January 1, 2015

A particularly silly critique

Comment on 'Piketty and the elasticity of substitution'

Blog-Reference see also later Blog-Reference

“A particularly technical and effective critique of Piketty is ... that for capital returns to be consistently higher than the overall growth of the economy – or “r > g” as framed by Piketty – ... the elasticity of substitution between capital and labor, which needs to be greater than 1 for r to be consistently higher than g.” (quote from intro)

In order to buy this argument one has to buy its premises and these premises are known to be false. The first rule of scientific inquiry has been aptly put by Davidson:

“..., before accepting the conclusions of any economist’s model as applicable to the real world, the careful student should always examine and be prepared to criticize the applicability of the fundamental postulates of the model; for, in the absence of any mistake in logic, the axioms of the model determine its conclusions.” (2002, p. 41), see also (Keynes, 1973, p. xxi)

The elasticity argument presupposes the existence of of production function with convenient properties. There is no such thing. And any graduate student could know this.

“Orthodox economists operate with concepts like continuous substitutability in consumption and production, positively sloped industry supply curves, and well-behaved aggregate production functions, for which there is little or no empirical support, because they are wedded to a political myth of the market as a self-regulating mechanism.” (Blaug, 1984, p. 973)

Not only that there is empirical support lacking, any undergraduate student of physics laughs out loud when confronted with an economist's production function.

“The idea of a path-independent transformation of one set of physical objects into another violates so many physical laws that one can only marvel at the audacity of those who wrap themselves in the banner of physics before marching off to do battle with the opponents of production functions.” (Mirowski, 1995, p. 327)

An effective critique does not waste time with the green cheese assumptionism economists are famous for.

Suffice it to mention that capital, profit maximization, decreasing returns, equilibrium and many other notions of marginalism are nonentities.

The worst thing of all, though, is that economists are talking about distribution without knowing what profit is.

“A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10), for the correct approach see (2014; 2014)

The discussion about the elasticity of substitution is in no way different from the discussion about how many angels can dance on the point of a pin.

That the graduate students at MIT are not aware of this is small surprise. They even accept supply-demand-equilibrium as an explanation. What is a real surprise is that this shallow argumentation is taken seriously on this blog.

To be as clear as possible: Marginalism is Zombie-Economics (Quiggin, 2010).

Egmont Kakarot-Handtke


References
Blaug, M. (1984). Review: Why Economics is not Yet a Science. Economic Journal,
94(376): 972–973. URL
Davidson, P. (2002). Financial Markets, Money and the Real World. Cheltenham,
Northampton, MA: Edward Elgar.
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume
(Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave
Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014a). The Profit Theory is False Since Adam Smith. What
About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
Macmillan. (1936).
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us.
Princeton, NJ, Oxford: Princeton University Press.