Home > Uncategorized > Marginal productivity theory — a dangerous thought virus

Marginal productivity theory — a dangerous thought virus

from Lars Syll

execThe marginal productivity theory of income distribution was born a little over a century ago. Its principle creator, John Bates Clark, was explicit that his theory was about ideology and not science. Clark wanted show that in capitalist societies, everyone got what they produced, and hence all was fair:

“It is the purpose of this work to show that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates. (John Bates Clark in The Distribution of Wealth)”

Clark was also explicit about why his theory was needed. The stability of the capitalist order was at stake! Here’s Clark again:

“The welfare of the laboring classes depends on whether they get much or little; but their attitude toward other classes—and, therefore, the stability of the social state—depends chiefly on the question, whether the amount that they get, be it large or small, is what they produce. If they create a small amount of wealth and get the whole of it, they may not seek to revolutionize society; but if it were to appear that they produce an ample amount and get only a part of it, many of them would become revolutionists, and all would have the right to do so. (John Bates Clark in The Distribution of Wealth)”

So the neoclassical theory of income distribution was born as an ideological response to Marxism. According to Marx, capitalists extract a surplus from workers, and so workers get less than what they deserve. Clark’s marginal productivity theory aimed to show that this was not true. Both capitalists and workers, Clark claimed, got what they deserved.

The message of Clark’s theory is simple: workers need to stay in their place. They already earn what they produce, so they have no right to demand more.

Blair Fix

Although card-carrying neoclassical apologetics like Greg Mankiw wants to recall John Bates Clark’s (1899) argument that marginal productivity results in an ethically just distribution, that is not something – even if it was true – we could confirm empirically, since it is impossible to separate out what is the marginal contribution of any factor of production.The hypothetical ceteris paribus addition of only one factor in a production process is often heard of in textbooks, but never seen in reality.

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 teamwork production that characterize modern societies.

History has over and over again disconfirmed the close connection between productivity and remuneration postulated in mainstream income distribution theory. The theory is obviously a collapsed theory — and when a theory is impossible to reconcile with facts there is only one thing to do — scrap it!

 

  1. lobdillj
    August 23, 2019 at 12:54 pm

    Yea, verily! This is a true fact, worthy of all men to be received.

  2. Yoshinori Shiozawa
    August 24, 2019 at 10:54 am

    The most interesting “news” for me in Blair Fix’s article in Evonomics was the results obtained by psychologist John E. Hunter (See Figure 2 of Fix’s article). This is quite remarkable and worth reading.

    Lars Syll cited the part which is related to ideology or persuasive role / function that marginal productivity theory plays in the distribution arguments. He added that measurement difficulties of marginal productivity. However, I believe it is also necessary to know the theoretical defects of marginal productivity theory. There are two main points.

    One lies in the very concept of productivity itself. Lars Syll talks about difficulty of measuring marginal productivity and he is right in this claim, but there is much more important question on the productivity concept. In order that the productivity is a measurable quantity, it must be an entity that can be well defined. On this point, Blair Fix has given a good explanation and I do not argue it. Please read the part of Fix’s article that Lars has not cited above.

    The second point lies in the logic of marginal productivity theory as a theory of distribution. It is a simple deduction from Solow-Swan production function. Indeed, assume the production function takes the form

    Y = f(W, K, L)

    where Y is the (net) product, W the labor input, K the capital used, and L the land used. Assume further that the function f is differentiable and homogeneous of order 1. Then, it is easy to show

    (a) w = f_W(W, K, L), π = f_K(W, K, L) and r = f_L(W, K, L)

    where w, π, r are respectively wage rate, profit rate and rent for the land. By the assumption of homogeneity of order 1, and by the chain rule of derivatives for composite function, we get

    (b) Y = f(W, K, L) = w W + π K + r L.

    When we admit Solow-Swan type production function, it is almost inevitable that we must accept marginal productivity theory.

    Let me also add that there is no need (as we see from above) to assume only one factor in production process. There must be some confusion in Lars Syll’s comment. However, there is a bigger trouble with Lars Syll’s argument. He often cites Robert Solow and Paul Romer as good criticizers of mainstream economics / econometrics, but their theories are not very different from marginal productivity theory, because both of them assume Solow-Swan type production functions (or more restricted Cobb-Douglass or CES production functions). Even their criticism or reflections are right, we cannot accept their theory (Classical growth theory or New [Endogenous] growth theory). I believe Lars Syll should state this explicitly.

    At last of his comment, Lars Syll again repeats his favorite dictum: When a theory is impossible to reconcile with facts there is only one thing to do — scrap it. But this is insufficient to change economics or economic thought. We need a new, better theory that can replace the old theory. If not, the old theory remains intact and governs people’s mind and ideas.

