By Rumplestatskin, a professional economist with a background in property development, environmental economics research and economic regulation. Follow him on Twitter @rumplestatskin. Cross posted from MacroBusiness
The media attention surrounding French economist Thomas Piketty’s new book Capital in the 21st Century is growing ever more fervent. Here are my two cents.
To me three things are clear to be about this book. First, it is a timely reminder that distribution of resources within society matters. This is especially important for an economics profession who has often ignored the issue and whose core analytical framework is a completely inappropriate tool for its analysis.
Second, and this is quite a surprise, the mainstream economics profession seems to be rather accepting of the book, which, when I read it, seemed to make the claim that most of their scholarly methods are flawed and that the economics profession knows very little about the more important elements of social organisation. While on the surface this appears to be a mature response by the profession to valid criticisms, I fear that the profession will corrupt the message of the book and will unfortunately not have the impact on improving economic scholarship that it seems intended to have.
Third, and this is my one personal gripe, the book fails to acknowledge the many social processes studied by sociologists and even ecologists that have been used to explain unequal outcomes in a wide variety of settings. For example, the process of preferential attachment is fundamental to producing the unequal distribution of the success of artists, musicians and even, ironically, authors. Such a process can not only explain the broader inequalities in terms of access to resources (income and wealth), but also the inequality of book success, where Piketty finds himself in the top 1% of economics authors (and there really is no shortage of books covering similar topics recently, for example here, here, here and here).
I want to now explore these latter two point in more detail.
The surprise hero
The mainstream acceptance of the book in economic circles is, in my view, due to the simplicity of the r > g story Piketty weaves into the long run inequality trends he has meticulously pieced together. This story is compatible with many of ridiculously simplistic explanations economists love, such as technology change, education, regulatory intervention in labour markets, and just about anything else. Yes, the mainstream is stuck on these same metaphysical explanations that Henry George made fun of back in the 1870s.
What this means then is that r > g heuristic Piketty uses is not a precise model applicable to a wide variety of circumstance, but a general framework in which a variety of political, social and institutional models will site. This heuristic basically says that the rate of return to capital owners tends to exceed the rate rate of growth of the economy, and hence increases inequality over time. It is a similar idea to the model from Chapter 4 of Joseph Stiglitz’s PhD thesis from 1966. Piketty summarises the process as follows:
When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels—levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.
This explanation is general enough not to exclude many popular but flawed neoclassical stories about inequality. Indeed Piketty peppers his explanations of potential forces leading to a divergence of wealth with hints of neoclassical theories, which definitely help him appeal to his intended audience. But ultimately he paints a political, social and institutional story of wealth distribution, one which the economic reviews seem to miss.
the inequality r > g is a contingent historical proposition, which is true in some periods and political contexts and not in others.
It is unfortunate that the definition of capital that Piketty uses does not distinguish between scarce factors of production, like land, patents and other State-granted monopoly rights, and produced factors of production, like buildings and so forth. This matters in theoretical discussions because produced factors of production don’t necessarily produce any return unless coupled with a scarce factor of production. James Galbraith noted this in his review, along with other important measurement issues such as implicitly using value as a measure of quantity (which has been criticised elsewhere). These are certainly correct, but one can’t expect appropriate data to emerge from the history books that can be easily segregated into modern definitions. Indeed, others have argued that Piketty uses capital in the more general and appropriate way as the monetary value of assets able to be used as collateral. Which is a fine debate to have, but not much help when the body of existing economic theory uses the term to mean something else. In all, this confusion is likely to be exploited by those wishing to leverage Piketty’s new-found popularity to their advantage.
One thing we miss in this process is that if ownership of wealth was equally distributed, it wouldn’t matter whether r > g in terms of its impact in inequality. Or more precisely, institutional settings can be designed to combat any social force that concentrates wealth if we so desire, and if it is politically palatable.
Corrupting the message
Blogger J.W. Mason has already noted these obscure interpretations of the book within economics, calling the corrupting process ‘bastard-Pikettyism’. Like me he fears the valid methodological critiques will be ignored, and the main message will be propagandised into one that is supportive of the current mainstream approach.
Let’s not pretend this isn’t the way new ideas are dealt with by the power structures within the economics tribe. Thomas Palley has extensively discussed how this same process happened following the financial crisis. He calls it ‘Gattopardo economics’, and his subtitle sums up the process: The crisis and the mainstream response of change that keeps things the same.
