What New Theories of Distribution and Growth Do We Need?
The very sharp Ravi Kanbur and Joseph Stiglitz move the ball forward on sources of rising inequality:
Wealth and Income Distribution: New Theories Needed for a New Era: “Six decades ago, Nicholas Kaldor (1957) put forward…:
…the constancy of the share of capital relative to that of labor…. Simon Kuznets (1955) put forward… while the interpersonal inequality of income distribution might increase in the early stages of development, it declines as industrialised economies mature. These empirical formulations brought forth a generation of growth and development theories whose object was to explain the[se] stylised facts…. However, the Kaldor-Kuznets stylised facts no longer hold for advanced economies….
It stands to reason that theories developed to explain constancy of factor shares cannot explain a rising share of capital… [or] the new trends, or the turnaround….
Indeed. This seems to me exactly right. Which is why I have never understood economists who think that they can use an argument made from within a Solow growth model–a model deliberately engineered to make it next to impossible for almost anything to materially alter factor shares–to argue that Piketty must be wrong in his claims that the forces he has identified are materially altering factor shares.
Kanbur and Stiglitz continue:
Rising inequality has opened once again… questions [of] the normative significance of inequality of outcomes versus… opportunity. New theoretical developments are needed….Piketty has himself put forward a theory… consistent with the other stylised fact of rising capital-output ratio only if the elasticity of substitution between capital and labour is greater than unity, which is not consistent with the broad empirical findings (Stiglitz, 2014a). Further, what Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K….
Here, however, I lose the thread:
Piketty’s “capital” is–explicitly–not K-in-a-neoclassical-production-function but rather W-the-capitalized-income-streams-in-a-rent-seeking-society. Indeed, in ordinary speech that is what “capital” means:
Capital: Definition: “capital noun (MONEY)…:
…[U] wealth, esp. money used to produce more wealth through investment or a new business: “She invested well, and can live on the interest without touching the capital.”
The reading of Piketty as using “capital” to primarily mean produced-means-of-production has always seemed me very odd, as an incredibly strange warping of what he is saying. I remember back in 1979 Jeff Weintraub and Shannon Stimson taught me that that you could make a hash of anyone’s argument if you took one of their central terms and read it ungenerously–“democracy” for Tocqueville, “rationality” for Weber, and so forth. But that was not a good intellectual strategy.
Thus, IMHO, the finding of a capital-labor K-and-L elasticity of substitution that is less than one for “capital” understood as produced-means-of-production-machines-and-buildings-that-are-the-variable-K-in-a-neoclassical-production-function is not terribly relevant, and not a strong critique of Piketty’s argument. And so Stiglitz and Kanbur seem to me to be not criticizing but rather confirming Piketty when they write:
There is a fundamental distinction between capital K, thought of as physical inputs to production, and wealth W, thought of as including land and the capitalised value of other rents…. New theories explaining the evolution of inequality will have to address directly changes in rents and their capitalised value (Stiglitz 2014). Two examples… sea-front property on the French Riviera… government gives an implicit guarantee to bail out banks…. [We] will need a theory of rents which takes us beyond the competitive determination of factor rewards…. [Moreover,] ntergenerational transmission of inequality is more than simple inheritance of physical and financial wealth…. Human capital inequality perpetuates itself through intergenerational transmission just as wealth inequality caused by politically created rents perpetuates itself…. We still need fully developed theories of how the different mechanisms interact…. The distinction between opportunity and income begins to fade and the case for progressive taxation is not undermined by the ‘equality of opportunity’ objective…
Names that have not been mentioned in this discussion as much as I think they deserve to be mentioned include, most prominently, Mancur Olson and William Baumol. Great profit could, I think, be earned from bringing to the center of the discussion:
William Baumol (1990): Entrepreneurship: Productive, Unproductive, and Destructive
Mancur Olson (2000): Power and Prosperity