Home > Uncategorized > What can students possibly learn through impossible examples?

What can students possibly learn through impossible examples?

from Emmanuelle Bénicourt, Sophie Jallais and Camille Noûs and RWER #98

The case of distribution of revenue

Marginal product is a key concept of neo-classical economics, for, in the perfect competition model, it determines inputs’ demands (the quantities chosen by a competitive profit-maximizing firm are such that the value of the input’s marginal product equals the input’s real price). It is then a core concept of neoclassical distribution theory, the so-called ‘marginal productivity theory of income distribution’ (McConnel, Brue & Flynn 2018, chapter 16, 6th section’s title, 325), in which the price of each input equals its marginal productivity. This is generally what appears in the chapter of beginners’ textbooks which deals with “the markets for the factors of production”, which students read thinking that marginal productivity of an input is the increase in the quantity of output that arises from one additional unit of that input, and “of course” from additional used quantities of all other inputs.

Yet, concerning the presentation of distribution theory, using impossible examples to explain marginal product has two unfortunate pedagogical consequences, consequences that are all the more unfortunate that they happen to be conflicting. On the one hand, (i) it leads to an absurd, and sometimes inconsistent, income distribution theory; on the other hand, (ii) it (more or less explicitly) encourages students to interpret our world through this dubious theory without further questioning.

Our beginner students, to whom the concept of the marginal product (most of the time, labor) has been presented through examples with a fixed-proportion production function and excess quantities of all inputs (except labor), must surely be thinking that an additional unit of labor leads to something similar to the consequences of the withdrawal of one unit of factor, to which Hicks draws attention in the following passage:

“If the proportions are fixed, then […] the withdrawal of one unit will lead to a far greater diminution in the product that can fairly be attributed to that unit alone, since its removal put corresponding units of other factors out of action. If all the factors were paid according to their marginal products calculated in this second manner, their total pay would undoubtedly be far in excess of the value of the goods they produced. Which is absurd.” (Hicks 1932, 81)

For example, if returns to scale are constant, and if we choose units of measure so that the quantity of each of the n inputs needed to produce one unit of output equals 1, if the quantities of n – 1 inputs are sufficiently excessive, then an additional unit of the nth input will lead to the production of an additional unit of output. If we calculate the marginal product of each input in this manner, for each unit of output produced, the total pay for inputs will be n times greater than the total product!

This ill-defined concept is also clearly inconsistent with the normative content of the marginal productivity theory of distribution, be it implicit — as when Mankiw speaks about the marginal product of a factor as “its marginal contribution to the production of goods and services” (Mankiw 2015, 390, emphasis added) — or explicit — as in McConnel, Brue and Flynn 2018, which claims: “In this marginal productivity theory of income distribution, income is distributed according to contribution to society’s output”, and “To each according to the value of what he or she creates” (McConnel, Brue & Flynn 2018, 325). For, when inputs are complements, their physical productive contributions are impossible to disentangle: it is obviously impossible to separate out the productive contribution of each input.

read more: http://www.paecon.net/PAEReview/issue98/BenicourtJallaisNous98.pdf

  1. Meta Capitalism
    January 20, 2022 at 3:03 pm

    What timing! I just spent the last few hours gather citations on this very topic (Hill and Myatt 2010). The deeper one looks the more questionable are the claim that new technology leads to higher real wages. The real question is who owns your labor?

    Back in the 1950s, Robert Solow, father of economic growth theory, attempted to pin down exactly what had caused the US economy to grow over the past half-century. His seminal growth modelbased on the same theoretical foundations as the Circular Flow diagramassumed it would be due to the productivity gains arising from labour and capital working ever more effectively together. But when he plugged US data into the model’s equations, to his surprise he found that capital invested per worker explained a mere 13 percent of the American economy’s growth over the previous 40 years, and he was forced to ascribe the unexplained remaining 87 percent to ‘technical change’.34 It was an embarrassingly large residual, leading his contemporary Moses Abramovitz, whose own calculations were turning up similarly large explanatory gaps, to admit that this residual was effectively a ‘measure of our ignorance about the causes of economic growth’.35 (Raworth 2017, 223)

  2. yoshinorishiozawa
    January 20, 2022 at 6:12 pm

    In Chapter 2 of his General Theory, J. M. Keynes claimed that “The classical (i.e. neoclassical) theory of employment has been based … on two fundamental postulates.”

    Two postulates were formulated by Keynes as follows:

    Postulate I. The wage is equal to the marginal product of labour.

    Postulates II. The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment.

    Postulate I is but the marginal theory of value and distribution of neoclassical economics. Keynes did not refute Postulate I but, by hindsight, we now know that we must also reject this postulate.

    The three authors of “The riddle of the use of impossible examples” have shown how Postulate I still survives in microeconomics textbooks. For example, Greg Makiw is one of the most famous leaders of New Keynesian economics by his menu cost theory of price rigidity.

    Heterodox economics should overthrow both two postulates of neoclassical economics. Various misunderstandings followed from them. Keynes admitted Postulate I as valid but it was his error, which is an example of many errors he committed. The three authors explained persuasively how the basic theories of neoclassical economics are absurd (impossible examples).  

    Our next problem must be : How can Keynes’s theory can be reformulated when we reject two Postulates?

    For this point, see my paper:The principle of effective demand: a new formulation. Review of Keynesian Studies 3: 67-95 (Open access journal)

    In Section IV Questions regarding Price Changes and Choice of Production Techniques, I showed that, even if we admit there are continuum of production techniques that form either Cobb-Douglass or CES (Constant Elasticity of Substitution) functions as they are supposed in many of neoclassical economic models, it is proved that no substitution of inputs occurs in the economy as a whole. This is an emergent property that is not observed for firm-level choice of production techniques. This invalidates the neoclassical theory of value and distribution from its foundations. It also proves that classical theory of value à la Ricardo is more appropriate than the neoclassical theory of value. My paper has shown that Ricardo’s cost-of-production theory of value and Keynes’s principle of effective demand are in fact not only compatible but afford two aspects of a new macroeconomic theory, which was still obscure at the time of Sraffa, Kaldor and Pasinetti. Pleas see my comment on Lars Syll’s post of January 17, 2022 “Cambridge economics has died out”

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