I still do not have a copy of Piketty's book, but watching the ongoing debates it has triggered has been quite fascinating, with the recent subtext of Paul Krugman (and a few others, notably Simon Wren-Lewis) arguing with various heterodox economists over it, particularly Jamie Galbraith and most recently Tom Palley, standing out quite noticeably. I was frankly not all that impressed by Palley's latest bit on flim-flam, but in attempting to rebut it, Paul Krugman has just up and blown it in such a massive and embarrassing way I simply cannot resist commenting on it.
So, he comments on the "hangups of the heterodox," which I just tried to link to, but it did not work (sorry about that, but Mark Thoma will probably link to it). Anyway, Krugman says a number of not unreasonable things, such as noting that he has noted that when an economy is in a liquidity trap, flexible prices may be destabilizing. But then at the end, when he attempts to deliver what he obviously considers to be the ultimate coup de grace, he does it, not only blows it, but falls flat on his face in a massive error. I quote his final paragraph:
"And what's going on here, I think, is a fairly desperate attempt to claim that the Great Recession and its unfortunate aftermath somehow prove that Joan Robinson and Nicholas Kaldor were right in the Cambridge controversies of the 1960s. It's a huge non sequitur, even if you think they were indeed (which you shouldn't.) But that's what seems to be happening."
OK, I do not think that is what Galbraith or Palley are arguing, although Jamie in particular is making a case that Piketty wrongly ignores the capital theory debates, and Krugman has been whonking on about how the marginal productivity theory of income distribution is a "good first pass" on at least the factor income part of it. But no, that is not where Krugman falls down.
It is in his parenthetical aside, that "you shouldn't" think that Robinson and Kaldor (who was not one of the main participants in that debate from the Cambridge, UK side, and I say that as one who has recently been labeled a "Kaldorian") were right in the debate. The problem is that Paul Samuelson agreed that in fact Robinson and Piero Sraffa (and Garegnani and Pasinetti) were in fact right. The possibility of reswitching does undermine profoundly the marginal productivity theory of factor income distribution, especially for capital. He did so in his "Summing Up" paper after the symposium on reswitching in the QJE in 1966. His final sentence of that paper, after going through the arguments in several papers was "The foundations of economic theory are built on sand."
Krugman makes a lot of good points, but he really needs to get it together about what went down during the Cambridge capital theory controversies. Robinson and Sraffa were right, and Paul Samuelson said so. Period.