Tuesday, April 29, 2014

Mike Konczal — Studying the Rich: Thomas Piketty and his Critics

Piketty’s argument is convincing and well-supported. So what is the debate over? Much of the critical response to Capital has focused on Piketty’s “r > g” equation and what “r,” the rate of return on capital, is doing in Piketty’s story. Generally, critics have come at him from two different directions. Though these debates aren’t necessarily ideological, the directions tend to be affiliated with the right and the left respectively....
... the book is an attempt to ground the debate over inequality in strong empirical data, put the question of distribution back into economics, and open the debate not just to the entirety of the social sciences but to people themselves. As Piketty says, the distribution of wealth “is too important an issue to be left to economists, sociologists, historians, and philosophers. It is of interest to everyone, and that is a good thing.” He is right....
If economists to Piketty’s right are concerned that he doesn’t ground his theory deep enough in economic models, economists and others to Piketty’s left are concerned that he concedes too much to mainstream economics and not enough to politics.
So, while economists to Piketty’s right think he should create a model that predicts the rate of return on capital (his r) based on the state of the economy, rather than historical data, economists to Piketty’s left want him to emphasize the idea that many different rates of return are consistent with the character of the economy; “r” is a function of institutions and political decisions. Those on the left also worry that the debate over Capital could devolve into, as the economist Suresh Naidu argues, a “bastard Pikettyism” that just navel-gazes at the mathematical economic models discussed above, instead of a more critical, broader inquiry of how capital works in economies and societies.... 
These passages surely suggest that Piketty believes that “r” is not simply a fixed economic parameter, and that something can be done about “r” as a political project. Why doesn’t Piketty embrace this idea, or at least make more of it in his theory?

The answer is partially driven by the numbers. If “r” is consistent across countries and centuries with radically different infrastructures, institutions, philosophies, and populations, structural and institutional changes are unlikely to make a big difference. Piketty emphasizes that the trends he finds are not the result of the various “market imperfections” that economists break out to justify government action. If anything, he argues, a more efficient market could increase the rate of return on capital and accelerate inequality.

Though he equivocates on this point, the text suggests that Piketty believes social democratic reforms outside high taxation are incapable of changing these dynamics....
This is a remarkable provocation for liberals. Piketty is, in a way, saying: go ahead and make whatever reforms you want. Break up the banks. Pass the campaign finance package of your dreams. Reach deep into the bag and pass all the non-reformist reforms that you can think of. All your reforms can’t guarantee that you are safe from the logic of r > g. Reforms won’t change the nature of capital: to accumulate, eat up a larger share of the economy, and let the past dominate the future.
Exactly. As I have been saying, capitalism is antithetical to liberal democracy and reforming it won't work, at least for very long. Palliatives are no panacea. Either liberal democracy survives or capitalism survives, but both cannot live together for long. As long as money and machines are valued over people, democracy will remain at unrealized ideal because democracy is based on a humanism that acknowledges human being as social being. Conversely, capitalism is based on an atomistic mechanism that is driven by individual self-interest expressed as utility maximization where utility is defined materialistically. The difference is profound because at its basis it a distinction between spirituality in the broad sense acknowledging "the human spirit" and materialism in the sense of viewing humans as large animals that have dominated their environment and a few have dominated the others, which is the objective.

Mike Konczal is at his best doing political analysis.
Policies evolve from identifying a problem. Whether or not it is feasible, Piketty’s suggestion for a global wealth tax evolves from identifying the problem as global and systemic. And here I think this book signals a major change in the debate over inequality.

First, the rosy picture that economists have painted about the nature of inequality has been displaced. The idea that labor’s share of the economy is more or less fixed, an essential element of the mantra that a rising tide lifts all boats, has been dealt a serious, if not fatal, blow.

The idea that the inequality is necessary for a well-functioning society has also been thrown into question. In the wake of the financial crisis and Great Recession, more and more research institutions are finding that higher equality corresponds to better growth, or at least has no negative effect. The causation here might be difficult to prove, but the research suggests that we can no longer take for granted that that growing inequality is a necessary evil for a better economy.

Second, the debate over wealth and taxes is back. Many economists argue that capital income shouldn’t be taxed at all, since it is unfair to tax people because they happen to save, as if it is simply a choice in the marketplace. There are, however, significant advantages to owning wealth, including security, political power, the ability to direct private investment, and much more. These benefits need to be subject to democratic scrutiny....
What seems to escape the attention of most is that the issue is not only the relationship of the rate of increase in wealth to the increase in growth. It is also the source and use of wealth. Is the source economic rent or is it equitable return on productive investment? Is the use simply to increase luxur consumption, add to savings and increase status and power, or is it to invest in innovation in a truly competitive environment?

Capital committed to productive investment increases growth and much of that is in the form of  gains due to the increasing value of ownership of the means of production. Much of this remains unrealized, and the gains are paper gains corresponding to increased capital formation, which is supposedly the purpose of capitalism. But wealth obtained from economic rents, in particular land rent, but also monopoly rent, financial rent and rents derived from other aspect of power, such as intellectual capital protected from competition through patents and copyrights, is unearned and unproductive. This is what we should be talking about in that it is undeserved.

Boston Review
Studying the Rich: Thomas Piketty and his Critics
Mike Konczal
(h/t Brad DeLong)