedience may be obscured for us in a commercial economy by the fiction of the so-called labor contract as a free bargain and by the frequency with which service is rendered indirectly through a money payment. But not only is there actually little freedom to bargain on the part of the steel worker or miner who needs a job, but in some cases the medieval subject had as much power to bargain when he accepted the sovereignty of his lord. Today I do not directly serve my landlord if I wish to live in the city with a roof over my head, but I must work for others to pay him rent with which he obtains the personal services of others. The money needed for purchasing things must for the vast majority be acquired by hard labor and disagreeable service to those to whom the law has accorded dominion over the things necessary for subsistence.”

27

William Timberman 09.23.14 at 6:22 pm

que_es @ 26

Yes, the observation has been around for a long time, but we haven’t made of it nearly as much as we should. We therefore accept as given what isn’t given at all, which strangles up our minds. As what’s not said gradually comes to supplant what is said, honest folks are forced into schizophrenia, and genial academics like Paul Krugman are compelled to offer their services as intellectual paramedics. All of which is unlikely to end well….

28

yabonn 09.23.14 at 6:49 pm

What is it that Piketty thinks will happen when r > g, but will not happen when g > r?

I suppose he thinks a rentier class happens. Am I missing something?

29

Kevin Donoghue 09.23.14 at 7:33 pm

What is it that Piketty thinks will happen when r > g, but will not happen when g > r?

Let’s look at a sample of his comments (coming from various sections):

“If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high.”

“Are there deep reasons why the return on capital should be systematically higher than the rate of growth? To be clear, I take this to be a historical fact, not a logical necessity.”

“Let me now turn to the consequences of r > g for the dynamics of the wealth distribution. The fact that the return on capital is distinctly and persistently greater than the growth rate is a powerful force for a more unequal distribution of wealth. For example, if g = 1 percent and r = 5 percent, wealthy individuals have to reinvest only one-fifth of their annual capital income to ensure that their capital will grow faster than average income.”

30

JW Mason 09.23.14 at 9:18 pm

yabonn and Kevin-

Yes, that’s what he says. Two problems, one theoretical and one empirical. First, any formalization of the argument that I’ve seen has the concentration of wealth rising continuously in r/g (or in r – g). It’s very hard to produce a regime shift at r=g. Second, empirically, what does Piketty’s data say about r/g? It says that the ratio was highest in the first half of the 20th century — the period in which the distribution of income became more equal.

31

Thornton Hall 09.24.14 at 12:13 am

@16 JQ I think you just elegantly and concisely stated why I’m struggling to get through your book.

I’m nervous about whether change can happen. Krugman was invited to “Rethinking Economics” and says something quite wrong and no one in the orthodoxy can bring themselves to see it. Then today or yesterday he hammers away at what I call the “tool theory of theory” which goes something like this:

a faulty syllogism does not correctly model the world, but it can be used as a tool to understand the world.

Say what? That’s what you get from the very best Swedish Memorial Bake-Off Winner?

32

Thornton Hall 09.24.14 at 12:53 am

@3 Is there really no hope of the economics mainstream rethinking the Lucas Critique? Just today I was wondering about how such a criticism would apply in other fields:

psychology: until you have a theory that includes the firing of neurons, you have nothing to say about about behavior.
biology: until you understand the creation of proteins by DNA, you have nothing to say about how species are related.
home engineering: until you have a theory about how wood cells can stick together for a hundred years you are not allowed to discuss whether timber framing is superior to balloon framing.

Am I missing something, or is the Lucas critique just… stupid?

33

J Thomas 09.24.14 at 1:21 am

Am I missing something, or is the Lucas critique just… stupid?

We treat things as black boxes. You watch the inputs and the outputs and try to predict.

If it works to open the black box and look at components of it that you can treat as black boxes, that might be useful. It might give you better results. If that’s hard to do, or if you try it and get bad results, then I think it’s not good to say that’s the only OK way to proceed.

If you understand the firing of neurons and can work your way up to creating and using memories and so on, that’s good. You might also get some good results treating that stuff as a black box.

If you understand all the details about how wood handles stress that will probably be useful for wood architecture stuff. But if you know enough to get by about that, the rules that work for carpentry and building, then you can get by.

I think Lucas also had the complaint that if you treat a whole economy as a black box, and you only measure inputs and certain outputs like unemployment and prime interest rate etc, we might simply not have enough data to predict very well. But even a good understanding of each of the components of the system does not tell you what you need to know about a whole economy. It’s kind of like, knowing everything about how the pieces on a chessboard can move — the rules for pawns and knights and such — will not tell you all you need to know to play chess. In that particular game it’s necessary, you can’t play chess unless you know those rules, but it isn’t enough. So probably after you think you know what to expect from each individual businessman etc, you still don’t have enough of a track record for whole economies to verify your macro predictions.

We just have to do the best we can.

34

Tabasco 09.24.14 at 1:52 am

“Heterodox economists … have failed to make much of a difference (that is not the same as saying that their arguments were bad or unconvincing!)”

If heterodox economists have failed to make much of a difference then almost by definition their arguments are unconvincing.

35

A H 09.24.14 at 2:43 am

@33 “I think Lucas also had the complaint that if you treat a whole economy as a black box, and you only measure inputs and certain outputs like unemployment and prime interest rate etc, we might simply not have enough data to predict very well.”

This is pretty much the opposite of the Lucas critique! The assumption that agents can optimize their behavoir is at the core of the Lucas critique, If agents can’t predict economic outcomes how do they optimize their behavoir?

36

notsneaky 09.24.14 at 4:14 am

I still want to see an answer to JMason’s question in 17 and 24. This is what’s driving me nuts about the book. The book promises an answer, or pretends to have an answer, to this question, but so far, I cannot see where it gives it. It just keeps asking you to turn the page and keep reading. But it never gets there. Sure, it gives some empirical correlatiosn which maybe support it. But it does not give the answer to the question “why”.

(note: and in some parts where it does try to give a “why” answer, that answer is clearly bunk. For example. g is population growth + income per capita growth. At one point Piketty says that population growth has an equalizing effect. This is nonsense if taken literally. What he really means is “if wealthy people have higher net reproduction rate than non-wealthy people, then that will equalize wealth”. But he doesn’t say that. He does actually say “population growth has an equalizing effect”. This is confusing the difference between the population growth of wealthy people and non-wealthy people with the average growth rate of population. In fact, since usually non-wealthy people, in the real world, have higher net reproduction rates than wealthy people, overall population growth has a UN-equalizing effect on the income distribution. So in this case, higher g, or lower r-g, works completely the other way than he says.

Yes, I know this is nit-Pikettin’. But the book is full of these annoying fudges, or less charitably, bullshitin’, and however small each one is individually, by the fourth or fifth chapter they’re starting to add up. Now, if at some point he would just sit down and lay it out in clear terms (math or no math, I don’t care) it’d be one thing. But he never does that.)

This is one of the most frustrating books I’ve read in awhile. And annoying because usually when a book is this sloppy I just throw it away and do something better with my reading time. But I really want him to be correct so I keep turning that page, hoping that there is actually something more than “inequality has increased and that’s bad” to it (which it has, and it is, but I don’t need this particular book to know that)

37

Sandwichman 09.24.14 at 4:38 am

André Orléan on the legitimacy crisis in economics. From the introduction to The Empire of Value (2014):

The economics profession is presently experiencing a grave crisis of legitimacy. There was a time when it sought to provide sound guidance for democratic societies by improving the effectiveness of reasoned public policy. But now, through its own negligence, it has shown itself to be a source of confusion and error. It allowed a suicidal scheme of financial deregulation to be put into effect, without any prior attempt having been made to assess the scope of the risks involved or to devise appropriate precautions against them. Instead of awakening minds, economics has put them to sleep; instead of enlightening them, it has cast them into darkness. The disrepute in which the profession is held today stands in proportion to its own failure, which is extreme and without precedent.

The reaction of economists to the scathing criticism that has been directed at them is striking above all for its lack of intellectual courage. Even if a majority is prepared to admit that very harmful mistakes have been made, most economists also persist in warning against throwing out the baby with the bathwater. To be sure, they say, undue reliance on a type of modeling that recklessly overrates the virtues of competition, together with a dogmatic insistence on the hyperrationality of economic actors, is indefensible. But these shortcomings give a distorted picture of the discipline. Economics is perfectly capable of correcting its excesses, by drawing upon new fields of research such as multiple equilibrium theory and experimental economics, even neuro-economics. So say the economists. And yet instruction at the university level remains the same as it was before the crisis; research likewise proceeds on the same assumptions as before, using the same methods as before. However many newspapers and magazines announce the return of Marx, Schumpeter, and Keynes, the fact of the matter is that nothing has really changed.

None of this should come as a surprise. Science obeys its own rhythms. Economists are not like weathervanes, pointing this way or that with every shift in the winds; they cannot be expected today to teach the opposite of what they professed yesterday. Nor is economic theory a mere collection of recipes that can be sampled in response to changing tastes; it is a highly structured body of propositions built up from falsifiable hypotheses, rigorous methods of proof, and a vast archive of established results—what the historian and philosopher of science Thomas Kuhn famously called a paradigm. Kuhn showed that it is in the very nature of paradigmatic inquiry to resist challenges to its view of the world. For a paradigm to be overturned at a moment of crisis, not only must a persistent series of anomalies have been observed, in contradiction of the accepted wisdom, but, no less importantly, there must be a new paradigm ready to take the place of the old one. Now, the fact that an economic crisis brings previously unsuspected problems to light does not mean that fresh solutions are available on demand. It is true that economists today quote Keynes, Minsky, and Kindleberger more often than they used to. But this ought not fool anyone. No matter that economists now find it convenient to distance themselves from the neoclassical assumption of efficient financial markets, the theoretical framework that organizes their thinking and their teaching remains unchanged. It has been kept in place exactly as it was.

