Wallace Stevens
posted a very long and very thoughtful comment that calls for an extended
reply. I urge you to re-read his entire
comment before paging down to my responses.
I am going to try to respond to
it paragraph by paragraph.
Stevens paragraph
one:
" I think that you are a bit too loose with the words
"explain" and "justify". They are not the same.
Neoclassical theory attempts to explain the distribution of income under
certain assumptions: if markets are perfectly competitive (including no unions
or minimum wage), if we have continuous returns to scale, etc., etc. then one
can expect the distribution of total income between capital and labour to be
equal to their respective marginal products. Now, one can legitimately
challenge that the assumptions are simply too starkly at odds with reality for
the theory and its results to be of any use. And one could propose more
realistic assumptions and build a more plausible model, based on those
assumptions, that might point to some different conclusion about the
distribution of income. But one would still have "justified" nothing.
One would simply have offered what might be a superior explanation (this is
what, in my albeit limited understanding, I see Piketty doing). It would be a
great, and unwarranted, leap to go from there to saying that you have justified
something or that all is for the best in the best of all possible worlds
(certainly, that is not what Piketty concluded). "
This is perfectly correct and a good deal too
disingenuous [not on Stevens' part! but on the part of the economist s who
regularly say this sort of thing.] It is the intellectual's version of bait and
switch. [For those unfamiliar with this
expression, bait and switch is the practice of promising fabulous savings on
one item in an ad -- the bait -- and then offering another more expensive item
when the customer comes into the store -- the switch.] When challenged, economists say they are just
building pure mathematical models that claim no special relation to reality. But then when the naysayers have gone away
mollified, they return to making policy recommendations on the basis of the
models, as though they did actually have something to do with reality. The casual invocation of the notion of
marginal product even by really smart economists like Krugman is an example.
Stevens paragraph two:
"There is no question that the
conclusions of neoclassical economics can, and have, been used for ideological
purposes as Mannheim would define "ideological." But I feel that this
is a bit like Darwin being hijacked by social Darwinism, or, for that matter,
Marx being hijacked by the Soviets. For fun, the next time you meet one of
these ideologues, ask them what impact the original distribution of capital has
on the theory and its conclusions (Answer: None). Then suggest that it is
indeed all for the best in the best of all possible worlds, with the modest
proposal that we transfer all of the ownership of capital from the plutocrats
to a giant public pension fund that invests for their retirement on behalf of
the workers. The whole, mathematically elegant neoclassical
machinery—regardless of whether you think it is realistic or not—runs just the
same and points to exactly the same conclusions, independent of who owns the
capital."
Again, perfectly true, but also not
representative of what real economists actually do when they enter the world of
policy proposals, which they always do.
Paul Samuelson liked to say that as far as the models were concerned, it
made no difference whether capital hired labor or labor hired capital, which
was of course perfectly true. I am not
entirely sure that Samuelson, brilliant as he was, fully understood that this
demonstrated the utter irrelevance of neo-classical economics to an
understanding of capitalism. The jibe
about Darwin being hijacked by Social Darwinism is not really quite a propos, because it is the creators of
neo-classical economics themselves who have done the hijacking. If Darwin had used his own theories to push
Social Darwinism, or if Marx himself had proposed Soviet style state capitalism,
the comparison would be more precise.
Stevens paragraph three:
"Also, it is worth remembering that Marx's methodological approach,
although less mathematical, was not that different from the neoclassicals in
its use of simplifying assumptions like perfect competition. And all theorizing
involves some degree of reduction."
Once again, true, and a really interesting point. The classical political economists and the
neo-classicals can be seen as making precisely opposite simplifications: the classsicals assume a single dominant
technique of production in each industry, which makes their reasoning nicely
formulisable using linear algebra. The
neo-classicals assume an infinite number of techniques of production in each industry
[and a production function that is continuous, hence differentiable], which
makes their reasoning nicely formulisable using calculus. But this is not at all merely an alternative simplifying
choice. The choice reflects and serves
polar opposite underlying purposes. For
the classicals, the two dominant issues
were distribution and growth. They began
with an understanding of the uneliminable class conflict between landlords and
capitalists, between capitalists and workers.
It was immediately obvious in their models that what went into the
pockets of one of the three great classes came out of the pockets of the other
two. They were right about this. It was also obvious, they thought, that the
demand for food would drive up rents, diminishing profits and therefore slowing
growth. It is not so clear that they
were right about this. The concerns of
the neo-classicals are different. They
are nicely summarized in this famous definition of economics offered by Lionel
Robbins in his classic book, An Essay
on the Nature and Significance of
Economic Science: "Economics is
the science which studies human behaviour as the relationship between ends and
scarce means which have alternative uses."
This is a definition that obscures the class conflicts that the
classicals highlighted. Now mind, formal
models being what they are, anything you can say in one model can, with enough
effort, be said in the other, but the classical model does not naturally and
easily lead you to the conclusions of the neo-classical models, and vice versa. That is where ideology enters.
Stevens paragraph four:
"Finally, what does neoclassical
economics tell us about the minimum wage? It says that if you impose a minimum
wage above the current market rate, then, like anything that goes up in price,
you risk causing a drop in demand, meaning, in this case, unemployment. Now,
some convincing empirical studies for the US have shown that, in small doses,
there is no such effect, or that employment actually appeared to increase after
the minimum wage was raised. Neoclassical theory is actually able to
accommodate this kind of result—even first year students learn about pure price
effects and versus income effects and how the latter can overwhelm the former.
But I don't think anyone really disagrees with the prediction that, if the
minimum wage were raised, say, to $1,000 per hour, employment would go down.
And so really the only point of debate is at what point will it NOT have this
effect. My sense is that it is far below what most people would think of as a living
wage--particularly for anyone with dependents. But just because neoclassical
economics tells us this, it does not mean that this must, necessarily, be the
end of the story. We can for example have a guaranteed annual income that
"end runs" the market. The theory explains and predicts what will
happen in the context of a labour market. We ignore that warning at our peril.
But it doesn't mean that we then have to conclude that there is nothing to be
done, the poor will always be with us, etc. We just have to look elsewhere for
solutions."
Quite true.
Even under socialism, the economic planner s will have to take full
account of the consequences of their decisions, and having pure hearts will not
allow them to ignore those consequences any more than being free of sin enables
me to fly like an angel.
Well, enough response. Thank you, Wallace Stevens, for a very
intelligent and thought-provoking comment, as usual.