    • Frank Salter
      August 24, 2019 at 11:55 am

      What you say is true. The quantity calculus proves that there are NO theoretically valid production functions. ALL are merely concrete descriptions of single sets of data. It is a category error to ascribe theoretical meaning to any production function.

      Only theories developed from first principles’ analysis can be theoretically valid.

  3. Ken Zimmerman
    August 26, 2019 at 2:16 am

    Why do you guys continue to attack one piece of the current economics empire at a time. The whole thing is corrupt. Throw it all out and begin again. Hurt a lot fewer and help a great many more people that way.

    • Yoshinori Shiozawa
      August 26, 2019 at 3:02 am

      Ken, you should know that Solow-Swan type production function (which includes Cobb-Douglas and CES production function) lies at the base of all mainstream macroeconomics.
      If it fails, almost all macroeconomic models break down. To attack Solow-Swan type production function is to undermine whole neoclassical macroeoconomics. Do you know any model that do not contain Solow-Swan type production function?

      • Ken Zimmerman
        August 26, 2019 at 9:52 am

        Yoshinori, yes, I understand the origins of the marginalist model of production. But it’s not the only model of production. We can go back, or forward, depending on how you see things to Drucker. There are several sociological models of production. One in particular, Social Production theory is going strong right now. And there’s the long-standing Rational Choice theory of James Coleman. In psychology we have Hertzberg’s Two-Factor Theory, Maslow’s Hierarchy of Needs, the Hawthorne Effect theory, Expectancy Theory, and Three-Dimensional Theory of Attribution. Finally, there is structural-functionalism, a theory that spans sociology and anthropology.

  4. Yoshinori Shiozawa
    August 27, 2019 at 1:57 am

    Ken, are they a theory of production? In my understanding, they are at least no theory of material production. What you call sociological theory of production (and reproduction) treats production and reproduction of habitus, cultural capital, knowledge, and social relations, but not the material producion. They are important as subjects of social theory, but they have little relevance with theory of material production that is believed in economics to be determinant of income categories (wage, profits, and rents). I have once been interested in these arguments and in Bourdieu in particular. However, such sociological critiques are easily ignored by conventional economists as having no relevance to the wages and profits.

    To criticize and undermine the neoclassical core of “theory of distribution”, we need focused critique of production function and its mode of reasoning around it.

    As for James Coleman, I have bought many years ago his Foundantions of Social Theory which counts nearly one thousand pages but I am not fascinated by it so much. He tells about “micro-to-macro transition” and “macro-to-micro transition but they did not teach me almost nothing when I wrote on micro-macro-loop characteristics for human behavior (a Japanese paper written in 1999. See §§1.5.6 of Chapter 1 of our book).

    I have also studied Maslow’s theory on Hierarchy of Needs. It must be an important point for consumer demand theory and it can give some hints when we reflect on workers’ and managers’ incentives but it is too weak as a rebuttal of neoclassical distribution theory. Ken’s arguments seem too disparate and does not reach to the core of the discussion.

    • Ken Zimmerman
      August 27, 2019 at 7:51 am

      Yoshinori, I disagree 100%. All theories of production–theories of any sort–are constructed by humans and thus are cultural productions. They flow from the understandings, priorities, moralities, mathematics, etc. of the culture we share. Because our culture today in large part accepts one form or another of marginalist economic thinking as real, then marginalist production theory is real. And not just real, but preferred. But what if our culture did not accept marginalist thinking as real? How would we treat production? Right now, engineering models involved with marginalist thinking guide the production of products, from TVs to computers, from autos to clothing. Take away the marginalist part of engineering, what would our engineering look like? How would it work? If the marginalist thinking is removed from production in general, what would it look like? There would likely be no more need for capital, for example. Perhaps production would be based on Maslow’s hierarchy of needs. Or, social goals from the most to the least needed. Or, perhaps to meet the goals of some sort of happiness index. So long as we lock ourselves into the terminology and cultural biases of marginalist economic thinking, we’ll never move on to other options. That is the direction everyone on this blog keeps telling me they want to move. You’ll not get there following Yoshinori. There are limitless options to consider. Why get stuck with one, particularly one that is not only failing more each day but each day becomes a greater threat to the survival of our species.

  5. Yoshinori Shiozawa
    August 27, 2019 at 8:31 am

    Do not complicate everything mixing every other thing. It only means that your are not ready to criticize anything with sharply focused argument. To undermine marginal productivity theory, it needs only two thing.

