Afternoon Must-Read: Unlearning Economics: Capital in Pikettys Capital

Unlearning Economics: Capital in Pikettys Capital: “Although Piketty relates his framework back to the neoclassical production function…

…it plays only a supporting role (he refers to Cobb-Douglas somewhat disparagingly as a ‘simple story’), and his conception of ‘capital’, as defined above, is far more general than a literal interpretation of the production function might suggest…. Rognlie’s argument takes the estimates of the elasticity as central…. Piketty only references elasticity estimates for support, and actually stakes most of his claim that diminishing returns will not become a problem on historical observation: ‘On the basis of historical data, one can estimate an elasticity between 1.3 and 1.6. But not only is this estimate uncertain and imprecise. More than that, there is no reason why the technologies of the future should exhibit the same elasticity as those of the past. The only thing that appears to be relatively well established is that the tendency for the capital/income ratio β to rise…. To be sure, it is likely that the return on capital, r, will decrease as β increases. But on the basis of historical experience, the most likely outcome is that the volume effect will outweigh the price effect, which means that the accumulation effect will outweigh the decrease in the return on capital.’ This is not to say that Rognlie’s arguments are not worth considering, and he makes some good points… that the returns to new, IT-based technologies are not especially high… that, absent housing housing bubbles, capital’s share of income has declined in many countries over the past few decades…”