It is tremendously confused Rakesh, and the critiques Sraffa made of it in
the 1920s are still worth a read today.
The basis of it is diminishing marginal productivity, which is a simply
nonsensical argument to apply to capital machinery, as Sraffa argued and as
I elaborate in my Debunking Economics.
Keynes had pretty much abandoned the MEI arguments by 1937, but of course
textbook writers kept it alive because it was such familiar marginalist stuff.
Steve
At 11:53 AM 21/03/2002 Thursday, you wrote:
>Paul Krugman gave a couple of lectures at Stanford. The first was on
>intractable slumps, which quickly summarized his book on The Return of
>Depression Economics.
>He focused on Japan, and called again for the BoJ to set a 2 or %inflation
>target in order to discourage oversaving and a liquidity preference. He
>did not analyze the role of exchange rates at all though Stanford prof
>Ronald MacKinnon later challenged him on this.
>
>I asked him why the marginal efficiency of capital seems to have fallen so
>precipitously. He replied that there had been faster capital build up in
>Japan...so that the capital per worker was higher there than in the US!
>That's it. I truly believe that the whole idea of the declining marginal
>effiency of capital is tremendously confused. Does it fall because of Adam
>Smith like overcompetition? Because the Ricardian principle of diminishing
>returns applies to the capital stock? Is it an objective or subjective concept?
>
>Fred often suggests that the rate of profit plays a marginal role in
>contemporary economics, but it seems to be center stage in Keynes' murky
>concept of the marginal efficiency of capital.
>
> He also lectured on currency crises. Argentina was his focus. He wanted
> to focus on what a bad idea currency boards are (he seemed convincing);
> again his proposed solution was monetary--devaluation.
>
>I raised the problem of competitive devaluations. He said that while going
>off the gold standard did create that problem, the effect for example of
>the UK going off it in 1931 and the effective devaluations that followed
>thereafter were to reflate the global economy to some extent and thus
>positive overall--he suggested that Barry Eichengreen had analyzed this in
>most detail. He also suggested that the UK decision in 1931 probably
>saved Britain from an even worse depression and thus from the possibility
>of fascist take over.
>
>Rakesh
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Dr. Steve Keen
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