    One is to show how and why marginal productivity theory and its base aggregate production function (or Solow-Swan type production function) are wrong. For this, we have already a good book:
    Jesus Felipe and John McCombie (2013) The Aggregate Production Function and the Measurement of Technical Change, Edward Elgar.

    The other is to present a new, good theory that does not draw on marginal productivity nor on aggregate production functions. Such a theory already exists. See our book:
    Shiozawa, Morika and Taniguchi (2019) The Microfoundations of Evolutionary Economics, Springer. Readers can read Preface at
    https://www.researchgate.net/publication/334508762_Microfoundations_of_Evolutionary_Economics

    • Ken Zimmerman
      August 27, 2019 at 11:14 am

      Yoshinori, okay, let’s get to the problem directly. In order to do what all these “equations” of Solow, etc. say they can show we need interval data. Economics has no interval data beyond the basics of production. How many of X are produced, how many of Y are not produced, how much (e.g., metric tons) of iron, zinc, platinum, etc. are used in production. But the bigger questions have at best ordinal data. Why is 100 of X produced instead of 10, 50, or 0, Because a survey says people want this or that. Because the company makes less profit on one vs. another. How much less or more depends on a hundred conditions the company can’t identify or measure. How many workers needed depends on the machines purchased, which depends on the size of the company and where it’s located and what’s available at the time, and what local skill and pay standards are. Planners can consider all of this but cannot optimize it. In other words, ordinal (ordered, ranked) is the best data we have for the important questions. Yet, we pretend it’s interval data or maybe ratio, or both. It’s just a game of pretend. Nothing wrong with pretending, so long as you have some solid observational and historical data for decision making.

    • Yoshinori Shiozawa
      August 27, 2019 at 1:52 pm

      In my understanding, to criticize a theory or a concept (for example, marginal productivity theory or aggregate production function), it is necessary to know what it means. When one does not know what it means, one should refrain from criticizing it. If one dares to do without knowing what it means, such a criticism turns out most probably meaningless and often it backfires.

      • Ken Zimmerman
        August 27, 2019 at 10:07 pm

        Yoshinori, marginal productivity theory. Production level/cost = a dash of X + a glob of Y + a whisper of Z. Anything else? Of course we’re not really certain of the significance of X, Y, Z, collectively or individually, or how much of each needs to be in the equation to reach a specific goal indeterminately fixed for explicit and tacit reasons. And people say economists don’t know what’s they’re doing!

      • Rob
        August 27, 2019 at 10:21 pm

        Yoshinori’s mouth backfires and shoots himself in the foot again. He simply cannot refrain from nasty ad hominem when faced with the reality of his utterly useless literature-only pontifications, resorting to ex cathedra pronouncements others simply do not understand. But they do, for what is plainly visible to others falls on deaf ears of literature-only story telling pseudo-scientists (aka economists) who cannot see their own hubris consuming their good sense.
        .

        In the absence of the commitment to contributing to useful knowledge, the behavior of the work of academic economists have been dominated by two other major forces: (1) the mathematical games that are played for the sake of getting published and acquiring grant money, and (2) cronyism within the profession, which, in combination with the mathematical game playing, has dominated the reward system and incentive system of the profession. (Payson 2017, 10)

        .
        Like a used car salesman hawking lemons masquerading as Cadillac’s, or a street vendor screaming, “Look at me, look at me, buy my lemons for only $100!”, he tries to sell his utterly useless new literature-only storytelling book.

  6. August 27, 2019 at 9:54 am

    Here Ken’s position is justified by what Yoshinori wrote on August 25:

    “(1) Stop working on macroeconomic models. Macroeconomy is too complex a system and is adaptable to no macroeconomic models. In that case, the best adjustment for econometrics is to retreat from fitting macroeconomics models to an economy.”

    The problem is not the macro-economic perspective but the typical understanding by one who has been 40 years an economist of what is meant by the word ‘model’. The simple circuit of a crystal set is a model via which one can see and communicate how radio reception works, and the traffic over the airwaves is just as complex as that in a global economy.

    As far as I am concerned Ken shot himself in the foot when, having said “So long as we lock ourselves into the terminology and cultural biases of marginalist economic thinking, we’ll never move on to other options”, he went on to say “That is the direction everyone on this blog keeps telling me they want to move”. When I have offered him (and indeed everyone here, and Yoshinari in a detailed outline) such a complete rethink, all he has done is sabotage engagement with it by ridiculing the (to him unfamiliar) culture it had come from.

