The Diamond Sutra tells us that Buddhism- considered as a reified doctrine- is bullshit. However, this does not mean that peeps can't be Buddhists to a salutary end in the same way that bulls eat grass and return the favor by taking a dump on the meadow . Amartya Sen, has a witty paper from 1974, written for his former PhD supervisor, in which he shows that 'capital theory, growth theory, distribution theory' and other stuff which his other supervisor, Joan Robinson, thought was meaningful was actually bullshit of a more worthless sort than any actually bovine might let drop.
It begins thus-
It is well known that the Venerable Subhuti had a conversation with Buddha on transcendental wisdom which was immortalized as the Vajrachedikaprajn-dpdramitd, the so-called "Diamond Sutra", translated into Chinese around 400 A.D. by Kumarajiva from Kucha (Eastern Turkestan); indeed this was the first printed book in the world.
For Mahayana Buddhism, Subhuti is the disciples who most gets that nothing reincarnates. Nothing is virtuous. Thus to say Subhuti reincarnates is to say that one is wholly ignorant of the message of the Diamond Sutra.
What has only very recently come to light is the fact that despite his virtuous life, Subhuti had some lapses, and was born again in this century. Since the lapses were moderately serious, Subhuti was reborn as an economist, and since he was what Buddha called "a hair-splitting Brahmin" (see Kassapa-Sihanada Sutta),
Subhuti was not a Brahmin. He belonged to the wealthy mercantile caste.
Subhuti was destined to specialize in capital theory.
This is foolish. Subhuti's people were good at accumulating and allocating capital. Capital theory was of interest only to crap mathematical economists and Leftist nutjobs.
One day Subhuti was sighing in his study after reading Venerable Harcourt's survey and a hundred other books and papers on the subject, overwhelmed by the loftiness of the thoughts revealed in these works, when Buddha suddenly appeared, taking pity on his old acquaintance. Subhuti promptly uncovered his right shoulder, knelt upon his right knee and raising his hands with palms joined, addressed Buddha thus: World-honoured One, have you come to help me out of this mess of measurement of capital? Buddha said: Verily, I have come on a different purpose. To deflect you from your studies. Do not, 0 Subhuti, spend your life on a problem that is possibly trivial.
This is the opposite of the truth. The problem of measuring capital is not trivial. Indeed, at precisely the time when Sen was writing this, it was both very profitable to get right (e.g. by buying and asset-stripping companies whose book value did not correctly reflect asset value because capital was being mispriced) and also vital to properly categorize Capital for purposes of indicative planning (at that time Industrial Policy was still a thing) as well as for improving allocative and dynamic efficiency.
What Sen meant was that Capital theory was cretinous because the guys doing it were as stupid as shit. But this was also true of every other branch of academia in the Humanities and Social Sciences.
Subhuti said to Buddha: Trivial indeed, World-honoured One, from the standpoint of the "Ultimate Principle of Reality". But it is a serious problem for economics which I have been fated to do in the great cycle of rebirth, and I must do my duty this time. Enlighten me, 0 Enlightened One. Buddha said to Subhuti: Why do you want to measure capital, 0 Subhuti? What good will it do to you?
Subhuti was a 'Seth' of precisely the type which had bought up a lot of British firms in Sen's Calcutta. True, the Seth very quickly bankrupted the original company- but militant Trade Unionists would have done that anyway. Still, the Seths, as a class, were creating working capital and deploying it in a manner which escaped rent extraction save of a type which itself secured its victim a larger rent.
Measuring capital means making it fungible- i.e. seeing how much the market will pay for it in one way or another. You can raise money on the market to take over a bunch of heterogenous assets and then liquidate them to increase 'circulating capital'. This means the economy can jump to a different production function leaving the Marxist nutters and the corrupt bureaucrats scratching their heads and wondering where their victim slipped off to. Ultimately, you get the State to finance your entrepreneurship such that the tax payer gets the down-side and you end up with some state of the art assets with high marginal efficiency of capital, while using the other stuff as collateral and then gradually letting the nationalized Banks or LIC or whatever takeover the 'sick units' and the accumulated losses etc.
Buddha gave good advise to 'Seths'- i.e. capitalists- like Subhuti's folk- indeed, you could say he was promoting 'portfolio choice' theory. It shows a deep ignorance of Buddhism to write frivolous Sen-tentious shite like this-
Subhuti replied: Despite early doubts I have lately become interested in using an aggregate production function.
