Friday, April 25, 2014

Piketty and the Dangers (Again) of Arguendo Reasoning

-- Posted by Neil H. Buchanan

There has been an explosion of interest in Thomas Piketty's new masterpiece, Capital in the Twenty-First Century.  My most recent post (last Friday, here) was written after I attended an event at a DC think tank, where I witnessed one extraordinary example (out of many, many examples) of the red-baiting that Piketty's book has inspired among American right-wingers.  I also plan to write my annual scholarship review for the Jotwell website about the book, and the discussion among economists and other scholars promises to continue for months, if not years.

Today, due to limited time, I will make only one point about the response thus far to Piketty's book.  In a blog post yesterday (here), Paul Krugman argued against lefty economists who object to Piketty's methodological choice to use orthodox economic tools to explicate his arguments.  In particular, Piketty uses "aggregate production functions" as a starting point, and he makes the further assumption that the owners of Capital and Labor (the two inputs into the aggregate production function) are paid their "marginal products."

Although this is in some ways a mind-numbingly technical point, it is actually quite easy to understand.  The basic idea is that economic activity generates incomes, which are generally categorized into two boxes: wages/salaries or profits.  The standard economic approach acts as if the total amounts of capital and labor can be coherently measured by one number each (even though that is not true), and it then uses a mathematical shortcut that purports to "prove" that labor is paid nothing more nor less than its appropriate total reward, based on its productivity, and the same is true for capital.  That is, there are no "extra returns" for capitalists to expropriate from workers.  The mathematical shortcut, however, cannot help but "prove" that result, because using that form merely assumes what one purports to prove.

Krugman makes two very important points: (1) It is not fatal to the analysis that production functions are a convenient analytical fiction, and (2) One can believe that capital and labor are paid their "just" returns without giving away the inequality debate, because we can still argue that the ways in which people come to own capital are unjust.  That is, we can conditionally allow that GM is not underpaying labor without conceding that the owners of GM deserve to own GM (and thus deserve their share of GM's profits) in the first place.

This is an important and elegant point, but I think that it is an extraordinarily powerful example of the dangers of arguendo reasoning that I have discussed here on Dorf on Law in the past (especially here and here).  That is, I see how one can believe that we could still win the debate over inequality, even after strategically setting aside our very real objections to the two points that Krugman is willing to hold in abeyance.  But holding them in abeyance is not likely to be static or reversible.  The more we concede, or even fail to argue, important points on which the debate could be waged, the more likely it is that those points will be viewed (even by people on the better side of the debate) as having been fully conceded, not just provisionally set aside.

And this is going to be a fierce debate.  Giving any ground, even for clever debating purposes, carries extraordinarily high consequences.  I see Krugman's point, but I think it is naive to imagine that we can hang everything on the idea that the public at large will be open-minded on the question of who should own capital.  The stakes are too high to let everything come down to that one question.

17 comments:

Jimmyd said...

Neil. Sometimes it is necessary to give intellectual ground in order to maintain political relevance. The last thing Krugman wants is to be painted as a shrill and a crank so he wants to keep his enemies even closer than his friends--which means arguing on their ground. In a world where it is likely the Republicans will take over the legislative branch later this year I can not find any fault with that strategy.

This isn't to say I agree with it--I tend to be the type that wants to set the heather on fire--but it is comprehensible to me.

Neil H. Buchanan said...

Jimmyd's comment concisely describes a strategic approach that, I think, many liberals have adopted (on this and other issues) over the years. For what it's worth, however, I don't think that this explains what Krugman is doing. He seems pretty clearly to want to differentiate himself from non-mainstream Keynesians (call them "heterodox" or "post-Keynesians"), and to argue that mainstream Keynesians are right not to reject the slanted neoclassical approach to economics.

As far as I can tell, it's not that Krugman is saying, "Gee, I'd really like to be able to admit to being more radical than I am, but I need to be strategic about this." He's already been permanently labeled "shrill" and "a crank," and nothing he does now will change that.

Even if I'm right about that, however, Jimmyd's comment reminds us of the central question to which I keep returning: When and how does one accept the terms of a debate, versus rejecting those terms? I doubt that there's a general answer to that question, or even a general way to approach an answer to that question.

What I do see is plenty of evidence of liberals discovering to their dismay that they have conceded contestable ground, which is exceedingly difficult to take it back. Agreeing that "taxes are distorting," for example, is utterly contestable on both theoretical and empirical grounds. But try to say so today, and people are flabbergasted. That didn't happen on purpose, but it happened when liberals conceded the point "for purposes of discussion."

Bob Hockett said...

Thanks for the recent and forthcoming discussion of Piketty's book, Neil. The red-baiting out there, I can't help but note, is as comical as it was predictable.

Piketty is obviously not channeling Marx - though some of his arguments complement some of Marx's, and though his book might be even stronger were he to take up some more specifically Marxian themes.

Were Piketty to argue along Marxian - or, heck, even late Keynesian or Minskyan - lines, he would argue both (a) that the growing inequality he traces is logically dictated by 'the capitalist mode of production' itself, and (b) that the same logic renders capitalism itself prone to all but inevitable (economic) crisis and collapse. Piketty argues neither.

With respect to (a), Piketty speaks in terms of statistically corroborable, relatively stable empirical tendency alone, not 'deep structural' inevitability. And with respect to (b), he speaks of undesirable social and political consequences of growing inequality, not economic ones.

For more on the latter - specifically, for an empirically corroborated account of how growing income and wealth inequality renders financial bubbles, busts, and ensuing debt-deflations ('depressions') more likely - I am going to recommend 'Income Inequality and Financial Fragility: Some Empirics in the Political Economy of Finance,' at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2204710, on which I'd love to receive comments from any who care to discuss.

None of this, of course, is to take anything away from Piketty. His results are obviously very important and ought to be widely and carefully discussed.

Thanks again,
Bob

Jen Taub said...

Bob,

Glad you posted a link to "Income Inequality and Financial Fragility: Some Empirics in the Political Economy of Finance." I do care to both read and discuss. Will be back to you in the coming weeks.

Best,

Jennifer

Bob Hockett said...

Thanks a million, Jennifer - will be eager to hear what you think!

All best,
Bob

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