Sunday, 29 July 2012

The Krugman Alternative

Not a plot proposal for a convoluted film involving leaps onto moving vehicles, but a sketch of the background to the “debate” inspired by Paul Krugman’s post on taxing job creators. There is a tension between two claims which conservatives are wont to make about the rewards which go to producers. One of these claims was presented in its most explicit form by the economist John Bates Clark:
Firms operate in a region of their production functions where diminishing marginal returns cause each worker added to a work force to raise total output by a smaller amount than did the previous worker. The employer will hire more workers as long as the last one hired contributes at least as much to total revenue as the cost of employing that worker. Because every worker is the marginal worker, and because the last worker hired adds to the employer's gross income an amount equalling the wage rate in a competitive labor market, all workers are paid the values of their marginal products.
If we consider this simply as a statement about the implications of profit maximization it is irrefutable. To protect it from nitpicking it can be framed in rigorous mathematical form. But for Clarke and many conservatives it has a moral implication: capitalism is just, even if the justice it dishes out is a bit rough at times. The rewards received by workers are a fair reflection of their contribution to the production process. Unlike the mathematics, the morality can certainly be disputed, as Mark Thoma notes:
There have been many, many objections to the normative conclusions drawn by Clark from his marginal product theory. To name a few, it requires perfect competition, it rewards factors, not individuals (owning capital and land gives the owners income, but the income is for the contribution of the factors, not for the contributions of individuals receiving the income), there is no meaningful way to separate the contributions of factors to total product (when crops grow, was it the hoe used to weed the plot of land, or the person operating it?)
If John Bates Clark represents one strand of conservative thought, another, which is especially prevalent in America, is the entrepreneur-worship of Ayn Rand. The creators of businesses have a value to society which far exceeds the rewards they reap. Without them the looters and moochers who make up the mass of the population would be living in squalor:
Do you ever wonder after dealing with all that is going on with the economy and the upcoming election if it's getting to be time to "go John Galt." For those of you who have never read Ayn Rand's Atlas Shrugged, the basic theme is that John Galt and his allies take actions that include withdrawing their talents, 'stopping the motor of the world', and leading the 'strikers' (those who refuse to be exploited) against the 'looters' (the exploiters, backed by the government).
One-percenters of the world unite! I’m not the first to notice that the Randian world view owes a lot to Karl Marx. It’s a story of exploitation, with a creative elite taking the place of the proletariat as the victims. And so we come full circle. John Bates Clark used his theory to undermine Marxism. The workforce is not exploited, it gets the marginal product of labour and the capitalists get the marginal product of capital. Countless conservatives have endorsed this argument. Paul Krugman, tongue firmly in cheek, deploys the same argument against the Randroids. The magic of the market ensures that Galtian superheroes, too, receive their marginal product. “You got a problem with that?” (This appears to be the state motto of New Jersey.)

To date, no conservative blogger has shown much enthusiasm for Krugman’s deployment of Clark’s anti-Marxist weaponry against the Tea Party. For me, the interesting thing is seeing how they avoid getting caught on the horns of this dilemma: should they abandon Clark or Rand? There are various moves they can make, some of which could lead to an interesting debate, but it’s a bit sad that several of them have opted for the silliest response I can imagine: “Paul Krugman simply doesn’t understand the subtleties of that marginal productivity stuff!” No cigar, guys. If this was about bank clearing-systems or option-pricing theory you might be right, but an international trade theorist who doesn’t know this material is about as plausible as a chef who can’t brown onions. You don't score any points by interpreting "marginal reduction" to mean "shipping half of our best-educated people to Somalia."

Friday, 20 July 2012

A picture for Bob Murphy

Since I'm too lazy to use this blog for blogging, I might as well use it to illustrate the comments which I post on other blogs from time to time. This picture explains why I think Bob Murphy is doing Paul Krugman an injustice in this post. The picture shows how real GDP shrinks when Romney supporter John Q. Wheelerdealer reduces his input to the economy in disgust at the antics of President B. Hussein Obama. As I say in comments:
Krugman is applying the Envelope Theorem correctly: the difference between the income which WheelerDealer foregoes by going Galt and the reduction in national income is approximately zero. Not exactly zero, because there’s a small ‘triangle’ [see picture] under the marginal productivity curve with area 0.5 x dL x dW, where W is WheelerDealer’s real wage and L his input.