Piketty on Capital: A Footnote

I have maybe a hundred pages to go. I’ll finish it this weekend.

Yeah, it is a very good book with insights and analysis on every page beyond the headline number crunching. And the left-center social democratic economists like Baker and Jamie Galbraith are being grumpy about it, while the centrists, as Galbraith says, maybe like it a little too much. My impression is that the Piketty is even more Marxian than he openly acknowledges.

It seems to me that his conclusion is that global or regional wealth taxes at an effective level are improbable;that the transfer states have about reached their limit; that the creation of public capitals and commons is way out of fashion; that the “patrimonial middle class” gives too much support to the rentiers; and that worker organization is likely impotent and irrelevant. What gave us the Great Compression was the massive destruction of capital from 1914-45 and the political equality resulting from it. Marx.

Baker seems to be arguing that the future Piketty predicts may not, and should not, come to be. It’s not an attractive prospect.

I find revealed preferences amusing, though, so I look at my own investments to find out what I really think. As far as I can tell I’m betting with Piketty.

Besides, as every professional gamer knows, Microsoft makes the only mice worth having. So in a sense Bill Gates invented the good mouse.

Thinking about Piketty and “a public sense of agency” and “the naturalistic fallacy.”

The great sleight of hand of right of centre economic thinking has been to portray markets as “natural” and thus to oppose any and all interventions as “unnatural.” It’s given them a psychological high ground that has helped bring us to the mess we’re in.
(Even worse, a secondary portrayal, that of economies as self-regulating, self-stabilising systems has bitten even harder on all the necessary regulation and interventions that could make life better.)

This then is the danger of (r-g). Piketty tells us that “r” has been around 4.5% and only lower for that “Golden Age” blip. The implication is that it is “returning to the natural level” and that will be taken by many on the right as an automatic reason to oppose efforts to lower “r.”

Likewise “g” is the long-run rate of growth, which you can get quotes from lots of people (e.g. Tyler Cowen, Chris Dillow and many more) as being stuck for advanced economies around the 1-3% region (Piketty puts it as 1.5% or 2.5% with pop. growth.) So here we have another “iron law” which economists happily live by – and suggests we have no agency in this matter. I’d love to see a CT seminar on long-run growth/technological advances, BTW…

In passing, Galbraith point that we can affect the rate of interest by creating new public banking institutions is a great insight and should temper my quick fire grumpiness about him and Baker in my previous comment.

Baker is doubling down …

https://twitter.com/DeanBaker13/status/452419686433443840

In the spirit of hair splitting about individual sentences.

“Did Bill [Gates] invent the computer or just the mouse?” Of course the mouse was first popularized by Apple, Microsoft’s rival.

The shift from “invent” to “first popularized” makes the passage a non-sequitor. And “first popularized” itself is, of course, redundant.

I’m reading the Piketty, too, and was already thinking about which barely-relevant quip was going to be taken out of context to demonstrate Piketty’s incompetence.

I was assuming it would be something in one of his literary readings, which are… bad.

But we could do computer trivia again, if Den Baker is more comfortable with that.

Echoing @Z #4. This book is crying for a seminar.

@ 1

When all you have is a hammer…

That’s pretty accurate, but of course the mouse was invented by Doug Englebart in the ’60s. The distance between “invented” and “popularized” is one of over 15 years.

Nitpicking over these details seems really petty. It’s a search for gotchas in the hope that a single error activates “falsus in uno, falsus in omnibus.”

Picketty’s thing is clearly a joke, as none of the assertions in it are true; it’s a joke about “cults of personality,” though it would have been funnier if he had linked it to Jobs instead of Gates, largely because a fair number of people in the Jobs Cult would have nodded their heads in agreement, just as some will about the Reagan/Pope ones. Graeber’s related errors about technology seem to actually be errors, but the thrust of his point is still correct even if he didn’t get the details right.

@ mattski @ 16- wouldn’t that depend on which type of hammer you have? Granted a ball peen can drive a nail it’s just not as efficient about it as a claw hammer and forbid you should bend the nail( likely with a ballpeen) in the process. I’m generally leery of things that have only one use or one interpretation. I figure I’m going to read Piketty in tandem with Braudel’s more comprehensive history of the rise of capitalism in Europe.

donquijoterocket @ 20

I hope you’re not driving nails with the claw end of the hammer. It’s hard to know with Braudel what is history and what is a vivid imagination.

JW MAson wrote:

(independently of each other, I guess).

That was certainly Gates’s view:

… Gates found himself surrounded by ten Apple employees who were eager to watch their boss assail him. Jobs didn’t disappoint his troops. “You’re ripping us off!” he shouted. “I trusted you, and now you’re stealing from us!” Gates just sat there coolly, looking Steve in the eye, before hurling back, in his squeaky voice, what became a classic zinger. “Well, Steve, I think there’s more than one way of looking at it. I think it’s more like we both had this rich neighbor named Xerox and I broke into his house to steal the TV set and found out that you had already stolen it.”

@ 20

Not sure if you took my meaning. I was pointing to the tendency of some folks to treat Marx as a panacea or a demigod or a repository of shit-that-doesn’t-stink. As opposed to a bright, acerbic fellow with a critical, but not necessarily constructive eye.

Nvalvo – thanks. Is there an authoritative history of this stuff?

I look at the quote at the center of the OP, and I can see Dean Baker’s point, as well as Piketty’s and Henry Farrell’s. The conceptual language is, itself, untrustworthy. I would call Piketty to account for saying, “the US economy was much more innovative in 1950-1970 than in 1990-2010”, as if “innovative” was a measured observable, with a clearly defined relationship to various dimensions of economic performance.

We don’t have a good framework of terms, here, which would let us understand each other, and sarcasm, though entertaining, just compounds the base problem.

Metatone @ 6 & 7

Economics has become the Lillian Hellman of the social sciences: every word is a lie, including including ‘and’ and ‘the’. Of course, it is hard to write a book on economics without making big mistakes, when the conventional framework of terms is total crap, one Big Lie after another. Communication depends on social conventions, and the conceptual language and conventions of economics are deeply corrupt.

Work like Piketty’s, or that of Graeber or Acemoglu, is stimulating, in part, because it hints at a vision, a truthful vision, of how the economic system works and is working. We need such a vision, to coordinate a reform politics that gets somewhere, anywhere, in adapting to our evolving, deteriorating circumstances. We don’t have such a shared vision, or the language it could provide to discuss things. What we have, instead, is the ideological framework erected by the fake discourse of neoliberals and conservative libertarians, and derived from the caricature that is Friedmanite “Free to Choose” market economics and the pejoratives of Public Choice hostility to “rent-seeking” corruption of big government. So, whereever Piketty, or Graeber or Acemoglu, or Galbraith or Dean Baker, or any number of others, run out of whatever road they are paving themselves, we are back in the deeply rutted swamp of Econ 101 textbooks written by the likes of Mankiw or, even worse, baseless pontifications legitimated by advanced “research” with DSGE models and the like.

I thought Galbraith’s review did a remarkable job: the first few paragraphs are a lucid and elegant brief review of the conceptual problems of defining “capital” and the role of “capital” in the “capitalist” economy. Conventional, mainstream economics is a mess of lies, because it sharply limits the application of such critical thinking. The Solow growth model is stupid, but it is official, accepted establishment stupid; so we cannot have intelligent discussion, sorry.

Mainstream economics does every thing it can possibly do to shed referents, without losing its last shred of facial plausibility. Should we be surprised that it is so difficult to narrate the history of the last century or two, with a framework of terms, which, by design, has almost no correspondence to events? Is there a credible, textbook narrative analysis, of, say, the Great Depression, the most dramatic and important macroeconomic event in a century? None that I know of that goes beyond one or two events without absurd oversimplification or the introduction of wildly discordant explanatory schemes.

To narrate the political determinants of the distribution of income and wealth, if done well, is going to be a deeply subversive and probably revolutionary act. If Piketty did it well, either he wouldn’t be published, or if published, he’d be studiously ignored, when he wasn’t being radically mis-interpreted.

Given how much pressure the economic system is under, though, I suspect some obvious intuitions are likely to be promoted into the popular discourse by Piketty and his critics, almost despite their fumbling. I would think the notion that r > g cannot happen, without the margin, r – g, being predatory, might slip thru, if only because it is also pervasive, everyday experience.

@Bruce Wilder @33 & @Others

To be clear, I wasn’t trying to castigate Piketty (or Graeber or Acemoglu) for the problems with various details – indeed my hamfisted point was that so much of what has happened since the 70s hasn’t been studied very well (either because of lack of resources, or ideological interference) we’re really struggling to write books that explain our current economic position.

@BruceW – I hope you’re right about r-g = predatory slipping through.

I’d add that I think that focusing on r & g can be valuable, the trick is not to let the right use the naturalistic fallacy to prevent anything being done about them.

My own personal frustration is that the acceptance of the limitations of “g” seems entirely too bound up with the definitions at work in economics. Somehow we seem locked into a loop where all at once “we’re richer than ever before” – but – “we have to cut back on all these programs…” – and if you do that to research, then it probably will change the progress on the technological frontier, no?

The Gates/mouse thing is so obviously a joke I can’t believe anybody who actually read the book would take it seriously. This bit in the book was preceded by Piketty’s stab at the justification of the stratospheric salaries of what he calls “supermanagers,” a phenomenon that’s apparently most evident in the US and Britain. Pikkety is mainly attacking the idea that these salaries reflect the marginal productivity of their earners. He offers other explanations such as the indirect participation of the executives in setting their compensation and the substantial reduction in top marginal tax rates. From there he points out that the reductions in top marginal rates are not statistically related to productivity growth. The paragraph that contains the joke begins by pointing out that “these issues are too strongly charged with emotion and too closely bound up with national identities and pride to allow for calm examination” and therefore “reason is often at a loss”.

Yak. 1st graph is Metatone @ 7.

Metatone: My own personal frustration is that the acceptance of the limitations of “g” seems entirely too bound up with the definitions at work in economics. . . .

The popular centrist political obsession with “growth” sloganeering is going to be an important filter on interpretation of Piketty’s work. The kaleidoscope of Brad “Center for Equitable Growth” DeLong self-parody began last December will continue an extended run, no doubt.

The looming capital fact — sorry — of 21st century economics would seem to me to be global resource limits and congestion effects, which will constrain both per capita and aggregate growth in ways that have only been experienced locally and exceptionally since the industrial revolution began. I think there’s a good case that raw potential “g” is near-zero or negative for much of the rest of the century. High return on capital could be some combination of predatory or catabolic (Watson Ladd @ 32), almost certainly is subject to collapse, as the political power that support economic rents erodes or the capital stock runs out.

Right now, I think the political argument that “jobs” require ditching labor protections, environmental protection, social welfare, principled international behavior, etc., is winning, because this discussion we’re having is still way too abstract and detached. Some large part of that abstract detachment is related to economic conventions, including the meteorological fallacy and the ritualistic acceptance of absurdities such as “skills-biased technological change”, but also seemingly unrelated false conventions, such as the “market failures” canon. Economics is a logic chain of Big Lies, and we need to break that chain.

