The rich got richer

Recommended reading, economic debates, predictions and opinions.
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parvus
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Re: The rich got richer

Post by parvus »

Yabbut, capital and land only have value in the context of labour. (Sorry to be vague. but I don't want to turn this into a Keynesian underconsumption argument -- at least not yet.)

Let us assume that capital creates its own markets -- supply-side economics going back as far as Say and James Mill. Of course, this doesn't yield a crisis theory, as in Marx and the Austrians.

But it puts the focus where it belongs: a priori identification of capitalism with full employment. That to me is a more relevant question than income inequality. The folly, I think, of neoclassical economics, is to treat every activity as a potentially market activity, and thus a waged activity. But the monetization of activity is not the same as the growth of capitalism. Prostitution is not necessarily a capitalist activity. If it's a simple exchange, it's no different than subsistence farming. If it's an organized business -- a brothel -- it may well be a capitalist enterprise, with profits that can be reinvested.

(I know, I'm probably falling back on the distinction between productive and unproductive labour.)

Anyway, here I'm trying to stick to technical terms rather moralizing ones, so I try "exploitation" as a neutral term.

It could be that surplus value is the source of profit; it could be that time preference is the source of profit. In both instances, there can be failures of capital valorization, against Say's Law. For the Marxists, it's the declining rate of profit; for Austrians, overinvestment. In both instances, I would suggest, full employment is actually symptomatic of the beginnings of a bust.

But the marginalist school suggests the opposite, and is based on an implicit underconsumptionist thesis: that there is no limit to growth, no limit to the monetization of activity. Therefore, full employment is always the thrust of of equilibrium, economies always tend towards equilibrium, and the only limiting factor theoretically is a heterogeneity of utility curves (to which, arguably, inflation and fiscal policy can be reduced, not as objective impediments, but as factors that enter one's relative risk aversion curve).

Now, in microeconomics, we look at total factor productivity, and attribute GDP shares to capital, labour and a residual (technology? or innovation, i.e., a deus ex machina?).

In 20th-century marginalism, it might be posssible that the gains of the (Solow's?)residual (Rumsfeld's "unknown unknowns") accrue to capital. But that's not a satisfactory explanation, for two reasons. It implies diminishing marginal returns to capital vis a vis labour, though it is plausible that capital has the power to capture the returns of the residual. At the same time, it is hard to credit the notion that returns to capital can expand at 5% a year when GDP expands at 1.5%. That implies a negative return on labour, at least for that particular year.

Or it means extremely sloppy economic accounts.

There are three approaches I can think of (but I'm an amateur political economist). The first is technology/innovation as the deus ex machina. But doesn't technology/innovation ultimately derive from labour? If so, capital replaces living labour with dead labour, which depreciates quite rapidly. (How many people still use a CD player?) Or does education count as a capital investment? If so, how do we represent it in the national accounts, since it's generally a collective cost, not a firm-specific cost. Nor is it the accidental product of a free Sunday School that all labour acquires.

Or is it that labour income has become supplemented by capital income. This raises questions about how we think of taxes. Increasingly, the burden has fallen on individuals, through personal income taxes and sales taxes. But look at it a little bit more deeply. Who pays taxes for public sector workers? The private sector? Taxes derive from profit, don't they? The public sector by definition doesn't make a profit.

So, is government a capital cost? In the old days, of course, it was easy for government to pay its way and even redistribute, through corvee -- or forced labour. But I don't honestly see government reverting to that.

Yet, government pays out more than it produces. Could it be that pensions and private savings, included in individual income, are a claim on corporate profits? If so, then the return on capital is a bit of a misnomer. It's a headline number vis a vis GDP growth that doesn't actually account for the ultimate distribution of profit. It could be that labour's share is much higher, when all is taken into account.

Finally, there are those who claim we live in a capitalist society. But that's not entirely true. We live in a society where vast realms of activity have been monetized. That's not necessarily capitalism. If a single prostitute exchanges sex for money, that's not necessarily the accumulation of capital. There's no reinvestment to expand the business.

The influence of marginalist economics as an overreaching, but inadequately founded social theory, has been quite deleterious, in my opinion, and as a social psychologist and sociologist I have to chuckle at the emergence of behavioural economics. D'oh. A necessary corrective, to be sure. But not a sufficient one. Oftentimes, marginal economics is as silly as the contractarian/natural law theorists: Hobbes, Locke and Rousseau: entirely a prioristic.