We can see this starting in quite a few of the now hundred of reviews and comments emerging online. For example, Tyler Cowen seems to want to corrupt the idea of capital back into a physical thing and essentially say that the past is not a good guide to the future. Of course Piketty is no fool and completely acknowledges the uncertainty, simply noting that we should learn lessons from history that reverting toward equality is no automatic outcome. In my mind the vagueness of the use of the term capital is allowing the profession to read it as they see fit, ignoring the political and institutional environment.
Robert Solow seems to like the book (32min mark of linked video), and particularly idea of an r > g mechanism. We see Solow at pains to fit Piketty’s commentary on the long-run picture of inequality within his ‘model thinking’. When he discusses what he thinks is going on with the gap between r and g he says:
On the pure theory side, the sorts of influences that appear in the book suggest that there will be an increase in the capital output ratio – this is likely if the law of diminishing returns is still operating at all – is likely to push the realised rate of return on capital down a little bit. You can ask how much down if you make the technical calculations that one would normally make, and that rest on assumptions that are already in Thomas’s book, you would expect the rate of return on capital to fall when the permanent growth rate falls, and fall somewhat better than one to one, so that the gap between r and g is likely to remains positive to be somewhat narrower. So there is no reason to suggest that this process of accumulation of wealth and income at the top of the distribution to top increasing.
Oh no, please, not those technical calculations.
The great fear I have is that the economic profession will use the book to argue that inequality is a complex issue and that changing the distribution of wealth is technically difficult. It is not. There are endless policy options for reducing inequality which are simple to implement, and often are implemented (or have been) in some part of the world. It’s not rocket science. Sure, politically redistribution is difficult. But it is not the job of the economics profession to pander to current political sensitivities – we should be offering solutions.
Here are just a few; mortgage (and other) lending constraints, limits to rent increases and more secure housing tenure for renters, limits on executive pay, higher welfare support to the most needy, shifting the tax base away from wages towards land and land-like resources, stop privatising public utilities, greater public investment in network infrastructure, and more.
Was it r > g that got Piketty’s book into the 1%?
The inequality of media attention lavished on this book [1], in preference over the many other equally worthy new economic books, is part of the some social mystery that the book itself attempts to resolve.
In my view it is clear that owning wealth is an advantage to acquiring more wealth. In sociology, and on the fringes of economics, the process of preferential attachment is being regularly identified in social systems. This review is helpful in getting acquainted with the idea.
While the idea that r > g suggests a process preferential attachment, or cumulative advantage, the mechanisms at play in such a processes are unable to be modelled in a world of perfect markets. The fundamental feature of capitalism, it seems, is not the perfection it is made out to be in economic theory. This will be hard to deal with for the true believers in the profession.
Preferential attachment processes at the individual level can, and have been, identified empirically. We know that already large firms are more likely to win government contracts, thus reinforcing their dominant position. We observe that corporate directors with more cross-directorships are more likely to get new directorship positions. We know that current level of popularity of books, music and films is a good predictor of their future popularity and that ‘superstars’ are the product of a cascading process of gaining advantage.
And more relevant to this discussion, am I likely to buy, read and review a book that already has gained significant media attention than one that hasn’t? Yep.
To maintain a degree of fairness and equality when there is widespread preferential attachment processes occurring society there must either be either a) institutional limits on these processes, or b) active redistribution to counteract the undesired results. In sports we see example of a), where team salary caps are common. Piketty notes the historical role of taxes on capital as an example of b) and promotes such solutions later in the book.
To be clear, Piketty makes a great contribution to economics, especially in his call to tightly link economic analysis to historical political and social conditions, rather than pretend to solve problems of the world from detached abstract reasoning. However like all reformation efforts in the discipline, his (and fellow students of inequality) will be met by fierce internal opposition, the ultimate outcome of which is to twist his work into something it is not in order to pretend that it supports the status quo. This happened to Coase, it happened following the Cambridge controversy, it happened in macro after the financial crisis, and it will happen again now. There are simply too many vested interests who want the profession to continue to come to the same conclusions.
fn[1]. Here’s just some of the attention the book has received: Bloomberg, Real World Economics Review, Dissent Magazine, Monthly Review, Quartz,New Yorker, Business Insider, Harvard University. Marginal Revolution, Foreign Affairs, Huffington Post, The Nation, Taleb, The Economist, New Yorker Magazine, BHL, The Conversation, Tyler Cowen again, Squarely Rooted, Joshua R. Hendrickson, RWER again,
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Correction: You mention “Blogger J.W. Mason” but link to a post on The Slack Wire by Josh’s co-blogger, Suresh Naidu.
