Veiled Repression

Abstract:

The Cambridge (UK) versus U.S. capital theory debates of the 1960s showed that the workhorse mainstream growth model relies on unsustainable assumptions. Its standard interpretation is not consistent with the past four decades of data. Part of an estimated increase in the ratio of personal wealth to income in recent years is due to higher asset prices. The other side of the accounts reveals that financialization and growing business debt partially offset the greater net worth of households. Attempts to interpret growth in wealth principally as a consequence of capitalization of rents are misleading, but capitalization of a rising profit share helps explain an upward trend in Tobin’s q. Growth models based on Cambridge ideas can help correct these misinterpretations.

Keywords:

• Cambridge controversies
• income distribution
• wealth distribution

Notes

When they surface today, results of the controversy are often misstated. For example, the economics commentator John Kay wrote in the Financial Times (October 6, 2015) that “Robert Solow [from MIT] won easily because of the care he took to specify … his models” and that the other side was led by the “Cambridge Marxist economist Joan Robinson.” In fact, Solow’s colleague Paul Samuelson (1966) graciously conceded that MIT was wrong. Even so, macroeconomic courses in leading U.S. departments continued to be based on the theory that failed. MIT’s canonical textbook by Olivier Blanchard and Stanley Fischer (1989) did not bother to mention the controversy. Joan Robinson was a left Keynesian, not a Marxist, and a full professor at Cambridge. The classic reference is G.C. Harcourt (1972).

The Australian economist Trevor Swan (1956) independently invented the same model.

In his General Theory, Cambridge’s preeminent economist John Maynard Keynes (1936) dismissively labeled this assertion Say’s law after an early nineteenth-century French scholar. The law implies that any excess of income over consumption and taxes somehow gets automatically translated into an increase in the capital stock. For example, savings newly deposited in a bank immediately get lent to a firm to purchase new equipment or to a contractor to build a house.

The calculation of u relies on the rough-and-ready “perpetual inventory” estimate of K used in the U.S. national income and financial accounts (details below). The profit share π is calculated using “net operating surplus” estimates from the U.S. national accounts (Table 1.16). The profit rate follows from the accounting equation r = πu.

In any case, the elasticity is a messy mélange of productivity, distributive, demographic, and demand shifts (Barbosa-Filho forthcoming)—not a useful parameter.

Equation (2) follows from consolidating the “Balances” in a version of Table 1 extended to include liabilities of the rest of the world such as reserves of the central bank and national liabilities that it holds.

Perry Mehrling’s (2010) New Lombard Street is a useful summary of the current state of finance.

The “≈” signals that equality is only approximate (to roughly three significant digits) because of minor transfers not intermediated via claims in the financial system.

William Lazonick (2015) gives an insightful review.

He is not cited by Piketty, but some time ago Robert Hall (1981) of Stanford’s Hoover Institution came up with similar results in a high-tech paper.

The basic idea can be traced to Thorstein Veblen, Gunnar Myrdal, and Robin Marris (who called the ratio v in his theory of the firm) and Keynes.

Estimating q is tricky. José Gabriel Palma (2009) reports an increase from around 0.5 to 2.5 between 1980 and 2000.

Which relationships generate income is another tricky question. Import quotas are legally sanctioned public–private relationships often used to exemplify targets of rent-seeking. But restrictions on imports helped stimulate industrialization in Korea, so were they unproductive?

For details, see Nelson Barbosa-Filho and Lance Taylor (2006), who work with the wage as opposed to the profit share. Cycles in π and u are evident in Figure 1.

That is, capitalists’ ratio of saving to wealth is s_cr and the economy-wide ratio is g.

Additional information

Notes on contributors

Lance Taylor

Lance Taylor is Arnhold Professor Emeritus, New School for Social Research. The research has been supported by the Institute for New Economic Thinking. Comments by Thomas Ferguson, Duncan Foley, Armon Rezai, and two anonymous referees are gratefully acknowledged.