On the Capital/Output Ratio

A post on the capital output ratio was perhaps inevitable given my teaching and research engagements with macroeconomics, growth theory, and capital theory. This blog post seeks to critically discuss some of the manifestations of the capital-output ratio (K/Y ratio henceforth) in economics. 

K/Y ratio in Macroeconomics

The K/Y ratio captures a technological characteristic of the economy as a whole. It conveys to us the amount of capital required to produce one unit of output. A reduction in it therefore implies we require less capital to produce one unit of output. 

Since capital refers to the stock of produced means of production, which are of a heterogenous nature, K for the economy as a whole requires aggregation via prices: k1p1+k2p2+…+knpn=K. That is, K refers to, as H. G. Jones puts it (p. 17) in his 1975 book An Introduction to Modern Theories of Growth, “an index of aggregate capital.” Of course, Y too requires aggregation via prices.

Roy Harrod, in the chapter ‘Capital Output Ratio’ in Economic Dynamics (1973) treats K/Y ratio as a “kindred concept of the capital-labour ratio” (p. 46). Subsequently, he outlines the scope of the capital-labour ratio in economic studies. 

“It is to be stressed that the capital-labour ratio is a useful weapon for comparing alternative methods of producing a given object, for comparing methods of producing different objects or for comparing the changes through time of methods of producing a given object. It is on the whole an unserviceable tool in relation to national income as a whole, but it can be employed in a very rough sort of way for comparing different countries” (p. 48, emphasis added). 

Similarly, Harrod writes that “the concept of the capital labour ratio is not very helpful, if applied to the economy as a whole, owing to the difficulty of assessing the value of K, namely capital as a whole” (p. 50). 

Additionally, I think that such an aggregate conceptualization conceals more than it reveals. For instance, it conceals the nature of interdependence of production in an economy. What if K/Y changes because of a change in the nature of structural interdependence? Or, what if it changes because of a change in the volume and composition of aggregate consumption demand? After all, the volume of investment influenced by consumption. As Keynes rightly writes in Chapter 8 of The General Theory, “capital is not a self-subsistent entity existing apart from consumption”. 

K/Y ratio in Growth Theories

The K/Y ratio is used as an argument in Kaldor’s (1957) stylized facts: ‘steady capital-output ratios over long periods’. Here too, what is it saying about the structural nature of production and consumption in the economy? 

While Kaldor is talking about ex-post K/Y ratios, the ex-ante K/Y ratio plays a crucial role in Harrod’s growth equation g=s/v. Here, s refers to the marginal propensity to save and v refers to the desired or normal K/Y ratio. A decrease in v raises g, or more accurately, the ‘warranted rate of growth’. 

In the super abstract setup of the corn model (as in Ricardo) or the single-commodity model (as in Solow), since the input and the output are the same commodity, aggregate K is a homogenous set. This assumption allows us to sidestep the problems associated with the measurement and aggregation of ex-ante K. 

One cannot help but wonder how Solow’s single-commodity growth model (expressed via the aggregate production function) continues to be applied in growth accounting exercises on actual multi-commodity economies. We had noted some of the theoretical and empirical problems with one such exercise on the Indian economy in a short note in Economic & Political Weekly.  

K/Y ratio and Capital Theories

Capital theories are concerned with the conceptualization, measurement, valuation, determination, and aggregation of capital. Owing to the central role capital plays in production, the choice of the capital theory has a significant impact on both microeconomics and macroeconomics. Moreover, since capital accumulation is central to growth theory, the choice of the capital theory has a significant impact on development theories too. Similarly, on international trade theories; on this subject, you can consult the 1979 book Fundamental Issues in Trade Theory edited by Ian Steedman. 

In sum, while mathematization of the growth models gives us a better sense of its grammar, capital theory helps us understand its epistemology. And it is the latter which can better guide the use of K/Y ratio in economic theories, empirics, and policies.  

