Crooked Timber is having a book event on Piketty’s Capital in the 21st Century. My contribution is here. A few supplemental bits:
First, I need to point out a problem in my post. I write: “It’s striking, for instance, that the book does not contain a table or figure comparing r and g historically.” But of course, as David Rosnick points out in email, this is not true. There are three figures in chapter 10 that purport to give historical values for r and g. The inadequacy of these figures to bear the weight put on the r > g apparatus is, I think, evident. Why are there no cross-country comparisons? Why the odd periodizations? Why so much emphasis on the data-free values invented for the distant past and future? Perhaps most damningly, what about the fact that r > g is no more true in the increasingly unequal second half of the 20th century than in the increasingly equal first half? But none of that changes the fact that my sentence, as I wrote it, is wrong.
Some people may be interested in other things I’ve written relating to Piketty on this blog over the past couple years:
Piketty and the Money View: A Reply to MisterMR
Wealth Distribution and the Puzzle of Germany
Three Ways of Looking at alpha = r k
With respect to the Crooked Timber piece, I should say — should have acknowledged in the post itself — that it all comes out of conversations I’ve been having with Suresh Naidu over the past year or so. Suresh himself has written various things about Piketty; he’s working on a piece now on these same themes of capital, Piketty and the money view that should move the conversation significantly forward.
I should also have pointed out the Real World Economic Review’s superb special issue on Piketty. Jamie Galbraith’s, Merijn Knibbe’s, and Yanis Varoufakis’ contributions made many of the same points I tried to make in the Crooked Timber post. Knibbe’s piece in particular is a tour de force, everyone interested in these debates should read it.
Finally, I should say: I’ve been reading Crooked Timber since it began, in 2003. For a long while I was a regular commenter there, most of that time pseudonymously as Lemuel Pitkin. Now twelve years is a long time in internet time. Not so long in real life but still long enough for me to go back to graduate school, get my PhD and various teaching jobs, and to start this blog. Crooked Timber was probably my main inspiration to try to write in this format. So I can’t deny it, I’m thrilled to finally have a post up there.
First of all, congratulations for your CT post, that I’m not the first to say that is very good.
That said, I have a problem with such a pure “money view” position. As the post on CT was about Piketty, I’ll post my doubts here.
The problem is that at least some capital goods are produced means of production and, as such, they have a cost of production.
This cost of production cannot be that much lower than their “money view price” (that is, the cashflow that they produce capitalized at the expected profit rate), otherwise everybody would produce these capital goods and make an huge profit on them.
However, the rate of profit on this “real capital” assets depends mostly on the wage share, since a falling wage share increases profits but not the cost of production of “real capital” goods.
But the expected rate of profit on other capital goods shouldn’t be totally unrelated from the rate of profit of “real capital” assets.
Hence we should see an increase in Piketty’s “r”, not an increase of the capital to income ratio, as a consequence of a falling wage share.
Instead, we get a constant “r”, an increase in asset valutations, and apparently (per some of your previous posts here) a completely different expected profit rate, where investment on financial goods is ok even with low profits while investment in new factory doesn’t happen without ultra high expected profits.
This is very weird and should be explained, but I don’t think you can explain this just with a “money view”, because in said money view you can’t distinguish between “real” and “financial” assets.
Note that this is the flip side of the idea that the wage share is determined by “politics”: If the wage share is low, profits on “real capital assets” should be very high, so why don’t investors swarm these market and, in the process, push down the markup on the prices of production on consumer goods (thus rising the wage share)?
(as I’m writing these lines my little brain is obviously working on weird theories on financial and non-financial accelerators, but I’ll spare you for today!)
Thanks for this comment and sorry for the slow response.
You are right, “in principle” a capitalist economy should function in such a way that that (1)profit income is derived from assets purchased in the market; (2) the market price of those assets should reflect a uniform rate of profit; the market price of those assets should also reflect their cost of production; and (4) costs of production should reflect objective conditions of production — ultimately, labor time. So at the end of the day, the issues I’m raising here shouldn’t matter — capital measured as money values should behave like a physical quantity (the quantity of labor time embodied in capital goods, to be exact.)
The problem is, it just doesn’t do so. There’s no way around this: If we add up the observed new investment from year to year we don’t get a series that looks anything like the aggregate value of capital assets from year to year, for any reasonable assumptions about depreciation.
