Must-Read: Suresh Naidu: A Political Economy Take on W/Y

Must-Read: Suresh Naidu: A Political Economy Take on W/Y: “The full political-economy equilibrium… lets us see the determinants of the wealth/income ratio… http://amzn.to/2pynukp

…as being more about bargaining, monopoly, and finance than about savings and growth rates…. leads us to examine noncompetitive, nonaggregative theories of distribution…. brings institutions into the forefront in explaining the capital-labor split… and the capitalization of expected future capital income into wealth at the current rate of profit. We no longer even attempt to deduce the distribution of wealth from the timeless principles of competitive markets and the twin Eulers: Euler’s theorem applied to CRS production functions and an Euler equation for consumption. We wind up… having to investigate the details… idiosyncratic rules, market structures, and norms….

As a payoff from this point of view, we get to reinterpret and refine the Kuznets curve predictions. Regulations, policies, norms, and “institutions” determine the capital share parameter α and the rate of profit r, which in turn determine the level of W/Y. The distribution and level of wealth can then generate political influences that alter those same regulations, norms, and policies. We can imagine multiple path-dependent Kuznets trajectories. They all begin with some technologically induced initial inequality of wealth (possibly including human capital). That level then reproduces itself by generating a set of institutions and policies that amplifies and secures the returns to wealth holding. This trajectory can lead to a “Kuznets plateau”, which it would take a substantial shock to disrupt. But there can be other trajectories…

Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum, eds.: After Piketty: The Agenda for Economics and Inequality http://amzn.to/2pynukp