It seems to me that “inequality” is a a euphemism that is particularly suited to being co-opted. After all, isn’t inequality “natural”? Well, of course it is not. Underlying inequality is coercion and the inequality that results from that coercion enables even greater coercion. For this reason, the work of the early 20th century American legal realist, Robert L. Hale should be brought into this discussion. Private property is not some act of nature, it is a creature of the law, as are the myriad of policies and court rulings that “forbid both the rich and the poor from sleeping under bridges.” See Hale’s Robert L. Hale, “Coercion and Distribution in a Supposedly Non-Coercive State,”
Ants at the Piketty Picnic: What’s Wrong with “Inequality”?
So what’s wrong with inequality, anyway? According to conservatives like Bork, inequality is the innocent outcome of innate differences in “preferences and talents.” Doing away with inequality would not only be inefficient but would require the exercise of coercion.
Liberals, meanwhile are shocked, shocked to find so much inequality going on in this day and age. Obviously there is a need for a bi-partisan effort to tone down the inequality a bit without too much coercion. Oh, thank you very much.
So what’s wrong with inequality? For anybody paying attention, Judge Bork let the cat out of the bag. Inequality is coercive (but don’t tell anyone!). That’s why conservatives attack equality as coercive.
The move incorporates several tactics associated with Karl Rove: take the offensive, attack your opponents’ strengths and steal their thunder by accusing them first of what they might effectively use against you. Libertarians and conservatives have made it their business to “own” the coercion claim and thus deflect its sting. Liberals aid and abet them by conceding a whimsical “efficiency/equity trade-off” and by running interference against normative encroachments on allegedly positive economic methodology.
Why do people want to get rich? Sure, they want nice stuff, but more fundamentally they want to be freed from the coercive everyday insecurity of being poor. How do the wealthy stay rich and get even richer? They use the political power that their wealth accords to keep the game rigged in their favor.
These are not state secrets. Nor are they facts disclosed in data reported by the BLS or the IRS. Just common knowledge — common sense that doesn’t count for beans in the marginal productivity analysis. Inequality is a positive fact; coercion is a normative claim. So let’s all talk about inequality as if it has nothing to do with coercion. Let’s not talk about the elephant in the room. What elephant?
So what’s wrong with “inequality”? Framing the debate to be about “inequality” misses the point that the real problem is coercion. If the inequality conversation leaves the coercion question up for grabs, you can be damn sure the right will seize it and run with it. Loser liberals then will have yet another opportunity to be shocked, shocked that so much inequality is going on.
What is wrong in Bork’s reasoning is the peyorative use of the expression `coerce by law´. The intention is clearly to define growing inequality as a natural outcome driven by physical/chemical/biological (unchangeable) laws of preferences. It’s not so. Those laws of preferences are as arbitrary as the social laws and their effects are equally coercitive.
I never understand the creeps who pervert science like this Ignacio.
“I never understand the creeps who pervert science like this Ignacio.”
I do:-
http://www.plosbiology.org/article/fetchObject.action?uri=info%3Adoi%2F10.1371%2Fjournal.pbio.1001549&representation=PDF
” But it is not the job of the economics profession to pander to current political sensitivities ”
A heritic, a heritic sir! (awkard silence ensues)…
Loved the post, followed the links, only one quibble: no mention of the co-opt of Keynes by the hack Hicks in the 30s.
“So, what’s wrong with inequality, anyway?”
Please forgive this 600-word rant, as I will forgive you if you don’t want it to appear here. But I was inspired to write it this morning largely by what I read here, as well as my scientific education, and it seems to answer this question.
Death and Capitalism
A recent 700-page book (Thomas Piketty’s Capital for the 21st Century) is attracting significant attention for its scholarly demonstration of the tendency for capital to magnify itself. Records from many places and times show that the holders of relatively more capital accumulate yet more, and do so faster than their less wealthy peers.
Naturally, this positive feedback loop accelerates as the capital disparity grows.
Ultimately, having the bulk of existing capital and the accompanying power held in very few hands creates an unstable society that self-destructs.
Long before this massive study, folk wisdom said it more succinctly: Them as has, gets.
I have long suspected that this is a pattern that was established ages ago in another field of competitive endeavor: the evolutionary events that gave us our present life course of increasing competence followed by senescence and death.
Although holders of large amounts of capital can now avoid taxes (which falsifies a different bit of folk wisdom), death remains a universal certainty.
Science and medicine and every adult’s thoughts have long focused on the problem of aging and senescence, but usually on mechanisms and prevention rather than on the reason why such characteristics evolved in the first place.