So how do you resolve this? One possibility is that we are mismeasuring capital and/or accumulation. For example, IP claims may be an important part of wealth but the labor that ultimately produces them — creative work, R&D, marketing, etc. — does not get counted as investment. A second possibility is that a large and perhaps increasing fraction of assets are not produced by labor (or any other scarce resource) but are arbitrary claims on the social product created by legal fiat. To the extent that’s the story, we would have to doubt whether the system should still be called capitalism. A third possibility is simply that we are never in the long run — that the short run adjustments that are assumed away in the previous paragraph actually take a long time — so long that the system is always quite far from the values implied by the “fundamental” parameters of technology, labor supply, etc. In that case the kind of analysis used by Piketty (and mainstream growth theory, and you in this comment) is not wrong in principle, but it only describes very long run tendencies and can’t account for historical changes even on the scale of decades. This seems to be what Piketty says in his reply at CT.
Thanks for the answer.
I’ll put it shortly because I just have a fuzzy idea of what I mean, but i think that:
1) The so callet “long run” actually is not a time frame but a way to speak abut supply side fundamentals and not demand side effects. Such supply side equilibrium indeed is just a notional idea and the economy is never really there;
2) The so called “short run” is not really a time frame but a term to speak about aggregate demand problems. I think that in the “short run” the economy works through an investment accelerator, that can be replaced by an increase in debt levels if new investment for some reason is not possible, and a sort of Goodwin model of wage share/unemployment/profit rate/recessions;
3) But that there is also another aspect (again, not a time frame) that works as a ratchet, and increases the value of capital/wealth relative to total income, so that for some reason after some cycles the economy cycles at a lower wage share range, but the apparent rate of profit doesn’t rise because of the denominator effect of wealth. I totally have no idea of what this third aspect is (policy preferences? Natural resources constrains? Increase of the debt to total income ratio?).
I’ll bang my drum a bit more, starting from a “money view” point of view.
Let’s say that Y is total income, W the wage share on total income, and C represents total wealth.
I’ll also assume that all wealth C gets some returns, and that there is a tendency on an equalisation of the rate of profit on every asset, however that is just a tendency, if the rate of proft is 5% some assets will give 3%, other 7%.
The average rate of profit then is:
r = Y(1-W)/(C+YW)
I’ll also suppose that W depends on the employment level, so that when the employment level rises, also W rises.
Now, if we ignore C, we would have a situation where, cyclically, there is a boom, more people are employed, W rises, r falls. Since not all assets have exactly the same profit rate, some assets will reach a negative (or 0) rate of profit before r becomes 0, triggering a recession, which initially lowers profits, until wages also fall and W finally falls. At this point we have a new boom and the cycle begins anew.
However, r depends also on C, and specifically on Y/C. If C is low relative to Y, the economy cycles at a high wage share and employment level, but if C is high relative to Y the economy cycles at a low wage share and employment level.
This IMHO is a general description of Keen’s model, of Marx theory of the falling rate of profit, and of Piketty’s result that r tends to be more or less stable. In particular Keen uses the debt/income ratio for C, while Marx apparently assumes that Y/C tends to fall on the long run because of technological reasons (I’ll also add Rodberthus to the mix, he tought that C rises because of increasing land prices, but he has to assume an increase in the prices of land products in the total value of Y, as factories can be produced but the amount of land is fixed).
An increase of C relative to Y can explain the so called “secular stagnation”.
But the problem is, why does C increase relative to Y?
If C was composed only of “true” capital goods, say factories, this wouldn’t make sense. If we call K the amount of real capital goods, K/Y should be constant unless there is a technological change (back to Marx’s falling rate of profit!), but there is no real reason to think that this happens in the long run.
If C-K is just aggregate debt, in theory inflation could fix the problem, but in reality if W doesn’t rise inflation just mean that capitalists will save more in nominal terms.
Hence my question is, what factor causes the increase of C/Y (or, that is the same, C/K)? I think that this is a very important question.
Meyerson’s last column at the post is about disgorge the cash and stock buybacks:
https://www.washingtonpost.com/opinions/how-to-end-the-stock-buyback-deluge/2015/12/30/e9408c52-af2e-11e5-9ab0-884d1cc4b33e_story.html?hpid=hp_no-name_opinion-card-b%3Ahomepage%2Fstory