The present work proposes to make a new beginning. It proceeds from the conviction that the difficulties encountered by economic theory owe nothing to momentary circumstances, but are the consequence of a fundamentally mistaken conception of economic behavior.

38

Peter T 09.24.14 at 5:07 am

I share the sense of frustration with Piketty – a lot of what he lays out is common sense, or a straightforward exploration of a fascinating set of information. But it’s riddled with loose concepts and strait-jacketed by the need to conform to the orthodox mechanics. Then again, I have sympathy if this is a deliberate ploy to tempt the profession into again thinking seriously about the subject, rather than continuing with the rigorous manipulation of loose notions.

Piketty does at least make a stab at defining wealth, as the value of what yields income (rather than using capital in the usual broader sense). But his history does not extend looking at what this implies – that wealth in this sense is not unique to capitalism, is always politically defined and constrained, and has only a loose relationship to production. I think of the book as the cheese before the economics mousehole; the trap is some way off.

39

J Thomas 09.24.14 at 8:22 am

#35

“I think Lucas also had the complaint that if you treat a whole economy as a black box, and you only measure inputs and certain outputs like unemployment and prime interest rate etc, we might simply not have enough data to predict very well.”

This is pretty much the opposite of the Lucas critique! The assumption that agents can optimize their behavoir is at the core of the Lucas critique, If agents can’t predict economic outcomes how do they optimize their behavoir?

I have probably misunderstood Lucas.

I thought the idea was that agents will attempt to optimize their behavior, and if we understand those agents well enough then we will successfully predict their attempts to do that, and that will let us predict the economy.

If agents can successfully optimise, then instead of developing theories of macroeconomics we should get some agents to optimise for the whole economy instead of just for themselves. Unless we are ready to assume that if they optimise for themselves that *will* optimise for the economy as a whole, in which case we don’t need no macroeconomics.

But if they will *attempt* to otimise, that will have effects that must be predicted. And there’s the problem that they learn from experience. If they can predict what the government will do, they will act on those predictions. So whatever your macroeconomic theory expects will happen, it probably won’t happen that way the next time around because the actors will do something different based on what they learned last time.

So what we need to do to get a working macroeconomics, is to predict how their behavior will change before it happens. And to do that we need a deep understanding of them.

But I may have misunderstood.

40

yabonn 09.24.14 at 9:49 am

notsneaky
I still want to see an answer to JMason’s question in 17 and 24

Well, JW Mason himself seemed to agree Piketty thinks indeed that there would be a rentier class – while thinking P may be wrong there. Maybe you want an answer to another question, but I’m not sure which.

At one point Piketty says that population growth has an equalizing effect. This is nonsense if taken literally.

I haven’t read the whole thing, but maybe he meant that bigger families decrease each heirs’ share, and consequently increase their salaries/capital income ratio?

41

Thornton Hall 09.24.14 at 12:06 pm

@OP To my mind, the econoblogosphere is, perhaps, the Road to Damascus waiting for its Saul. But that may be too ambitious.

In the history of physics analogy, Piketty is like Tycho Brahe who charted the location of every star in the sky, night after night after night. He had some bizarre ideas about theory, but the data collection laid the groundwork for his famous student Johanas Kepler. Kepler’s theories focused on the subset of physics related to orbits. Only then could Newton come along and generalize at a much bigger level.

In this analogy, economics will become an empirically useful endeavor when Piketty’s students’ students are being awarded their PhDs. Do we have to wait that long?

My current hope is Noah Smith. This post here (http://noahpinionblog.blogspot.com/2013/08/a-few-words-about-math.html) suggests he should see the problem and be a critic of the entire Neoclassical edifice. But he seems to have fallen for some bad apologia that suggest the problem is confined to macro, and, even there, prefers to defer to the elders.

42

Kevin Donoghue 09.24.14 at 1:08 pm

J.W. Mason,

“It’s very hard to produce a regime shift at r=g.”

I don’t see the need for one, since Piketty asserts that r > g nearly always, in the real world. That in itself doesn’t bother him; it’s the size of the r-g gap that matters. But if you do want a regime shift I’d say it’s actually very easy to produce one. Consider a simple model of dividends (the Gordon growth model): g > r does not compute.

“…what does Piketty’s data say about r/g?”

Well g is easy to measure, but r isn’t. It’s the ratio of earnings from capital to the market value of capital. So the numerator should be the sum of all rents from property, earnings on equities, royalties etc.; while the denominator is the market value of all these assets. I’m not sure what you mean by Piketty’s data? Fig. 10.9 on page 354? I’d love to know where he got the data for that. It sort-of supports your point.

My view remains that his theoretical framework is pretty sound, being a blend of ideas derived from Solow and Tobin, two sound men; as to the empirics, there’s a lot of open questions. I’ve plenty of sympathy with people like Dean Baker who say that the real problems with inequality come from rigged markets, not the compounded returns on large fortunes.

43

notsneaky 09.24.14 at 1:26 pm

I haven’t read the whole thing, but maybe he meant that bigger families decrease each heirs’ share, and consequently increase their salaries/capital income ratio?

Yes, that’s what he meant, but that’s not “population growth” (which would affect g) that’s just “wealthier folks have more surviving children than non-wealthy folks” (which doesn’t really affect g)

44

yabonn 09.24.14 at 1:35 pm

notsneaky @ 43
But why only “wealthier folks”? Everybody has bigger families ; for the rich, that means inheritance dilution.

45

notsneaky 09.25.14 at 12:09 am

Because if you start with a group with no wealth and you let the share of that group in total population grow then inequality increases. 0/N=0, but share of 0’s goes up. More generally, if number of surviving children decreases with wealth (or income) then higher population growth is going to mean more inequality, not less, contra Piketty.

Basically he’s trying really hard to provide a justification for what’s supposed to be the main contribution, which is that if r>g then we’re in trouble. g is pop growth + growth of average income. There might be a good case for the “growth of average income part”, I don’t know, haven’t seen anything convincing thus far. But there isn’t for the “pop growth” part. He’s just trying to force that square peg into the round hole with his hammer because everything has to be about r vs g. So you get nonsense arguments like the one he gives.

And the reason he resorts to this is because he wants to argue that we should expect g to be lower from here on now, and part of the reason for that is because pop growth is leveling off.

He’d have a stronger case (maybe) if he just kept pop growth out of it.

46

Peter T 09.25.14 at 1:35 am

Since r>g is central to Piketty, I’ll have a stab at putting it in a form that avoids the economics straitjacket. Start by distinguishing between primary and secondary (or higher) claims on income, with income defined as the entire productive yield available to a community. A primary claim is a share in the yield of whatever productive unit one works in (say, a peasant’s share in the yield of his/her farm, or a wage as part of the workforce of a factory). A secondary claim is a claim on the primary claims. Piketty’s r is the average rate of return of secondary claims. Given that ownership of secondary claims is much more concentrated than that of primary claims then,

– if secondary claims can be purchased and
– if the owners do not spend all their income,

then ownership will be come more concentrated and the share of income taken by secondary claims will rise, unless total income rises fast enough to offset these trends.

Piketty’s “wealth” is simply the value of all secondary or higher claims, derived by multiplying the total claims by r. It is not the same as the value of the productive assets of the community (for one thing secondary claims are either not permitted or cannot be practically enforced on the bulk of such assets). Secondary claims are not equivalent to rent either: they often play a major role in maintaining the production system. How far they do so is a matter for investigation in each case.

Putting it this way let’s us see that, first, it’s not a problem specific to capitalism and secondly, that the central issues are political: over what will secondary claims be allowed? how much accumulation will be allowed? can they be purchased? in what areas will tertiary or higher claims be allowed? and so on. There are, historically, a wide range of answers to these questions.

It also lets us see that the state, which creates, guarantees and regulates such claims, is central to the issue. A lot of history is about the tussle between the state’s need to keep its independence from concentrated ownership in order to maintain the system as a whole, and ownership’s desire to escape or capture the state. Primary owners’ desire to escape or limit secondary claims is also a major theme. Distribution of income within productive units is a related but conceptually separate issue.

Does this help?

47

yabonn 09.25.14 at 8:36 am

notsneaky @45
if number of surviving children decreases with wealth

At this point, we should really try to find the precise quotation I suppose. Still : I think there is the part were we don’t understand “population growth has an equalizing effect” in the same way.

For you it is about the effects of the fertility of two groups, rich and poor, and you find it doesn’t make sense. For me, it means big families will tend to dilute wealth – something I can imagine.

48

Ze Kraggash 09.25.14 at 9:39 am

“big families will tend to dilute wealth”

to dilute is absolute numbers, yes, but if 1% owns X%, and assuming all groups grow proportionally and all wealth is strictly inherited, after the population doubles 1% still owns X%. And if the poor reproduce faster, then inequality will grow. Which is, it seems to me, what notsneaky is saying.