Sandwichman @ 40 not all economists lie

I wasn’t saying that economists — even those who might be my political opponents — necessarily intend to lie, only that economics, as it exists, makes it very hard for economists to articulate useful truth.

In fact, I would say economics makes it very hard for economists to discuss economic topics intelligently among themselves. Which accounts for the degeneracy of much of the research program, as well as degeneracy of the intellectual contributions of economists to the popular political discourse.

Wilder, you expect too much and too little from economists. Adam Smith was a moralist.

I don’t expect science, models and formulas and data manipulation. I don’t expect “truth.”

I do expect economists to do the job as defined by Marx and Keynes: to prevent catastrophe and horror, to prevent (not patch up afterwards) recessions and depressions and stagnation and wars of competition and gross inequalities and inefficiencies. I do not give them points for waving their hands and saying they tried and the a-holes wouldn’t listen. The job description does not allow failure, the stakes are too high.

It’s more politics than academics, more art than science. I don’t worry if “The only thing to fear is fear itself.” is completely clear and accurate. I don’t care if they lie.

Random Lurker,

Why do you say “rent capital” would be fixed in quantity? And what is the significance of the real/rent distinction?

> Why do you say “rent capital” would be fixed in quantity?

You could think of it not as a description of the real economy but as a two-good model, with fixed-in-quantity and easy-to-make-more standing at the endpoints of what’s really a continuum of difficulty-to-increase-supply. With the intent that the model reveals how “capital” flows between the two categories [~~over the distribution] under changing economic conditions.

That’s probably not the words that Marx would have used to catalogue or describe what he was writing about, but he was writing a long time ago. Rhetorical styles are culturally [and thus temporally] dependent, and jargon changes too.

I see Drezner has a new book called The System Worked [sic].
Maybe do a seminar on that along w/ Piketty (I’m kidding, mostly).

BW@23:
It’s hard to know with Braudel what is history and what is a vivid imagination.
Whoa. I’m not at all sure I’d agree w/ that. (Not that this is esp. on-topic.)

Sandwichman @ 48

Yes. I said, “lies”, but it could be accounted for as appallingly bad taste.

bob mcmanus @ 45

OK. I confess that I’m a fan of economics, and would like to see much better quality of play in the professional leagues. Also, I’d like to understand what’s going on, even when I don’t like it, or especially when I don’t like it.

Bruce,

You’re rarely contrite and grounded unless and until you’ve been flamboyant and outrageous first. But you’re a good egg.

a two-good model, with fixed-in-quantity and easy-to-make-more standing at the endpoints of what’s really a continuum of difficulty-to-increase-supply.

This doesn’t sound right. What does this have to do with the distinction between “rent capital” and “real capital?” Houses are bought and sold. Houses are also rented. Land is about the only good I know of which is fixed in supply. But land is bought and sold as well as rented. Kitchen equipment–fairly easy to produce more of–is bought and sold as well as rented. Clothing, lawn mowers, etc.

What insight is gained by distinguishing between markets for sale and markets for rent? I’m not saying there isn’t a distinction. I want to know why you, or Random Lurker, thinks that it’s significant.

@mattsky
What Collin said above, however I’ll try to get more into the details, in two parts: what’s the theory and why is it relevant.
WHAT’S THE THEORY
Marx distinguished four kinds of capital goods: manifacturing (factories, what I called real), land and natural resources (what I called rent capital), commercial and financial capital.
Let’s start with “real” capital.
Real capital is that part of capital that is actually manufactured, so basically factories. In the case of houses, when we see houses as capital goods, they are partly “real” (the brick and mortar) and partly “rent” (the land they occupy).
The “real” part of capital has a cost of production, that is technologically determined (for Marx, who believed in the LTV, it was determined by the amount of labor needed to build them).
Now, it is assumed that the rate of profit of each capital good will tend to reach the average rate of profit. In the case of real capital, this happens through the material production of new capital goods in those sectors where the rate of profit is higer than average, until they fill the market. In those sectors where the rate of profit is lower than the average, the cost of production of capital goods will be higer than their market value, obsolescent capital won’t be replaced, and the physical quantity of capital will slowly fall.

Rent capital, like land, however, does not have a cost of production, so cannot respond to changes in the rate of profit in its sector by changes in quantity, but only in price. The market price of land, by consequence, will adjust so that land assets will have the average rate of profit.

Commercial capital, according to Marx, is just a subpart of manifacturing capital. However, given the importance of brand, distribuition etc. in the economy of today, I think it should be treated as analogue to rent capital. The same goes for all the forms of mini-monopolies, like patents or land in the city centre, since the whole point of a monopoly is that it is not reproductible.

Finally, financial capital has an interest rate, that cannot exceed the average profit rate because most debtors are businesses that use the money to build capital goods, so the interest rate is linked to the expected rate of profit to new capital. Financial capital then acts as rent capital.

But, if financial, rent and commercial capital prices are determined by the average rate of profit, what determines this misterious rate of profit?
It has to be determined by the “real” capital goods, whose cost is independent from the average rate of profit.

WHY IT MATTERS
If we accept this theory, we see that the various bubbles, the increase in the debt levels etc. are a consequence of a falling rate of profit on new marginal real capital goods (see my note in my previous comment).
This means that it is the secular stagnation that caused the bubbles, and not the other way around.
But what caused the secular stagnation?
I believe that the problem is distributional, that workers get wages that are too low in the manifacturing sector, but I have not a good explanation of this.
However I don’t think that, as Bruce Wilder implies, the stagnation can be caused by the rent/financial sector.

maidhc @56: It was Babbage’s Difference Engine that was built, and there are two working examples, I believe.

Yes! Thanks for correcting my (embarrassing) error.

It’s obvious, this finding from Picketty (“Mobility, equality: rickety”). Still, good that he sees the wood for the trees – Economy’s trained to be thickety.

Without reading, I can’t be too critical, but is he too rote-analytical? The view from down here seems to make it quite clear that these trends are, at bottom, political.

“But the (best) data you have isn’t on growth of capital income: it’s on returns to capital.” – Watson Ladd #32
The opposite is the case. There are plenty of caveats to raw data on capital incomes, but it’s there and can be analysed. Rates of return requires assumptions about the values of capital and for reasons including (but not just) the Cambridge controversies already noted in discussion, this raises a host of problems.

bob mc – have you read this

http://dl.is.vnu.edu.vn/bitstream/123456789/238/1/Capital_as_a_power.pdf

might interest you if not

= = = William Timberman @ 2:48: Somewhere in the Sixties, or thereabouts — after the war, after Bretton Woods and the various economic miracles of Europe and Japan — the trick bag must have seemed almost bottomless. Several decades of enforced underconsumption in the industrialized countries had bequeathed capitalism a torrent of pent-up demand, and, for the first time, reasonably effective demand management was available to structure it: mass advertising and market surveys, planned obsolescence, and so forth. Labor pacification had evolved from a form of warfare into a form of engineering, with lifetime employment in Japan, Mitbestimmung in Germany, and stage-managed union contracts and the GI Bill in the U.S. = = =

Between 1920 and 1960 the world was undergoing conversion to petroleum/gasoline/diesel fuel. Animal and human power gave way to internal combustion + electricity. Thousands of quads of energy were mined from the Carboniferous Era and dumped into the current homo sapien economy. For the most part, this simply gets ignored in modern economics and economic theory, and attempts to discuss it are derided. We’ll see [1] whether that was just a coincidence or a critical link.

Cranky

[1] Well, I _probably_ won’t see; my children certainly will.

Haven’t read the book yet — it is next on my list. Just want to say that, with Piketty, and also Quiggin’s Zombie Economics, Brynjolfsson & McAfee, Graeber, and perhaps a few others, it feels like economics is getting back on track toward becoming a real social science (despite any errors these books may exhibit, which I would always expect to exist, anyway).

(I just watched the YouTube of Brynjolfsson & McAfee presenting their thesis at one of the Google talks, and they are very good. Recommended viewing.)

I think that “capital” is a concept that will always remain slightly outside mathematization and quantification, because it is a higher context. Indeed it is formally analogous to “language”, “context”, “ritual”, “symbol”, and “institution”.

But I think we could verbally define “capital” as: that, which serves to make transactions (and/or work-transformations) to be easier or more gainful, so that individual choices are made as to whether to acquire it and use it in those transactions or work processes.

Thus the two important parts of the definition are: it makes doing other things easier, and it is, under certain conditions, possible to individually acquire. That is, it is tradable or negotiable. “Capital” is thus an immediate subset of the set of ALL economic institutions — which reduce costs if they are working properly, but which are not always so tradable (e.g., governmental economic institutions).

There are four main kinds of capital, so far as I can see: 1. Human: individual learning, and at the group level, socio-political power (which can be acquired); 2. Geographic: spatial centricity and land; 3. Manufactory: technology and manufacture; and 4. Financial Liquidity: consumer durables and wealth assets including financial paper. Their relative importance has varied throughout history.

Capital cannot have absolute valuation — much like money cannot, over the long term. (This is conceptually adjusted-for, although not terribly well, in at least two ways: A. the hard-money goldbugs, who think that money must have a hard value for The System to work properly (and which, I think, is the source of the intellectual error of the Very Serious People in this economics crisis, when they are not committing outright malfeasance) — and/or, B. the discount rate, a conceptual back-formation from the financial markets, and which gives the appearance of conversational omniscience to financiers and capitalists, — and thereby fools a good many people, including it seems most economists, into thinking that financiers must know what they are talking about.)

Capital’s value is really local, and sometimes very short-term. As Adam Smith might have written, it is “limited by the extent of the market”. (He wrote that about the “division of labor”, but it also applies by group extension to the value of capital.)

The way that capital is “quantified” (in quotes, because the quantification is loose and provisional,) depends upon the two main decision-making processes: prices and votes (in the case of socio-political capital).

And, in turn, current prices and votes all come down to, or are determined by, the individual’s finite daily attention-budget, composed of current needs plus current attention to future needs — in tandem with all other individuals.

However, it all does not necessarily all add up. The finite daily attention-budget of individuals is a permanent failure of information, a permanent market failure, frustrating Hayek’s dream of the market as always the best calculating device. Especially when new complications arise.

If prices aren’t working to satisfy the whole society (a complication that is currently building up, in the case of increasing inequality) then we are going to turn more to votes, to solve our problems. This is also really a part of “economics”, however much its tenured practitioners may resist this conclusion.

