Thursday, January 15, 2015

Brad DeLong — Thomas Piketty: On the Elasticity of Capital-Labor Substitution

As I have said before in Very Rough: Exploding Wealth Inequality and Its Rent-Seeking Society Consequences (backed up by the numbers
 ofhttps://www.icloud.com/numbers/AwBUCAESEClb5VcMwjLJSBQQ90kTwzMaKUxB6_WCLZAfXLz1z3UT9I4hfYXqx6Igi7h4ZLFMjXXKOR3hQyuhEeGhMCUCAQEEIJPCSiJ_LdTd3IlxVH0-VvhIG5nYypcMustkcP_RZXnB#20140602_Roughing_Out_a_Piketty_Model)
and elsewhere, in my view Thomas because he really needed a rent seeking society chapter in his Capital in the 21st Century. The underlying logic of his argument seems to be that wealth can take two forms: investments in capital-embodied technological wealth that boost wages in the economy, or investments in rent-seeking wealth that erode wages in the economy. And, I think, his argument is that we are headed for a society with a higher wealth-to-income ratio, and in such a society a greater share of wealth will find its way into the second channel.

Maybe that is not what Pikitty’s argument is. But I at least think that it is what Piketty’s argument should be–because I think it is highly likely to be true…
YES!!!

And that introduces the need for power to account for the ability to extract rent.

WCEG — The Equitablog
Thomas Piketty: On the Elasticity of Capital-Labor Substitution
Brad DeLong

9 comments:

Anonymous said...

See my response to Brad, and Piketty's interview. Piketty doesn't have a separate chapter on rent-seeking because he thinks all returns to capital are equally worthy of being called "rents", and that there is no principled way of drawing a distinction between returns to "productive" capital and returns to "non-productive" capital.

Piketty is identifying problems and dynamics endemic to capitalism, forces that operate both when capitalist markets are running efficiently and when they are running inefficiently or imperfectly. He is not telling a story about market imperfections. The "rent-seeking" story Brad wants to tell is a market imperfections story: cases in which capital owners manage to trick the market (i.e. people) into delivering a return for the use of that capital that is out of proportion to the productive value of that capital. This certainly happens, but there is no reason for thinking it is a special factor in the rise of inequality.

For what's it's worth, there are also market imperfections that result in an unjustified return to labor. For example, FIRE sector CEO base salaries are part of the return to labor, not the return to capital.

The relevant discussion in Piketty is on pages 423-424.

Tom Hickey said...

Dan, while I agree with you about Piketty's intention, his choice to use a neoclassiclal approach obscures the rent and rent-seeking issue. In my view his book would have been improved by taking Brad's advice. But I don't think he wanted to go there in this presentation, which I think he saw as radical already.

Someone should ask him about this tho.

Anonymous said...

Tom, somebody did ask him about it - in the interview you posted yesterday. And he answered it convincingly.

Anonymous said...

And actually the rent and rent-seeking business is part of mainstream economics: it's standard market imperfection stuff, and the implication is that economic rents can be minimized or eliminated by making markets more efficient and competitive. By refusing to go down that road, Piketty is bucking the mainstream analysis and focusing on problems that are endemic to capitalism, independently of whether its markets are functioning efficiently or inefficiently.

Tom Hickey said...

Yes, he answered that this was his intention. but I don't think that was as obvious in the book as it needed to be. Most economists don't recognize power or rent unless you first hit them over the head with a 2x4 to get their attention. This is what Brad is saying.

In my view, its ALL about power and rent as the classical economists, and especially Marx, realized. Neoclassical economics was developed at least in part to exclude power and rent. This has to be brought back not only into focus but where it belongs as the chief focus.

Basically, all capitalism has done in the larger and longer view is to replace a feudal ruling elite with a capitalist ruling elite, and to replace hard power with "soft" power that is disguised and never mentioned. But that "soft" power is if effect as hard as hard power in the result for many.

Tom Hickey said...



This is the issue. You think that Piketty handled it sufficiently clearly, while Brad and I don't.

Piketty is an institutionalist that understands now the economy is shaped institutionally, and his critique is institutionalist. However, it has largely been mistaken as neoclassical and the arguments against him have been neoclassically based.

He has made a tremendous contribution in pointing to how the neoclassical (formal) method and its assumptions are off the mark. But he did this in more or less a nuanced way. But conventional economists don't do nuance, any more than do most politicians. That's why a more radical approach is needed, as more "heterodox" economists understand, although I could count Piketty in the heterodox camp, for sure.

I understand why he compromised more than some heterodox economists would like, but the success of his work speaks to that. It was a good strategy.

However, he could have included a chapter on power and rent that he could now use to respond to critics by citing the book directly. Now he needs to put that chapter up on his reference site instead of burying his views in places that few will find.

They are on the run. Now is the time to go bold.

Anonymous said...

Tom, I think all this business about "heterodox" vs. "neoclassical" is kind of a red herring, and just arid professional wrangling among people with various chips on their shoulders. Most of the polemical uses of these terms just get thrown around as battle axes with no clear meanings attached to them.

The book's argumentation is extremely clear, and make perfect sense on its own merits to anyone who takes the time to read it. But most people have not, because they are either lazy or at least too busy with other things.

There is a standard line of defense used by defenders of capitalism according to which all of the bad stuff about capitalism would be smoothed away if only markets were more efficient and competitive, and we got rid of all the corruption and cronyism.

That's an argument the libertarians and Austrians love. It's an argument the neoliberals like DeLong basically go with as well.

Some like to add into this market imperfection story a further story about the need for some countercyclical demand management, or for monetary tweaking and tuning. These are further Keynesian and monetarist twists in the broad defense of capitalism strategy.

Piketty has a theory about the forces that tend to produce increasingly unequal distributions of wealth and income. His theory is that these forces are embedded in the very DNA of capitalism, and can only be countered non-capitalist public political interventions in the economic sphere.

This is a theory almost nobody wants to hear, and some of the responses have been laughably uninformed and kneejerk: "He's wrong, because he's neoclassical! He's wrong, because he's a French Socialist! He's wrong, because its all about the cronyism! He's wrong, because its all about the rents and market imperfections!"

Tom Hickey said...

It may be a red herring, but the issue is model or no model. If you don't have a model, no conventional economist will give you the time of day. Piketty knowns this and as former MIT econ prof, no one is going to accuse him on no model. He was known there as an expert in modeling.

A fundamental problem is that institutional arrangements are difficult to impossible to model, but key to economics. Piketty knows this and his work is testimony to it. But conventional economists want to address it in terms of what they perceive as "the model," that is, the formalization, and to nit pick about data. Piketty has demonstrated they he has thought this through and easily fields questions about both the modeling and the data.

But we need to push further, getting much more explicit about the role of economic rent and the underlying power to extract it.

This goes for most heterodox econ, too, excepting Marxists and Marxians and a few other radicals.

"The rent is too damn high."

Tom Hickey said...

He's wrong, because its all about the rents and market imperfections!"

I don't recall seeing this criticism. Who makes it?

Agree about the others.