{"id":7497,"date":"2020-02-10T15:36:23","date_gmt":"2020-02-10T15:36:23","guid":{"rendered":"https:\/\/progressiveeconomyforum.com\/development\/?p=7497"},"modified":"2020-02-10T15:36:25","modified_gmt":"2020-02-10T15:36:25","slug":"principals-of-macroeconomics-5-robinson-and-the-theory-of-capital","status":"publish","type":"post","link":"https:\/\/progressiveeconomyforum.com\/development\/blog\/principals-of-macroeconomics-5-robinson-and-the-theory-of-capital\/","title":{"rendered":"Principals of Macroeconomics 5: Robinson and the Theory of Capital"},"content":{"rendered":"\n

Joan Robinson first defined the term \u201cmacroeconomics\u201d that appears in the title of these five blogs, a concept developed in her 1937 book Introduction to the Theory of Employment<\/a><\/em>. If J.M. Keynes was the \u201cfather\u201d of modern macroeconomics, Robinson, 20 years younger, was its \u201cmother\u201d. She holds the distinction of being the foremost economist not to win the Nobel Prize<\/a>, which many anticipated she would receive in 1975. Whether because of her gender or her political views, this misjudgement weakened of the reputation of the Bank of Sweden (that awards the prize).<\/p>\n\n\n\n

\"\"
Source: Economic Sociology and Political Economy Community<\/em>. <\/figcaption><\/figure>\n\n\n\n

“Economics itself…. has always been partly a vehicle for the ruling ideology of each period as well as partly a method of scientific investigation.” <\/p>Joan Robinson<\/cite><\/blockquote>\n\n\n\n

While many consider her greatest work to be in the theory of growth and development (The Accumulation of Capital<\/em> 1956), I focus on another of her theoretical contributions, the critique of mainstream (neoclassical) economics. <\/p>\n\n\n\n

Robinson\u2019s Objections<\/strong><\/h4>\n\n\n\n

In Chapter 1 of The General Theory<\/em> Keynes famously\nrefers to two \u201cpostulates of Classical economics\u201d, one of which determines the\ndemand for labour and the other the supply. He states that \u201cI shall argue that the postulates\u2026are applicable to a\nspecial case only and not to the general case\u201d, with continuous\nfull employment the \u201cspecial case\u201d<\/a> and less than full employment the\ngeneral case.<\/p>\n\n\n\n

In the\ncontext of later parts of The General\nTheory<\/em> (for example, Appendix on User Cost and Chapter 20 on \u201cThe\nEmployment Function\u201d) it is clear that Keynes wrote tactically in accepting the\nlimited applicability of mainstream supply and demand for labour. With an eye\nto what he considered his important contributions to come later in his book, he\napparently decided to not to fight a battle over the theory of the labour\nmarket.<\/p>\n\n\n\n

Robinson took on this fight with\nher path-breaking 1953 article, \u201cProduction\nFunction and the Theory of Capital<\/a>\u201d, which initiated what came to be called\nthe Cambridge Capital Controversy. Superficially arcane and esoteric, this\ncontroversy goes to the heart of mainstream economics. I do not exaggerate when\nstating that if Robinson\u2019s critique is correct, mainstream economic theory\ncollapses. In the judgement of prominent\neconomic historian Mark Blaug<\/a> Robinson won the argument, even that her\nmajor opponent \u201cdeclared unconditional surrender\u201d.<\/p>\n\n\n\n

Yet the theory Robinson\ndemolished lives on while she has been relegated to the fringe by the followers\nof those she demolished. Why and how flawed economics crowded out sound\neconomics tells the non-specialist much about the political and ideological\nnature of what today passes as accepted economic wisdom.\nRevealing the why and how requires first the explanation of Robinson\u2019s\ncritique, and second its limited long-term impact on the profession.<\/p>\n\n\n\n

Mainstream labour market theory\npresents the demand for labour by private companies as negatively related to the\nwage level. Other things equal, employers will\nincrease employment if the wage level falls and vice-versa. Robinson\u2019s critique\nundermined this apparently commonsense conclusion, which derives from a false\ncomparison with markets for goods and services.<\/p>\n\n\n\n

If the price of apples falls, a\nbuyer is likely to purchase more, and purchase fewer if the price rises. The\nincrease in amount demanded occurs because 1) a lower price frees a bit of\nincome (if you buy four apples for one pound at 25p each, at 20p you can buy\nfive for a pound); and 2) with apples cheaper you may substitute them for\nsomething whose price has not fallen, such as pears.<\/p>\n\n\n\n

