Okay, I really did not want to spend more time arguing about methodology but there seems to be some simple points getting lost in cyberspace. Paul Krugman picks up on the debate between Simon Wren-Lewis and Tom Palley, coming down clearly on the side of the former.
I won't go through the blow by blow, but I do want to deal with the point Paul raises at the end of his post.
"And what’s going on here, I think, is a fairly desperate attempt to claim that the Great Recession and its aftermath somehow prove that Joan Robinson and Nicholas Kaldor were right in the Cambridge controversies of the 1960s. It’s a huge non sequitur, even if you think they were indeed right (which you shouldn’t.)"
Hmm, I don't quite see it that way. To me there is a very specific issue that Piketty raised that relates directly to the Cambridge controversies. He argued that the elasticity of substitution between capital and labor was greater than one. Therefore even as the amount of capital increased relative to labor, there was no reason that the rate of profit had to fall proportionately. This raises the prospect of an increasing capital share as economies get richer.
This relates to the Cambridge controversies since the Cambridge U.K. people argued that the idea of an aggregate production function did not make sense. They pointed out that there was no way to aggregate different types of capital independent of the rate of return. The equilibirum price of any capital good depended on the rate of return. Therefore we can't tell a simple story about how the rate of return will change as we get more capital, since we can't even say what is more capital independent of the rate of return.
The takeaway from this, or at least my takeaway, is that we don't have a theoretical construct that we can hope more or less approximates how the economy actually works. The theoretical construct doesn't make sense. This means if we want to determine the rate of return to capital we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit.
The debate touched off by Piketty's claim about the elasticity of substitution will inevitably be a fruitless one. We are not going to find a technical relationship in past data that will tell us how profit shares will change as the ratio of capital to labor increases.
Does any of this mean that the Great Recession proved Joan Robinson and Nicholas Kaldor right? Not as far as I can see. Although it is pretty damning of the state of the economic profession that almost no one recognized the growth of housing bubbles in the United States and much of the rest of world, and that their collapse would create a hole in demand that would be extremely hard to fill.
I will say that I am a bit at loss to understand the meaning of Simon Wren-Lewis's comment that:
"As I said in my original post, I would like to make students aware of heterodox critiques, but I want to point out where in my mainstream account that critique would enter. (I think what I teach is pretty close to how many central bankers think, if not the rest of 'my tribe'!)"
It certainly is worthwhile to know what central bankers think, but is this supposed to be a source of legitimation? After all, even by the I.M.F.'s measures the wealthy countries are losing well over $2 trillion a year due to economies operating below potential GDP. The cumulative losses to the rich countries from the Great Recession are virtually certain to exceed $20 trillion and could well top $30 trillion. Is it supposed to be some sort of validation that the folks who got us here share your view of the world?