I submit that the reason is the same as the reason for the downfall of societies that progress to the stage of excessive wealth concentration.
An adult organism in the prime of life has many advantages over younger rivals. It is larger, has learned important lessons and mastered skills that no younger conspecific is likely to have. It may also have managed to dominate a favorable location or form alliances with others.
I write in the most general terms, because the same would seem to apply to most higher organisms. It does not seem to apply to microorganisms, which (coincidentally?) do not usually suffer from aging and senescence. The advantages of maturity often include the ability to confer some level of advantage on offspring (pine trees, duPonts). All these advantages are biological analogues to accumulated financial capital.
Consider what this situation means in evolutionary terms. The most effective organisms, which most effectively accumulate their various forms of capital, will not only occupy comfortably the environmental niche carved out by their species, but will also become dominant within their species. Their enhanced reproductive success and its indefinite duration would soon turn their species into near clones of the advantaged elders.
But such a uniform gene pool is known to be a route to extinction, making an entire species vulnerable to challenges that would have left many survivors from a more varied population.
A uniform gene pool means a relatively static species, lacking the variations needed to respond to, and gradually adapt to, changing conditions and new challenges.
Result: death of a species.
Remedy: limited lifespans for individuals.
Thus all of the higher life forms we know have evolved to possess and pass along the inherited characteristics we call aging, senescence, and death.
Like eyes, aging and death are so important to species survival that they will have evolved numerous times by numerous routes. Unlike eyes, aging and death can be produced by many combinations of many malfunctions, rather than requiring the coordinated convergence of a suite of specific functions to serve a specialized purpose. Death is easier than clear vision.
Logic, biology and history tell us that a society that wants to survive had better prevent the accumulation of masses of capital so large that they affect the functioning of the whole. Inequality itself is essential to natural selection. But too much of anything is not too good.
Let those with eyes to see, do so.
Nice post; thanks.
In his critique of Prof. Sargent’s 2007 graduation speech, Prof. Krugman homes in on one of the 12 “principles” that Sargent espoused: “There are tradeoffs between equality and efficiency”.
I was puzzled as to why that statement seems so plausible. It doesn’t in fact square either with our lived experience or with the IMF paper that Krugman quoted in his critique.
Later, reading a column by Martin Wolf, I came to think that the plausibility rests on the sorts of things taught in introductory economics courses. Talking about why there might be an equality/efficiency tradeoff, Wolf writes: “Inequality might in fact promote growth because it reflects high incentives for innovation and entrepreneurship. It might mean higher savings and so higher investment, since richer people may well save a higher fraction of their income. … In poor countries, inequality might also give a part of the population the resources to start a business or get an education. …”
Sound familiar? It’s Econ 101, isn’t it? But of course at the top of the economics profession the tradeoff is doubtful and controversial; in fact, it’s far from being a “principle”.
Krugman suggests that the attention currently being given to Sargent’s speech is actually a blind. It isn’t anything to do with economics. He writes that it is: “…essentially stealth anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths. But they aren’t, and the real goal here is to undermine the case for fighting unemployment in the here and now”.
If I am right and the plausibility of the fake equality/efficiency “tradeoff” rests on half-remembered introductory economics courses (which have been taken by very many people nowadays), then the purpose of introductory economics is to soften people’s brains to the point where a bogus argument for a Right-wing policy position can be accepted without question.
The Krugman critique:
http://krugman.blogs.nytimes.com/2014/04/21/no-time-for-sargent/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body
The Martin Wolf piece:
http://www.irishtimes.com/business/economy/a-more-equal-society-will-not-hinder-growth-1.1770291?page=1
Though the mainstream will no doubt try to defuse, deflect or obfuscate Piketty’s arguments, the book will also allow those economists with more radically sensible ideas – especially the young – space to maneuver. I forsee a significant divide opening up in the profession between the conservative forces clinging desperately to the old model, and young revolutionaries determined to shove common sense down their throats.
A Piketty split, if you will…
We should be asking a fairly simple question with an obvious answer. Does inequality promote a decent, fair, and equitable society we would want to live in? The answer is, for most of us, of course not.
But we should still take a look at equality. Equality does not mean uniformity. Moreover, rewarding some modestly for their contributions does not injure most people’s sense of fairness and equality. When we talk about inequality today we are referring results that are unfair, excessive, do not correspond to the value of any contributions to society, and are often destructive to any society we might want. Modern inequality is characterized by both its unlimited nature and its complete detachment from any societal good. While true, this is still insufficient. To truly grasp modern inequality, we need to see it for what it is, looting, looting of the many by the few. It is inherently criminal. And it is precisely its criminality which is missing from virtually all economic analyses, including Piketty’s and Rumplestatskin’s.
