Saturday, May 31, 2014

Suresh Naidu — Capital Eats the World

Naidu observes that it is not only wealth and status that confer power, but also legal and other institutional arrangement that are under the control of the ruling elite who formulate these arrangements in their individual and class interests.
The everyday encounter most people have with accumulated wealth is not through prices in the market for shoes, or the society pages, but instead the control and threats inflicted by their employers, landlords, and bankers. [1] Inequality of income and wealth means that some people live off unjustly earned income, [2] but it also means a lot more people are on the short-end of an asymmetric exchange, toiling away as personal assistants and Mechanical Turks.

This is where Piketty’s Walrasian conventions dampen his contribution: he discusses the first, but not the second. It’s like saying slavery is an inequality of assets between slaves and slaveholders without describing the plantation.
 The consequences of neoliberalism as a social, political and economic theory of society and governmance:
An economy that allows indentured labor means that wealth can purchase more power over people; an economy with robust union contracts means that capital is trammeled in its control over the shop floor. From sexual harassment on the job to the indignities of gentrification and nonprofit funding, a world of massive inequality is a world where rich people get to shape environments that everybody else has to accept.

Piketty repeatedly announces that politics plays a large role in the distribution of income. But he neglects that the distribution of income and wealth also generates inequalities of larger privileges and prerogatives; wealth inequality together with a thoroughly commodified society enables a million mini-dictatorships, wherein the political power of the rich is exercisedthrough the market itself....
But there is an important and nasty complementarity between massive inequality in income and wealth and a commodified, “fully-incentivized” world. When every action can have pecuniary rewards attached to it, and every source of well-being can be priced at exactly a person’s willingness to pay, the social power commanded by the rich is magnified in a way that is difficult to see when comparing a dollar in 1920 with a dollar today.
What are the solutions?
Where Do We Go From Here?

Piketty’s book reflects the promise and current limits of economics as a discipline. The ideas, which are powerful, could not have originated anywhere but mainstream economics. They require a command of the mathematical models of growth and taxation, and only economists would appreciate the painstaking reconstruction of the balance sheet data.

But Piketty oscillates between paying homage to fundamental forces of technology, tastes, and supply and demand, and then backtracking to say that politics and institutions are important....
So how to do better?
[1] A first step could be a multisector model with both a productive sector and an extractive, rent-seeking outlet for investment, so that the rate of return on capital has the potential to be unanchored from the growth of the economy. This model could potentially do a better job of explaining r > g in a world where capital has highly profitable opportunities in rent-seeking rather than production, and it would generally disassociate the growth of the productive economy from the growth of abstract wealth....
[2] More fundamentally, a model that started with the financial and firm-level institutions underneath the supply and demand curves for capital, rather than blackboxing them in production and utility functions, could illuminate complementarities among the host of other political demands that would claw back the share taken by capital and lower the amount paid out as profits before the fiscal system gets its take.
This is putting meat on what Brad Delong calls the “wedge” between the actual and warranted rate of profit.
We need even more and even better economics to figure out which of these may get undone via market responses and which won’t, and to think about them jointly with the politics that make each feasible or not. While Piketty’s book diagnoses the problem of capital’s voracious appetite, it would require a different kind of model to take our focus off the nominal quantities registered by state fiscal systems, and instead onto the broader distribution of political power in the world economy.

Capital Eats the World
Suresh Naidu | Assistant Professor of Economics and International Affairs at Columbia University

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