Nothing wrong with that. Cold War analysts were constantly revising their estimates of each other's military-industrial production functions. For your military doctrine to be credible, the economic facts on the ground have to support production estimates. But this is a wholly empirical and ideographic matter. It had nothing to do with the toy models used by stupid pedagogues.
And I would like to have the rate of profit in the economy determined by the marginal product of capital.
Why? That is foolish. The rate of profit should relate to risk or uncertainty. The real interest rate should determine the m.e.k .
The plain fact is, Sen had a shaky grasp of basic Econ. He confused marginal utility with marginal propensity to consume. His colleagues were making equally egregious errors. That's why Academic Econ fell steeply in prestige over the course of the Seventies. But then something similar had already happened to Literary Theory and Sociology and so forth.
I know from some of the books I have read that the difficulty in this arises from having more than one capital good and the problem of measuring capital. 0, how I wish that capital goods were homogeneous!
They are fungible. That's all that matters. You measure the value of the asset by seeing how much you can sell it for or what you could trade it for.
Seeing you, World-honoured One, an idea occurs to me. Why don't you simply make all capital goods homogenous? So many economists will be grateful to you for this, 0 Tathagata.
Nonsense! Nobody in their right mind would want a atomic reactor to be indistinguishable from a tractor.
Then Buddha said: As I have said many times, I am not a magician.
Which is why he didn't do bar mitzvahs
I cannot do the impossible, and my admiration is great for those who can change reality at the stroke of a pen. But tell me, Subhuti, do you really believe that having only one homogeneous capital good will permit you to derive a rate of profit purely from the technical relationship between homogeneous capital and output?
So long as all capital assets are fairly liquid at some level or another then the m.e.k will relate to the real interest rate. Profit will depend on risk or uncertainty.
Subhuti replied: Thus it is said in some venerable books. Buddha said: Revere them, Subhuti, but trust them not. Suppose you do get the value of the marginal product of capital in terms of output of consumer goods. In what units will it be expressed?
either money or, under 'War Economy' conditions- a 'numeraire' which is a commodity bundle of some sort.
Physical units of additional consumer goods per unit of additional homogeneous capital.
That's a capital-output ratio.
But the rate of profit is a pure number. Surely you will need something more in going from the first to the second to reflect the relative price of the capital good vis-a-vis the consumer good.
This is garbled nonsense. What this guy is getting at is 'time preference'. If people don't care when they get to consume stuff then the capital-output ratio, in a steady state, is the average efficiency of capital.
But the equilibrium price of capital in units of consumer goods depends on the rate of profit used for discounting,
the interest rate is used for discounting. The fact is, if risk or uncertainty rises, the rate of profit can rise while the return on investment is negative. Entrepreneurship is a real thing.
and a variation of the rate of profit can involve a variation of the value of the same physical capital in units of consumer goods. This difficulty is not eliminated by having one homogeneous capital good.
But it is by having money or a numeraire.
Subhuti said: How does Venerable Solow do the whole thing so easily in his simple growth model? Has he then made a mistake, 0 Enlightened One? My heart aches badly. Buddha replied: Forsake fear, Subhuti. Venerable Solow may make peculiar assumptions, but he never makes a mistake. He not only assumed a homogeneous capital good but simply one good in the economy, which eliminates the problem of the relative price of capital and consumer goods, which must be unity. Subhuti asked: And Venerable Samuelson's model of surrogate production function? That does not assume one good in the economy, if I have followed it right. Buddha replied: No, that belongs to a higher tradition. It eliminates the problem by assuming that the sectors producing the different goods have the same factor-intensity, i.e. the same ratio of physical capital to labour.The assumption is that equal factor intensity holds at all factor-price ratios
This is essentially another way of eliminating the relative price problem.
Because the assumption is that relative prices changes don't change anything at all.
However, you must note, Subhuti, that the model accommodates heterogeneous capital goods also, and the problem of relative prices is carefully eliminated by the equal factor-intensity assumption.
No. It is the assumption that factor-price ratios can change without factor intensity changing.
