from Geoff Davies
I have read only reviews of Thomas Piketty’s Capital in the Twenty-First Century, but clearly it is valuable for documenting the nature and history of inequality over the past century or three, and for highlighting the excessive political power that flows from super-wealth. Yet he frames it in terms of capital and capitalism and, for all the quality of his diagnosis, his main prescription evidently is just to tax the wealthy, through income and inheritance taxes.
The trouble is, capital and capitalism are very ill-defined. To speak of capitalism is to invite an un-constructive shouting match. Capitalism has caused great harm to people and the world! Yes but capitalism is what has made us rich!
A more useful framing is that there have been, and can be, many ways to structure a market economy. When one looks into the mechanisms that have operated in market economies, one can readily identify mechanisms that pump wealth from the 99% to the 1%. One can then think of ways to stop or reverse these flows, so wealth flows more fairly to everyone involved in its generation. It will be much more effective to fix the problems at the source than just to apply traditional retro-active bandaids like taxes.
In my own book Sack the Economists, I identified seven fairly obvious such mechanisms. Below is an edited excerpt that summarises mechanisms identified in the course of the book’s analyses. (Dean Baker has also made lists, short and longer, which are a little more detailed and only partly overlapping with mine.) Read more…
from David Ruccio
According to the AFL-CIO’s latest “Executive Paywatch” report, the CEO-to-average-worker-pay ratio rose last year to 331:1. And the ratio of CEO pay to the minimum wage was much higher: 774:1.
That’s because, in both cases, workers’ wages remained more or less constant while the amount of surplus those workers created that ended up in the pockets of the CEOs of the nation’s largest corporations continued to rise.
As the AFL-CIO argues in their report: Read more…
from Peter Radford
I will not pile on any more: the Piketty book is required reading. Enough said.
What strikes me is that his data set is so comprehensive that it ought to end many of those lingering debates within economics. I doubt it will, but it ought to.
I have a few comments I want to make because of his book and the reaction to it.
First: it confirms, in my mind, my argument that economic systems cannot ever be carved out of their historical, social, and political contexts. Not, at least, if the analyst wants to be left with anything at all useful. Studying economics as some abstracted other-worldly stand alone entity is entirely pointless. Pretending that everyday people act in an economic sense without reference to a whole slew of cultural, institutional or other relationships and pressures is just nonsense. Of course they do. We all know that.
I understand that distilling some uniquely “economic” regularities is useful. I understand that establishing certain cause and effects relationships can help us understand society, but, ultimately it is society we are understanding, not just some economic agents roaming about absent any other influences. So anything understood within the domain of economics must then be converted to, or fitted within, the larger picture before it is thought of as having any relevance. Particularly policy relevance.
So it is not enough to build upon micro foundations unless those foundations extend across a diverse realm that includes all the elements at the base of the society being studied. To avoid such an extension is to display an extraordinary and willful narrow mindedness.
With this in mind, I think Piketty’s book is the starting point for a thorough review of economic thought. Including much current heterodox thought which suffers from the same disease as orthodoxy: it is not comprehensive enough to have real value. Read more…
The Solitude of Latin America
Antonio Pigafetta, a Florentine navigator who went with Magellan on the first voyage around the world, wrote, upon his passage through our southern lands of America, a strictly accurate account that nonetheless resembles a venture into fantasy. In it he recorded that he had seen hogs with navels on their haunches, clawless birds whose hens laid eggs on the backs of their mates, and others still, resembling tongueless pelicans, with beaks like spoons. He wrote of having seen a misbegotten creature with the head and ears of a mule, a camel’s body, the legs of a deer and the whinny of a horse. He described how the first native encountered in Patagonia was confronted with a mirror, whereupon that impassioned giant lost his senses to the terror of his own image.
This short and fascinating book, which even then contained the seeds of our present-day novels, is by no means the most staggering account of our reality in that age. The Chronicles of the Indies left us countless others. Eldorado, our so avidly sought and illusory land, appeared on numerous maps for many a long year, shifting its place and form to suit the fantasy of cartographers. In his search for the fountain of eternal youth, the mythical Alvar Núñez Cabeza de Vaca explored the north of Mexico for eight years, in a deluded expedition whose members devoured each other and only five of whom returned, of the six hundred who had undertaken it. One of the many unfathomed mysteries of that age is that of the eleven thousand mules, each loaded with one hundred pounds of gold, that left Cuzco one day to pay the ransom of Atahualpa and never reached their destination. Subsequently, in colonial times, hens were sold in Cartagena de Indias, that had been raised on alluvial land and whose gizzards contained tiny lumps of gold. One founder’s lust for gold beset us until recently. As late as the last century, a German mission appointed to study the construction of an interoceanic railroad across the Isthmus of Panama concluded that the project was feasible on one condition: that the rails not be made of iron, which was scarce in the region, but of gold.
