"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister
"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."
- Daenerys Targaryen
"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"
- Tyrion Lannister
"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."
- Jorah Mormont
"These bad people are what I'm good at. Out talking them. Out thinking them."
- Tyrion Lannister
"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."
- Michael Barone
"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker
Saturday, June 14, 2014
Friday, June 13, 2014
Thursday, June 12, 2014
As Zach Beauchamp points out, Brat thinks that most economists have smuggled a utilitarian ethic—maximizing the most good for the most people—into economic analysis, without debating whether there are other, better ethics.
What would be a better ethic? Well, for Brat that's simple enough: Christianity. He realizes that markets can fail, but he doesn't think regulation is the answer. He thinks religion is. "If markets are bad, which they are, that means people are bad, which they are," he says in a 2011 paper. The answer is to "preach the gospel and change hearts and souls," so we can "make all of the people good"—which means "markets will be good" too.
Not exactly Dodd-Frank.
There's an argument to be made that the change in the tax code (in the 1950s and again in the 1980s?) that made this kind of thing common really hurt the economy and society.
Wednesday, June 11, 2014
We do provide long run series on capital depreciation in the "Capital Is Back" paper with Gabriel [Zucman] (see http://piketty.pse.ens.fr/capitalisback, appendix country tables US.8, JP.8, etc.). The series are imperfect and incomplete, but they show that in pretty much every country capital depreciation has risen from 5-8% of GDP in the 19th century and early 20th century to 10-13% of GDP in the late 20th and early 21st centuries, i.e. from about 1%[/year] of capital stock to about 2%[/year].
Of course there are huge variations across industries and across assets, and depreciation rates could be a lot higher in some sectors. Same thing for capital intensity.
The problem with taking away the housing sector (a particularly capital-intensive sector) from the aggregate capital stock is that once you start to do that it's not clear where to stop (e.g., energy is another capital intensive sector). So we prefer to start from an aggregate macro perspective (including housing). Here it is clear that 10% or 5% depreciation rates do not make sense.
SIMON WREN-LEWIS NEEDS HELP FIGURING OUT WHAT “NOTHING” AND “ZERO” MEAN, AND THE REAL ASYMMETRY BETWEEN MONETARISTS AND FISCALISTS by Mark Sadowski
In his discussion of the first point, Summers just talks about substitution elasticities (i.e. when the capital stock increases, by how much does the rate of return to capital decrease?), as many other economists have also done. He accuses Piketty of confusing gross returns to capital with returns net of depreciation. But in the book, Piketty specifically says that his figures are net of depreciation. If you want to quibble with his specific data or how he accounts for depreciation in it, then you can do that, but you can't just say "I think he misreads the literature by conflating gross and net returns to capital." He doesn't conflate them. He's careful to explain the importance of depreciation and tries to account for it.
Additionally, when economists start going into the substitution elasticity stuff (on which Summers himself admits there is not good data), they appear to me to be pushing Piketty into a physicalist capital framework that is totally different from what he is talking about. As I explained in a prior post, Piketty has a social constructivist account of capital. The "capital" he is discussing in his book refers to all tradeable assets that deliver passive returns, not just physical buildings and machines and the like. Models that try to show adding more machines will cause the rate of return to fall proportionally such that the owners of the machines won't grab increasing shares of the national income do not actually address Piketty's "capital." Summers falls into that trap here.
Read the entire post for the overall point, but the gist here is that those who hold big piles of wealth see their wealth and capital income increase each year by r * s. They don't need their s to be 100% to see their holdings grow at a faster rate than those without big piles of wealth (i.e. those who only make money by working). So long as their savings rate is sufficiently higher (how much is sufficiently higher depends on the spread between r and g) than those with only labor incomes, they will perpetually gain on those people in terms of wealth and income. Piketty has not mistakenly assumed all capital income is saved at 100%. Summers has that wrong.
Tuesday, June 10, 2014
Moreover, economic theory is unclear about whether slowing growth would in fact result in a rise in r – g. In general when growth rates fall, the ratio of capital to income rises, and the increased prevalence of capital drives down the rate of return on capital. Whether the return on capital falls more or less than the growth rate depends on how substitutable capital and labor are, with less substitutability meaning that the extra capital will be less useful thus driving its return down more. Unfortunately, the degree of this substitutability has not been clearly established, although Piketty's assumption that it is sufficient to prevent a large fall in the rate of return on capital is a plausible reading of the aggregate data.
