Mark Thoma has written a very nice blog on how Piketty’s work is transforming economics by bringing it closer to its political economy roots. I found the post excellent, and wanted just to point out one thing which, I think, is very well argued by Thoma and another where he somewhat simplifies the matters.
What I liked?
Thoma’s point that distribution (both regarding the flows of income and distribution of asset endowments) was excluded from the economic analysis, and thus income distributions studies relegated to the netherworld of economics is absolutely correct. Until some 10 years ago one had hard time even finding in JEL classification the right slot for the papers on personal income distribution. Thoma, very rightly, singles out two methodological developments which explain this disregard of income and wealth distributions: (1) theory of marginal productivity which took its “final” form with Marshall and Walras more than 100 years ago, and (2) the distinction between normative and positive economics, which he says (I did not know that) goes back to Nassau Senior.
The former provides fully market-based explanation for all incomes of the factors of production (thus dispensing with the need to introduce political elements) and allows us to conclude that any distribution of income that emerges must be optimal. If we however want to question the initial endowment of assets (“yes, it is fine that capital gets x, but let’s see who owns that capital”), the positive economics kicks in, and says that we do not need to worry about the initial distribution of wealth either, because it is given and outside our analysis. These were two powerful developments which totally excluded any concern with distribution issues. This is why practically nobody cared about income and wealth inequalities.
Where I disagree?
I think that Thoma too easily glosses over Marx (one sentence) by saying that Marx believed that since labor is the only source of value, the entire net product (after depreciation) should belong to labor. This is not entirely exact, and if it were would imply that both Smith and Ricardo should have (since they held labor theory of value) believed the same. Marx made an important new step by distinguishing between value of labor and value of labor power. The latter is equal to the value of goods necessary to return worker to where, in terms of physical and social needs, he was before the beginning of the process of production. Basically, it is equal to the subsistence wage (amount of food, housing, satisfaction of other needs where the relative needs also crept in) that is necessary, after a full working day and worker’s exertion, to restore him/her to the original position. But in addition, Marx argued, labor possesses a unique characteristic that the value created during the process of production (say, during 10h of work) exceeds the value of the labor power, that is value of the commodities that are included in the subsistence wage (e.g., you need to work 4 hours to get enough to purchase these commodities). The difference (6 hours) is the surplus value received by the capitalist.
Thus, in Marx we have two steps: (a) labor theory of value, and (b) value of labor power which together show (Marx was very proud of this) that exploitation is not mere stealing but takes place on the back of the action of the law of value. Capitalism allows everything to be bought and sold according to its value, including labor. Surplus value and exploitation are thus “imbedded” in the “value-driven” or “value-based” nature of the capitalist process. They are not a robbery; they are just an intrinsic feature of the system.
Joan Robinson thought that Marx’s distinction between value of labor and value of labor power was just “metaphysics.” It is quite likely so. But nevertheless, it was an important methodological innovation which distinguishes Marx from Smith and Ricardo.