Home > New vs. Old Paradigm > Capital: Piketty and such

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.

  1. April 18, 2014 at 3:02 pm

    Reblogged this on Taking Sides.

  2. Bandorino
    April 18, 2014 at 3:11 pm

    Thanks for your commentary Peter! I can’t wait to read Piketty’s book. I always feel like I’m back in college and participating in inspirational discussions when I get the latest postings on the Real World Economics Review Blog. I’ve learned far more here that has made sense than what I ever remember learning in the two undergrad Econ classes I took in college.

  3. robert r locke
    April 18, 2014 at 5:03 pm

    “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.”

    Peter, this statement lacks analytical vigor and rigor. It ignores the great battle that went on and those who fought it to advance industrial democracy and trade unionism against the metanarrative of neoclassical-economics. For those of us who fought and are still fighting it does a disservice. When I was an undergraduate in the 1950s almost every college student in US history read Vernon L Parrington’s Main Currents in American thought, Pulitzer Prize in History 1927, which presented US capitalism in terms of Robber Barons in the Gilded Age. By the time we got to the 1970s, we were reading Alfred D. Chandler, Jr.’s The Visible Hand, Pulitzer Prize in History 1977, in which the those Robber Barons had been turned into the heroes of American capitalism How did it happen, this transformation of the US Psyche. Not without Sturm und Drang in the rentless struggle to establish the new paradigm. There was nothing comfortable about the new narrative, then or now.

    • Marko
      April 18, 2014 at 7:05 pm

      You’re right , Robert. We took up the anti-war , environmental , women’s rights , and other banners , and we let economics and labor issues fall by the wayside. And – collectively , at least – we never did pick those banners back up. Big mistake.

      It’s all a bit fuzzy for me now , but as I recall , that whole sex-drugs-and-rock-‘n-roll thingy was a major distraction too……

      • robert r locke
        April 19, 2014 at 6:11 am

        Yes, that is what the left did; it abandoned the 99% for a lot of issues that still preoccupy it today, women’s rights, civil rights, gay rights, native rights, etc. Fine and good but what about the working slobs. During the 1980s when it was clear that the gap between the rich and the poor was increasing rapidly, hardly anything was said about it by the American left and the neo-classical economists ignored it all-together except to say it was a good thing.

    • Bruce E. Woych
      April 19, 2014 at 8:46 pm

      http://en.wikipedia.org/wiki/New_Deal

      http://en.wikipedia.org/wiki/G.I._Bill

      http://en.wikipedia.org/wiki/Labor_unions_in_the_United_States

      Michael Kidron
      International Capitalism
      (1965)
      http://www.marxists.org/archive/kidron/works/1965/xx/intercap.htm
      =======================
      The attack against democratic economies was a relentless pursuit from the monopolist class interests that encouraged corporatism and fascist power over authentic global democracy and made the methods of cold war political economy the foundations for private equity models and the neo-conservative privatization of a monetarism constituting a new monopoly exploit and a political economy to expand it globally that essentially “liquidated” the democratic industrial state in favor of international capital domination, flow and finance imperialism..

      The so called “left” did not “abandon” the great fight for equity and parity in economic liberty, but it was overwhelmed by regulatory and legislative capture as well as control fraud that served a self propelling life style in the elite sector that emerged complacent and subservient to the 1% that came to dominate the wealth.

      It just so happens that global ecological destruction coincides with this “evolving” creative destruction and its correlates of social injustice and culturally regressive inequality on a disproportionate global scale. What should be emphasized to this new generation is that the 21st century economics can not and should not be written in 20th and 19th century terms. Converging international currents are being met with equally compelling diverging international interests. The scale and scope of these are somewhat diametrically opposed and the competitive domains between the public the private and the sovereign wealth potentials are inversely related. Capital in the 21st century is a power grid and it needs to be seriously re-evaluated for both cultural and ecological reasons that are fundamentally more rational than economics as it is now conceived.

  4. Bruce E. Woych
    April 18, 2014 at 5:45 pm

    “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.”

    Bravo!
    .
    It is about time we measure our reality we are experiencing in terms that meet substantial observational evidence in real time, and not fit measure to methods of past blind alleys and theoretical apron strings. These were, in fact, complacent because they were compatible to life styles and appeared as counter-culture. But the battles of the 50s and 60s are not going to continue solving anything happening today…in fact these results are all being dismantled and used against true reforms. The truth is that the definitions are 19th century observations functionally illiterate today. These are maintained and repeated as rituals of pretense by intellectual authority that gets its legitimation from the past, but refuses to acknowledge its own crisis of representation.

    This is a great presentation and timely. We need reality not theory today. And we need it NOW!

  5. Charles
    April 18, 2014 at 7:10 pm
  6. April 19, 2014 at 1:11 am

    I agree readily with most of these observations. I agree particularly with the statement that :

    “ …economic systems cannot ever be carved out of their historical, social, and political contexts”

    [although I think I would add the epithet “ecological” to the list of relevant contexts, probably, in first place, before “historical, social and political”. ]

    I also agree strongly with the assertion that:

    “,,,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.”

    The idea that:

    “the classical trio of Land, Labor, and Capital all need to be put aside and replaced with a more precise set of basic inputs”

    is also a great one, provided, of course, that energy and physical resources (understood in all their biophysical and thermodynamic complexity) get proper attention.

