On Piketty "Not Reading Capital"

Did he or didn't he?:

Like his predecessors, Marx totally neglected the possibility of durable technological progress and steadily increasing productivity, which is a force that can to some extent serve as a counterweight to the process of accumulation and concentration of private capital.  

My conclusions are less apocalyptic than those implied by Marx’s principle of infinite accumulation and perpetual divergence (since Marx’s theory implicitly relies on a strict assumption of zero productivity growth over the long run).

For Marx, the central mechanism by which “the bourgeoisie digs its own grave” corresponded to what I referred to in the Introduction as “the principle of infinite accumulation”: capitalists accumulate ever increasing quantities of capital, which ultimately leads inexorably to a falling rate of profit (i.e., return on capital) and eventually to their own downfall. Marx did not use mathematical models, and his prose was not always limpid, so it is difficult to be sure what he had in mind. But one logically consistent way of interpreting his thought is to consider the dynamic law β = s / g in the special case where the growth rate g is zero or very close to zero. 

In Marx’s mind, as in the minds of all nineteenth- and early twentieth-century economists before Robert Solow did his work on growth in the 1950s, the very idea of structural growth, driven by permanent and durable growth of productivity, was not clearly identified or formulated.... Today we know that long-term structural growth is possible only because of productivity growth. But this was not obvious in Marx’s time, owing to lack of historical perspective and good data.

That Marx actually had a model of this kind in mind (i.e., a model based on infinite accumulation of capital) is confirmed by his use on several occasions of the account books of industrial firms with very high capital intensities. In volume 1 of Capital, for instance, he uses the books of a textile factory, which were conveyed to him, he says, “by the owner,” 

Marx was also an assiduous reader of British parliamentary reports from the period 1820–1860. He used these reports to document the misery of wage workers, workplace accidents, deplorable health conditions, and more generally the rapacity of the owners of industrial capital. He also used statistics derived from taxes imposed on profits from different sources, which showed a very rapid increase of industrial profits in Britain during the 1840s. Marx even tried—in a very impressionistic fashion, to be sure—to make use of probate statistics in order to show that the largest British fortunes had increased dramatically since the Napoleonic wars.  

The problem is that despite these important intuitions, Marx usually adopted a fairly anecdotal and unsystematic approach to the available statistics. 

Marx seems to have missed entirely the work on national accounting that was developing around him, and this is all the more unfortunate in that it would have enabled him to some extent to confirm his intuitions concerning the vast accumulation of private capital in this period and above all to clarify his explanatory model. 

No doubt Marx’s literary talent partially accounts for his immense influence.

In Chapter 6 I return to the theme of Marx’s use of statistics. To summarize: he occasionally sought to make use of the best available statistics of the day (which were better than the statistics available to Malthus and Ricardo but still quite rudimentary), but he usually did so in a rather impressionistic way and without always establishing a clear connection to his theoretical argument.

Gary Becker: Able To Disagree Without Being Disagreeable

This past weekend I toasted Ed Nell at his retirement function at the New School on being "a member of a vanishing species, a true gentleman and scholar of the Old School."  The death of Gary Becker reduces by one the size of that species, given that while Ed is now retired, he is still alive and hopefully still active, but Becker is no longer among us.

In making that toast I noted that many now view such a label as ironic or even silly, and few under the age of 40, or maybe even 50, would take it seriously.  "Scholar" is one thing and still generally OK when appropriate (clearly so in both of their cases), but "gentleman" is a much more questionable term, with many essentially instantly asuming that its use implies that the person in question is probably a classist or sexist or some other undesirable "ist," and I would probably agree that anybody running around claimng loudly to be one is likely to also be one of these not so admirable "ists."  But, with that caveat of being "of the Old School," this means that the person in question is not one of those "ists."  They respect others and are polite and friendly to others, even when they disagree with those others.  Indeed, the mark of this is being able to disagree without being disagreeable, something that applied to both of these Old School gentleman-scholars.

I did not know Gary Becker at all well.  However, I did have a number of professional interactions with him over the years.  Most of these involved in some way my editing journals that have behavioral economics as a main theme of what they publish.  Justin Wolfers has just posted a claim that Becker was really the frist behavioral economist, even while admitting that he would not have liked to have labeled himself as such.  In general, Becker has been viewed by most behavioral economists as "The Enemy," probably the most important and influential scholar advocating a strongly rationalistic approach to economics, even as he took a broad view of what might enter into a person's preferences, which might include altruism and concern for others.  In any case, in all my personal and professional dealings with Gary Becker, he was always the utmost gentleman and scholar, able to disagree without being in the least disagreeable, a model gentleman-scholar.

