A Debate on Mainstream Economics: A Gadget is a Dangerous Thing

Anthony Bonenby Worldly Philosopher Anthony Bonen

Recently, Paul Krugman (here, here and here) has taken a keen interest in a heterodox economist’s critique of mainstream economics (and not for the first time). In reponse, Tom Palley has issued solid rejoinders to Krugman and Simon Wren-Lewis. However, I fear the brilliant and (rightfully) esteemed Nobel laureate has missed the key point of heterodox’s frustration with marginal productivity theory. So, I follow his call to “continue to debate how we do economics.”

A key issue in distribution debates is the fair remuneration of capital and labor. Marginal productivity theory says, very basically, that the real wage and the (real) rate of profit are equal to the marginal increase in production added by the last unit of labor and capital, respectively.

Many economists, Krugman points out, do not believe this to be a cardinal truth of capitalist economies. Rather, he says [my emphasis]: 

"there are plenty of economists who are willing to use marginal-product models (as gadgets, not as fundamental truth) who don’t at all accept the sanctity of the market distribution of income."

That word – gadget – really stunned me. It sounds benign, innocuous even. Yet marginal product models are no mere “gadget”. They are the entrée for modern macroeconomics.

 

Top economic journals will simply not publish a paper in which profits are determined by, for example, Kaleckian-style mark-ups (and don’t even ask about the extraction of surplus from labor). Choosing to publish only in more ‘pluralistic’ journals will limit academic employment opportunity. The reality for many young economists is that we have no choice but to adhere to this “gadget” through years of grad, doc and post-doc work. Not long after, you can soon reach a point at which you don’t even want to hear a criticism of this gadget that you’ve worked with for so long. Accepting it would undercut years (decades, perhaps) of your work!

So why not just suck it up? Let profit equal the marginal product of capital in my models, but then acknowledge this in no way reflects reality. Two reasons:
1) it is not – as Krugman implies – an innocuous assumption, and;
2) marginal product valuation of factors of production is essentially a tautology.

First, the problem is not that I or anyone else think New Keynesians believe capitalists and workers get what they deserve (i.e., what is fair). Rather, ‘getting what they deserve’ is necessarily and precisely what marginal-product models say. There is no ambiguity about this. If a model (not the modeler!) says that capital receives its marginal product, then there is no moral basis within the analytical framework to argue capital should get more or less.

The Salt Water folks may eschew the optimal distribution implied by marginal-product models, but using them in the “Civil War” (Krugman’s term) means New Keynesians have forfeited all battles over mathematical tools to the Fresh Water side – group who does buy into the sanctity of market distribution. So, why should progressive economists use a mathematical framework that is inherently divorced from their view of the drivers of distribution? The standard answer is that it’s easier to do so (“tractable” in the jargon). It was disheartening to hear a renowned economist whom I greatly admire suggest precisely this path.

More importantly, marginal product theory is an irrefutable tautology. We will never delineate the partial derivative additions of capital and labor to output. Therefore, we will never be able to test the hypothesis that profit equals the marginal product of capital. We go on assuming (only in our models, of course) that capital gets what it adds and adds what it gets. This is the beautiful result of free and equal agents maximizing their payoffs. Problem with marginal product theory is not just that it implies market forces could bring about a fair distribution of income, but that this outcome will necessarily be defined as “fair” because labor got what it added, and capital added what it got. Point finale.

Marginal product theory, at its core, recasts distributional outcomes as a technological issue – decidedly outside the scope of economic departments. If economists are serious about discussing, modeling and testing distribution theory then we must move beyond the limited framework provided by marginal productivity. The rigorous and realistic modeling of income distribution is and will remain a great challenge for years to come, but it must be done. Perhaps I’ll try after I get tenure.

I have learned and have used marginal-product models, but not because I believe them to be useful gadgets, it is because I must. It is an ill-founded theory with strong implications for distributional ethics masquerading as an agnostic gadget. Yet, I cannot avoid it – and that’s not the fault of the Fresh Water brood.

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