George Cooper — Still not buying r > g

Dan Kervick writing on Rugged Egalitarian, has written an interesting article which looks to be, at least partially, a rebuttal of my recent post: The Magical Mathematics of Mr Piketty Part II. Dan sets out a thought experiment built around a model economy of serfs (workers) and barons (capital owners). He uses the model to argue that the rate of return on capital, r, is unrelated to the rate of economic growth g. Specifically, to show that it is possible to have a zero growth economy with a 5% return on capital, thereby supporting Piketty’s r > g claim.

Readers will be unsurprised to hear – I’m still not convinced.

Still not buying r > g
George Cooper

Dan Kervick — How Hassett Gets Piketty Wrong

So according to Hassett, Piketty has argued that eventually capital is going to “have everything” and “get all of income.” And the reason for this is that our economy can indefinitely substitute capital equipment for labor, so that all returns will eventually accrue to the owners of that capital. 

But Piketty makes no such argument.

Piketty says first that the capital/income ratio β – the ratio of total accumulated wealth to annual national income – tends toward s/g over the long run, where s is the nation’s savings rate and g is its growth rate. And the total capital share of national income is always rβ, where r is the rate of return on capital. So if the total accumulated wealth of some nation is 5 times its annual national income, and the annual rate of return on capital is 5%, then the total capital share of income will be 25%. Suppose also the savings rate is 9% and the growth rate is 1.5%, and that these rates are stable over an extended period of time. Then s/g is 6, and that initial 25% capital share will move in the direction of 30%, and stabilize there....

Rugged Egalitarianism
How Hassett Gets Piketty Wrong
Dan Kervick

See also, Nothing Magical about Piketty’s Mathematics

George Cooper worries that Thomas Piketty has advanced some “magical mathematics” in Capital in the Twenty-First Century: mathematics which lead to absurd results. And Cooper argues that when one repairs these absurdities in the most logical way, Piketty’s main policy prescription – a 2% global wealth tax – is seen as a recipe for economically disastrous effects. But the mathematical fix Cooper proposes is not at all plausible given the historical trends Piketty’s research has revealed. More importantly, I think Cooper has simply misconstrued Piketty’s mathematics, and that it doesn’t require any fix at all. When we interpret the mathematical formulae in the way Piketty has indicated, and impose economically natural conditions on their range of application, Cooper’s problem disappears, and Piketty’s historical analysis and projections emerge unscathed.

Justin Fox — Will Economics Finally Get Its Paradigm Shift?

Justin Fox reflects on George Cooper's new book.

Then it comes time to offer up his ideas for a new economics paradigm: 

1. Replace utility-maximizing economic man with a Darwinian fellow who simply wants to do better than the next guy.

2. Let this selfish creature fight it out in a macroeconomic model based on the circulatory system. “Capitalism would act to push wealth up the social pyramid,” Cooper writes, “while democracy, and its progressive taxation system, would act in the opposite direction to push it back down, causing a vigorous circulatory flow of wealth throughout the economy.”

So what makes modern capitalism work is not so much the accumulation of capital as its constant flow through the system. It’s an interesting thought. The basis of a new paradigm for economics? Hmmm. Cooper does his best to prep the reader by showing how intuitive and simple the insights of Copernicus, Darwin, and William Harvey (Charles I’s physician, who figured out how blood circulates through the body) were, but I still found his suggestions to be almost laughably crude. Maybe that’s just me. Or maybe it’s the natural initial reaction to a potential new paradigm.

Harvard Business Review — HBR Blog Network
Will Economics Finally Get Its Paradigm Shift?
Justin Fox | Executive Editor, New York, of the Harvard Business Review Group

Lars P. Syll — Economics in need of a re-think

George Cooper, author of the highly praised, The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy, has a new book, Money, Blood and Revolution: How Darwin and the doctor of King Charles I could turn economics into a science.

Lars P. Syll | Professor, Malmo University
Economics in need of a re-think

Quoting George Cooper

My comment there:

I haven’t read Cooper’s book yet, but based on the passages quoted above, I would agree that economics is in a pre-revolutionary stage, much as classical physics was immediately prior to relativity and quantum mechanics. Nineteenth century physicists actually sounded a lot like today’s conventional economists that dominate the field and have declared the methodological debate over. Perhaps economics will get its Einstein, Bohr and Plank, et al.

And perhaps we see some the early work having already emerged in Keynes, Lerner, Minsky, Tobin, and Godley, as well as in philosophy, life sciences, psychology, and social sciences. I lead with philosophy there with a reason — economics is foundationally normative and economic institutions are not based on nature as much as they are on custom and law. 

The just so stories that economists since John Locke and Adam Smith tell about the origins of property, markets, money, utility, and motivation are just that — made up. There has been little serious examination of these key elements in conventional economics in light of the disciplines that actually study these matters empirically and historically.

A large stumbling block for conventional economists is “lack of formalization” that enables precise predictions. Well, that was a huge stumbling block in the acceptance of quantum theory as well. Even Einstein objected that God does not play dice and he never really accepted the stochastic nature of physical reality at its core. Maybe, just maybe, the subject matter exceeds the degree of precision that economists holding on to traditional econometric models admits — as Keynes, who knew something about probability, told Tinbergen.

Comment by Tom Hickey— 24 March, 2014 #