Tuesday, May 6, 2014

Galbraith on Piketty, Cambridge was right

I learned that James Galbraith had written a review of Piketty on Krugman's Blog. Krugman brushed it aside as another Hangup of the Heterodox, "a fairly desperate attempt to …somehow prove that Joan Robinson and Nicholas Kaldor were right in the Cambridge controversies of the 1960's."

Now Galbraith is one of my favorite economists, so I had to have a look.  I very much like Galbraith's critique of Piketty!  I posted the following comment to Krugman's blog.

Galbraith's critique of Piketty seems right on to me, and it's not just about the Cambridge Controversy. Surely a global wealth tax is impossible, but a strong estate tax and unions are not. Reading Galbraith, I'm inclined to believe him on Cambridge also. According to Wikipedia, it's US economists who are the outliers who pretend it didn't happen. That figures too.
Now one way of looking at the Cambridge Controversy was that it was about the definition of Capital. The old fashioned idea was it was exclusively things like industrial machinery, stuff used to make stuff, which doesn't change rapidly (even wars don't usually diminish it much), but may fluctuate rapidly in price depending on the outlook of the economy and the availability of funds.  But those fluctuations in price don't represent the capital itself.

American economists want to make Capital equivalent to financial investment, which does fluctuate rapidly, and further includes a lot of crap, like toxic MBS's in the late 2000's.  This is not unlike the way that GDP (invented by Keynes as a part of understanding a wartime economy--and explicitly not as a measure of economic health) has come to be used, over the dead body of it's creator, a measure of economic health.  And GDP also includes a lot of crap which we might be better off not doing.

Though French, Piketty falls into the trap of the American economists.  And so the part of his story which includes huge "capital destruction" at various times in history, is made of this bogosity also.

Piketty is right on only with regards to inequality.  He tells that story well.  But according to Galbraith, his findings based on income tax returns, while impressive and useful, is not original, and merely confirms what has previously been shown by others, like Galbraith himself, from other measures.

Update: Now, mind you, despite Galbraith's critique, I find Piketty very impressive and timely.  Most of what he says is right on.  We need progressive income taxes.  (As well as carbon taxes and the like.)  We need strong estate tax on super wealthy estates (I'm fine with a $10M exemption, adjusted for inflation, but inescapable 50% rate above that and 80% above $1B).  An international weath tax is likely impossible, but it it were not, it would be a fine idea too.  Capitalism steals the wealth of society for the wealthy, and ultimately (in advanced Capitalism, where we are now) locks it up beyond productive use.

It's the dismissal of Marxism, and the failure to emphase the need for strong labor unions.  I call for universal unionization, all working people should have collective bargaining on their behalf.  The very reason why "the wealth" are able to increase the return to themselves is organization.  A capitalist system enables and subsides the organization of Capital.  Labor needs a corresponding force.  Everywhere and Always.

Krugman rightly, in many ways, praises Piketty.  But his Hangups of the Heterodox post linked above is one of Krugman's worst (in the ideas it expresses…not with regards to being an opening for debate…it's an outstanding opening for debate…Bravo Krugman!).  And it does reveal the fundamental limitation of Krugman's writing.  I should emphasize first, however, that we are most lucky to have Krugman!  Long Live Krugman!  Krugman is great and wonderful in almost everything he says at the NYTimes, on his modern classes, tours, and seminars.  In this, I fault Steve Keen for not emphasizing enough (or claiming otherwise).

Krugman just has one particular weakness, and it's easy to see how it comes about.  Krugman is NOT representative of the "field" of Economics.  Krugman is an outlier.  He is far better than almost everyone in mainstream Economics, or even what he calls Keynesian Economics (what I would call Hicksian and Samuelsonian).  Krugman is far better than almost all professional economists precisely because he has an intuitive sense of economics which goes far deeper than the near useless models of neoclassical economics, though Samuelsonian economics relies on them.  Krugman uses his deeper intuitive sense to know which models to apply and when.  And thus he can claim to be a modern Keynesian, as he defines it, when he really isn't fundamentally so.  He just puts on that clothing where it actually works.

But meanwhile, to maintain his credibility, his acceptability to Capitalist media, he must insist that he is the representative of the continuing grand tradition of Capitalist Economics.  He is not a Marxist!  And he does so by having his anti-Heterodox flag, fighting the rear guard on the Marxians, Cambridgians, even the truest Keynesians (who are the Post Keynesians, don't you know, and I would like to be considered Marxian Post Keynesian).

Cambridge was right!  And you should know that. Regardless of what Krugman, who is right about nearly everything else, says.

Dean Baker also denies he follows the Cambridgeans, but then, he dismisses the American side of the Cambridge controversy without explicitly saying he is doing that.  A kind of pox on both houses. Take a look at the fine comment by Sandwichman, who also sees Krugman's Hangups piece as a rear guard action defending economic orthodoxy, but also refuses to come to the defense of Cambridge as I fearlessly do.

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