Re r > g, absent countervailing redistribution (and it is good to see that word entering into public debate), there are really several ways inequality can result. There is the problem of interest, for instance. A loan of amount X results in a repayment of an amount X + Y, Y being the interest. That Y does not get randomly redistributed to the general population but gets concentrated in the hands of a few, the owners of capital. Over time, this results in a massive upward transfer of wealth.
There is also the process we have seen from the 80s onward where the Fed made war on increases in workers’ wages. The result is that these wages in real, inflation adjusted terms have remained flat for the last 35 years, and all the gains in productivity over this time have gone to the wealthy.
Yet another way is to eliminate progressive taxation. Only for the very top rungs of wealth is their a real discrepancy between inflows (income) and outflows (costs). While for most of us, our wealth is at or near zero or slowly increases over time, for the wealthy, their wealth increases far faster than their consumption, and low tax rates have no redistributive effect. As the author says, “it is clear that owning wealth is an advantage to acquiring more wealth.” Or as I would put it, the more one loots the more opportunities and powers one has to loot, the more politicians one can own and the more one can manipulate and rig the financial system and government.
In this regard, r > g is just another formulation of what we have for several years called the paper vs the real economy. In some ways, the paper economy appears detached from the real economy. We have only to look at the current stagnant real economy and the stratospheric paper economy to see this. The problem is, of course, as we saw in the housing bubble and the meltdown, that the bubbles, and more particularly, their bursts, do not stay confined to the paper economy. They spill over with devastating effects on to the real economy. And even the mere existence of the paper economy has a distortive effect on the real economy as executives destroy their companies to fulfill the quarterly expectations of the paper economy.
Must have been writing at the same time Hugh. Criminality is a big key. I’m as sure as I can be that inequality is a biological crippler. We see lots of animal groups doing this and often find something like depression, represented by very differentiated hormone levels. If my own reflection is anything to go on, “they” have made it more or less impossible to do any decent work. I just don’t want to enter the pecking orders involved. The behaviour of most managers is now intolerable, even if not aimed at me.
I must say we need more on how equality would work. Bad people at the top and bottom influence a great deal because they can’t be trusted.
“”There is the problem of interest, for instance. A loan of amount X results in a repayment of an amount X + Y, Y being the interest. That Y does not get randomly redistributed to the general population but gets concentrated in the hands of a few, the owners of capital. Over time, this results in a massive upward transfer of wealth.””
So true, Hugh. And may I point out that since “money” comes from that ‘lending at interest’, EVERY dollar of money that has ever been created has been funneling those interest payments to the issuing class, in perpetuity, and will continue to do so, until we change this money system, possibly reversing that unnatural flow from the many to the few.
Because, that’s how they do it.
Thought the post put together a lot a material raised here before, though done better. We’ve known books and other news needs to be ‘timely’ for long enough. One might wonder why the gatekeepers didn’t seize on many other efforts on the financial curse on inequality health epidemiology. Nice to see Downunder’s go at some evolution-explanation and that A Smith had worked out the coercion-starvation factors involved. Life ain’t often fair.
Biology often ‘promotes’ an individual as leader, though there are alternative methods, Quite often, this leader is easily replaced from further down the troop or shoal. The leadership is just part and parcel of what the ‘individual’ has become, We humans generally have an ideology of individualism. Individual organisms have been central to philosophical reflection on such processes, but they are not the only type of biological individual. For example, both genes and groups have been considered kinds of biological individual that function as units of selection. In biology, the Tripartite View holds that any organism is physically continuous and bounded and is:
1. a living thing (individual, agent) during at least some of its existence
2. that belongs to a reproductive lineage, some of whose members have the potential to possess an intergenerational life cycle, and
3. which has minimal functional autonomy of the relevant kind.
Organisms also construct the niche they occupy and exist in various group forms such as a trait group, “a set of individuals that influence each other’s fitness with respect to a certain trait but not the fitness of those outside the group”. There are superorganisms like hives.
The trait group is probably worth mention in terms of Piketty. The intuitive idea behind a trait group is that demes can feature evolutionarily relevant structure wherein organisms belonging to one part of the deme are subject to causal influences that do not extend to the deme as a whole. A population of such structured demes would then function as a metapopulation, with natural selection operating between the trait groups that make up that metapopulation. Trait groups exert a ‘sphere of influence’.