    • Ken Zimmerman
      August 27, 2019 at 11:39 am

      Dave, don’t know who shot who, or why. But it’s my view margianlist thinking is a crock. It pretends to provide answers to the questions we face about what humans need to support themselves and live a rewarding life. It’s gives none. Except perhaps to tell non-economists, learn economics and mathematics, then you’ll understand. You won’t. Economists of today have constructed a basically inhuman system which they claim meets the needs and wants of humans. It doesn’t. In a world with enough food for everyone, with the ability to create enough housing, clothing, health care for everyone, but still over half of the population, even of the richest country in the world lack these basics. Each day more of the population slips into debt from which most will never emerge. American college students now have $1.6 trillion in debt from education needed to make all the world a functional place for everyone. Economic inequality is rising around the world, and particularly in the US. So much so that even the 1% are now worried about being murdered in their beds in violent revolution. And the only good news. The SOB David Koch dies. A man who used millions of dollars to create a nation and a world that served his particular interests. The only thing worst than that is the cynical politicians who accepted his millions and took his orders. Unless you’re psychopathic this is not a world of which anyone should be proud. The control of wealth and thus power must change, or our species I fear will be extinct in 100 years or less. While societies burn, here we stand debating the ins and outs of marginalist production theory that never had any positive impact on anything.

      • August 27, 2019 at 3:12 pm

        Ken, if you head what I wrote, you would have seen that I agreed with you. What you say now didn’t need saying: that’s where most of us here started, and anyone with his eyes open can see it for himself. My way of expressing it is that what we have now is not economics, it is capitalism. I have spent most of my life trying first to understand and then to find ways of explaining what genuine economics is, and why it morphed into capitalism (i.e. people being different and some psychopathic); and how to change what we have back to what we should have with an intellectual and procedural rather than a bloody revolution. You can join in debates about the ins and outs of marginalist productivity theory if you must, but you would do better to use your obvious talents to look for and explore constructive contributions (here the crystal set form of iconic modelling) instead of smothering them with your pessimism.

      • Ken Zimmerman
        August 28, 2019 at 12:10 am

        Dave, sometimes bloody revolutions are necessary. In whichever sense the term bloody is used here. Some “constructive contributions,” I hope.

        I take economic life to be the activities through which people produce, circulate and consume things, the ways that people and societies secure their subsistence or provision themselves. Here “things” includes material objects as well as the immaterial: labor, services, knowledge and myth, names and charms, and so on. In different times and places, different ones of these will be important resources in economic life, and when they are important, they come within the scope of economic anthropologists. In contrast economists tend to identify economic life in terms of the sorts of mental calculus that individuals use and the decisions that they make (for example, utility maximization), which stresses the form of thought of the person being studied. Currently, many economists explain economic life in terms of self-regulating markets. Anthropologists’ view is broader, however. While they would recognize the growing importance of such markets in economic life, anthropologists would never take these markets as “natural” or inherent for economic life. Such markets are merely one possibility for organizing economic life.

        The analytic starting point of economics is the individual; the analytic starting points of economic anthropology are groups, institutions, and society. In considering the individual, the anthropologist focuses on the actor as an entity constructed out of culture and society, as “actor-in-interaction,” or “actor-in-society.” Often, moreover, anthropologists take groups and society as phenomena sui generis, and do not consider the individual actor as such at all. In microeconomics the individual is assumed to have a given and stable set of preferences and chooses that alternative line of action which maximizes utility (individual) or profit (firm). Economic theory deems that this is economically rational action. Anthropology, however, includes several possible types of economic action. For example, using Weber’s typology, economic action can be either rational, traditional, or speculative-irrational. Noteworthy is that, except for residual mention of “habits” and “rules of thumb,” economists give no place to traditional economic action (which, arguably, constitutes its most common form). Economists see only one form of rationality, while anthropologists see many in the data. That’s why anthropologists consider rationality a variable to be studied, while economists take it (their one version of it) as an assumption. Economists tend to regard the meaning of economic action as derivable from the relation between given tastes on the one hand and the prices and quantity of goods and services on the other. In other words, a mathematical equation. Anthropologists see meaning more broadly as what constitutes human economic actions and objects. For anthropologists, meanings are historically constructed and must be investigated empirically, and are not simply derivable from assumptions and external circumstances. Finally, anthropologists give full and salient consideration of power in economic actions, particularly in the capitalist economy. By contrast, microeconomics has tended to regard economic action as an exchange among equals and has thus had difficulty in incorporating the power dimension. Mostly economists have given up any attempt to make the effort. After all, perfect competition and all that.

      • August 27, 2019 at 3:17 pm

        My apologies: opening should have read ‘if you had read what I wrote’. “My eyes are dim; I cannot see …”.

  7. lobdillj
    August 27, 2019 at 12:28 pm

    Ken, I couldn’t agree more!

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