Branko Milankovic — Limits of neoclassical economics

Branko nails it.

When people criticize Piketty for elevating a mere economic identity that shows that the share of capital income in total income is x times y (not important for my argument) to a Fundamental Law of Capitalism they show their inability to go back to economics as a social science, or differently, to transcend neoclassical economics.

The share of capital income in total income is not only a reflection of the fact that people with a factor of production B have so much, and people with the factor of production A have the rest. It gives us a measure of the share of the total pie that owners of capital (who are the principal social group in capitalism) are able to claim for themselves without having to work. This is key. We are basically saying: 20% of people of the richest people claim one-half of national output and they do so without having to work. If it were a question of changing the distribution in favor of factor A (donuts) and against factor B (pecan pies), there would be no reason to be concerned. But here you change the distribution in favor of those who do not need to work, and against those that do. You thereby affect the entire social structure of society. This is where social science comes in, and neoclassical economics goes away....

The aim of neoclassical economics was from the outset the elimination of consideration of economic rents, which had been central to classical economics, coincident with the rising influence of Marx, one hand, and of Henry George on the other.

The entire 100 years of neoclassical economics was, in part, driven by the attempts to make us forget this key distinction: between having or not having to work for a living.

See John Maynard Keyes, The General Theory, Book VI, Chapter 24. Concluding Notes on the Social Philosophy towards which the General Theory might Lead. 

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. (II)

Seems Maynard had anticipated this.

Milanovic concludes:

The principal, and stark, issue then becomes: can a society where most of the rich are non-workers be called a “good society"?

I don't see this as the key criterion. The very wealthy are aware that those who do not work are not recognized as part of a meritocracy, which is key to their self-justification. They actually "work" very hard and getting things to go their way. Even at the top, it's not bean bag. Different cohorts of the rich compete for capital share. This is often a fierce battle that transcends nation states. This is now a global issue, and it is becoming increasingly global under neoliberal globalization and a new aristocracy of wealth and power.

The actual issue is social and political — asymmetric power — although in today's world this is based on economic and financial means," that is, wealth and control of resources. Asymmetric power facilitates rent extraction leading to greater wealth and therefore power. That cycle must be broken in order to change the game and level the playing field. This cannot be done through economics alone, It is a social and political issue that requires a social and political solution as well as an economic one.

globalinequality
Limits of neoclassical economics
Branko Milankovic | World Bank