Political Economy is Political

by Henry on May 27, 2014

The best explanation of the current Piketty-Financial Times brouhaha was written by Mike Konczal a few weeks before it actually happened.

As Foucault argued, the ability of social science to know something is the ability to anthropologize it, a power to define it. As such, it becomes a problem to be solved, a question needing an answer, something to be put on a grid of intelligibility, and a domain of expertise that exerts power over what it studies. With Piketty’s Capital, this process is now being extended to the rich and the elite. Understanding how the elite become what they are, and how their wealth perpetuates itself, is now a hot topic of scientific inquiry.

Many have tried to figure out why the rich are freaking out these days. Their wealth was saved from the financial panic, they are having a very excellent recovery, and they are poised to reap even greater gains going forward. Perhaps they are noticing that the dominant narratives about their role in society—avatars of success, job creators for the common good, innovators for social betterment, problem-solving philanthropists—are being replaced with a social science narrative in which they are a problem to be studied. They are still in control, but they are right to be worried.


Political economy is political – a fact which many of its most prominent practitioners have ignored, or actively sought to bury. Although it appears technical, it starts from a set of political premisses. It radically emphasizes questions of (purported) economic efficiency, and discounts or actively deprecates questions of who-gets-what, even though theories that emphasize distribution have microfoundations that are quite as solid as the dominant mode of economic thinking. Furthermore, the dominance of these economic theories has had profound political consequences, as scholars as different as Jack Knight and Jim Johnson, Mark Blyth and Steve Teles have documented in various ways.

The reason that Piketty’s book has gotten such a reaction – both from its advocates and its critics – is because it threatens to upset the current equilibrium in economic thinking. As Mike says, it threatens to open up new questions – questions which are profoundly and politically uncomfortable for dominant approaches in economic thinking. The result is that it isn’t only the rich that are freaking out. I would guess that one can explain the immediate reaction of 85% of economists and public writers to the book by looking to their priors on this question – whether they like to emphasize efficiency questions over distributional concerns, or vice versa (another 10% can be explained by whether the writer in question thinks that he/she and his/her mates do or don’t get sufficient citations and respect). People who might have found the book interesting had it been an academic exercise, and perhaps even agreed with large parts of it, are freaking out because they worry that it has serious implications for political debate. If people start debating whether capitalism is inherently rigged, so that those with a lot of capital will naturally do better than those who won’t, … well who knows where they might go next.

To be clear – this doesn’t invalidate criticisms of Piketty’s book, any more than it means that his arguments are necessarily correct. Even if the actual reason why people are casting around for Devastating Critiques is because they don’t like the book’s political implications, they may actually find good criticisms, and uncover real mistakes. Motivated reasoning, if properly harnessed, can be epistemologically very valuable. That methodological critics of Piketty (and people insistently suggesting that there’s nothing very interesting to be learned from studying the distribution of wealth) nearly all clump together in one ideological camp, and people defending the methodology clump together in another, doesn’t mean that the dispute between the two isn’t useful. Argument about politically divisive topics is only disinterested in rare and isolated instances – yet it still can have great benefits. What it does mean is that the dispute, in the end, is a directly political one – over what constitutes the proper subject matter of economics and the other social sciences. Plausibly, it’s the people who are least willing to acknowledge the political aspects of the debate who are most completely captured by them. Practical economists, who believe themselves to be quite exempt from any political influences, are usually slaves of some defunct political philosopher.

{ 177 comments }

1

Shirley0401 05.27.14 at 3:13 pm

“The reason that Piketty’s book has gotten such a reaction – both from its advocates and its critics – is because it threatens to upset the current equilibrium in economic thinking. As Mike says, it threatens to open up new questions – questions which are profoundly and politically uncomfortable for dominant approaches in economic thinking.”
As a complete non-expert, this is what’s struck me about the attention Picketty’s been getting. (I think I “get” r > g, conceptually, but I have to tap out as soon as someone raises concerns about the models or math.) Suddenly, we have people with valid credentials suggesting that the underlying assumptions upon which we’ve built our economic systems are worth investigating. If people are willing to take seriously the possibilty that distribution matters as much, if not more, than efficiency — and that optimizing for efficiency won’t result in some sort of of golden mean — that means not only moving the goalposts, but maybe fundamentally changing how we keep score.
Personally, I find myself incredibly interested in, and encouraged by, the conversation that’s being had. There seems to be a real possibility we’re moving towards mainstream acceptance of the idea that maybe we’ve developed our economic priorities around a less-than-optimal framework. It’s hardly surprising that there would be some pushback, especially from those whose reputations depend upon the validity of that possibly-faulty framework. (That the possibility it might also affect them on a personal level would influence their judgement is something else, and I’ll leave that to the Guardian to consider.)

2

Cade DeBois (@cadedebois) 05.27.14 at 3:28 pm

“If people start debating whether capitalism is inherently rigged, so that those with a lot of capital will naturally do better than those who won’t, … well who knows where they might go next.”

Systems of privilege rely on controlling the narrative, by making sure the more “creditable” voices are only those who benefit from that system while anyone hurt by the system is branded too biased or flawed to be listened to. If we allow those people who have been systematically dismissed and excluded from the discusssion–women, disabled people, POC, people who work in fields normally not blessed by a capitalist economy–by asking these kinds of questions–like, whether capitalism really perpetuate privilege, as opposed to assuming people who are economic “losers” have only themselves to blame (a common way of discrediting their voices)–then they lose control of the narrative, a narrative that has allowed them to justify the wrongs of the system. So yes, people be freaking out. They ought to be. This is how revolutions start.

3

Sandwichman 05.27.14 at 3:32 pm

Frederic Harrison summed it up eloquently in 1872:

Political economy professes to be a science based on observation. But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients. In practice this magazine of untruth escapes detection for two reasons. One is that the facts relating to labour are invariably seen through the spectacles of capital. … The second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed.

4

William Berry 05.27.14 at 3:53 pm

“Political economy is political”.

Aphorism of the year, so far!

5

marcel 05.27.14 at 4:12 pm

William Berry wrote:

“Political economy is political”.

Aphorism of the year, so far!

And very economical too.

6

A H 05.27.14 at 4:19 pm

The Giles critique of Piketty in the FT is really weak. Maybe Piketty committed some mistakes in collecting and preparing his data, but a far worse sin is to just take different raw data series and combine them together with no analysis or preparation, which is exactly what Giles does in his graphs that supposedly prove Piketty was wrong. I bet there were some interesting editorial discussion about how hard to push this.

7

Vladimir 05.27.14 at 4:25 pm

It would be interesting to compare the reaction of the various pundits in regard to the discovery of errors in the work of Rienhart and Rogoff vs. Piketty. I’d put my money on one’s priors determining the reaction, with the role reversal that implies. On the issue of political economy being political: Branko Milanovic , who makes studying inequality his main area of research has written about an experience he had talking to someone from a well funded, well known think tank. The official told him that he could fund research about reducing poverty – wealthy donors do like to fund such things – inequality however was another matter. The rich don’t like to fund research that might delegitimize the basis of their wealth.

8

Rakesh Bhandari 05.27.14 at 4:43 pm

I posted this reply to Konczal’s piece at Boston Review:

This is an insightful review.
I think there is an additional problem with Piketty’s measure of r. It is an aggregate measure of return across all types of capital or assets.
But consider this piece by Justin Fox

http://blogs.hbr.org/2010/11/the-real-story-behind-those-re/

Here Fox shows that while the rate of profit and the mass of profits can appear to be at historical highs, the rate of return on domestic non-financial investments can still be low. Profits are being made on foreign operations and by financial firms. We have to disaggregate capital to see this. Piketty does not do this.

But if the r not on capital in general but on domestic, non-financial or industrial investments is not high enough to motivate capital accumulation–and this seems to be the case in the US–we get not patrimonial capitalism in economic equilibrium but an economic crisis or secular stagnation that can only be resolved if capital can restructure industrial and labor relations to raise again not r in general but r on domestic industrial investments.

There is simply no industrial class conflict in Piketty’s model, It’s of course in industrial class conflict to raise r through speed-ups and wage reductions that capital reveals itself not to be a quantifiable thing with a marginal physical product but as a class relation.

Piketty himself admits that r was sufficiently low circa 1910 to have Germany and France fight for investment outlets in Morocco. He draws from Lenin! Wasn’t expecting that.

Tthe risk adjusted rate of return on capital has been low as Tyler Cowen notes, and that profitability on even extant non-financial domestic industrial investments is low if Fox is right, to say nothing of anticipated profitability on marginal investments, which is really what matters. If that is low, then firms will use cash to buy back their own stock and merge and perhaps even speculate when they are not investing abroad.

Piketty is so focused on r being relatively higher than g that he may neglects whether r is robust enough to sustain real capital accumulation; r can still be positive, and even greater than g, and still not robust enough to sustain real capital accumulation.

A second big problem may be Piketty’s non-engagement with Branko Milanovic though Milanovic has reviewed the book favorably. Still Milanovic shows that the rise of inequality within nations has been dwarfed by the rise in inequality between nations since 1850 and that therefore the most important form of capital that someone can inherit is not property but citizenship in a wealthy country. Piketty has little to say about global inequality.

All that said, Piketty’s work sets a whole new context for understanding the rise of social Darwinism in the 19th century. With the increased importance of inherited wealth, it was ideologically important to assert that it was being inherited by those who had the natural abilities to make use of all that rentier income. Property followed the natural talent in the blood, it was asserted; when in fact the myth of blood was created to justify the inheritance of property. The biological followed the social.

Interestingly Piketty does not mention Galton, Sumner and that horrid cast of characters in Andre Pichot’s The Pure Society.

9

Plume 05.27.14 at 5:01 pm

I can see this going to extremes. Congress, under pressure from the NRA and the gun industry, made it basically impossible for the CDC to do gun violence studies. There are hundreds of laws on the books that make it next to impossible to expose polluters via the study of chemical compounds they use. “Trade secrets” are legion, and pretty much make it illegal for agencies like the EPA to do their jobs. In some states, people can be thrown in jail for exposing horrific practices used on animals, especially “beef cattle,” or even saying “bad things” about those practices.

One day, perhaps, studies like Piketty’s will be subject to similar restrictions, silenced, legally. If that sounds too much like a bad dystopian novel, again, consider what has already been done in the name of protecting corporations and the rich.

10

Bruce Wilder 05.27.14 at 5:22 pm

methodological critics”

The conservatives in political economy have won, because they have always fought for, and over, methodology. Respectable methods are what make work, “rigorous”. What’s respectable has been determined largely by aggressive conservatives. And, respectable methodology has always provided convenient excuses for ignoring reality. Centrists have often taken reality for granted, never really pressing the need for a critical method to discern what reality is, often taking the conservative methodological programs seriously, accepting them for the sake of argument, without effective counter criticism.

The FT critique exposes this standard division. First, there’s the claim that the criticism is “methodological” — technical, arcane, something experts may testify on and have respectable disagreements among themselves about. The mandarins are donning their robes, and we hoi polloi must look on in hushed silence as they debate among themselves. Surely, we are entitled to any opinion approved by at least some of the robed wonders. The slander of “flawed methodology” is meant to make rejection of Piketty, and rejection of the reality he’s shone a light on, respectable. “Spreadsheet error” — where have we heard that before? — oh, well, that’s that, no need to read the book, I saw the movie.

The second move manifest in the FT critique — more ridiculous on its face — is to simply claim that re-working the numbers reveals no trend in wealth inequality. It’s a remarkable indication of self-confidence, a bold bluff in the face of 30 years of newspaper headlines and numerous manifestations in everyday life, but also a clear indication of the ambition of the right, an ambition that has been realized before.

It is the second move that potentially turns this into the Monty Python dead parrot routine, and conservatives depend on the centrists not wanting to be part of a joke, of wanting “serious” debate so badly, that they will overlook the most blatant indications of bad faith, with solemn declarations about the epistemological value of motivated reasoning, and so on.

We know where this path leads. There’s no limit to the madness.

11

Jim Harrison 05.27.14 at 5:26 pm

You write “Motivated reasoning, if properly harnessed, can be epistemologically very valuable.” Yep, but in this instance I predict it won’t be or won’t be for very long. We’ve seen how this plays out in the climate change wars where denialist critiques of mainstream climatology have long since become mere PR devices. Unfortunately, we can expect the intellectual discussion of inequality to be even more distorted by interest than debates about climate because the powers behind the sides are, well, unequal. There were business and government groups that wanted to prevent or mitigate global warming for their own benefit, and these balanced the other interests. I don’t expect a similar correlation of forces when it’s every kind of privilege that is being made uncomfortable. I recall Freud saying something to the effect that the voice of reason was soft but persistent. That may be; but money is also persistent and it’s very loud.

12

Main Street Muse 05.27.14 at 6:10 pm

“The reason that Piketty’s book has gotten such a reaction – both from its advocates and its critics – is because it threatens to upset the current equilibrium in economic thinking.”

I cannot believe it took this book to “upset the current equilibrium in economic thinking.” I would have thought the crash of 2008 might have encouraged such an upset. This was a crash created in part when the US housing market became chips in a new form of black jack developed by “innovative” and well-paid bankers. I would have thought that such “innovation” in finance would have forced economists to recognize the ideology of models is not based in reality, that just because housing prices never tanked, astronomical rises in housing prices might not be sustainable, etc. and so on.

It is wrong to say that “people with a lot of capital will naturally do better than those who don’t” – there is nothing natural about the growing income inequality. The political economy tipped many years ago on the side of theories like “trickle down” and the Laffer Curve. And what do we see as a result? Wealth flowing upward, a pretty fountain of money nearly as big as that diamond of Fitzgerald’s. None of that money flows downward, however.

Are there economists who fervently believe capitalism (as practiced in the US) is NOT a rigged game? Shame on them. Super-PACS pick the candidates who win, not voters. And today, SCOTUS protects corporations, not citizens.

For an idea on where people will go next, Google the Moral Monday protests in North Carolina…

13

adam.smith 05.27.14 at 6:11 pm

I couldn’t disagree more with Bruce on “methodology”—getting the facts right is important in its own right, but it’s also important because overall the left tends to be on the right side of a lot of economic data.
What Giles did – working through spreadsheets and their sources – is enormously useful and should be rewarded. Even peer review practically never provides that type of scrutiny. Sure, you’re more likely to spend hours&hours pouring over Excel if you’re hoping to find something, but that doesn’t make it wrong (the two main sources of “hoping” is a graduate student hoping to score a publication or someone ideologically motivated. It seems that, e.g., in the less publicized data dispute about AJR’s settler colonialism data it was the former, in the R&R case it was a mix of both).
It’s also mostly _not_ arcane – Giles explains everything he identifies as errors in pretty lay terms.

In this case, specifically, the only meaningful difference in the data – i.e. the development of wealth inequality in the UK – is about how to chain different data series and that’s really a crucial issue if you want to patch together long-term data and we should care about getting this right.
And if it turns out that wealth inequality in the UK hasn’t actually increased, that would be a really important thing to know, especially given the fact that no one denies that income inequality at the top has increased dramatically: it could be that it has increased, but the British wealthy are just spectacularly good at hiding it. It could be that there are some policies in place that do decrease wealth inequality – if so, we’d want to know which, etc. etc.
Like Piketty and Krugman I’d be shocked if Piketty’s general wealth-trend findings turn out to be false, but because I’d be shocked, I’d really want to know if that were the case.

14

David 05.27.14 at 7:14 pm

If you look at what Piketty actually says, much of it is not especially radical. But the problem (and it is a methodological one, albeit at a higher level of abstraction) is that someone is even subjecting current economic orthodoxy to actual empirical validation by, you know, researching and presenting data. So the smug assertion that a rising tide lifts all boats is heavily qualified in practice by the pragmatic findings that the tide hasn’t risen very much, that it depends on how many boats you have, and that a lot of people don’t own boats anyway. As Piketty notes (with some understatement) a lot of people don’t realise just how incredibly artificial the assumptions that contemporary economists make actually are. He is working explicitly in the French social sciences tradition (he refers to a number of his illustrious predecessors) which implies long and painstaking collection and analysis of data over extended periods of time. Imagine if other people started studying economic issues using the same methodology? Where would it end?
There’s one other area that’s important as well, politically, and that’s agency. Apologists for the current system like to say that it’s natural, it’s just the way things are. People get rich by making intelligent economic choices and working hard, and successful companies are those that best interpret market signals and follow them blindly. Piketty makes it very clear that the real reason for the increasing inequalities in ownership of capital are firmly rooted in actual political decisions about taxation and spending. Which means, of course, that in principle those inequalities could be reversed in the same way …. What a thought.

