I'd Like To Hear Second Thoughts On The CCC From Joseph Stiglitz

Stiglitz's first thoughts can be seen in his 1974 review of Harcourt's 1972 survey book. About that time, Stiglitz also reviewed Pasinetti's presentation of the Kahn-Kaldor-Pasinetti-Robinson theory of growth and distribution. Neither Harcourt nor Pasinetti were happy with Stiglitz's respective review. Morishima (1977) is an outgrowth the JEP's editor becoming aware of Pasinetti's unhappiness.

I don't want to hear second thoughts from Stiglitz so much on the technical content below. I rather hear second thoughts on a point from the sociology of "knowledge". What determines how some views become worth considering in mainstream economics, while others are written out? I think Stiglitz might have something interesting to say on that based on his recent experiences, and I wonder if that could inform how he might look back at the Cambridge Capital Controversy.

Stiglitz writes:

"It is also true that with profit-maximizing competitive firms, in long-run equilibrium where all relative prices are constant, the rate of interest is equal to the own rate of return of every capital good (the marginal productivity of every capital good in terms of itself..." -- J. E. Stiglitz (1974)

I find Stiglitz less than forthright in failing to address the conception of capital as finance. Is Stiglitz clear that, in neoclassical theory, no theorem asserts the equality in equilibrium of the interest rate and the marginal product of (finance) capital? I think Stiglitz's formulation about own rates, as if that was a point in dispute, is likely to mislead readers.

"...At any moment, there is a given vector of capital goods and of labor. Under the extremely simplified models conventionally used, these endowments determine the marginal productivity of the different capital goods and the rate of interest. Given the savings behavior, this determines the change in the stocks of capital goods; eventually the economy converges to a state where the rate of interest is equal to the rate of growth divided by the savings propensity; still, at each moment, it is the 'capital goods-labor ratios' which determine the rates of return on the different capital goods." -- J. E. Stiglitz (1974)

(Notice Stiglitz does not say marginal productivities determine factor prices.) I think this emphasis on very short run equilibrium paths has not held up well; I see no reason to think a capitalist economy will follow such a path. Anyways, a consensus still does not exist on whether this approach is resistant to Cambridge capital critiques.

Consider:

"All that [reswitching] implies is that the weak qualitative assumptions we conventionally make in economics - that is, convexity of the technology, with its implications of diminishing returns - do not have any strong implications for comparisons of economies in steady state: that is, reswitching establishes that the derivation of simple comparative dynamics propositions requires stronger assumptions than those required for the existence of competitive equilibrium and the derivation of qualitative properties concerning economies with given initial endowments...

...Moreover, it is easy to develop, using steady-state analysis, all manner of paradoxes. For instance, the opening of free trade may actually lower steady-state consumption (this does not contradict the classical propositions concerning gains to trade). One can show that of all the feasible steady states in a life-cycle model, the one which maximizes steady-state utility is not sustainable by a competitive equilibrium (without appropriate lump-sum transfers), and conversely. (This does not contradict classical welfare propositions.)" -- J. E. Stiglitz (1974)

(I think the classical theory of free trade is more about the comparison of steady states than very short run paths with given initial endowments of capital goods.) I don't think this comment has aged well, either. Economists have not been able to state general assumptions that rule out capital-reversing - which is not the same as reswitching. Furthermore, if reswitching is so non-threatening, why hasn't it entered the mainstream introductory textbooks? Why are economics students at all levels not taught to be clear on the structures of their models and their implications? Surely, one should not still be able to surprise economists with paradoxes whose possibility was established decades ago?

References

• Harcourt, G. C. (1972). Some Cambridge Controversies in the Theory of Capital, Cambridge University Press
• Pasinetti, Luigi L. (1974). Growth and Income Distribution: Essays in Economic Theory, Cambridge University Press
• Stiglitz, Joseph E. (1974). "The Cambridge-Cambridge Controversy in the Theory of Capital: A View from New Haven: A Review Article", Journal of Political Economy, (Cowles Foundation Paper 410), V. 4
• Stiglitz, Joseph E. (1975). "Growth and Income Distribution: Essays in Economic Theory", Journal of Economic Perspectives, V. 13, N. 4 (Dec.): 1327-1328
• Morishima, Michio (1977). "Pasinetti's Growth and Income Distribution Revisited", Journal of Economic Perspectives, V. 15, N 1 (Mar.): 56-61