49

yabonn 09.25.14 at 2:06 pm

Ze Kraggash @ 48
In my picture, the X% (lets say “of everything”) grows at its financial rate, below the +100% in population. So surely it must go down, because doubling the population also double “of everything”, and X% just increased 6%?

… At this point I fear we are heading to YA Piketty Definition Party ; I _have_ to finish that book.

Back to my dejected heirs, the absolute should matter some, I think, because there is that threshold below which you need to work, and grow with the rest of us “g”.

50

Alex K. 09.25.14 at 3:02 pm

“My view remains that his theoretical framework is pretty sound, being a blend of ideas derived from Solow and Tobin, two sound men”

Could you expand on the soundness of the Solow growth theory?

There are proofs that aggregate production functions do not exist, not even as an approximation (if you want to have the aggregate production function be an actual aggregate of micro-production functions). Have those proofs been refuted — because of some recently discovered mistake maybe?

If they have not been refuted, then empirical estimates of the aggregate production function remain “estimates of nothing”: one of the most prominent examples of modern scientism, of the activity that mimics the appearance of science while having no scientific substance.

51

notsneaky 09.25.14 at 4:43 pm

@47-49

Ze Kraggash, yes that is exactly what I am saying.

You have:
(A) pop growth of wealthy – pop growth of non-wealthy
vs
(B) pop growth of wealthy + pop growth of non-wealthy (weighted by shares)

Piketty says that lower (B) increases inequality but what he really should say is that lower (A) increases inequality. But then that doesn’t fit this whole r vs g thing.

@50 Alex K., of course aggregate production functions do not exist, since they are abstractions. So there’s no “proofs” that they do not exist, just proofs that they can’t be derived from some underlying market structure and technology without strong assumptions. So what? Ultimately the question is whether or not they’re useful abstractions or not. Anyway, off topic really.

52

yabonn 09.25.14 at 6:38 pm

yabonn @ 49 don’t work and post!
Ze Kraggash @ 48 sorry about that. I meant :
“So surely the percentage X% must go down : numerator increases 6% or so, and denominator “doubles” (add quotes ad lib) because there is more wealth around due to the population increase.” That’s how I understood the r/g thing, at least.

53

Ze Kraggash 09.25.14 at 6:58 pm

I got it. You were saying that the wealth of the top 1% (the capitalists) increased according to the rate of profit (r), while the wealth held by the bottom 99% (assuming it’s all derived from labor) must have doubled. It seems a bit counterintuitive to me, but I can’t think of a good rebuttal.

54

Sandwichman 09.25.14 at 7:06 pm

Alex K @50:

Jamie Galbraith on 1950s growth theory:

…Over the eighteen years of the baby boom, from 1946 to 1964, the fruits of growth were matched by a rapidly rising population to enjoy them.

It was in this spirit that, in the 1950s, economists invented the theory of economic growth. The theory set out to explain why things were good and how the trajectory might be maintained. Few economists in the depression-ridden and desperate 1930s would have considered wasting time on such questions, but now they seemed critical: What did growth depend on? What were the conditions required for growth to be sustained? How much investment could you have without choking off consumption and demand? How much consumption could you have without starving the future? The economists’ answer would be that, in the long run, economic growth depended on three factors: population growth, technological change, and saving.

It was not a very deep analysis, and its principal authors did not claim that it was. In the version offered by Robert Solow, the rate of population growth was simply assumed. It would be whatever it happened to be—rising as death rates came under control, and then falling again, later on, as fertility rates also declined, thanks to urban living and birth control. Thomas Robert Malthus, the English parson who in 1798 had written that population would always rise, so as to force wages back down to subsistence, was now forgotten. How could his theory possibly be relevant in so rich a world?

Technology was represented as the pure product of science and invention, available more or less freely to all as it emerged. This second great simplification enabled economists to duck the question of where new machinery and techniques came from. In real life, of course, new products and processes bubbled up from places like Los Alamos and Bell Labs and were mostly built into production via capital investment and protected by patents and secrecy. Big government gave us the atom bomb and the nuclear power plant; big business gave us the transistor. Working together, the two gave us jets, integrated circuits, and other wonders, but the textbooks celebrated James Watt and Thomas Edison and other boy geniuses and garage tinkerers, just as they would continue to do in the age of Bill Gates and Steve Jobs, whose products would be just as much the offshoots of the work of government and corporate labs.

With both population and technology flowing from the outside, the growth models were designed to solve for just one variable, and that was the rate of saving (and investment). If saving could be done at the right rate, the broad lesson of the growth model was that good times could go on. There was what the model called a “steady-state expansion path,” and the trick to staying on it was to match personal savings with the stock of capital, the growth of the workforce, and the pace of progress. Too much saving, and an economy would slip back into overcapacity and unemployment. Too little, and capital—and therefore growth—would dry up. But with just the right amount, the economy could grow steadily and indefinitely, with a stable internal distribution of income. The task for policy, therefore, was only to induce the right amount of saving. This was not a simple calculation: economists made their reputations working out what the right value (the “golden rule”) for the saving rate should be. But the problem was not impossibly complex either, and it was only dimly realized (if at all) that its seeming manageability was made possible by assuming away certain difficulties.

The idea that unlimited growth and improvement were possible, with each generation destined to live better than the one before, was well suited to a successful and optimistic people. It was also what their leaders wanted them to believe; indeed, it was a sustaining premise of the postwar American vision. Moreover, there was an idea that this growth did not come necessarily at the expense of others; it was the product of the right sort of behavior and not of privilege and power. Tracts such as Walt W. Rostow’s Stages of Economic Growth spread the message worldwide: everyone could eventually go through “take-off ” and reach the plateau of high mass consumption. Capitalism, suitably tamed by social democracy and the welfare state, could deliver everything communism promised, and more. And it could do it without commissars or labor camps.

A curiosity of the models was the many things they left out. The “factors of production” were “labor” and “capital.” Labor was just a measure of time worked, limited only by the size of the labor force and expected to grow exponentially with the human population. Capital (a controversial construct, subject to intense debate in the 1950s) was to be thought of as machinery, made from labor, measured essentially as the amalgam of the past human effort required to build the machines. As every textbook would put it, if Y is output, K is capital, and L is labor, then:

Y = f(K, L)

This simple equation said only that output was a function of two inputs: capital and labor. Note that, in this equation, resources and resource costs did not appear.

55

Alex K. 09.25.14 at 8:35 pm

@notsneaky:
“[Aggregate Production Functions] can’t be derived from some underlying market structure and technology without strong assumptions. So what? Ultimately the question is whether or not they’re useful abstractions or not. Anyway, off topic really.”

I don’t think it’s off-topic: someone claimed that the theoretical apparatus in Pickety is essentially sound, being based in part on Solow growth theory.

I am saying that there is nothing theoretically sound about that theory: the attempt to explain growth (and whatever else) by using the two constructed variables of “capital” and “labor” runs into problems as soon as you try to settle on a consistent definition of “capital” and “labor” — a definition where the aggregated “capital” is somehow formed from dis-aggregated capital (and the same with labor). The problems are not merely that you can’t aggregate exactly — it’s that you can’t aggregate even to an approximation.

I am all for useful abstractions: if you show me that in a certain situation a few factors dominate, then I’m all for making a model using only those factors and then putting all the other factors under the umbrella of “error term(s).” But you should still do some work to show that the “error terms” are well behaved, and to do that you will likely need to argue by referring to the reality that you are trying to model.

I see no such efforts (never-mind successes) when it comes to justifying Solow growth theory.

———–
Also, here is some light reading related to aggregated production functions:

http://college.holycross.edu/eej/Volume31/V31N3P489_491.pdf

56

Bruce Wilder 09.25.14 at 9:15 pm

Microeconomic production functions do not make much sense, either, and for many of the same reasons.

57

Sandwichman 09.25.14 at 9:25 pm

Alex K.,

Y[e] = f[aith](K, L[ittle]).

58

Alex K. 09.25.14 at 10:03 pm

“Microeconomic production functions do not make much sense, either, and for many of the same reasons.”

I don’t suppose using production functions for analyzing movie production in Hollywood will get you very far — but I wouldn’t mind defending the use of production functions in some manufacturing contexts.

All I would insist on is that if you call some work as being based on a “theoretically sound” foundation, there should be some justification of that soundness: i.e. show me how the inevitable errors that result when models are confronted with reality are manageable and well behaved.

Such a thing does not exist for Solow growth theory.

59

bob mcmanus 09.25.14 at 10:25 pm

60

Sandwichman 09.25.14 at 11:09 pm

“Not even wrong”

I had encounters with the AggProdFunc a while ago that sure persuaded me of its vacuousness and of the obstinacy of the mumpsimus monks who intone it.

61

Bruce Wilder 09.25.14 at 11:31 pm

Alex K: I wouldn’t mind defending the use of production functions in some manufacturing contexts.

Then, you’d be a fool. It was in trying, as a naïve twenty-something, to do exactly that, that I first realized just how brain-dead the concept was.

In manufacturing, everything is organized around technical control of the process and efficiency is a matter of controlling value of product quality and the expense of waste. You see anything about technical efficiency in the assertion that output is a function of input? You see any role for management. There’s a lot of management in manufacturing organizations.