The first of these arguments\ncannot apply to the labour market. Employers hire workers in order to produce a\nproduct the employer then sells. A lower wage itself does not increase a\ncompany\u2019s anticipated sales. Thus, if a lower wage results in more employment\nthat must result from substitution of labour for other production inputs. The\nsubstitution would involve using more labour in place of capital, equipment and\nmachinery, when wages fall, and using more capital in place of labour when\nwages rise.<\/p>\n\n\n\n

The analytical conclusion seems\nobvious and irrefutable. Wages go up and employers replace labour with capital\n(production becomes more \u201ccapital intensive\u201d). Wages go down and employers\nreplace capital with labour (production becomes more \u201clabour-intensive\u201d). The\nimplications are profound \u2013 if workers organize and force wages up, employment\ndeclines. For individual companies and the macroeconomy higher wages come at\nthe cost of unemployment.<\/p>\n\n\n\n

Obvious as it may seem, this\nargument is false. It is a non sequitur<\/em>\nbecause, strange as it may seem, for the economy as a whole lower wages need\nnot imply that labour becomes cheaper than capital. In her 1953 article\nRobinson demonstrated the faulty logic by asking the apparently simple\nquestion, how is capital measured? For labour, it is a reasonable simplification\nto treat it as homogenous and to measure it in hours worked (for example). This\nis not valid for capital, which is inherently heterogeneous as well as of\nvarying age across the economy.<\/p>\n\n\n\n

Robinson pointed out that we must\nmeasure capital in prices. Even if we find a suitable way to combine machinery\nand equipment of different ages and types, an insurmountable problem remains. When\nwages go up and down, the value of equipment will go up or down depending on\nthe labour cost of the equipment. For example, if wages rise, the cost of a\nhand-made tool will increase substantially, while equipment largely made by\nother equipment will be relatively unaffected.<\/p>\n\n\n\n

Implications of Robinson\u2019s Critique<\/strong><\/h4>\n\n\n\n

In a succinct 25 pages without\nuse of mathematics, Robinson demonstrated that it cannot be proved that an\nincrease in wages results in labour becoming more expensive compared to capital\n(while not difficult, the algebra of the proof is tedious). The explanation of\nthis apparently paradoxical conclusion is straight-forward. In an integrated\nproduction system, increases in wages can increase or decrease the value of the\neconomy\u2019s capital (machinery and equipment) depending on the labour cost of special\ncapital equipment.<\/p>\n\n\n\n

The implications of Robinson\u2019s\nargument are profound to the point of revolutionary. Depending on the\nproduction structure of each economy, its technology and product mix, an\nincrease in wages might result in less employment, more employment, or have a\nneutral impact. For the economy as a whole, we cannot predict the impact of\nwage changes on employment. This indeterminate outcome applies to conditions of\nfull utilization, Keynes\u2019s \u201cfirst Classical postulate\u201d.<\/p>\n\n\n\n

Keynes demonstrated that the\nlevel of aggregate demand determines output and employment for the economy as a\nwhole, not relative prices of goods and services. On the contrary, aggregate\ndemand determines those prices. Robinson took the next bold step and\ndemonstrated that the balance between wages and profits does not rule the\nlabour market.<\/p>\n\n\n\n

Immediately after Keynes\npublished The General Theory<\/a><\/em>,\nhis mainstream opponents began their ultimately successful task of\nreformulating his theory to strip it of its innovative features. In Robinson\u2019s\ncase the mainstream has failed in its attempts to reformulate her analysis in\norder to rob it of its devastating conclusions. <\/p>\n\n\n\n

For that reason, her contribution is ignored, treated as an embarrassment not to mention among the faithful and certainly not to students or the potentially inquisitive layperson. To use her phrase, Robinson\u2019s critique hit too deeply into \u201cthe ruling ideology\u201d of mainstream economics.<\/p>\n\n\n\n

Photo credit: Wikimedia Commons<\/a><\/em>. <\/p>\n","protected":false},"excerpt":{"rendered":"

Joan Robinson first defined the term \u201cmacroeconomics\u201d that appears in the title of these five blogs.. If John Maynard Keynes was the \u201cfather\u201d of modern macroeconomics, Robinson was clearly its \u201cmother\u201d. <\/p>\n","protected":false},"author":11,"featured_media":7501,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[1],"tags":[197],"class_list":["post-7497","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","tag-economic-history-and-thought"],"acf":[],"authors":[{"term_id":151,"user_id":0,"is_guest":1,"slug":"prof-john-weeks","display_name":"John Weeks"}],"_links":{"self":[{"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/posts\/7497","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/comments?post=7497"}],"version-history":[{"count":3,"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/posts\/7497\/revisions"}],"predecessor-version":[{"id":7503,"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/posts\/7497\/revisions\/7503"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/media\/7501"}],"wp:attachment":[{"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/media?parent=7497"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/categories?post=7497"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/progressiveeconomyforum.com\/development\/wp-json\/wp\/v2\/tags?post=7497"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}