Subhuti then spoke thus: I am worried by the equal factor intensity assumption. Do we really require it, Enlightened One? Buddha answered: No, it is sufficient but not necessary, in the sense that some rather special configurations of other things can almost accidentally yield a surrogate production function. But the closest we come to the heart of the matter is with Venerable Samuelson's assumption about factor intensities.
We can always change our metric to say that factor intensity is equal in restaurant cooking and processed food manufactured. Thus we could say 'chef embodies 'Human Capital' while the robot pasta-maker 'embodies the wage labor of robotic engineers' etc. However, if relative factor prices change then we would have to change the metric. Samuelson is saying 'assume factor intensity doesn't change' which may be an okay approximation in the short run. That is the 'heart of the matter'.
Subhuti spoke now in sorrow thus: But the equal factor-intensity assumption is not really very close to reality.
That doesn't matter. This was the Cold War era. So long as the structure of the Military-Industrial complex was sclerotic and slow to change you could do back of the envelope analysis using a 'surrogate production function' of this sort. The big question in 1974 was, would the Soviets get to 'networked computers' before the US? If they did, they'd be the guys with a 'Star Wars' type anti-ballistic missile shield. America would have been fucked. Samuelson remained bullish on the Soviets to the bitter end. Ironically, it was Soviet mathematical economists who persuaded Gorbachev to fuck up completely. That's not a mistake the Chinese are going to repeat. Only mimetics, not maths, matters in Econ. Buddhism is essentially a mimetic field- like in the Vimalakirti.
Is there no method of getting the rate of profit as the partial derivative of some value of capital without going as far as Venerable Samuelson's assumptions? Buddha replied: For special cases, certainly yes. For an economy in equilibrium growth with the rate of profit equal to the rate of growth, one can get the equality of the profit rate and the marginal product of capital value without much difficulty.
So, if x is equal to y, then 'one can get the equality of x to y without much difficulty'. What a wonderful discovery!
But this covers only a particular situation.
No. It is a tautology. It is true in all possible worlds. Equilibrium growth means no change in capital output ratio. What Sen has stated is an accounting identity which must hold unless population is growing faster or slower than capital accumulation.
Subhuti asked: Is there then no measure of capital value such that the rate of profit equals the marginal product of capital irrespective of the exact situation of the economy unless the Samuelsonian surrogate model holds?
There are an infinite number of such measures of capital value. However this is also a true measure of the cuddliness of the baby. For any model, and any properties we might want that model to have, we can find a metric which permits that.
Buddha said: There is indeed. Venerable Champernowne's chain index gives a measure of capital such that one can use it as an argument in the production function and such that the equilibrium rate of profit will equal the partial derivative of output with respect to capital at its appropriate chain index value.
But there are an infinite number of ways to do this! Still, it must be said, Champernowne was smart- not Ramsey or Turing level smart but still pretty high IQ. He had indeed addressed reswitching in a comment on Joan Robinson back in the early fifties.
Of course, the neoclassical model is not fully restored since Venerable Champernowne's cunning trick lies in his skilful revaluation of capital, which may differ from the market value of capital.
Though this is what entrepreneurs do all the time. It is because of 'Value discrepancy' that there is a market for Capital assets.
Subhuti asked: Does this work always, World-honoured One? Buddha said: No, but it demands less than the surrogate production function. However, if there are conditions that lead to multiple switching, i.e. a situation such that a technique that is more profitable than another at a high interest rate and less profitable at a lower interest rate could again become more profitable at a still lower interest rate, then, O Subhuti, the Champernowne index may not work, as Venerable Champernowne had pointed out in 1954 before the debate on multipleswitching erupted between Brahmins of different traditions.
Jews. Not Brahmins. You could always have a complex valued Champernowne index to capture re-switching. The maths was available in the Sixties but the game was not worth the candle. The bigger problem is that the 'configuration space' of Econ isn't connected. Still, computability is not the problem coz the direction of Schelling focal solutions to the coordination problem are, or swiftly become, either 'common knowledge' or simply motivate Tardean mimetics.
After describing the war between the two Cambridges as a 'Kurukshetra' Sen finally turns to his own 'vishada' or mental depression
. I devoted myself to development economics before I took to the path of capital theory. I had convinced myself that in some cheap labour economies like India and China it makes sense to recommend choosing relatively less capital-intensive techniques of production, but I now realize that this is not the enlightened way in view of the difficulties in the conception of capital as a factor of production.