In addition, the return on capital is also determined by individuals’ willingness to provide funds, that is, to save, and with slower consumption growth on the horizon (in part because of longer periods of retirement), individuals should be willing to save more for a given rate of interest—further driving down the interest rate and the return on capital.
As a result it is ambiguous whether or not r – g would increase or decrease as a result of lower growth rates. In fact, many standard economic models imply that r would fall by more than g so that lower growth rates would actually lead to a reduction in r – g and consequently push in the direction of less inequality.
It is worth noting that, separate from Piketty’s argument about increases in the capital share, it is plausible that continuing increases in income inequality within capital income in the United States will occur simply as a result of the large increases in inequality within labor income that have already occurred.
- That Piketty has no real theory of what determines the rate of profit, and so doesn't have a real theory of wages either. This is what led toMatt Rognlie's complaints and his claims that Piketty ought to be saying that the processes of wealth accumulation he identifies (a) reduce the salience of the rich--that although they own more wealth relative to a year's national income they receive a smaller share of national income--and (b) amplify the real incomes of the not-rich and (c) lead not to less but more income inequality.This criticism is, I think, in large part a consequence of criticism (1): if you have a physical-factor-of-production definition of "capital" in the forefront of your mind, it is a very natural criticism to make. Piketty seems to need an additional argument here: that control over wealth shapes politics, and that politics will make sure that the rate of profit does not fall too far--that wealth is not allowed to compete with itself and so lower the rate of return and boost wages substantially as the process of wealth accumulation continues. It seems to me that Piketty has a good case here. But I think he needs to make it.If he were to make it, what would he say? Suresh Naidu, I think, lays out the issues rather well. He speaks of the "'domesticated' version of [Piketty's] argument... a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates.... This is story that is told to academic economists, and it is plausible, at least on the surface..." The problem for Piketty is that it is only plausible. There are the Matt Rognlie's who believe that capital and labor are not (yet) that substitutable (if they ever will be), and consequently that capital accumulation raises the bargaining power of labor by enough to guarantee rapidly-rising real wages and probably a rising labor share and thus a decreased salience of capital ownership in income if not in wealth. They look forward to at least a partial euthanasia of the rentier, and see the process of accumulation that Piketty describes as an equalizing rather than an unequalizing process. Thus, I think, the 'domesticated' version of Piketty--the one that speaks of wealth-as-productive capital, and of the return to wealth as the marginal physical product of that capital times the value of undifferentiated output, is relatively weak.Suresh, however, does not believe in the 'domesticated' Piketty. He writes: "There is another story... that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand.... I think the production approach is less plausible... housing [with land] plays such a large role... [i the 'domesticated' version] average wages would have increased along with K/Y [if factors are paid marginal products].... The (really great) sections from the book on corporate governance actually suggest something quite different... a gap between cash-flow rights and control rights.... This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view..." And here we have passed out of neoclassical economics entirely. Factors of production are no longer paid their marginal products. Instead, wealth controls government. Government sets barriers to keep those kinds of property that the wealthy control safe from competition and earning their rents. The government is an executive committee for managing the affairs of the ruling class. And, as a bonus, the property rights system acts as a fetter on the process of economic development because it is tuned not toward equalizing private and social values but toward enriching the already-rich.As Suresh points out, if you adopt the 'domesticated' version of Piketty, then, first of all, nothing can be done save for progressive taxation: "This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies.... If it is just a very high substitutability... labor market reforms are... off the table, as firms just replace workers with machines if you try to raise the wage..." In the 'domesticated' version, the market is working: labor is low-paid because it is not very valuable and capital is high-paid because it is very useful indeed. Plus, I would add, the 'domesticated' version is subject to Matt Rognlie's critique in a way that the wild version is not.But by now we have arrived at the point that Piketty needs to write another book--a book about control rights and cash flow rights and the political economy of distribution and the state, a book that is (mostly) hidden behind Piketty's assumption that r will not fall by much as W/Y rises...
- That Piketty's argument that the rate of profit has a floor needs to be spelled out. this is essentially (3) in a different form: the argument that accumulation might lead to more wealth equality but less income inequality and much higher real wages is a serious and important one. Piketty does not believe it. But what I see as his failure to deal with it head-on and convincingly is the biggest hole in the book.
Monday, June 09, 2014
Gross (with depreciation) versus net. Elasticity of substitution.