Our independence from Spanish domination did not put us beyond the reach of madness. Read more…
form Lars Syll
Sweden is according to new statistics from Statistics Sweden in a state of deflation. The inflation rate was -0.6 percent in March.
To a large extent the deflation is caused by tight monetary and fiscal policies pursued by Sweden’s Central Bank and the government. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last 2-3 years been very close to zero, and now even negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is still at almost 9 % and youth unemployment close to 26 %.
This is deeply worrying.
So yours truly thought he should give the Swedish Fed and the Swedish finance minister - Anders Borg – a suggestion for reading …
Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, Minsky and Krugman have given us on debt-deflation processes and liquidity traps: Read more…
The future is solar, as we all know. And the future is here (graphs). Solar panel area tripled in ten years which, as panels are becoming more effective, means that solar power generation must have increased fourfold or something like that. Which is only the beginning. A quick internet search yielded, however, that China and the USA seem to be outgrowing the EU.
An interesting aspect: solar electricity is not only durable – it’s also ‘local’. The modern state is to quite an extent a network state: sewer systems, highway systems, railway systems, the electricity grid, television and telephone networks etcetera. Solar electricity is, though compatible with networks, not necessarily dependent on large, national grids and allows for a more dispersed use of capital (financially as well as physically).
The comparative advantage of the southern EU states is not yet visible in the statistics.
Source: Eurostat, for a number of states no data available.
from Peter Radford
Buried somewhere in the pile of stuff I have accumulated as I think about inequality are these statistics:
- Of all the income generated between 2009 and 2011 in the US 121% went to the top 1% of income earners
- The top 1% owns just over half of all investment assets including 64.4% of all bonds
- And, the bottom 90% incurs 72.5% of all debt
Think through the consequences of these numbers.
Basically we have an economy where the top 1% reaps all the rewards; where less well off people constantly fall further behind; and where the top folk lend to the bottom folk so that the less well off can keep on consuming and thus boosting the profits of the businesses the top folk own. This is a nice game for the rich as long as it lasts. Here in the US that would be the past forty years or so.
This is really simple.
It explains why our economic policies focus on preserving creditors, bailing out lenders, and keeping the inflation alarms ringing even when there is no inflation. Those policies benefit Read more…
from Edward Fullbrook
Now Paul Krugman has gotten into the Piketty act. The just published issue of the New York Review of Books features a long review essay by Krugman (it’s open-access) on Capital in the Twenty-First Century. Here is how it begins.
Thomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. Yet his influence runs deep. It has become a commonplace to say that we are living in a second Gilded Age—or, as Piketty likes to put it, a second Belle Époque—defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work. In particular, he and a few colleagues (notably Anthony Atkinson at Oxford and Emmanuel Saez at Berkeley) have pioneered statistical techniques that make it possible to track the concentration of income and wealth deep into the past—back to the early twentieth century for America and Britain, and all the way to the late eighteenth century for France.
from Lars Syll
In a report published by The Association for Heterodox Economics, INET is criticized for actually marginalizing heterodox economics:
Our main concern is that the positive potential of INET is steadily being closed down. What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline …
Marginalising heterodoxy creates problems for teaching economics as a discipline in which economists constructively disagree and can be in error. This is important because it is through a conformity that suppresses a continual and diverse critical awareness that economics becomes a dangerous discourse prone to lack of realism, complacency, and dogmatism. Marginalising heterodoxy reduces the potential realisation of the different components of economics one might expect to be transformed as part of a project to transform the discipline …
from Robert Locke
It is very difficult for historians to establish any set of ideas when confronted by people who are historically ignorant. Recently I wrote, in a the RWER Blog that economics has never established a scientific paradigm in its discipline. So the idea that neoclassical economics did and that it is now being challenged is false. It never did achieve paradigm status. Twenty-five years ago (1989) I said the same thing in the first two chapters of Management and Higher Education Since 1940 (Cambridge University Press). In the first chapter, “The New Paradigm,” I wrote about the attempt Read more…
‘Totally stunning’: two hyperboles. But I had to use them. Could anybody only six years ago have imagined a Eurozone core with 4% unemployment or less (here the new regional unemployment data) and a southern periphery with large areas with unemployment of over 30%. Broad unemployment in these regions must be somewhere between 35 and 40%. Hey, Andalucia has 36% normal unemployment… Mind that inflation is going down in the core, too. Unemployment percentages of 3 to 4% are i.e. totally feasable.
