Wednesday, April 30, 2014

Krugman, Clark and Vernengo.

Among many other awards and honours, Paul Krugman won in 1991 the John Bates Clark Medal.

Paul Krugman (2014) on distribution:
"There are a few economists on the left who seem to believe that:
"…
"2. If you believe in, or even use, marginal productivity theory, you are conceding that capitalists deserve their income.
"Neither of these things are true. … And saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get." (emphasis mine)
John Bates Clark (1908) on distribution:
"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. The indictment that hangs over society is that of 'exploiting labor.' 'Workmen' it is said, 'are regularly robbed of what they produce. This is done within the forms of law, and by the natural working of competition.' If this charge were proved, every right-minded man should become a socialist; and his zeal in transforming the industrial system would then measure and express his sense of justice.". (emphasis mine)
Clark sets out to disprove that labour was exploited by capitalists: he was an anti-Socialist. In "The Distribution of Wealth: a Theory of Wages, Interest, and Profits" Clark purports to show that each "factor of production" was remunerated according to its marginal contribution to output: if capital gets a larger and increasing share it's because its contribution is objectively greater, and growing.

Labour, on the other hand, creates only a small amount of wealth and gets the whole of it: it has no reason to complain.

Paraphrasing Krugman, Clark (whom never before had been accused of socialism or of leftism) is "conceding that capitalists [and workers] deserve their income".

If you accept Clark's argument (which any micro101 textbook teaches: it supposedly justifies the decreasing slope of production functions), his conclusion for you is, as it should be for Krugman, a positive fact (following Milton Friedman's terminology). Of course, Paul Krugman can deplore that on normative grounds. But that is a value judgment, a personal preference.

Krugman used to know this. In his 1992 pioneering piece on inequality (one of the first dealing on that subject in the popular press), Krugman wrote:
"Rising inequality need not have any policy implications. Even if you would prefer to have a flatter distribution … what should we do about it?"

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Matías Vernengo discusses this subject here and here. Perhaps Vernengo would find it easier to explain that exploitation, contra Clark, is a positive fact, even if unpalatable to some.

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