India did need to concentrate on getting girls out of villages and into giant factory dormitories. The fact is, this is more 'capital intensive' (because girls who would have been fetching water in pots are now getting piped water) than a case where Betty from Birmingham moves from working in a hair-dresser to assembling circuit boards.
What sense can there be in talking of the ratio of capital to labour, or of capital to output?
A sound 'Cold War' type sense. That's why it was being done back then. We still use such rough and ready methods to figure out if China can get to a point where it invades Taiwan faster than the 'Quad' develops a countervailing power in the relevant region.
How naive have I been! I shall never again recommend choosing low capital-intensity in cheap-labour economies. Buddha said: Why not, 0 Subhuti, why not? When you say you were recommending less capital-intensive techniques, you were suggesting specific technical alternatives over others. Perhaps recommending that in constructing an irrigational dam, the earth may be moved in a surpluslabour economy by men with baskets rather than by bulldozers.
Why not just leave the matter to accountants? Which method is cheaper? This is ideographic. It may turn out that using 'surplus labor' is prohibitively expensive because the local people want a permanent source of cash but don't give a shit about having a dam which will send water far away to thirsty cities. On the other hand, you can hire the local tough guys to keep the bulldozers and engineers safe while distributing enough booze and porn to keep the other locals quiet for a year or two while the dam goes up as quickly as possible. In reality, economists don't get asked for input in such matters save after the fact for a cosmetic purpose. The lender dictates how the thing will be built- i.e. which firm gets the contract.
Sen wrote another paper around this time, which I have discussed elsewhere, in which he pretty much tells his readers that 'Project evaluation' is cosmetic bullshit.
Subhuti asked: In view of the difficulties in the conception of capital that you have already opened your holy mouth on, surely it makes no sense whatever to talk of lower or higher capital intensity?
Haldane & Goodwin, while in India, formulated the 'Goodwin Class Struggle model' which is a Volterra predator-prey model in which, wait for it.... workers are wolves and capitalists are sheep! In other words, if the workers keep trying to eat the capitalists they go capital intensive and wait till the workers starve. A better alternative is to get your hand on teenage girls in the boondocks and move them into factory dormitories. They will quit in their twenties to have babies but not very many babies and will come back in an upswing when the labor market is tight. The good news is that you get demographic transition. Boys however- except the entirely spiritless- should do migrant construction or get conscripted or just spend a lot of time knifing each other.
Buddha replied: That thought of yours is so complicated and involves so many different colours that you may well be born as a chameleon in your next incarnation. First, the fact that it may be unenlightened
in other words, 'politically incorrect'
to hold that the rate of profit is determined by the marginal productivity of capital, need not in the least disturb the argument that at a given rate of profit, one technique may have a higher capital intensity than another.
Don't be 'politically correct'. It is obvious that capital intensity differs. Sen doesn't say that what matters is the size of the market. But size of market is itself a function of the capital output ratio. A subsistence economy has to invest a lot to get to a point where there is sufficient market size for capital intensity in production.
Second, when one recommends choosing less capital-intensive techniques in a surplus-labour economy, one is usually making a statement about investment and not about the existing capital stock.
No. One is making a statement about the size of the market. If export pessimism prevails (because you think your people are shit) then you have to have lots of little guys making one or two cars a day in tiny workshops. If you are known to shoot Trade Unionists and, what is more, can give manufacturers what they really want- viz plenty of teenage girls who will put in four or five years before running off to get preggers- then you can do export led growth.
Therefore, the problem of ex post fixity versus malleability on which-as you point out in your humble Buddhist style-I have opened my holy mouth, is not relevant. I take it that you are not recommending that you scrap your already installed mechanized machinery and change them into baskets and such.
But depreciation will have the same effect soon enough
Third, when one recommends a lower capital-intensity it is not a question of treating capital as one factor of production but of economizing on the use of the class of non-labour means of production vis-d-vis the use of labour, which is relatively abundant.
I suppose Sen means 'landesque Capital'.
Where is your common sense, Subhuti?
Sen has endowed him with none because Sen has none.