Mind also that borders between countries do explain part of the differences. But only a part. Mind also that unemployment in Eastern Germany is finally becoming less high – but it took, despite lavish transfers, almost 25 years and mass migration before this happened. The ‘Wirtschaftswunder’, based upon debt redemption and equality, worked better than neoliberal internal devaluation (in the fifties unemployment went down from about 12% to about 2% in 9 years).
from Edward Fullbrook
Merijn is ahead of me as I have only just ordered Thomas Piketty’s Capital in the Twenty-First Century. The book is receiving masses of favorable media attention in the West, including from The New Yorker, the Financial Times, the Economist and The Observer where yesterday Piketty and his book occupied the cover of the newspaper’s review section. This attention is surprising given the book’s central message (one often expressed on this blog), that capitalism has now failed the world and that inequality is now accelerating at a very dangerous pace and that the rule of the ultra-rich over the everyone else is a form of gangsterism. The Observer’s feature writer went to the École d’économie de Paris to interview Piketty, and here are a couple of quotes.
Update: via Business Insider: this 2012 Cato Institute report by Steve Hanke and Nicholas Krus which, starting in France in 1796, carefully lists all 56 known episodes of hyperinflation (21 of which were connected with demise of Soviet Union and Yugoslavia).
I’m reading Thomas Piketty’s book about wealth, capital and inequality. At this moment one remark:
His book is based upon a very extensive ‘open source’ dataset which spans the centuries and the globe (wealth, return on capital, labour share, share of capital etc.). This seems to be part of a trend as Piketty is not the only economist who does this. Other examples are:
Carmen Reinhart and Kenneth Rogoff with their ‘This time it’s different. Eight centuries of financially folly‘ dataset, which spans the centuries and the globe (debt).
The late Angus Maddison data on GDP (dataset continued by ‘a group of close colleagues’) which span the millenia and the globe
The Bank for International Settlements with their recent dataset on house prices which span decades (for Norway: centuries) and the globe.
The (real) wages datasets of the International Institute of Social History (moderator: Jan Luiten van Zanden) which span the centuries and the globe.
These datasets are changing or did already change the science of economics. A common theme: there is no such thing as a stable monetary capitalist economy.
I do think that, as long as we have the Sveriges Riksbank prize in economics science in memory of Alfred Nobel, the founding and maintenance of such datahubs should be one of the arguments to award the prize.
One of the functions of the 2% Eurozone inflation target of the ECB is to make processes of internal devaluation easier. This should, according to the ECB, be possible without outright deflation of the price level. According to the 2011 ECB manual ‘The monetary policy of the ECB‘ (161 pages):
Taking the existence of unavoidable inflation differences into account, it has been argued that the ECB’s monetary policy should aim to achieve – over the medium term – an inflation rate for the area as a whole that is high enough to prevent regions with structurally lower inflation rates from having to meet the costs of possible downward nominal rigidities or entering periods of protracted deflation. According to all available studies, a rate of inflation below, but close to, 2% for the euro area provides a sufficient margin also in this respect.
In other words: 4% inflation in the Netherlands and Germany is necessary to enable Spain and Portugal and Greece and Italy to lower their price level relative to the Dutch and German level without having to lower nominal wages. That’s what this is all about. One can wonder if such a policy is effective anyway. As a recent ECB working paper states: Read more…
from Asad Zaman and the WEA Pedagogy Blog
What is really strange is the contrast between the strength of the arguments against conventional economics, and difficulties involved in teaching common sense. It is like someone who has been convinced that day is night, and great effort is involved in pointing out the sun to him. I sometimes give the following example.
