Must-Read: Dietrich Vollrath (2016): The Returns to Societal Capital
Must-Read: Dietrich Vollrath (2016): The Returns to Societal Capital: “Brad DeLong… points out that much of our prosperity comes from a stock of societal capital that we unknowingly rely on every day…
…Trust: I think this is much of what DeLong has in mind. We are lucky to be in the “trust” or “cooperate” equilibrium in our repeated game of exhanging goods and services. If you like, call it the “stag hunt” equilibrium Nick Rowe talks about. Regardless, we benefit from the decisions of our ancestors to play this equilibrium, so that it is the default. If you want to say this is due to some institutions, or culture, or pure luck, it doesn’t matter. We’ve found our way to the trust equilibrium, and benfit from that immensely. Scale… I think it is as relevant as trust. Scale influences the potential profits from innovations, and so is crucial to growth. Bigger market, more profits, more incentives to innovate. But scale is not the same thing as trust, or institutions, or culture….
The heart of DeLong’s point is that neither trust nor scale are things that are owned by any firm or individual. You could say that we inherited them from our ancestors, or you could say these are emergent properties, or you could say that they are designed by the institutions we choose for ourselves. Regardless, trust and scale are “ideas” in the broadest sense, and are inputs into the production process in that trust and scale mean our set of rival inputs (labor, capital) can produce more with them than without.
How is it that scale and trust mean we are overpaid?… [I’ll] “hoist one from the archives” of this blog:
Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?: “Just to refresh, a production function tells us that output is determined by some combination of non-rival inputs and rival inputs.
…Non-rival inputs are things like ideas that can be used by many firms or people at once without limiting the use by others. Think of blueprints. Rival inputs are things that can only be used by one person or firm at a time. Think of nails. The income earned by both rival and non-rival inputs has to add up to total output. Okay, given all that setup, here are three statements that could be true.
- Output is constant returns to scale in rival inputs
- Non-rival inputs receive some portion of output
- Rival inputs receive output equal to their marginal product
Pick two.
Resuming: The Returns to Societal Capital: The ideas of trust and scale are non-rival inputs to production. If we assume that output is constant returns to scale in rival inputs (point 1), then we have to pick either 2 or 3. As neither trust nor scale receive payments, we have essentially chosen 3. And in that sense DeLong means that rival inputs (our labor and our capital) are overpaid. We are not compensating anyone for the trust and scale that we inherited or created as a group…. Labor is overpaid because it earns returns that could be going to ideas like trust and scale. Whether we say that what it earns is the marginal product or not is irrelevant…. You may be wondering how the increasing returns to scale that DeLong mentions fits in here…. In terms of all inputs (labor, capital, and ideas) production is increasing returns to scale. If I doubled all of them, output would more than double.
Back to the main story. What DeLong does with this is to provide what I found to be a unique justification for the public sector. That is, taxes are a way of collecting the royalties on trust and scale that we inherited and/or create ourselves. Taxes are the rents to idea of playing “cooperate” or having scale. And the proper use of those rents, if I am reading him correctly, is in ensuring that those endowments are perpetuated and handed off to our own children.
What does it mean to perpetuate trust and scale? Part of it, I think, is in providing the insurance against the fluctuations that are the necessary corollary of the markets we create with trust and scale. Those fluctuations play havoc with local communities and ways of life, a la Polyani….
The issue with this, as DeLong spends most of his post working out, is that simply handing out those rents to people creates issues for everyone involved. Those paying taxes feel that they are being taken as suckers. Those receiving the rents – the members of disrupted communities – feel like deadbeats. No one wants to be in either of those positions….
The distribution of those rents is perhaps more palatable when seen not as a handout (which makes people feel like a deadbeat) but as something like a dividend on shared ownership of an asset. I feel like this would be one way to think of how a universal basic income could be framed – everyone is getting their share of the collective dividend payment due to the owners of the “ideas” of trust and scale. It is a sign of ownership, not dependence.
- Dietrich Vollrath (2016): The Returns to Societal Capital
- Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?
- Dietrich Vollrath (2015): Mathiness versus Science in Growth Economics: