(Waldman 2013) K is not capital, L is not labor

Waldman, Steve Randy. K is not capital, L is not labor. Interfluidity. 2013 Mar 18. Available from: http://www.interfluidity.com/v2/4218.html. Accessed 2013 Apr 3. Archived by WebCite at http://www.webcitation.org/6FbLhD0Yx.

Waldman responds to a post by Garett Jones about the Chamley-Judd Redistribution Impossibility Theorem, a result in mathematical economics that shows, under the assumptions of the Ramsey model of macroeconomics, that workers can never benefit in the long run from taxation of capital, even if they receive the proceeds of the taxation. Waldman traces this result to a fundamental characteristic of the Ramsey model: its model of capital (K) can accumulate, and always increases productivity in direct proportion to the amount of K available, so that it produces more K over time, while its model of labor (L) is fixed and cannot accumulate. Under these circumstances, transfers from K to L always slow the growth of K and diminish the wealth available for paying future wages.

Waldman points out that real-world capital and labor behave very differently from K and L. Labor includes an accumulable, capital-like element, in the form of individual skill and knowledge together with organizational structure, collectively known as “human capital”. If wages contribute to the formation of human capital, and if human capital contributes sufficiently strongly to worker productivity, the Chamley-Judd result can be reversed, with zero taxation on labor, rather than on capital, becoming the optimal strategy for long-term growth (and long-term benefit to workers). Also, real-world capital includes financial instruments that do not directly contribute to productivity at all, and do not automatically get used to purchase productive capital: “Models that are more realistic about finance, whether Keynesian or monetarist, predict states of the world where financial capital formation is harmful to real economic performance.”



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Last revision: April 10, 2013