Suresh Naidu — Notes from Capital in the 21st Century Panel

While I have a long piece on Piketty's book coming out in Jacobin, I was lucky enough to be a discussant on a panel with Thomas last Thursday, where I got a chance to lay out some second-order reactions to the book as well as talk with him a bit. Here are my notes from that, tidied up a bit and including some things I didn’t get to say.

Perhaps a useful analogy is that this is the "Free to Choose" or “Capitalism and Freedom” for our time, from the left. I can’t think of a book that emerged from economics for a mass audience with as much reception since then. And what good news this is for economics! For 50 years Milton Friedman was the public face of partisan economics, and stamped it with a conservative public face that persisted. Maybe now Piketty’s book will give my discipline another public face.

But let me push back against the book a bit. I think there is a "domesticated" version of the argument that economists and people that love economists will take away. Then there is a less domesticated one, one that is more challenging to economics as it is currently done. I'm curious which one Thomas believes more. I worry that the impact of the book will be blunted because it becomes a “Bastard Piketty-ism” and allows macroeconomics to continue in its modelling conventions, which are particularly ill-suited to questions of inequality.

The domesticated version is a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates. It is fundamentally a story about market forces, technology and trade making the demand for capital extremely elastic. We continue to understand r as the marginal contribution of capital to the production of the economy. I think this is story that is told to academic economists, and it is plausible, at least on the surface.

There is another story about this, one that goes back to Keynes. And the idea here is that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand of the capital market. Keynes writes that "But the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners." Keynes footnotes it with the 19th century saying that “John Bull can stand many things, but he cannot stand 2 percent.”

The book doesn't quite take a stand on whether it is brute market forces and a production function with a high elasticity of substitution or instead relatively rigid organization of firms and financial institutions that lies behind the stability of r.

I think the production approach is less plausible, partly because housing plays such a large role in the data, partly because average wages would have increased along with K/Y, partly because the required elasticity of substitution is too big for net quantities, and partly because of the differences between book and market capital. The (really great) sections from the book on corporate governance actually suggest something quite different, that there is a gap between cash-flow rights and control rights, and this is why Germany has lower market relative to book values. This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view. This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies....

Suresh puts his finger on the nub of it.

We live in a world where much more of everyday life occurs on markets, large swaths of extended family and government services have disintegrated, and we are procuring much more of everything on markets. And this is particularly bad in the US. From health care to schooling to philanthropy to politicians, we have put up everything for sale. Inequality in this world is potentially much more menacing than inequality in a less commodified world, simply because money buys so much more. This nasty complementarity of market society and income inequality maybe means that the social power of rich people is higher today than in the 1920s, and one response to increasing inequality of market income is to take more things off the market and allocate them by other means.

Along with this is the condition in which privatization, commodification, and capitalization of all resources threatens the very subsistence of marginal populations in developed regions in addition to emerging and still undeveloped, resulting in mass immiseration and social dysfunction characteristic of failed states.

The Slack Wire
Notes from Capital in the 21st Century Panel
Suresh Naidu