Without doubt, however, Becker introduced into sociology, law, and several other disciplines an approach from economics that emphasized analysis based on a rational agent approach, and the influence of this will continue, and these models certainly serve as benchmarks, even when they are not fully correct.  He has certainly been the most important figure since WW II, indeed, possibly in the entire history of economics, to have spread this view, even as he took a moderate view of what constitutes what it is that agents prefer or are seeking to maximze in a possible utility function.  I have also heard that he, along with several others of his colleagues at Chicago, were unhappy and dismissive when they received word that the founder of behavioral economics, the late Herbert Simon, had received a Nobel Prize in 1978, although I cannot verify that for certain.  Regarding these reported attitudes, I respectfully disagree.

This may not be very proper, but I am going to poke at his broader perspective, not on ideological grounds as many reading this might, but on substantive grounds, while keeping in mind that he always was indeed the perfeect gentleman-scholar (of the Old School).  So, Tyler Cowen at Marginal Revolution linked to a 1962 paper by Becker in the JPE, "Irrational behavior and economic theory," which Tyler described as showing that the theorems of economic theory hold even in the face of irrational behavior.  I must report that this does not appear to be the case, and that this paper is much weaker in its arguments than I expected, although I suspect Becker would have provided more sophisticated arguments in more recent years.

So, the paper follows strongly on the "survivalist" arguments of Alchian and Friedman, that individuals and firms may not know what they are doing or be engaging in conscious optimization, but that those who survive the best will be those who are in fact coming closest to optimizing.  However, Becker pushes the argument further.  He identifies "rational behavior" as implying "downward-sloping demand curves," and while later in the paper he refers to this as a "tendency," early in the paper he simply asserts it to be true, no matter what.  He does not even recognize the theoretical possibility of Giffen goods, which have since been shown fairly strongly to exist in at least some cases (rice in China for one).  I suspect he was listening to George Stigler, who strongly asserted that there were no empirical Giffen goods, and in any case, Becker does not offer any possible exceptions in particular, although  using "tend" in places later in the paper.  In any case, Becker accepted that individuals might "behave irrationally," with impulse buying his main example, but then argued that they, and especially aggregated markets, and also firms, would nevertheless face downward-sloping demand curves due to budget constraints. Sorry, but no dice.

I note an even more striking possible exception to his claims about downward-sloping demand curves and indeed how these relate back to the fundamental argument about rationality.  I am thinking about speculative bubbles.  Now, at the time Becker wrote, he was almost certainly under the "survivalist" influence of Milton Friedman who had not too long previously dismissed the idea that speculative bubbles might lead to instability in foreign exchange markets on the grounds that speculators would lose money and be driven out of the market.  They would not survive because they would stupidly buy high and sell low.  However, we have since learned from DeLong et al that in fact "noise traders" can not only survive but can even be the best performers in a market.  Ooops.

And in fact we have seen lots of markets in recent years since Becker's 62 paper that certainly look like bubbles, with the dotcom stock market one and housing markets in many nations more.  On the surface, these phenomena look like violations of "the law of demand."  Prices rise and people buy more of whatever it is, and vice versa, selling (or buying less) when price falls.  We see lots of this out there.  This is not all that uncommon.  So, the usual explanation in standard views is that the demand curve is shifting outwards, although still downward sloping.  It is shifting because ceteris is not paribus, and in particular, expectations are changing.  Now, there are some special cases where such shifting expectations mght be rational, but the vast majority of evidence suggests that when we see this, we are not seeing rational behavior but what Minsky and Kindleberger would call a "mania."  These are cases where irrational behavior does not result in clearly downward-sloping demand curves.  I deeply respect Becker's scholarship and intellect, but on this one he was misguided.

BTW, I cannot resist closing on a personal note.  Many years ago, indeed, decades ago, I submitted a paper to a journal about speculative bubble dynamics.  The paper was rejected with a referee declaring that if bubbles existed that would mean that Giffen goods existed, and George Stigler had shown that they do not.  End of report and basis of paper rejection. And, indeed, as I suggested above, I think Stigler misled Becker on that matter back in those days as well, although Becker may well  have changed his mind on these matters in more recent years.