15

Bruce Wilder 05.27.14 at 8:11 pm

if it turns out that wealth inequality in the UK hasn’t actually increased, that would be a really important thing to know

“if”?!?

especially given the fact that no one denies that income inequality at the top has increased dramatically

“no one denies” ?!? (makes that “if” strangely ironic)

My point was that there’s a danger of too much in the way of concessions of good faith at the center and on the center-left turning this whole discussion into an exercise in agnatology (i.e. ” the study of culturally induced ignorance or doubt”), and it seems to me that the usually reasonable adam.smith is demonstrating that danger in his comment.

It’s not reasonable to suppose that wealth inequality has not increased. If you concede that kind of unreality, even in the subjunctive, you’ve passed thru the looking glass. And, it is also not reasonable to suppose that there are not plenty of people, whose political druthers or self-interest, won’t lead them to deny it, if they are given any chance. There are plenty of economists, who will happily deny the existence of involuntary unemployment, even while millions go without work or income, or deny the failure or inefficiency of financial markets, even in the wake of a global financial crisis. The precedents are clear. There are no limits and there are consequences.

I’d be really shocked if Piketty’s general wealth-trend findings were not “false” in some particulars or at some level of discrimination or resolution. Piketty’s said as much, in acknowledging that there’s quite obviously a lot of measurement error in the various series, and judgment calls in the process of stringing them together. And, that’s not to mention the deep conceptual issues about what constitutes wealth or capital and what we think the nature of the thing we are measuring is.

My view is that methodology is very, very important — too important to be left to lunatics like Robert Lucas or Edward Prescott or — in earlier eras, Milton Friedman or Vilfredo Pareto (or really scary, Mises). It isn’t enough to just claim that “no one denies” whatever seems obvious in the large. It isn’t enough to claim that financial markets are obviously not efficient or that prices are obviously sticky or that wealth is obviously increasing in size relative to the economy and in concentration (Piketty’s two claims.)

If we acknowledge the obvious, and then try to measure it — to turn subjective perceptions and experience into common, objective measurements, we are creating a shared reality. And, as the OP eloquently explains, then it becomes a social science problem to solve, and a problem that politics cannot ignore. That’s what’s at stake here. Method matters, because methods are how we get measurement, and measurement is subject to caveats and doubt and error and judgment and conceptual prejudice, so we take methodology seriously, but conservative hacks to be jokes, or we lose.

Done right, method and measurement take us from vague and subjective perceptions to a common understanding, informed by detailed understanding. It equips institutions of governance with competent staff and conceptual frameworks. If it all becomes a dust cloud of denial and confusion, we end up with a social science and politics of learned helplessness.

We’ve had thirty or forty years of a politics based in large part on a successful effort to debase academic policy economics, so that people do not hold the government responsible for the performance of the economy. And, the result is political cover for disastrous policies, and no political consequences for the purveyors of disaster. (Krugman had a piece today on how bizarre ideas about economic causality drive Euro policy forward from catastrophe to serial disaster.)

16

adam.smith 05.27.14 at 8:50 pm

Bruce – as Piketty says, out wealth data is incredibly bad. I’m not going to assume bad faith in any attempt to take a closer look at Picketty’s findings in that respect. Because the data is so bad, I think it’s certainly possible, if unlikely, that we’re not seeing much of an increase in wealth inequality in some cases.*

Our income data, on the other hand, is good enough to declare anyone who doubts that income inequality is increasing in the UK (and almost all other advanced industrialized countries) outside of fact-based discourse.

* and I also don’t think the FT is exactly the opinion pages of the WSJ ideologically, nor does Chris Giles seem like an ideological attack dog, though both he and the FT certainly skew neoliberal.

17

shah8 05.27.14 at 8:52 pm

Bruce Wilder, one of the frustrations with Piketty that has been sounded ever since the start of talk is that Piketty demonstrated through standard economic lenses things that heterodox economists have always known or could show to be valid for whatever constraints they name. Even then there was that peculiar “lump of capital” fallacy that “rigorous” economists always say “sure” and shrug it off, embedded in Piketty’s analysis.

I don’t really think that Piketty is all that revolutionary, and I don’t think Piketty leads to any revolutionary reanalysis of class relations or any other thought modes that might reset who are winners and who are losers. We have a very sophisticated propaganda apparatus that creates lots of sinks with which frustrated energy can go into talking about, but can never go anywheres. I always think of ZeroHedge, Testosterone Pit, and likeminded sites as exemplars where dissent is twisted into angry confusion rather than any sort of effectual thinking. Much of the talk about 1%’ers and inequality is similarly ineffectually crude. You can’t make meaningful policy from “millionaire taxes”, for any number of reasons. The sort of talk that has always been carefully excluded is usually about power, and usually about how rentiers can directly impose power on the people around them. So, strong nudges away from single payer or single insurer. Strong nudges away from restructuring bankruptcy rules so that normal people have more economic rights. Strong nudges away from talking about access to legal resources, particularly against the powerful (and plenty of talk about evil tort lawyers), or of even collective action against bad actors with power.

A compensationary state where people get a minimum living allowance of some sort is allowed in public forums. An egalitarian state where the poor can testify against the rich at any sort of remotely equal level in the legal system is not truly allowed. That would interfere with Geithner making it all better for his friends.

18

Bruce Wilder 05.27.14 at 8:56 pm

On past performance, I’d be less concerned about how the clowns on the right try to shape the narrative of Piketty with denial and “spreadsheet errors”, than about soi-disant liberals, like Brad DeLong, Larry Summers or, unfortunately, the not so reliable Krugman. With them, it isn’t the measurements, per se, but the conceptual issues that will cause confusion. They will cling to the idea of capital as a factor of production, to diminishing returns, to strange views about substitution between capital and labor (robots, the “virtue” of skills and education), and experience the greatest difficulty in seeing political conflict over distribution as anything but a misunderstanding.

r > g as a trend is a huge conceptual challenge, because it implies that increasing wealth (nevermind increasing concentration of wealth) is, at the margin, a bad thing for society and for social welfare. That’s a tough thing for mainstream economists to wrap their heads around. Seeing imaginatively how that could be the case could have a profound impact on politics, as the OP indicates. But, it will be most destabilizing, I think, for the vaguely center-left mainstream establishment, as it challenges their sincere faith in the “market economy” as an unjust world that could be made more just with just a few tweaks and adjustments and oil on points of friction.

19

casino implosion 05.27.14 at 9:14 pm

lol @ konczal. If the doings of social scientists had any effect on the world of wealth we’d have all been on big rock candy mountain for a century now.

20

shah8 05.27.14 at 9:14 pm

Wait, the center-left, in the technocratic guise, has never had a “tweak” ideology, except when they want to appease sentiment they view as being too far to their left. What folks like Arne Duncan and Samantha Power wants to really do are not “tweaks”, but remaking of entire power structures. The ACA is not a “tweak”. However, what usually happens is that the center-left will always construct, in conservative terms, the market narrative, and ply “tweaks” for that, like the cadillac tax on health insurance, or lotteries for entrance into good charter schools (of course, only so many seats).

21

Bruce Wilder 05.27.14 at 9:26 pm

shah8 @ 17

All true.

I do think think there’s something to the idea that Piketty signals a change in the zeitgeist, just the beginning of an awakening by the upper middle class that the megarich are eating the economy from the bottom up. As the consciousness spreads among the presently complacent that they might be next on the menu — and as the U.S. economy takes the next big step in its downward trajectory of income — the character of political protest will change and we will see if the apparatus of the surveillance state is up to the job put to it.

adam.smith @ 16 Because the data is so bad, I think it’s certainly possible, if unlikely, that we’re not seeing much of an increase in wealth inequality in some cases

I’m not sure what work you imagine “in some cases” is doing for you, so maybe you have some understanding of your statement, which is not ridiculous foolishness. There are necessary relationships between income and wealth, such that it simply isn’t possible, given what we know about changes in income inequality and readily observed indicators of wealth like the property market or the financial markets, for there to be no appreciable increase in wealth inequality. The more than proportional increase in the claims of wealth on national income are not in doubt, and that increase, given that a very large part of the population is known to have no appreciable wealth, implies increased inequality of wealth. In fact, it implies, I think, that the rich are eating the poor — to put it in plainer terms than the mild and neutral “inequality” usually indicates.

22

John Garrett 05.27.14 at 9:33 pm

There is definitely a change in the zeitgeist, but it really began (or perhaps exploded) with the occupy movement. I don’t think those brave few have ever been sufficiently recognized by us older folks on the left.

JG

23

adam.smith 05.27.14 at 9:57 pm

I’m not sure what work you imagine “in some cases” is doing for you, so maybe you have some understanding of your statement, which is not ridiculous foolishness.

I mean country cases, in this case the UK. I’m sure you regard my position as ridiculous foolishness, but there is no necessary relationship between income and wealth. If the high earners spent a larger share of their income on (conspicuous) consumption, for example, you can have an increase in income inequality without an increase in wealth inequality. If (and I’m taking your word for it) wealth as a share of national income is increasing, that could also be true because of middle-class wealth increases (which would still be wealth inequality, but not show up in Piketty’s 90%/99% data). Do I think that’s terribly likely? no.
But given how little we really know about wealth, I I think it’s a bit early to shut down the debate and assume anyone who raises a doubt about this is acting in bad faith.

24

Bruce Wilder 05.27.14 at 10:18 pm

shah8 @ 19

Yes. All true. Except I’d question whether Arne Duncan and Samantha Power genuinely constitute center-left, and not center-right; the pro-plutocracy conservatism of the Obama Administration is confusing — I expect it’s their main selling point relative to their political funders.

And, privatizing education would be the classic case of what drives r > g, the rich eating the poor, with no robots or technologically determined marginal productivity of capital dictating a natural distribution of income. Will any centrist establishment economist notice? Draw a connection? Of course, the accepted methodologies define “microfoundations” in terms that make such connections between the detail and the general impossible. The methodologies insisted upon by conservative ideologues.

I just finished reading Larry Summer’s review of Piketty — pointed to by DeLong, natch. It’s everything you’d expect, including the bits of brilliant irony interjected to make parody impossible. He opens by comparing Piketty’s Capital to Kennedy’s Rise and Fall of the Great Powers in its ability to seemingly capture the zeitgeist, characterizing Kennedy’s work as a warning against the danger of imperial overreach, but instead of noting the imperial overreach and the economic squandering of the second Bush Administration that fulfilled Kennedy’s prophecy, he tells us,

. . . recall that Kennedy seemed to hit the zeitgeist perfectly but turned out later to have missed his mark as the Berlin Wall fell and the United States enjoyed an economic renaissance in the decade after he wrote

Really, what can you do with that? Summer’s peroration includes a call for a policy of increased public investment in infrastructure — the very policy he effectively opposed in office in 2009.

Most people have only the vaguest idea what economists are talking about in the best of times — and that’s by design. Economists actually count obscurity of terms and framework as desirable features of their disciplinary discourse, and this extends to accepted customs of popularization, which reduce Econ 101 and op-ed policy economics to tales of a just world, the magic of the market, and the fairy dust of business confidence. I’m not confident that I understand how the hard grit of reality grinds away at that kind of ideological nonsense, or how crisis affects it, but of grinding and crisis, I’m confident enough.

25

Bruce Wilder 05.27.14 at 10:26 pm

there is no necessary relationship between income and wealth

If wealth is not a claim on income, what is it?

26

Agog 05.27.14 at 10:47 pm

The Citigroup ‘Plutonomy’ notes remain a useful and charmingly amoral resource on these issues of course.

27

elm 05.27.14 at 11:08 pm

adam.smith:

Giles claims:

However, whichever level one picks, the lines in red in the graph show that – unlike what Prof. Piketty claims – wealth concentration among the richest people has been pretty stable for 50 years in both Europe and the US.

That result, and his central claim: “wealth concentration among the richest people has been pretty stable for 50 years in both Europe and the US” is strikingly at odds with what the bulk of academid researchers on the subject have found, especially regarding the U.S.

28

Bruce Wilder 05.27.14 at 11:33 pm

. . . given how little we really know about wealth, I think it’s a bit early to shut down the debate and assume anyone who raises a doubt about this is acting in bad faith.

I’m not going to belabor the point any further than this comment; other people have things to say, I’m sure. If you don’t realize that doubts will be raised in bad faith, . . . well, nothing I say is going to help you. FT, in addition to (nearly but not quite) denying wealth trends identified by multiple studies as well open-eyed observation, has, itself, come very close to alleging data fabrication, with no basis I can see, so I think we can dispense with high-minded posturing. We do know some things about wealth, and what we know ought to put some bounds on what we find worthy of deep skepticism.

We also know some things about propaganda, and I’m surprised by how many have gleefully picked up on “spreadsheet errors” to make the comparison with Rogoff and Reinhart, and to take a swipe at Krugman for tribalism, with a sniff of “see, both sides do it”.

We should be suspicious. We have every reason to believe that some entering in the debate will do so with the intention of destroying all knowledge and any truth they find inconvenient. This is nothing new.

29

adam.smith 05.27.14 at 11:54 pm

elm – I do think he’s overstating and I think his argument about the US is pretty weak, but he is right that, if you look at the Kopczuk/Saez data which runs until 2000, you see surprisingly little movement for the wealth share of the 1% after WWII: https://www.documentcloud.org/documents/1165408-kopczuksaez2004.html (table on p. 67) and Saez isn’t a suspect for wanting to cover up inequality. That said, I would have imagined – and other results seem to show – that there’s a clearer upwards trend since, probably starting out in the 1990s. So I think it’s highly unlikely that there’s no upward trend in the US, but Giles isn’t completely off-base here given the cited datasource.
In the UK, I’m much less certain. If I had to bet, I’d still think you’d find an upwards trend. What’s confusing there is that Picketty seems to use data for 1990 that Giles has first appearing at 2002 so someone has to be wrong here, and substantially so. And if the strong upwards trend in the UK is based on three data points from the 2000s from a series with dubious comparability, that’d be bad. Of the various things that Giles raises, that seems to be the one that most requires a response.

30

Tabasco 05.28.14 at 1:18 am

If income inequality has been increasing, and the FT is not denying this, then the only way that wealth inequality could not also be increasing is if the (absolute, not proportionate) dollars that the rich have left over after they spend is their income is the same as the dollars left over by the non-rich . This seems unlikely. Or, if the non-rich have made much bigger dollar capital gains on their houses than the rich. Again, unlikely.

Which is Piketty’s point, of course.

31

adam.smith 05.28.14 at 1:57 am

If income inequality has been increasing, and the FT is not denying this, then the only way that wealth inequality could not also be increasing is if the (absolute, not proportionate) dollars that the rich have left over after they spend is their income is the same as the dollars left over by the non-rich .

no, that’s incorrect.
1) what matters for wealth shares are proportions, not absolute values. Simple example:
A owns $1000 and earns $200 and spends 100; B owns $100, earns $20, and spends 10. Wealth inequality remains the same. Now increase income inequality and have A earn $300 but spend $200. Wealth inequality still remains the same, though A still saves 10 times as much as B.

2.) Another example – mostly hypothetical, but still – is a reversal of fortune. Take the example above, but now have B earn $300 and A fall down to $20. Obviously wealth inequality falls, while income inequality increases.

Again, as I say from the start, I find it more plausible that wealth inequality is increasing, but I don’t think we have the data to be as confident about this across the board as most here seem to be; and the income data we have doesn’t necessarily mean increasing wealth inequality—it just means it’s more likely.

32

geo 05.28.14 at 2:04 am

adam.smith@13: it could be that [wealth inequality in the UK] has increased, but the British wealthy are just spectacularly good at hiding it

How about the American wealthy? I once came across a passing comment by (I think) Robert Kuttner that around $9 trillion of wealth was hidden. Does anyone know?

