A quick announcement – we’ll be publishing Thomas Piketty’s response to the seminar in early January, it being the time of year when many readers are likely to be spending time with their family or being otherwise engaged. In the meantime, readers may be interested in the Foreign Affairs debate on economic inequality (which evidently owes a ton to Piketty) and Dan Hirschman’s paper on why Piketty’s work seemed so surprising when it first came out. And to all who celebrate it, happy Christmas, and to those who don’t, happy holidays! Myself, I’ll be spending it with my extended family in the West of Ireland (including Milo, the Crooked Timber Christmas dog
{ 32 comments }
Tom Slee 12.23.15 at 1:11 pm
As it’s a placeholder post I’ll assume off-topic is OK.
many readers are likely to be spending time with their family or being otherwise engaged.
Am I the only one to find myself out of sync with Crooked Timber? My time here tends to be on weekends and at other non-work times, but I’ve noticed that the blog is more active during weekdays. Do most people CT at work? Or even see it as part of their work-related activities?
ccc 12.23.15 at 3:58 pm
Additional recent pieces that relate to Piketty:
Dean Baker, “Working Paper: The Upward Redistribution of Income: Are Rents the Story?”
http://cepr.net/publications/reports/working-paper-the-upward-redistribution-of-income-are-rents-the-story
De Long on Baker
http://equitablegrowth.org/must-read-dean-baker-the-upward-redistribution-of-income-are-rents-the-story/
Baker’s reply
http://cepr.net/blogs/beat-the-press/brad-delong-on-piketty-s-likely-response-to-rent-argument
De Nardi, Fella & Yang, “Piketty’s book and macro models of wealth inequality”
http://www.voxeu.org/article/pikettys-book-and-macro-models#.Vnkao0auL40.twitter
De Long, “The Melting Away of North Atlantic Social Democracy”
talkingpointsmemo.com/features/marchtoinequality/fourmeltingsocialdemocracy/
Rakesh Bhandari 12.23.15 at 5:36 pm
@1 Opposed to the sharing economy in principle, I participated in the Piketty symposium only because the CT collective paid me handsomely to contribute.
Rakesh Bhandari 12.23.15 at 6:01 pm
As to Baker’s critique, I think he is missing entirely Piketty’s argument. Would Piketty be surprised that great fortunes have been made by cornering the market, sometimes even with government assistance? Of course not.
Take what Baker would take probably the greatest fortune ever built through anti-competitive practice, Bill Gates’.
But what is Piketty’s point–the fortune that Gates made through his operation system (say $8 billion) is but a fraction of the wealth that he made as a rentier (now his wealth is, say $70 billion).
If he Baker thinks he can check wealth concentration simply through a campaign against anti-competitive practice, Piketty would remind him that there is still a need for a global wealth tax.
Rakesh Bhandari 12.23.15 at 6:19 pm
sorry for typos…meant “would probably consider” and “operating”. Hope meaning was clear despite typos.
Bill Hamlin 12.23.15 at 7:31 pm
It is possible that the share of the wealth of the top 1% can rise from 10% to 20% while at the same time the other 99% will also have a rise in wealth. That would occur when there is a growth in the amount of available money. Not only is the Fed making money (so as to issue food stamps for example) but even a bank loan creates money — the bank only needs to have 10% of the loan amount in assets for example.
Say in 1980 there was $1000 shared among 100 people. One person (the top 1%) had $100. Now in 2015 there is $10,000. The one person has $2000, and the rest has the other $8000. In an efficient economy (cell phones, Internet, etc) and an economy where inflation is under control, we are all benefiting.
P O'Neill 12.23.15 at 8:10 pm
Piketty’s blog hosted at Le Monde is good for seeing his broader policy perspective and Google-translates effectively enough if needed.
http://piketty.blog.lemonde.fr/
bob mcmanus 12.23.15 at 8:49 pm
but I’ve noticed that the blog is more active during weekdays. Do most people CT at work? Or even see it as part of their work-related activities?
