Distribution theory I. The origin of economic models
Last time, on entry II, I advanced quite a bit on the exposition of my critical perspective towards the history of economic thought, and reached some key conclusions. Today, on this entry, I intend to further explore those ideas I already established from the point of view of another of the main currents of economic theory development: Theory of Distribution. The aim is to proof that last time it was not just a lucky shot, that the use of a wrong methodological perspective in economics affects negatively to the results of its whole research.
Distribution theory is particularly interesting for this purpose because it was the place where economic models were firstly introduced. Such a fundamental pillar on ulterior economics developments is also used from the wrong perspective, as I will argue now, therefore yielding inconsistency between the models and the reality as a result. It all began with the physiocrats. Quesnay, who might be the most influential among them, came up with the very first economic model ever: the economic tableau. To do so, he basically combined what previous authors had already theorized, that is, Petty’s point that agricultural production could create surpluses and the 3 rents from Cantillon, in a model which aimed to picture the nature of an economy. It was a vision of the economy as a circular flow of goods between different sectors, each of which corresponded to a certain social class.
However, he made one mistake, assuming that only agriculture could generate surplus and profits. His fellow physiocrat Turgot would in the future amplify this view to establish that more sectors could generate surpluses, and available capital would distribute among them depending on their rate of profitability, reaching some “kind of equilibrium” (on his own and undefined words). Anyway, the point is that the precedent of making preposterous assumptions that ignore chunks of reality in order to make the model be consistent was set.
This trend would but go on with the following models by other authors. Adam Smith tried to explain the distribution of wealth generated by production himself, but ended up in a self-contradictory idea of rent. Besides he found no way to quantify the rate of profit. Malthus assumed that population growth must overwhelm always the growth in food production, leading to a natural limitation of growth, which is not consistent neither empirically (history has proven him wrong in Latin America or Asia, for instance) nor theoretically (according to him, population growth is exponential and food production arithmetical, so population must grow faster, however it depends on the rate of exponential growth and on the rates staying steady for huge periods of time. Besides, his conclusion pretends to be scientific but it is actually inferred discretionally from some data)
Ricardo pulled off his corn model, which meant assuming corn was the only capital in agricultural production and a one good economy, which is surrealist to say the least. To try to fix this, he made up his labor based theory of value, which I already commented on entry I, but again, in the core he needed a one good economy or some sort of invariable standard to reflect every other good on. He could never find such invariable standard. And then came Marx and reached the very doubtful conclusion that, to increase profits in absolute terms, the capitalist must reduce the rate of profit, which due to their greed would lead to the collapse of capitalism. Again, history seems to proof him wrong, may it be his failed predictions or ulterior developments such as the concepts of value chain controlling, target costing, or economies of scale indicate. All due to the fact that, at the core of his model, there was the computation of a “rate of exploitation” which existence is doubtful so it is not an ideal magnitude to rely on.
Long story short, we observe all the models are inconsistent with reality, even though they might or not be internally consistent (Smith, for instant, wasn’t). And they are not due to the preposterous assumptions they make. So far nothing new. Notwithstanding, why make such assumptions? Because they cannot measure all the magnitudes they would need to explain them otherwise. Quesnay could not measure surplus in industrial sectors without a clear measure of value. Smith couldn’t measure the rate of profit. Malthus couldn’t establish clear growth functions for population and food, just vague generalizations. Ricardo couldn’t measure relative prices between goods without wasting his model. Marx couldn’t quantify exploitation (although he dissents)
The problem here is the order of scientific development. To build formal scientific knowledge, first you compile data, the patterns it follows and from there build measurable magnitudes. Next step will be using those patterns and magnitudes to enunciate basic laws and theories, which are empirically based. Finally, from those empirically consistent (I insist on the feature empirical) you may derive models, which will thus be consistent with reality and, as a result, useful. Hence why the failure of economic models. It has started to build the house by the roof, it has gone straight to the models without having prior enough data or reliable magnitudes, as I argued on entry II.
The problem is, even if economics wanted, it could not establish measurable magnitudes. Because the subject of study, human behavior, isn’t constant, therefore it is barely possible to deduce a universal and long-lasting pattern, at least without making some assumptions. That is the core of the problem with economics, as I had already established. It chose the wrong method, one which cannot suit its reality, instead of using methods which actually have to do with the subject of its study. Would it be easier, for the purpose of distribution theory, to use accounting to measure production and then social network theory to study the spread mechanisms along a social system? Probably.
Anyway, my space is running out, but there are a few more distribution theories left. On the following entry, I shall see if they manage to succeed where their predecessors have failed. We will see if modern developments solved the issues I have commented. For now, I will call it a day.
AUTHOR: Pablo Moral Pérez