While variation is crucial to the process of natural selection in general, and there are many techniques (both mathematical and biological) for understanding it, a particular set of concepts and ideas has been used in understanding human variation in particular. We have conceptualized our own variation in terms of there being sorts or kinds of people, whether those be defined in racial, ethnic, geographic, cultural, genetic, phenotypic, economic, or other terms. Such conceptions share some distinctive features: they are often hierarchical, are often associated with positive status or negative stigma, and have often involved an explicit or implicit appeal to both norms and ideals of what it means to be human. And boy have we been wrong a lot of the time!
I wouldn’t want to criticise Piketty for the lack of biology. The business of cross disciplinary thinking is far too difficult. My own reaction to the book was first that it said nothing new, though seemed to bring more tax data into play than in previous work. After read two I haven’t found much for students to read from it and have started to feel uncomfortable with the maths anyway. I think we need a stronger emphasis on criminality in the accumulative process and what inequality does in disabling large sections of our population.
Yes, a financial bubble or a housing bubble sounds so benign. Yet when these bubbles burst, people lose their jobs, their savings, and their homes, and some of them DIE as a direct result. Those who profit from the blowing and the bursting of bubbles have killed them. I call that murder.
“The business of cross disciplinary thinking is far too difficult.”
IMHO, that’s where solutions roam. They shouldn’t be “enclosed” by the esoterically initiated alone.
“I think we need a stronger emphasis on criminality in the accumulative process and what inequality does in disabling large sections of our population.”
Yes, criminality juxtaposed with “legality” and proportionality. Maybe some brave soul can undertake the behemoth task of researching the empirical data…but the “behemothality” would require “funding” from sources who might find the undertaking less than “worthy”. Reminds me of G. Santayana-“The empiricist…thinks he believes only what he sees, but he is much better at believing than at seeing”.
I agree the murder element Carla. Pretty sure I can track some pretty prestigious money to dead bodies and burned out farms in the Kivus. The way forward is cross-disciplinary but not just in the universities – they are either sausage factories or tweedy.I did a paper in Warsaw years ago on the invention of the bullshit meter. The thing works but never gets into production. Establishment funding does support a rival that guarantees truth, but not beyond the truth that it can’t work. The long establishment funding letter is read to the working prototype and it melts down in overload.
I think this is the best review I have read of this book so far, and agree about the “bastardization” that is already going on. Two points especially bear repeating:
One thing we miss in this process is that if ownership of wealth was equally distributed, it wouldn’t matter whether r > g in terms of its impact in inequality. Or more precisely, institutional settings can be designed to combat any social force that concentrates wealth if we so desire, and if it is politically palatable.
I have already had to make this point several times in discussions of the book. Piketty tells a subtle, complex and open-ended story in chapters 7 through 12 of the book about the social structure of economic inequality, which includes factors relating to the unequal distribution of capital, factors relating to inequalities in wage income and factors relating to the interaction between the two. Many reviewers and commentators, however, have seemed to assume that those chapters are irrelevant to the book’s argument and that everything important follows in some mechanical way from r>g.
Also this:
the inequality r > g is a contingent historical proposition, which is true in some periods and political contexts and not in others.
Piketty’s approach is empirical, and this is something many of the reviewers, even the friendly reviewers, from the mainstream economics profession have trouble working with. Piketty uses historical analysis to make very general, but empirical claims about long term economic trends, specific historical episodes and observable tendencies. The critical reviewers think he should follow a more a priori method based on a simple, intellectually totalitarian model that churns out a deterministic economic history like the output of some kind of machine. They sometimes suggest the model he should< be using, or the model he really has in mind – which they then, not surprisingly, declare to be incorrect.
I think a big factor in the positive reception of the book in mainstream circles has to do with its invocation of meritocracy. Piketty himself is, I think, quite coy and occasionally sardonic about the role of meritocratic ideals in contemporary culture. However, he recognizes the role those ideals play in modern liberal democracies, and puts a lot of emphasis on the ways in which the strong reemergence of rentier capitalism threaten them.
The typical upwardly mobile ivy league technocrat and self-made social climber seems to have no trouble at all with the inequality that attaches to the socioeconomic gaps between the intellectually special and the coarse rubes who exist to service their needs. They think that kind of inequality is God’s sanctioned gift for being awesome. But they are sometimes miffed by the income that flows to the dumbass scions of old wealth. By framing much of his argument in terms of the reemergence of “patrimonial capitalism”, Piketty has found an audience among elite opinion leaders who live by the code of innate merit.
Dan,
Thank you for these insights.