Subhuti replied: In my incarnation as a modern economist I have learnt how deceptive commonsense can be. I prefer rigorous arguments. As you concede, the non-labour means of production are heterogeneous. How can we talk about an overall capital intensity? Are there fixed relative prices among the different non-labour means of production? The debate on capital theory is not irrelevant to this question. Buddha said: It is not, of course. But it may not make a difference when we are talking of sharp contrasts as we are doing when we recommend moving earth by hands and baskets rather than by bulldozers in building an irrigation project.
This is silly. The very poor will happily pretend to move some earth in this manner if they get paid. But then the monsoons will come and will wash away the fruits of that labor and none will be better pleased then the guys with the baskets.
We may not be absolutely certain of the correct relative price of baskets vis-a'-vis bulldozers, but within the limits of variations that may be relevant the former may involve a lower capital intensity than the latter in each case. And when one is making a general recommendation in favour of less capitalintensive techniques in cheap-labour economies, one has in mind something of this kind. For less clear cases, one would, of course, need to do a detailed cost-benefit analysis, and comparison of overall capital intensity will not be the right way of going about it.
So Sen's shite on 'Choice of Technique' was shite. Fair point. However as Sen admits in another paper he published at this time, if the guys doing the C.B.A aren't the guys paying for the project then their work will be merely cosmetic.
Sadly, Sen makes the Lord Buddha the ventriloquist's dummy of his own abiding stupidity.
Buddha said: Let (ql, . . ., ql) be the amounts of n types of capital good inputs needed per unit of output under technique 1 and (q,. . ., q2) those under technique 2. We refer to them as vectors ql and q2 respectively.
The problem here is that no Technique of production has a well defined vector of this sort. Even assuming linear production functions, exogenous facts which cause output to fluctuate will yield different vectors.
The appropriate shadow prices may depend on many things and might not even be known with very great precision.
Which is why they are shit compared to actual prices.
They may even depend on the choice of q.
Or on the choice of anything at all.
Suppose the planner only knows that the price vectors pl and p2 in the two cases would belong to some set ir. Then we would be able to say that q1 is more capital-intensive than q2 if for every pair of price vectors pl and p2 (not necessarily distinct) taken from E, we have: p1q1 >p2q2
We know, of course, that for any E the ranking of the vectors of q will be a quasi-ordering, and satisfy some systematic properties, e.g. transitivity.
This is false. There can't be a quasi-ordering of vectors of q because there are no fucking vectors at all. Under any given technique of production we don't know what portion of which capital goods will be attributed or 'absorbed' by a unit of output because this depends on actual outcomes. Perhaps Sen should have spoken 'magic formulas of production' rather than 'techniques'.
Sen himself had done a bit of empirical research on cottage industries. He knew- as does anybody who bought DIY stuff- that the 'capital intensity' of stuff which requires a lot of labor- e.g. making pasta at home or weaving cloth on a loom in your cottage- is very very high because people won't use that shit more than a couple of times. I have a fancy ice-cream maker which I bought on discount for about a hundred quid. I made ice cream twice. Thus home-made ice-cream turned out to be way more capital intensive than stuff from the fancy Italian place down the road.
Subhuti asked: But, 0 Enlightened One, knowledge must lead to some real gain? Buddha said: Do you remember what I told you 2,500 years ago in that park near Shravasti, when you asked me: "In the attainment of the Consummation of Incomparable Enlightenment did Buddha make no acquisition whatsoever?" Subhuti replied: I have forgotten, but here is A. F. Price's translation of the "Diamond Sutra", and I notice on page 61 that you replied to my question thus: "Just so, Subhuti. Through the Consummation of Incomparable Enlightenment I acquired not even the least thing: wherefore it is called 'Consummation of Incomparable Enlightenment'." Buddha said: Just so, Subhuti, just so.
Around this time, Purnendu Chatterjee was getting this PhD in Operations Research at Stanford. He became a partner at McKinsey before starting up on his own and becoming a billionaire employing 8000 people. One can't say Chatterjee has knowledge about Capital allocation which he can sell us or which we could confiscate from him. Like the Buddha, what he has can't be 'reified'. Nor is there a 'technique' or 'algorithm' which could capture the 'Purnendu function'. Sadly studying Sen-tentious shite won't help our people in this matter. There's nothing wrong with math usefully applied- e.g. in O.R. But maths as mental masturbation makes you go blind. You end up shitting on the Buddha. That's not cool.
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