Let me close by noting one more positive aspect of Becker and his intellect. While I disagree (as noted above) with many things he argued, I also recognize that he was consistent in his views.  He was not a simple ideologue or party hack, and supported things that many who admire him did not but that were consistent with his broader philosophy.  He was indeed, whatever one thinks or thought of his arguments or positions, a genuine gentleman and scholar of the Old School.

Barkley Rosser

Becker and Marx

On Andrew Sullivan's Daily Dish, Justin Wolfers is quoted comparing Becker to Marx :

"no economist since Marx has had such a profound impact across the social sciences, transforming not just economics, but also sociology, political science, criminology, demography and legal scholarship"


I want to compare them in another respect. Both  championed different forms of Rabid Economism. Marx's economism was holist,  Becker's individualist, but both forms are equally reductionist and equally  imbecilic. Marx's materialism reduces the cultural, the political, the ethical to super-structural epiphenomena: all were just distorted reflections of the underlying reality of class struggle. Becker thinks all human agency simply consists of maximizing utility. For neither thinker do human beings have the ability to think and act  "for the sake of the world," as Hannah Arendt would say. For each, we are deluding ourselves if we think that acting can ever be a matter of  trying to get things right - to do what is called for, to believe what is warranted -independent of what our interests dictate. For both, in other words, the concept of disinterested action - including the disinterested pursuit of truth - is a snare and a delusion.  Finally, in this latter respect, both systems of thought are self-undermining:   neither can make sense of  itself as a disinterested attempt to understand the human condition.


(I owe my appreciation of this parallel to Deirdre's McCloskey hilarious charcterization of Stigler as "the last vulgar Marxist.")

Funding for the Veterans Health Administration

Greg Mankiw tries to revive the case of a privatized VHA by citing an extremely unfortunate issue with respect to how the Phoenix VHA rationed services:

Maybe privatization would solve the problem. If veterans had vouchers that they could take to competing healthcare providers, they would likely not have had to wait as long.

Isn’t the real issue better discussed here?

The Department of Veterans Affairs spends more today in inflation adjusted dollars than it did after World War II and the Vietnam War, when millions of troops returned from the battlefield, according to federal budget figures … Two factors more than any others have driven health care costs higher at the Dayton VA Medical Center, officials said. Aging Vietnam veterans who have more health needs as they grow older, and the return home of thousands of veterans from the battlegrounds of Iraq and Afghanistan. "It's the number of veterans returning from the war, but it's also the conditions they are returning with," said Dr. William J. Germann, Dayton VA chief of primary care service and a retired Air Force brigadier general. "There are a number of veterans coming back dysfunctional and as a result may not be able to hold a job."

I have to wonder whether the economic advisors to the President who made that horrifically expensive decision to invade Iraq in 2003 advised this President that William Kristol’s forecast was way off base. As you may recall – Kristol said the cost of invading Iraq would be less than 0.2% of GDP. I also have to wonder why these economic advisors thought we could continue to lower tax rates when any sensible person would have known that the future costs of the Iraq War to the nation would be enormous. While it is true that VHA funding has risen sharply – it has not increased by a sufficient amount to keep pace with its growing demands. Mankiw’s faith in market place solutions to this growing demand would put more of the budgetary costs on the back of the returning soldiers.

The Unemployment Rate Fell for the Wrong Reason

BLS reported:

Total nonfarm payroll employment rose by 288,000, and the unemployment rate fell by 0.4 percentage point to 6.3 percent in April, the U.S. Bureau of Labor Statistics reported today. Employment gains were widespread, led by job growth in professional and business services, retail trade, food services and drinking places, and construction.

Not a bad increase in employment per the payroll survey but when one looks at the household survey, reported employment fell. The employment to population rate stayed at 58.9%. So why did the unemployment rate drop so much? The labor force participation rate fell from 63.2% to 62.8% as noted later by the BLS:

The civilian labor force dropped by 806,000 in April, following an increase of 503,000 in March. The labor force participation rate fell by 0.4 percentage point to 62.8 percent in April. The participation rate has shown no clear trend in recent months and currently is the same as it was this past October. The employment-population ratio showed no change over the month (58.9 percent) and has changed little over the year.

