A LENGTHY RESPONSE TO WALLACE STEVENS

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.