Relatively long time readers of this blog may recall that
four and a half years ago I wrote a 9,000 word review of a major book by Thomas
Piketty, Capital in the Twenty-first
Century. Piketty’s work was based on
research he carried out with Emmanuel Saez.
Today, Paul Krugman linked in Op Ed essay to a new journal article by
Piketty, Saez, and a young Assistant Professor, Gabriel Zucman entitled “DISTRIBUTIONAL
NATIONAL ACCOUNTS: METHODS AND ESTIMATES FOR THE UNITED STATES.” I have just spent most of the morning reading
it, and I strongly recommend it to anyone who wants to dive deeply into the
structure of economic inequality in the United States. The growth in inequality in the United States
in the last thirty years is astounding. Speaking
as an interested amateur, I was especially impressed by the methodological
transparency of the essay. The authors
make quite clear the places where their data fall short or they are compelled
to make ad hoc assumptions not yet supported by evidence or theory. The essay is hard going, at least it was for
me, but the picture it paints is compelling.
To cite just one among many conclusions of the essay, since the 1980s,
the bottom half of the adult
population has experienced no aggregate
growth in real income whatsoever.
What is more, within that group, it is retirees who have experienced
real income growth through Social Security and health insurance. The working age portion of the bottom 50%
have suffered a significant decline in real income. By the way, the instincts of the Occupy Wall
Street protestors were exactly correct.
It is the top 1% that has experienced almost all the growth in income
over that time.
If you are interested, you can find the article here.
14 comments:
It's good to see Piketty's name. He seems to have dropped off the face of the earth. It's a mystery to me why politicians on the left don't refer to him and make his argument that r>g, and therefore, in a capitalist system, growing inequality is inevitable. The argument should be over what to do about it.
Thanks for mentioning Occupy and the battle against the 1%.
It's not just neoliberal capitalism, but also the CRISES of neoliberal capitalism and the neoliberal solutions to those crises, that have resulted in the massive transfer of wealth upwards. "A recent paper from the Federal Reserve Bank of Minneapolis reports that, on average, the bottom 50 percent of American households have about half as much wealth in 2016 as in 2007" (Minnesota Public Radio 8/30/2018).
Other good references for people interested in the redistribution of wealth under neoliberalism :
Winner-Take All Politics (Jacob Hacker and Paul Pierson) -- they cite Picketty
Who Stole the American Dream? (Hedrick Smith)
By the way, these macro-economic forces (leave it to "the market," disinvest from public good) are also partly to blame for the rise in college tuition, up 1,120 % from 1978 to 2008 -- a fact which, if I remember correctly, was curiously left out of the cost-of-college discussion a few months ago.
Prof. Wolff,
Although not unrelated to the Piketty, Saez, and Zucman paper which I found interesting although rather long, my comment is more related to your review of Capital in the Twenty-first Century and to some criticisms to that book, which, to the best of my knowledge, Piketty never addressed.
Both David Harvey (the Marxist geographer) and James Kenneth Galbraith (the Keynesian economist, son of John Kenneth, whom you met, I believe) made reference to the so-called Cambridge Capital Controversies[*], involving Sraffian and marginalist economists, as mentioned in passing in Capital. Because you cite Sraffa elsewhere and because Galbraith is an economist and goes to more details, I hope you will find his review more interesting.[**]
In a nutshell, both men seem to believe financial measures of capital as employed by Piketty are fundamentally wrong, for reasons Galbraith briefly explains in his review.
Personally, I think Galbraith overstated his critique (I also believe the Cambridge Capital Controversies are a bit overblown). But I would be more interested in your own opinion. Are you aware of those critiques? If so, do you have an opinion?
I think some of your readers (not necessarily the more prolific commentators) are knowledgeable in this subject and they may want to intervene, too.
Any opinions would be appreciated.
[*] https://en.wikipedia.org/wiki/Cambridge_capital_controversy
[**] https://www.dissentmagazine.org/article/kapital-for-the-twenty-first-century
Anonymous,
As a non-economist, I’m not able to say anything intelligent about the economic merits of Galbraith’s criticism. Nonetheless, I’m skeptical. For one thing, Krugman (I know, he is not this blog’s favorite economist, but he is someone with technical ability and is well to the left of center) was very positive about Piketty’s book. For another, I wonder if there isn’t some academic back-biting going on. Piketty left a position at MIT to return to France because, at least in part, he felt that American economics was too narrowly focused. He saw a need for interdisciplinary work that was looked down on in the US. He refers to investigative work on tax records as too historical for economists and to economic for historians. Apparently, he isn’t a member of the club.
In any event there is an enormous amount of criticism published on, say, Hume, Kant, or Marx. Yet that doesn’t prevent those who see merit in what Hume, Kant, or Marx had to say from making their case. It seems highly unlikely that there are no respectable rebuttals to Piketty’s critics any more than there are none to the critics of Hume, Kant, and Marx.
Some years ago, I read something by Paul Samuelson on how he came to write his undergraduate economics text book. After WWII, his dean told him that the market needed a new textbook and suggested that he write it. Samuelson, who had a large family, could use the money. But he was worried about what it would do to his professional reputation. In the end, he decided that the work he’d already published was solid enough to absorb the inevitable hit to his reputation that writing a textbook for undergraduates would bring.
I may be mis-taking your point, David, but I hardly think that either David Harvey or James Galbraith, whom Anonymous at 5:32 PM referred to, would have been much concerned about Piketty leaving MIT (or anywhere else for that matter).
Thanks, David Palmeter.