Arun Bose: An Introduction to His Life and Work

This blog post introduces you to the economist Arun Bose (1919-2003) who made important contributions to Sraffian and Marxian literature. Bose was called a ‘Sraffian Marxist’ alongside Ronald Meek and Ian Steedman by Samir Amin in a 2015 article in the Monthly Review. Despite his substantial corpus of published writings, his work seems to have been largely forgotten within India. Therefore this essay provides an introduction to his life and work and ipso facto is a modest attempt at generating interest in Indian economic thought specifically (and more generally in the history of economic thought). In the past, blog posts which fall into this theme dealt with the economics of Krishna Bharadwaj and VKRV Rao. And what follows is a condensed version of Section II of my article ‘Arun Bose on Sraffa: Value Theory and Demand‘ published in Artha Vijnana as part of a 2018 special issue dedicated to the ‘Indian Reception of Piero Sraffa’s Economic Contributions’.”

Born in Calcutta, Bose had become interested in Marxian political economy by the end of high school. He completed his undergraduate studies (Tripos) at Cambridge University between 1937 and 1940. One of Bose’s recollections of Cambridge is the following: ‘During extra-curricular sessions, both Maurice Dobb and Piero Sraffa discussed economic theory and Marxian political economy, leaving an indelible impression on my mind’. Moreover, Bose was actively involved in student movements there and also joined the Communist Party of Great Britain. In the decade following this, Bose worked as a full-time activist in the Indian communist movement.’

Around 1957, Bose decided to resume his study of economic theory. Under the Commonwealth Universities Interchange scheme, he spent a year at Trinity College, Cambridge in 1960-1. Subsequently, he was asked to join the newly founded Kirori Mal College in Delhi at the behest of the economist B. N. Ganguli and the English professor Sarup Singh. B. N. Ganguli is the author of Indian Economic Thought: Nineteenth Century Perspectives (1977), one of the handful of books dedicated to Indian economic thought. In memoriam, the Economics Department at Kirori Mal has organised public lectures under the auspices of Arun Bose Memorial Lectures.’

Between 1963 and 1965, Bose closely engaged with Sraffa’s Production of Commodities by Means of Commodities (1960). Bose published a comment in Economic Weekly (now Economic & Political Weekly) in response to Krishna Bharadwaj’s review of Sraffa’s book entitled ‘Value through Exogenous Distribution’. Bose also published responses to the reviews of Sraffa’s book by Roy Harrod and David Collard respectively in the Economic Journal, one of the main international vehicles for the dissemination of economic ideas. And in 1965, he published an article on Sraffa’s book in the Economic Journal. And during this period, they corresponded; Bose sent Sraffa five letters to which he received responses to all but one (more details about the correspondence is available at the online archives of Trinity College).’

Bose’s next publication was after six years: an essay on Marx in the 1971 volume of the History of Political Economy; it continues to be an important journal devoted to the history of economic thought. Next year, he published another essay on Marx in Science & Society. After another brief hiatus from publication, he published a book in 1975 titled Marxian and Post-Marxian Political Economy; he gave a series of lectures at the Indian Statistical Institute (ISI), Calcutta with the same title. Bose acknowledges Sukhamoy Chakravarty for reading the book draft and for familiarising him with modern linear economic theory (Chakravarty had also reviewed Sraffa’s book which had appeared in 1961 in Arthaniti, the journal of the Department of Economics, University of Calcutta). I reproduce an excerpt from the book’s preface where Bose describes his reason for being impressed with Sraffa’s work:

‘Piero Sraffa impressed me with his conviction that it was perfectly possible, though difficult, to develop a theory of political economy into an exact science, based on absolute precision of concept however much we may approximate in empirical work which would be wielded as effectively as a surgeon’s or a welder’s tools, to dissect or dismantle, and then reassemble the ‘unseen’ interconnections of the economic process, whose cognition is essential for revolutionary political action’ (p. 11; also reproduced in my Artha Vijnana article on p. 29).’

