Dan Kervick writing on Rugged Egalitarian, has written an interesting article which looks to be, at least partially, a rebuttal of my recent post: The Magical Mathematics of Mr Piketty Part II. Dan sets out a thought experiment built around a model economy of serfs (workers) and barons (capital owners). He uses the model to argue that the rate of return on capital, r, is unrelated to the rate of economic growth g. Specifically, to show that it is possible to have a zero growth economy with a 5% return on capital, thereby supporting Piketty’s r > g claim.
Readers will be unsurprised to hear – I’m still not convinced.Still not buying r > g
George Cooper
13 comments:
I'll post a response either tonight or tomorrow.
The best review I've seen of Piketty, and the best explanation of the Cambridge Capital Controversies, is Piketty’s Fair-Weather Friends, by Seth Ackerman. Excerpts:
Thus, while there are many things to be found in the book, it’s this notion of r > g as a Marx-like “defect” at the heart of the capitalist system, driving the system toward its own discrediting, that seems to have caught the imagination of so many liberal readers and commentators...
At its heart, the (Cambridge Capital) controversy opposed two visions of the capitalist economy. In the neoclassical vision, the most fundamental forces shaping the division of society’s produce are the supply and demand for labor and capital, and behind them, the technical facts of technology, scarcity, and consumer tastes. In this vision, the income distribution can be explained by the old platitudes “when the price goes up, less is bought,” and “when more is supplied, the price goes down.”
In the Cambridge vision, social, historical, and political forces — class struggle — are the essential factors in setting the income distribution. Once that distribution is fixed, the rest of the economy adjusts around it...
The Post Keynesian political description of the economy makes more sense to me than does the exposition of a Marx-like defect at the heart of the capitalist system. Perhaps it's just a matter of taste in assessing the prospects of getting from where we are now (as a society, economically) to where we want to be. MMT deals with the political economy as it currently exists and suggests numerous possibilities for moving in the right direction. The Piketty model, from my perspective, is more revolutionary and unrealistic, in the Marxist tradition...
Observation: MMT/PK economists not impressed by Piketty's work because it doesn't bring anything significantly new to the discussion.
The main admirers of Piketty's work are neo-liberal economists (e.g. Krugman) who are the modern day equivalents of the religious apologists of a previous era. Piketty attacks their fictional world, from within that fictional world (marginalist economics). Many discussions get lost in a swirl of excessive abstraction, or unproductive detail.
Post Keynesians agree that there is no natural equilibrium where everyone is compensated according to his/her worth. There is no need to prove that r can be greater than g. The historical data is interesting, but doesn't tell us anything that we didn't already know.
Or does it?
The data set is what's new and interesting.
The reason that Piketty's book made a splash is that it is a critique from within orthodoxy. For that reason the heterodox find Piketty's critique to be uninteresting since it doesn't really anything that is germane other than the data set.
Post-Keynesians are part of a 20th century tradition stemming from Keynes and other early-to-mid 20th century figures for whom the big questions are such things as:
What causes depressions and recessions?
What is the best way to combat depressions and recessions?
What causes involuntariy unemployment?
What causes economic growth?
Where do profits come from?
What causes inflation?
What is the role of money in the economy?
None of these are major topics of Piketty's book. Piketty is reaching back to an earlier 19th century classical context and resurrecting the distributional questions that were on everybody's mind back then. The big figures for him are Ricardo, Malthus and Marx - although he is probably just as interested in Balzac and Jane Austin. He's discussing distributional issues that haven't been a main subject of discussion in any of the major existing schools of thought. The book has struck a big nerve, in my view, because many people sense that we are in some way moving back toward the entrenched socioeconomic inequality and class structure of the late 18th and early 19th centuries, and of the Belle Epoque or Gilded Age.
People like Brad DeLong are able to get into this somewhat, because DeLong teaches the history of economics, and has some intellectual context for these discussion. For others, Piketty is speaking an entirely new language. It is telling that the sole chapter in Piketty's very large book that mainstream economists have gravitated toward is Chapter 6, because that's a chapter in which Piketty challenges the "balanced growth path" thinking of economists who have used the production function approach.
As I've said before, I don't think Piketty poses any kind of direct challenge to the post-Keynesians, since the issues are orthogonal to the ones they usually think about. On the other hand, for the sub-school of post-Keynesian thought that is doggedly committed to the irrelevance of mathematics, it's hard to get a feeling for what Piketty is doing.
