I know. I wrote I wouldn’t be able to comment on Thomas Piketty’s book, Capital in the Twenty-First Century, until I found the time to read it, which won’t happen until the semester is over.
But the debate about the book is taking off and I simply don’t have the patience to wait until my lectures are over and final grades turned in. So, permit me, for the time being, to comment on the commentary.
Thomas Palley has observed that “Neoclassical economists have always talked of capital (K). The forbidden subject is capitalism.” Yes, but, even in talking of capital, they have a problem, one that was addressed during the 1960s in the Cambridge capital controversy. As Joan Robinson argued (and as my students used to learn in Principles of Microeconomics), capitalist income (total profit as the return on capital) is defined as the rate of profit multiplied by the amount of capital. But the measurement of the “amount of capital” involves adding up quite incomparable physical objects – adding the number of assembly-lines to the number of shovels, for example. That is, just as one cannot add heterogeneous “apples and oranges,” we cannot simply add up simple units of “capital,” unless one knows the price of capital, which is the rate of profit. Thus, you can’t use the amount of capital (as in the neoclassical aggregate production function) to determine the rate of return on capital—unless you already know the rate of profit.
That’s the thorny problem Paul Krugman simply sidesteps in defending Piketty’s use of the aggregate production function. Even Paul Samuelson had to concede the validity of Robinson’s critique.
But Krugman is right in arguing “you really don’t need to reject standard economics either to explain high inequality or to consider it a bad thing.” I agree. What’s interesting is that, as Piketty shows, it’s possible to analyze and criticize inequality using some of the tools of neoclassical economics. Not easy but it’s possible. Which means that neoclassical economists, for the most part, choose not to try to analyze and criticize inequality. In other words, the fact that they don’t spend much of their time—in teaching, research, and offering policy advice—in analyzing and criticizing the grotesque levels of inequality we’ve seen in recent decades is, in part, an ethical question. They could but they don’t.
And that’s perhaps an even more damaging critique of mainstream economics than the capital controversy itself.
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