We are far from full employment and we are not closing the gap quickly enough.

Paul Krugman Really Blows It

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.

Barkley Rosser

WaPo: From Luhansk To Lugansk And Back Again

I guess few here are interessted in this, but I cannot resist noting the weird gyrations of spelling of urban names in Ukraine going on at the Washington Post.  I note first that they consistently use the Russian-favored spelling of the national capital, Kiev (rather than Kyiv), while they consistently use the Ukrainian-favored spelling for the name of the second largest city in the nation (is it still a nation?), Kharkiv (rather than Kharkov).  But they are gyrating on this other city near the Russian border, east of Donetsk, with its major public buildings under the control of pro-Russian separatists, without any other cities in its oblast under such control.

So, prior to the recent uprsisings, WaPo had been using the Ukrainian-preferred spelling: Luhansk.  Then fairly recently as I noted in a previous post they suddenly switched to the Russian-preferred spelling: Lugansk.  Yesterday in their main article on the region, they were openly schizophrenic, with a photograph labeled using the Russian-preferred spelling, with the text having reverted to the Ukrainian-preferred spelling.  Today, there were several articles, and all have reverted to Luhansk, the Ukrainian-preferred spelling.  I do not know who is making these decision or on what grounds, but I confess that I feel their pain.

I Finally Can’t Take Naomi Klein Any More

She seems like a nice person and she wants the best for everyone, but her writings have become so counterproductive, so utterly wrong and yet so influential within the activist community, that it’s time to stand up.  (Or in my case, sit down at the computer.)

I just read her latest screed in The Nation, “The Change Within: The Obstacles We Face Are Not Just External”.  For the record, not everything in it is nonsense, but the most important parts are.

I’ll start with the less significant gripe.  Klein writes that we are unprepared to deal with climate change because “Climate change is place-based, and we are everywhere at once.”  We move around too much.  We are too global.  We've got to stay in one place for long periods and get to know the local flora and fauna, ID that flower that’s blooming a week earlier this year.  The reason we don’t understand climate change is that we've become too cosmopolitan.

Well, count me as a rootless cosmopolitan.  I like where I’m living, but I like most of the places I used to live too.  I don’t have any particular attachment to local places, local people or local thinking.  Or to put it differently, I appreciate all the local places, people and cultures, and I don’t place my current abode above them.

And guess what?  While many of its effects are local, climate change is the mother of all global problems.  The carbon cycle is planetary, and its impacts are driven by processes that span the planet too.  Above all, the solutions have to be global in scope.  Living your own particular, pristine local lifestyle is not the answer, folks.  We need global collective action, and that’s going to come from people who adopt a global perspective and feel comradery with other people who speak different languages and live thousands of miles away.  Klein has it ever so wrong about localism.  Yes, love the local wonders wherever you may be, but try to summon within yourself an intellectual and emotional frame that’s broader than anything we've ever seen before.  That’s what we’ll need.

But the real whopper is what she leads with: “Climate change demands that we consume less....”  How can I express how angry I feel when I read this?  Yes, it is ignorant and appeals to the prejudices of her tribe (the nouveau righteous), but it is deeply, deeply hostile to human solidarity.  Oh, and it has as much political potential as a suicide cult.

Folks, we’re still not out of the global meltdown that hit us in 2008.  There is massive unemployment throughout the industrialized world, much of it unmeasured because workers have dropped out of the labor force.  Outside our charmed circle, such as it is, literally billions of people lack the basics for health, security and the pursuit of their dreams.  So it is true, a large portion of the world’s people are consuming less than they’d like, and here we have Klein cheering it on.

Let me get personal.  My college is going through another of its periodic spasms of budget cuts.  We've laid off faculty lines and are looking to slash expenses anywhere we can, despite the fact that we've been making these kinds of cuts for years and never restoring them.  I will grant that much of this can be laid to our own failings, but we are part of a larger story, the long-term defunding of public higher education in a country whose progress in that area has come to a standstill.  I can assure Klein that this will lead to less consumption: unemployed faculty will consume less, students priced out of higher education will consume less of this product, and people who supply goods and services to our institution will have to take a hit as well.  And you know what?  This will do nothing at all to stop the climate juggernaut.  (One of the positions we cut was for a faculty member whose specialty is “climate justice”.  What do you think of that?)