33

roger nowosielski 05.28.14 at 2:12 am

Good job, Henry. I wish, however, that your valiant effort to return the “dismal science” to its humble beginnings, though certainly on the right track, had a bit more bite to it. The citation from Foucault is all to the good, of course, for any challenge to the dominant narrative by speaking truth to power is certainly a good place to start. In light of the fact, however, that our capitalism-driven political system is so intertwined with and codependent upon the prevalent economic paradigm, there isn’t really much reason to hope that anything worthwhile might ensue from recasting our economic disagreements in terms of the political. As Mike’s review makes it rather clear, the limits of the potential universe of discourse will continue to be defined by the right and the left wingers — all the usual suspects, really. Nothing new and different there.

May I suggest a much more radical approach to the problem. Benjamin Kunkel’s Utopia or Busthttp://www.versobooks.com/blogs/1566-exclusive-extract-chapter-one-of-utopia-or-bust-by-benjamin-kunkel — is certainly a good place to start. Also see Richard D. Wolff’s “Beyond Piketty’s Capital: Richard Wolff Warns us Not to Band-Aid Capitalism,” as per link:
http://www.rdwolff.com/content/beyond-piketty%E2%80%99s-capital-richard-wolff-warns-us-not-band-aid-capitalism

34

Bruce Wilder 05.28.14 at 2:27 am

. . . hidden. Does anyone know?

if anyone knew, it wouldn’t be hidden, would it?

A great deal of wealth is hidden in plain sight, in the sense that the totals or the income streams are more or less known, just the equities are hidden, but some of the big numbers are attached to contingencies that really obscure who owns what. That’s what derivatives do and the numbers there are huge. Piketty argues, I believe, that one of the reasons to impose wealth taxes is to clarify the equities.

35

Cranky Observer 05.28.14 at 2:45 am

= = = A great deal of wealth is hidden in plain sight, in the sense that the totals or the income streams are more or less known, just the equities are hidden, but some of the big numbers are attached to contingencies that really obscure who owns what. That’s what derivatives do and the numbers there are huge. = = =

Not all US wealth is found in the big coastal cities, nor necessarily trades on Wall Street. I’d suspect that very large amounts are tied up in real estate and local mid-sized corporate entities, family controlled across multiple generations. Although manufacturing in general isn’t what it was, historically a midsized machine shop serving the aerospace/military industries, and its associated properties accumulated over 30-50 years, could comprise $200 million of family wealth that appears on no researcher’s ledger.

Cranky

36

Tabasco 05.28.14 at 3:28 am

Adam.smith

Point taken, but for your first counter example to work in practice, the super rich would have to consume an awful lot. Now, of course, there are a lot of stories around of ultra conscious consumption, and wall streeters who put their entire incomes up their noses, but there also a lot of stories of rich people who live off the interest on their interest.

37

Dr. Hilarius 05.28.14 at 3:34 am

First, John Garrett@22, your observation is consistent with my own. The Occupy movement and news coverage of it brought the issue of income/wealth inequality into the mass media. I recall watching Brian Williams of NBC covering the issue and thinking “this is amazing.”

Not being any kind of an economist I can ‘t weigh in on data about whether wealth inequality has increased or remained stable for the top 1%. My daily experiences says yes.

But another important factor is the geographic distribution of income. Concentrated wealth in major urban areas prices out even the middle class. Housing costs are a major factor. A friend had 40+ groups of would-be renters show up for an open house. A potential renter needed at least $9600 cash up front to get into this modest 2-bedroom house. It was rented to an Amazon employee making over $125K. Increases in commercial rents exclude businesses that don’t market luxury goods. Hardware stores are replaced with Restoration Hardware. Neighborhood bars are replaced with bars featuring 50 different single malts (not to malign single malt, but it is expensive). Can’t afford $20 to park your car while shopping? It’s off to the suburbs with you, you aren’t our type any longer.

38

Manta 05.28.14 at 9:52 am

“the dominance of these economic theories has had profound political consequences”: is it true? It seems to me that Frederick’s maxim is more accurate:
“I begin by taking. I shall find scholars later to demonstrate my perfect right.”

39

reason 05.28.14 at 10:27 am

Rakesh Bandari @8
“But if the r not on capital in general but on domestic, non-financial or industrial investments is not high enough to motivate capital accumulation–and this seems to be the case in the US–we get not patrimonial capitalism in economic equilibrium but an economic crisis or secular stagnation that can only be resolved if capital can restructure industrial and labor relations to raise again not r in general but r on domestic industrial investments.”

Why do you think “restructure industrial and labour relations” is the answer rather than realign exchange rates?

Rakish B

40

Barry 05.28.14 at 12:18 pm

Henry: “…whether they like to emphasize efficiency questions over distributional concerns, or vice versa…”

Last I heard, the people trumping ‘efficiency’ (1) gave not been able to actually show any lost of growth or output at the levels of distribution even slightly achievable, and (2) have quite carefully missed the fact that the developed world has not seen increases in growth after adopting numerous right-wing changes. They use a specter of ‘weapons of mass economic destruction’ which is just as fraudulent as Saddam’s.

41

Barry 05.28.14 at 12:22 pm

Vladimir 05.27.14 at 4:25 pm
“It would be interesting to compare the reaction of the various pundits in regard to the discovery of errors in the work of Rienhart and Rogoff vs. Piketty. “

Note that R&R didn’t just have a spreadsheet error, they trimmed their data, with all points removed being against st their hypothesis.

When a grad student does that, there are nasty words used, concluding with ‘you are expelled’. When elite economists do it, that’s not even to be mentioned in the field.

42

reason 05.28.14 at 12:38 pm

oops
Sorry I have no idea where the “Rakish B” at the bottom came from. It is not meant to be there (in case anybody thinks I was being rude).

43

TM 05.28.14 at 1:48 pm

BW 18: “r > g as a trend is a huge conceptual challenge, because it implies that increasing wealth (nevermind increasing concentration of wealth) is, at the margin, a bad thing for society and for social welfare.”

I’m sorry but none of this makes sense. r>g actually doesn’t imply what Piketty says it implies and it certainly doesn’t shed any light on why “increasing wealth is a bad thing for society”, and neither is it empirically well founded. It is unfortunately an immense distraction away from the empirical accomplishment of Piketty’s work, I assume born out of the desire to be seen as a theoretician rather than “just” a data cruncher. What people (e. g. Krugman) now take away from it is the entirely misconceived idea that we need to focus even more on raising g by any means possible.

44

Rakesh 05.28.14 at 3:03 pm

@39 important point.
Possible considerations.

1. Strength of US exports less sensitive to relative value of dollar than the strength of growth abroad (there is old econometric research by Andrew Warner on this); growth abroad may depend on raising r through restructuring of labor relations.

2. Currency politics could result in beggar-thy-neighbor dynamics.e.g. a weakened dollar could compound problems of insufficient profitability in, say, Japan to sustain real investment. This is the dynamic that Robert Brenner had emphasized.

3. Lastly QE seems to have already had the effect of pushing the dollar down without solving the underlying secular stagnation, though the dollar seems to be strengthening at the moment.

45

TM 05.28.14 at 4:18 pm

AS 29: Krugman cites a data series by Emmanuel Saez and Gabriel Zucman that looks very different from Kopczuk/Saez:
http://krugman.blogs.nytimes.com/2014/03/24/american-patrimony

46

Bruce Wilder 05.28.14 at 5:28 pm

TM @ 41

Perhaps you could commit yourself to what you think r > g as a sustained trend implies.

Because I’m getting nothing out of open-ended negatives.

47

elm 05.28.14 at 6:38 pm

TM@43: Piketty himself referred to that newer, more comprehensive series in his response to FT.

For instance, my US series have already been extended and improved by an important new research paper by Emmanuel Saez (Berkeley) and Gabriel Zucman (LSE). This work was done after my book was written, so unfortunately I could not use it for my book. Saez and Zucman use much more systematic data than I used in my book, especially for the recent period. Also their series are constructed using a completely different data source and methodology (namely, the capitalisation method using capital income flows and income statements by asset class). The main results are available here: http://gabriel-zucman.eu/files/SaezZucman2014Slides.pdf.

As you can see by yourself, their results confirm and reinforce my own findings: the rise in top wealth shares in the US in recent decades has been even larger than what I show in my book.

48

Agog 05.28.14 at 7:22 pm

I’d love to see a thorough dissection of Chris Giles’ contributions to the FT over the past few years. In recent years it has become predictable to read in his pieces that deficits must be reduced and that interest rates must be raised, almost as if he were shilling for rentier interests.

49

elm 05.28.14 at 7:51 pm

Agog, I’d noticed the same about Giles. Relentless criticism of any anti-austerity research and boosting of pro-austerity data. I wonder if and how he covered Reinhard & Rogoff’s paper in 2010?

The problems with Reinhart/Rogoff’s 2010 paper, of course, extended beyond excel mistakes:

While using RR’s working spreadsheet, we identi ed coding
errors, selective exclusion of available data, and unconventional weighting of summary
statistics.

By “unconventional weighting of summary statistics” and “exclusion of available data”, they mean that R&R threw out 4 out of 5 high-debt years worth of data for New Zealand and then weighted the one remaining year (oddly, with negagive growth) equal to 19 years of high-debt U.K. data.

50

TM 05.28.14 at 7:57 pm

BW, “Perhaps you could commit yourself to what you think r > g as a sustained trend implies.”

If r is the return on capital, as it is then r > g doesn’t really imply anything because it is meaningless. g is a growth rate but r is not. Also, g is a growth rate of a flow, not a stock.

If r is the rate of net reinvestment, which is what people generally seem to take it to mean even though that’s not the definition given (namely, rate of return), then the numbers Piketty cites cannot be empirically right for reasons that I explained on an earlier thread, to wit: there is no way growth rates on the order of 5% can be sustained over time spans of centuries. Furthermore, I find it implausible to believe that aggregate capital in the US for example has been growing at a high rate since the 1970s or so. What we have seen is not a fantastic rate of investment but the opposite: deinvestment, deterioration and deindustrialization. I don’t see any evidence for the theory that rising inequality has been driven by capital investment – the opposite is true!

51

Bruce Wilder 05.28.14 at 8:43 pm

TM @ 48

r > g forces you to see — as you clearly do see already — that income from wealth can not be exclusively or primarily income from (socially) productive capital investment.

r is a rate of return on accumulated wealth, which can not be the same as accumulated capital in the sense of synthetic factors of production. Private wealth may be socially parasitic, and its accumulation socially pernicious.

Given the dominance of neoliberal interpretations of neoclassical economics, which is basically an economics of virtue triumphant, in which investment in innovation and skills earn their just rewards, this is a considerable challenge. In a policy regime determined to reduce taxes on wealth, in order to encourage accumulation, Piketty has stepped in to advocate taxes on wealth to rein in its accumulation, before its accumulation dooms us.

If you can see how accumulating concentrations of wealth drive disinvestment, then you can understand our world.

52

TM 05.29.14 at 5:50 pm

I’m afraid I disagree with your interpretation. Not with statements like “Private wealth may be socially parasitic, and its accumulation socially pernicious”, but with the claim that this is what follows from, or is “proven” by, Piketty’s conceptual framework.

53

TM 05.29.14 at 6:08 pm

Just got this petition solicitation:

“I support using Thomas Piketty’s powerful new framework to evolve progressives’ fight against the concentration of political and economic power.”
http://www.progressivesunited.org/action/piketty-capital

No idea what that means, and who is supposed to read that petition… It’s probably just me.

54

Neil in Chicago 05.30.14 at 12:31 am

. . . one can explain the immediate reaction of 85% of economists very simply: You don’t get tenure by telling the emperor he’s naked.

55

adam.smith 05.30.14 at 2:15 am

For those still interested, Piketty’s comprehensive, and entirely convincing imo, reply is here: http://piketty.pse.ens.fr/files/capital21c/en/Piketty2014TechnicalAppendixResponsetoFT.pdf
He does say that the UK data is of terrible quality overall and that is, of course, a problem, but his arguments against using the UK wealth series preferred by the FT is very convincing.

56

reason 05.30.14 at 8:00 am

Rakest @44
1. Exports are not the point. Net exports are the point (and remember the J-Curve adjustment, where initial movements may be in the wrong direction)
2. Yes, currency politics are a problem which why the whole disfunctional international financial system needs (which has caused the problem) needs to be sorted out. http://www.theguardian.com/commentisfree/2008/nov/18/lord-keynes-international-monetary-fund
3. I’m not sure that this isn’t a point in my favour. It sounds suspiciouly like the story about how stimulus didn’t work because we still haven’t fully recovered, ignoring that the supporters of stimulus said from the start that it wasn’t big enough.

The point is that an overvalued dollar, hurts workers everywhere in that it pushes demand for labour down domestically, and reduces the value of money wages elsewhere. Japanese citizens (and German citizens) benefitted from a long run process increasing their purchasing power as their currencies appreciated. We need that process to happen again. It seems to me that modern international financial system systematically responds incorrectly, creating vicious rather than virtuous circles (leading to stagnation and disinvestment in highly productive countries and limiting the gains less productive ones). Capital should flow from rich to poor countries not the other way.

57

Corey Robin 05.30.14 at 1:37 pm

Folks in this thread may be interested in this piece by Seth Ackerman, over at Jacobin, on Piketty, his defenders, and his critics. It may be the best, and certainly the most comprehensive, that I’ve seen. Definite must reading.

https://www.jacobinmag.com/2014/05/pikettys-fair-weather-friends/

58

elm 05.30.14 at 3:36 pm

Corey Robin @56: Thank you/curse you for the link.

The material is fascinating and challenging, as are the articles it references (spoiler alert, Larry Summers is still a jackass).

On the other hand, I had planned to tend my lawn and paint the guest bedroom this weekend, and it seems like I’ll be otherwise occupied now, with 1000+ pages of reading to catch up on (including Piketty, whose book I have not yet read).

59

Rakesh 05.30.14 at 4:08 pm

OK so we have the question of whether the decline in r will be small enough as the capital-output ratio rises that capital income relative to labor income will in fact rise too.
Piketty concedes that r could fall but insists on the basis of historical evidence and technological optimism that it’s not likely to fall enough for distributional shares to remain constant. He predicts greater inequality or the return of patrimonial capitalism as the capital-outcome ratio rises.
Piketty has been focused on distribution, and so have his critics.
But after the discussion of this and the Cobb-Douglas function, Piketty does turn to Marx, though there is very little direct commentary on this section.
And the point that I am making is that Marx did not argue that r had to fall to zero to create convulsions, and Piketty recognizes that a falling r has historically caused convulsions, e.g. imperial conflict over investment outlets.
Piketty concedes that r can or even likely will fall. He only insists that it’s not reasonable to assume that r will fall below g. But what he does not recognize is this: r does not have fall to zero for surplus value to be inadequate to sustain accumulation if minimum capital requirements are rising and/or depreciation schedules are short.
If insufficient surplus value is produced to sustain real investment, we will find not the return of patrimonial capitalism but a different set of problems, e.g. groping or even radical attempts to reorganize production to raise profitability, struggle over the control of investment outlets, the use of otherwise idle surplus value in the world economy turned into a global casino. This will create more immediate and sharper problems for the capitalist system than slowly growing distributional inequality.
Marx’s Capital remains more relevant than Piketty’s Capital.

60

Ronan(rf) 05.30.14 at 4:31 pm

Ackerman’s review is interesting, and is the best explanation Ive read (although I havent searched high and low for an explanation, I have to admit) of the Cambridge capital controversy.
I have a (slightly tangential) question though. He makes a comparison between the ‘leisure class’ of the late 19th century and today’s elite (who are driven, hard working etc) Was the perception of a ‘leisure class’ a fact, or was it an image they cultivated/a caricature that was asigned to the elite ? If the modern elite is more (superficially) representative of the population at large, and more concerned about their position (more willing to work hard to maintain it) , does that imply that there is a lot more competition amongst the elite than there was ? (Is it the case that movement within the elite is now more fluid, and wealth more transient ? Is there more mobility within and between deciles, particularly at the top and bottom? )
Ackerman seems to assume that “mores have changed”, could it be that they changed as a reaction to greater competition within the elite ?
Note: Im sure someone out there knows a lot about this subject and the question doesn’t make a huge amount of sense as framed, so Im just spitballing really ..

61

William Timberman 05.30.14 at 4:45 pm

Bruce Wilder @ 51

I find this interpretation persuasive, even if TM doesn’t. I think you’ve nailed it, and such additional gloss as needs to be applied to Piketty’s work from the left is amply provided by the Seth Ackerman piece linked by Corey@56. The elements of a coherent narrative are all more or less in place, but some crucial questions remain. Taking the Kochs as the symbolic stand-ins for the entire class of Piketty’s noveaux riches, and referring specifically to conditions in the U.S., I would ask:

1. Do the Koch brothers really want to run the country? Will their heirs be equally sanguine about the task bequeathed to them? Somehow, despite the unholy tincture of egotism and prudery which has driven them so far, I doubt they have any real idea what they’d be getting themselves into.

