Home > RWER > Piketty finally admits marginal productivity theory is wrong

Piketty finally admits marginal productivity theory is wrong

from Lars Syll


In yours truly’s article Piketty and the limits of marginal productivity the author of Capital in the Twenty-First Century is criticized for not being prepared to fully take the consequences of marginal productivity theory — and the alleged close connection between productivity and remuneration postulated in mainstream income distribution theory — over and over again being disconfirmed both by history and, as shown already by Sraffa in the 1920s and in the Cambridge capital controversy in the 1960s, also from a theoretical point of view:

 

Having read Piketty (2014, p. 332) no one ought to doubt that the idea that capitalism is an expression of impartial market forces of supply and demand, bears but little resemblance to actual reality:

“It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously, or at the very least to be rather optimistic in gauging their marginal productivity.”

But although I agree with Piketty on the obvious – at least to anyone not equipped with ideological blinders – insufficiency and limitation of neoclassical marginal productivity theory to explain the growth of top 1 % incomes, I strongly disagree with his rather unwarranted belief that when it comes to more ordinary wealth and income, the marginal productivity theory somehow should still be considered applicable. It is not.

Wealth and income distribution, both individual and functional, in a market society is to an overwhelmingly high degree influenced by institutionalized political and economic norms and power relations, things that have relatively little to do with marginal productivity in complete and profit-maximizing competitive market models – not to mention how extremely difficult, if not outright impossible it is to empirically disentangle and measure different individuals’ contributions in the typical team work production that characterize modern societies; or, especially when it comes to “capital,” what it is supposed to mean and how to measure it. Remunerations, a fortiori, do not necessarily correspond to any marginal product of different factors of production – or to “compensating differentials” due to non-monetary characteristics of different jobs, natural ability, effort or chance.

It’s pleasing to now see that Piketty has taken this critique to heart. In an interview in Potemkin Review he now admits that marginal productivity explanations of income is wanting, not only for those at the very top, but, generally:

PR: At the same time as you have faced such neoclassical criticisms to your right, some heterodox economists have criticized you for not breaking fully with the neoclassical framework. Don’t you think it would be useful to challenge more directly some of the theoretical elements of the neoclassical consensus?

Piketty: I do not believe in the basic neoclassical model. But I think it is a language that is important to use in order to respond to those who believe that if the world worked that way everything would be fine. And one of the messages of my book is, first, it does not work that way, and second, even if it did, things would still be almost as bad.

PR: Are you saying that notwithstanding your rhetorical strategy to communicate with neoclassical economists on a ground where they feel comfortable, in your views it is not just that you reject marginal productivity explanations of income for those at the very top but more generally as well?

Piketty: Yes, I think bargaining power is very important for the determination of the relative shares of capital and labor in national income.

  1. blocke
    January 16, 2015 at 1:26 pm

    “Wealth and income distribution, both individual and functional, in a market society is to an overwhelmingly high degree influenced by institutionalized political and economic norms and power relations, things that have relatively little to do with marginal productivity in complete and profit-maximizing competitive market models”

    If this is now a penetrating glimpse into the obvious, then why are we not in economics studying “institutionalize political and economic norms and power relations” in our economic curriculum. It requires institutional and methodological retooling, but get on with it.

    • Bob
      January 16, 2015 at 3:12 pm

      Because those that control the institutions, fund the student placements and set the curriculum’s could not have it. It’s possibly that simple.

      • January 16, 2015 at 5:09 pm

        “Because those that control the institutions, fund the student placements and set the curriculum’s could not have it.”

        I would agree with this, but I would further add that this is a cyclical process in which we get things mostly right in times of major crisis and then get less and less right as we move through times of prosperity. I would mention an LRC circuit as an analogy, but the way knowledge moves through our society is fundamentally changing.

  2. Bob
    January 16, 2015 at 3:11 pm

    I think your article has cut off the last short, but important, reply:

    “Yes, I think bargaining power is very important for the determination of the relative shares of capital and labor in national income. It is perfectly clear to me that the decline of labor unions, globalization, and the possibility of international investors to put different countries in competition with one another–not only different groups of workers, but even different countries–have contributed to the rise in the capital share.”

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