I have not read Picketty’s book yet, but it does seem to me that there is very little discussion about the social corruption of institutional power mechanisms which led to deregulation (wealth and income gaming) like the Marquette decision, GLB 1999, 2005 Bankruptcy Reform Act, etc… Tony Benn reminds us if we can create laws that hurt people, we can create laws that support and help them too.
I, particularly, enjoyed “the ivy league technocrat and self-made social climber” distinctions, as there are so many species of neoliberal phylum yet to be identified. All the best.
… and if you think about it, those are exactly the types of people liberals have elected: Clinton and Obama are two up-sucking, down-kicking climbers from humble origins with infinite admiration and solicitation for the wealthy into whose stratum they have sought so hard to ascend, and unyielding contempt for the riff-raff from whose sad and dysfunctional neighborhoods they sought so hard to escape.
Someone should write that book Dan!
Elite Conditioning Strategies: Grooming Future Neoliberals
– it is potent mix of (american exceptionalism, individualism, hyper-religiosity of the marketplace, and a mastery of legal language to mask the utter contempt for those who do not ascend to elite bootlicking). This is why Edward Bernays’, Arlie Hoschild’s and Sheldon Wolin’s work needs to be much better understood.
First of all, if wealth is equally distributed, you cannot have r > g, instead r = g.
r > g requires a class system, where one class gets r and the other gets g
I don’t get the hoopla over Piketty’s book, it is basically a tautalogy, that inequality exists because we have inequal distribution of wealth.
I must be missing something profound.
This book validates the most commonly held belief in all of economic thought: It takes money to make money. Hence the universal acclaim. Who can argue with that? Piketty’s is brilliant at stating the obvious. What we do about it is another question. He wants to tax real estate equity, instead of going the direct route of progressive income taxes since the latter is not politically feasible. I prefer a tax on polo ponies myself.
The whole discussion this book raises is beings used by the elite to showcase their concern and willingness to open up a dialogue before they slam the door of the till shut once again on the greedy little fingers of the 99%. Don’t hold your breath waiting for the rich to pass those ducats over here.
Many links point straight to a well-known company’s website. Advertising hijack?
Unless Joseph Stiglitz’s PhD thesis from 1966 was on Apple Computers (which would certainly be prescient) the link given is wrong.
Inequality comes naturally from debt-contract money.
In a monetary-finance system, where all money comes into existence through debt contracts, access to the money ‘system’ is necessarily through a screening process based on debt-contract (credit) -worthiness, and therefore those who have access to lower-cost money with which to make MORE money is increasingly limited to the fewer and fewer creditworthy, as the working class gets limited access, not to front office bank lending, but through the backroom’s very expensive credit-card operation, forcing always-greater returns from the many to the few.
It’s a money-system design problem.
We NEED a new money system, not based on debt contracts.
The national money system should be seen as part of our institutional COMMONS, operated as a public utility providing exchange media and purchasing power to our society based on the principle of public purpose.
It’s OUR money system.
Lambert,
Thanks for this intelligent and most useful post. I am hosting the FDL salon for Piketty in a couple of weeks and the this discussion and the articles cited are great for clearing away the brush so we can have a decently informed interchange with him. You are dead right on the economists’ criticisms ofhis work on the grounds that it is not (a) complete, (b) does not specify the steady-state properties of the implicit model, and (c) does not exactly conform to the requirements of Walrasian neoclassical theory, which as you well know is the Nicean creed (Credo in unum Deum mercantorum) of the professional certified economist. They will do to him what Hicks did to Keynes. I actually think he will survive the assault, as he really doesn’t care what they think, and doesn’t need them to validate his empirical achievement. There are a lot of things to criticize about his definition of capital, but it is forced on him by the tax records he uses, and you can’t make bricks without straw. The same was true of Kuznets’ national income construction. Nothing’s perfect. We get our information where we can find it, and it sure beats making it up from ‘first principles.’
The work of Piketty and Saez has been on the Internet since ’03 or ’04, so Piketty enjoyed a long pre-print publicity tour, which explains part of rapid popularity of the book. Another, I believe, is how these two worked their analyses within frameworks where at least the methodology couldn’t be overly criticized by the orthodox economists. In fact, they’ve have 10 years to mount a credible response and as yet haven’t managed it. Now that the work is a book, the ortho econs have to at least play nice to avoid looking like idiots so, as you suggest, one alternative is to misconstrue the data (How many can truly follow the arguments here? Only the resulting headlines matter), or argue with Piketty’s remedies, which even the non-econs or non-ortho econs are undertaking.
r>g is the inevitable beginning of the end of any pyramid scheme.
r>g marks about the half way point of the game where it dawns on the child that eventually there will be two children and only one chair.
r>g is the red light flashing indicating that indeed their are limits to growth.