The bottom-line is that output is not a function of input — it literally does not satisfy the mathematical definition of function: the same input can produce differing output. (The dodge, of course, is to assert that maximum output is a function of input, but that just begs the question of what is to be meant by, “maximum” in an operational context.)

I’ve seen economists informally describe the production function as a recipe, but the contrast with an actual recipe reveals the gaping problems. Think about baking bread: a baker and a baker’s tools: his spatula, his bowl, his board, his oven. Everything in the recipe — the eggs, flour, sugar, yeast — have been mysteriously omitted from the production function, but try to overlook that. Also, the gas to heat the oven. In what sense, can you be said to have maximized output from the combination of the baker’s time and the oven’s time? How do you account for the idleness of the oven at other times? If you drop an egg on the floor, how do you account for that instance of waste?

And, if you forget trying to analyze an actual plant, an actual baker’s kitchen and go with a theoretical economist’s retreat to extreme abstraction, in which K, L represent the whole vertical chain of production from the dust of the earth, what is the excuse for having “K” at all, since K is itself an assembly of products?. If you are going to follow the production process into an infinite regress, why not follow Sraffa into an infinite regress that eliminates K altogether?

The production function does not survive an hour’s critical scrutiny or application to a practical context. If you take the whole technical apparatus of production as the exogenous gift of engineers, and the social apparatus as the gift of managers, and confine your attention to doing linear programming to identify shadow prices, the best you can manage is a first cut at daily scheduling of operations.

It’s not like no one has noticed these problems. Nicholas Georgescu-Roegen famously tried to work entropy into the equation. But, much of the literature explores purely theoretical issues in a flurry of notation, and simply side-steps the criticism, like it has never been raised, or can be answered by an appropriate assumption.

Sorry, for the off-topic rant.

62

Sandwichman 09.26.14 at 12:03 am

“…or can be answered by an appropriate assumption.”

ceteris paribus

63

J Thomas 09.26.14 at 12:17 am

In manufacturing, everything is organized around technical control of the process and efficiency is a matter of controlling value of product quality and the expense of waste. You see anything about technical efficiency in the assertion that output is a function of input? You see any role for management. There’s a lot of management in manufacturing organizations.

The bottom-line is that output is not a function of input — it literally does not satisfy the mathematical definition of function: the same input can produce differing output. (The dodge, of course, is to assert that maximum output is a function of input, but that just begs the question of what is to be meant by, “maximum” in an operational context.)

Ah, that brings back memories. My junior year in college I tried to design an economy for a small southeast-asian nation using Leontieff matrices and I grafted a price structure onto it. Every turn of the game was supposed to be a month, so I figured I could put in supply-and-demand functions and run it 20 or 30 times to get the next turn’s results, and the economy would quickly get into balance doing that.

But it didn’t. I thought there must have been something wrong with my programming. It didn’t work even after I took out the drug economy that the players wanted, that got the whole country growing drugs and importing everything else they needed.

I guess the imports were part of the problem. Probably they needed a tariff structure, with 20 product groups they were getting stuck making two or three and importing everything else which put them at the mercy of the international market. But nothing I tried worked. My economy resolutely refused to equilibrate. I could set it so it equilibrated everything to zero, but that was it.

Later I realized that of course it was never going to reach an equilibrium no matter how long I ran it, it was making limit cycles and they all had different frequencies, and, well…. I’d taken some intro economics courses and I’d read a variety of other interesting things, and I believed that the invisible hand would not have palsy. But for me it did. To run the game I had to give up on the program make up economic numbers that kind of made sense. The players of course couldn’t tell the difference. I used an RNG to make random numbers, and then weeded out results that looked too implausible. The players were happy to accept anything that favored their own revolutionary groups, but argued about things that didn’t. I told them I tried to make the program follow laws of economics, but I didn’t always know the details of why things worked the way they did. Players were inventive at coming up with plausible explanations when they wanted to. But a lot of the time they paid more attention to the war.

Leontieff input-output models are neat. Oversimplified, of course, but if you don’t start doing anything until you have everything perfect, when will you start?

64

Thornton Hall 09.26.14 at 1:12 am

I love the subtitle, “Not Even Wrong”, but if Bruce is right, and I’m sure he is, how did the book get so long?

65

notsneaky 09.26.14 at 1:22 am

When I said above that this was “off topic” I was very much anticipating that this would turn into some discussions about production functions and all that. Not interested. Once you’ve danced that dance several times, it’s sort of boring and pointless. Suffice it to say that I actually think the Solow model is a very useful and practical model, which has a lot to say about the real world we live in. From “why do some poor countries grow faster than others”, to “why do some poor countries catch up with rich countries”, to “why does the growth rate of income slow down the richer you get”. to “why did the Soviet Union experience a burst of growth, followed by stagnation”, to “why was Western Europe able to recover so quickly from the devastation of WW2”, to a number of other relevant questions. Show me a model without production functions which can generate the same amount of insight and then we’ll talk.

What I wanted to do is to take Piketty on his own assumptions and analyze his argument while accepting his premises. So far, even under these conditions, it looks sketchy. If you’d like, if you’re the heterodox sort, feel free to just reject it all together because he says something about Solow. I don’t care, it’s your business.

And Sandwichman, I’m pretty sure I’ve told you this before, but the ability to look up synonyms in a thesaurus or a disposition for making snide comments is not actually a substitute for thinking. Or having something useful to say.

66

Nathanael 09.26.14 at 1:27 am

There’s a lot of nice discussion here on how worthless classical microeconomics is. :-) This is a a drum I have been beating for years, so it’s nice to see some support.

67

Nathanael 09.26.14 at 1:33 am

John Quiggin 09.23.14 at 5:56 am wrote:
“Piketty has pursued, much more successfully, the strategy I advocated here: roughly speaking, orthodox methodology + radical content.”

Good political strategy, poor scientific strategy. (Since the orthodox methodology is mostly bullshit.) Piketty succeeded by jettisoning most of the orthodox methodology and keeping just enough to get the orthodox to read the book.

An analogy is trying to describe evolutionary biology within the orthodox *Christian* theological methodology; it’s really pretty hard to do that, though the poor 19th century biologists tried. You really need to jettison as much of the bad methodology as you can.

68

john c. halasz 09.26.14 at 1:40 am

@65:

Define “useful”.

69

Alex K. 09.26.14 at 2:14 am

“You see anything about technical efficiency in the assertion that output is a function of input? You see any role for management. There’s a lot of management in manufacturing organizations.”

There are important aspects of the management/ownership of a firm that are completely unaccounted for in a purely technical description of a firm. I think those aspects are mostly related to the embedding of the firm in a larger complex economic system: in disequilibrium, different owners and managers will have different opinions about the best course of action, and there is not (as in equilibrium) an unambiguous right answer, except maybe after the fact.

But as far as purely internal efficiency is concerned, I don’t see why in manufacturing situations you can’t account for it by adding another type of labor input called “management.” This is going to introduce various errors, but I don’t see them as unmanageable errors.

“Think about baking bread: a baker and a baker’s tools: his spatula, his bowl, his board, his oven. Everything in the recipe — the eggs, flour, sugar, yeast — have been mysteriously omitted from the production function, but try to overlook that. Also, the gas to heat the oven. In what sense, can you be said to have maximized output from the combination of the baker’s time and the oven’s time? How do you account for the idleness of the oven at other times? If you drop an egg on the floor, how do you account for that instance of waste?”

All of the above seem pretty weak criticisms unless I’m missing some deeper point.
The eggs, flour and sugar are the inputs. How exactly are they unaccounted for? The point is not so much to maximize output as it is to maximize profits; that point in the production set that maximizes profits will have its own particular combination of idleness for the oven and the baker. The dropped egg can be seen as the result of the quality of labor plus some random error term.

I don’t see much problematic about this. If the criticism of aggregate production functions would be only that they don’t correspond exactly to reality then that would be a criticism not worth making. The problem is that there is no good grasp of the errors involved in such aggregation procedures — and from negative aggregation results we know that there is no good reason to expect such bounding of the errors involved.

(I agree with your other point, about expressing a micro-production function as f(K,L) — there are indeed deep aggregation problems in such a procedure too)

70

Thornton Hall 09.26.14 at 2:22 am

@65 I didn’t realize that it was Solow who noticed that poor countries do best when they avoid hosting America’s proxie wars.

71

Sandwichman 09.26.14 at 2:39 am

@65

Thesaurus? I suppose you’re referring to “mumpsimus.” That’s classic Joan Robinson on the Cambridge Capital Controversy. She said she found it in a dictionary.

“I was delighted to find in a dictionary the word mumpsimus, which means stubborn persistence in an error that has been exposed.”

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Sandwichman 09.26.14 at 3:08 am

Of course Robinson also wrote that the purpose of studying economics was “to learn how to avoid being deceived by economists.”

73

notsneaky 09.26.14 at 3:11 am

@68 Like South Korea? I guess beyond the point where serious discussion is possible and we’ll just get the usual knee-jerkin’. Too bad, it was looking good for awhile.

74

notsneaky 09.26.14 at 3:14 am

John h. “Useful” = teaches you something about the world which you didn’t know before (or at least which is not obvious). Conditional convergence, capital as not the ultimate source of growth, limits to growth via accumulation and saving, declining growth rate, golden rule of saving – all useful insights. And supported by data (to the extent that economic hypothesis and predictions can be)

I mean, you got a different model which can explain, say, Japan *and* Soviet Union?

