Excellent analysis comparing Piketty's Capital and Tyler Cowen's Average is Over, explaining in some detail Piketty's argument based on rent accrual. Dan lets Piketty sum up his own argument:
The problem posed by this use of the word “rent” is very simple: the fact that capital yields income, which in accordance with the original meaning of the word we refer to as “annual rent produced by capital,” has nothing to do with the problem of imperfect competition or monopoly. If capital plays a useful role in the process of production, it is natural that it should be paid. When growth is slow, it is almost inevitable that this return on capital is significantly higher than the growth rate, which automatically bestows outsized importance on inequalities of wealth accumulated in the past. This logical contradiction cannot be resolved by a dose of additional competition. Rent is not an imperfection of the market: it is rather a consequence of a “pure and perfect” market for capital, as economists understand it: a market in which each owner of capital, including the least capable of heirs, can obtain the highest possible yield on the most diversified portfolio that can be assembled in the national or global economy. (p. 423)
I suspect that Piketty and Cowen have complementary points.
Piketty claims that the fundamental architecture of capitalism results in a tendency toward rent accrual by owners of capital. Since capital tends to concentrate, this results in a privileged class. This seems to be true.
Cowen argues that technology has reached the point that labor is becoming increasing obsolete. The tendency is toward the need for and high compensation of only the highly knowledgeable and highly skilled, a small portion of the population. Therefore, employee compensation will concentrate that the top end, with technological innovation rendering lower skilled workers redundant. This seems to be true also.
The labor problem here is also that workers at the upper end of the pay scale, where compensation includes not only salary but also other forms of compensation, are not paid based on their marginal productivity. Owing to competition among firms for the best of the best, top level employees can command a residual over MP as a form of rent. They can capitalize their "labor assets." Those lower on the pay scale where labor is abundant are either paid at their MP or even less when government subsidies to the working poor allow for this, since they own no labor assets that they can capitalize as rent.
This is a pincers movement that is putting not only the poor and less educated in jeopardy, but also the broad middle class, as jobs migrate to the top end, to what we now call the upper middle class and lower level rich. The bulk of capital gets increasingly concentrated in the future at the level of the super-rich.
If these analyses are correct, the developed nations first and then the entire world faces bleak social prospects unless political steps are taken to overhaul the institutional arrangements that are producing this kind of result.
Rugged Egalitarianism
Laissez-faire’s Piketty Problem
Dan Kervick