2. Will their bedfellows among the libertarian and social conservatives stay where they’ve been put? As the strains we can already see opening fissures in their united front are intensified by the consequences of their own influence on public policy, this doesn’t seem a foregone conclusion.

3. What about the entrenched interests of the x/industrial complexes which hitherto have been to such a great extent creatures of the capture of government by private wealth? Will they continue to acknowledge their true masters, or will they engage in their own essentially unmanageable enterprises? When the entire staff of the state department would be hard put to crew our existing fleet of aircraft carriers, I think one has a right to ask.

Needless to say, this is a partial list, but even so we can’t go far wrong in suspecting that 1980-2014 amounts at best to a bit of busking while we wait in line for our tickets to the main event.

62

LFC 05.30.14 at 4:53 pm

TM @50:

Question: what future time frames is Picketty dealing with? Is he dealing with centuries (in which case I tend to understand your point)? Or is he projecting out only in terms of decades (for which time span I would disagree w you that r>g is meaningless)?

63

LFC 05.30.14 at 5:15 pm

Ok, I read the Ackerman piece to this point:

its gloomy forecast of a return to “patrimonial capitalism” is based on the prediction that over the next decades, the gap between r and g will widen

So P’s projections are in terms of decades, not centuries, and I therefore disagree w/ TM’s conclusion that r>g is meaningless. If the time frame is decades (as opposed to centuries), I don’t think it’s meaningless.

64

LFC 05.30.14 at 5:32 pm

The Ackerman piece (down to where I read) is good, tho I had a bit of trouble following the factory/McDonald’s analogy, which is prob my deficiency, not his (plus I didn’t follow the internal link).

65

bob mcmanus 05.30.14 at 5:45 pm

63: Anybody want to crunch some numbers?

At our current conditions, well under 1.0% growth, flat to declining wages, high underemployment, middle class expenses rising, and the gains to the top continuing as they have since 2009, I would expect patrimonial capitalism to get here pretty quickly. To the extent it is not already here.

The question at any time is whether this generation of rich decide this is the time to lock it in for their progeny.

66

elm 05.30.14 at 6:18 pm

On the controversy about r>g, I guess Keyes’s quote comes to mind:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Perhaps, as Summers, et. al. assert r>g will eventually stop holding. If it takes a long time for those imagined forces to assert themselves, or if the mechanism requires another couple of world wars, then it’s not particularly relevant.

LFC@64: The McDonalds training materials state/assume that worker productivity is constant, rather than declining with increasing worker-count. I.e. the Econ 101 story of diminishing worker output doesn’t match how real world businesses work and observational evidence.

67

LFC 05.30.14 at 7:02 pm

The McDonalds training materials state/assume that worker productivity is constant, rather than declining with increasing worker-count.

That’s what I took Ackerman to be arguing, but if you read the way he phrases that passage it’s not as clear as it might be, imo: he refers to “how busy the restaurant is,” which is a measure of how many customers are in the place, not how many workers, leaving the reader who doesn’t follow the link to infer (reasonably enough, i suppose) that there are usu. more workers at peak hrs. Anyway, not a big deal.

68

TM 05.30.14 at 7:09 pm

LFC, have a look at the diagram showing Piketty’s estimates for r and g, figure 1 in the Krugman review:

http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/

This goes way back, implying that r has been around 5% for millennia, which is nonsensical if r is supposed to be a growth rate. (*) So yes, Piketty is dealing with centuries. I made this very point in an earlier thread (http://crookedtimber.org/2014/04/26/how-we-do-intellectual-history-at-the-new-york-times/comment-page-9/) you even asked why I considered such sustained growth rates impossible and I explained it. I would also point out that by Piketty’s argument, and given his estimate r – g estimate for the last 20000 years (about 4%!) , society should have gotten exponentially more unequal since Roman times and up until the early 20th century. A scientific theory should be evaluated by comparing its predictions with empirical reality and it doesn’t seem that it fares well in that test – unless you make a lot of ad-hoc adjustments.

(*) Ignorance of the implications of growth rates is a standard characteristic of ALL mainstream economic discourse and the Piketty debate is another deeply frustrating case in point (http://www.slideshare.net/amenning/growth-in-a-finite-world-sustainability-and-the-exponential-function). Incidentally, George Monbiot just published an excellent take-down of the growth mantra:
http://www.monbiot.com/2014/05/27/the-impossibility-of-growth/

“Let us imagine that in 3030BC the total possessions of the people of Egypt filled one cubic metre. Let us propose that these possessions grew by 4.5% a year. How big would that stash have been by the Battle of Actium in 30BC? … Go on, take a guess. Ten times the size of the pyramids? All the sand in the Sahara? The Atlantic ocean? The volume of the planet? A little more?”

This is almost the scenario indicated in Piketty’s diagram.

69

LFC 05.30.14 at 7:18 pm

@bob mcmanus 65

TM’s argument, if I understand it, is that given resource/physical/other constraints, g (and therefore r, which may outpace g but remains dependent on it to some extent) can’t grow exponentially (or even steadily) over a long time period: it’s physically impossible, b/c the planet, if not environmentally completely collapsed, eventually runs out of space (miniaturization and whatever other technological fixes notwithstanding).

For that argument, which TM has made here quite insistently, the time period wd seem to be crucial: Is P. talking about centuries or decades? If he’s talking about centuries, TM’s argument seems to have some force. If decades, not so much. (Tho no doubt TM will appear at some pt and tell me I’m full of sh*t and that I don’t understand the math or whatever…)

Your (mcmanus’s) comment is on a somewhat different pt; nothing wrong w that of course. But i was spec. trying to address TM’s argument. (You (mcmanus) have read the Piketty bk and I haven’t, so i assume your not bothering to respond to TM may be an indication that you think TM has gotten things wrong. But I’m speculating…)

70

TM 05.30.14 at 7:18 pm

LFC, have a look at the diagram showing Piketty’s estimates for r and g, figure 1 in the Krugman review:

http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/

This goes way back, implying that r has been around 5% for millennia, which is nonsensical if r is supposed to be a growth rate. (*) So yes, Piketty is dealing with centuries. I made this very point in an earlier thread (http://crookedtimber.org/2014/04/26/how-we-do-intellectual-history-at-the-new-york-times/comment-page-9/) you even asked why I considered such sustained growth rates impossible and I explained it. I would also point out that by Piketty’s argument, and given his estimate r – g estimate for the last 20000 years (about 4%!) , society should have gotten exponentially more unequal since Roman times and up until the early 20th century. A scientific theory should be evaluated by comparing its predictions with empirical reality and it doesn’t seem that it fares well in that test – unless you make a lot of ad-hoc adjustments.

(*) Ignorance of the implications of growth rates is a standard characteristic of ALL mainstream economic discourse and the Piketty debate is another deeply frustrating case in point. Incidentally, George Monbiot just published an excellent take-down of the growth mantra:
http://www.monbiot.com/2014/05/27/the-impossibility-of-growth/

“Let us imagine that in 3030BC the total possessions of the people of Egypt filled one cubic metre. Let us propose that these possessions grew by 4.5% a year. How big would that stash have been by the Battle of Actium in 30BC? … Go on, take a guess. Ten times the size of the pyramids? All the sand in the Sahara? The Atlantic ocean? The volume of the planet? A little more?”

This is almost the scenario indicated in Piketty’s diagram.

71

TM 05.30.14 at 7:21 pm

Corr: given his r – g estimate for (most of) the last *2000* years (about 4%!)

72

LFC 05.30.14 at 7:21 pm

(plus haven’t read whole thread closely, i must confess)

73

TM 05.30.14 at 7:36 pm

Also LFC here’s a quote from Ackerman:

“Coupled to this is an amazing empirical finding: that the “raw” rate of return (this is not Piketty’s term) has in fact always stood much higher than the growth rate. *Astoundingly, it’s been largely steady for centuries*.”

74

LFC 05.30.14 at 7:41 pm

I happened to read the Monbiot piece (even referred indirectly to it at my blog).

I’ve looked at Fig. 1 in the Krugman piece (reproduced from P’s book, presumably).

I’m going to bow out b/c I remain confused on this pt and I don’t think further dialogue here is going to alleviate my confusion.

It is interesting to me though that your argument — which is that r>g is either impossible (if r is a “growth rate”) or meaningless (if r is not a “growth rate”) doesn’t seem to have been made by anyone else. Or perhaps it has been made by someone else and I’m unaware of it.

75

Bruce Wilder 05.30.14 at 7:46 pm

I thought the Seth Ackerman piece was excellent.

I’d be even more emphatic about one of his principal themes: administrative hierarchy.

Production processes are managed by bureaucracies. In a managed production process, the wage will be equal to the marginal product of labor because management makes it so.

As Ackerman emphasizes, skyrocketing top executive pay appears to have driven both the rise in capital’s share of income, as well as had its own effect in driving inequality.

If technology has an influence, it is the technologies of communication and computing, which would seem to reduce the resource cost of monitoring and control. (Color me skeptical about drawing any linear trend line in these early days — see the Snowden thread to see how little we understand.)

Administrative hierarchies have to eat — they require large surpluses of energy — and, contra Tim Worstall — I think we are at a resource extraction plateau: peak oil, certainly, but more general. And, anything that eats has to do something else, which Queen Victoria would prefer I not mention, and we’re running low on our capacity in that regard as well.

I’m not optimistic. The most straightforward interpretation of trends, istm, is the emergence of a neo-feudalism, which will handle resource constraints by reducing the requirements of the excess population, and then, reduce the excess population.

76

LFC 05.30.14 at 7:49 pm

Monbiot’s colorful example doesn’t fit P’s diagram. (1) M. is doing a bit of fudging betw economic growth and growth in “total possessions,” which is a little different. (2) M’s example covers 3000 yrs.

That said, I thought the Monbiot piece made some good/interesting pts.

77

TM 05.30.14 at 8:02 pm

Yes it’s 3000 years instead of 2000. It’s a great illustration but has nothing in particular to do with Piketty.

78

TM 05.30.14 at 8:24 pm

Note also that Piketty’s estimates for g make sense: there was very little economic growth until the 19th century (of course, population growth also was very slow). It truly is amazing that nobody else asks the obvious question – how can capital grow at 4-5% rates when there is almost zero growth in production? And also, if r fell so dramatically in the 20th century as a result of “exceptional factors” (Ackerman) due to the world wars, why didn’t the wars, epidemics and so on in earlier centuries have similar effects?

It seems to me, after reading a whole bunch of Piketty reviews, that nobody really analyzes this as a scientific theory to be tested. I guess economists just don’t think that way.

79

Bruce Wilder 05.30.14 at 9:36 pm

nobody else asks the obvious question – how can capital grow at 4-5% rates when there is almost zero growth in production?

I thought I was asking that question, above. Or, I was making the point that it is an obvious question, with an answer that tends to upend the neoclassical assumptions.

Did someone say that capital is growing ad infinitum? That’s no part of Piketty’s theses. His r is a rate of return on wealth, not a growth rate.

Piketty imagines that wealth accumulation and slow growth tend toward an equilibrium in which wealth claims a large portion of income. But, he imagines an equilibrium as the target (though not necessarily a target achieved, given wars, epidemics, etc.).

Formally:
Define r as the rate of return on capital, s as the savings rate and g as the growth rate.
Define ɑ as the share of capital income in national income
Define ß as the capital / income ratio.

Piketty comes up with these two “laws”:

ɑ = r x β (The share of capital income in national income is equal to the average rate of return on capital time the capital/income ratio. This is an accounting identity.)

β = s / g (The capital to income ratio is equal to the savings rate divided by the growth rate. This describes a long-term tendency, achieved (if at all) only over a period of decades.)

The second relationship describes the asymptote: what tends to happen over a very long period of time: the stock of capital can become quite large relative to annual income, and capital claims a large share of national income. But, it’s an equlibrium result.

80

js. 05.30.14 at 9:48 pm

The Ackerman piece is indeed excellent—thanks to CR for linking to it.

A question for those who’ve finished the Picketty: I’d gotten half way through the penultimate chapter (the global tax on capital one), and then… well, I effectively lost the book. How much am I missing?

81

elm 05.30.14 at 10:08 pm

TM@77

how can capital grow at 4-5% rates when there is almost zero growth in production?

The factor r is rate or return on capital, not rate of capital accumulation/growth. It would mean that (overall) each $100 worth of capital produces $4-5 in rent/grain/widgets per year. Not that each $100 of capital grows to $104-105 per year.

And also, if r fell so dramatically in the 20th century as a result of “exceptional factors” (Ackerman) due to the world wars, why didn’t the wars, epidemics and so on in earlier centuries have similar effects?

Ackerman’s piece covers some of that already:

And that was due to precipitous capital losses on real estate and bonds that accompanied strict postwar rent controls and financial repression, as well as high taxes and outright physical destruction — all exceptional factors in an era of world wars. From now on, Piketty argues, capitalism can be expected to slide back toward the nineteenth century norm.

Presumably rent controls didn’t follow on the crusades, nor did the English civil war destroy much of the predominant capital at the time (farmland).

WWII did destroy lots of the sorts of capital goods that were valuable at the time, such as factories and buildings.

That said, I’d much prefer to see error bars/confidence intervals on Picketty’s data, but that critique isn’t specific to Picketty.

I don’t think that graph is intended to state that in the year 1033, the rate of return on capital was exactly 4.5%. In fact, the data point is labelled as 1000-1500, suggesting that it’s an aggregated value, surely estimated, across 500 years.

82

Ronan(rf) 05.30.14 at 10:36 pm

“Presumably rent controls didn’t follow on the crusades, nor did the English civil war destroy much of the predominant capital at the time (farmland).
WWII did destroy lots of the sorts of capital goods that were valuable at the time, such as factories and building”

On that, (from a link in Suresh Naidu’s article also in Jacobin)

http://www.stanford.edu/~scheidel/Leveler.pdf

83

A H 05.30.14 at 11:34 pm

As Bruce Wilder said above, r is a rate of return, it’s not a growth rate.

Piketty claims the economy tends toward a steady state in which the growth rate of capital is the same as the growth rate of output. This is determined by Piketty’s second “law”.

As I understand it, the crux of Piketty’s argument about r > g, is that if g declines and r does not decline (and savings behavoir stays the same), then the steady state will be a much higher capital to output ratio than we have now.

84

LFC 05.31.14 at 3:36 pm

TM wrote this @50:

If r is the return on capital, … then r > g doesn’t really imply anything because it is meaningless. g is a growth rate but r is not.

In other words, TM’s position is that it is “meaningless” to compare a growth rate (g) to a rate of return (r), or to chart one against the other. As far as I can tell, he has not explained why he thinks this is meaningless.

85

mattski 05.31.14 at 5:07 pm

I find TM’s argument against long term sustainability of growth rates to be absurd. On the one hand, how many arrowheads would you trade for an iphone? On the other hand, take a look at the changes in the surface of the planet over the last 1000 years for example. Roads, bridges, houses, cities, airplanes, automobiles, cargo ships, naval fleets, sports stadiums, golf courses, rainforests that have been razed…

For better AND worse, this is the manifestation of our ever increasing wealth.

86

mattski 05.31.14 at 5:10 pm

**And as Krugman has suggested, future forms of growth can take many divergent forms, even the form of ameliorating environmental damage caused by previous forms.

There aren’t any consistent “units of growth” over time.

87

elm 05.31.14 at 5:35 pm

LFC @ 84: As a very charitable interpretation of TM’s post I could agree that those different types of quantities are notintrinsically comparable, but economists (including Piketty) can use that fact to draw conclusions within the domain of economics.

Summers surely understands the implications (and vigorously denies Piketty’s observations for that reason).

The significance of r>g lies not in pure math, but in its implications within economics. The details of that significance can be found in the Ackerman piece, Bruce Wilder’s post @79, and surely in Pikettys text.