He went on to publish two follow-up books: Political Paradoxes and Puzzles (1977) and Marx on Exploitation and Inequality: An Essay in Marxian Analytical Economics (1980). While a visiting fellow at the Delhi School of Economics (DSE) during 1976-7, Bose delivered lectures on capital theory. (Today, in India, to the best of my knowledge, capital theory is a full course (albeit elective/optional) only at the University of Hyderabad; Bharadwaj had played an important role in designing their MA Economics curriculum along with Amiya Bagchi, Amit Bhaduri, and K. L. Krishna.) A year before his retirement from Kirori Mal College in 1985, Bose published a letter in the Economic & Political Weekly titled ‘Piero Sraffa’; this was in response to P. R. Brahmananda’s obituary of Sraffa in 1983, also in the form of a letter. Brahmananda had himself engaged with Sraffa’s book in a set of three articles in 1963 in the Indian Economic Journal; these were later reproduced in the first volume of the 4-volume Piero Sraffa: Critical Assessments edited by J. C. Wood (1995, Routledge).’

After his retirement, Bose employed his ‘Sraffian Marxist’ approach within a wider social scientific framework to explain India’s socioeconomic condition. In this period, he published the following: an article each in Economic & Political Weekly (1986) and International Review of Sociology Series I (1987); and two books in 1989 titled Theories of Development of Material and Human Resources and Education: Requiem or Rethinking’ and India’s Social Crisis: An Essay on Capitalism, Socialism, Individualism and Indian Civilization. In his Idea of India, Sunil Khilnani identifies India’s Social Crisis as an important contribution to ‘historical sociology’ (p. 218).’

To conclude, there are enough published works by Arun Bose for someone who is interested in writing a dissertation or thesis in the area of Indian economic thought. Moreover, his notes, manuscripts, and correspondence are available for purposes of research at Nehru Memorial Museum & Library (NMML) although I personally found them to suffer from poor penmanship. It is extremely vital that we engage with the ideas of economists such as Arun Bose who provide an alternative way of understanding our economic surroundings.’

Pierangelo Garegnani (1930 – 2011)

On October 14, 2011, heterodox economics (in particular, classical economics) lost one of its warriors. This post attempts to summarise some of his key contributions towards economic theory. First and foremost, he was an economic theorist par excellence. He contributed to the famous (now, almost forgotten) capital theory debates in 1960s along with Piero Sraffa and Joan Robinson on his side and Paul Samuelson and Robert Solow on the other. Alongside others, he pointed out logical flaws in the marginalist conception of capital and its devastating effects on equilibrium. Basically, marginalist theory of value and distribution (in modern parlance, microeconomic theory) was shown to be logically inconsistent. Today, these debates hardly ever appear in economics textbooks because marginalist or neoclassical economics invented inter-temporal equilibrium to take care of capital-theoretic issues. Moreover, history of economic thought has been sidelined ‘ through famous graduate economic programs and by preaching that history of economic thought is of no use to a ‘practical’ economist, both in academia and in business.

Garegnani made significant contributions to the revival of classical economics on the foundations laid down by Piero Sraffa. In particular, Garegnani, through various journal articles (in Italian and English) resurrected the works of old classical economists ‘ mainly Smith, Ricardo and Marx. More than Sraffa, perhaps, it is Garegnani who has aided the revival and resurrection of classical economics. His command over the history of economic thought with a special focus on old classical economists and ‘old’ and ‘new’ neoclassical economists (Walras, Wicksell, Hicks, etc) is evident from his clear exposition of their analytical structure.

Like ‘old’ classical economists, Garegnani’s interest has been to explain growth dynamics of an economy. This, he believed and also demonstrated that it is possible by drawing insights from Keynes and working on a classical (Sraffian) foundation. In this regard, Garegnani and his friends-colleagues-students have been quite successful in their analysis of capacity utilization, supermultiplier, role of wages, profits being a monetary phenomenon and so on.

Given the massive contributions made by Garegnani, it has been an honour for me to have been introduced to his work during my Masters in Economics at University of Hyderabad. It is one of the few Universities, in India and possibly, in the world, which still teaches classical economics as a distinct approach to understanding contemporary economies. I hope that more Universities begin to recognise the benefits of a pluralist education and start teaching classical economics as a distinct subject.

Others

Robert VienneauSusan PashkoffFrancesco SaracenoTyler CowenDavid RuccioMatias Vernengo