Comments on RWER issue no. 69

real-world economics review, Issue no. 69, 7 October 2014

Special issue on Piketty’s Capital

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You may post  and read comments on individual papers by clicking below on the paper titles.  To qualify for posting, comments must refer directly to the RWER paper, and not just to other comments.

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The Piketty phenomenon and the future of inequality         2
Robert Wade         download pdf 

Egalitarianism’s latest foe        18
Yanis Varoufakis         download pdf

Piketty and the limits of marginal productivity theory        36
Lars Syll         download pdf 

Piketty’s determinism?        44
Ann Pettifor and Geoff Tily         download pdf 

Piketty’s global tax on capital         51
Heikki Patomäki         download pdf

Reading Piketty in Athens         58
Richard Parker         download pdf

Pondering Mexican hurdles while reading Capital in the XXI Century        74
Alicia Puyana Mutis           download pdf

Piketty’s inequality and local versus global Lewis turning points        89
Richard Koo         download pdf 

The growth of capital         100
Merijn Knibbe         download pdf 

Piketty vs. the classical economic reformers         122
Michael Hudson         download pdf 

Is Capital in the Twenty-first century Das Kapital for the twenty-first century?          131
Claude Hillinger         download pdf

Piketty and the resurgence of patrimonial capitalism         138
Jayati Ghosh         download pdf

Unpacking the first fundamental law         145
James K. Galbraith         download pdf

Capital and capital: The second most fundamental confusion         149
Edward Fullbrook         download pdf 

Piketty’s policy proposals: How to effectively redistribute income         161
David Colander         download pdf

Piketty: Inequality, poverty and managerial capitalism         167
Victor. A. Beker          download pdf

Capital in the Twenty-First Century: Are we doomed without a wealth tax?          175
Dean

Board of Editors, past contributors, submissions and etc.          181

 

  1. October 8, 2014 at 9:02 pm

    This paper appropriately distinguishes physical quantities from market values of stocks and flows; yet, it does not go far enough. It neglects the existence of quantities and market values of paper (financial assets) REPRESENTING those realities. Nor does the paper address the issue of distribution of ownership of those separate stocks and flows — thus requiring the creation of six interrelated accounting systems. That is the offering of Concordian economics.

  2. Newtownian
    October 9, 2014 at 3:47 am

    I just had a look at this issue. It looks fantastic with many commentators I greatly respect (noting I haven’t read through Picketty yet).

    EXCEPT for the usual Gorilla of an omission……………………………………………

    Try as I might in 182 PDF pages I could not find a single reference to the natural environment or climate change, peak oil, degrowth, exponential economic growth impacts, some small discussion oil and only a single footnote with the word ‘ecosystem’.

    Which I suggest indicates the real natural world is still not seen as relevant to economic thought and critique even for ‘real world’ economists.

    This comes concurrently with the release of Naomi Klein’s new book “This changes everything” http://www.theguardian.com/books/2014/sep/19/this-changes-everything-capitalism-vs-climate-naomi-klein-review !!??? which makes this omission even more bizarre.

    From a mainstream economics group I would have expected this. But RWER I thought was progressive. This omission is so depressing – for me personally in part after having spent two days last week at a degrowth conference which itemized how bad, bad economics policy is regarding sustainability and future generations and now desperately new economics ideas are needed.

    https://theconversation.com/life-in-a-degrowth-economy-and-why-you-might-actually-enjoy-it-32224.

    I used to think that there was some light when I have seen those wonderful articles of Lars Syll appealing for more integration into the hard sciences. But regrettably it looks that progressive economists are still as siloed as their neoclassical counterparts.

    (enraged defenses contradicting the above greatly welcome as I would be delighted to be wrong in a major way).

    • merijnknibbe
      October 10, 2014 at 10:20 am

      My piece contains a reference to an Arrow e.a.article which discusses this, the fact alone that the Piketty concept of capital encompasses (some of the) natural resources in stead of only produced capital or financial capital is quite a step ahead.