While Prof. Galbraith is a respected scholar and his opinion evidently deserves a hearing, I felt something slightly iffy in his review. I suppose you might have felt it, as well.
Regardless, like I said, I think Galbraith exaggerates his critique, but my intention is, if possible, to elicit comments from those readers who may be lurking. So, I'll abstain from going into further details.
Thanks again.
If anything Galbraith understates the critique - indeed, he entirely mis-states the Marxian element of the critique as he does not understand what the concept of capital means for Marx. For a critique that is much more blistering than Galbraith's see the one by Yanis Varoufakis at:
https://www.yanisvaroufakis.eu/2014/10/08/6006/
None of this is to deny that (1) economic inequality has massively increased from the end of the long boom in the late 60s/early 70s to today; (2) that this is not an aberration but part of the normal workings of capitalism; and (3) that Piketty's book did a great service in bringing some much needed PR to the first two points.
P.s. Of course Krugman is silent on these weaknesses of Piketty, since he shares the same neoclassical assumptions that were the target of the Sraffa/Cambridge critique.
Thanks for your reply, Heraclitus.
Although I read it at the time, I am familiar with Varoufakis's review and indeed with the other reviews by RWER.
I'll ask you one question. You write:
None of this is to deny that (1) economic inequality has massively increased from the end of the long boom in the late 60s/early 70s to today; (2) that this is not an aberration but part of the normal workings of capitalism; and (3) that Piketty's book did a great service in bringing some much needed PR to the first two points.
If those critic are right, then how on earth can you know that "economic inequality has massively increased from the end of the long boom in the late 60s/early 70s to today"? Wouldn't you need to measure wealth inequality?
Maybe --I say maybe because I am not sure-- one could measure income inequality, but I see no way one could measure wealth inequality. One is a flow, the other is a level.
Just in case I wasn't clear: to measure wealth inequality we need to aggregate levels, stocks, of different assets: tangible (buildings, herds, mineral deposits, factories, machines, raw material, land) and intangible (from patents and copyrights to financial assets).
How are we supposed to do that if a monetary measure is fundamentally wrong?
Even in the case of income flows, which are generally measured in monetary terms, if those flows are generated by assets which cannot be aggregated, how do we know they don't hide impoverishment?
A 100 thousand dollars profit, for instance, may be a lot of money for a small business but nothing for a large business. How do we calculate the "size" of the business?
Even if r > g, inequality does not necessarily increase. My demonstration of that is here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2716709
My demonstration (but not others) only works with an economy with one produced commodity that serves as both an input into production and as the consumption good. It is not illegitimate to aggregate capital or wealth by use of prices. It is incorrect, in a multi-commodity economy to insert such a measure into production functions (either for individual firms or for the economy as a whole). Output is not a function of the numeraire value of capital, and when one pretends otherwise, one should note the mistake.
But when one is trying to make observations like whether Queen Elizabeth or Queen Victoria was happier, one might support oneself with non-rigorous observations.
(Krugman and Galbraith are in different groupings of economists, even if their politics are nearby.)
Hi Robert. Thanks for your reply. (You are replying to me, I take it?)
It is not illegitimate to aggregate capital or wealth by use of prices. It is incorrect, in a multi-commodity economy to insert such a measure into production functions (either for individual firms or for the economy as a whole).
The problem, at least as I understand Galbraith stated it, is that the price of productive assets reflects their profitability ... which depends on their prices.
How can the same figure, obtained in the same way, be legitimate in one case and illegitimate in another? That is not clear to me.
---------
By the way. Production functions in general don't need to aggregate capitals. One can have a production function with as many independent variables, measured in physical terms, as one wants:
Q = Q(sausages, buns, mustard, Coke, kitchen hand)
In OR terminology: the decision variables for that hotdog kiosk are number of sausages, number of buns, cubic centimeters of mustard, liters of Coke, ..., hours of work.
One can disaggregate labour input, as well.
It's true, however, that in a textbook one reads that as
Q1 = Q1(K,L)
That doesn't mean we must have only two inputs: K and L.
The Cambridge England side of the argument often presented their ideas within models of activity analysis. I have an example: http://robertvienneau.blogspot.com/2016/12/example-of-choice-of-technique.html
Here is a story that is nonsense. Consider two countries with same technology. In one country, people have more self control and are more willing to defer consumption. As a result they have more capital per capita, and the interest rate is lower. Firms respond to this lower interest rate by adopting more capital-intensive techniques, and output per head is higher.
The failure of this moralizing tale has quite far-ranging consequences. Basically, most of academic economics has been a fraud for decades. Some go along with it because they hope to occasionally put in a bit more realism. Some go along because, even so, they can advance useful policy arguments in this fraudulent structure. Others know no better. I am willing to work through mathematical exercises.
The failure of this moralizing tale has quite far-ranging consequences. Basically, most of academic economics has been a fraud for decades. Some go along with it because they hope to occasionally put in a bit more realism. Some go along because, even so, they can advance useful policy arguments in this fraudulent structure. Others know no better. I am willing to work through mathematical exercises.
I may not agree with every single word there and still share the general thrust of the observation.
My point is that critiques must be well-founded and one must accept their implications, whether one likes them or not. One cannot pick and choose this bit that I like and forget that other that I find unpalatable. To put things differently, I don't believe that any argument is a good argument, provided it supports my cause.
We've seen a lot of that these last few days.
There's more to good reasoning than its conclusion.
PS,
Just to be on the safe side: my remark ("We've seen a lot of that these last few days") is not addressed to anyone in particular.
I think it important to make that very clear.
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