Piketty’s Fair-Weather Friends by Seth Ackerman
The problem for the book is that its gloomy forecast of a return to “patrimonial capitalism” is based on the prediction that over the next decades, the gap between r and g will widen due to a fall in the growth rate (g). No one has a problem with the prediction of falling growth — all else equal, this will happen simply if population growth slows, as it almost certainly will. The problem is that if growth slows while the rate of saving (i.e. investment) stays constant, capital will start accumulating faster than output is rising, meaning the measured capital-output ratio will increase.
But marginal productivity theory sees a rise in the capital-output ratio as an increase in the “supply of capital,” which, in classic supply-and-demand logic, ought to bring about a reduction in its “price” — that is, a fall in r. According to the theory, this should neutralize the effect on the r-g gap.
In his faint-praise review of Piketty’s book, Larry Summers was unyielding on this point: “Economists universally believe in the law of diminishing returns,” he insisted, in a line resounding with the thud of a fist pounding a lectern. Piketty’s forecast of rising r - g must be rejected, Summers concluded, because “as capital accumulates, the incremental return on an additional unit of capital declines.”
Piketty had of course been aware of this issue when he wrote the book, and he made an attempt to reconcile his argument with conventional theory. He contended that as growth slows and the capital-output ratio rises, r might decline (as theory predicts) but the magnitude of the decline might still be small enough to permit a net widening in the r - g gap.
The technical term for the quantitative relationship involved (that is, between the size of a change in the capital-output ratio and the size of the change in r that supposedly results, or vice versa) is the elasticity of substitution: the higher the elasticity, the smaller the “response” of r to a given change in the volume of capital. When the elasticity is higher, it’s taken to signify that the force of diminishing returns to capital is weaker, due to richer technological opportunities for labor-saving investment.
As Summers pointed out in his review, “economists have tried forever to estimate elasticities of substitution with many types of data,” so there’s a large literature on the subject. This is the so-called production function literature, which tries to apply marginal productivity theory empirically by estimating the supposed causal relationships between quantities of labor and capital inputs, on the one hand, and the quantity of output on the other. Piketty’s argument was that the elasticity needed for his forecast to come true isn’t all that much higher than at least a few of the estimates found in the existing production function literature.
But in saying so, he made a crucial error. He confused two different ways of measuring the elasticity: the usual (gross) measure, which counts depreciation as part of the return to capital, and his own (net) measure, which doesn’t.
When this discrepancy is accounted for, the elasticity Piketty requires turns out to be far, far higher than any known estimate. This was first pointed out in mid-April by Matt Rognlie, an MIT graduate student and blogger. The problem was ruefully acknowledged by Brad DeLong, the former Clinton administration economist, who is sympathetic to Piketty’s project.
Summers’s review a month later in the journal Democracy sealed the judgment: Piketty “misreads the literature by conflating gross and net returns to capital,” Summers wrote. “I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.”
A reader at this point could be forgiven for feeling confused. Didn’t Piketty gather his own data? He did, of course. That Herculean effort by him and his team of international colleagues, compiling statistics on historical rates of return and capital volumes in many countries going back to the eighteenth century, is the one point on which all reviews are unanimous in their praise.
As Piketty makes clear, those data — which he’s made freely available on the internet for anyone to check — are indeed “explained” by a net elasticity of 1.3-1.6, which would indicate an extremely weak force of diminishing returns to capital. Yet it’s also true that this figure is far higher than any found in the existing literature — probably more than twice as high as the highest typical estimates.
What should we make of this?
First, Piketty’s estimate of the elasticity of substitution can’t really be compared with those in the literature. His is based on economy-wide data covering decades and centuries while estimates in the literature typically cover only a few years, and often just a few industries. Moreover, his pertain to all private wealth, while the literature focuses narrowly on production capital. These are very different concepts.
But most importantly, given the flawed marginalist theory behind it, and its even more flawed basis of measurement — a subject there’s no space to go into here, but which marks a fundamental critique of the production function literature advanced in an important book published just two months before Piketty’s — the elasticity of substitution simply cannot be regarded as a meaningful measure of an economy’s technology (or anything else), or as providing any clue to its future.
What’s essential, rather, is Piketty’s empirical demonstration that the rate of return on wealth has been remarkably stable over centuries — and, contraSummers, with no visible tendency to vary in any consistent way against the “supply of capital.”
