Well, as I pointed out yesterday the Capital Controversies have come up once more. Now, again, there were a number of important issues in the controversies — the measurement of capital being one as this leads to some very salient criticisms of using production functions in empirical work — but I want to follow up on the same theme I discussed yesterday; namely, income distribution.
The mainstream economists have a very difficult time figuring out why Post-Keynesians and Sraffians get fired up on this point. After all, they insist, you can account for various aspects of income inequality in their marginalist models. What’s more you can do this without assuming that capital and labour receive a share of the national income in line with their marginal productivities. This is, as I pointed out yesterday, quite true.
A semi-regular commenter on here, ivansml, made this point over at Vernengo’s blog. He wrote,
Competitive equilibrium is just one kind of a market structure. In markets with monopsony or bargaining, wage doesn’t have to equal marginal product of labor... I’m aware that Sraffian authors reject marginalism (well, the basic idea, at least). Aware and unconvinced. I don’t see any evidence that disaggregated general equilibrium models suffer from logical inconsistency, just because Sraffa wrote down a model where prices are indeterminate – if you ignore demand and preferences, then of course you’ll find you have more unknowns than equations, and Sraffian models can be recast as special cases of GE anyway (Hahn, Cambridge J. Econ. 1982; Mandler, Rev. Econ. Stud. 1999). But I guess that as a rhetorical strategy for those already convinced, a blanket dismissal of neoclassical theory as a way to avoid engaging any arguments of substance, it works quite well.
I don’t want to address some of the technical points here in detail — but in passing I will note that it is well-recognised that General Equilibrium models suffer from logical problems as was shown in the Sonnechein-Mantel-Debreu theorem — rather I want to deal with the overarching theme.
The theme of ivansml’s comment is that the Sraffians are saying the same thing as the General Equilibrium theorists, just in special case form. This is mistake often made by the mainstream — and sometimes, but less often, by heterodox authors — and it makes them myopic, insular and arrogantly blind to any need for academic pluralism. Basically it is a mistake of misrecognising what an economic model is and what it does.
An economic model is a sort of parable. Intuitively, every economist should know this. You lay out assumptions — that is, a framework for a logical narrative — and then you follow these assumptions through to the narrative endpoint. But the assumptions are not arbitrary. Indeed, I would argue that they are key to the whole model and to what it conveys.
Think of this like a film script. The assumptions give the story a narrative structure. Thus they determine whether the model is Sraffian or Marxist or marginalist, in the case of economics, and whether the film is a horror, a comedy or a romance, in the case of a film script. The different narrative structures — or genres, if you like — convey different things to the people who use them.
There are many features that makes, in this case, Sraffian models different to marginalist models. But I want to focus on how the two view prices and distribution. In doing so I will lay out two short parables. These are not themselves true Sraffian or marginalist models but they capture the differences in the narrative structures.
Parable 1 — In the Beginning There Were Prices
On Marginalist Island lots of men and women live in peaceful coexistence. They have established for themselves a system of property rights and they use either money, barter or a numéraire to engage in trade with one another. There are a given number of goods and services in the economy. These include labour services and previously accumulated capital. The capital is an accumulation of past savings — people putting aside consumption at one point in time for consumption at another point in time. People have set preferences and want to maximise their utility in line with these. Everyone meets at a given instant in time and exchanges their goods and services — including labour services — with one another. Prices are set through a bartering process ruled over by an auctioneer and profits are equalised through competition. People give up their labour in line with their desire to earn a given wage offset by their desire for leisure. While owners of capital get compensated for the use of their machines (or whatever) by the income they generate.
Parable 2 — In the Beginning There Was Distribution
On Ricardo Island lots of men and women live in a far from peaceful coexistence. Property rights are in place and people use either money, barter or a numéraire to engage in trade with one another. Again, there are a given number of goods and services in the economy — including labour services and previously accumulated capital. This capital is an accumulation of past labour inputs — it is a result of people having worked in the past to produce goods that would increase their productivity in the future. People have no set preferences and care little about utility — the manner in which they consume is either arbitrary or subject to rules of thumb and so does not concern us. Everyone meets at a given moment in time and exchanges their goods and services, including their labour services. But the meeting is not between people bargaining and bartering. Rather, some of the community have power over other parts of the community and try to use this to negotiate how high their share of the total income will be. Some of the community own more of the capital than others and they try to keep down wages in order to maximise their profits, although the profits of the capital owners as a whole will be equalised through competition. The prices that the system ultimately generates will be completely based on the distribution of resources among different groups.
Back Down to Earth
Do you see the difference in the narrative structure between these two scenarios? I hope you do because if you don’t you are likely a dogmatist who will try to reduce one narrative to the other — that is, you are likely a person who does not tolerate difference of perspectives and tries to reduce everything to your own perspective and pretend that it is the only one. In this case I suggest that you seek advice from family and friends.
To everyone else it should be clear that the narrative structure of the two parables is different. In very boiled down form: in the marginalist stories prices are set by preferences and distribution follows while in the Sraffian story prices are set by distribution. Yes, we could add in more elements to either story. In the marginalist story, for example, we could introduce trade unions and monopolists. But that does not change the narrative structure. And the narrative structure is what is interesting. Why?
Because, as we have said, these are just parables, stories, fictions. So too are the actual models that economists in either tradition work with. There is no inherent truth to these stories, they are just stories. But they are stories that colour how we view the world. If we view the world in line with Parable 1 we will have a very different approach to it than if we view the world in line with Parable 2. Different perspectives will mean that we will view different real world events in different ways.
When we start doing economics we inevitably adopt a narrative structure. This will have an enormous power over how we think about the world. To the less self-conscious among us — and, sadly, economists are generally less self-conscious than people in other social sciences — they will even shape our world in ways that we do not recognise.
The problem today is that students of economics are offered only one narrative structure. They are not given a choice. By the time they have encountered others they cannot tell the difference between the two and try to reduce everything to their own point-of-view (well, not all of them, but most). Indeed, most of the students who would have been inclined to greater narrative choice — that is, greater pluralism — have already been driven out of the discipline. Even those who did encounter different narratives early on find it very difficult to get work because they live in a world where others have closed their minds to everything but their own narrative structures.
At the end of the day, we can have different schools of thought attack each others models all they want. That’s fine. All in good fun. But if they ever become convinced that their’s is the only way of looking at the world that is when things start to get dangerous. That is when dogma sets in and academic pluralism is closed off.
The Sraffian view in economics got a far later institutional start in academia and that, largely, accounts for its marginalisation now. Whether it can begin to make its way onto the curriculum is an open question. Whether it will or not has to do with institutional structures. Privileged academics who insist that only their view is Truth will always move to defend their privilege. Such people will likely be so convinced that their’s is the only way that they will not even realise that they are marginalising others — these are the zealots. They need to be overcome by people who want to see more choice for students and a more open discourse in economics.