Wm. Timberman @62:
Yes, I think this begins to answer what seemed Random Lurker’s question-with-too-obvious-an-answer @59, namely, why do “workers get wages that are too low in the manufacturing sector”? Obvious in the sense of end-of-Fordism, end-of-capitalism’s-golden-age, drastic decline of unions, relocation of some production to global South. Question is whether this trend will reverse itself eventually, as labor costs in the developing world become perhaps (emphasis on “perhaps”) impossible to keep driving lower, and, if it does reverse, whether the result will be hopeful (e.g., resurrection of some kind of quasi-Fordist model) or not hopeful (e.g., declining profit margins coupled w inability to find a new workable model of capitalism drive firms into self-destructive frenzies of one kind or another, taking a lot people down with them). I admit I don’t really know what I’m talking about but am emboldened to comment anyway because this thread does not impress me as one where a whole lot of people know what they’re talking about (although the economists, of which I’m not one, may).

bob mcmanus:

Capital is power, Capital is language (C Marazzi), Speech is power (Foucault?); power is everywhere; all is capital and all is labour. So why are the rich getting richer? What is the universal speech act, the episteme that legitimates inequality?

This is unhelpful. Capital is not language. Inequality is not legitimated, to the extent it is legitimated, by a “universal speech act,” but rather by a whole variety of “speech acts,” e.g., every time a David Brooks writes an op-ed column about entrepreneurialism or whatever, that is a discrete speech act, not a “universal” one, that contributes in a small way to the legitimation of inequality.

You (bob mc.) obviously read a tremendous amt, far more than I, but seem to have a weakness for facile, rather unilluminating poststructuralist aphorisms (“capital is language,” “power is everywhere”). I know Foucault (supposedly?) said “power is everywhere,” but so what? Where or what does that insight get you?

[I accidentally entered this with an old moniker so it got stuck in moderation. I will try again:]

Haven’t read the book yet — it is next on my list. Just want to say that, with Piketty, and also Quiggin’s Zombie Economics, Brynjolfsson & McAfee, Graeber, and perhaps a few others, it feels like economics is getting back on track toward becoming a real social science (despite any errors these books may exhibit, which I would always expect to exist, anyway).

(I just watched the YouTube of Brynjolfsson & McAfee presenting their thesis at one of the Google talks, and they are very good. Recommended viewing.)

I think that “capital” is a concept that will always remain slightly outside mathematization and quantification, because it is a higher context. Indeed it is formally analogous to “language”, “context”, “ritual”, “symbol”, and “institution”.

But I think we could verbally define “capital” as: that, which serves to make transactions (and/or work-transformations) to be easier or more gainful, so that individual choices are made as to whether to acquire it and use it in those transactions or work processes.

Thus the two important parts of the definition are: it makes doing other things easier, and it is, under certain conditions, possible to individually acquire. That is, it is tradable or negotiable. “Capital” is thus an immediate subset of the set of ALL economic institutions — which reduce costs if they are working properly, but which are not always so tradable (e.g., governmental economic institutions).

There are four main kinds of capital, so far as I can see: 1. Human: individual learning, and at the group level, socio-political power (which can be acquired); 2. Geographic: spatial centricity and land; 3. Manufactory: technology and manufacture; and 4. Financial Liquidity: consumer durables and wealth assets including financial paper. Their relative importance has varied throughout history.

Capital cannot have absolute valuation — much like money cannot, over the long term. (This is conceptually adjusted-for, although not terribly well, in at least two ways: A. the hard-money goldbugs, who think that money must have a hard value for The System to work properly (and which, I think, is the source of the intellectual error of the Very Serious People in this economics crisis, when they are not committing outright malfeasance) — and/or, B. the discount rate, a conceptual back-formation from the financial markets, and which gives the appearance of conversational omniscience to financiers and capitalists, — and thereby fools a good many people, including it seems most economists, into thinking that financiers must know what they are talking about.)

Capital’s value is really local, and sometimes very short-term. As Adam Smith might have written, it is “limited by the extent of the market”. (He wrote that about the “division of labor”, but it also applies by group extension to the value of capital.)

The way that capital is “quantified” (in quotes, because the quantification is loose and provisional,) depends upon the two main decision-making processes: prices and votes (in the case of socio-political capital).

And, in turn, current prices and votes all come down to, or are determined by, the individual’s finite daily attention-budget, composed of current needs plus current attention to future needs — in tandem with all other individuals.

However, it all does not necessarily all add up. The finite daily attention-budget of individuals is a permanent failure of information, a permanent market failure, frustrating Hayek’s dream of the market as always the best calculating device. Especially when new complications arise.

If prices aren’t working to satisfy the whole society (a complication that is currently building up, in the case of increasing inequality) then we are going to turn more to votes, to solve our problems. This is also really a part of “economics”, however much its tenured practitioners may resist this conclusion.

just

@mattski 64
Sorry, I’ll try to explain with more clarity the distiction between the 4 kinds of capital, starting from Marx, and then adding some tweaks:
1) MARX
As you know, Marx believed in the labor theory of value. Let’s explain the 4 types of capital in Marx’s theory using his logic that imlies the LTV, and then in the tweaks I’ll try to re-adapt the theory without the LTV (though I happen to believe that the LTV is correct, but I suspect you wouldn’t appreciate an explanation that implies the LTV).
Marx believes in the LTV, that implies that the cost of all stuff is directly proportional to the labor needed to produce it. Literally: If you want a factory that is built by 100h of work, you’ll have to pay 1000, If you want a smaller factory that is built by 150h, youll’have to pay 1500. A car that needs 10h? 1000; etc. [The LTV is actually an equilibrium theory IMHO, but lets not open this other can of worms, and assume that all prices are always “at equilibrium” and thus proportional to labor].
This is also true for capital goods. This is what I called “real” capital, is the only “true” capital in the marxist sense, and is literally composed by past labor.
But then Marx realizes that landed capital (very important in his times) cannot be described this way. He then states that land is not really capital, but is treated as such in a capitalist economy. This is what I called “rent” capital and refers specifically to “rents” in the sense of the classical economists, that means land rents (as opposed to capitalists “profits”).
So “real” capital is frozen labor and profits are produced by labor, whereas “rent” capital is the ownership of some scarce natural resource, literally, and nothing else, and thus produces “rents” in the classical sense.
Then Marx says that “commercial” capital is a subpart of industrial (“real”) capital, and while I disagree, I’ll explain this in the tweaks, so we can ignore commercial capital here.
Finally Marx says that financial capital is “fictitious” capital, because it doesn’t really correspond to “frozen labor”. However, Marx believes that financial capital is used to finance the acquisition or the production of other capital goods, so the interest rate has to be between 0 and the average rate of profit.
You ask for human and intellectual capital. If by human capital you mean things like skills, such as being an engineer, this is clearly “manifactured” in schools, and this requires labor, so this is clearly “real” capital. If by intellectual capital you mean stuff like patents and logos, those are restricted by law to sorts of monopolies so they act as “rent-like” capital, but see my discussion of commercial capital in the tweaks. If by intellectual capital you mean the actual research and developement, activity, this can’t be “capital” in absence of a patent system because everybody would replicate new inventions but, if/when this doesn’t happen, this would be “real” capital.

2) TWEAKS
First, does this distinction make sense out of a labor theory of value? In my opinion, yes.
That’s because a lot of capital goods have a cost of production that is fixed. For example if you build a factory, the bricks have a certain fixed price, the robots too, the engineer also have. While during time those prices fluctuate, they can’t fluctuate just at random: if it is expensive to build a robot, the price of said robot can’t diverge from the cost of production THAT much for a sustained period of time. So it is imho true that there is some “real” capital, whose cost of production is fixed, whose supply is quite elastic.
On the other hand, there are goods whose supply is basically scarce, like oil. The price of an oil field basically depends on how profitable that oil field is, so it act like “rent” capital in Marx model [side note – marx assumes that most “rent” capital usually includes some embedded “real” capital like canals, etc. – which is certainly true for oil field that require substantial “real” capital for being used].

So in the end if you express this in non-ltv terms you get to Collin Street’s definition, that there is a continuum between comletely elastic and completely inelastic capital goods. The idea however is based between the difference between “stuff that is produced by labor” and “scarce resources that exist by themselves in nature”.

There is however another important tweak I made, that is that I assume that “commercial” capital and “immaterial” capital like logos or patents can be treated as rent capital (though they are not rent capital, since “rent” here is still used in the classical sense of the rent of the land owner).
For things like patents, those are artificial monopolies so I think that it is obvious that they work similarly to rent capital.
For commercial capital, it is important to note that we live in a period of oversupply, so that the attention of the consumer becomes sort of a scarce resource. Big distributors can then use some sort of “monopoly power” on buyers.
But most importantly for some famous cases like Facebook, Google, Apple, Whatsapp etc., the “immaterial capital” that is the logo (or rather, how famous they already are) also works as a sort of pseudo monopoly: For example, If I created a search engine that is exactly equal to Google’s, and used equal servers and equivalent coders (thus having the same “real” capital), I still couldn’t compete vs Google (cfr. Bing, and it is sponsored by Microsoft, so they have certainly more “advertisement power” that a real new entrant would have).
This is a very important form of “immaterial” capital, and in my opinion it still works like “rent” capital because “fame” it is still a sort of scarce resource.

Thus in the end whe have 4 kind of capital:
1) capital proper, that is produced by labour, that I called “real” capital;
2) Land, that I called “rent” capital;
3) Commercial and other forms of immaterial capital, that Marx ignores but I think work as if they were rent capital (though they clearly are not “land”). Those pseudo-rents are (mostly) produced by the control over distribution, that is a bottleneck today, or by legal restrictions like in patents.
4) financial capital.

But of those 4 kind of capital, only the first one, capital proper, has an independent dinamic, the other three follow, so in my first comment I treated the three as if the were all “rent” capital (since in the modern usage of the term “rent” is applied to all sorts of things and not just to land).
Finally, obviously each business will have some real, some rent, some pseudorent, and likely some financial capital, so you can’t say directly say that Apple is “real” or is just”pseudo-rent”, it will usually be part and part. But it seems to me that a really large part of the evaluation of the financial markets of the value of famous or otherwise already dominant firms is due to the “commercial pseudo-rent” capital, and thus rises as the rate of profit of marginal “real” capital falls.

bob mcmanus @ 82

Re bad Marxism: I suspect that this discourse alone would eventually have reduced the LTV to a failed attempt at de-mystification, even if Brad DeLong, et al., hadn’t already been hard at work on it with their sublime collection of neoliberal wrecking balls.

@81 “As you know, Marx believed in the labor theory of value…”

I, for one, don’t know that. It has been fiercely debated. At any rate, the worth of Marx’s critique of classical political economy doesn’t hinge on whether or not he “believed” in the LTV.

bob mcmanus @82:

Social relations may be represented by symbols but that does not mean social relations are symbols. The relationship between employee and manager/boss, e.g., is not simply symbolic. Similarly, “family, company, nation; property, freedom, time” are not only symbols. A nation-state, e.g., obvs. has a symbolic dimension, but that doesn’t mean it is a symbol, i.e., “something that stands for, represents, or suggests another thing.” One might say it’s a form of political community and/or a way of organizing authority, so it has important dimensions that are not, or not only, symbolic. As for the last paragraph of 82, I’m not really sure what it means (but I’ve had some wine, so maybe I’ll put some of the blame on that). Signing off this thread for a time.