My impression is that the discursive parts of the web are largely populated by a) students but not here (they are at interest and identity blogs), b) bored professionals doing lightly-supervised drudgery in front of screens (lawyers, academics, programmers, finance, writers, but not doctors), c) retired cranks.
ckc (not kc) 12.23.15 at 9:37 pm
…soon-to-be retired lightly supervised academic who reads evenings and weekends (from interest – most of this stuff is outside my professional expertise, hence no commenting generally)
Ronan(rf) 12.23.15 at 11:29 pm
Im probably loosely situated in category (b), though aspire to (c).
LFC 12.23.15 at 11:39 pm
@ckc (not kc)
If people only commented on matters w/in ‘their professional expertise’, wouldn’t the comment threads be sort of dull? (Though there may admittedly be trade-offs here…)
js. 12.23.15 at 11:42 pm
Tom Slee — Back when I was in academia, I would regularly spend time on CT when I should have been prepping for class or writing or reading, though admittedly that could be at any time of the day or night on any week of the day. Now, it’s more of an evenings-and-weekends affair for me.
Rakesh Bhandari 12.24.15 at 4:54 pm
On the Hirschman problematic–here’s a question that cannot yet be answered since the data have not yet been produced:
Piketty and Zucman:
“we describe the existing evidence regarding the evolution of the
share φ of inherited wealth in aggregate wealth. This is an area in which available historical
series are scarce and a lot of data has yet to be collected. However existing
evidence—coming mostly from France, Germany, the United Kingdom, and
Sweden—suggests that the inheritance share has also followed a U-shaped pattern over
the past century. Modigliani’s estimates—with a large majority of wealth coming from
life-cycle savings—might have been right for the immediate postwar period (though
somewhat exaggerated). But Kotlikoff–Summers’ estimates—with inheritance
accounting for a significant majority of wealth—appear to be closer to what we generally
observe in the long run, both in the nineteenth, twentieth, and early twenty-first centuries.
Here again, there could be some interesting differences between Europe and the
United States (possibly running in the opposite direction than for wealth concentration).
Unfortunately the fragility of available U.S. data makes it difficult to conclude at this
stage
fn: 4 See Kotlikoff and Summers (1981, 1988) and Modigliani (1986, 1988). Modigliani’s theory of life-cycle
saving was first formulated in the 1950s–1960s; see the references given in Modigliani (1986).
Rakesh Bhandari 12.26.15 at 6:28 pm
Again relevant findings about global inequality. Milanovic seems to think the pace of global convergence will be slower than Piketty suggests.
http://www.voxeu.org/article/income-inequality-and-citizenship#.Vn2JBQkcywY.twitter
Rakesh Bhandari 12.26.15 at 6:36 pm
I am wondering how Piketty’s high estimate of high marginal rate of substitution affects his proposed policy recommendations. It could be that the reason he puts less emphasis on reforms to strengthen possibilities for working class organization is that he fears that this would just lead to the replacement of labor with capital. He would thus rather strengthen and make more efficient the social state through progressive taxation than put policy in place that would allow for a sharp increase in wages?
Rakesh Bhandari 12.26.15 at 6:42 pm
Another prediction of growing inequality
http://economia.icaew.com/opinion/global-review-2015-winter/the-world-economys-labour-pains
Rakesh Bhandari 12.29.15 at 1:59 am
Why does Piketty call his fundamental inequality of r>g a contradiction, even the central contradiction? Is it because this inequality (along with certain additional conditions such as an initial unequal distribution of wealth and a sufficiently high savings propensity of those who are wealthy) is what is behind things out of their own nature likely becoming their own opposites, e.g. meritocratic capitalism becoming a rentier society and an entrepreneur becoming a rentier; and/or is it because this is what will sharpen the contradiction in society between those who receive income as rent and those who earn it through work?
Is Piketty’s use of the concept of contradiction nothing but a rhetorical gesture? Is “contradiction” meant in a dialectical or some other sense?
I don’t think this has been discussed in this symposium.
Rakesh Bhandari 12.29.15 at 3:55 am
“In its rational form [dialectic] is a scandal and abomination to bourgeoisdom and its doctrinaire professors, because it includes in its comprehension and affirmative recognition of the existing state of things, at the same time also, the recognition of the negation of that state, of its inevitable breaking up; because it regards every historically developed social form as in fluid movement, and therefore takes into account its transient nature not less than its momentary existence because it lets nothing impose upon it, and is in its essence critical and revolutionary.â€
Rakesh Bhandari 12.29.15 at 4:01 am
Interesting criticism from the “right” of Piketty: http://www.kornai-janos.hu/Kornai2015-Piketty-article.pdf
In Understanding Classes Erik Olin Wright argues: 1. Piketty should not have counted much supermanager income as labor income: 2. it is doubtful whether a lot of housing should be included as wealth if the returns are basically rents being paid to the owner: and 3. Piketty’s concept of class is not sufficiently relational to capture how income is produced and how surplus income is appropriated.
