That seems to be the choice facing humanity.
mentions of Milton Friedman and Anna Schwartz's A Monetary History of the United States. Pethokoukis, Naidu, Shenk.
In the advanced nations, at about 1950 the wealth to income ratio began widening again even has growth remained high until the 1970s? Is this in Solow's review? Krugman and Baker and Kuttner warn against cyncism (see below). But Picketty has a valid point. From his interview with Porter:
The experience of Europe in the early 20th century does not lead to optimism: The democratic systems did not respond peacefully to rising inequality, which was halted only by wars and violent social conflicts. But hopefully we can do better next time. At the end of the day, it is in the common interest to find peaceful solutions. Otherwise there is a serious risk that growing parts of the public opinion turn against globalization.Baker has an interesting point about the global level:
The top of my list is the loss of China as a source of extremely low cost labor. According to the International Labor Organization, real wages in China tripled in the decade from 2002-2012. While these data are not very accurate, there is little doubt that wages in China are rising rapidly. While Chinese wages still have a long way to go before they are on a par with wages in the United States or Europe, its huge cost advantage is rapidly disappearing. Manufacturers can look for other low-wage havens, but there are no other Chinas out there. The loss of extreme low wage havens is likely to enhance the bargaining power of large segments of the workforce.
However, perhaps a more fundamental objection to Pikettys' grim future is the fact that a very large share, perhaps a majority, of corporate profit hinges on rules and regulations that could in principle be altered. My favorite example is drug patents. This industry accounts for more than $340 billion a year in sales (@ 2 percent of GDP and 15 percent of all corporate profits). The source of its profits is government granted patent monopolies.
Dean Baker
For Britain and France, the total value of the capital stock—owned, as is almost always the case, largely by the 1 percent (whether aristocrats or members of the bourgeoisie, whether it’s France in 1780 or the United States in 2014)—was about seven times national income from 1700 until around 1910. (National income, roughly speaking, is the sum of all forms of income in a given economy—wages, profits, interest, dividends, and so on.) With two world wars and a depression, the capital stock fell to about three times national income. (Curiously, Piketty notes that the monetary destruction of paying for war through taxes and inflation did more damage to the capital stock than the physical destruction of combat itself.) It began to recover around 1950, but was inhibited by extremely high tax rates in the first postwar decades. As of 2010, the capital stock had recovered to between five and six times national income in Britain and France.
Doug Henwood (emphasis added)
Still, while such deliberation is clearly necessary, political action cannot be factored out of that process just because we happen to have lived through the Cold War’s unmourned collapse. It’s energizing to see that a younger generation of political intellectuals, who were in grade school when the Berlin Wall came down, missed the anticapitalist vaccination. They might be able to take Piketty’s data and cause some genuine trouble with it. Because serious trouble—demonstrations, strikes, insurgent political movements—is what it will take to derail capitalism’s inevitable tendency toward concentration. Short of that, it looks like we’ll be continuing our journey along the road to a new serfdom.
Doug Henwood
Despite some losses to financial capital during the Great Depression, the more powerful era of equality in the U.S. began during World War II. The war was a massive macroeconomic stimulus; it produced full employment, stronger unions, and investment of public capital. The government’s wartime policies also repressed private finance in multiple and reinforcing ways, including the Fed’s pegging interest rates on Treasury bonds at a maximum of 2.5 percent, marginal tax rates set as high as 94 percent, and an intensification of the anti-speculative financial regulation of the New Deal. All of this did not end with the war. It had a half-life well into the postwar era, until unions were bashed and finance deregulated beginning in the 1970s.
Robert KuttnerTrue, but my question would be, did the ratio of r to g shrink America after the post years or did it start widening after WWII? My guess is that it started widening around the 1970s, if my memory serves. I'll have to scan the reviews.
Piketty mentions some of this briefly but doesn’t focus on the political dynamics, and he is surprisingly blasé about the role of deliberate policy. “Neither the economic liberalization that began around 1980 nor the state intervention that began in 1945 deserves much praise or blame,” he contends. “The most one can say is that state intervention did no harm.”...
Not surprisingly, Piketty is much better informed on the nuances of French politics and economic history. In France, where the prosperity of the postwar boom is known as the Trente Glorieuses—30 glorious years of high growth and full employment—Piketty reports that the wealth distribution was already becoming more unequal again in the late 1940s as capital began recovering its normal place. It was rather high rates of growth, rising real incomes, and the expanding welfare state that made the postwar boom a happy French memory.
Robert Kuttner (emphasis added)But doesn't Piketty also credit the Baby Boom and reconstruction for the high growth rates, changes that ended in the 1970s? Japan and Germany went online. Nixon went off the gold standard. Maybe social democratic policies that encouraged high growth rates slowed down the erosion of the r/g ratio?
“In North America,” Piketty writes, “there is no nostalgia for the postwar period because the Trente Glorieuses never existed there: per capita output grew at roughly the same 1.5–2 percent rate throughout the period 1820-2012.” But this is a non sequitur. A two-century average tells us nothing about particular decades, nor does the average per capita output tell us anything about the wage dispersion. In fact, there is great nostalgia in the U.S. for the postwar boom, and appropriately so, precisely because it was a period of steadily rising wages and job security—a period of both rapid growth and more equal distribution.
He also writes, “The significant compression of income inequality over the course of the 20th century was due entirely to the diminished top income from capital.” But that is misleading, too. What really happened is that the temporary weakening of capital, financially and politically, gave progressives and social democrats an opening that they successfully exploited for three decades after the war.