On the other hand, there might be some post-Keynesians who feel that they have carved out a progressive but safely non-socialist approach to political economy, in which we can attend to questions of full employment without getting into touchy issues about the distribution of wealth and power, and without advocating a frontal assault on concentrated capital.
From the comments over there:
"Let’s not consider economic growth yet and just say the builders repair the wear and tear of all buildings, so that their value stays the same."
How about we consider the way it actually works under our current FFNC currency regime where the govt authorizes its fiscal agents to lend increasingly every year against these buildings that are not improved and are not even maintained properly...
Good assessment, Dan. I would just add that I don't think that MMT economists identify as Post Keynesians, although they are often considered a subset of PKE, whatever that is. See Lord Keynes various posts on PKE. There's disagreement over it.
While MMT economists share some affinities with some Post Keynesians, they also identify with institutionalism.
Neither Warren Mosler nor Jamie Galbraith identify with PKE.
Jamie Galbraith and Joseph Stiglitz, specialized in inequality pre-Piketty.
The Kansas City school economist with the longest history of addressing inequality and distributional issues is, of course, Michael Hudson, who sometimes self-identifies as MMT, but he has never actually written from the MMT POV. Some people probably associate him with MMT though, even though he is often out of paradigm with MMT.
There's been a lot more focus on unemployment and poverty than inequality. That is new now that the middle class is fading and social mobility freezing, along with a significant increase in capital share over labor share and also within the labor share based on the relative value of "human capital." But that's largely since the crisis and the slipping of the developed world toward Third World status in some respects.
Wow! These are all excellent responses. Thank you so much. I will contemplate and perhaps respond tomorrow if I can think of anything to add...
I think the basic questions is whether the rise of a large and prosperous middle class in the developed countries post WWII is a sustainable trend that will persist into the future and possibly increase and proliferate to the emerging countries, or a just historical blip of special conditions and converging accidents that will fade from memory over time as those who participated in it die off. Could go either way, but that is chiefly a political choice that will be made either peacefully or through conflict.
I don't think that inequality is going to be biggest issue by any stretch though. My view is that all bets are off now that the specter of global warming is beginning to dawn more widely in the collective mindset. It's going to be a huge game changer the consequences of which we cannot really get our minds around yet, and how humanity will address it as a species now aware of itself in a globalized setting under severe challenge remains to be seen. Will the future be characterized more by competition and conflict, or cooperation and coordination?
"but that is chiefly a political choice that will be made"
Tom who/what are the two factions making this choice?
Who are the people on the one side saying "we should have a middle class..." and who are the people on the other side saying "we should eliminate the middle class..." ?
Where is this being debated? Between "left and right"?
The "left and right" both support the middle class... perhaps they differ on the methods of support (right: "trickle down", left: "subsidy/redistribution") but they both support such a subset of the population.
I dont see this being directly debated politically, again where is this?
... I rather see ignorant political factions/sects debating the methods of support for the middle class and neither side knows what is really going on or how our current system actually operates...
rsp,
Tom here is Cantor's detailed support plan for the middle class:
http://www.ericcantor.com/congressman-cantor%E2%80%99s-plan-for-the-middle-class/
And here is Obama's:
http://l.barackobama.com/tax-calculator/
So both "left and right" political factions believe they are advocating for the middle class... both want a vibrant middle class... they perhaps differ on methods...
So where is this being debated politically? ie "to have/have not" a middle class? Both left and right support a vibrant middle class...
Perhaps the real economic issues we face are NOT "left/right" issues...
rsp,
Most of the "debate" in the US is political propaganda to convince voters, first, that they actually have a choice, and secondly, to dupe the rubes.
The political choices are made by those controlling the process. In interest politics, its factions of the ruling elite jockeying for power.
None of them give a hoot about voters other than to get their vote in elections. Look at how politicians follow through on campaign promises. They don't, or if they do it is only because it supports their agenda and that of their cronies.
It's corrupt through and through, and "democracy" is a façade that puts of veneer over it through lack of transparency, legitimation of crime at top, and a Mafia oath of silence. They even treat political power like "our thing" (cosa nostra).
What the US power elite has been doing to its vassal states for a long time, it's now doing with its own population.
Matt,
When you ask these politicians what family income they consider to be middle class, their reply is middle class is a family making $200,000/year. Well over the top 1% divide. But this is a number that most voters buy, because they can envision themselves as getting up to that level
Post a Comment