Thursday, June 26, 2014

Lars P Syll — Bob Rowthorn questions two of Piketty’s central assumptions

It seems to me that Rowthorn is closing in on the nodal point in Piketty’s picture of the long-term trends in income distribution in advanced economies. As I wrote the other day:

Being able to show that you can get the Piketty results using one or another of the available standard neoclassical growth models is of course — from a realist point of view — of limited value. As usual — the really interesting thing is how in accord with reality are the assumptions you make and the numerical values you put into the model specification.
Lars P Syll's Blog
Bob Rowthorn questions two of Piketty’s central assumptions
Lars P. Syll | Professor, Malmo University

1 comment:

Dan Kervick said...

Thus, Piketty’s argument rests on two crucial assumptions: β = K/Y and σ > 1.

Piketty doesn't "assume" that β is equal to K/Y. That's just the definition of β. He also doesn't "assume" σ > 1. He attempts to measure the historical values of σ by combining the growth model framework with historical data about capital shares and capital-to-income ratios.

Chapter 6 is the only chapter that contains any use of the CES growth model. Piketty, as I read him, relies on that model solely for "defensive purposes." His opponents have used that model in conjunction with empirically unfounded assumptions to argue that the rate of return on capital falls commensurately with rises in the capital-to-income ratio so as to keep the capital share constant. Piketty chief argument against this position is empirical: that's just not what the historical data shows. For anyone committed to the CES framework, the historical data yields the conclusion that elasiticities were slighly greater than 1 in the 19th century. But if one thinks all that elasticity stuff is BS, one is still left with the sheer historical data which seems enough to refute the balanced growth path conjecture. Piketty himself seems to be diffident. He is willing to work within the CES framework to interpret history in a way that accepts his opponents basic framework while showing why they are wrong. But in the online appeandix and lecture notes he says that the whole idea that one can measure the various ways in which capital can or cannot be substituted for labor with a single parameter σ is greatly oversimplified.