Home > Uncategorized > Dear Deirdre, Distributional Issues Do Matter. Always. And everywhere.

Dear Deirdre, Distributional Issues Do Matter. Always. And everywhere.

Deirdre McCloskey has written a lengthy Piketty criticism – and she totally agrees with Piketty. It’s Friedmanian in spirit: a self-concious, eloquent (even more eloquent than Friedman!) defense of the market based upon clever arguments and our experience with markets, though also more literate and less US centered than the typical Friedman piece. But it’s a somewhat weird piece. She states that she totally disagrees with Piketty. But she doesn’t. In fact she totally shares his vision: it’s all about g. She defines ‘g’ as ‘The great enrichment’. And states, just like Piketty, that g, or the high growth rate of our economy, saved us from becoming a rentier economy. And just like Piketty she does not seem to understand balance sheets. More on that below.

I agree with many points and surely with the first three of its main arguments:

1) A-historical economics stinks, when we have to understand how markets work we have to look at history

2) When we do this we see almost unbelievable dynamism (at least since about 1800) and a more or less continuous and almost unbelievable increase of material wealth

3) This dynamism continuously interrupts all kinds of ‘patrimonial capitalism’: fortunes are lost and vested interest go down, again and again, because markets and innovation disrupt the existing order

4) Distribution is not really important as the growth of total wealth and income of the 99% since 1800 or so dwarfs the share going to the 1% in 1800 or so (and wouldn’t you rather be poor in 2014, with antibiotics, or rich in 1800, without antibiotics?).

Aside: as an economic historian (just like Deirdre), people who typically construct their own ‘capta’ (see below), I was totally enamoured  by the next sentence:

Piketty gives a fine example of how to do it. He does not get entangled as so many economists do in the sole empirical tool they are taught, namely, regression analysis on someone else’s “data” (one of the problems is the very word data, meaning “things given”: scientists should deal in capta, “things seized”)”

I can’t however agree with all of it.

A) about 1):

Aside from a-historical economics McCloskey also chides input-output analysis. She states that this brand of economics (which estimates inputs and outputs and their relation, i.e. efficiency) gives people a static view of a highly dynamic system. But it doesn’t. Look here for the input-output analysis based Eurostat data on the rapid, dynamic increase of resource productivity (partly caused by the building bust): modern input-output analysis emphasises the dynamism of our economy!

B) About 2) and 3):

I. Material prosperity did increase faster and faster in an increasing number of countries after 1800 or so. But Fogel, in an article mentioned in the list of works cited by McCloskey, states that it was only since about 1895 that this led to better living conditions (health, longevity, infant mortality, food etcetera) than during the best phases of the pre-industrial time, though continuous improvements were visible after about 1880 (from a level clearly lower than the highest level which could be reached before 1800. Growth, urbanization and sweat shops had their downsides – which for some people lasted their entire life (even when they grew older than 50).

II. Markets and the bourgeois ethic were very important. But the increase in material prosperity was to a considerable and often crucial extent also caused by government investments (bridges, roads, sewer systems) as well as ‘communal’ private organizations. One example: Alexander Fleming, who discovered penicillin, worked at the time at St. Mary’s hospital in London (a charity, as far as I could investigate) while large-scale use of this antibiotic only started in 1944, when the US army etc. etc. An interesting overview of the importance of charities, cooperations (often commercial endeavours, of course) and other ‘communal’ enterprises in France, where they employ 10% of the labour force, can be found here. Emphasis on government investment and consumption (roads, bridges, primary and secondary education, health care) and ‘communal’ organisations (the church…) surely was crucial pillar of the bourgeois ethic which McCloskey considers to be so important, at least in Europe after about 1890.

C) About 4.

McCloskey chides Piketty for not incorporating human capital in his estimates. That’s not fair. Piketty estimates capital using the definitions of the national accounts. Piketty  states that he estimates marketable capital (stuff that can be sold) but, looking at the definitions, that’s not true. The concept of (fixed) capital used in the national accounts is about fixed capital which can be sold and has as such a second hand value (houses, military equipment) as well as capital that has production costs and can be transferred to new generations (coastal defences and the like). It’s not about capital that can’t either be sold or transferred, like ‘human capital’, important as it is. Human capital does matter and so does the sun – but you have to draw the line somewhere. nd this line is drawn for a reason: you can’t make any reliable estimate of the value of human capital which can be part of a balance sheet. Putting the value of something which you can’t sell or transfer on a balance sheet is daft anyway. Which brings us to balance sheet analysis. Above, we’ve talked of physical capital and ‘g’, the growth of material production. The value of physical capital is part of the asset side of the balance sheet, which shows which items are used to produce something. The main Piketty formula is, however, r>g, ‘r’ being the return on capital. The return on capital is defined by the nature of the items on the liability side of the balance sheet: who owns all the fixed capital items and to which extent does this entitle these owners to ‘r’, a return on investment. These are legal, social and political variables and a continuous struggle about ownership and entitlements is going on all the time, as events in Ireland and spain and Greece have recently shown. But the capitalists and the state and the households and the  pension funds do not just own fixed capital (or the companies owning fixed capital). They (especially banks) also own debts. ON top of that many banks have the extreme prerogative to issue government backed money in exchange for the ownership of debts. Mortgages are the most import example. This licence to print can lead to bubbles, like in the Netherlands around 1978 and between 1994 and 2008 (graph). Mind that the graph shows one of the most important variables included in the national account estimates of wealth: land underlying houses. Mind also that when the implicit price of land underlying houses decreases equity of households decreases – but the debt used to finance the bubbles does not go down. And neither does the stream of seigniorage profits flowing to the banks, disguised as interest paid by households on their mortgage debt. Long story short: there was a huge transfer of wealth and income towards the banks who, as a bonus, also received generous government aid after 2008. The point: McCloskey argues that the distribution of production is, in the end and large and by, ruled by ‘marginal productivity’. Labour en capital get their ‘fair’ share. But in a financialized economy that’s not the case. Ownership, of land, fixed capital and debts, does matter for distribution. Even when these owners do not work for a day in their life. Stating that everybody gets her or his fair share and if not that it does not matter is too easy. The dices are loaded. People do try to rip you of. One example: the weird fact that extremely high Greek and irish government deficits caused by bankaid do not lead to panic in Brussels and Frankfurt while much lower deficits caused by, among other things, pension payments, do led to panic. And lower growth of riches might very well fail to compensate this, in the future. And now. And at this moment it is, contrary to statements of McCloskey, leading to increasing poverty, in the Eurozone.


Source: 1992-2013: CBS; 1965-1991: my capta



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