88

roger nowosielski 05.31.14 at 10:48 pm

#57

Perhaps Corey is right in that Seth Ackerman’s review of Piketty’s Capital in “Piketty’s Fair-Weather Friends” is the most incisive to-date; which isn’t saying much since most of the reviews we’ve been treated to had come from the mainstream. I don’t put much credence, btw, in there being a very significant difference between the so-called MIT economic model (credited to Paul Samuelson and company) and the one which is being endorsed by those who subscribe to an alternative, as per the “Cambridge capital debate.” And although Ackerman does a pretty credible job at elucidating the main issue underlying the Cambridge debate controversy – namely, the questionable validity and usefulness of marginal utility theories – I’m afraid that simply saying that “history and custom, as well as politics, laws and struggle, will determine who gets what, [that[ it’s a system of grab what you can,” is sufficient to delineate a radically different conception of “doing economics” from the mode that’s currently in use.

To be sure, Ackerman starts with an underlying promise: “To a remarkable extent for a work of modern economics,” he says, “Piketty’s book explores social class in all its rich historical dimensions.” We’re led to believe thus that Ackerman is about to break new grounds, that the introduction of the social class concept and the ensuing struggle will result in a brand-new approach to economic analysis, an approach that will surely translate to a brand-new conception of the subject matter, a brand-new understanding. I’m afraid the results are all but disappointing.

It would appear that “a return to dynastic wealth,” otherwise referred to as “patrimonial capitalism,” is Piketty’s main concern, in that it “will fatally erode capitalism’s legitimacy.” There’s no telling what Piketty’s main concern really is, but the question I put: why should it be the reviewer’s? As things stand, however, Ackerman, whether unwittingly or not, get drawn into this quagmire and volunteers a rebuttal. He doesn’t think it’s necessarily so, and the bulk of his argument hinges on the presumably new ethos of the new “nouveau riche”: in a startling contrast to Veblen’s depiction of the privileged class in his time, as a class of leisure, now we’re supposed to believe that the present-day would be captains of industry, the movers and the shakers, have all of a sudden been instilled by their parents with an ethic of virtue, Max Weber addition.

Whether or not you put credence in such anecdotal evidence is really beside the point. What is the point, however, is that Ackerman considers this little tidbit, accurate or not, as reason enough to discount the gravity of the impending crisis simply because the offspring of the ruling class happens to believe in work ethic and in the American Dream: as though the beliefs of the new elite had any impact on how those who happen to experience the growing inequality will tend to believe or think. High hopes!

True to form, however, Ackerman is careful to remain noncommittal:

“Just how the spoils of that twentieth-century victory get handed down to future generations is a matter that will no doubt depend on the multiplicative dynamics of capital in the twenty-first century, as Piketty claims. But whether those numbers spell a social crisis or just more of the same will depend on how the next chapter of the struggle is written.”

Spoken like a true academic.

89

bob mcmanus 05.31.14 at 11:58 pm

88: as reason enough to discount the gravity of the impending crisis simply because the offspring of the ruling class happens to believe in work ethic and in the American Dream

That is not how I read Ackerman’s argument. I read him as saying resistance and reform will be made more difficult by of this superficial adoption of petit bourgeois values by the elite class.

Which is what we have, even in the early stages, been seeing, that financial and economic crises of capitalism are not being accompanied by political crises of sufficient intensity and class division to create energy for systemic change, and that is a problem, and perhaps a dystopian catastrophe.

Bill Gates and Ophrah Winfrey just don’t look enough like Louis XVI and Maria Antoinette to motivate pitchforks and guillotines. Doesn’t mean that they aren’t as dangerous and socially destructive.

90

roger nowosielski 06.01.14 at 2:49 am

You’re talking then about the uncanny adaptability of capitalism to morph itself, even to the point of appearing completely innocuous to the very people it harms; and that’s a problem in its own right.

Apropos of Ackerman, however, I’m not quite convince that he’s all so concerned about resistence. He still seems to be struggling with the idea whether capitalism is/can be a meritorious system,

91

Rakesh 06.01.14 at 5:20 am

Piketty criticizes Marx for not using all the available statistics to estimate the capital-intesity of firms at his time. But of course Marx did not intend his Capital as a study of the English capitalism of his time; he intended to lay bare the law of motion of capitalism in its ideal average, and used data from English capitalism only because it best approximated in his time capitalism in its ideal average. Wassily Leontief marveled at the accomplishment:

“However important these technical contributions to the progress of economic theory, in the present-day appraisal of Marxian achievements they are overshadowed by his brilliant analysis of the long-run tendencies of the capitalistic system. The record is indeed impressive: increasing concentration of wealth, rapid elimination of small and medium-sized enterprise, progressive limitation of competition, incessant technological progress accompanied by the ever growing importance of fixed capital, and, last but not least, the undiminishing amplitude of recurrent business cycles — an unsurpassed series of prognostications fulfilled, against which modern economic theory with all its refinements has little to show”

92

Rakesh 06.01.14 at 5:44 am

James Galbraith argues that Piketty’s r is a statistical artifact, and does not indicate the rate of the creation of new physical capital.

JKG: “What is K? For Piketty, K is the financial valuation of privately-held capital assets, including land, bonds, stocks and other forms of private wealth, such as housing. One may quarrel (as I have) with the connection of this value to prior definitions of capital, but that is not the issue here.
Financial valuation (FV) can be rendered as the present value of the expected future returns from the ownership of capital assets; for this a discount rate is required. Is the discount rate the same as r? Not necessarily. Keeping them distinct, we have:
K = FV = Σi [ Ε(Pi)/(1+d)i]

where Ε indicates an expected value, d is the discount rate and (i) is a time subscript.
Note that FV depends on d. If the discount rate falls, then the financial value of the capital stock will rise. Since the discount rate bears some relationship to the interest rate, at least in equilibrium, FV and therefore r can be pushed around by monetary policy, so long as monetary policy can influence financial valuations without also affecting current money profits. FV also depends on the current expectation of future flows of profit income, which are, in part, a psychological matter.
Clearly, this concept of capital bears no relationship to the physical construct that normally enters a neoclassical production function or the technological view of the capital/output ratio. Piketty’s use of “K/Y” as notation is, in this respect, non-standard. Still, nothing prevents us from measuring r – as Piketty defines it – from the observed profit flow and the financial valuation of the capital stock.
Why, as an historical matter, would r as measured tend to be constant over long periods of time? One answer is now obvious: the expected stream of future profits at any given time depends on current profits. In a boom, things are good and are expected to remain so. In a slump, the reverse. P and FV do not always move together. But they will more often than not. And so the ratio between the two observed variables – which is r — will normally not change very much. One can surely find exceptions – in the turning points of the business cycle, or when monetary policy drives capital valuations out of synch with current profits. But Piketty’s approach of calculating decade-by-decade averages may wash those out, to some degree.
What does the long-run constancy of r have to do with savings or with the creation of new physical capital? Nothing at all. Piketty’s r is basically a weighted average of financial rates of return across the yield curve and the risk profile of privately-held capital assets. It is the artifact of current profits and the effect of discounted profit expectations on market values.”

93

Val 06.01.14 at 7:41 am

This is a little bit off topic but (kind of) related, so I hope it’s ok to raise here. As several people have noted there is a relationship between population growth and economic growth. Piketty begins his book by talking about Malthus and the fear of over-population in the late 18thC, and he (Piketty) seems to accept that rapid growth in population was a ‘new’ phenomenon.

I’ve read various discussions about historical population growth (eg http://www.resilience.org/stories/2009-04-20/peak-people-interrelationship-between-population-growth-and-energy-resources) and often they seem to relate the rapid period of growth since the 18thC to energy sources. The thing they don’t seem to discuss is that mathematically if you had a long period of small net population increase you would always eventually get to a point where population started to increase more rapidly.

This could suggest that people have got causation the wrong way round – that it wasn’t technology or fuel sources that caused population growth, but rather that increasing population made it necessary to find new fuel sources, etc.

As I say bit off-topic I guess, but it’s an interesting question (I think) that no-one seems to talk about, so I wondered if anyone here could comment?

94

roger nowosielski 06.01.14 at 12:42 pm

@91

Good point, Rakesh, especially the laws of motion analogy

95

J Thomas 06.01.14 at 12:47 pm

“This could suggest that people have got causation the wrong way round – that it wasn’t technology or fuel sources that caused population growth, but rather that increasing population made it necessary to find new fuel sources, etc.”

I think they influenced each other.

I have the impression that from the neolithic on, there was a rather high birth rate but the population did not increase all that fast. Particularly local famines would cull the population.

That was true in europe through something like the 1300’s. Later, as before but more so, cities were places where surplus farmers went to die. The birth rate in cities was below replacement, babies were particularly likely to die in cities, etc. Epidemics showed up there first and slowly spread to the countryside. The population as a whole had high birth rate, low population growth.

New technologies didn’t happen just because the population was already high, but to some extent they could only happen with a high population. Port cities maybe used to have less famine because ships could bring in food relatively fast and cheap, even while they also brought in epidemic diseases. But with improved transportation we could get more food from the fields to the ports, and more food from the ports to the inland populations. But a small population can hardly afford improved roads, much less railroads.

Any given skill set would result in some carrying capacity, the population would in theory rise to that level and then fluctuate around it. But the population kept rising because we kept finding ways to let it rise.

OK, so I’ve presented these ideas without any backing for them, and careful research might show that some of them are wrong. I hope I’ve at least presented the ideas clearly.

96

P O'Neill 06.01.14 at 1:20 pm

We all need to wait for the definitive take-down of Piketty.

Jonah Goldberg –

I spent pretty much all of May working on a very long essay on Piketty’s book for Commentary so I can’t get into all of it here

Link not included in interest of sanity.

97

john c. halasz 06.01.14 at 2:40 pm

@93:

“This could suggest that people have got causation the wrong way round – that it wasn’t technology or fuel sources that caused population growth, but rather that increasing population made it necessary to find new fuel sources, etc.”

The trouble with that proposal is that it involves a kind of inverted teleology: just because people needed to find new energy sources or other means of subsistence, it doesn’t follow that the would or could have found them, rather than just succumbing to the usual limiting factors, resulting in higher mortality rates. (In fact, the Atlantic economy is thought to have been running out of wood resources, the main source of thermal energy, such that it is sometimes projected by economic historians that it would have collapsed within 100 years, due to the loss of wood energy supply, had not the industrial turning point occurred).

The problem with mining coal is not that such resources were unknown or too limited previously, but that when coal is mined, the shaft quickly floods and the water needs to be pumped out in order to further mine the coal. Horses turning water-wheel pumps were used to do that, but the horses needed to be feed with forage crops, so the amount of coal that could be economically mined was limited by the implicit trade-off with agricultural produce. With the invention of the steam engine, in effect, coal could be used to mine coal, (hence early engines were rated by the number of horses they could displace), such that a great increase in cheaper coal supply became possible. Prior to then, the main sources of energy were wood/charcoal, wind, water wheels, and, most of all, muscle power, derived from feeding men and animals. But with the new availability of a much more intense source of energy in larger quantities, improvements in metallurgy became possible, leading to improvements in tools and the invention of mechanical machinery, etc. As such developments diffused outward, the gradually rising productivity of labor resulted in increased net output or productive surpluses, which then increased the carrying capacity allowing for increased population growth.

98

john c. halasz 06.01.14 at 3:14 pm

The Black Death BTW would have contributed mightily not just to the demise of serfdom, but to the revival of trade and the growth of cities in Europe, since the greatly reduced population would have resulted in the shifting of labor from more marginal to more fertile lands, thus automatically raising per capita productive surpluses, (“the real wage”). Trade itself increases productive surpluses by carrying goods from where they are naturally plentiful to where they are scarce and vice versa, (which is why it occurs), but it is constrained by the given level of productive surpluses and faces diminishing returns. But no doubt the evolution of forms of business organization in the early modern era of mercantile capitalism was a key to potentiating the emergence of industrial capitalism.

99

geo 06.01.14 at 5:11 pm

Rakesh @91. Thanks for the Leontiff quote. Do you remember where it came from, by any chance?

100

Ed Herdman 06.01.14 at 5:16 pm

101

J Thomas 06.01.14 at 7:34 pm

#96

“We all need to wait for the definitive take-down of Piketty.”

We also must carefully distinguish between:

1. An argument can be made that Picketty made methodological mistakes so his conclusions are not certain

versus

2. More careful analysis of better data shows that Picketty was mistaken.

Those are two very different things. If eventually a new analysis is made that gives different results, we must be sure to spend as much effort looking for flaws as has been spent looking for Picketty flaws.

102

J Thomas 06.01.14 at 7:39 pm

#97 John C. halasz,

Very well said! You interrelated a lot of important ideas clearly.

103

adam.smith 06.01.14 at 7:46 pm

@J Thomas #101
That was a joke. If you don’t get it, i.e. if you don’t know who Jonah Goldberg is, count yourself lucky and try to keep it that way. I promise that you’ll be a happier person.

104

Bruce Wilder 06.01.14 at 8:13 pm

Just like we tend to project linear trends forward — even when we know perfectly well that they cannot continue indefinitely — we tend to look back into the depths of human history and pre-history and imagine a foggy sort of homogeneity or uniformity — a constancy — that was never the actual experience.

Population explosions, migrations, famines and massive epidemics have punctuated human history, and from the sketchy evidence of archaeology and genetics, pre-history.

You cannot have an urban civilization without an extractable agricultural surplus, with which to feed the soldiers, artisans, merchants, entertainers and priests. When that surplus becomes available, towns and trade tend to quicken, and when it disappears, epidemics — and sometimes, collapse — follow. The worst epidemics and famine tend to coincide.

Agricultural productivity is subject to congestion and depletion effects, which can set up the conditions to amplify the longer population cycles that drive the rise and fall of civilization, or to create a pattern of prolonged stagnation with shorter cycles of periodic harvest failure and famine.

As population on the farm increases, the productivity of the marginal farmhand on the margins of the fixed allotment of natural resource will run into the law of diminishing returns, and the available agricultural surplus will decline, and sometimes, because of depletion and congestion, the decline is very, very sharp. Practices that answer the immediate demand for additional food to feed an increasing population, but deplete the fertility of the land in the long-term can help create a cliff. If the fishermen overfish the pond, a population crash for the fish may trigger a similar effect among the fishermen.

On the other hand, migrations and trade to bring fertile, virgin lands under cultivation or an innovation in technique can magnify the available surplus, and a virtuous cycle can carry a long upswing forward.

For obvious reasons, there’s a lot of interest in generalizing this pattern to energy use.

From the end of the Dark Age around 800 BC down to Aristotle’s day, the Greek population increased by a factor of more than ten. Some of this was amplified by use of iron implements and a revival of maritime trade — reviving trade from the Black Sea and intercourse with the Persians, Solon planting olive orchards, that kind of thing. Some of this was accomplished by migration and colonization — Sicily must have been incredibly fertile land for Magna Graecia.

The Romans appear to have been well-fed and pretty healthy down to Trajan, conquest and commercial expansion making up for a surprisingly backward agricultural tech and increasing social problems. Roman plumbing made classical Roman cities healthier places than the fetid cities of Western Europe well into the 19th century. The decline in agricultural productivity and trade that began in the 2nd century continued for centuries, and culminated in the Plague of Justinian, that marked the beginning of another Dark Age.

The discovery of wet rice methods in China, which permitted three crops a year, generated a vast surplus and a flowering of an urban civilization on a vast scale. Eventually, population pressures on the rice paddy choked off much of the surplus, and China stagnated well into the 20th century.

The Medieval Warming combined with technological innovations like the heavy plough, a practical horse collar and better crop rotation practices, to increase the agricultural surplus available in northern and Western Europe. It also triggered the Viking migrations and the German migrations to the east. The collision of Franks and Vikings in Normandy and Anjou resulted in the invention of the motte and bailey fort, and an explosion of the military caste carrying that technology outward in the Norman conquest of England and Sicily, the Crusades and Frankish conquests in the Mediterranean, etc.

Most of the population increase in the High Middle Ages remained on the farm, though there was some revival of cities and trade as well as international war for a tiny warrior elite. And, that crowding and congestion on the farm, combined with the end of the slight climactic warming, to eliminate the surplus, setting up the near-starvation conditions that made the Black Death so potent a killer.