75

Thornton Hall 09.26.14 at 3:27 am

@73 Exactly like South Korea. Behind the North when the war ended (I’ve heard) and afterward treated like Japan and Germany and everywhere else where we fought a war.

Proxy wars were fought not by Americans, but rather, our proxies. See, eg, all of Central America, Haiti, most of South America, many Arab nations, Angola especially but other parts of Africa, China.

Places where we fought actual wars: Canada, Mexico, Europe, Japan, Korea, Vietnam, Iraq, Philipeans.

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notsneaky 09.26.14 at 3:48 am

Sorry Thornton, I’m having a hard time figuring out what it is you’re trying to say. South Korea is one of the growth success stories, no? And yes, avoiding having a war on your soil helps with growth. What’s your point? Or are you just confused about something?

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john c. halasz 09.26.14 at 3:49 am

@74:

Aside from the apparent fact that you got your numberings wrong…

I myself wouldn’t try to conflate the U.S.S.R. and Japan in some sort of singular totalizing explanatory scheme, based solely on economic factors, likely over-generalized and ahistorical, without regard for the political dimensions, including the geo- part. But YMMV. However, hermeneutically speaking, just as one always chooses one’s past precedents based on present concerns, so one can choose one’s “insights”.

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notsneaky 09.26.14 at 4:11 am

Ah, sorry about the numberings.

Does that mean we have a different definition of “useful”?

79

john c. halasz 09.26.14 at 4:51 am

It means that there are lots of different “usefuls”. And I find Sandwichman, among others, very “useful”, in his erudite and acerbic way.

80

Bruce Wilder 09.26.14 at 6:17 am

Alex K. @ 69: I don’t see why . . .

I’m sorry you don’t, but as much as I am inclined to belabor the point, it is off-topic, and I must limit myself. The things you suggest have been tried, even though they are conceptually incoherent, and they do not help.

Nathanael @ 67 Follow JQ’s link to himself, and pay attention to dsquared’s comments — excellent.

notsneaky @ 65 The Solow model appears to work as a growth accounting framework for algebraic reasons that have little enough to do with its conceptual conceits. In that way, it is a bit like Piketty’s framework of accounting relationships. Whether one thinks it works well as a growth accounting framework depends a bit on how satisfied one is by its tendency to explain so little, in the sense it attributes so much to a residual conventionally thought to represent technological advance. As you suggest @ 74, that probably should be regarded as an achievement, since it put capital accumulation in perspective.

I don’t think you are justified in asserting that the Solow growth model lends much factual enlightenment to the kind of “why” explanations you allude to, as examples @ 65, though. People just make that stuff up, and the Solow growth accounting is practically a blank slate, on which any prejudice may be chalked without much fear of contradiction by facts. The stuff that matters is in the residual or left entirely unnoticed, including much of the path dependence of development.

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notsneaky 09.26.14 at 6:47 am

notsneaky @ 65 The Solow model appears to work as a growth accounting framework for algebraic reasons that have little enough to do with its conceptual conceits.

Not true, although it’s a common misconception because of that “Bah Humbug” paper that keeps getting circulated in the heterodox econoblogosphere. That paper is junk and just makes a basic mistake.

Also growth accounting is one thing, Solow model another. Accounting makes no predictions, models do.

82

Sandwichman 09.26.14 at 7:25 am

So, Radek, tell what the aggregate production function can explain about endogenous population and resource cycles in hunter-gatherer economies?

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notsneaky 09.26.14 at 7:39 am

Asshole.

84

John Quiggin 09.26.14 at 7:47 am

The bottom-line is that output is not a function of input — it literally does not satisfy the mathematical definition of function: the same input can produce differing output.

This is uncontroversial isn’t it? Although production functions are used as a kind of shorthand in various contexts (and are often used wrongly in such contexts) the idea that production technology can be described by functions rather than state-contingent sets and correspondences was obsolete by the early 1950s (see Arrow, Debreu, Shephard etc). The fact that the same inputs can produce many different outputs and same outputs can be produced by many different inputs is central to neoclassical micro. AFAIK, the only more recent theorist to make serious use of a fixed-proportions technology was Sraffa.

85

dsquared 09.26.14 at 7:51 am

Suffice it to say that I actually think the Solow model is a very useful and practical model, which has a lot to say about the real world we live in. From “why do some poor countries grow faster than others”, to “why do some poor countries catch up with rich countries”, to “why does the growth rate of income slow down the richer you get”. to “why did the Soviet Union experience a burst of growth, followed by stagnation”, to “why was Western Europe able to recover so quickly from the devastation of WW2″, to a number of other relevant questions.

I think a lot depends on whether you consider “I dunno, probably something to do with technology” to be an impressive answer.

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yabonn 09.26.14 at 7:54 am

Ze Kraggash @ 53
It is a bit counter intuitive, but consider that one more rich is one more share in the family pie, while one more poor is one more income. At least I think that is the idea.

87

Ze Kraggash 09.26.14 at 8:07 am

@yabonn, but this is not about their incomes, it’s about their wealth, their assets. Someone with a good income but no assets and living paycheck to paycheck has 0 wealth. So, it probably has something to with these new people accumulating their wealth, how fast it’s happening compared to the accumulation of wealth by the capitalist segment.

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J Thomas 09.26.14 at 9:04 am

#84

Although production functions are used as a kind of shorthand in various contexts (and are often used wrongly in such contexts) the idea that production technology can be described by functions rather than state-contingent sets and correspondences was obsolete by the early 1950s (see Arrow, Debreu, Shephard etc).

So, up to a point you can model it as a function with more inputs. But then it gets more convenient to use a collection of functions with state variables to decide which function to use.

So doesn’t it depend on how much complexity you are ready to put into your model? And doesn’t the amount of complexity you’re ready to deal with, have something to do with the quality of information you have available?

I talked to a building contractor who had two men he trusted to manage projects. One of them consistently came in about 20% lower cost than the other. Something about management skills? (Or maybe the other guy was skimming more?) How do you put that into a model, except by adding a random component? Unless you have data about individual managers, what good does it do you beyond a source of random variation?

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yabonn 09.26.14 at 9:16 am

Ze Kraggash @ 87
Well, yes you need lots of assumptions and hand waving from here : saving rate for the poor, type of wealth of the rich (bonds and housing probably won’t react the same to population growth) etc. Accepting all that (and more I didn’t think about) one can maybe get what P means with his g and r. For example, your example at 48 of X% staying the same is just, in this case, a case of the r=g.

90

Ze Kraggash 09.26.14 at 9:35 am

I don’t get the role of g. For example: as a laborer, I could rent a house all my life and accumulate 0 wealth over 30 years. Or I could buy a house, pay about the same amount monthly, and accumulate $200K of wealth over 30 years. This should produce a significantly different result, as far as inequality is concerned, no? But does this have anything to do with g?

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John Quiggin 09.26.14 at 9:38 am

@88 A production model that didn’t have random variation would be a very bad one. As would one that assumed that principals are fully informed about the quality of agents. That’s why thousands of papers have been written on these topics (I’ve written 50 or so myself).

Economic activity is incredibly complex, and any attempt to understand it is fraught with difficulty. That’s true whether you call yourself heterodox, orthodox, mainstream or nothing in particular. Are you saying anything more than this?

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J Thomas 09.26.14 at 11:00 am

#91

Economic activity is incredibly complex, and any attempt to understand it is fraught with difficulty. That’s true whether you call yourself heterodox, orthodox, mainstream or nothing in particular. Are you saying anything more than this?

I’m saying that people make models at varying degrees of complexity, for particular purposes. It sounds like people are saying that a model which uses production functions instead of something more complex is considered bad today, but doesn’t it depend on your purpose?

Since you can’t be completely realistic about everything at once, perhaps sometimes it’s OK to simplify parts of a model?

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J Thomas 09.26.14 at 11:07 am

#90

I don’t get the role of g. For example: as a laborer, I could rent a house all my life and accumulate 0 wealth over 30 years. Or I could buy a house, pay about the same amount monthly, and accumulate $200K of wealth over 30 years.

I know a guy who got a good job and put money into a house. But after some years there was a recession and he lost his job. Lots of people lost their jobs, and housing prices dropped. He would not be able to meet his payments and would lose the house. A man came to him and offered him $5000 for his $60,000 equity in the house. He got angry. “It’s worth $60,000 and you want it for $5000?” The man shrugged. “That’s my offer. If you’d rather you could get nothing.” He took it. When I met him, 10 years later, he was renting an apartment and he rode his bicycle to work because he did not want the expense of a car.

If only he had bought a house that cost only $60,000 he might have done much better. But if he moved into a neighborhood where he could get a $60,000 house, not unlikely it would have burned down.

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Kevin Donoghue 09.26.14 at 11:10 am

Truly Solovia is the Palestine of economics. No matter what atrocities are perpetrated elsewhere, they will never get the same attention. I should have known what I was starting when I said that Solow is a sound man. For notsneaky and others who find Piketty’s book a struggle, please note that Solow’s review is an excellent synopsis:

http://www.newrepublic.com/article/117429/capital-twenty-first-century-thomas-piketty-reviewed

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Alex K. 09.26.14 at 11:10 am

“it is off-topic, and I must limit myself. “

Well, OK then. It’s unlikely though, that you will ever be able to show something as strong as “production sets can’t be used to analyze any important aspects of the production process.”