There are two massive holes in Klein’s argument that rival any open pit mine you might stumble upon.  First, what do you mean “we” when you say “we must consume less”?  Aha, you didn't mean everyone, just the ones who were overconsuming, right?  And who gets to decide who they are?  And in an economy in which my income is your spending (the fundamental macro identity, in case you were wondering) how are you going to cut the consumption of the “bad” people without starving the “good” ones?  It’s all simply bonkers.

And the other hole is that in an economy that operates on prices, as ours, for all its faults, clearly does, the economic quantity of consumption is not tethered to the physical quantity of resources people consume.  I know this first-hand: the faculty jobs we've cut would not have sped up the extraction of fossil fuels one iota—perhaps even the contrary if our climate specialist would have been ultra-persuasive.  Moreover, the students who acquire less education will not be saving the planet that way either.  (In case you were wondering: yes, education is part of GDP.)

Think about it: how can economic growth be “bad” and recessions, with all the cutbacks they entail, not be “good”?

And by the way, replacing a capital stock built up over decades in response to insanely low fossil fuel prices with one that runs sustainably is going to require a lot of economic activity—you know, GDP.

There was a companion article in the same issue by Chris Hayes that’s soooooo much better, and makes it crystal clear what an immense political task we have in front of us.  One place to start would be to stop doing dumb things, like telling the people whose support we’re trying to get that the solution is for them to have less.

A Supreme Cellphone Moment

The Supreme Court took up the question of whether police can search the cellphones of people they’ve arrested without first obtaining a warrant.  All the argument, according to the report in today’s New York Times, was about criminal cases, remote-controlled bombs or driving without a seatbelt.

Actually, there’s a far more important context, government suppression of peaceful demonstrations.  One of the standard tactics to emerge in recent years has been the mass arrest of demonstrators, scooped up by the hundreds, held in custody and then released a day or two later with charges dropped.  I’d like to see a successful legal challenge to this, but I’m not holding my breath.

If the court, in its wisdom, decides that routine searches of cellphones are permitted, it is only a matter of time before mass cellphone inspection becomes part of the routine.  Why settle for simply squashing a demonstration—why not find out the organizational structure, the informal networks, the pathways by which information and ideas are disseminated?  It’s all there in those little phones.

Minnesota Mafia Challenges Piketty

Let me begin by noting that I have as yet been unable to obtain a copy and so have not read Piketty's smash hit book yet.  However, I think that I know enough about what is in it to post on this particular matter.  Anyway, Tyler Cowen at Marginal Revolution has posted a challenge put to him by Tony Smith regarding Piketty's book that can be labeled as coming from the Minnesota Mafia.  The econ department at the University of Minnesota, along with the closely allied research department at the Minneapolis Fed, which have long had people going back and forth or simultaneously in both, has long been the real fountainhead of new classical real business cycle DSGE macro, even if some of those who initiated that movement there are either not there anymore (Prescott, and many former students) or no longer a follower of it (Kotcherlakota, now Minneapolis Fed President, although for its failure to predict the crash or say much useful about Fed policy) or both (Sargent).  Nevertheless, a major contingent remains in one or both of those places, including Chari, Kehoe, McGrattan, Rios-Bull, and several others, and their former students continue to identify strongly with the place while they are now all over the world.

The centerpiece of  post is a paper by Castaneda, Dias-Gimenez, and Rios-Bull (http://www.econ.umn.edu/~vr0j/papers/maxrefin.pdf) entitled, "Accounting for the U.S. Earnings and Wealth Inequality," published in the Journal of Political Economy in 2003.  Several other papers are linked, with the most impressive by Heathcote, Storeslettin, and Violante
, an overview paper of the broader approach from 2009.

These models are variations of DSGE models, except that they involve incomplete markets, with Heathcote, et al. calling this approach the "standard incomplete markets"(SIM) approach.  The difference from usual DSGE models is what markets are incomplete, in this case idiosyncratic uninsured risks.  So, the missing markets are insurance ones, and these are what eventually explains the development of inequality.  The other part needed is that there are heterogenous agents done in the Minnesota way, an interval on some variable, in this case discount factors.  The main paper also adds a social security mechanism.  With proper calibration, they claim to reproduce the pattern of income and wealth inequality in the US economy up to 2003.  Most controversially they claim that introducing an estate tax will make little change in wealth distribution, only raising the wealth Gini from .79 to .80.  Cowen is impressed.

