It’s Piketty Day here at Berkeley. So let me note that Robert Solow has another good Piketty review:
Robert Solow: ‘Capital in the Twenty-First Century’ by Thomas Piketty, Reviewed: “Inequality… has been worsening…
the widening gap between the rich and the rest…. A rational and effective policy for dealing with it… will have to rest on an understanding of the causes… the erosion of the real minimum wage; the decay of labor unions and collective bargaining; globalization and intensified competition from low-wage workers in poor countries; technological changes and shifts in demand that eliminate mid-level jobs…. Each of these candidate causes seems to capture a bit of the truth. But even taken together they do not seem to provide a thoroughly satisfactory picture…. They do not speak to the really dramatic issue: the tendency for the very top incomes—the “1 percent”—to pull away from the rest of society. Second, they seem a little adventitious, accidental; whereas a forty-year trend common to the advanced economies of the United States, Europe, and Japan would be more likely to rest on some deeper forces….
We need a name for this process for future reference. I will call it the “rich-get-richer dynamic.” The mechanism is a little more complicated than Piketty’s book lets on… [but] you get the picture: modern capitalism is an unequal society, and the rich-get-richer dynamic strongly suggest that it will get more so. But there is one more loose end to tie up… the advent of very high wage incomes…. Only when you get to the top tenth of 1 percent does income from capital start to predominate…. In the 1960s, the top 1 percent of wage earners collected a little more than 5 percent of all wage incomes… nowadays… 10–12 percent…. Piketty… attributes this to the rise of what he calls “supermanagers”… top executives… financial services…. There is not much understanding of this phenomenon, and this book has little to add…. Another possibility, tempting but still rather vague, is that top management compensation… [is] a sort of adjunct to capital…. The class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers…
You should go read the whole thing.
How to sum up the argument of and the reaction to Thomas Piketty?…
In the communities in which I live and work, everybody is very impressed with Thomas Piketty’s Capital in the Twenty-First Century. We are impressed with the amount of work that he and his colleagues have put into data collection, data assembly, and date cleaning. We are impressed with the amount of thought that has gone into the caddies attempt to understand the issue. Very impressed with how skillfully he has written his book. We are impressed with how much Arthur Goldhammer has sweated blood with the translation. And we are impressed with the intelligence with which he is constructed as arguments.
Now everybody has their complaints.
Everybody has 10-20% of the argument that they disagree with, and perhaps another 10 to 20% that they are unsure about. But it is a different 30% for everybody. There is not consensus but majority agreement that each piece of the book is roughly correct. And so there is rough near-consensus that the argument of the book is, broadly, right.
What are the serious complaints?
That Piketty tacks back-and-forth between a market value–the capitalized current value of all claims on income that are not brow-sweat– and a physical quantity conception of capital in a way that is not legitimate. That leads his argument astray in places, particularly in that it hides the fact that the capital accumulation that makes the rich so much richer also strengthens, or ought to strengthen, the bargaining power in the labor market of the not-so-rich, and so increased relative immiserization of the masses goes along (or ought to go along) with increased absolute prosperity.
That Piketty’s framework conceptualizes the issues in an unclear and counterproductive way by speaking of “tendencies” that can be counteracted, rather than doing the normal MIT economics thing–calculating a steady-state equilibrium growth path to which the economy converges over time, and then calculating how that equilibrium steady-state growth path can and does jump in a comparative-statics should the background economic conditions that determine where it is located shift.
That Piketty has no theory of what determines the rate of profit, and he badly needs one. And since he doesn’t have a real theory of the rate of profit, he doesn’t have a real theory of the rate of wages.
That Piketty wants to assume that the rate of profit has a floor below which it will not fall–and so increased capital accumulation certainly reduce the labor share of income and may lead to little or no trickle-down to real wages from the increased productivity that ought to flow from increased wealth accumulation–but this argument needs to be spelled out.
That the true historical drivers of the process are not the rate of profit r and the growth rate of the economy g that Piketty speaks of, but rather (1) the economic destruction of the relative wealth of the old European aristocracy as its landed rents collapsed under the impact of competition from the new regions of European agricultural settlement in the New World; and then (2) the rise of urban landed wealth in the form of location as population growth and economic density have outran transportation technologies, and congestion has become a first-order economic cost.
Then there are a bunch of nonserious complaints:
that Piketty goes too far in coquetting with some of the modes of expression of Karl Marx.
That Piketty’s arguments lead to political conclusions regarding the desirability of more progressive income and wealth taxation that they do not like.
That Piketty’s arguments lead the political conclusions regarding the desirability of more progressive income and wealth taxation that those who write their paychecks do not like.
That Piketty’s analysis indicates that the dirty hippies of the Occupy Movement were right after all, and that is intolerable.
But I do find, seriously, an absence of serious critiques from the right of Piketty…
So what do we think of the (serious) critiques of pieces of the argument?
That Piketty tacks back-and-forth between a market value and a physical quantity conception of capital. Yes. He does. He shouldn’t. It is a potential source of confusion-and it has, I think, confused some readers. But this seems to me to be a very minor criticism: recognize that he is talking about the market value of wealth understood as capitalized claims on incomes from whatever source–land, location, buildings, machines, organizations, production processes, intellectual-property rights, protected monopolies, and so on–and things become clearer and the argument, I think, becomes stronger.
That Piketty speaks of “tendencies” that can be counteracted when he ought to be doing comparative statics on the steady-state growth path. This is what I think. This is what my model of what Piketty is doing that I summarized here does. But, once again, not a biggie.
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 to Matt 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.
That the true historical drivers of the process are not the rate of profit r and the growth rate of the economy g that Piketty speaks of, but rather (1) the economic destruction of the relative wealth of the old European aristocracy as its landed rents collapsed under the impact of competition from the new regions of European agricultural settlement in the New World; and then (2) the rise of urban landed wealth in the form of location as population growth and economic density have outran transportation technologies, and congestion has become a first-order economic cost. This is the economic historians’ critique. It is one I still have to think about. It is clearly right: one of the things that destroyed European aristocratic oligarchies’ wealth was New World agricultural competition that reduced valuation ratios, just as the landed wealth of the owners of Mayfair, Paris, and Manhattan is a substantial part of the runup in wealth. But is this a criticism of Piketty’s argument or just a mechanism through which it works? I am not sure…
To sum up: a very good book, a very, as Solow says, serious book. It has certainly moved me from thinking that the odds that two generations hence we will have a much more unequal and plutocratic society were 2-1 against to thinking that they are 3-1 for…