Krugman on Palley's Gattopardo Economics

So Krugman has weighed in on Tom's review of Piketty's Capital, which is all the rage now. Krugman's defense of Piketty is based on denying that neoclassical economics is a theory of distribution, on the one hand, and on the other suggesting that using mainstream models to discuss inequality might be a strategy, that is a politically calculated plan of action, that would put the discussion of inequality at the center of the political agenda. This without necessarily, he argues, stop discussing the methodological issues on how to do economics.

On the first topic, he is obviously disscusing the issue that is central to the capital debates (and central to Piketty's book) which was discussed by Tom, and also by Jamie Galbraith, and Lars Syll and in my own post on the topic, that linked to Jamie's review. According to Krugman:

There are a few economists on the left who seem to believe that: 

1. You need to believe in the existence of a perfectly well-defined aggregate measure of capital to believe in the marginal productivity theory of income distribution; 

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. Nothing about marginal productivity theory depends on the exact truth of a simple aggregate production function with capital defined by a single number. And saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get.

First of all. It is NOT an issue of right and left. It is a question of logic and evidence. And yes, you may very well  have a disaggregate intertemporal version of the marginalist analysis, and you still have to show that there is a rate of interest (a natural one, that Krugman always cites, and says it has been negative, by the way), that equilibrates investment to full employment savings.

So yes dude, marginal productivity implies that the remuneration of capital, its natural rate of interest, produces full utilization of capital (and to derive that you need full utilization of labor, since if labor was not utilized its price would fall, and substitution would imply more demand of cheap labor rather than capital), and that by definition capital receives according to its productivity. Distribution is endogenous. As much as labor receives according to its productivity (Krugman should read the stuff in his Principles book, by the way, in which he teaches exactly that).

Also, Krugman says that:

You can be perfectly conventional in your economics — or, my own attitude and what I think is Piketty’s, willing to use conventional models when they’re convenient and seem useful without treating them as irrefutable truth — while still taking inequality very seriously.

This is a repetition of an old arguments of his about using flawed theoretical models to say reasonable policy propositions. He argued before that:

By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote. So you could do exchange rate models that actually had realistic assumptions about prices and employment, but put the focus on rational expectations in the currency market, so that people really didn’t notice. Or you could model optimal investment choices, with the underlying framework fairly Keynesian, but hidden in the background. And so on.

And that it a nutshell is what Tom is criticizing. The need to make things look respectable, in Piketty's book, are what make his contribution very likely Gattopardo economics.

PS: Krugman has more on Palley here, and more to follow from NK on that later; also if you want to understand why Krugman does not understand the limitations of mainstream economics go here for a primer on the capital debates.