Therefore, if we expect growth to slow, the most reasonable expectation is that the r - g gap will in fact increase, and inherited wealth will expand.
where α is the share of capital income in total output, r is the average return on capital, and k is the aggregate capital-output ratio.
As accounting, this is true by definition. As economics, what kind of economic behavior does it describe? There are three ways of looking at it.
In the standard version, the profit share is determined by a production function, which is given by technology. The profit rate r* required by capital owners is fixed by technology in combination with time preferences. In this closure, k is the endogenous, or adjusting, variable. Investment rises or falls whenever the realized profit rate differs from the required rate, thus keeping k at the level that satisfies the equation for r = r*.
In Piketty’s version, r is fixed (somehow; the mechanism is not clear) and k is determined by savings behavior and (exogenous) growth according to his "second law of capitalism":
k = s/g
That leaves α to passively accommodate r and k. Capitalists get whatever the current capital stock and fixed profit rate entitle them to, and workers get whatever is left over; in effect, workers are the residual claimants in Piketty's system. (This is the opposite of the classical view, in which wages are fixed and capitalists get the residual.)
In a third interpretation, we could say that α and r are set institutionally -- α through some kind of bargaining process, or by the degree of monopoly, r perhaps by the interest rate set in the financial system. The value of the capital stock is then given by capitalizing the flow of profits α Y at the discount rate r. (Y is total output.) This interpretation is the natural one if we think of “capital” as a claim to a share of the surplus as opposed to physical means of production.
This interpretation clearly applies to pure land, or to the market value of a particular firm. What if it applied to capital in general? Since claims on the surplus -- including claims exercised through nonproduced assets like land -- are not created by reserving output from consumption, aggregate savings would be a meaningless accounting construct in this case. (Or we could adopt a Hicksian view of saving in which it equals the change in net wealth by definition.) Looking at things this way also puts r > g in a different light. Suppose we think of the capital stock as a whole as something like the stock of a firm, which entitles the owners to the flow of profits from that firm. If the profits today are α Y and output is expected to grow at a rate g, what is the value of the stock today? If we discount future profits at r, then it is the sum from t=0 to t=infinity of α Y (1 + g)^t / (1 + r)^t, which works out to α Y / (r - g). So if we can take the rate of return on capital as the discount rate on future profits, then r > g is implied by a finite value of the capital stock.
We shouldn't ask what capital "really" is. It really is a quantity of money in a process of self-expansion, and it really is a mass of means of production, and it really is authority over the production process. But the particular historical questions Piketty is interested in may be better suited to thinking of capital as a claim on the social surplus than as a physical quantity of means of production. Seth Ackerman has some very interesting thoughts along these lines in his contribution to the Jacobin symposium on the book.
Sunday, June 08, 2014
One of the tags on Melbourne-based songwriter Courtney Barnett's Bandcamp page is "slacker," a term with roots in the 1890s but stronger ties to a decade about a hundred years later. Barnett's music-- like the term-- feels older, too. Building on the wordy irreverence of mid-'60s Bob Dylan and a Byrds-ian blend of psychedelia, folk and country, "Avant Gardener" tells the story of a girl dragging her underemployed ass out of bed late on a Monday morning to try her hand at gardening-- at which point she suffers a panic attack.
The scene unfolds like a dream: "Halfway down High Street, Andy looks ambivalent/ He's probably wondering what I'm doing getting in an ambulance," Barnett sings, her voice drifting through the lines in sweet speak-sing. "The paramedic thinks I'm clever 'cause I play guitar/ I think she's clever 'cause she stops people dying." They're both right. Later, the song's poor narrator struggles to get a good pull on her asthma inhaler. "I was never good at smoking bongs," she confesses. Some slacker.
This Be The Verse
from the controversial Jacobin piece on bro-bashing. "While intergenerational critique is both healthy and necessary, I’d hope we could transcend the Oedipal alienation of “This Be the Verse…”" I don't think it's Oedipal, just realistic. Parents can be assholes because they're miserable. There's little accountability. And possibly parents are easily tempted to fuck up their kids. Power corrupts. So don't have kids.
Henwood's criticism of Piketty was that he was too moderate. Henwood is also a critic of DeBlasio and Obama, so perhaps Aaron Bady is a supporter of them and considers Henwood's criticisms as "prolier-than-thou" and leftier than thou and conceives of it as tough "bro" behavior. But then again he mentions "data."