So, what is going on here?  Heathcote et al lay out the various mechanisms and review the broader related literature.  Various models have thrown in as shocks family and human capital ones, with the missing insurance markets including finance, public, and some others.  There is even a policy claim that being able to separate initial condition effects from later shock effects suggest policies focused on early education to improve human capital or others focused on later "insurance."  Obviously this is very different from the reputed story that Piketty ultimately develops regarding dynastic families emerging in a "patrimonial capitalism" and his focus on the overall return to financial capital compared to the overall rate of growth.  The stories are extremely different.

In the end, what is really driving Minnesota models is this distribution of different discount factors.  So, it is at the bottom line that those on top are patient and willing to abstain while those at the bottom are short-sighted and impatient, tsk tsk.  In this view, obviously the losers deserve what they (don't) get, while the virtuous rich deserve theirs.  This is the Protestant Ethic triumphant!

Barkley Rosser

The Illusion of Marginal Productivity

Page 341:

"As noted, the theory of marginal productivity and of the race between technology and education is not very convincing..."

Class dismissed.

Conditional Minimization of Type I Error and the Emergence of Scientific Sects

I think I've figured out a crucial missing link in the account of science I've long supported, and I want to put it in words while it’s clear in my mind.  What follows will be a quick sketch without much detail or example.

The overarching framework is that the key to science as a progressive human activity is its privileging of the goal of minimizing Type I error (false positives).  Research protocols can largely be explained according to this principle, including elaborate validation of methods and apparatuses and rules for replication and statistical significance.  These protocols are often fudged in the grimy day-to-day reality of research, but the stature of a field as scientific depends on containing these breaches.  There are two practical consequences of the strong bias against Type I error: one is that understanding of the objects of research can be expected to improve over time, the other that an immense division of labor can be supported, since specialists in one subfield can rely on and build upon the validated findings of other subfields.

So far so good, but how do we explain the sectarian division of research communities, much less the periodic Kuhnian emergence and overturning of entire paradigms?  How can science be progressive in the sense of the previous paragraph and yet support mutually inconsistent research programs over long periods of time?

Here is my tweak.  Classical Type I error minimization is unconditional; it seeks to prevent false positives that might arise from any form of mismeasurement, misspecification, misinterpretation and so on.  All potential sources of error are taken into account, and the goal is to reduce as far as possible the likelihood that a false positive could result.  The problem is that this can be a herculean task.  There are a great many potential sources of error, and it typically isn't possible to address each one of them.  A fallback position is conditional minimization of false positives.  This describes a strategy in which a (hopefully sparse) set of assumptions is adopted, and then Type I error is minimized conditional on those assumptions.  A research “sect” is a community that shares a common set of assumptions as a basis for minimizing Type I error from the remaining sources.  This is, I think, what Kuhn meant by “normal” science.

And where do these assumptions come from?  That’s a huge topic, which historians and sociologists of science love to study.  Once they are adopted, a set of assumptions is maintained providing the conditional minimization of false positives it permits looks enough to practitioners like the unconditional kind.  If you do everything you’re supposed to, minimizing Type I error conditional on the assumptions of your community, and your results still exhibit numerous and costly false positives, these assumptions become vulnerable to challenge.  Here too, of course, actual scientific practice can be closer or further from the ideal.  Some fields are aggressive at identifying anomalies; others train their adepts to not see them.

Seeing it this way allows me to acknowledge the good faith of practitioners whose assumptions differ from mine, providing they are honest about the conditionality of their work and willing to consider evidence that calls it into question.  They should expect this of me, too.  But skeptical historians of science tell us that self-awareness at this level is extremely rare, for personal and institutional reasons that are all too obvious.

Recognizing the necessity and ubiquity of conditional Type I error minimization makes me a bit more inclined to see economics as scientific.  I have complained in the past, for instance, about econometric work that doesn't so much test models as calibrate them.  Certain underpinnings of a model, like intertemporal utility maximization, are simply assumed, and then great amounts of statistical ingenuity go into devising and improving their empirical implementation.  I now see that this qualifies, at least formally, as conditional minimization of Type I error, and that, from within this research community, it sure looks like models are being progressively refined over time.  But I still think that economics rather stretches the boundaries of science in its willingness to cling to assumptions that, objectively considered, are extremely weak—inconsistent with the findings of other disciplines and at variance with observable fact.