Look at that old lady purchasing tomatoes. You know what she is doing? She is differentiating a multivariate utility function and setting up a simultaneous equations system of first order conditions. Now she is solving the nonlinear system. Fantastic, she just solved it to find the utility maximizing purchase under budget constraints is exactly 12.8 oz of tomatoes. Alas, she cannot slice them with such precision, and does not know the integer programming techniques required to solve the more complex optimization problems. OOPS, she miscounted the money she paid, and did not notice the change in the budget constraint when the greengrocer shortchanged her.
While this is usually good for a few laughs, especially from deeply indoctrinated students, because we are poking fun at the sacred principle of utility maximization, there is a serious point involved. Our personal experience, observations of others behavior, and general knowledge of how markets and shopping works, provide overwhelming evidence against microeconomic theory of consumer behavior. Yet we set it all aside when we read Samuelson. If a Nobel prize winner said so, it must be right. My survey which provides a summary of this evidence is linked below:
“The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature” [with Mehmet Karacuka] International Journal for Pluralism and Economics Education Vol. 3 (4) 2012, p 366-414
As a group, why are we such complete failures at persuading the public of something which is plain as the sun? I have the following hypotheses: read more here
‘Greek bonds fly of the shelves‘. Yesterday, Greece successfully issued 3 billion 4,95% bonds – and I’m still not seeing that one coming. Greece does not need new debt to be able to pay its interest bill. It needs frontloaded debt reduction to get debts down to a sustainable level, i.e. 60% of 2015 GDP (conservatively estimated, i.e. taking 0% growth and 3% deflation into account).Credible measures and structural reforms to make the remainder of the debt more flexible (i.e. ‘deflation protected’ bonds) have to be put in place. Tax measures – like a land tax – which increase the velocity of the stock of wealth and induce market oriented and demand boosting use of this wealth have to be introduced. Read more…
from Trond Andresen
Due to technological possiblities, success in stock market trading has increasingly become dependent on being at the front of a rat race in software, computing capacity and fast optical cable connections. While the firms whose stock is traded obviously do not change their prospects over time horizons shorter than days or even months, to win in the stock selling and buying game, today you have to act and react on a time scale of fractions of milliseconds. Automated high frequency trading (HFT) enables this. This race has now become so absurd that even the business press and financial regulators and pundits have become critical to it. One technical measure against HFT that has been implemented by a new stock exchange, IEX, is that all traffic go through a roll of cable (!) that delays the signals so much that HFT trading cannot profit parasitically from orders given to that exchange.
Here follows a simple proposal which does not depend on any changes to physical infrastructure, can be mandated by regulators and implemented easily at any exchange, and which enables not only the blocking of trading on millisecond scales, but can remove trading on any time scale that is considered too short. Being implemented as software, it also has the advantage that its parameters can be easily adjusted based on how the system performs. This solution does not presuppose any transaction fee, and it impacts small and big trade(r)s in the same way. Read more…
from Lars Syll
It is important, for the record, to recognize that key participants in the debate openly admitted their mistakes. Samuelson’s seventh edition of Economics was purged of errors. Levhari and Samuelson published a paper which began, ‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false’ … Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives … However, the damage had been done, and Cambridge, UK, ‘declared victory’: Levhari was wrong, Samuelson was wrong, Solow was wrong, MIT was wrong and therefore neoclassical economics was wrong. As a result there are some groups of economists who have abandoned neoclassical economics for their own refinements of classical economics. In the United States, on the other hand, mainstream economics goes on as if the controversy had never occurred. Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all metric work.
Some links, 10/4/2014. Cooperations, energy (graph), Peter Praet (ECB) on the impossibilities of monetary policy in the EZ
The ILO is officially charged with promoting and estimating cooperatives:
As business organization, cooperatives contribute to economic development, generating more than 100 million jobs and securing the livelihoods of nearly a quarter the world’s population. Cooperatives provide an important channel for bridging market values and human values … The financial and ensuing economic crisis has had negative impacts on the majority of enterprises; however, cooperative enterprises around the world are showing resilience to the crisis. Financial cooperatives remain financially sound; consumer cooperatives are reporting increased turnover; worker cooperatives are seeing growth as people choose the cooperative form of enterprise to respond to new economic realities. This report provides historical evidence and current empirical evidence that proves that the cooperative model of enterprise survives crisis, but more importantly that it is a sustainable form of enterprise able to withstand crisis, maintaining the livelihoods of the communities in which they operate