Rakesh Bhandari 12.29.15 at 6:12 pm
Cass Sunstein, New York Review of Books, 1/14/16:
“Zucman largely praises FATCA, but in the United States, the law has turned out to be highly controversial, and some people are loudly calling for its repeal or modification. One reason is expense. Foreign financial institutions are not at all happy with the considerable administrative burdens that it imposes. Another reason involves unintended adverse consequences. Because FATCA increases the costs of having American investors, it gives some foreign banks an incentive not to allow Americans to invest at all (or to charge them higher fees). The law is also a blunt instrument. A lot of law-abiding Americans, living abroad, use foreign financial institutions, and they do not need FATCA to ensure that they obey the law. The same is true of many Americans who choose, for one or another reason, to invest abroad.
But if we keep the size of Zucman’s estimates in mind, these concerns need not be taken as decisive. If the effect of FATCA is to produce major reductions in tax evasion, and to ensure that people pay what they owe, then it might well be worthwhile to incur the costs. Of course foreign banks do not like the law, not only because compliance can be burdensome, but also because it makes it much harder to provide tax havens. That is not exactly an argument against FATCA.”
LFC 12.29.15 at 6:56 pm
Henry’s OP mentions the symposium on inequality in the current (Jan/Feb 2016) issue of Foreign Affairs. Ronald Inglehart’s piece that begins the section, to judge from its opening paragraphs, takes a line similar to J.W. Mason’s essay here, in that Inglehart argues that trends in inequality track w “shifts in the balance of power between elites and masses.” Other contributors to the FA section are F. Bourguignon, P. Ronsvallon, D. Allen (who also contributed to the CT symp.), A. Atkinson, and J. Tepperman (the last writing about Brazil’s bolsa familia). Haven’t done more than glance through the FA section. The Inglehart piece is prob worth reading (despite his, annoying to some, insistence on using the word “modernization”).
Rakesh Bhandari 12.29.15 at 7:31 pm
Inglehart has an interesting thesis that the working class which had turned rightward due to post-materialist values (cultural integrity, family, nationalism, abortion) may focus again on economic inequality and turn left, even possibly become class-conscious. Made me think of another kind of post-materialist valuation of autonomy and self-expression. According to Boltanski and Chiapello network capitalism promised greater scope for autonomy and self-expression (coopting what they called the artistic critique of capitalism) and were able to win the consent of those otherwise made insecure by its flexible forms of operation.
So another form of Inglehart’s interesting argument is that people may come to value economic security again and not be content with post-materialist promises of greater self-expression and flexibility.
Rakesh Bhandari 12.29.15 at 7:39 pm
Bourguignon’s argument is quite interesting to me. Piketty gives us a narrative of the return of capital and of the power of the dead over the living. Larry Summers gives us a narrative of the return of secular stagnation. David Kotz and David Harvey tell us the story of the rise and possible fall of neo-liberalism.
Bourguignon puts globalization at the center: “The same factor that can be credited for the decline in inequality among countries can also be blamed for the increase in inequality within them: globalization.”
Ronan(rf) 12.29.15 at 9:28 pm
Bourguignon has a new book out on the subject afaik, Though I’ve read neither the book nor the article yet. I’m surprised (unless I’ve missed it) that there wasn’t more about globalisation causing the increase in inequality which (also afaik) is milanovich s argument and, before it became sexy, kindred winecoff s
ipeatunc.blogspot.ie/2011/06/there-is-no-great-stagnation-only-great.html?m=1
LFC 12.29.15 at 9:49 pm
Bourguignon puts globalization at the center: “The same factor that can be credited for the decline in inequality among countries can also be blamed for the increase in inequality within them: globalization.â€
It would seem fairly obvious that more than one ‘factor’ has led to the increase in within-country inequality; hence the quoted Bourguignon statement is excusable only on the grounds that it comes from a short piece in a wide-circulation magazine. That said, I haven’t read the article yet.