So let's step back from monetization as a proxy for capitalism. If labour is earning a declining share of output, yet is still necessary to the realization of profit on capital and land, how can a disequilibrium exist. How can capital's share grow faster than the economy itself.

Perhaps because labour has dropped out? Because of the informal economy? Because of a "back to the land" philosophy? Because of voluntary demonetization?

These three approaches are not mutually exclusive.

But they do point out problems in the national accounts, both in gathering information and giving proper attributions to the sources and ultimate distribution of income.

And they have, of course, a further implication, one I've been brooding about since the early 1990s: profitable capitalism does not mean full exployment. Everyone and their sister is concerned about high levels of youth unemployment. Where were they in the early 1980s or the early 1990s? This is not news.

If Say's Law is correct, capital will always find profit. But that doesn't mean full employment.

I think that economists should dump the elegant econometric apodicticities -- economics is not math with theorems that are already true needing only elaboration. Instead, they might try their hand at economic history. Inflation, after all, existed before there were central banks. Gold, rather than being an inflation hedge, was a direct contributor to infation. A fully monetized economy is a relatively recent phenomenon, as opposed to barter or services in kind (tenant farmers, household service).

Anyway, just me thinking aloud. Mebbe I'll put it into a book one day. Not a moralizing book I hope.

And I haven't even brought up the topic of biopolitics.
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BRIAN5000
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Re: The rich got richer

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And the rich live longer

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Re: The rich got richer

Post by Flaccidsteele »

newguy wrote:Well we'd have to see the data. I've never understood r^2 anyway. I can calculate it, just never know when to use it. It's supposed to show predictive power yet it has no way to predict it's own predictive power.
Here is another interpretation from John Cassidy of The New Yorker.

Some interesting comments:
John Cassidy wrote: > Proposals that are supported up and down the income spectrum have a better chance of being enacted than policies that do not have such support. To that extent, democracy is working.

> The issue is what happens when some income groups, particularly the rich, support or oppose certain things, and other groups in society don’t share their views. To tackle this issue, Gilens and Page constructed a multivariate statistical model, which includes three causal variables: the views of Americans in the ninetieth percentile of the income distribution (the rich), the views of Americans in the fiftieth percentile (the middle class), and the opinions of various interest groups, such as business lobbies and trade unions.

> This is what the data shows: when the economic élites support a given policy change, it has about a one-in-two chance of being enacted. (The exact estimated probability is forty-five per cent.)

> When the élites oppose a given measure, its chances of becoming law are less than one in five. (The exact estimate is eighteen per cent.)

> The study suggests that, on many issues, the rich exercise an effective veto. If they are against something, it is unlikely to happen.

> One issue is that their survey data is pretty old

> Another issue is that, in a statistical sense, the explanatory power of some of the equations that Gilens and Page use is weak. For example, the three-variable probability model that I referred to above explains less than ten per cent of the variation in the data. (For you statistical wonks, R-squared = 0.074.)
It appears that we are back to relying on our anecdotal confirmational biases.
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parvus
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Re: The rich got richer

Post by parvus »

This is a fundamental problem. Does the state favour the rich because rich people run it. In other words, they serve their personal interests. Many believe so, and your typical American congressperson is atypically well off.

Or is it structural, that the state in capitalist society must promote capital for reasons of revenue and social order?
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Re: The rich got richer

Post by ghariton »

Tyler Cowen reviews Thomas Piketty's book. He finds it an important book, but deeply flawed.
Although r > g is an elegant and compelling explanation for the persistence and growth of inequality, Piketty is not completely clear on what he means by the rate of return on capital. As Piketty readily admits, there is no single rate of return that everyone enjoys. Sitting on short-term U.S. Treasury bills does not yield much: a bit over one percent historically in inflation-adjusted terms and, at the moment, negative real returns. Equity investments such as stocks, on the other hand, have a historical rate of return of about seven percent. In other words, it is risk taking -- a concept mostly missing from this book -- that pays off.

<snip>

Furthermore, even if one overlooks Piketty’s hazy definition of the rate of return, it is difficult to share his confidence that the rate, however one defines it, is likely to be higher than the growth rate of the economy. Normally, economists think of the rate of return on capital as diminishing as investors accumulate more capital, since the most profitable investment opportunities are taken first. But in Piketty’s model, lucrative overseas investments and the growing financial sophistication of the superwealthy keep capital returns permanently high. The more prosaic reality is that most capital stays in its home country and also has a hard time beating randomly selected stocks. For those reasons, the future of capital income looks far less glamorous than Piketty argues.
Lots more good stuff in the review.

