Know Nothings

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Decades ago, the Cambridge economists pointed out flaws in the orthodox theory of capital, which purported to measure, in monetary terms rather than material units, the aggregate ‘productivity’ of heterogeneous capital goods.

Of course, this defeat had no impact on the neoclassical research programme. Far from it: in the following decades, they added another explanatory variable to the Cobb-Douglas function, and repeated the same error.

Knowledge, information or ‘human capital’ was uncovered as an input to production, and usually supposed to exhibit increasing returns to scale (the ‘spillover effects’ of endogenous growth theory).

From there it entered World Bank reports, which gravely explained the developmental struggles of various countries by reference to their lack of human capital and ‘good governance.’ And from the management literature – ‘knowledge transfer’ etc. – it was but a short leap into the everyday journalistic toolkit.

But human capital posed the same difficulties of measurement and aggregation as its big brother. Users relied on a single (dimensionless?) scalar to measure ‘knowledge’.

One of the participants in the original capital controversy could thus slip comfortably back into the fray. Ian Steedman gave neoclassical luminaries like Robert Lucas, Robert Barro, Paul Romer and Xavier Sala-i-Martin a deserved walloping for their ‘conceptual confusions’ and ‘terminological slapdashery’:

In all too many contributions to New (Endogenous) Growth Theory – though not in all – central reference is made to ‘a stock of knowledge’, a ‘stock of ideas’, etc., this variable featuring centre-stage in the analysis. Yet it is immediately apparent that this is far from being a crystal clear concept. Is knowledge a homogeneous quantity of which there is simply more or less? Clearly not. How then, in constructing a measure of the total stock, is one to select ‘the weights (prices) with which an idea in carbon chemistry, say, is to be combined with an idea in the production of insurance services? It is not obvious what the weights are, and they certainly are not to be found in market prices’…

Even if ‘knowledge’ either is or can be rendered homogeneous – and that is a very big ‘if’ – the question arises whether there exists any cardinal measure of the single stock of knowledge. It is certainly – and lamentably – common in the NGT literature to treat the ‘stock of knowledge’ as if it were a single magnitude with a cardinal measure, without any justification being given for this highly dubious assumption.

Few if any authors indeed state explicitly and openly that they suppose the stock of knowledge to be cardinally measurable. Yet they repeatedly assert this by implication. Let A represent the stock of knowledge. We read over and over again that a function with A as one of its arguments does (or does not) exhibit constant returns to scale. But either assertion is utterly meaningless word-juggling if A is measurable only ordinally! Again, we read over and over again that, in such a function, A has a decreasing (or increasing) marginal product – i.e., that equal successive increments in A yield decreasing (or increasing) increments in output. By the very meaning of ordinality, however, no meaning can be attached to the claim that successive increments in (ordinal) A are (or are not) equal! …

This is certainly not ‘measurement without theory’; it is theory without the minimal conceptual clarity required to make that theory worthy of attention. No amount of ‘sophisticated’ mathematical analysis can turn conceptual confusions into meaningful conclusions.

The circularity apparent in orthodox capital theory also re-appears. From the Sraffian perspective, the measurement of capital in money terms (i.e. seeing capital income as reward for productivity) was meaningless. The value of commodities depended on the income distribution between capital and labour. The ‘productivity’ of aggregations of capital goods was thus a function of the class distribution of income. The former was an algebraic result of the latter, not its cause. 

Similarly, as Philip Mirowski has observed, what today counts as ‘knowledge’ is determined by what someone is willing to pay for. The genius and productivity of managers can be inferred from the size of their salary package.

Most of them can point to educational attainment as evidence of their accumulated ‘stock of human capital’. In reality, such university degrees have merely bestowed a title to future income streams (i.e. a right to claim a portion of the social product). Today’s patents of nobility are degrees in law, finance, management etc., awarded by prestigious universities and marked with the necessary seal.

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4 Responses to “Know Nothings”

  1. Green can be gold « Churls Gone Wild Says:

    […] magnitudes. A similar charge would later be levelled against neoclassical economists during the Cambridge capital controversy, which concerned the adequacy of aggregate measures of the productivity of heterogeneous […]

  2. National guilt « Churls Gone Wild Says:

    […] Members of the liberal professions (certified academics, architects, lawyers, accountants, etc.), together with civil servants and other members of the skilled professional salariat, imagine that the income premium they command, and other privileges, are due to their ’different genius’ (as in Adam Smith’s parable of the philosopher and the street porter). Their relatively high earnings (compared to the wages and salaries earned by employees generally) are understood as a just reward for talent. According to the prevailing ideology, the level of payment they fetch in the labour market (or receive as proprietorship or partnership income) is set by the worth of what they contribute as an input to production. The latter capacity is held to derive either from intrinsic characteristics of the person herself (superior cognitive skills), or from a provident and well-calculated investment of time and effort in education – foregoing earnings for several years of additional study, bestowing upon her a stock of human capital. […]

  3. The ‘green’ economy: a fantasy fuelled by financialization « Churls Gone Wild Says:

    […] in ‘clean’ information-processing equipment, software, intangible IP assets and ‘human capital’, and to an epochal technological step change: the New […]

  4. The right man for the job | Churls Gone Wild Says:

    […] The latter capacity is held to derive either from intrinsic characteristics of the person themselves (superior cognitive skills), or from a provident and well-calculated investment of time and effort in education: foregoing earnings for several years of additional study, bestowing upon them a stock of human capital. […]

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