Bruce Wilder 12.30.15 at 1:28 am
Rakesh Bhandari @ 19
It is quite possible that the large incomes extracted by supermanagers represent largely a liquidation of “accumulated” capital, a dismantling as it were of production structures that supported high productivity and high incomes in some advanced countries.
JW Mason 12.30.15 at 3:34 am
Are Rents the Story?
While I certainly have criticisms of Piketty’s story [*], I must say I like it much better than the rent story. I mean, what is a rent? In this context, it’s a payment in excess of the marginal cost of producing the good or service being paid for. In other words, the term “rent” is only meaningful against a background in which economic transactions are normally exchanges of goods at prices equal to their marginal costs of production. Obviously, this is a very restrictive framework but outside the term “rent” doesn’t have a well-defined meaning. Or maybe it’s better to say, every interesting payment in the real world has a substantial element of rent.
This is one of those things that makes a certain amount of sense as a rhetorical ploy — noting how actually existing capitalism debates from the market ideal — but is useless for making positive claims about the world.
* Or at least, with common interpretations of his story. As we’ll see when his response is put up, Piketty himself seems to basically agree with my post here.
Bruce Wilder 12.30.15 at 7:16 am
JW Mason: what is a rent? . . . it’s a payment in excess of the marginal cost of producing the good or service being paid for.
Uh, no.
First of all, economic rent isn’t a payment, per se, at all. “Economic rent” refers to an analytic distinction, a counterfactual difference in income between what is earned and what might be earned in some alternative scenario. If that income is realized as a payment, it is some portion of that payment.
Economic rent (Paretian) is the extra income earned by a factor resource — e.g., land, capital, or labor — by virtue of its present use over and above what it would earn in some alternative employment (conventionally, the “next best use”). The implication is that we are paying more to allocate the factor to its best use than is necessary, because what is necessary is just slightly more than the threshold established by what would be earned in the next best use.
It doesn’t really say anything about marginal cost pricing of unit production, as such. Rice, say, might be priced at the marginal cost of producing the last bushel of rice. The best land for rice may still earn a substantial rent, if it is not well suited to alternative crops, and the most marginal land for rice, because it is well-suited to alternative crops — say, wheat — will earn a very small rent.
It is wrong to imagine that a perfectly competitive economy would eliminate economic rents. What perfect competition eliminates is economic profit. In a perfectly competitive economy, the price of the best land for rice would get bid up, despite the paucity of alternative uses. That would not eliminate the rent, just the profit from owning the land that earned the rent, and that because the financial expense of owning the land had been bid up.
Economic rent becomes the negotiable margin, within which the distribution of income is bargained over, without affecting the allocation of factors.
If people working for Acme Consolidated have higher productivity in their jobs inside the company — once fully trained in the fabulous Acme System — than they would in their next best opportunities outside the company, the company might pay them a premium over the market wage (aka their next best opportunity). That premium would constitute an economic rent. It might even be behaviorally important, since Acme employees would feel rewarded for loyalty and reluctant to chance losing that economic rent premium, by getting fired and having to take their next best opportunity (aka the market wage). It might also be the case that the leaders of Acme have based their business plan in part on being able to hire cheap and train cheap hires into highly productive associates in the Acme Way of Doing Things, pocketing some of that economic rent. Which way things go is bargaining power all the way down.
JW Mason 12.30.15 at 7:49 am
I’m not sure how any of this contradicts my comment.
Economic rent (Paretian) is the extra income earned by a factor resource — e.g., land, capital, or labor — by virtue of its present use over and above what it would earn in some alternative employment (conventionally, the “next best useâ€). The implication is that we are paying more to allocate the factor to its best use than is necessary,
And the (opportunity) cost of the use of the factor in this way, is just what it would yield in the next best use.
