It’s rare that you will see Peter Klein and James Galbraith agree, but they do. And after getting my own copy of Capital in the 21st Century, I can join the party: Thomas Piketty doesn’t have the foggiest idea what economists are arguing about when they bring up concerns over aggregation in capital theory.
Here’s Klein (his is the second review, under Hunter Lewis):
Piketty understands “capital” as a homogeneous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quality of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.”
Profits are amounts, not rates. The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible from the perspective of modern production theory.
Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.
The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.
After quoting from Piketty’s (3-page) discussion of the Cambridge Capital Controversy–in which Piketty somehow manages to conclude that Solow’s model “carried the day”–Galbraith points out, “And Solow’s model did not carry the day. In 1966 Samuelson conceded the Cambridge argument!”
I am really trying not to be a know-it-all about this, lashing out with suppressed jealousy at the guy who is getting worldwide acclaim. But I am pretty sure my jaw literally dropped when I went right to the section on the Cambridge Controversy in Piketty’s book (which I obtained just a few hours ago, and have only spent 30 minutes perusing so far).
Does anyone know, does Piketty’s book elsewhere deal with the problem of aggregating capital? I mean, since he doesn’t even bring it up in three pages devoted to a debate about aggregating capital (really: Wikipedia tells you more in the first two paragraphs than in Piketty’s 3 pages), I would be surprised if he mentioned it elsewhere…but I don’t want to assume. Who knows how these Frenchmen write books?