Capitalism has been great for growing our waste based economy at the fastest rate possible and 10% of the population of the planet just can’t figure out why those lazy little people with different colored skin haven’t jumped on board the train.
“r>g marks about the half way point of the game where it dawns on the child that eventually there will be two children and only one chair.”
Powerful image, Eeyores enigma. The Capitalist solution to this “problem” is to kill off one child so the remaining one can claim the spoils. Which is the way we seem to be heading.
An alternative? Each child loses some weight (chances are they are both a bit corpulent), so they can share the chair. Or, maybe, tear apart the chair and construct a neat little tiny house-for-two with the recycled lumber.
Like other commenters, I find the use of the term, “inequality” to be suspect. It is loser liberalism at its worse, inviting the strawman from the Right that absolute equality is desired by the Left, and inviting the centrists to treat the phenomenon as a mystery or the outcome of forces of technology. Piketty’s book fits neatly into this centrist slot, with its calls for taxes on wealth (like that will ever happen!)
The books that are most popular with academics are books with ambitious scope combined with obvious flaws and shortcomings. Some years ago, some professor I had pointed out that Rawls’s Justice was just such a book. Anyone could read it, feel stimulated by the breadth of vision, but undisturbed in his own convictions, because so many shortcomings in reasoning were immediately evident, that any reader could feel superior. Piketty’s book has this same academic best-seller quality: one learns a lot of facts, thrills to a broad vision, as one might, looking out at the view from a great height, without having to climb a mountain. There’s no close reasoning, very little math beyond simple arithmetic, and, in the end, no conviction that there’s anything to be done, really.
Real progressives have been grumpy in their reviews, because PIketty ignores the role of institutions in producing inequality. It would not take much to turn Piketty’s survey into a diatribe against parasitic rentiers and predatory finance. But, that much will not be forthcoming, and will not be acclaimed by the media or academia.
That about sums it up. Not that’s it’s a negative reflection on Piketty or his book but that it’s the reception of the book that is suspect. You don’t need a weatherman…
There have already been plenty of diatribes. A simple telling of the story, without too much blaming or railing is sometimes the most effective strategy. In any event, the story needs to be told clearly somewhere, so that the diatribe artists have something to work from.
r > g could be a lot more subversive than the mainstream economics profession expects on first impression.
There just are no positive stories to explain r > g as a secular trend. You cannot hold on to a Solow model with substitution between capital and labor plus marginal product, even with technological bias. Accumulating capital should push labor’s marginal product up. Capital that is pushing wages down is pushing g down: that’s an ugly story even in neoclassical happy talk.
These are general issues in argument we don’t take seriously enough Bruce.
I really like this review.
And yet, I simultaneously have the same reaction to it as I do many similar efforts. How does one talk about inequality specifically, and economics more generally, without addressing rule of law?
In its most elemental form, capital is just past labor. There’s no inherent reason that past labor should grow in value faster than present labor. It is simply a political choice on how to allocate scarce resources. If criminals are protected by the state rather than prosecuted by it, then their lawbreaking will pay off. Especially when that same state aggressively targets the lower classes for minor infractions.
No disrespect to Piketty – aside from the general “as an academic economist he was likely forced to renounce both the rules of mathematics and common sense as part of his thesis requirement”, that is – but anyone who misses/ignores the driving role of state-sponsored looting and kleptocratic faux-capitalism in promoting ever-worsening wealth inequality is highly unlikely to have much of anything useful to say about what ails us.
And it’s even worse than Downunderer’s eloquently pithy “them that has, gets” – at the risk of less pith but more exactitude, one needs to append “…and even when TTH’s current looting operation blows ups due to its own excesses, them-that-now-no-longer-has (or no longer has nearly as much of as before) gets bailed out by the state they have effectively co-opted, at the expense of the usual looting victims.”
…Damn. Well, if that’s the way it works, I might have to decide to fail up and turn in my thesis someday, LOL.
But, who is TTH?
http://www.google.com/search?hl=en&source=hp&q=tth&gbv=2&oq=tth&gs_l=heirloom-hp.3..0j0i10j0j0i10l2j0l3j0i10l2.1490.1760.0.2530.3.3.0.0.0.0.220.440.0j2j1.3.0….0…1ac..34.heirloom-hp..1.2.220.2y_EX025mGg
?
Them That Has
Heck, it happened to Adam Smith. Lots of people pay no attention to what he actually wrote.