    Sadly, so far, it has been mainly those self-identifying as “ecological economists” who have tended to recognize this.

    I now teach some continuing education-style courses in ecological economics and, unlike many ecological economists, I like to include in my courses a significant dose of neo-classsical theory – either elements of neoclassical theory that I find either still very useful or elements, worth understanding on their own terms, if for no other reason than in accordance with the principle of “know thy enemy’s doctrine”.

    The traditional Q = f (K. L) production function, however, doesn’t make the cut except as an object of ridicule to entertain the students.

    Nor do I find it helpful to talk about capital-labour substitution in general terms, because the extremely heterogeneous categories “Labour” and “Capital” are so hard to define rigorously, and it is damn-nigh impossible to meaningfully quantify the volumes of input of any one of them, in any particular case. Besides, when last did a sequence on “production” in a neoclassical textbook, even in a textbook as sophisticated as Mas-Collel, Whinston & Green, realistically confront the true opportunity cost of resource inputs, or the hidden opportunity costs of the “free disposal” assumption, To do so, would require that the sequence be PRECEDED by the chapter on externalities and public goods. The latter topics are typically addressed towards the end of micro textbooks, as a special case; not as a fundamental element, and profoundly qualifying element of the entropy-increasing transformation process we so euphemistically call “production”.

    At the macro level (not my specialty), I imagine these problems are simply compounded.

    Economic activity takes place in a complex ecological and social-institutional context, and has enormous biophysical and entropic consequences. Economic analysis that attempts to shade out either of those contexts, can only be justified as a very temporary pedagogic device to be remedied, with proper analysis, later. Otherwise , it is simply nonsense, or even worse still, ideological propaganda .

    Michael Barkusky
    Pacific Institute for Ecological Economics
    Vancouver BC
    Canada

  7. Bruce E. Woych
    April 20, 2014 at 4:07 pm

    (Sorry if this duplicates) It still indicates that the posting was being moderated and it may have contained excess links (4 were included). I have taken the liberty to edit it slightly from the original.
    This work cited with the link from 1965 could stand a 2014 obvious revision but it certainly indicates that the “left:” was not asleep in the 60s nor was it tied up in marginalized factions of identity politics as an economic category of state or status. It is still worth reading and the shortcomings only point to a 20/20 hindsight that actually delivers insights to revising economic theory itself.
    Michael Kidron
    International Capitalism
    (1965)
    http://www.marxists.org/archive/kidron/works/1965/xx/intercap.htm
    =======================
    The attack against democratic economies was a relentless pursuit from the monopolist class interests that encouraged corporatism and fascist power over authentic global democracy. It incorporated the methods of cold war political economy as the foundations for private equity models and the neo-conservative privatization of monetarism. Neo-conservativism and liberalization emerged as a new face of imperialism using capitalism and markets as a pretext to colonize entire regional economies and reduce them to scale. The process constituted a new monopoly exploit and a political economy that has expanded globally to essentially “liquidate” democratic ideals along with the industrial state in favor of international capital domination, power relations, and a neo-finance imperialism..

    The so called “left” did not “abandon” the great fight for equity and parity in economic liberty, but it was overwhelmed by regulatory and legislative capture as well as control fraud that served a self propelling life style in the elite sector that emerged complacent and subservient to the 1% that came to dominate the wealth.

    It just so happens that global ecological destruction coincides with this “evolving” creative destruction and its correlates of social injustice and culturally regressive inequality on a disproportionate global scale. What should be emphasized to this new generation is that the 21st century economics can not and should not be written in 20th and 19th century terms. Converging international currents are being met with equally compelling diverging international interests. The scale and scope of these are somewhat diametrically opposed and the competitive domains between the public the private and the sovereign wealth potentials are inversely related. Capital in the 21st century is a power grid and it needs to be seriously re-evaluated for both cultural and ecological reasons that are fundamentally more rational than economics as it is now conceived.

  8. April 30, 2014 at 7:14 pm

    An often missed feature of capital is that it’s more benign when it fails. Left to itself, steady-state capitalism results in constant collection of rents and concentration of wealth as per Piketty’s r > g formula. This theoretically leads to declining returns internally and misery externally.

    But to the extent that capital is benign and workable in practice it’s because the world is not a steady state. There’s technological and physical depreciation, political shocks, changing preferences, and other changes that gradually force the East India Company to be reinvested into Apple and Google. New ventures return more social value than incumbents, and it’s the constant churn or creative destruction of incumbents into new ventures that makes capitalism to any degree prosperous.

    Which makes all the more worrying the rise in competence of abstract capitalism. As capital achieves a formulation independent of the concrete good, Increasingly, old money isn’t caught out by the churn but stays in the top spot after a change sweeps the market. With labor equity and depreciation both gone or rapidly vanishing as means of redistribution, our only hope is to promptly revive democratic equity and replace it in the economic sphere.

  9. Bruce E. Woych
    May 11, 2014 at 2:00 pm

    Black Swans & Swan Songs: “Capital In The 21st Century”
    Thomas Piketty sits down with Ryan Grim to talk about “Capital In The 21st Century” , economics and the worldwide wealth gap, Published on Apr 18, 2014 (42:49 min.)

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