87: I am a social constructivist approaching a radical nominalism. As J S Mill said there is nothing but names. Marx’s problem is that he remained something of an Idealist.

But back to Piketty! It’s really good.

Piketty mentions that since China (maybe, it’s kinda opaque) does not allow capital to leave the country, it can institute a tax on capital more easily than Europe. Then he asks if Chinese billionaires really own their property. I’ll ask if wealth or property can’t move or seek the best return, is it really Capital? How many local restrictions can be placed before we generally agree it is not property, or maybe has become state capital?

Piketty:There are two main ways for a government to finance its expenses: taxes and debt. In general, taxation is by far preferable to debt in terms of justice and efficiency. The problem with debt is that it usually has to be repaid, so that debt financing is in the interest of those who have the means to lend to the government. From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them

Something the New Keynesians, however much they nod toward Kalecki 1943, just don’t get, or don’t want to get. It is probably even better to tax the 99% than to borrow from the 1%.

@89: Does anyone really believe that Chinese capital can’t leave the country? China is, after all, a weird combo of oligopoly, corporatist state, and kleptocracy. Capital is parked in all sorts of places (such as Vancouver) all the time.

I don’t think the problem of capital is so difficult. First, it is money value in a process of self-expansion. Second, it is concrete means of production. And third, it is authority over the production process, and a claim on any resulting surplus. Individually, these elements can be found in many social formations. It is their fusion that makes capital distinct.

Mainstream economics mixes up the first two moments of capital, and ignores the third.

Bob @91 You are forgetting MMT. Fiat currency countries can spend (up to a point) without needing to tax or borrow. That could also include grants to poorer countries if they were so inclined.

A couple of terrifyingly ignorant questions, but I won’t find out if I don’t ask.

1. When Piketty talks about (eg) a per capita income of 30000 euros he’s including, as it were, all capitas, right? (ie. the entire population, not just the amount actually earning said income.)

2. I’m feeling slightly frustrated by the consistent use of mean rather than median. I keep finding myself wondering what the guy in the middle is earning/worth, especially in a book that’s largely about inequality. Am I right that he’s not talking about medians (at least not in the 150-odd pages I’ve read) because they’re not the numbers that are most relevant to the arguments he’s making and the data he wishes to present?

Oh, and can I very quietly suggest that the episteme referred to by Bob M way upthread would be that of market fundamentalism/naturalism – the idea that any inequality is, by definition, desert, and that therefore any attempt to alleviate it would be tropical rain forest or something (whatever the opposite of desert is)?

I’m irritable because I’m listening to the horrible scherzo of Beethoven’s 7th, and have skimmed so many discussions of the meaning of capital that I’m inclined to wonder whether we shouldn’t simply describe capital as inequality.

To the degree that we can’t agree on a definition of capital we can’t measure it. Inequality is considerably more tractable. Politically and economically, it’s what matters. /pragmatist

@Ronan 68, @LFC 74

I can’t find it now, but I think Dean Baker’s points about China vs “the global south” are:

– Nowhere else in the Global South has the same scale of physical/geographic/human resources. Companies can shift some production from China to e.g. Vietnam/Bangladesh et al. but not all.

– Few of the alternative countries have the internal economic muscle to build the transportation/power infrastructure that makes production really cheap.

All that adds up to some kind of levelling up of wages – even if companies can move out of China to some degree, while labour is cheap elsewhere other factors are more expensive, so there is room for Chinese wages to rise at least to some degree and nothing companies can do about it.

Of course, the hard part for The West â„¢ is that rising Chinese wages in the short term implies a serious rise in imported inflation…

“Update: Dean Baker has modified his review to say that the Gates bit was a “throwaway line,” which helps imo clarify his real disagreement.”

No, he didn’t print the entire sentence; he’s still BS-ing.

No Kuznets Curve (Piketty) means no Environmental Kuznets Curve means no ecological modernization (“decoupling,” “green growth”) snake oil.

@ 108

Yeah, I was scratching my head about that too. “Improving ones condition” was what I came up with.

@mattski 98

In reverse order:
“capital” in general, in marxism, is what JW Mason (95) and Ze Kraggash (104) say.
This is different than ” anything people might want and be willing to trade for”, because people are willing to trade for consumption. For example, if you buy a house to live in it, that is not capital, but if you buy it to resell it at an higer price or to rent it to someone, you are not consuming but trying to make money, so that house is capital.

However, Marx believe that the general rules of capitalism only can exist because there is a big industrial sector, that produces a lot of plusproduct. That plusproduct then is shifted around in various ways and constitues the various profits, rents, interests etc.. The exact ways this plusproduct is shifted around isn’t completely clear, and this lack of clarity creates the so called “transformation problem”, that is a famous problem in marxism so I’ll leave it at that.
However the difference between “real” capital and the other kinds of capital is important because only “real” capital creates plusproduct, the other ones just redistribute it.

Re: houses: If you buy a house with a mortgage from a bank, then your debt is financial capital to the bank. If you buy the house as capital (e.g. to rent it to someone), then to you it is both rent capital (because for most houses a big part of the value is just the land, or the place if they are in a favourable location) and “real” capital (since you pay for the building and for manteinance). However during bubbles IMHO the “rent” part is prevalent, plus there is the problem of “speculative capital” that isn’t really considered in this partition of kinds of capital.
In this example part of your rents/profits would be shifted away as interest to the banks, so here we would have:
1) real capital: the fact that an house was built and is mantained – the creation of some real value;
2) rent capital: the fact that the house is, say, in Manhattan, so its price skyrokets well above the cost of production (but this is not really a creation of “real” value, because you just displaced someone else from Manhattan);
3) financial capital from the bank, that siphoons away some of your profits/rents (an example of surplus that is shifted around).

Re: commercial capital is unclear: That’s probably because the first three categories are from Marx, while this one as I presented it here is a tweak of mine.
In my opinion commercial capital, as I used the term, is a form of market dominance that gives to the owner some “rent-like” profits. For example, since Apple is very famous, it can sell iphones that are (imho) overpriced vs their competitor’s products. They can do this because in the past their products were way better than their competitors’, so they now have an “image” that has a lot of economic value. This is an example of commercial capital.
Another example is big distributors that can get premium prices from producers because they control most of the sales channels. While those two examples seem different, they are example of the same thing: since we are in a market that suffers from overcapacity, control over distribution becomes more relevant.
But note that a “market that suffers from overcapacity” and “low rate of profits for marginal new manifacturing capital” are two ways to say the same thing, so the big commercial “pseudo rents” depend on the fact that the manifacturing sector reached some sort of plateau (“overcapacity”).

Re: the usefulness of this approach.
The problem is the direction of causality:
– Is the rentier sector that is strangling the “real economy”? (IMHO Bruce Wilder’s approach), or
– Is the real economy that sputters for some reason, and this causes an increase in relevance of the rentier sector and an increase in the price of rentier capital and in the debt to income ratio? (my approach, that I assume is the marxist one).
Those are two very different approaches.

JW Mason #95: “money value in a process of self-expansion”

What do you mean by this?

I mean that it is a quantity of money that grows over time. This is the only aspect of capital you see if your relation to it is as an owner of financial assets.

RL,

For example, if you buy a house to live in it, that is not capital, but if you buy it to resell it at an higer price or to rent it to someone, you are not consuming but trying to make money, so that house is capital.

But it is also both. If you buy a house to live in you also have an asset which can be traded at a future date.

Briefly, I think a big problem for LTV-types is an inability to see that value is fundamentally ephemeral. Value is “what people want at any given moment in time.” It can fluctuate wildly, and often does. But what determines value is desire and virtually nothing else. Today I am willing to pay $20 for a Derek Jeter bobble head. Tomorrow, it turns out, I wouldn’t pay .50 cents for it.

That’s the way the world works.

Gawd, I hate being behind the curve. I’m barely started on Piketty, yet here come Galbraith and Baker hard after him, and snapping at their heels in turn, the ubiquitous Prof. DeLong. LAst in train, Ct’ers, ever au fait et au courant have already decided who deserves a drubbing, and who elevation to the pantheon.

Tiempo para gastarlas, ‘at’s what I’m in great need of now. Perhaps the organization of a seminar, if Prof. Piketty can be persuaded to participate, would give me time to catch my breath.

Meanwhile, I can’t see, on the face of it, how the Galbraith review has committed any great crimes against either common sense, or the reviewer’s art. Mea culpa.

@bob mcmanus 114:
Wow thanks!

@mattski 115
That is what Marx calls “use value”, and I think in modern economics is “utility”.
But price is a different thing, that depends on supply, and not just on demand.
This is the reason that I said that the LTV is really an equilibrium theory: at equilibrium, the quantity of the supplied goods will depend on demand and “utility”, whereas the price will depend on the cost of production, because on the long term the supply of most stuff is elastic and the concept of equilibrium implies this sort of “long term” thing.
But, I think that discussing the LTV here is way OT.

mattski: “The beauty of it, for me, is that keeping it broad also keeps it clear. Try to narrow it down and that’s when the trouble starts.”

“Without precisely defined sources, methods, and concepts, it is possible to see everything and its opposite. ” Thomas Picketty

RL,

But price is a different thing, that depends on supply, and not just on demand.

Yes, an important point. It helps us to think about price vs “value.” A price is relatively objective while value is highly subjective.

Apple’s visit to Xerox, and tour of their Palo Alto Research Center, was part of a deal between the two companies – it was in exchange for selling Xerox a hundred thousand shares of Apple. Apple then licensed the mouse from SRI, who had the patent. The claim that both Microsoft and Apple stole from Xerox always struck me as an effort to rewrite history in order to justify Microsoft’s actions.

I should also point out that Apple’s Lisa, released in 1983, used a mouse.

From mattski’s link @122:

human capital — our ability to work and produce in the future

Surely part of the reason is that two quite different ways of thinking of “capital” are running up against each other, and someone like Steve Roth doesn’t seem to notice this. Random Lurker or JWM or whoever can correct me on this, but from a Marxist angle, “our ability to work”, etc. doesn’t sound like any kind of capital, it sounds like what Marx calls labor power. Of course, labor power can be converted into capital, and one might think of it as capital in potentia (or something), but it just doesn’t seem like this is what “human capital” means in contemporary US discourse. Rather, it seems like part of a quite different and possibly incommensurable framework.

Or to approach it another way, Piketty talks at great length about what was “safe” capital in the age of Austen and Balzac: land and gov’t bonds. What made them safe? A navy and police force and limited suffrage? The drawback was the limited supply and fixed return.

So perhaps the secret history of the last two hundred years is to increase the amount of what DeLong likes to call his beloved “risk-free investment instruments.” How did, and how do, stocks become safe?

130: But not just armed conflict, but also the rise of a populist or socialist majority is a threat to capital, and much more common, with obvious examples currently available, mostly in their suppression.