Inequality and Class Struggle

In his discussion of the Cobb-Douglas production function and the presumed stability of the capital/labor income split, Thomas Piketty references the work of "the young German historian and economist Jürgen Kuczynski" (p. 219). Readers of Capital in the 21st Century may be interested to learn a bit more about this intriguing character, whom Marc Linder profiled in a 1994 monograph, "From Surplus Value to Unit Labor Costs: The Bourgeoisification of a Communist Conspiracy" published in the book, Labor Statistics and Class Struggle.

In the mid-1920s, the American Federation of Labor adopted a new wage policy linking wage demands to productivity gains, which Linder described as "strongly reminiscent of the reasoning that Marx had used in an address to the General Council of the First International in 1865 to refute the claims of one of its members, a carpenter named John Weston, that a general increase of wage rates did not benefit the working class." An excerpt from Linder's book:

The reason that Green’s “Modern Wage Policy” Declaration seemed so curiously suggestive of Marx’s own popularization of the theory of exploitation is that it was, implausibly enough, written by a German Marxist mole in the AFL. That person, who was also responsible for developing the data on relative wages for the AFL, and thus for the organization’s conversion to a crypto-Marxist strategy of holding the line on the rate of surplus value, was twenty-two year-old Jürgen Kuczynski… 

In September 1926… Kuczynski departed for the United States, where his father, who spent half of each year at the Brookings Institution and as late as 1931 was a member of its advisory council, had secured him a stipend at the short-lived Robert Brookings Graduate School of Economics and Government. Through his father, Kuczynski again came into social contact with many scholarly and political leaders in Washington, D.C., including Justice Brandeis, a distant relative. 

Shortly before his departure for the United States, Kuczynski was struck by Paul Douglas’s recent article comparing the movements of real wages, production, and productivity. Although Douglas did not draw the parallel or discuss its significance, he presented data showing that from 1899 to 1923, the real earnings of manufacturing wage-earners had risen 28 per cent whereas their per capita output or productivity had increased 52 per cent. Kuczynski then published a piece in the Finanzpolitische Korrespondenz, which his father edited, in which he methodologically went a step beyond Douglas: by dividing the index of real wages by the index of production, he generated an index of “the share of industrial workers in the total product of industry.” This “social standard of living,” which Kuczynski conceded was very rough and in need of refinements, had declined by 50 per cent between the turn of the century and World War I and remained stagnant thereafter. 

In the course of re-reading Douglas on the boat to the United States, a “fundamental idea” dawned on Kuczynski -- namely, that the relationship between production and real wages was nothing but Marx’s idea of relative wages. Whereas only bourgeois theorists and especially social-democratic revisionists contested Marx’s ‘“theory of absolute immiseration,’” relative immiseration seemed, once the absolute variant was accepted, self-explanatory. The reason that no one had thought of calculating relative wages was the lack of relevant data. When Kuczynski realized on the boat that statistics recently published in the United States had made such calculations possible, he arrived in Washington with his “tongue hanging out.” In November 1926, two months after his arrival, he published two more articles in his father’s journal on relative wages, which were both suffused with a primitive version of ameliorative underconsumptionism. In one, expressly referring to Marx’s distinction between real and social standards of living, he loosely defined the latter as (wage-working) consumers’ share of the national product, In the other he presented the first fruits of his calculations of relative wages in several industries as the result of dividing real wages (measured both by a cost of living index and an index of wholesale prices of the particular industry) by productivity. In 1927 and 1928, Kuczynski published additional articles on the same subject in Germany until the relative wage “had again found its place as a category of Marxist doctrine." 

While refurbishing Marxism, Kuczynski also performed a much more spectacular feat: ventriloquizing President Green. Although Frey’s efforts at the 1925 AFL convention had “given a great movement a great idea,” Kuczynski was disappointed that the Federation had “forgotten” about computing the worker’s share of the product or implementing the new principle. To be sure, Kuczynski overstated his own and underestimated the AFL’s initiative: immediately after the Atlantic City convention, The New York Times had published an interview with Green in which he anticipated by a year Kuczynski’s call for a workers’ share index. Specifically, Green stated that the AFL should do research to show workers and the public “how the purchasing power of wages has varied . . . and what relation that curve bears to the output per worker.”