Having a strong explanatory power in some important situations is all that is required in order to justify keeping such production models in one’s toolbox.

96

yabonn 09.26.14 at 12:58 pm

Ze Kraggash @90
Well we may be at the limit of the sketch. One can imagine pathological no-wealth growth. Or wonder at the capital intensity of all this new stuff : if it’s very capital intensive, one may imagine a fast concentration, and back to your 48, etc, etc. It’s just that I don’t find “the equalizing effects of growth” is high on the list of bones to pick there.

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notsneaky 09.26.14 at 1:33 pm

@85 I think a lot depends on whether you consider “I dunno, probably something to do with technology” to be an impressive answer.

But it’s not just that is it? If you think that “X causes Y” and somebody comes along and shows you that “X cannot cause Y, because then we wouldn’t observe what we actually observe, it’s got to be something else” then I think that’s useful. Surely eliminating incorrect answer increases one’s understanding. As the man said, it’s better to know that you don’t know, than to not know and not know you don’t know.

(in fact, and some folks here might agree, Economics could probably use more of these Solow-type “I don’t know what the correct answer is, but what you got right now sure as hey ain’t it” kind of results. And usually the heterodox celebrate these kinds of results since they show up limitations of Economics. But here the “K” comes with a lot of historical baggage so accepting that “K” ultimately doesn’t matter all that much produces just too much dissonance)

98

Thornton Hall 09.26.14 at 1:52 pm

@95 This sort of high-broderist reasoning drives me crazy:

Well, OK then. It’s unlikely though, that you will ever be able to show something as strong as “production sets can’t be used to analyze any important aspects of the production process.”

It comes up a lot in defenses of Neoclassical Economics and basically says: “Ok, there are valid criticisms, but you can’t say it’s totally wrong. Nothing is totally wrong.”

But what if it’s totally wrong?

99

J Thomas 09.26.14 at 1:58 pm

It comes up a lot in defenses of Neoclassical Economics and basically says: “Ok, there are valid criticisms, but you can’t say it’s totally wrong. Nothing is totally wrong.”

But what if it’s totally wrong?

Then you have a counterexample to prove it’s wrong to say nothing is totally wrong.

100

Thornton Hall 09.26.14 at 2:17 pm

@76 South Korea did NOT host one of America’s proxy wars. Therefore it is consistent with my hypothesis that the key to doing well as a poor country is: do not host one of America’s proxy wars.

A proxy war is fought by proxies.

I would add the following political considerations to my scheme:

Be an actual nation-state.
Don’t be Communist.

101

Sandwichman 09.26.14 at 3:28 pm

Neoclassical economics is not “totally wrong.” But neither is it totally wrong to say that “tomorrow the weather will be much like today.” You don’t need a weatherman to tell you the latter.

Neoclassical economics is limited in its capabilities and much, much abused by people for ideological and professional prestige purposes. The worst part is the bullying of heretics in the name of neoclassical economics by a self-appointed orthodox priesthood.

In her post at the top of this thread, Ingrid linked to an earlier post, A liberating exit, in which she wrote, in part:

In 2001, I was one of the three Cambridge University PhD students who wrote a little piece called Opening up economics, which was originally signed by 27 economic, business economics and development economics PhD students to call for an ‘opening up’ of the economics discipline. In fact, originally we were four writing the proposal, but one dropped out since she became too worried that writing this piece might jeopardize her chances of getting her degree. In fact, I think it’s fair to say that many of us were scared, and some fellow PhD students didn’t want to sign because they worried about how their supervisors would react. So far for the notion of a free market of ideas.

The current discussions about the credibility and validity of the claims made by heterodox economics seem to some extent to miss the point of what I understood to be the main reason for anger and resentment among heterodox economists: the effective and very strong marginalisation of anybody who is not doing either fancy empirical work (advanced econometrics or experimental techniques), or theoretical work in the form of applied mathematics. Any other kind of work is not considered of decent quality, is not published in the journals which are perceived as publishing the highest-quality work, is not regarded as valid material for a job talk, and so on and so forth. In addition, the culture of mainstream (read: almost all) economics departments is such that many, possibly most, economists regard most of the other social sciences as journalism—and philosophy is just words, words, words (as one fellow PhD student once told me, “everyone can use words, it doesn’t mean anything”). The dominant views on interdisciplinary research follow from these attitudes: yes, good interdisciplinary research is valuable, but most work done in other disciplines is not real science, so we can’t collaborate with them.

That says it all.

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Plume 09.26.14 at 4:39 pm

While neither part of the Korean peninsula was ruled by boyscouts at the time of our invasion in 1950, it was the South, not the North, that was clearly worse, ruled by the right-wing thug and murderer, Syngman Rhee, who had been handpicked (and frequently protected) by America to hold power.

And, to make it worse, if the Allies and the Soviets had not split the peninsula in two after WWII, there never would have been a need for an invasion. It was classic blowback.

To top that all off, an early provisional government was the likely best chance for a sane, humane Korea, but America opposed it and it quickly fell apart, because they thought it might be communist. Its goals, at least, were far superior to anything that came later:

https://en.wikipedia.org/wiki/People%27s_Republic_of_Korea

An excerpt:

Program

The program of the PRK was presented in its September 14 twenty-seven point program. The program included: “the confiscation without compensation of lands held by the Japanese and collaborators; free distribution of that land to the peasants; rent limits on the nonredistributed land; nationalization of such major industries as mining, transportation, banking, and communication; state supervision of small and mid-sized companies; …guaranteed basic human rights and freedoms, including those of speech, press, assembly, and faith; universal suffrage to adults over the age of eighteen; equality for women; labor law reforms including an eight-hour day, a minimum wage, and prohibition of child labor; and “establishment of close relations with the United States, USSR, England, and China, and positive opposition to any foreign influences interfering with the domestic affairs of the state.”[2][3]
Development in the North

North of the 38th parallel north, the PRK’s local structure was maintained under Soviet occupation to become the basis of the modern North Korean party structure (see the origins of the Worker’s Party of Korea).
Development in the South

Shortly after the American landing in September 1945, the new United States Army Military Government in Korea, which controlled the peninsula south of the 38th parallel, abolished the PRK government by military decree, primarily because of suspicions that it was Communist. Some local units of the People’s Republic remained active in the Jeolla region and especially on Jeju Island, where their presence, together with marauding anti-communist youth gangs,[4] contributed to tensions that discharged in the events known as Jeju massacre.

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notsneaky 09.26.14 at 5:17 pm

the effective and very strong marginalisation of anybody who is not doing either fancy empirical work (advanced econometrics or experimental techniques), or theoretical work in the form of applied mathematics.

The first part may be true. But the second – “or theoretical work in the form of applied mathematics” – is just absolutely not true. Maybe, just maybe it was true… 20, no, 30 years ago. Maybe you even have to go back to 40.

These days there are very few people who are doing “theoretical work in the form of applied mathematics” (which IMO is actually a bit of a shame). There are probably more Economic Historians out there than people theorists of this sort. Actually, scratch that word “probably” and replace it with “obviously”.

If we were having this discussion 20 or 30 years ago I’d say “well, that’s not true but I can see how you think that since a lot of big names you hear about are theorists” but even that is not true anymore. Look at the list of John Bates Clark medal winners. In the past ten years I see only one who could possibly fit that description (Acemoglu). Ok, if we stretch it a bit, you got Matthew Rabin in 2001 (but hey, his “theoretical work in the form of applied mathematics” is all about showing that standard economic theory on uncertainty *doesn’t* work) To get to a theorist before that you have to go back to Kreps in 1989. So out of the last 16 winners you got 3 who do this sort of thing.

This is a common and completely erroneous misconception. Part of it may arise just from the different definition of what constitutes “theoretical work in the form of applied mathematics”. For some people that means “yuck, it’s got some equations in it”. But that’s not a serious definition.

Economics these days is 95% about “interesting data” and/or fancy econometrics. And even the “fancy econometrics” are not always about mathematical acumen per se but about being good at figuring out what kind of estimation strategy is appropriate to a given problem.

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Sandwichman 09.26.14 at 5:28 pm

“The first part may be true. But the second – “or theoretical work in the form of applied mathematics” – is just absolutely not true.” “This is a common and completely erroneous misconception.” Here we go again.

On a personal note, I would like to call attention to Kieran Healy’s, harry b.’s, Henry’s and dsquared’s characterizations — in the earlier post — of notsneaky-radek-younotsneaky’s assertions as confused, worrying, imprecise, anonymous, limited, dubious, intellectually unserious and weird.

I would be more compassionate.

Radek has difficulty expressing himself persuasively with words. Students who have taken his courses have complained about his extreme disorganization and his inability to explain the “incomprehensible formulas” he scribbles down. Give him the benefit of the doubt that he is “good at math” but apparently not good at conveying his understanding to others. It seems to me that he feels persecuted by those who have a greater facility with words. I suspect this accounts for his unprovoked aggression, his evasiveness and his aggrandizement of math as the shining path to precision and consistency.

