Thomas Piketty’s new book has been widely praised for its empirical contribution, but his prediction of rising inequality rests on economic theory. This column argues that Piketty’s pessimistic forecast is based on an extreme – and unrealistic – assumption about households’ saving behaviour. According to standard theory, the wealth–income ratio would increase only modestly as growth falls, so declining growth would not be a powerful force for generating high inequality.Saving causes investment. Morons. And they take Piketty's definition of capital to be captial goods rather than total wealth. I guess they either read the book superficially or just read negative reviews. They suggest, for example, that Giles points up data problems, when that has been thoroughly debunked for the red herring it is.
Their conclusion: Piketty's model conflicts with standard textbook models like the Solow growth model, so how could it be correct.
Concluding remarksThe concluding remarks show that they understand that the problem is with institutional arrangements to some degree, but the few they mention aren't the fundamental problem. It's the asymmetric power that enable extraction of economic rents that go chiefly to the top tier — who use a portion of these rents to control the neoliberal system through plutonomy in a complex system involving reliance on cronyism and privileges that wealth bestows, like a double standard of justice.
We are not sure why Piketty has chosen such an extreme assumption on saving. We have looked in the source materials underlying the book for a test of his assumption, and a comparison with the obvious alternative, and standard, theories, but did not find a clear test or comparison. What is clear, however, is that what lies behind his extreme predictions is his extreme – and, we think, unrealistic – assumption about saving.
Our view, instead, is that wealth dispersion in the Western world – which is very large and most definitely a compelling target of theoretical and empirical study – has primary determinants much different than those emphasised in Capital in the Twenty-First Century. These include, to mention but a few, educational institutions, skill-biased technical change, globalisation, and changes in the structure of capital markets. It is to these forces that those who care about inequality should be devoting their attention, and to which policy reforms ought to be targeted.
And once there is a large amount of inherited wealth held by a relatively small cohort, all that that has to happen for inequality to grow boundlessly is for this wealth be to be saved at compound interest while other cohorts are not able to save or must dissave owing to flat or declining growth.
VOX
Piketty’s ‘Second Law of Capitalism’ vs. standard macro theory
Per Krusell, Savings Banks Foundations and Swedbank Chair in Macroeconomics, IIES, Stockholm University, and a CEPR Research Fellow, and Tony Smith, Professor of Economics, Yale University
There were once experts in how flat the earth was, and how well the sun circled the earth. And they were awarded endowed chairs too.
ReplyDeleteWhat do these chairs endow recipients with? Rocking space in a home for senile Luddites?
Oh that Per Krusell again! Check http://larspsyll.wordpress.com/2013/12/22/self-righteous-drivel-from-the-chairman-of-the-nobel-prize-committee/
ReplyDeleteWell Per Krusell is famous draw strange conclusion when he analyze data as an example, Per Krusell was not satisified with the 700-page long Stern Review report released for the British government on
ReplyDelete30 October 2006 and lead by the esteemed
economist Lord Nicholas Stern of Brentford, former Chief Economist of the World Bank,
chair of the Grantham Research Institute on Climate Change and the Environment
at the London School of Economics.
Per Krusell was interviewed in Swedish Radio– Vetenskap & miljö, and told that -”The report was to alarming” , and if i understood him right he claimed that:
“-Climat change is expected to have little impact on the economy,GDP, aggregate output in the economy, in the worst case it will only
drop by a few percent in most countries”
He also told
-” I am a little worried that you close your eyes for other more important issues by thinking about the environment.”
Per Krusell,is professor of economics at Stockholm University, and leading a major international effort to calculate
the economic costs of climate change.He also told that
“- the threat is not so large in economic terms…” and
- “I think, it’s more important to get poor countries to develop. I am a little worried that you close your eyes for other more important issues by thinking environment.”
The 2006 Stern Report, right or wrong, did have a more alarming view, pointing out very seriuos impact on economy and society
in their summary they write:
“The scientific evidence points to increasing risks of serious, irreversible impacts from climate change associated with business-as-usual (BAU) paths for emissions.
Climate change threatens the basic elements of life for people around the world – access to water, food production, health, and use of land and the environment.
The impacts of climate change are not evenly distributed – the poorest countries and people will suffer earliest and most.
And if and when the damages appear it will be too late to reverse the process. Thus we are forced to look a long way ahead.
Climate change may initially have small positive effects for a few developed countries, but it is likely to be very damaging for the much higher temperature increases
expected by mid-to-late century under BAU scenarios.
Integrated assessment modelling provides a tool for estimating the total impact on the economy; our estimates suggest that this is likely to be higher than previously
suggested.
Emissions have been, and continue to be, driven by economic growth; yet stabilisation of greenhouse gas concentration in the atmosphere is feasible and consistent
with continued growth.
‘Central estimates of the annual costs of achieving stabilisation between 500 and 550ppm CO2e are around 1% of global GDP, if we start to take strong action now…
It would already be very difficult and costly to aim to stabilise at 450ppm CO2e. If we delay, the opportunity to stabilise at 500-550ppm CO2e may slip away.’
The transition to a low-carbon economy will bring challenges for competitiveness but also opportunities for growth. Policies to support the development
of a range of low-carbon and high-efficiency technologies are required urgently.
Establishing a carbon price, through tax, trading or regulation, is an essential foundation for climate change policy.
Creating a broadly similar carbon price signal around the world, and using carbon finance to accelerate action in developing countries,
are urgent priorities for international co-operation.
Adaptation policy is crucial for dealing with the unavoidable impacts of climate change, but it has been under-emphasised in many countries.
An effective response to climate change will depend on creating the conditions for international collective action.
There is still time to avoid the worst impacts of climate change if strong collective action starts now.”
see Stern, N. (2006). “Stern Review on The Economics of Climate Change (pre-publication edition).
Executive Summary”. HM Treasury, London. Archived from the original on 31 January 2010. Retrieved 31 January 2010.
I replied to parts of that Russell and Smith paper in the post I put up tonight.
ReplyDeletehttp://ruggedegalitarianism.wordpress.com/2014/06/01/emergency-the-world-needs-much-better-piketty-reviews/