The British Agricultural Revolution’s PR emphasizes Turnip Townsend, Jethro Tull and all that — improvements in practice. Enclosure also served to put a brake on congestion effects, as well as create an urban labor force. But, Victorian Britain was underfed — the Industrial Revolution was a near-thing, indeed, for that reason, and might not have taken place if Britain hadn’t been able to expand its reach into North America, Australia, South Africa, and the Argentine, and to expel or starve to death the Irish peasantry. The French Revolution and the revolutions of 1848 were clearly responses to famine or near-famine, as well.

The success of the New Deal in the 1930s was grounded on ordering an agricultural revolution with huge increases in agricultural surplus — by-products of the Second Industrial Revolution innovations — and a migration off the farm.

(It seems perfectly reasonable to expect a downcycle of a century or three in our immediate future.)

105

William Timberman 06.01.14 at 8:55 pm

BW @ 104

Like reading Gibbon all over again, that was — the deviltry in the details, etc., which late industrial and post-industrial technology was touted to overcome. Although I never much believed in Stewart Brand’s vision, and the back-to-the-land nostalgia of my youth, I’ve been equally skeptical about the high-tech alternatives — Star-Trek socialism has always seemed to me a lot like the Protestant version of heaven I was raised on, i.e bloodless and boring.

Needn’t be so, of course, but I’ve yet to encounter a convincing secular version of the biblical stewardship of creation, although there’ve been tantalizing hints, from Brautigan’s Machines of Loving Grace, to your own speculations voiced from time-to-time in previous CT comments threads.

Even if something comprehensive and deeply pragmatic were to emerge, the disgruntled, the enraged, and those bent on revenge for their disappointments real and imagined would still remain to be convinced. Lots of luck to those who take that as their task in life.

106

mattski 06.01.14 at 9:10 pm

@ 103

See this helpful tutorial.

107

Val 06.01.14 at 10:04 pm

@95, 97, 98 and 104
Thanks so much for those interesting and informative responses, including amazing rapid historical tour @104

Re the “inverted teleology” (@ 97), I don’t think it’s that so much, more that people don’t tend to take into account the mathematical inevitability (as it seems) that at some point a small natural increase will turn into a rapid natural increase, all else being equal. But of course all else isn’t equal, as Bruce Wilder says, and what you actually get seem to be kinds of booms and busts of population. It’s possible of course that we will see (not literally, but our descendants) a bust in coming centuries, but not necessarily brought about by famine etc in this case, rather the deliberate lowering of fertility that accompanies prosperity, which I guess could also have the same characteristics of a small slow decline inevitably leading at some point to a rapid decline, mathematically.

I originally studied maternity in my postgraduate history studies, and developed an interest in demography – plus a realisation that it’s an area where misunderstandings are widespread (don’t get me started on life expectancy), I guess because it seems like common sense, when it’s actually very complicated. However my historical studies (post school) have all been modern, so I don’t know much about earlier periods (and haven’t much time to read due to PhD being on other things – though can always find time for digressions like this!). But this is fascinating stuff.

On the subject, I’m interested in how economists are thinking about the effects of the predicted population stabilisation and start of the decline this century? Surely that’s a ‘post growth’ scenario (though climate change should cause that anyway)? Or maybe that’s a topic for another thread, if any CT contributors happen to be interested?

108

Val 06.01.14 at 10:26 pm

And of course I’m not forgetting (though I seem to) that what happens in coming centuries may be chaos, if we don’t get our act together on climate change.

A seductive thing about climate change is that the ‘warm period’ which many of us seem to be experiencing at present is actually quite pleasant – the brief earlier burst of heatwaves and fires (which I believe you are already having in parts of the US) all but forgotten in the extended mild autumn we are having here in southern Australia. But it’s becoming unseasonable – starting to feel wrong.

109

Bruce Wilder 06.01.14 at 11:21 pm

Rakesh @ 92

Interesting, but I cannot help thinking Galbraith seems to be missing a bet here. Literally.

Terming “r” an artifact makes it seem like putting it into the context of the business / financial cycle somehow renders it meaningless, but the financial cycle is how financial wealth works in a way that concentrates wealth and keeps r elevated above g over long periods.

Financial wealth is insurance, and the financial cycle is uncertainty in action. Financial wealth can earn a return as insurance, quite apart from the process of forming synthetic factors of production (“physical” capital). Owning rent-earning factors, like land or some kind of business monopoly, gives the owner a capacity to absorb risk, which is valuable as wealth, but that value is quite distinct from the value of produced goods.

In the rough-and-tumble of business life over business cycles, ordinary abrasion is going to differentially reduce the wealth of those who have too little, for whom critical setbacks leave permanent marks, and transfer that wealth to those with a surplus capacity to absorb risk.

The apparent stability of r over the business cycle is no mere artifact; it is literally how the system works. It is why the rich do not go always go down with the sinking ship of their original big win — the financial system allows them to make money from having money and power, and not just from producing goods, like the rest of us.

110

Rakesh 06.02.14 at 1:18 am

Interesting point, Bruce; and I’ll try to reply later. But Galbraith is right that Piketty’s capital is defined in term of financial valuation, and includes what have not been conventionally understood as productive assets; and what Galbraith says is consistent with Robert Rowthorn’s conclusion:

“Piketty argues that the higher income share of wealth-owners is due to an increase in the capital-output ratio resulting from a high rate of capital accumulation. The evidence suggests just the contrary. The capital-output ratio, as conventionally measured has either fallen or been constant in recent decades. The apparent increase in the capital-output ratio identified by Piketty is a valuation effect reflecting a disproportionate increase in the market value of certain real assets. A more plausible explanation for the increased income share of wealth-owners is an unduly low rate of investment in real capital. These alternative explanations may have distinct policy implications which it is beyond the scope of this paper to explore.”

111

Rakesh 06.02.14 at 1:20 am

Quickly on population and coal. It would be helpful to consult Robert C. Allen. As I remember it, his argument is that growth of international trade =>high wages=>population growth.
Then a growing population with high wages in England made it economical to replace labor with capital and that led to demand for coal, which could be met cheaply due to the geographic good luck of well-placed coal deposits in England.

112

Rakesh 06.02.14 at 1:23 am

On another thread it was mentioned that defendants now have to pay for their own defense. Prisoners sometimes have been billed for the costs of their imprisonment, and after their release debt collection agencies have added collection fees to these incurred charges. In Kafkaesque fashion ex-felons have then even been imprisoned for failure to pay these costs. At least that is what I understood from a public defender.

113

Rakesh 06.02.14 at 1:37 am

Quickly again. I am just not convinced that the return of patrimonial capitalism as a threat to meritocratic ideology captures our moment better than many other characterizations of our period, such as the return of Manchester capitalism as evidenced by industrial unrest in China and elsewhere; or the emergence of unsustainable capitalism; or the return of primitive accumulation (given land grabs for EPZ’s and resource extraction); or the persistence of casino capitalism.
Why the threat of patrimonial capitalism has become so salient seems to be something of a sociological question. Perhaps this Foucauldian study of the rich has provoked some resistance, as the OP says; but it has also become an international sensation, and perhaps it is because it is the kind of conversation that well-situated people are willing to engage in.

114

geo 06.02.14 at 1:54 am

WT@105: I’ve yet to encounter a convincing secular version of the biblical stewardship of creation

Try Ernest Callenbach’s Ecotopia.

115

LFC 06.02.14 at 2:29 am

Rakesh @112:
In Kafkaesque fashion ex-felons have then even been imprisoned for failure to pay these costs.

Off topic, but I doubt that imprisonment for debt exists anywhere today, at least not in the ‘developed’ world.

116

LFC 06.02.14 at 2:31 am

Unless perhaps somehow it’s squeezed under the label of contempt of court; still, seems unlikely.

117

Rakesh 06.02.14 at 2:59 am

118

Rakesh 06.02.14 at 3:02 am

Quickly again. I am just not convinced that the return of patrimonial capitalism as a threat to meritocratic ideology captures our moment better than many other characterizations of our period, such as the return of Manchester capitalism as evidenced by industrial unrest in China and elsewhere; or the emergence of unsustainable capitalism; or the return of primitive accumulation (given land grabs for EPZ’s and resource extraction); or the persistence of casino capitalism.
Why the threat of patrimonial capitalism has become so salient seems to be something of a sociological question. Perhaps this Foucauldian study of the rich has provoked some resistance, as the OP says; but it has also become an international sensation, and perhaps it is because it is the kind of conversation that well-situated people are willing to engage in.
All that said, see the very interesting debate between Debraj Ray and Branko Milanovic on Piketty’s book.

119

William Timberman 06.02.14 at 3:32 am

geo @ 113

Thanks, I’ll give it a try. For all sorts of reasons, largely originating, I suspect, in an essentially egotistical desire on my part not to be hoodwinked, I’ve always thought Philip K. Dick and Orwell more convincing futurologists than any of the grand optimists like Huxley or Gerard K. O’Neill.

In one of life’s little ironies, I wound up retired in a small town in AZ surrounded by slag heaps from a defunct copper smelter only 25 miles or so from Soleri’s Arcosanti. I’d admired Soleri’s vision, if not his skills as an engineer or politician, since I was in my twenties, and still keep a copy of Etica e Invenzione Urbana close at hand for a little light in moments of darkness. Arcosanti itself, when I was finally able to visit it, reminded me of something like the ruins of the Forum Romanum as occupied by an encampment of eager flower children. I don’t know what I expected, really, but his core idea, that of reducing our industrial footprint by more intelligent urbanization, while at the same time recovering or re-inventing the lost virtues of village culture, had always appealed to me. Discovering first-hand that he was a better bellwright than architect was a more than a little disappointing. I still have great affection for the man and his work, of course, but both feel less like a path to the future to me now than a not altogether commendable nostalgia for my own youth.

120

JanieM 06.02.14 at 3:42 am

121

Bruce Wilder 06.02.14 at 5:12 am

Rakesh @ 110: Galbraith is right that Piketty’s capital is defined in term of financial valuation, and includes what have not been conventionally understood as productive assets

Yes.

Piketty is confronting theory with data. And, it is not good news for a theory, which has tried to identify wealth accumulation with productive capital formation.

122

Rakesh 06.02.14 at 6:50 am

Perhaps not good news for neo-classical theory
http://glineq.blogspot.fr

123

Bruce Wilder 06.02.14 at 7:15 am

Perhaps not. (hoping, anyway)

124

gaddeswarup 06.02.14 at 9:07 am

125

LFC 06.02.14 at 3:11 pm

Janie M
“the return of debtors’ prisons”

ok, this part of the title is enough to persuade me I was, apparently, wrong

126

TM 06.02.14 at 4:11 pm

elm 81: You should read the whole back story. I have pointed out several times that r is not *defined* as a growth rate but everybody treats it like one. Because if it’s not a growth rate, then the difference r-g is a meaningless artifact. There is no reason why the difference between the rate of *return* on capital and the rate of *growth* of GDP would have anything meaningful to say about the economy. The argument why r>g is meaningful has been presented as follows: If capital grows faster than the overall economy, then capital income as a share of the economic product must increase. This would be correct *if* r is assumed to be a growth rate but it breaks down otherwise.

“I don’t think that graph is intended to state that in the year 1033, the rate of return on capital was exactly 4.5%. In fact, the data point is labelled as 1000-1500, suggesting that it’s an aggregated value, surely estimated, across 500 years.”

How do you think did they define, let alone estimate the “aggregate” “rate of return” on capital from 1000-1500? Do you even have a concept of what that would mean and how it could be measured? If r is *not* a growth rate, as you and I agree, then it’s not clear at all what an “aggregate rate of return on capital” would even mean. If it were a growth rate, it would be crystal clear: it would mean that capital multiplied by a *factor* of exp(500*.045)=5.9 billion. I hope we all agree that there is no way that that would make sense.

What is meant is probably an average, not an aggregate. Let’s briefly reflect on the terminology “return on capital”. What was “capital” at the time was land. Even using that terminology of “return on capital” (rather than land rent) for pre-industrial feudal society is very dubious. There is a reason why Karl Marx identified capitalism as a recent economic innovation, entirely different from feudalism. Later, mainstream economists started pretending that there was nothing special about capitalism, that capitalism had always been around, almost a part of the order of nature. Piketty seems to embrace that view, suggesting that there hardly was any difference between the 12th and the 18th century. After all, in his framework, capitalism is almost entirely explained by two numbers, r and g, and those hardly changed between the Roman empire to 1820, and moreover, according to Piketty, we are heading back to r and g values resembling feudalism. And people are swallowing such nonsense wholesale? Excuse me people. I’m not gonna give Piketty’s confused theories a pass just because I agree with some of his conclusions, and neither should you.

127

TM 06.02.14 at 4:18 pm

mattski 85:

Yours is a tired old argument based on a fantasy, totally bereft of any actual evidence. Again I recommend Monbiot (http://www.monbiot.com/2014/05/27/the-impossibility-of-growth/) for a brief take-down.

My own, longer answer is here, and I encourage you to actually look at some numbers and do some calculations before continuing this discussion.

http://www.slideshare.net/amenning/growth-in-a-finite-world-sustainability-and-the-exponential-function
http://www.slideshare.net/amenning/exponential-growth-casestudies

128

TM 06.02.14 at 4:54 pm

Val 93: By current estimates, average global population growth before about 1750 never exceeded 0.2%. Growth rates started to heat up only during industrialization. You are correct of course that even a small fractional increase adds up. Population increased from 500 million by 1500 to 800 million by 1750. It isn’t obvious to me why the latter figure, but not the former, should have created a population pressure that ultimately led to a fossil fuel powered industrialization. It might be more appropriate however to look at the demographic development of individual countries, which I haven’t. The conquest of America and introduction of the potato in Europe fueled demographic change, which probably contributed to creating the conditions for industrialization by providing a growing work force not needed in agriculture. So in that sense I think you have a point. But there is no way population growth could have accelerated as much as it did without coal-fueled industrialization.

129

TM 06.02.14 at 5:14 pm

And also, mattski 85: by all estimates (including those in Piketty’s the famous r-g graph, http://assets.nybooks.com/media/graphics/chart/image/krugman_3-050814.png), economic growth has been very slow for most of history, a fraction of 1% at best until 1750 (Brad DeLong even attempted to estimate “GDP” back in prehistoric times, which I think is absurd but of course it confirms that by standard definitions, there has been very little “economic growth” before industrial capitalism). So economic growth is really a recent phenomenon which has been going on only for a few hundred years. Nobody disputes that for a time period on that order (but not “over the last 1000 years”, as you imply), and starting from a low level, growth rates of 2-4% have been observed. It doesn’t follow, and is very poor thinking to assume, that trends observed in the recent past can, let alone must, go on forever.

130

roy belmont 06.02.14 at 5:52 pm

LFC at 3:11 pm:

It isn’t just the debtor snare – the existential cannibal doo-wop of having to literally pay money for a crime you committed because of not having money, or go to jail and owe money for going to jail – the “privatization” of US incarceration mechanisms, has resulted in virtual enslavement for many of the incarcerated.
Prisons are now being run on the business model. Return to the investors. Product. Legal protections. Lobbyists.
And a big fat check from the government for every filled bed in your institution.
And it’s private. Meaning you don’t really get to see what’s going on in there unless someone makes a big stink. And even then.
The stats on imprisonment place America on another, more hellish planet as far as prisoners per capita. And what’s happening to them inside is socially invisible. Mainstream journalism won’t touch it.
No privacy in there, no privacy out here for most of us now, but the scum-sucking greedheads who run the US prison industry get all the privacy they want.

Nice, if you’re a scum-sucking greedhead.

131

Bruce Wilder 06.02.14 at 5:57 pm

TM @ 128, 129: average global population growth before about 1750 never exceeded 0.2% . . . economic growth has been very slow for most of history, a fraction of 1% at best until 1750 . . . there has been very little “economic growth” before industrial capitalism

I refer you to my comment @ 104, particularly the first paragraph.

TM @ 126: if it’s not a growth rate, then the difference r-g is a meaningless artifact.

I refer you to my comment @ 76.

Piketty is focused on what limits the share of total annual income flowing to wealth claims, and what limits the concentration of those wealth claims. If you want to be dramatic about it — what share of national income goes to people who own for a living, as opposed to those who work for a living.

Piketty says that in the limit, the share of capital income in national income is equal to the average rate of return on capital times the savings rate, all divided by the growth rate.

The point being, that when the growth rate is less than the rate of return — g g, the story is quite different.

132

Bruce Wilder 06.02.14 at 6:09 pm

Something got badly scrambled in transmission in my comment @ 131 Maybe a less-than sign got misread as HTML?