My thoughts were more toward Gramsci than Che. And the Greenspan/Bernanke “put.”

It will be a couple of weeks before I have my hands on the book, so I’m running off reviews and comments. First, Piketty is clearly putting the political back into political economy – a long overdue move. Second, the discussion of “capital” and “capitalism” is, IMHO, more obscuring than enlightening. It’s a crossover from an ideological contest, not a useful set of analytic categories. I think Piketty’s definition of capital, as quoted above, boils down to something like “a claim on an income stream” (which could be by via property rights in goods or people, rents, enforceable rights aka feudal dues, tithes, government grants, shares in tax revenue and endless combinations and permutations of these) and his basic observation is that, absent political and environmental counter-forces, such claims will tend to grow faster than the streams themselves. History would support this contention.

Such claims are a feature of a structured (ie hierarchical) society, something for which mainstream economics lacks much theory. It will be interesting to see if the discipline grapples with or evades the issue – I would bet on the latter for at least the next few decades.

Whenever anyone attempts a sweeping look at the dynamics and trends of economic history, it is bound to expose how impoverished are our workaday economic frameworks, concepts and vocabulary. We’re not just confused; we’re asleep and dreaming, until jostled awake — then, still only half awake, then we’re confused.

In our somnolence, in our dream state, we didn’t ask, what is the difference between saving and investment? We didn’t ask, what is the difference between wealth and money? We didn’t ask, what is the difference between return on investment and economic rent? We didn’t ask, what is the difference between an investment in financial securities and an investment in a house or a factory or a law degree or a liberal education? We didn’t ask, what is money? or how does finance work in the economy?

I don’t think Marx had good answers. What’s good about Marx, though, is that he asked the questions. He wasn’t asleep. I am in the camp that doesn’t think he “believed in” the LTV, but I think he believed the oppression of the working class he witnessed, and which he found documented by Parliamentary committees, etc. Maybe, we should be economic phenomenologists for a while, and embrace the energy in the question, recognizing that the answers we have to hand are confused and confusing, but we don’t have to embrace those bad answers to recognize the good questions.

b. mcmanus @131:
But not just armed conflict, but also the rise of a populist or socialist majority is a threat to capital, and much more common, with obvious examples currently available, mostly in their suppression.

Are there all that many current (i.e., last 5 or 10 years) examples of “the rise of a populist or socialist majority” that capital has “suppressed”? It’s hard to discern a global rise of such a majority, though there are ‘anti-systemic’ movements here and there, while on a nat’l level such mvts are sometimes tolerated, if unhappily, by forces that in earlier yrs might have overthrown them summarily. For ex., if Venezuela under Chavez counted as such a “rise of a populist majority,” the US, after a somewhat feeble assisted-coup attempt, more or less resigned itself to his regime, and so too, it appears, did multinational corporations, at least for the most part. Correa in Ecuador has not been overthrown and his govt is pursuing a long-running lawsuit vs one of the big oil companies for environmental damage. And the Lula govt in Brazil cut the poverty rate by 30% over the 2000-2010 decade (see J. Abbott in Democratic Left, Spring 2014).

Thanks Metatone (103)/LFC (74)

Just to add – Baker’s argument seems to be that it ‘enhances the bargaining power of large sections of the workforce’ in the US, but even accepting rising Chinese wages and difficulties moving production to other low cost countries, how does that occur in anything but a trivial way ? Or at least for anything but the short term (until other low cost regions improve their infrastructure, the cost gap between the US/South increases again etc) ?
Disclaimer – IAMNAE

I’m about a quarter of the way through Piketty and I’m having a lot of trouble accepting the argument.
Piketty proposes two “fundamental laws of capitalism.” (Is it fair to be suspicious of anyone who claims to be the Isaac Newton or the Josiah Gibbs of economics?)
The first law is α= r x β, where α is the capital income ratio (income generated by the return on capital over the total income), r is the rate of return on capital, and β is the ratio of capital to national income.
You can rewrite this “law” as r = α/β. Or, (rate of return on capital) = (income on capital)/(national) income)/(capital)/(national income).
And through the magic of arithmetic, this becomes r = (income on capital)/(capital). Which is the definition of rate of return.
Piketty himself calls this an “accounting identity.” This seems to be a pretty word for a definition.
So the first “fundamental law” doesn’t appear to be a law at all.

The second “fundamental law” is β=s/g – the capital-to-income ratio is equal to the savings rate divided by the growth rate of the economy.
Piketty doesn’t claim that this is a rule that applies to every economy, he says it is only a state of affairs that economies must approach. In the short term it may not apply.
Not that “growth” means the percentage growth in income – the denominator of β. And “savings” means a contribution to wealth – the numerator of β. The reason the “law” applies only in the long term is that we need to allow the increases in wealth and income to overwhelm the pre-existing conditions of either lots of wealth, or no wealth.
This means that although β=s/g is not literally a definition, it is just as trivial a statement as α= r x β. I don’t doubt that the “second law” is more or less true in conditions of stable savings and growth, although if either savings or growth changes – and why shouldn’t they – then it will take time for the effect to establish itself, and there may not be enough time if growth or savings or both change again.
So it seems to me that the two “fundamental laws” are not laws at all and are fairly trivial assertions that hide more than they show.

@127: What I had understood by “human capital” is that many types of work need some kind of learning or training before a person is able to do them; when a person learns a new skill there is a labour input (the time of the person learning the skill, and — if there is a teacher — the time of the person teaching them), and the output is a person who has a new skill that they can then use (with the additional input of their own labour) to produce something. In a Marxian framework, this looks very like other instances of investing labour to create something that can then be used productively (e.g. building a factory) — hence its a form of “capital”. (But “capital” with the distinct difference that it’s very firmly attached to a particular person — the person who now has the new skill)

Bloix @ 141
Maybe I am misreading your comment :
1) Piketty’s “laws” are true assertions
2) Trivially so!
3) ???
4) They hide more than they show

As you guessed, I miss step 3. Is the hiding a consequence of naming the assertions “law”? In the use he makes of these assertions?

Is price relatively objective, while value is highly subjective*?

No: retailing firms have incomplete terms. Price of what? Call a detective! The marketers’ ads are compelling, and what they suppose they are selling includes ‘aspiration’ and ‘quality’ (sensation). But where are these spec’d? They’re not telling!

*Mattski (not addressing me): comment number one-two-three.

Human capital? Terminological nonsense. That which is inalienable cannot be “capital.”

“Human capital” is really more a topic for Corey Robin, a product of the reactionary mind as it were, a rhetorical trick to facilitate false attribution, that is to make plausible a false marrative, where wages and productivity are a just result of the independent power of personal virtue, rather than an epiphenomenon of social organization, social structure and political power.

FWIW, I suspect that ‘human capital’ can be included in what Marx called ‘the cost of the reproduction of labour’. He makes the point that this is contingent on social and economic circumstances.

Alot of bad history and bad policy has been created from assuming that the 1929 – 1971 period, ecompassing the Great Depression, World War II, and the post-war economic and population booms, as the norm when it was really exceptional and anomalous. All Piketty seems to doing is pointing this out in a fairly gentle way.

We have to get out of the habit of thinking that “it didn’t work between 1930s and 1970s” automatically shoots down any theory.

SusanC @143:

Right, that’s one way you could make sense of it, and I think Random Lurker may have suggested something similar upthread. But if one assumes a Marxist framework, Sandwichman’s 149 is about right I think.

158: Drum: “Or maybe war will once again take care of things. ”

Well, ok then. Something bigger and more horrible than WWII is coming, and what’s the big deal? Ho-hum.

That’s the freaking point, Kevin, the Marxian point if I may say so. Piketty wanted to make the catastrophes inevitable and choices irrefutable. (Drum does punt to robots, or cargo-cult Andromedans, or something else so he doesn’t have to confront the moral decision. Maybe something will come up?)

There is a profundo basso in the Piketty, just pretty constant quiet whisper:”And this will not end well.”

Inegalitarian slave-hell, the usual bored patrimonial billionaires playing with their military toys, radical socio-political change, or liberals can start taking responsibility and raise a little hell. Or billions will die.

‘Real Capital’ (econ.), after Smith has meant: stuff one makes more stuff with. Its roots in accounting for cash on cash mounting saw both merge in one monolith.

Marx wrote of capitalism, and noticed the gross fetishism: the social relations whose strict operations naturalised parasitism. He treated the term, in invective, as incorrigibly defective. From that induction stemmed ‘means of production’: equivocal language corrective.

But since, econ. usage reverted (though its use was still just as perverted). There is human capital; a boss needn’t sap it all, even when into goods it’s converted. We all know that Real is Best – so don’t throw it out with the rest. Just don’t use their system (Fuck ’em! No; ‘fist ’em!) it isn’t their stuff to invest.

If ‘capital’ means that activity*, actuality makes a captivity. Uncritical analysis: political paralysis. Bob’s comments† may have reflexivity. What starts out as faithful description decreases the scope of prescription – just like ‘laws of nature’, this fixed nomen-clature embeds a grotesque misconception.

The fallacy’s quasi-pathetic: that money and ‘rights’ are kinetic. The operant technique is cloaked in mystique – ungrounded in facts cybernetic. With ‘Capital’ a portmanteau word, we’re left to conclude the absurd. Contracts and plant: spot the difference! “We can’t!”. Time to stop buffing this turd.

Rejecting that false episteme isn’t ou-topian (or ‘dreamy’). Such ruling-class ‘verity’ has given us ‘austerity’ congenial to, say, Mussolini. The world, for the quietist Quinean or “leave all as is” Wittgensteinian, is not even strange – but, for Marx, it needs change: that’s the point, and it isn’t a tiny’un.

*”M-(C-)M” is one notation; M is magic; C, creation. This is not like Kant’s Deduction, nor an outline of production: it describes the money power (which infects the ivory tower). We’re furred up with filthy lucre, clinging like a mouldy mucor. Don’t believe the two-faced libel of the double-entry bible: if we will not model ‘money’, worker bees get sod-all honey.

†70 and 82 seek the myth and eat it too.

Limericky Dicky:
We’re furred up with filthy lucre, clinging like a mouldy mucor.

As Limericky Dicky doubtless knows, “filthy lucre” is Freud not Marx, though the latter did refer to “the economic sh*t” in correspondence.
See here.

@Bloix

Branko Milanovic’s review engaged with alpha/beta to some degree:

http://mpra.ub.uni-muenchen.de/52384/1/MPRA_paper_52384.pdf

A hammer is just a tool. It is not inherently capital although it may be capitalized. What makes that hammer “capital” is a discounted stream of future earnings imputed to it over and above replacement cost as it wears out.

The fact that a hammer has labour congealed in it doesn’t make it capital any more than a shoe or a hat is capital. The fact that skilled labour has labour congealed in it doesn’t make it human capital.