IPAT: Simple and Useful

Miles Kimball has steered me to Matt Ridley, who gets IPAT completely wrong.  Ridley says he used to be an ecologist, but if he was his training had some gaps.  Here’s what he says about IPAT:

In 1972, the ecologist Paul Ehrlich of Stanford University came up with a simple formula called IPAT, which stated that the impact of humankind was equal to population multiplied by affluence multiplied again by technology. In other words, the damage done to Earth increases the more people there are, the richer they get and the more technology they have.

Nope.  IPAT is simply a decomposition:

environmental impact = population x (real GDP/population) x (impact/real GDP)

The name comes from reading this as impact = population x affluence x technology

Old timers will remember that Barry Commoner used this framework to demonstrate that a number of critical environmental problems were due primarily to the latter ratio, not to the first two terms on right-hand side.  Rather than focusing on population growth (like Ehrlich did) or impoverishing ourselves, what we most needed to do was change the technologies we used to produce things.  Contra Ridley, it was not about “less” technology but different technology.

And it’s still a useful way to frame environmental issues.  Take carbon, for instance.  Us humans need to forego 60-80% of the available fossil fuel reserves if we are to avoid potentially catastrophic climate change.  How can we pull this off?  Simple arithmetic, mobilized by IPAT, shows us that neither population reduction nor shrinkage of GDP per capita can get us anywhere near this, short of some sort of nightmare scenario.  Our only option is to reduce the amount of fossil fuel use per unit GDP, and this we can do rather readily, if the IPCC can be believed.  (I’m not convinced personally, but I could be wrong.)  That’s the T part of IPAT.

I don’t like to spend my time correcting every mistake I find on the internet, but the IPAT formulation is worth preserving.

Piketty for Dummies

You look around.  Some people are rich, even very rich, and others are poor.  Most are somewhere in between.  It’s not equal, but you think this is how it has to be if we're going to reward talent and enterprise so that all of us can ultimately benefit.

It’s third grade all over again.  You look around the room.  Some kids are really smart; they know all the answers and it is obvious they will get ahead.  Others may not be quite as smart but they try very hard, and they'll be successful too.  Some are popular, with the ability to make lots of friends and get others to follow them.  A few of the kids have that special blend of imagination and courage that sets them apart.  They take risks to discover how far they can go beyond their “limits”; they explore hidden places, how toys and gadgets work, different ways of doing things.  Meanwhile, there is the majority, nice kids but ordinary, average ability, average motivation.  It’s already laid out who will be who in twenty or thirty years: you can see society separating into the leaders and followers, the rich and the rest.

This is a certain (conservative) view of inequality and how it comes about.  Liberals and lefties have a different view of that classroom, and there has been a lot of argument back and forth.  But now Piketty changes the story.

You're back in third grade again, and everything you saw is still there.  But now there’s something else: there’s another school across town, one you may never have heard of.  It’s at the end of a long private road, behind a locked gate.  The kids at this school live in a part of town you’ve heard rumors about but have never actually seen, with large houses set back from the road and, like the school, hidden from view.  These kids come from very rich families.  Some of them are talented and do well in their special school.  Others are average.  More or less all of them will stay rich when they’re grown up—richer than even the smartest and most motivated kids at your school.  Their families already own much of the town, and, since they’re making money at a faster rate than the town is growing (Piketty has measured this), over time they will own more and more of it.  The kids at your school, the smart ones and the ordinary ones alike, will mostly end up working for them.  Unless something is done to disrupt the process, your town will have a hereditary ruling class.  Piketty says, you have to tax this upper group to prevent them taking over completely.

What Capital in the Twenty-First Century does is to enlarge your perspective.  For decades, the discussion had all been about the kids at your school and how much to reward the ones who have what it takes to go further.  No one talked about that other school because it was smaller, and above all because it was behind a locked gate and hard to find out about.  Piketty and his coworkers have done the heavy digging to get the facts about this other school—who goes there and what awaits them after they graduate.  He’s found that the families of the kids at that school are getting richer by the year, and that the inequalities in your school pale beside the gap between yours and theirs.  He’s adding new questions you need to ask.