I append:

When the rate of return is equal to the growth rate, then in the limit, the share of capital income in total or national income will approach the savings rate. That is, people will come to balance savings with dis-savings while moving along a steady growth path.

If the growth rate is less than the rate of return, then, in the limit, the share of national income going to wealth claims can become much larger.

133

roy belmont 06.02.14 at 6:27 pm

TM:

…there is no way population growth could have accelerated as much as it did without coal-fueled industrialization.

Medical science had a part in that too didn’t it? Coming right along parallel to the exponentiating industrial.
So that not only were there more jobs and more jobs coming all the time, there were suddenly more and more hands for that work, and more coming as well.

I know the trope of birth reduction after stability, the idea that women who have reproductive control have fewer children, and when life expectancy increases the birth rate will eventually decline.
But you have that initial bubble of human profusion enabled by science – steam, doctors! – and then this odd but tacitly accepted idea that everyone who’s born has the right to be, as long as they’re human that is.

The bounce is the 19th c. and its rationoid Euro-American eugenicists, leading to some pretty arcane shit in the early 20th and then of course the German National Socialists and their quaint notions of racial itemizing and hierarchical distinctions.

The tension between those two things – everybody gets to be v. only the qualified do – is losing its abstract air now.
Thus “austerity uber alles”. Thus the prison system, the growth of inequality, the idiots standing on the even more idiotic and proclaiming their superiority to the world.

What I’m suggesting is what I heard Ken Kesey say in 1974 – that the noise of anti-population growth (which is the same noise as anti-economic growth), sensible as it is, needs to be modulated by some higher goals than simple reduction of growth itself, because the thing we’re yelling at won’t go quietly away and shrink down, and if we goad it into some sort of forced return to sensible practice – trimming, slowing down, letting go of delusions of unlimited gratification – it will want to get rid of us first, because we’re the irritant, the goads, the gadflies.
It’s a conundrum, filled with paradox.
And a ticking time bomb more scary than any crap movie plot.

134

TM 06.02.14 at 7:13 pm

“Piketty says that in the limit, the share of capital income in national income is equal to the average rate of return on capital times the savings rate, all divided by the growth rate.”

Ok I see that your post at 79 (not 76) presents these relationships. The first one, ɑ = r x β, is as you say true by definition. The second, β = s / g, you describe as a “long-term tendency” under “equilibrium” conditions. Of course, it’s hard to see how an equilibrium can be reached when inequality keeps increasing. Crucially, the savings rate s is a prominent part of the framework but nobody seems to have even mentioned it except for your 79 and 131 (and none of the reviews I have read, including Kruman’s, except for Ackerman, see (*)). A low savings rate would keep inequality low even with high r, and conversely, a high savings rate would increase inequality even with low r.

Even taking these “laws” at face value, it remains the case that r-g in itself doesn’t determine the inequality trajectory. In fact, given Piketty’s framework (ɑ=r*s/g), it doesn’t even matter whether r>g. What matters is whether r, g and s are currently increasing or decreasing. That simply follows from the mathematical relationships. Would you disagree with that deduction?

I guess part of my skepticism has to do with the s in the nominator. It means that a sure-fire way to reduce inequality would be to stop investing (s=0). Really??? Another problem I have is that there is no distinction between privately and publicly owned capital and no mention whatsoever of public investment. I reiterate my remark at 50: “What we have seen is not a fantastic rate of investment but the opposite: deinvestment, deterioration and deindustrialization. I don’t see any evidence for the theory that rising inequality has been driven by capital investment – the opposite is true!”

(*) Ackerman does briefly address savings rates. “… the gap between r and g will widen due to a fall in the growth rate (g)… The problem is that if growth slows while the rate of saving (i.e. investment) stays constant [sic!], capital will start accumulating faster than output is rising, meaning the measured capital-output ratio will increase.” This is not a consequence of a “widening gap” between r and g; rather it is simply a consequence of declining g with r and s remaining constant. What is not explained is why r and s would stay constant when g falls.

135

TM 06.02.14 at 7:15 pm

[That was a response to BW 131]

136

TM 06.02.14 at 7:18 pm

[Oops, numerator not "nominator".]

137

Bruce Wilder 06.02.14 at 8:01 pm

What is not explained is why r and s would stay constant when g falls.

Yes, he’s basically asserting as a matter of fact that they tend not to fall with growth.

He’s up against a conventional view among economists that is unconcerned with facts.
http://www.voxeu.org/article/piketty-s-second-law-capitalism-vs-standard-macro-theory

138

TM 06.02.14 at 9:05 pm

Thanks for the ref. Let’s agree then that the Piketty model makes a lot of implicit assumptions that are not empirically tested (to put it mildly). The “standard” macro theory also makes assumptions that may not be valid (in this case, constant gross investment). I’m not committed to these assumptions either. I am just very frustrated with economists claiming this or that follows from their “elegant” mathematical model when in fact it’s not an implication of the model but of unjustified assumptions (the model itself may also be problematic of course). I make no bones of my contention that economic growth must necessarily slow down and eventually give way to a steady-state economy (defined as population stabilization together with a roughly constant capital stock and roughly constant material production and throughput, while of course allowing for qualitative development). The suggestion that a steady-state economy implies increasing inequality, “because of r>g”, is wrong and dangerous. To the contrary, inequality has been rising for decades despite high (by historic standards) rates of GDP growth. It’s time to put a final stake through the GDP zombie, the oldest and worst of all economic undead.

139

Val 06.02.14 at 9:13 pm

TM @ 128
The point I think you (and maybe some others) are missing is that even a very small growth rate, if it continues long enough, will eventually become exponential. That’s the mathematical inevitability part. You don’t have to have an enabler for that, you just have to have a lack of constraints. Of course in reality you do have constraints on what population could be supported at different times as Bruce Wilder said, and you can also get exponential declines (therefore, booms and busts as I put it earlier).

You may not be exactly saying this, but the ‘humans discovered coal and then the population grew exponentially’ theory is clearly an oversimplification.

140

Matt 06.02.14 at 9:29 pm

I don’t understand “even a very small growth rate, if it continues long enough, will eventually become exponential.” A constant positive-percentage growth rate is always exponential no matter how small the percentage. A constant-addition growth rate is always sub-exponential no matter how large the addition.

141

Val 06.02.14 at 9:34 pm

And just for further info, apparently the world’s growth rate peaked in about 1960s and is now slowing down. In most wealthy countries the rate of natural population increase is now below replacement rate (which is about 2.1 children per woman).

The expectation is that that pattern will continue until the natural increase rate of the world is below replacement rate (ie negative population growth rate). The world population is expected to peak this century and then start to decline.

Btw it’s on page 3 that Piketty says that the “sustained demographic growth” that people were seeing in the late 18thC and 19thC was “a previously unknown phenomenon”. I don’t know whether it has any impact on his overall thesis, because I haven’t got much further than that yet! But I do think it may be oversimplification of the sort Bruce Wilder identified (for some reason my iPad is not letting me cut and paste, but that really nice intro at 104 about the imagined “foggy sort of homogeneity” of the past).

I guess it depends how you define “sustained”. If it ends this century, will that be a longer period of population growth than there ever has been before? Perhaps Bruce Wilder knows.

142

Val 06.02.14 at 9:39 pm

Matt @ 140
Aren’t population growth rates normally expressed as percentages? I just mean that if it’s a very small growth rate, it will take a long time (historically) before the curve starts to shoot up.

143

TM 06.02.14 at 9:56 pm

Val 139: “The point I think you (and maybe some others) are missing is that even a very small growth rate, if it continues long enough, will eventually become exponential.”

Maybe I’m missing that point, because it’s nonsensical. Growth by a constant fractional growth rate, however small, IS exponential. It doesn’t “become” exponential. You should review the math of exponential growth (http://www.slideshare.net/amenning/exponential-growthmath).

What is so special about population growth since 1750 is that growth rates have *accelerated* so much, from 0.2% p.a. to 2% p.a. by 1970.

“You may not be exactly saying this, but the ‘humans discovered coal and then the population grew exponentially’ theory is clearly an oversimplification.

Actually it would be wrong because population growth from about 1750 up to 1970 has been *hyper-exponential*. Since about 1970, it has slowed to linear. (http://www.slideshare.net/amenning/growth-in-a-finite-world-sustainability-and-the-exponential-function)

144

Bruce Wilder 06.02.14 at 10:01 pm

TM: Let’s agree then that the Piketty model makes a lot of implicit assumptions that are not empirically tested (to put it mildly).

Let’s not agree to that! Piketty is lousy with facts.

TM: The suggestion that a steady-state economy implies increasing inequality, “because of r>g”, is wrong and dangerous.

Piketty warns that a conventionally capitalist steady-state or low-growth economy, in the absence of countervailing policy, implies increasing inequality.

He’s not calling for faster growth. He’s calling for policy — taxes — to curb the excessive accumulation and concentration of private wealth in the presence of falling growth.

I understand if you’re concerned about ill-considered calls for renewed economic growth, but, otherwise, I’m at a lost to understand your concern.

145

TM 06.02.14 at 10:03 pm

“if it’s a very small growth rate, it will take a long time (historically) before the curve starts to shoot up.”

Forgive me for dwelling on this but it’s a teaching opportunity ;-)
The exponential growth curve actually looks exactly the same (up to a scale factor) regardless of the value of the growth rate and regardless of where you look. There is no point where “the curve starts to shoot up”. The exponential is sometimes taught as a “J-shaped” curve. That’s completely wrong. There is no kink in the curve, it’s totally uniform. Mathematically it’s one of the most beautiful structures imaginable.

146

Peter T 06.02.14 at 11:46 pm

Piketty’s r>g seems to me not so much a law of capitalism as a straightforward statement that, in any system that allows secondary claims on income, ordinarily the share of income going to those claims will rise until it hits a political or other limit. In other words, income shares between classes are politically determined. This much any good historian could have remarked as commonplace, but economists seem to need it spelled out in simple terms, repeatedly.

Whether those claims take the form of rents, interest, taxes, labour or whatever is a contingent matter (as Piketty acknowledges). If the top 10% prefer to take their cut as “wages”, well, there is precedent for that – it need not, and usually does not, imply that they are “earned” in the ordinary sense of the term. Of Jane Austen’s brothers, two went into the navy and two into the church. The incomes they drew were nearly as much inherited as money in the funds.

147

Val 06.03.14 at 1:00 am

TM @ 145

Forgive me for dwelling on this but it seems to me there might be a bit of mansplaining going on here, rather than a “teaching opportunity”.

I apologise if I have the terminology wrong, it’s been a long time since I formally studied maths apart from statistics. However it seems pretty clear to me that you are talking about the growth curve and I am talking about the total population. Obviously the shape of the curve you get depends what you are plotting. If you have a fairly large population and a fairly small rate of increase, and you plot the total population over time, I think what you will get is the kind of J curve I am talking about, with a long very gentle curve that ultimately shoots up sharply.

If I’m actually wrong please feel free to demonstrate.

148

Val 06.03.14 at 1:17 am

TM @ 145

It’s this thing, whatever you want to call it (J curve seems to often be used but I don’t know that it’s a good name)
http://www2.estrellamountain.edu/faculty/farabee/BIOBK/biobookpopecol.html
(scroll down a bit to graphs)

- if the growth rate (birth rate minus death rate) is small compared to the population, the part of the curve from 0 to where the steep upward climb begins will be correspondingly long and gradual, but the steep upward curve will still happen at some point.

Of course the ‘exponential/J curve/whatever you want to call it’ pattern is theoretical, as I’ve said.

Anyway I think that really is enough about this because it is tangential to the post and the main thread. Maybe the significance of it might be explored at some other time.

149

Matt 06.03.14 at 1:31 am

I think I see what you mean, that small constant percentage increases eventually grow the base to the point where there are large absolute increases in each generation. But I don’t think that actually fits for historical human population growth. If there were only 10,000 humans alive after the Toba catastrophe 70,000 years ago, and human population growth maintained an extremely low rate of 0.05% annually, human population should have reached 1 billion around 28000 years ago. It actually reached 1 billion only ~200 years ago.

150

Val 06.03.14 at 5:34 am

Matt @ 149
You should read Bruce Wilder’s comment at 104. There can be sharp increases and sharp declines, it works both ways.

I might try to write something about this on my blog sometime because it’s obviously interesting, but tangential here as I said, so no more from me here.

151

Ze Kraggash 06.03.14 at 7:47 am

What Peter T 146 said, only even more trivial: the rich are getting richer, both absolutely and relatively. Which has little to do with equations, and everything with political power. Give me enough power, and I’ll pump ‘r’ as high as I want, restrained only by the prospect of a pitchfork-wielding mob showing up in front of my castle.

152

J Thomas 06.03.14 at 1:16 pm

VAL @ 147, 148

He actually does have an important mathematical point.

Putting that aside for the moment, you have a point that the math is simple and the reality is complicated. The point of the math is that it makes clear a simple idea that’s worth understanding thoroughly. The simple idea can be applied to a whole lot of things, except of course you have to pay attention to the complications each time as well as the simple thing which is an important part.

The simple idea is about things that change by a fraction of themselves. Compound interest. Bacteria growing in culture medium or in a gallon of milk left out. Blog comments on a controversial topic. When each comment gets two responses, there’s a sort of explosion.

You can get absolute explosions even when the relative increase doesn’t change. It’s a useful idea that’s worth careful study.

But of course in reality exponential growth does not continue unchanged for a long time. If nothing else, the growth itself will change conditions. Cancer cells might grow exponentially but then they kill you. Dynamite, one molecule exploding sets off more than one more, but after awhile the explosion runs out of dynamite. The bacteria in the milk jug starve. Etc.

Very often the actual curve is more like the second one in the link you gave. It can look like two J curves fit together (but they can have very different slopes). It looks exponential for awhile, and then as things change it levels off.

We know that human beings have not really had a constant population growth rate, not for long. We expand into new ecosystems, and then for any given technology we reach an equilibrium where the population can’t expand further. Then maybe we get a new technology that lets the population expand more.

Before the Black Death the population in europe was expanding slowly. People had lots of babies. Poor people’s babies died. Rich people’s babies died sometimes. Afterward the population expanded fast. Maybe each woman had the same number of babies on average, but more of them survived because times were better.

Population rises when new technology allows it, and stagnates until a new opportunity comes along.

First world nations have stagnant population growth because it’s very expensive for wage-slave families to raise children to be wage-slaves. They could have more children, but the extra would have to become something else and how would they live? So they have two children, or one, and they vaguely feel like failures because they don’t want to recognize that in the game of population ecology they are at best barely breaking even.

We can apply the same sort of thing to Picketty. Of course we don’t have constant r and constant g. The world is complicated. We do however have a lot of rich people who do not invest more in productive businesses as they get richer. Picketty’s simple idea suggests that this is true and maybe inevitably true, and he suggests why this is a problem and he suggests simple solutions.

It’s trivial to argue that he does not tell the whole story. It would be complicated to collect real data to support a different story. In the meantime we can discuss whether he’s right that there is a problem, and if so what solutions seem plausible.

153

Mike Furlan 06.03.14 at 2:18 pm

So far absent from the discussion is N. Taleb’s criticism:

“His measure of inequality could be inconsistent across samples, so under fat tails, with his measure, Average(Inequality(A)+Inequality(B)) < Inequality(A+B). It can rise over time as populations get larger (under fat tails), or rise simply from model error or breadth of the measurement. "

Note 156

http://www.fooledbyrandomness.com/notebook.htm

154

J Thomas 06.03.14 at 3:35 pm

N. Taleb’s criticism:

“His measure of inequality could be inconsistent across samples, so under fat tails, with his measure, Average(Inequality(A)+Inequality(B)) < Inequality(A+B). It can rise over time as populations get larger (under fat tails), or rise simply from model error or breadth of the measurement. "

Does N. Taleb have evidence about the question whether this is a fat-tail distribution or not?

You can toss out almost any statistical conclusion if people will let you assume that the tails are fat enough that their data is wrong. Unless, of course, you actually look at the data and see how it is distributed.

But the problem is more severe than his sloppy empiricism, it is at the purely logical level: if the process is fat tailed, then wealth is generated at the top, which means increases in wealth lead to increases of measured inequality. Within population wealth creation is a series of small probability bets. So it is natural that the pool of wealth (measured in years of spending, as Piketty does) increases with wealth. Consider 100 people, for a tail α that corresponds to our measurement, the additional wealth should come come 1 person, which the remaining bottom 50 contributing nothing. It is not a zero sum gain: eliminate that person, and there will be almost no wealth increases.