It’s precious how folks who are deeply offended by the very idea of a labour theory of value swallow rhetorical snake oil like human capital without blinking.

The fact that a hammer has labour congealed in it doesn’t make it capital any more than a shoe or a hat is capital.

Like Walmart’s inventory? Commodities are not capital?

“Capital is an accumulation of commodities” …Marxist.org glossary, “Commodity”

I suppose the process or conditions in which “a pile of loot” becomes “capital” has to do with the social attribution of exchange-value to a collection, inventory.

And oh yeah, I am expanding the discourse way hell beyond “economics” to social theory.

But your world in which a Harvard MBA, a handsome face and 75 inches of height, a humongous twitter following has no “objective” value and can’t be monetized makes no sense to me.

Bloix @ 154

I am even farther behind in reading the book than you, I’m afraid, though I paddle upstream a bit further each day.

My first reaction to r > g is that the extent to which r is greater than g is a measure of how usurious and extractive the financial system is. It may well be an historic “norm” in the sense of a state toward which the anacyclosis of civilizations regularly, though regrettably, returns: a stasis of extractive oppression.

LFC @ 162

Gary Becker

Within the academy, it was a vehicle of inter-disciplinary aggression, but in the popular political discourse, I think it has been largely as I said. It is one of those seductive terms, which invites people to project their personal notions, while overlooking the social uses being made of the argument.

B Wilder 175
I’d forgotten about Gary Becker.

Sandwichman 169
It’s precious how folks who are deeply offended by the very idea of a labour theory of value swallow rhetorical snake oil like human capital without blinking.
Speaking just for myself, I wasn’t swallowing it or opining on its validity; I was querying B Wilder’s account of its intellectual origins. One can of course discuss the history of an idea even if the idea happens to be complete and utter bullshit; one can also discuss the history of an idea without taking a firm position one way or the other on whether it is bullshit or not.

Has anyone read Lane Kenworty’s new book, out of curiosity ? On social democracy in the US ? I’d guess some here will hate it (he finds solutions short of apocalyptic, 1 billion dead war ; ) – I assume. I havent read it )

IMHO, a level of education (“skill”) above the average can be considered [mini-]capital, and this includes useless titles used as credentials (because, the economic system is not THAT smart, so error is part of the system).

A level of education that is presumed of everyone (say, high school), cannot be considered capital, but “reproduction of the working class”. Those people will be considered “unskilled” (though, obviously, they aren’t).

Education is so obvously a form of capital, that people take loan to have it, on the expectation that the cashflow from it will be higer than the interest the pay on debt.
Wether it is “real” capital or “pseudo-rent” capital I don’t know (I think that if enough people get an engineering degree, they will just do jobs that don’t really need those skills, but they would displace non engineer guys, so they would get a rent of sort, but at the expense of someone else, not really productive capital).

Human capital can be sold: it’s what schools do.

So why do the rich get a good return in slow growth times?

Simple.

Because we choose not to guillotine them.

Sandwichman @ 169

It’s precious how folks who are deeply offended by the very idea of a labour theory of value swallow rhetorical snake oil like human capital without blinking.

Slow down there, partner! “Deeply offended?” Where do you get that?

And what is it about the idea of human capital that you find so absurd? If you were shipwrecked on an island wouldn’t you be grateful if one of your two dozen companions was an MD? What if one of your companions was a gifted musician (with an instrument!)? Are you arguing that special talents/expertise aren’t special? Why would you do such a thing?

I think it is important to distinguish between human dignity, which everyone has, and human talent/skill/knowledge, which are not equally distributed. Denying that some people have more valuable talents and skills than others is a denial of reality. We on the left shouldn’t do that.

Here are some points that no one seems to have addressed:

1. ‘Human capital’ is inalienable—I can’t transfer possession of it to another person.

2. The only ‘place’ where human capital is marketable is the labor market. In this, it is like all other forms of labor power and like no other form of capital.

3. If indeed specialized training is a form of capital, then every unemployed and underemployed comp lit PhD out there is an owner of capital(!)

And people still want to insist that human capital is actually a sensical category within a Marxist framework? Seriously?

“Because we choose not to guillotine them.”

Speak for yourself.

Read what Marx wrote about the coat.

I did. I don’t see what you’re getting at. Rather, it sounds very similar to what I said, that capital is anything somebody might want enough to trade something for.

If I was marooned with a physician and a musician, the very last thing I would wish for is to have them administer their talents as “human capital.”

I don’t understand what you’re saying. You wouldn’t want the MD to contribute his knowledge and skill towards your physical well-being? You wouldn’t want to hear the musician play? You know, the ‘deserted island’ thought experiment is only meant to emphasize the value of these peoples special talents. We wouldn’t be “paying” for their services on the island because of the extremity of the circumstance. But in normal life we’re happy to pay for special skill when that skill is just what we want.

Subjecting the petite bourgeoisie to debt peonage in exchange for the college education, which is their status identifier is cruel, and is also unwise economic policy, because, by conventional standards of economic analysis, it should not be possible for the individual educated person to realize the additional income, to fund the debt incurred. Using terms, like human capital, and talking rubbish about the potential of technical vocational training, is suppose to obscure insights about the actual incidence of the increments to income, which arise from educating a population. Education, as an economic resource, is not a “skill” or personal trait; it is a common wealth, a characteristic of a society and culture. It is not a hero — a John Galt, Henry Ford or Bill Gates — it is a capable population: the vast number who are ready to become auto mechanics in 1910 or computer enthusiasts in 1980. And, the gains diffuse throughout the economy. Indeed it is landlords, who realize most of the gains from the collaboration of educated people crowding cities.

At best, a credential, as a rent-seekers’ device, might allow the individual to realize a return, but only at the cost of the sclerosis, credentialism entails.

Finally, of course, debt peonage must sink the individual into a pernicious combination of risk-aversity in major life choices, and desperate futility in minor ones (prayer & lotto). Desperate gambles, just as socially destructive are the alternative for the individual.

These are the details that make r > g.

You don’t understand what ‘transfer possession’ means.

If
You
Insist
Capital’s
Private Property
Or indeed a flow of income
We can use a thinner concept: ‘means of production’.
If there are human ‘means of production’, that might even help with the labour theory.
How else is one to explain the fact that skilled labour “creates in equal times proportionately higher values than unskilled labour does”?

@mattski:

Ok, look: you can define ‘capital’ in any way you want — you can define it as just any resource, or you can define it as anything anyone might want, or anything anyone might want enough to part with something they have in exchange. Frankly, you could define it as a dog’s ass. I am making a limited, conditional claim: if you accept anything like a Marxist account of capital, one that is undergirded by an account of a certain mode of production that brings with it distinctive class divisions, etc., then the notion of human capital is not particularly sensical. Leaving aside my very first comment on this thread, I haven’t even attempted to engage people who are quite unconcerned with the antecedent.

If capital and labor have ‘merged’, then labor can no longer organize in opposition to, or rise up against, capital

How has it been doing lately?

the only remedy is to take a giant match, burn everything down, and start again from scratch.

Oh, call it an initial negotiating position, or a threat to get them to run to Savoy with their jewels, or a 2 x 4 to get the liberals to stop looking under rocks for zombie Bill Haywood or the ghost of Frances Perkins. Or my promise to not pull the Beemer into the garage and tweet nervously with my 500 dollar pad when London starts burning.

The actual plan, one I am hesitant to disclose for fear of Vanguardism and stray heroics, is to a) go Bartleby, withdraw our services and stop producing anything, including discourse and organization, and b) declare communism, it will only come when the 99% say it is already here. That also involves as much expropriation is I can get away with and as much sharing as I can handle.

Oh, call it an initial negotiating position

But where is there even the class conflict in your view to allow for negotiating positions, burning of matches and other things, etc.? I thought everything had merged into everything else?

When these threads are read out as evidence at the ICC, I want my name redacted.

Bob, if I may, that’s preposterous. It’s packaging: “write games: be prosperous.” But once you unwrap it all, it’s labour and capital. And meanwhile our fields still need phosphorus.

Yes, of course, we should take heed of data – but don’t be a tech-babble fêter. Work away: reduce entropy; make words, light, or therapy. (But where did you get that potater?)

There is no such thing as ‘the cloud’. The web? Switch, current, wire (while allowed), not dissemination of pure information. (And still those fields have to be ploughed.)

But supposing we did all just make disembodied code (and eat what, cake?) – so what? – we create at a nil K/L rate – such a limit reveals no mistake.

BTW many thanks, LFC, for response @ remark 163. Hadn’t thought to check origin, but internet foraging reveals that it’s in Timothy.

Hammer, by itself, is a commodity. Labor-power is also a commodity. Engineering degree is a characteristic of that commodity. Your engineering degree does not yield any surplus value for you, and therefore it’s not your capital. It does get you a higher wage, but no surplus value, sorry.

“In some sense, s/he is getting – 50$ of “pure wage”, 30$ of repayment on his human capital, and 15$ of profits on his human capital – so ha is getting 15$ of surplus value/profits.”

I believe he’s just getting $95/hr wage, determined (theoretically) by the supply/demand balance for this particular kind of labor-power. If there are too many engineers (who want to do engineering work) and not enough box-haulers, the box-hauler may be paid more than the engineer. And then what’s his “human capital” he is “profiting” from? This is just idiomatic usage of terms.

Limericky Dicky 207
internet foraging reveals that it’s in Timothy

Interesting, thks.

#165- thanks, Metatone, I’ve started reading it and it appears it will be helpful.

@Bruce Wilder
Yeah, I understand this point. But my point is that capitalists arent really incresing scarcity: this happens, for example with patents, but I believe this is a minor thing.

For example, IIRC, during the housing boom the price of houses went up much faster than the actual rent of the same houses. My intuitive explanation for this is something like:
– the actual rent of houses is limited by the wage of workers, who are the ones who are going to pay the rent after all;
– since houses are a sort of rent capital, their price as capital is inversely proportional to the average rate of profit, something like =
[yearly rent]/[average rate of profit] = [price of the house]

So the rents are fixed, but the price of the house rises, because the other investiment options have an even suckier rate of profit.

In this story, capitalists didn’t really increase the scarcity of houses, but still the kind of rent/speculative capital that is in housing looks bigger, and so it looks like if it is the FIRE giant squid (Firesquid! a new supervillain!) that is profiting and sucking away wealth from the people.

However this story implies that, for “some reason”, the rate of profit that is supposedly determined in the manufacturing sector fell.

Why did it fall? This isn’t very clear to me.

Three different ideas:
– we reached a technological limit of sorts, so there is no demand for new [real] capital that exceeds replacement of old capital;
– it is a demand problem, caused by the fall in the wage share of income, caused by globalisation/politics;
– it is the capitalists who are increasing scarcity more than what I think, the Firesquid!

I think that all those three ideas are resonable.

Here’s an idea: people lie, cheat and defraud.

Money and finance is the complex system by which we keep score. It enables people to be rational in economic decision-making in the base and literal sense of calculating comparative ratios, and making material choices and setting the terms of cooperative activity, accordingly.