105

notsneaky 09.26.14 at 5:45 pm

Look Sandwichmen. I’m not your buddy. In fact, some of your previous comments here and elsewhere directed at me have been downright creepy and stalker-ish. Your comment above was clearly a “I know where you live” kind of a threat or attempt at intimidation.

Cut it out. I would appreciate if you did not address me by my name (I have no problem with other commentators, who haven’t creeped me out like you, have doing so), I would appreciate it if you stopped making coded references to personal aspects which have nothing to do with the conversation, and I would very much appreciate it if you stopped making comments “On a personal note”.

I don’t know how others perceive it, and maybe they think it’s all cool because your world view is closely aligned with theirs so you get a pass, so a bit of nasty assholery is fine as long as its directed at one of them “evul economists”. But from where I’m sitting it looks like you’re obviously *trying* to act like a low life creep. Stop it.

106

Bruce Wilder 09.26.14 at 6:46 pm

John Quiggin @ 84: The fact that the same inputs can produce many different outputs and same outputs can be produced by many different inputs is central to neoclassical micro.

As a construct of theoretical analysis, the production function asserts that maximum output is a function of inputs. A production function describes a frontier of output. By assuming that the firm chooses a technical maximum output for any given set of inputs, the analyst sweeps away the managerial and technical problems faced by the firm trying to achieve such a technical maximum, and is able to focus her attention on the problem of allocative efficiency: given a production process represented by a production function, what output and what inputs are chosen? and what incomes do they earn? Neoclassical economics shows how market prices can resolve allocatively efficient answers to these questions on marginal principles.

As an analysis, it is neat and conceptually clear. It is the core of neoclassical economics, where “neoclassical” designates the heritage of the Marginal Revolution. It focuses explanatory attention on factor substitution at the margin in response to market price: the ubiquitous “trade-off” along the technically feasible frontier, which is the production function.

What the production function is not is a satisfactory theory of production, which can be usefully applied in an operational analysis of an actual industry or firm. It doesn’t form a useful descriptive analysis.

Alex K was making the case against aggregate production functions, but allowed, in an aside, that the production function concept might be useful in some manufacturing contexts. That’s a bit of a hot button for me.

From bitter experience, I know exactly how the production function concept breaks down, applied in an operational model used to describe and measure the situation of a particular industry or manufacturing establishment. For an actual firm, the technical and managerial efficiencies tend to dominate the problems of allocative efficiency, and they cannot be neatly separated.

In the aggregate Solow model, we find there’s a whole lot that cannot be explained by the allocation of resources and capital accumulation, which is “probably something to do with technology”. The same problem shows up in a micro-economic context.

I think a lot of economists have the same instincts that Alex K did @ 69, where he tried to force-fit technical efficiency into allocative efficiency — “management” as a factor input or waste as a labor quality issue. And, there’s definitely a lot of economists, who would do what Alex K did @ 95: “Having a strong explanatory power in some important situations is all that is required in order to justify keeping such production models in one’s toolbox.” I call that the “nothing is ever wrong” syndrome — and it is very common; even Paul Krugman has a very bad case of it. notsneaky made exactly the same argument in favor of Solow models, despite the aggregation problem.

The intuition one gets from the neoclassical analysis of the production function is that there are many possibilities for substitution of one factor for another. What one begins to understand from an acquaintance with fact is that technical and managerial efficiencies significantly constrain and dominate the substitution possibilities. There’s only one seat on the farm tractor.

107

Thornton Hall 09.26.14 at 7:09 pm

@106 There are two related moves that lead to the bitter disputes exemplified above. Krugman’s favorite is the “nothing is ever wrong” move that I call the “tool theory of theory.” All theories are wrong but some ar useful. But what Krugman never seems to see is that a tool that only clarifies thought can be used to get to any conclusion the user wants. That, of course, makes it a great way for bad people to kill poor people, which is what we see in Greece.

The other move is one that Nick Rowe makes a lot: we have a theory for that. Say somebody is pointing to asymmetrical information as causing problems for a particular theory. Nick will respond, but Neoclassical econ knows about that! Lots of theories include it. But this misses the point. The question isn’t whether each bit of reality is reflected in at least one mainstream theory. The question is: do you have a methodology that makes sure your models include asymmetric information when it plays an important role? And, no, there is no such method. It’s totally ad hoc. So, once again, theory gives answers that kill people.

Straight forward errors that kill people. In the face of that, snark is healthy.

108

Sandwichman 09.26.14 at 8:17 pm

@105

I’m confident the moderators are well acquainted with the ns-r-yns modus operandi and will take appropriate action if necessary.

109

Ingrid Robeyns 09.26.14 at 8:17 pm

Sorry for only now returning to the comments thread – work overtook my life for a few days.

First, a ‘housekeeping’ announcement: please people, you can disagree as much as you like but keep it polite. And I endorse Notsneaky’s call that everyone be called with their CT-name. As per our comments policy we do not tolerate aggression on this blog, and actually my threshold for aggression is much lower than the threshold of many other Timberites, so let’s just agree to behave (if you can’t, go away).

Substantively: let me first say thanks – I learnt a lot from the discussion. For one thing, I *thought* I understood the relevance of population growth, but now am no longer sure – will have to reread those earlier chapters to figure out what exactly is happening there, since it’s a long time since I read those.

Is it valid to call Piketty a heterodox economist? It depends on how broadly you define ‘heterodox’. I have a fairly broad definition of ‘heterodox’ and it can include economists who do not practice heterodox methods themselves, but are supportive of heterodox research and believe that the profession should be much more pluralistic. But take what he says in the concluding chapter about the type of economics we need, where he explicitly calls “to work more closely with other social science disciplines” (p. 575) and sees economics a discipline with “a political, normative, and moral purpose” (p. 574). I think that given power structures in the economics discipline, any change that will be significantly powerful and lasting cannot come from those who are too far removed from the center of power. It has to come from economists who endorse change, are supportive of methodological pluralism and the value of interdisciplinary, do not suffer from methodological or paradigmatic arrogance, YET at the same time are sufficiently respected by those they need to convince to ‘open up economics’ (otherwise they don’t have any power to change anything). We’ve seen over the last decades that heterodox economists don’t have that power and since I am still waiting/hoping for that change to happen, Piketty gave me new hope (not that it personally affects me any longer, but economics is too important to not care).

Tabasco @34, it is a logical mistake to deduce from this lack of influence that the heterodox arguments/critique would be bad, since that would assume that good arguments would win, which denies the complexity and power structures and role of vested interests in the sociology of an academic discipline.

Is Capital a perfect book? Of course not, and I, too, have all sort of minor (and one or two major) problems with the book (I will probably write about those at some point, but given my list of deadlines not very soon). Yet despite the flaws, I find his prediction that r>g in the future quite plausible, — and also his argument that this is hugely problematic since r ends up in the hands of the few wealthy, whereas the vast majority of people only have their labor to generate income (and wealth) and since g will most likely remain low, the gap between the have and have-nots will grow. He’s ultimately concerned with wealth and income inequality, and his prediction, based on his analysis of the past, is that wealth inequality will rise (and he assumes we agree with him that that’s undesirable, and hence proposes some measures in the last part of the book for how to deal with this).

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Plume 09.26.14 at 8:35 pm

A review of what sounds like an interesting new book on economics. Krugman on Jeff Madrick’s latest, Seven Bad Ideas.

One part of the review I found especially interesting — on Say’s Law. I’ve never understood the idea, pushed mostly by conservatives, that government spending and/or investment can crowd out private spending and/or investment. As if the public and private are two separate economies, working against one another. As if the government typically is in direct competition with the private sector. In reality, it is far more likely that private investors will “crowd” each other out, as they are far more likely to be in competition with each other on several fronts . . . . borrowing, investing and marketing being an obvious three.

Conservatives typically see this manichean war between public and private sectors, and never see the wars waged within their precious private sector. They assume that everything in the private sector involves addition, that money can magically appear in two places at once, that money apparently doesn’t leave the consumer’s hand and end up in the CEOs, that everyone wins in the private sector and there is no subtraction. In the public sector, it’s always subtraction. Taxes take from the private and supposedly just disappear. Public sector spending, in their view, goes nowhere, or just down the drain. So it’s a net minus, always, an extraction from the private sector without a subsequent addition there. But in the private sector, if one firm wins a contract, others obviously lose. If one company receives funding from X investors, that money isn’t going to other firms, etc. etc.

That supposed invisible hand sure isn’t steering economists in the right direction these days, much less the economy. This book, like Mr. Quiggin’s Zombie Economics, sounds like it’s an attempt at a bit of a correction.

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dsquared 09.26.14 at 9:08 pm

I think Bruce Wilder in 105 is totally correct; I was always very worried at how badly economics described the world that I used to work in, before I got into the operational research literature and Stafford Beer, but his books make it clear how much you really need to think about if you’re interested in really modelling a production process (and in his “Principle of Sufficient Variability”, he seems to have the sketch of an argument that state-contingent sets and correspondences aren’t going to solve the problem either)

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Sandwichman 09.26.14 at 9:35 pm

Plume @ 110

Regarding the so-called “Say’s Law” (which Say didn’t present as a law, etc.) Krugman asks: “But is this ‘mainstream economics’?” Well, yes and no. Not literally or in Keynes’s “supply creates its own demand” caricature. But Nassau W. Senior reformulated Say’s argument (which wasn’t presented by Say as a law) in terms of a “first fundamental proposition” that he described as a law with the same universality and certainty as the law of gravity in physics.