Taleb is starting from his own assumptions. He assumes not just that wealth comes from a small minority of the population, but that it comes from the wealthy. It isn’t scientists and engineers who create new methods that allow the total wealth to increase. It’s the people who are already rich, the rest contribute nothing.

It seems to me this assumption should be tested. Find a way to collect data to show how true it is.

The measured data favors Picketty. But Taleb makes a reasonable argument that maybe the measured data is wrong. If the breaks fall just right, the statistics could give us wrong conclusions. And with fat tails you can think it’s only a 5% chance the data is misleading you when in reality it’s some larger chance.

The obvious opportunity here for Taleb is to demonstrate that this is the case, and publish it, and the people who want Picketty to be wrong will like him a lot. Just arguing that there is a possible way for the facts to be wrong is not nearly as good.

155

adam.smith 06.03.14 at 4:03 pm

Just in case anyone is wondering about what J Thomas and TM are talking about: The exponential function’s relative rate of growth is constant. E.g. the standard exponential function exp(x) doubles at intervals of about .7—it’s 1 one at 0, 2 at ~.7, 4 at ~1.4, 8 at ~2.1. etc. While the interval changes, the general property is true for all functions in the exponential family. Of course that doesn’t mean that it doesn’t “shoot up” when you look at it. You can just define “shoot up” as a one-year growth of any given (absolute) value and then you get a point at which the exponential function “shoots up.”

156

TM 06.03.14 at 5:54 pm

as 155: “Of course that doesn’t mean that it doesn’t “shoot up” when you look at it. You can just define “shoot up” as a one-year growth of any given (absolute) value and then you get a point at which the exponential function “shoots up.””

The exponential function doesn’t “shoot up”, period. It grows smoothly by exactly the same fraction each unit of time. Each segment of the function looks exactly like any other segment, up to a scale factor in the x and y axes. Of course you are free to call a chair “beer-mug” by redefining the meaning of the word but that doesn’t mean that the rest of us will accept your redefinition of this or any other term. Maybe I am pedantic but I happen to think we need to be taking this stuff seriously. Al Bartlett was on to something when he famously remarked: “The greatest shortcoming of the human race is our inability to understand the exponential function.”

157

TM 06.03.14 at 5:56 pm

Peter T 146: “Piketty’s r>g seems to me not so much a law of capitalism as a straightforward statement that, in any system that allows secondary claims on income, ordinarily the share of income going to those claims will rise until it hits a political or other limit. In other words, income shares between classes are politically determined.”

This is precisely NOT what Piketty is saying.

158

TM 06.03.14 at 6:17 pm

Val 147: “If you have a fairly large population and a fairly small rate of increase, and you plot the total population over time, I think what you will get is the kind of J curve I am talking about, with a long very gentle curve that ultimately shoots up sharply.”

No. If the rate of increase remains constant – whether small or large doesn’t matter – you get an exponential growth curve. It is not J-shaped and does not “shoot up”. The shoot-up that is observed in human population growth is due to *accelerating* growth rates after 1750. As I pointed out, the growth rate increased from 0.2% to its peak value of 2% in 2 centuries. That is called *hyper-exponential* growth and that is what creates the (correct) impression of population suddenly shooting up. See http://www.slideshare.net/amenning/growth-in-a-finite-world-sustainability-and-the-exponential-function, slides 86-91.

Val 148: ” if the growth rate (birth rate minus death rate) is small compared to the population” etc.

The (fractional) growth rate is a *percentage*. The size of the population doesn’t even matter, it’s a *relative* concept!

JT 152: “the math is simple and the reality is complicated.”
And the cliches grow on trees…
The math is what it is and the reality is what it is. I’m not sure what you are trying to do. but what I would talk about is how human population actually changed over time, and what mathematical models are most appropriate to describe that empirical reality. In order to do that, understanding of the mathematical models is definitely an advantage.

159

Val 06.03.14 at 9:21 pm

TM @ 158
Oh well here I go damnit. I honestly don’t understand why you keep trying to prove me wrong. I looked at your link above and I looked at Wikipedia and various other places – thinking surely I must be wrong if he keeps going on about it – and I’m not. We are talking about the SAME THING! (Excuse capitals)

The red curve on your slide http://www.slideshare.net/mobile/amenning/growth-in-a-finite-world-sustainability-and-the-exponential-function and the green curve on Wikipedia http://en.wikipedia.org/wiki/Exponential_growth (labelled exponential growth) – that is the thing I am talking about.

I have to finish reading Piketty and do some work on my PhD now. Please feel free to visit my blog if you wish to say anything further – as I’ve said before I don’t think it’s quite right to keep having a discussion here that is, at best, tangential to Henry’s post.

Btw re what I take to be Henry’s main point: inequality, or inequity as we often say (ie labelling it as unfair) is very much considered ‘a problem’ now in public health (including my own thesis) particularly since Wilkinson and Pickett – by which process the very rich are now ‘a problem’ also, regardless of one’s politics. Though there has of course also been a backlash from the usual suspects.

160

adam.smith 06.03.14 at 9:40 pm

TM—you’re just being pompous. I understand exponential functions just fine, as surely you could tell by reading my post. “Shoot up” is not a mathematical term, so indeed I can define it in any way that I find useful. I find it useful to use terms in a way that corresponds to their natural usage. I know some people who are decent at math like to pretend it’s counter-intuitive and doesn’t correspond to what people know. They’re doing a disservice to the general perception of maths.
While the relative changes of the exponential function remain constant, its absolute changes grow, well, exponentially. That’s what people mean when they say the exponential function shoots up. Giving them unsolicited (and poorly executed, at that) math lectures in response is not a teaching opportunity but a dick move.

161

Ed Herdman 06.03.14 at 10:36 pm

This discussion does reinforce for me that focusing exclusively on the exponential function wrt real populations is a mistake. It’s useful, but the common perception/takeaway – that mainly resource limitations restrict growth – seems too optimistic. I didn’t know about the 1Bn 28,000 years ago thing, which is interesting – were there other significant population crashes beyond the one ~70,000 years ago and the Black Death that helped retard population growth?

162

TM 06.03.14 at 10:50 pm

Val, I’m not “trying to prove you wrong”. I just happen to be a mathematician who has studied this stuff and I know what I’m talking about. If you think you know better than me, why don’t you study the Math and then come back.

AS, “shoots up” in most people’s usage of the term implies an abrupt change. There is no such abrupt change in an exponential growth process. If you disagree with that statement, why don’t you explain mathematically why you think it’s wrong instead of insulting others.

163

adam.smith 06.03.14 at 11:29 pm

Tl:dr; When a term doesn’t have a clear mathematical definition, you can’t use math to show people they’re wrong about that term.

AS, “shoots up” in most people’s usage of the term implies an abrupt change. If you disagree with that statement, why don’t you explain mathematically why you think it’s wrong.

Sure. For any exponential function f(x)=a^bx I shall define the “shoot-up” point s as the point at which f(s)-f(s-1)=10a, in other words, at the point at which a one-unit change of x causes an increase of the function by 10 times its base.
Now, you may disagree with that definition. Obviously 10 is an arbitrary value. But as I say above there is no mathematical definition of “shooting up,” so this definition is just as good as the one that you’re proposing and it does at least seem to correspond to what Val is seeing and talking about.

In particular, you seem to be proposing something like f(s)/f(s-1)>>f(s-1)/f(s-2)). Which is fine and I’m not going to tell you that it’s wrong (again, no mathematical definition etc.), but it’s most certainly not the only way of describing the idea of a function shooting up. For example, it implies that, e.g., f(x)=x^2 doesn’t just not “shoot up,” it does the opposite (since for x>2, f(x)/f(x-1)<<f(x-1)/f(x-2)), which I'm pretty sure is not what most people would say looking at the right side of a parabola.

164

Ed Herdman 06.04.14 at 12:00 am

Additionally, when a population – which up to some point has not been strongly following exponential growth patterns due to a combination of factors (limited growth potential, occasional crashes) – suddenly does start to more closely follow an exponential trajectory, it seems appropriate to use some language to describe that as an abrupt difference in the pattern.

Even if you insist that the history of population change is strongly associated with consistent exponential growth, and that people are choosing a point to consider a break point with previous eras, I can just refer you to adam.smith’s comment. Even in this case, you should have inferred that in fact what signified the break is not to be found in the exponential pattern alone, or any mathematical model for that matter. It might be factors that have some interplay with individuals and the carrying capacity of the environment, or it might be emotional or social factors (all that 19th c. “fin de siecle” stuff about the breaks with tradition of modern life), or something else entirely. But nobody here, and none of these scenarios of what constitutes a break in a pattern, challenge the usefulness of talking about exponential functions – and the converse is true also.

In short, “a break” represents a judgement of the historical record and what has actually happened, which may well be more useful than limiting the discussion to saying there is some arbitrary mathematical model we’d like to use and that it seems to fit. We are not striving merely for reducing the explanatory model here.

165

Val 06.04.14 at 2:10 am

Thank you adam.smith @160 and everyone else who tried to get this conversation on to a sensible footing

Like so many women, I have to say this is not the first time this sort of thing has happened to me, and sadly it probably won’t be the last

https://www.byliner.com/read/rebecca-solnit/men-explain-things-to-me

but at least it seems it’s only a minority who do it here

166

Ed Herdman 06.04.14 at 3:36 am

Thanks for that comment; made a few things click for me this time, for some reason.

I actually saw this coming from the other direction as well – the narrow focus of the specialist leading to conceptual blinders. High attainment in a field doesn’t lead to broad vistas of the larger world, apparently.

Us guys are also supposed to carry and obey the religion of pack battles, too. Want to win a battle over political games the correct conceptual approach? Snarl back harder!

It seems to me that all these tendencies of the qualified professional can tie into each other.

167

Rakesh 06.04.14 at 7:02 am

http://robertpaulwolff.blogspot.in/2014/06/guest-post-on-piketty-by-my-son.html

Wolff however does not discuss Piketty’s ingenious use of returns on University endowments as a way of figuring out the kinds of returns the wealthiest may be making on the riskier assets that they are holding.

168

J Thomas 06.04.14 at 10:10 am

Val, what made you a target was not so much being a woman, as appearing to be a woman who knew no math. Men who look that clueless can get that response too, maybe not quite as often.

The hope is that a clear understanding of the simple math will help people think clearer. This might not be true, but mathematicians tend to believe it’s true enough to go out of their way to explain.

Despite everything I want to make one last try at explaining this simple idea. Even though it doesn’t necessarily fit the reality in any simple way.

The important thing about exponentials is that they do get big over time, faster than you’d expect. And a second thing is that how they look depends on how you graph them.

The story about putting one grain of wheat on one square of a chessboard, and two on the next and four on the next etc shows that an exponential function can get completely out of hand.

And this can be misleading. Imagine something is increasing at only 1 part in a thousand per year. Starting at 1, in 10,000 years it will get up to around 20 thousand. And in 100,000 years it will reach more than 10^43. That looks like it’s jumping up! But after 100,000 years it’s still only increasing at 1 part in a thousand. It jumped up a whole lot over 90,000 years, but in one year it isn’t going up any faster than ever.

It can look completely different just by how you graph it! And that can be very important. For example, Stephen J Gould built an entire career out of something he called “punctuated equilibrium”. He studied fossils, and he found that when he looked at large numbers of trilobite fossils and graphed their changes, each change came instantaneously. They didn’t go through a time when it was mixed between old and new, suddenly 100% of them were the new kind. He considered this a tremendous anomaly and he spent a lot of effort trying to explain it.

But a population geneticist could have told him — when a new trait is selected, other things equal its numbers will fit a logistic curve. With even a small selective advantage it’s pretty much over in 1000 generation. And on Gould’s timescale, 1000 generations was practically instantaneous. The whole thing came from how he graphed it. A symmetric pair of J-curves turned into a symmetric pair of L-curves. And that math error fueled a tremendous amount of creativity.

There is a useful lesson there if you can get past being condescended to.

169

Rakesh 06.04.14 at 2:42 pm

Debraj Ray and Branko Milanovic argument. See links
http://glineq.blogspot.fr/2014/06/nit-piketting-continued.html

170

Rakesh 06.04.14 at 2:58 pm

It seems like a technical point on which Ray and Milanovic are focused, but Ray may be right to call attention to the assumption that all capital income is saved.

If r were falling and capitalists wanted to maintain their consumption, capitalist consumption could increase as a percentage of capitalist income. Savings/investment would decline relatively. This would slow down the growth in the value of capital assets held by the non-working owning class. Of course to the extent that this capitalist class was sacrificing some accumulation of real capital assets to maintain or increase their own consumption, then the growth rate of the economy would also slow down, so inequality could increase.

171

Mike Furlan 06.04.14 at 5:29 pm

RE: http://crookedtimber.org/2014/05/27/political-economy-is-political/#comment-532522

Thanks for the reply J Thomas

Let’s break it down further.

One of Taleb’s arguments was, I believe if the income distribution is fat tailed, all other things being equal:

If the population grows, measured inequality will increase.

If the sample size is increased, measured inequality will increase.

Is this correct?

172

J Thomas 06.04.14 at 8:57 pm

One of Taleb’s arguments was, I believe if the income distribution is fat tailed, all other things being equal:

If the population grows, measured inequality will increase.

Actual inequality should increase. Measured inequality will probably increase, but the measured inequality will usually tend to understate the actual inequality because a lot of weight is in outliers, and if the samples are too small to reliably sample the pool of outliers then they’ll be off. Variability among samples should be higher than expected because of the outliers.

If the sample size is increased, measured inequality will increase.

On average, it ought to. The larger the sample, the more outliers you’ll get, and the better the chance you’ll get an extreme outlier. But it won’t happen every time.

173

Val 06.05.14 at 5:40 am

J Thomas @ 168
oh FFS. The point is I do understand the concept of exponential growth and I always did throughout the whole effing conversation. TM imagined that I didn’t. Please, that is enough.

174

Val 06.05.14 at 6:03 am

J Thomas @ 168
Ok, I’m fed up enough to do this now. I mentioned earlier in the thread that I had not formally studied mathematics since school, but I also mentioned that I had studied statistics as part of my public health studies. Just to clarify that, I did the Masters of Public Health course that was offered by a consortium of four Victorian Universities, Melbourne, Monash, Deakin and La Trobe. The first two are, I believe, ranked amongst the top 50 universities in the world.

As part of my MPH studies I was required to do biostatistics and epidemiology. I got 83% for biostatistics and 92% for epidemiology, and was awarded the prize for epidemiology in my year. Now you really cannot be that good at epidemiology without having a very good grasp of both logic and mathematical concepts. So next time you want to patronise someone for not being good at maths, just remember that you once, on a public blog, chose to patronise a women who was outstandingly talented in at least some branches of mathematics – and don’t do it!

175

J Thomas 06.05.14 at 8:48 am

So next time you want to patronise someone for not being good at maths, just remember that you once, on a public blog, chose to patronise a women who was outstandingly talented in at least some branches of mathematics – and don’t do it!

Val, what got at least two people to explain the exponential concept to you, was that you very strongly gave the impression that you had looked at a picture of an exponential function without understanding it. You never gave us a clue otherwise.

If you’re a Freemason and you want other Masons to know you’re one, why not give them the secret handshake?

When you act like you’re ignorant, people assume you’re ignorant. Your degrees aren’t tattooed onto your forehead.

176

Rakesh 06.05.14 at 3:31 pm

Maybe Milanovic and others are winning this debate with Debraj Ray
http://ruggedegalitarianism.wordpress.com/2014/06/04/why-is-r-g-so-significant-for-piketty/
But I think it is important to question the assumption that capitalists are but ascetic social servants sacrificing their consumption for the sake of accumulation. Marx is famously thought to have written this, but his view is actually more complex, and may be unjustified anyway.

177

Rakesh 06.05.14 at 3:37 pm

very interesting discussion of neglected aspects of Piketty’s book (I would include Piketty’s discussion of sovereign wealth funds, in particular his explanation for why the Saudis hold a disproportionate share of low yield US T-bills).

http://rajivsethi.blogspot.com/2014/06/plots-and-subplots-in-pikettys-capital.html

Comments on this entry are closed.