A funny thing happened on the way to the teaching of neoclassical economics
from David Ruccio
I often explain to students that the most controversial topic in the history of economics is the theory of capital.
It’s controversial because a theory of capital is also a theory of profits—and, therefore, what explains the existence of profits, who gets the profits, whether or not they deserve to get the profits, and so on. And different economic theories, historically and today, have offered different answers to those questions.
The issues surrounding capital are important not only because they are central to any theory of capitalism (in which profit—money begetting more money—plays a key role) but also because they inevitably arise in political discourse, especially in a presidential election year (and especially when one of the candidates has received preferential treatment on his “capital income” via the tax code and most people pay a much higher rate on their “labor income”) and when, in the midst of the Second Great Depression, labor income is declining, capital income is becoming more concentrated, and the overall distribution of income is becoming more unequal.
So, I was dismayed yesterday when, in an attempt to respond to student questions concerning Marx’s theory of surplus-value, I compared Marx’s approach with the neoclassical theory of profits as a return to capital. In Marx’s theory, profits are based on exploitation; while in neoclassical theory, profits are equal to the marginal productivity of capital.
The problem was, the students had never learned the neoclassical theory of capital and profits—even after multiple courses in neoclassical microeconomics, and many other neoclassical-based courses. How am I supposed to teach the Marxian critique of mainstream economics if the students haven’t even learned mainstream economics?
As it turns out, as Fred Moseley [pdf] explains, “the marginal productivity theory of distribution is quietly disappearing from microeconomic textbooks, both undergraduate and graduate, without mentioning to students this important omission.” Moseley suggests the theory has been dropped because of its many “fundamental and insoluble logical problems.” I don’t have a good explanation as to why it’s been dropped. But I do know that the effect of not explicitly treating the theory of capital (and therefore profits) is to leave students unaware of those problems. It also means students walk away with a business-school definition of profits (as total revenue minus total costs) and have no way of squaring that definition with the role of capital (as one of the factor services in a neoclassical production function whose return is determined in a supply-and-demand market). They don’t, therefore, know how capital fits into the larger neoclassical theory of capitalism and they’re not able to think through the various issues—theoretical, political, and ethical—concerning capital and profits.*
Since I’m a teacher, I end up teaching both theories—both the neoclassical theory of profits as the return to renting capital from households and the Marxian theory of profits as surplus-value. That way, the students know both theories, as well as their implications for economic theory and for public policy.
*It also means that someone like Matthew Yglesias can, with all seriousness, attempt to argue that Romney’s tax rate should be low by using the example of two doctors, one of whom “spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they’re capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor.” Yes, money begets more money but Yglesias is unable to offer any explanation as to where that “return” on capital comes from.