Robert Kuttner
This is an important insight [politicians listen to elites only]— and it gains special force these days, when the elite’s views not only favor the elite versus the rest (duh) but have also been systematically wrong, on issues from invading Iraq to giving deficits a higher priority than jobs.
But there is a danger here of going too far, and imagining that electoral politics is irrelevant. Why bother getting involved in campaigns, when the oligarchy rules whichever party is in power?
So it’s worth pointing out it does make a difference. Yes, Democrats pay a lot of attention to plutocrats, and even make a point of inviting Patrimonial Capitalism: The Next Generation to White House galas (I would have missed that, even though it’s in my own paper, but for Kathleen Geier. Thanks!). But it’s quite wrong to say that the parties’ behavior in office is the same. As Floyd Norris points out, Obama has in fact significantly raised taxes on very high incomes, largely through special surcharges included in the Affordable Care Act; and what the Act does with the extra revenue is expand Medicaid and provide subsidies on the exchanges, both means-tested programs whose beneficiaries tend to be mainly lower-income adults. The net effect will be significant losses for the super-elite — not crippling losses, to be sure, and hardly anything that will affect their elite status — and major gains to tens of millions of less fortunate Americans.
If you’re waiting for a revolution, or even a new New Deal, this may seem disappointing. But it matters a lot all the same.
KrugmanKonczal in his review:
Why does it matter? First, capital ownership is concentrated. In the United States, the top one percent own 35 percent of all capital, and the top 10 percent of wealth holders own roughly 70 percent. The bottom 50 percent have roughly 5 percent. Moreover, Piketty argues that “the past tends to devour the future”—wealth accumulated in the past becomes more dominant and commands more power and attention than wealth being created now. In France, for example, where the inheritance data is best, the wealth of the dead amounts to nearly twice that of the living.Skidelsky:
But towards the end of the 19th century, discussion of the class inequality of rewards faded away. The marginalist revolution— direct precursor of the mathematical economics of today—dropped the attempt at social realism, by positing a perfectly competitive market economy with numerous “agents,” each of whom would receive the value of his “marginal product”— the exact amount he added to economic value. The existence of power in the market was recognised only in the form of “monopoly”—a single firm in an industry being able to set the price of its product, a problem to be tackled by regulation or trust-busting laws. This new, marginal analysis was intended to bypass the unsettling distributional issues raised by the classical economists. The claim that the market paid every producer what he was worth undercut the socialist argument for redistribution.
In his massive book, Capital in the 21st Century, Thomas Piketty, a professor at the Paris School of Economics, revives the economics of David Ricardo and Karl Marx. His thesis is simple. The growing concentration of capital in fewer hands has enabled its owners to keep it relatively scarce and thus valuable. Agricultural land has dropped out as a factor of production, but urban real estate has taken its place. Capitalist societies therefore have a natural tendency to generate a highly unequal distribution of wealth and income
...
Deeply impressive in its style and learning, Piketty’s argument is nevertheless incomplete. His story is about the super-rich racing ahead of the rich (and everyone else) since the 1980s. He explains this by the power of the rich to set their own pay and the ease with which they can transform their super-salaries into capital. But there may be another explanation, which is that digital technology actually increases the marginal product of the top performers in all fields of endeavour, creating a global elite of superstars who are distinguished from the rest by their exceptional talents. This is the view of Erik Brynjolfsson and Andrew McAfee in their new book The Second Machine Age. To the extent that “technology increases the reach, scale, or monitoring capacity of a decision- maker,” it makes managers more “valuable.” This implies that supermanagers get higher pay because they are more productive, not just because they can set their own salaries.
Digital technology can also boost rewards to superstar writers and performers. For example, digitisation and globalisation have “supercharged the ability of authors like JK Rowling to leverage their talents… Rowling’s stories can be captured in movies and video games as well as text, and each of those formats… can be transmitted globally at a trivial cost.”Dean Baker:
Hmm, I don't quite see it that way. To me there is a very specific issue that Piketty raised that relates directly to the Cambridge controversies. He argued that the elasticity of substitution between capital and labor was greater than one. Therefore even as the amount of capital increased relative to labor, there was no reason that the rate of profit had to fall proportionately. This raises the prospect of an increasing capital share as economies get richer.
This relates to the Cambridge controversies since the Cambridge U.K. people argued that the idea of an aggregate production function did not make sense. They pointed out that there was no way to aggregate different types of capital independent of the rate of return. The equilibirum price of any capital good depended on the rate of return. Therefore we can't tell a simple story about how the rate of return will change as we get more capital, since we can't even say what is more capital independent of the rate of return.
The takeaway from this, or at least my takeaway, is that we don't have a theoretical construct that we can hope more or less approximates how the economy actually works. The theoretical construct doesn't make sense. This means if we want to determine the rate of return to capital we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit.
The debate touched off by Piketty's claim about the elasticity of substitution will inevitably be a fruitless one. We are not going to find a technical relationship in past data that will tell us how profit shares will change as the ratio of capital to labor increases.
Does any of this mean that the Great Recession proved Joan Robinson and Nicholas Kaldor right? Not as far as I can see....Baker:
It certainly is worthwhile to know what central bankers think, but is this supposed to be a source of legitimation? After all, even by the I.M.F.'s measures the wealthy countries are losing well over $2 trillion a year due to economies operating below potential GDP. The cumulative losses to the rich countries from the Great Recession are virtually certain to exceed $20 trillion and could well top $30 trillion. Is it supposed to be some sort of validation that the folks who got us here share your view of the world?This blogpost.
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