George
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parvus
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Re: The rich got richer

Post by parvus »

Thanks George.

Also, an astounding fact for those National Post types who in late 1990s excoriated Ontario for having a lower standard of living than old Mississippi -- an observation based on nominal taxation and of course based on averages rather than medians.

Well, the once piss-American-proud NPers, most of whom later went to "right" for Maclean's (except our Lord, who got thrown in prison for fiddling the books) seem to have gotten it wrong. They all thought it was about taxes, and of course to make Canada look bad, by comparing combined provincial-federal tax rates in Canada with federal rates in the U.S. Left off the table were payroll taxes (evidently they don't exist in the U.S.) breakout of CPP and OAS versus SS, a compensation for health care costs (evidently health care is free in the United States) and property taxes.

As Tim Cestnick later wrote, in the relatively sane Globe and Mail, tax rates for middle-income Canadians are not terribly different than they are for middle-income Americans, depending of course on which part of the country you live in.

So, the NYT today reports that the middle class is no longer winning the race, but fading fast. But remember, Mississippi has a higher standard of living than Ontario.

How could that be? Because the National Post was populated with wealthy boomer wannabees, who aspired to be among the top 1% --a blonde syndrome.

The middle class in the U.S. is falling behind the rest of the developed world because low taxes also lead to low transfers. It's the total tax-transfer system that counts. But we had aspirant wealthy boomers complaining about government largesse, wanting to get out of CPP as quickly as possible and retire to ... Mississippi? Stockwell Day was going to part the waters (with his personal watercraft) and give the people the opportunity to earn more on their investments, to opt out of public health care and public pensions, to tame the state and bring it down to size.

Pure UCS ideology as blonde would say. Stockwell Day was nothing more than a lifeco/mutual fund company shill.

It must be a humbling experience for Americans to learn that they are no longer Number #1. It must equally be a humbling experience for the David Frums, the Terence Corcorans, the Conrad Blacks, the Diance Francis's that the "freer market" US experience leaves you worse off than if you had just stayed put in Soviet Canuckistan, all things considered. That is, if you don't have the right friends. (cf. George W. Bush and the Texas Rangers).

Of course I'm gloating. I knew a lot more about taxation and transfers when I started my journalism career then the self-deluded fatheads at the National Post did. And thankfully, I never applied for a job there. I probably would have been fired for not following the party line.

But the more important lesson, as George frequently points out, is that we can construct a better tax-transfer system to secure for most Canadians a decent standard of living regardless of market outcomes.

It's one thing to use the market to pull your chariot; it's quite another thing to let it steer it. Not dirigisme, but not quite laisser-faire either (since, amid our world of monopolies and oligopolies and barriers to entry, laisser-faire has as much substance as the tooth fairy).
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Re: The rich got richer

Post by mudLark »

parvus wrote:It's one thing to use the market to pull your chariot; it's quite another thing to let it steer it.
Notwithstanding that you may have mangled "it" Parvus ... well said :)
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Re: The rich got richer

Post by Norbert Schlenker »

The Financial Times has taken Piketty to the woodshed, though the details are behind a paywall. Today the Spectator has a couple of interesting commentaries here and here.
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Re: The rich got richer

Post by CROCKD »

Thomas Piketty was interviewed by Michael Enright on Sunday Edition this morning. The Sunday Edition

Thanks to George and Norbert for the links to some critical reviews of his book. "Capital in the 21st Century"
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Re: The rich got richer

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Human sacrifice helped ancient societies entrench class divide, study suggests - Technology & Science - CBC News
Watts and his colleagues found that ritual human sacrifice was relatively uncommon among egalitarian societies, with only about a quarter of them engaging in it.

But the vast majority of highly stratified societies — about two-thirds — made human sacrifices to the gods.
Is this a preview of what's to come?

newguy
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Re:

Post by Mordko »

Brix wrote:
In Canada, the average income for the top five per cent of the taxfiler population in 2004 was $178,000; in the United States, it was 2.5 times higher at $416,000.
There's worse news. A recent study of relative population size has shown that individual Canadians, compared to their US counterparts, have only a 1 in 9.173 chance of existing at all.
:thumbsup: excellent!
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