During the housing bubble, the price of houses went up much faster than the actual rent of the same houses, because banks gave out loans to people, who should not have qualified on the basis of their actual incomes, and then repackaged the loans as “safe” securities to be sold on financial markets. The institutional mechanisms, which should have kept housing prices and residential mortgage-backed securities prices accurate (roughly in proportion to local household incomes), broke down. Some economists might say this was a market failure involving asymmetric information and the corrosive effect of the (US) government’s guarantee of bank deposits (FDIC), and implicit guarantee of mortgage-backed securities (thru Fannie Mae, etc), and they wouldn’t be entirely wrong. I would say it was a failure of hierarchy, the failure to properly appraise the value of real estate, to rate securities, to underwrite mortgages, etc. — all carried out by institutional hierarchies of regulatory control. (And, some economists — the ignoramuses and corrupt, sociopathic bastards — would say that markets are magic and no one can see a bubble and these things happen as they have always happened and there’s nothing anyone can or should do.)

Anyway, the point is that money is an institutional mechanism for conveying information — feedback and signals — and facilitating calculation and making deals and contracts. It is artifice, but potentially very useful artifice in coordinating variously decentralized economic activity. Piketty’s “r” is a symbolic summary representative of the results from the operation of this artificial, institutional system. “r” is fake. a simulacrum of “g”. To get r > g requires that the artifice become parasitic and extractive; it requires lies and fraud in a system for generating and conveying information.

@Bruce Wilder
And why this epidemy of unheticness? And did the same happen in Ireland, Spain, Greece and Italy? Those four have four very different patterns of debt imho.

@Bob Mcmanus
I have a degree in “scienze della comunicazione”, which in english would be “media studies” or “communication” I suppose. When I was at university I had to study a lot of semiotics and sociology of communications and all this stuff.
We had also books about fascism propaganda in our history course, for example.
And here is the thing: If you see, for example, Goebbles’ “documentaries”, for example, they are really stupid, and wouldn’t fool a teenager. But the nazis had a monopoly of information, so in a few years they persuaded everyone. Something similar happens imho with commercial ads today: nobody really believes that if you use nespresso all woman will love you, but in the end we are so filled with this kind of message that we end believing it.
This kind of construction of reality is really a problem of comunication firepower, which requires economic or political power.
Goffman (another guy I had to study) wrote a lot about this construction of reality and framing, and used the concept of frontstage (when our significant interaction take place) and backstage (when we prepare the tools we will use during the frontstage).
But he never tackled, IMHO, the economic problem of the backstage: if you want to present yourself as a reliable succesful guy (frontstage) maybe you need an Harvard accent, and that is expensive (backstage).
All this long comment to say that, while at some level you are right that everything is a social contruct, the process of construction still follows the usual materialistic laws of power and money (or, the superstructure and the substructure determine each other, but the substructure is more equal than the other).

In fairness, most people use Microsoft style mouses(two buttons) not Mac style ones(one button).

Maybe that is just an historical accident, owing to MS monopoly, but many people find one button mouses maddening.

Patrick C @ 223

Steve Jobs thought a mouse should only have one button. He also couldn’t understand why there should be both a delete key and a backspace key. Or why application windows should have their own menus.

Two-button mice work quite well on Macs — that is, they invoke the same kind of context menus as appear in Windows. But, now, you can use so many different “gestures” that the computer can appear to be practically spastic. Progress.

and, which “epidemic of sluggishness” do you suppose he means to denote?

Oh, I have no idea. I was wondering about that phrase too, and just threw out what seemed like a possible approximation. Might well be wrong, obviously.

Good behavior doesn’t, generally speaking, pay well. Stealing reduces the price I pay, assuming I can get away with the theft. Selling a fake is a way to cut the costs of production.

It is enlightened self-interest to see that actual value to society or in the social aggregate from social cooperation depends on the integrity of the system of social cooperation, that is, that people cooperate within the constraints of rules, but a successful system of rules simply raises the payoff from breaking the rules.

I assume most bank robbers are political conservatives; they want money to buy stuff, and, if a bank robber were to think about it, I’m sure they would realize that money would be worthless, if everyone could and did steal it. They want to steal, but they want everyone else to accept money in exchange for goods.

I think the root problem with the Euro is that the folks designing, instituting and administering the system did not know what they were doing. But, there were plenty of smart people, who could see how to exploit the shortcomings in the system and its web of constraints. Economists, who preached a brain-dead “free-market” ideology of sweeping away institutional constraints, were particularly at fault for setting up the system to fail. In this, they got plenty of help from people, who would be in a position to benefit from the system breaking down. The breakdown of the system will pay off, just not for the society as a whole.

When you posit a “g” of return on constrained economic behavior, and compare an “r” from lying, cheating and stealing, “r” is going to be bigger.

Beyond that — and this was what I was trying to highlight — the returns to the social aggregate, the public good — “g” may not be easy or costless to privatize. Just because an investment has a positive net present value does not mean that political structures can be costlessly erected to capture the future payoff, and channel that payoff to fund a debt.

As a general proposition, because capital investment is sunk cost investment, and much of the return is an economic rent, there’s no reason to think benefits can be privately and efficiently captured and used to fund a debt, as a general rule. To naively imagine that good investments pay off privately is to fool yourself before you have even begun to think about the problem.

Mc Manus, #1

I haven’t read any of the comments on this thread yet, so this may be a moot point, but do you agree with the following assessment of Piketty’s position (as expreseed by Ives Smith and presumably Pilkington)? Is that what Galbraith really said?

“As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education. Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance. As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education. Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance.”

Having said the above here is a link to an interview with Costas Lapavitsas, someone I like along with Varoufakis. Part one of four on financialization. CL says it is all different now.

On the primary level, Gates and Waltons and Kochs have high incomes because they have buckets of money.

On another level, why do they have the money? Importantly, mostly stocks now, instead of land and bonds. This is where “technology and education” might come into play, as drivers of globalization and managerial capitalism and financialized capital reproducing and accumulating world-wide on lightspeed networks. Veblen is very much worth reading on the last Gilded Age. No, the stuff other than Leisure Class.

Collin Street:
r>g means that on average people are borrowing money for investments that won’t pay, yes?

As I understand it (n.b. not having read the book itself and w/ the ritual disclaimer IANAE), r>g means returns on investment exceed the rate of economic growth (as measured by GDP growth, presumably). This says nothing, afaict, about whether people are borrowing money to invest. Standing alone as a formula, r>g seems to me to be completely silent on the question of where the money to invest comes from (earned, inherited, borrowed, stolen, reinvested — standing alone, it doesn’t say). Second, it does not necessarily mean that on average “investments won’t pay”; r>g must imply that at least some investments do “pay,” otherwise r couldn’t be greater than g. I’m not sure how the “on average” thing works out, though, and the returns to the very richest presumably do skew the whole picture. Presumably most of the returns are flowing to the top 1% or .1% since they have so much more to invest to begin with (and, as Piketty evidently says, they get the best advice). But I don’t think C. Street’s implied summary can be quite right.

Btw, I believe no one has mentioned the latest Michael Lewis book that has been getting some media attention. Would seem possibly to have some relevance to aspects of this discussion.

C. Street said r>g means people are borrowing money to invest, and to my perhaps naive eye that appears to be a claim about “where money to invest comes from,” i.e., people borrow it. And r>g does not, to me at least, say that.

And what does “funding the difference” mean here exactly? This not like funding a trade deficit; we’re not in the land of accounting identities and all that stuff, are we? E.g. companies can, within broad limits, pay whatever they decide to in dividends, irrespective of the overall growth rate of the economy or even to some extent of their own balance sheets, no?

Well, “requires” is too strong a word. “It is facilitated by” would be better.

Trajectorily, my last to Bob*
Was a lazy, perhaps wayward, lob.
My main point is this:
Information, too, is
‘stuff’ input into a job.

I still, though, maintain my insistence
that we can’t put up any resistance
unless we decouple
the ‘base’ from the bubble
of claims owing it their existence.

The physical facts of production,
(including intangible-construction)
are conceptually distinct
from finance, though linked
(by contingencies apt for destruction).

Of course there is some complication:
For hierarchy and domination
Are social relations
Quite near the foundations
of finance-led wealth generation.

And though these aren’t strictly peculiar
(apprenticeships – were they unrulier?)
still perhaps proles are tethered
in mind and in method
despite Marley’s “don’t let them school ya”.

Money-thinking pervades, it is true
And may sometimes change what workers do†.
But concrete realities
Not vague generalities
are needed here – Bob, what say you?

*207 up above: disputation sent with love.

†That’s “what” and “how”: technique whereby, not “whether”, “when”, “who”, “where” or “why”.

RL 243
Thanks for link.
Nitpick: Looking quickly at it, I see: “By invoking capital right from the beginning, Piketty breaks ranks with most modern discussions of inequality, and hearkens [sic] back to an older tradition.” Should be “harkens,” I believe. Interesting that the editorial staff at NYRB missed this. Well, ****, they’ve got a thick journal to put out; they can’t be bothered w spelling.

On further reflection, that’s not quite right. r is the rate of return on capital stock, g is the rate of increase of the output, which is a flow. We need further assumptions about how g is related to the capital stock. If somebody can clarify in a few lines, please do.

Maybe but we have a stock on the one hand and a flow on the other. The economic output G (a flow) depends on the capital stock R, so G=R*e (e would be something like the capital productivity). Now part of G is consumption, part of it is capital replacement, and part is capital growth. g, the growth rate of G, doesn’t tell us anything about that partition and neither does r, the growth rate of R. It is intuitive that when r goes up, the part of G left over for consumption declines, but r>g is not in itself sufficient to derive what really happens. You need further assumptions about e.

I’m not well schooled in economic terminology but I think I can parse the algebra.

Thanks. My immediate response would be that there is no mention of depreciation, and the assumption that all capital profits are reinvested is patently false. I’m also not convinced that anything lying in a bank account (or stock or real estate portfolio) represents capital stock. Wall Street bubbles aren’t productive capital (=capital stock). But I gather that economists don’t know how to distinguish productive capital from bubbles so they just assume it’s all productive.

I also take issue with the designation of G as total income. G is total economic output. It’s not the same as income. Presumably economists assume that everything produced is enjoyed by somebody as income. But that can’t be right. When a capital owner spends money on capital replacement, that money is income for the workers who do the work but it is also subtracted from the capitalist’s profit = income. (And if we accounted for Natural Capital depreciation, as we should but never do, the whole model would be ridiculously inadequate.)

As to correctly accounting for stocks and flows: I have to disagree with your careless remark. A flow doesn’t turn magically into stock. Economic models really need to make a sharp conceptual distinction between the two, which they don’t. The Polish economist MichaÅ‚ Kalecki once defined economics as “the science of confusing stocks with flows.” (I remember reading something similar from Herman Daly).