My point is that separating money payments into the part that is equal to the hypothetical next-best alternative and the “rent” that is in excess of this, doesn’t seem like a productive way to think about trends in income distribution, or any other concrete phenomena I can think of. Are you sorry if you lose your job? Well then your wage payments included a rent component. But I can’t see how it makes sense to add up that component plus various forms of property income, etc., into some aggregate category of income. Worse than that, it establishes as the analytical and political baseline the hypothetical case where there are no “rents”. And of course there’s the implicit or sometimes explicit suggestion that “rents” are morally objectionable. Together these basically mean that any economic arrangement other than an arms-length, one-off market exchange is treated as illegitimate.
I’m sorry to say that Dean himself to a certain extent illustrates the dangers of going down this road.
Bruce Wilder 12.30.15 at 5:20 pm
JW Mason: I’m not sure how any of this contradicts my comment.
You and I disagree about whether “economic rent” is a useful concept in application to the distribution of income. We agree that establishing as an “analytical and political baseline the hypothetical case where there are no “rents†“ is not useful.
I objected to your earlier definition of “economic rent”, which incorrectly related the concept to marginal cost pricing of product.
Our common “enemy” here is the Chicago-esqe idealization of the competitive market economy as a self-regulating system achieving optimally efficient allocation of scarce resources. It is that conceptualization that tries to model every economic arrangement as ideally one-off, arm’s length and so on. And, it relies exclusively on the marginal to explain behavior.
Economic rent uses the inframarginal to explain behavior. That expansion of the explanatory space is what makes it such a useful concept.
The pejorative connotations are a burden, but not entirely undeserved, as economic rent introduces the problematics of power. But, isn’t that what we want? A political economy with a politics?
Rakesh Bhandari 12.30.15 at 6:31 pm
Interesting discussion of rents. It seems that what Piketty is critical of in rentier society is not what could be considered rents in an idealized competitive economy but the extent to which “there is illicit link of imputing to the owner[-rentier] the productivity of the things he owns”, to use Maurice Dobb’s expression. That illicit linkage is made regardless of the state of competition.
Again what Piketty is interested in is not primarily rents but rentiers, whose initial fortunes may indeed be built on abuse of patent law, Board-approved super-manager income, inflation of real estate or financial stock due to government policy (elimination of rent control or the Fed put), or generally transient Schumpeterian super-normal profits.
As DeLong says, the wealthy are likely to have the power to extract such rents through control of the policy process; and Baker seems wrong to me to recommend that the struggle should be only one to prevent fortunes from ever being built on rents. Fortunes will indeed be made one way or another, and once made they will become the basis of growing social power unless taxed as Piketty recommends. Again Gates’ wealth is now many, many times what he made through sale of his operating system.
Bruce: “What perfect competition eliminates is economic profit. In a perfectly competitive economy, the price of the best land for rice would get bid up, despite the paucity of alternative uses. That would not eliminate the rent, just the profit from owning the land that earned the rent, and that because the financial expense of owning the land had been bid up.”
In the Ricardian model what gets eliminated is not profit per se but the extra profit not from owning the land but for the farmer leasing the best land. And Ricardian differential rent claimed by the owner of the best land could still be virtually eliminated if demand for what is grown is not strong enough to induce cultivation on marginal land.
Bruce Wilder 12.30.15 at 8:07 pm
Rakesh Bhandari @ 31
The Virginia public choice school is responsible, I think, for making “rent-seeking” a pejorative, based on making an unexamined “analytical and political baseline the hypothetical case where there are no “rents†“. Unimpeded market competition is made into the mythic opposite of rent-seeking, without sufficient appreciation for how that works out in functional detail. There’s a lot of truth in the meaning of the myth, which, I suppose, is part of why it is so convincing, but it misses much of the institutional mechanics (which is kind of ironic, because those guys thought they were the new institutionalists).
If I were to try to tackle the question of how economic rents figured in the escalation of supermanager “compensation”, I think I might try to develop hypotheses drawn heavily on ideas like those in Schlieffer and Summers, Breach of Trust.
In the U.S. financial sector, it is a kind of whirlwind of “competition” unleashed by deregulation that sweeps away the small economic rents that maintained the separation of sectors and the integrity of the network of firms that made up the banking and finance sector. When there are no small economic rents available from the political framework, only size grants sufficient power to maintain even a semblance of stability or integrity, and the result is TBTF institutions struggling to maintain the ethical standards of organized crime. But, plenty of hedge funds delivering outsized returns to the mega-wealthy from milking small savers and small debtors (really is there any difference?)
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