It might not sound like “supply creates its own demand” on first hearing but Senior deduces the same conclusion of an impossibility of a general glut from it. Senior’s proposition IS widely taken for granted or propounded in mainstream economics. It states : “That every man is desirous to obtain, with as little sacrifice as possible, as much as possible of the articles of wealth.” One might even detect an affinity with Lionel Robbins’s definition of economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” In a word, it’s the maximization principle.

In “Expectation and Rational Conduct” (1937) Terence Hutchison argued that Senior’s first fundamental proposition shared “one remarkable characteristic” with “almost all” formulations of the utilitarian maximization doctrine: “they appear further to postulate, and only are applicable if the further postulate is made, that all expectations are perfectly correct.” In these formulations, uncertainty is relegated to an ambiguous ceteris paribus alibi which makes the utilitarian calculus immune from criticism.

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Sandwichman 09.26.14 at 9:41 pm

Immunity from criticism = if reality doesn’t conform to theory, it’s because one of the “other things” wasn’t “the same.”

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Kevin Donoghue 09.26.14 at 9:59 pm

“I *thought* I understood the relevance of population growth, but now am no longer sure….”

I wouldn’t worry too much. You were probably right. The discussion of of population growth in this thread wandered far from anything in Piketty’s book.

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Ingrid Robeyns 09.26.14 at 10:07 pm

Thanks for trying to re-assure me, Kevin!
Still, I read the first parts of the book immediately after it was published, so I think I should go back. If I see how many times I’ve read (at least parts) of John Rawls’s Theory of Justice, and even upon the Xth reading discovered new insights, I suppose that there is no harm (and the only cost the opportunity cost) to reread parts of Piketty’s book.

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Unlearningecon 09.26.14 at 10:39 pm

Bit late to the party, but if I may attempt to answer JW Mason:

“What is it that Piketty thinks will happen when r > g, but will not happen when g > r?”

You seem to be thinking of this issue in binary terms. Piketty is not concerned about any sort of “regime shift”; he’s instead arguing that when r is persistently and significantly above g, inherited wealth will begin to dominate earned income. The relationship is a long term tendency rather than some inviolable law (yes, his misuse of the term ‘law’ is unnecessary and confusing).

And inequality fell when a lot of capital was wiped out during the recession/war period, but this is central to Piketty’s arguments about capital ownership and the dominance of unearned income – I’m not sure why you think it contradicts him?

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Bruce Wilder 09.26.14 at 11:00 pm

Thornton Hall @ 102 There are two related moves that lead to the bitter disputes exemplified above. Krugman’s favorite is the “nothing is ever wrong” move that I call the “tool theory of theory.” All theories are wrong but some are useful. . . .
The other move is one that Nick Rowe makes a lot: we have a theory for that.

Do you have a category label for JQ’s move, as quoted below?

JQ: Although production functions are used as a kind of shorthand in various contexts (and are often used wrongly in such contexts) the idea that production technology can be described by functions rather than state-contingent sets and correspondences was obsolete by the early 1950s (see Arrow, Debreu, Shephard etc).

No hint, of course, of what problems “state-contingent sets and correspondences” solved for Arrow, Debreu, Shephard etc or how this would relate to the difficulty of understanding the economics of the technical and managerial organization of an actual manufacturing firm.

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John Quiggin 09.26.14 at 11:29 pm

@118 Umm, if you read on a little bit in the same brief comment you’ll see that the problem it solved for Arrow, Debreu etc is precisely the one you raised, that the same inputs can produce different outputs, and vice versa. That has to be true if factor prices are going to equilibrate supply and demand, which is the central point of general equilibrium theory.

As for applications at the managerial level, there’s a vast literature on this in operations research, management science, managerial econ etc. It started with linear programming way back in the day, and now includes non-linear optimization methods, stochastic frontier analysis and so on.

Again, I’m the last person to suggest all this stuff is perfect (and certainly Arrow wouldn’t claim that GE actually describes the economy), but you appear to be suggesting (maybe seriously, or maybe in some kind of unnamed rhetorical move, I can’t tell) that this vast literature doesn’t exist. If you’re really unaware of it, I’d be happy to supply a reading list, along with some critiques.

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Thornton Hall 09.26.14 at 11:54 pm

@118 I’ll have to think about it. But in @119 the words “vast literature” are a dead give away of the “we have a theory for that” move.

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Thornton Hall 09.27.14 at 12:04 am

My latest is on the tool theory of theory. I really should translate the Is-LM graph into a series of premises before I am sure of what I’m saying, but damn if I don’t *sound* sure:
http://thorntonhalldesign.com/philosophy/2014/9/23/a-question-so-obvious-youd-have-to-be-an-economist-not-to-ask-it

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Bruce Wilder 09.27.14 at 2:15 am

John Quiggin @ 11:29 pm: the problem it solved for Arrow, Debreu etc is precisely the one you raised, that the same inputs can produce different outputs, and vice versa.

Oh, for the love of mike!

The problem I raised was that production functions analyze only one type, and therefore, one portion of production efficiency, that relating to the allocation of factors, aka allocative efficiency.

That leaves other types of efficiency in the organization of production unidentified and unanalyzed.

The point about output not being a function of inputs was to highlight the insufficiency of the production function as a theory of production. If you don’t even have enough terms in the equation to establish a functional relationship, that’s a conclusive indication you’ve left something out.

None of this is hidden in basic neoclassical theory. The production function becomes a function by introducing an assumption that technical and managerial efficiencies are achieved (aka output is “maximized” for a given set of inputs). But, one really finds out how limiting this concession to analytic convenience is, when one goes about trying to understand the organization of a manufacturing operation, which is what I was saying to Alex K.

The suggestion that I was denying the existence of the vast literature in operations research, management studies, etc. seems bizarre to me. I’ll let Thornton Hall administer the appropriate snark. I do think dsquared’s reference to Stafford Beers, a founder of operations research, was exactly on point, regarding what I was trying to get at.

Beers applied concepts of cybernetic control from feedback to problems of business and production organization, and his ideas may indeed form a useful contrast to the approach of economists to efficiency. Beers got a little weird for my taste, frankly, but I got a lot out of his sketchy introductions. Ross Ashby’s little book, An Introduction to Cybernetics, ought to be a foundational classic for economics. The model of control that Ashby laid out gets a lot of uncredited application in economics, including principal-agent analysis; it should be applied to understanding production processes, imho.

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Sandwichman 09.27.14 at 2:25 am

“vast literature” are a dead give away…

Sometimes the “vast literature” turns out to be no more than half-vast.

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Thornton Hall 09.27.14 at 2:27 am

Lol

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Sandwichman 09.27.14 at 3:39 am

In the sense of lots of quantity but of dubious quality or originality. For example, the New Keynesian “shirking” efficiency wage literature and the Environmental Kuznets Curve.

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John Quiggin 09.27.14 at 9:31 am

@125 Sturgeon’s Law applies, in more ways than one.

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yabonn 09.27.14 at 6:45 pm

Kevin Donoghue @ 115
The discussion of of population growth in this thread wandered far from anything in Piketty’s book.

Well that’s what you get for talking about a vaguely remembered economy book in a thread full of economists, I guess.

Still, you will find the inheritance as dilution first at the start of the first at the start of the “Growth, Illusions and Realities” part, and then in the “Growth as a factor for Equalization”. In that part too you will find growth reducing inequalities (an example with productivity boom, instead of population boom, granted). Maybe this will be enough to reassure Ingrid Robeyns @ 116 re: the growth reducing inequalities intuition.

Also : grmbl.

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Alex K. 09.27.14 at 8:27 pm

BW:
“What the production function is not is a satisfactory theory of production, which can be usefully applied in an operational analysis of an actual industry or firm. It doesn’t form a useful descriptive analysis.”

Production functions (or more generally, productions sets) do not even pretend to be a complete description of a firm (say). Production set theory has a clear and hard to miss label of “black box theory of production.”

You can mark it as a youthful mistake that you tried to use such a black box theory to explain the details of the managerial sausage making (i.e. how firms go about achieving various optimizations, optimizations which are just assumed by production function theory).

But just because you made such a mistake it does not mean you have somehow proved that a black box theory of production is not useful in various contexts. For some analytic purposes (say, the analysis of the viability of some investment), what is of interest is mostly what can be achieved with various technologies and inputs — that in order to achieve those results you also need certain managerial talent and certain operational procedures is something understood, but not part of the analysis.

Maybe you wanted to say that the use of black box theory of production tends to marginalize more detailed analyses of productive organizations. Or something. That would have made some sense. But to say that production set theory has no analytic use is clearly absurd. (On the bright side, you did avoid being “not even wrong”)

——————-

To bring this back on topic, the criticism of aggregate production functions (AGFs) does not fall into the category of gratuitous criticisms which view any abstraction from the complexity of the real world as invalid. Rather, the problem is that in the use of AGFs there is no evident process of abstraction whatsoever, let alone any rough estimation of the errors introduced by the abstraction. As soon as you try to clarify what AGFs abstract from, you get into unsolvable theoretical problems.

Bringing this back to Pickety, Kevin Donoghue is probably right that there are open questions in his empirics and I’m also right that Pickety uses no solid theory. Other than that, he seems to have written a pretty popular book.

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