@TM
I mostly agree on what you said (excluded the difference between stocks and flows- the two things are different but must be comparable IMHO).
However this r>g thing isn’t a logical certainity, but an empirical question.
Is really r>g in capitalist economies?
There isn’t a real hard reason for this, but Piketty, empirically, found that this is true most of the time (or so I gather from the various reviews). The point isn’t theoric, is empiric.

This is the second paragraph of B. Milanovic’s piece in The American Prospect summarizing Piketty’s basic argument:

Piketty’s key message is both simple and, once understood, almost self-evident. Under capitalism, if the rate of return on private wealth (defined to include physical and financial capital, land, and housing) exceeds the rate of growth of the economy, the share of capital income in the net product will increase. If most of that increase in capital income is reinvested, the capital-to-income [i.e. capital-income to wage-income (?)] ratio will rise. This will further increase the share of capital income in the net output. The percentage of people who do not need to work in order to earn their living (the rentiers) will go up. The distribution of personal income will become even more unequal.

Reading this passage drove me back to the chapter on “national income and product” in my (very old) basic economics textbook, which for some reason I still have. (I took the basic course but nothing beyond that, and it was a v. long time ago.)

To simplify considerably and cut to the chase, the textbk says that “net national product” (which I assume is what’s meant in the above quote by “net output” or “net product”) can be measured by: (1) consumption + investment + govt spending or (2) wages + rent + interest + profit. The two ways of calculating net product result in the same number. In Piketty’s argument, evidently, it’s the second approach to measuring ‘net product’ that is being used, and the argument, if I understand it rightly, is that the wage share of the net product will fall if the rate of return on capital (broadly defined) exceeds the growth rate of the economy. But this is still a bit confusing to me, since it would seem economists include earnings on or from capital (rent, interest, dividends, etc.) when calculating the growth rate of the economy, i.e. the growth rate of net product.

So, I get Piketty’s conclusion — the wage share of net product will fall; the rent/interest/profit share of net product will rise — but, without having read the book, I don’t quite get the argument about exactly why this happens (just saying r>g doesn’t answer this for me partly because, as just mentioned, r would appear to be included in the calculation of g as that is conventionally done). In other words, intuitively the argument sort of makes sense, but it makes less sense to me when I try to unpack what the “growth rate of the economy,” as it’s usually calculated, means.

I’m sure the economists here will be shaking their heads at this display of dumbness on my part, but so be it. (I’ve haven’t helped clarify matters much earlier, so I might as well continue as I’ve begun.)

p.p.s. In fairness, I suppose I did eventually have to imbibe a little bit of post-Econ-101 economics, but I never went back and thought about certain basic concepts as mainstream economists use them, and I never grasped them at a v. deep level to begin with. (I did pass the basic econ course, but suffice to say it was not exactly a highlight of my college transcript.)

Consider a firm’s balance sheet: one the left, assets — the stuff, which will be expended in the course of the firm’s business — and on the right, equities and liabilities — what and who finances the assets. The equities and liabilities are the legal claims to ownership of the future cashflows of the firm. These claims are “capital” and income from them is capital income.

If we think of capital as being the assets of the firm — the stuff that will be expended to generate revenue — we might well take a benign view of the role of capital in the economy. Capital investment is investment in assets, which anticipates an increase in the value of the assets by the operation of the firm. The firm purchases inventory, anticipating an occasion to sell from the inventory at a profit. The firm purchases production equipment, anticipating an opportunity to expand output by using the equipment to increase the productivity. Capital earns a return, by increasing future output. A $100 could buy labor services to produce a 100 widgets today, or equipment to produce a 110 widgets tomorrow. The return on capital — the ability to pay interest to the provider of equity finance — rests on the potential of capital investment, incorporating technological knowledge, to increase output in the future.

The r in r > g seems to represent that potential in capital to increase output. But, the “> g” calls this optimic view into question. r > g says the rate of growth in capital is greater than the rate of growth in output. Capital isn’t, in this scenario, a rising tide raising labor’s boat; capital is swamping labor’s boat.

r > g, to the extent of r – g, isn’t capital financing a factory, which increases output and productivity, such that workers get a raise, and consumers see falling prices. It’s capital financing a payday lender.

The ugliness of r > g is logically necessary, at least for r > g as a sustained long-term trend. It is saying that the equities and liabilities side of the balance sheet — the side of the balance demanding payment, demanding income from capital — is growing, even while the productivity of the asset side in producing increases in output lags.

LFC @ 240 wrote, “. . . it seems to me that isn’t necessarily so. It requires, rather, corporations making decisions to place their shareholders’ (short-term) interests above everything else.”

To which I would say, yes. Exactly.

@258:

That’s a confused mash-up of Marxian and Austrian marginalist conceptions. In the first place, savings don’t produce investments and aren’t deferred consumption. Investments produce savings, (in the “real” sense, of unit-cost reductions, productivity increases or efficiency, increases in actual and potential distributable productive surpluses). That’s why there is a system of banking and credit: to finance the building of future production capacity, without deflating current production and consumption. And why that banking system is leveraged: it creates credit-money, beyond the “hard” money that would be currently in circulation, (from ongoing production), which is always a bit fictitious and speculative, and such “financial assets” will vary in their “moneyness” not just with the returns from actual productive investments, but in relation the the varying degrees of “moneyness” in the outstanding stock of “financial assets” and the cyclical claims on the realizations of productive investments that they seek to lay claim to.

Nor is production merely a means to hedonic consumption: not only is production at all levels constantly ongoing, (such that interest rates are not simply expressions of time-preference, but reflect the various states of the ongoing system), but production shapes the (social) world in which we all must struggle to survive and the (projectively constructed) human and natural ends we subserve. It’s not just that” you can’t eat what you don’t grow”, it’s that you don’t grow what you can’t “eat”. (Man ist was er isst).

Nor is the “value” of capital determined by its “scarcity”. (One could argue that its “scarcity” is produced by power-relations, though it doesn’t follow that changing those power-relations would eo ipso solve all the systemic functional problems that we face). And certainly nowadays there is no global scarcity of capital: the Fed has been handing out money like candy to the elite financial system, and globally corporations have some $3 trillion in cash sitting on their balance sheets. What is “scarce” is perceived opportunities for real productive investment, due to multiple intersecting dysfunctions, not least of which is an over-supply of “investable funds” facing a vast accumulation of unrealizable debt-claims, too much capital facing too little productive employment. This looks to me like an over-accumulation crisis in fictitious capital, not “scarcity”. And you might ask yourself, why is it that there always seems to be a “scarcity” of capital, (even when there isn’t), while labor is never scarce, but always in excess supply. There’s some basic “mystification” lurking there.

At any rate, it seems to me on a “deeper” level that there is no shortage of work to be done. If we are to accomplish the great transformation of advanced production economies in the face of growing resource constraints and environmental limits into a sustainable system of efficient energy and resource use, then the “value” of vast amounts of capital, both as physical stocks and infrastructure and as the pile of financial assets claims laid on top of them, will have to be “destroyed”, even as vast amounts of real investment and its financing will have to be undertaken to replace and renovate the “destroyed” system. It might be that dilemma that has given the global capitalist system pause, in the face of the unsustainable imbalances and restructuring needs that it itself has created.

Well, just to make some brief comments on Marx and his deployment of LTV. It was supposedly the “transformation problem” that proved Marx mistaken and inconsistent and thus his entire 3 volume elaboration nugatory. But that’s because he was mis-read as requiring labor-values be transformed into monetary cost-prices of production, which are the actual phenomenal basis of investment decisions, (once the “assumption” of all sectors having equal organic compositions of capital was dropped). But actually both value and cost-prices terms have to be so “transformed” at the same time and in the same way. So regardless of what exact interpretation or solution you attribute to Marx, he was actually saying something more interesting than a technical puzzle: cost-prices of production can’t be determined without first determining the distributions of surplus-value, (between profits, rents, interest, taxes, etc.), that go into their determination. IOW he is suggesting a rather complex account of price-determination that involves re-distributing value between different sectors, (such as, e.g., with the productive quasi-rents of oligopolistic industries, which is very much part of his account of the tendency toward ever-increasing concentration of capital), in order to arrive at a tendency toward a putatively uniform equilibrium rate-of-profit. The reason that Marx was apparently so relaxed about his “solution” is because, given constantly changing technical conditions, the cost-prices of production, on which momentary investment decisions depend, will constantly be changing around, (unlike Ricardan “natural prices” to be solved in long-period equilibrium), whereas Marx is concentrating on the overall systemic outcomes or tendencies of such myriad momentary decisions. Which brings out that Marx’ deployment of LTV is not just making a fundamentalist claim that labor-power produces all “value”, but rather is about the interactions of labor-power with technical change within a complex account of the dynamics of capital accumulation (and concentration). And the class struggle between labor and capital is not just about the distribution of income, but also and very centrally about control over the production process and the public and social ends it should subserve, including its overall (re-)investment function. And contrary to RL above, I don’t think that Marx was offering an “equilibrium” account, but rather was using those classical premises to undermine them, offering an account of long-run dynamic disequilibrium and the accumulating crisis tendencies that would accompany it. That is at least a more interesting account of price formation and dynamics than simply explaining nominal prices by means of nominal price, tautologically, because short-run supply and demand equilibrium “at the margin”.

Mattski above. Words have various uses, and just because in everyday use, one can “rent” an apt. or car, or furniture, or TV, doesn’t mean that you have grasped the economic concept of “rent”. RL made a mistake when he attempted to explain it through Marx, (who has a rather murky two part discussion of the issue). It’s much easier to go back to Ricardo’s account of land rents, where the economic concept of rents was first clarified and explained. (B.W. is often referring to a much more complex account of rents, basically what Marshall called productive quasi-rents, that accrue to large-scale oligopolistic production). But, please, take the time to look some things up, before adventitiously opining.

As to Piketty, whatever he adds in terms of accumulated and analyzed data, it doesn’t seem that theoretically he’s gone much beyond Sraffa. Sraffa has a theorem that given to identical economies with physically identical capital stocks and outputs, the one with the high rate-of-profit and thus inversely the lower distribution to wages, will have a “negative Wicksell price effect”, which means that the value of capital, of the capital-to-output ratio and of output will all be “higher” when expressed in nominal prices, despite being physically identical. (Needless to say, this is not any actual comparison between two economies, but between the same model with a different parameter specification, and doesn’t “prove” anything about the real world, but rather is an abstract heuristic exercise). But this abstract point actually makes sense in “market” terms. Since prices and wages are approximate inverses, (high wages = low prices and vice versa), low wages and high prices will result in increase in nominal prices for both capital and output. And comparisons between physically similar sets of capital equipment with differing rates of profit are occurring on stock and financial markets all the time, and obviously “the market” will pay a much higher price for the more profitable set. But it seems to me that the heuristic-critical point here is that capitalists in general will always be trying to engineer such a nominal price illusion in their favor, regardless of the economic conditions or circumstances they might find themselves in.