#robert solow

Neoclassical economics beings from the realm of exchange and works back to production. It puts enormous weight on the virtues of price-fixing markets in assuring efficiency, justice, and social well being. The fundamental 'economic problem' facing humankind is the scarcity of resources; the solution is to allocate resources as efficiently as possible to meet human needs. The invisible hand of the market is the surest path to this end, as households exchange their endowments and commodities, including labor and capital, to improve their lot. Those who hold these views expend great amounts of energy to proving that untrammeled exchange produces maximum satisfaction, but direct very little attention to the actual operations of production, which are represented in terms of highly generalized 'production functions' that can generate steamboats as easily as tubas. Production functions join factor inputs (resources) in the right proportions to create commodity outputs in the quantities demanded by final consumers. Our approach begins with production, the source of commodities exchanged in markets. Production is not the passive joining of inputs but the active application of human labor with the help of human-made tools, to natural materials in order to transform them into useful objects. In generalized commodity exchange, commodities are produced by commodities, but the key factor, wage labor is embodied in a class of living, breathing workers. As the productive powers of human labor have expanded over the centuries, commodity exchange has expanded around the globe and market institutions have been created to facilitate these commodity flows and to coordinate disparate acts of production. In the neoclassical scheme production is guided to beneficial ends by an exogenous set of factor supplies and consumer preferences of individuals and households. Price of inputs and outputs are set by the intersection of aggregate supply and demand curves. Prices are key signals in the market system. They regulate individual firm and household behavior. They cannot be affected by individual action because such action is limited by perfectly free and open competition. Businesses react in a rational manner to price and profit signals, and allocate their resources so as to maximize profits, i.e., the differences between revenues and costs. Thus 'profit maximization' is a curiously passive activity in the neoclassical world. Positive and negative (excess) profits call forth adjustments; zero (excess) profits signal that all is well. Profit is a residual that disappears in the equilibrium state to which the economy gravitates. Firms are able to equalize revenues and costs at the margin by making substitutions along their production frontier. Capital, too, is passive. It is simply a fund of homogeneous value, one of several inputs or factors of production. Capital does not make profit, but simply commands a 'fair return' for its contribution to productivity. Our view is again quite to the contrary. The goal of capitalist production is to generate a surplus of output over inputs. The distribution of this surplus is at issue. Most of it goes to enrich the class that controls the means of production in the form of money profits, derived from surplus value (labor time). Capital is both money invested to make a profit and a relation of class domination and exploitation. The long-run goal of capitalists is to maximize their accumulation of capital. They are spurred on by the force of competition, which is not a matter of adjustment but of surviving and prospering by keeping up with, or bettering, one's opponents. Production is constrained and enabled by such objective considerations as technological knowhow, installed equipment, consumer demand, labor skills, and time worked. Both profit rates and prices themselves produced, flowing from the technical and social relations of production, not established in exchange prior to production. Prices and profit rates are, therefore, secondary variables in the analysis of production and capital accumulation- guided principally what society can do, not what is subjectively desired. Allocation of scarce inputs is not longer the issue so much as the development and distribution of socially-generated wealth. Finally, neoclassical economies remain at rest unless moved by exogenous disturbances. When the system does receive such a shock, ration responses to price and profit signals, perfect competition, and adjustment of production mixes assure that it will return to equilibrium. The economy grows through the expansion of factor supplies, chiefly the laborforce, and through technological change that moves production functions outward [as argued by Solow]. Such change is either exogenous or induced by factor prices that trigger the search for technologies which will conserve on labor, materials, or capital. Our view of capitalist reality is once more quite otherwise. The economy is fundamentally a disequilibrium system, drive to grow and to change by its own internal rules of surplus generation, by investment to expand capital, by fierce competition, and by technological change to extract more surplus (value) from human labor. Growth is itself produced by the systematic expansion of the forces of production, that is, through industrialization. This is an inherently creative and unpredictable process of doing things that could not be done before (and consuming things that never existed before), and cannot be uniquely determined by price and profit signals based on past or present production or preferences. Prices and profits are approximate guides in a rapidly shifting world of production. Equilibrium is always just out of reach; efficiency is an idea to be considered seriously when the money is running low.

Robert Solow

Piketty writes as if a tax on wealth might sometime soon have political viability in Europe, where there is already some experience with capital levies. I have no opinion about that. On this side of the Atlantic, there would seem to be no serious prospect of such an outcome. We are politically unable to preserve even an estate tax with real bite. If we could, that would be a reasonable place to start, not to mention a more steeply progressive income tax that did not favor income from capital as the current system does. But the built-in tendency for the top to outpace everyone else will not yield to minor patches. Wouldn’t it be interesting if the United States were to become the land of the free, the home of the brave, and the last refuge of increasing inequality at the top (and perhaps also at the bottom)? Would that work for you?