Friday, February 2, 2018

Rishabh Kumar — Not just r > g but r + q >> g: Piketty meets Ricardo in the long run of Indian history

Many assets have the potential to become valuable without actual accumulation. Writing in the initial stages of capitalism, Ricardo recognized the unusual position which landlords occupy: they control a non-reproducible asset, which generates rents under expanded capital accumulation. These rents extract away from surplus value and get capitalized into higher land prices. His vision was partially invalidated by gains in agrarian productivity but the history of wealth-income ratios testifies to the strength of the underlying principle. A monopolization of resources has the potential to drive up the magnitude of wealth as much as the accumulation process (if not more) – think of real estate prices in Manhattan, San Francisco, London, Shanghai, Mumbai and Bangalore. For any rate of capital gains (1+q) on existing assets, if q > g then wealth rises relative to income due to the divergence of asset prices and consumer price inflation. This inequality (q > g) is critical to deciphering large swings in wealth-income ratios. Over the long run, capitalists may steadily accumulate reproducible capital but in the medium run there can be strong redistributions of wealth towards the rentier class....
Echoes Michael Hudson's conclusion:
The rise of wealth is not simply a matter of accumulation but the designation of control under the institution of private property. Whether for the production of agricultural commodities or the provision of housing services, gaining property rights to land can redistribute wealth very rapidly. Demographic dividends and urbanization create tremendous pressure on space and have the potential to rapidly drive up wealth-income ratios. These effects can be very strong when growth creates competition for such limited assets or when lack of growth empowers those who already possess them. For example, even in rich countries like the UK and the US, modern trends seem to be a capital gains phenomena related to real estate. The demand for such an important property right residing with rentiers is as much a driver of wealth today as the steady accumulation of capital by capitalists. Today both capital and land values are rising faster than national income. As long as such private wealth grows faster than income, workers will remain excluded from any notion of shared prosperity. This is one of the reasons why Smith, Ricardo, Malthus and Marx spoke about class dynamics in rigorous terms. Much may still be learned from taking these classical political economists seriously.
Developing Economics — A Critical Perspective On Development Economics
Rishabh Kumar | Assistant Professor of Economics at California State University. @Kumar_EconIneq.

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