Capital: Piketty and such
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. All economists henceforth need to be heterodox and capable of taking an inclusive social stance before they can truly claim to be talking about an economy. Because of this I expect there to be little or no reaction from those who understand economics only within the limited confines it currently resides. His book is too broad in its social implications for orthodox economists to have much to say. He has roamed far from their field of expertise. He has rendered them obsolete.
Second: once again I find myself reflecting on how panglossian so much of modern economics is. It papers over the very long term effects that Piketty has drawn out in stark, and perhaps controversial, detail. In particular it sheds a harsh light on the oddity of the self-correction mechanism that sits at the heart of orthodoxy. It seems that under “normal” circumstances a free market system, in its capitalist form, simply rumbles on and on crushing all before it. There are side effects, some benign and others malign, but none fatal. All capitalism results in overwhelming inequality. This is not sufficient to cause it to collapse. Nor is the effect of competition enough to dampen its progress. Neither the Classical nor the Marxist critiques hold up. We can excuse them only because they were both articulated before capitalism came of age. They both mistook youthful exuberance for the finished article.
What we cannot excuse is the theorizing done post-war when longer data sets were available if only sought. Instead post-war theorists indulged in deliberate wishful thinking. They looked around them and mistook the aberration of the post-war decades as evidence of a long term effect. They especially excluded from their thought the impact that the mid-twentieth century brought with it enormous social and political changes that softened the harsh edges of unfettered capitalist activity. So, deluded by this narrow view and by their desire to justify capitalism in an era of ideological competition with the Soviet Union they happily conflated capitalism with democracy. They confused themselves. They imagined that the positive properties of democratic expression, particularly its redistribution of incomes and wealth within society, were outside the economic system which they narrowed down to simple market mechanics. Yet they attributed those positive effects to those same limited mechanics. In other words they internalized the effect, but externalized the cause. By so doing they misled themselves into thinking capitalism was capable of expunging its own malignancies. They could then forge ahead and theorize ever more wonders attributable to this botched vision of markets. After all they had assumed away that a market could ever produce socially damaging results without being subject to some awful external shock.
Thus armed they could fight the Cold War, fend off communism, and begin to create policies that purified markets of any taint. Capitalism, freedom, democracy, and American prosperity tripped off their tongues as if they were all one and the same.
Of course not all economists fit into this mold. Heretics abound. But orthodoxy became dominant because its narrative was comfortable. People thought it explained the post-war American experience, and it could provide an alternative to the more statist theories of Keynes and others who were more skeptical of the supposed natural efficacy of markets. It had a nice ideological ring to it.
Third: I disagree with Piketty with respect to the outcome of the so-called Cambridge or Capital controversies of the 1950′s and 60′s. He is wrong when he says that the Samuelson/Solow side won the debate. They didn’t. Indeed they acknowledged their loss. The problem is that their loss never resulted in a suitable revision of theory. They simply ignored the consequences of the loss and plowed on as if nothing had happened. The result is that despite being an epic review of capital and the role it plays in creating massive inequalities in society, Piketty’s book glosses over any detailed look at the way in which capital becomes part of the production process. It is not his intention to delve too deeply into such matters. I concur with his omission on that score, but someone, somewhere, needs to re-visit those controversies in the light of Piketty’s revelations and produce a more modern and helpful notion of capital that can then be incorporated into contemporary theory. Until the clutter is removed from around the subject of what, exactly, capital is, talking about substitution with labor is meaningless. We don’t know what is doing the substituting. Nor can we properly compute a return to capital if it remains such a slippery almost chameleon like entity. Perhaps we are afraid we will just end up realizing that returns to capital are socially constructed as some have argued all along. Such a conclusion would unravel orthodoxy at warp speed. Deservedly so.
From my stance I have a similar problem with labor itself.
To me, both capital and labor are references to power and social relationships not to actual production inputs. Labor, for instance, is some part energy and some part skill or know-how. It seems to me that energy and knowledge are true production inputs. That they are clumsily combined into something called labor is an anachronism from the classical era when people like Ricardo, Malthus, and Marx were discussing in very broad terms the gross effects of the new capitalist era they saw emerging around them. Come to think of it the classical trio of Land, Labor, and Capital all need to be put aside and replaced with a more precise set of basic inputs. Energy, Primary Knowledge, Secondary Knowledge and Physical Resource are my suggested alternative. Where Primary Knowledge is that reducible into code and thus amenable to embedding in machinery; and Secondary Knowledge is that which enables adaptive reaction to novelty, and which is thus the source of future code.
But enough. Go read Piketty’s book. It will reward your effort.