  3. October 9, 2014 at 10:29 am

    The paper by Varoufakis seems really good though now i dont have time to go through the details (Galbraith’s papers, especially the math models, also seem apt). Its possible Piketty will have some value in bringing up the issue of inequality, though also it may be this will simply permit the status quo to ‘recuperate’ (i think that is the term) the discussion. The same was said about MLK and the civil rights movement—and similar things are said about the way the ANC in south africa, ghandi in india, and even NGOs in the environmental movement—have turned liberation type movements into just another example of mosca’s (italian reactionary around the time of pareto) ‘revolving elites’. ‘Meet the new boss, or new class, same as the old boss or class’. (Djilas in yugoslavia, Bakunin, Burnham—trotskyist turned reactionary) , all discussed the process.

    (Of course Galbraith is part of a ‘hereditary dynasty’—-JKG (not JFK) , who always donated part of his salary to the common good—i.e. harvard u, the truly needy—was from a part of canada not far from where half my family was from —between the tar sands and whatever they call that in NW dakota; leanard peltier is also from turtle mountains area, i hear; my family got their 40 acres and many of them weren’t impressed with the indigenous who often were getting drunk down by the train tracks. )

    Piketty is from MIT in pedigree. (my niece just started there; i guess it runs in the family, but somehow i didn’t get my share of the good genes, or maybe i misplaced or misused them). I liked that R Goodwin was mentioned and the italian whose name i can’t spell —most people i have talked to have never heard of them. I learned about this from old papers in PNAS (around 73) by P Samuelson (also of MIT) on both the ‘transformation problem’ and also combining R Goodwin’s class struggle lotka-volterra model with Ed Kerner’s ‘gibbs ensemble, biological ensemble idea’.. (Kerner has some very interesting papers). (I just found this because i was sortuh applying statistical mechanics to biology—prigogine popularized the idea.

    I remember i was working in crete (for like 5$/day loading pipes—i was trying to aquire wealth (like 50$ so i could cover what i needed for my ticket—i was going to india) . I took a vacation, hiked up to the top of the mountains, and lo and behold i found a purse loaded with change which was more than enough (and there was no id in it so i didnt have to try to return it). So, i got to Mumbai with $2 in spending money (i had to lie to customs when they asked me if if i had 1000$, i said 2000$ if you consider 1/10 of penny as 1). I sold my camera and everything else on the street the next day; good to go. Time to visit kashmir, ladack (himalayas) , taj mahal, veranasi (banaris) (place of the dead—ghats and opium .).
    This comment is mostly irrelevant, but i largely agree with the paper to the extent i understand it. (I spent a bit of time trying to formalize Piketty’s argument, but it seems its done there; also by Galbraith. Regarding the comment about Naomi Klein, who seems to be a local hero—especially among what some term the ‘limousine liberal’ set, and whose brother recently spoke at a graduate seminar where a friend of mine works (he was mostly impressed that Klein’s brother, as an environmentalist, was going to be flying to delhi, niacaragua, oregon, etc. to spread the gospel), . i think an analogous criticism applies.

  4. October 9, 2014 at 10:49 am

    The profit theory is false since Adam Smith. What can you expect from distribution theory?
    Comment on RWER issue 69

    Critical economists never bought into marginalism as a theory of income distribution (Syll, 2014, p. 40) and it is clear by now that the orthodox approach is a failure. Quite naturally, Heterodoxy is drawn to Marx. Unfortunately, Marx also got it wrong. For the formal proof see (2014).

    All major economic schools lack a consistent profit theory and therefore all distribution theories are hanging in the air. Piketty is no exception.

    As Hicks already observed with regard to profit: economics is “a science still groping in the dark” (1931, p. 170). Economists have no true conception of the most important phenomenon in their universe. What is immediately obvious is that the theories of income distribution and wealth distribution are wrong by logical necessity.

    The first step out of the cul-de-sac is (2012)

    Egmont Kakarot-Handtke

    References
    Hicks, J. R. (1931). The Theory of Uncertainty and Profit. Economica, (32):
    170–189. URL http://www.jstor.org/stable/2547922.

    Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN
    Working Paper Series, 2012793: 1–13. URL http://ssrn.com/abstract=2012793.

    Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series,
    2414301: 1–25.
    URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301.

    Syll, L. P. (2014). Piketty and the Limits of Marginal Productivity Theory. realworld
    economics review, (69): 36–43. URL http://www.paecon.net/PAEReview/
    issue69/Syll69.pdf.

    For an overview about the desolate state of profit theory, which has been known for
    a long time but never rectified, see the web page
    http://www.axec.org/#!profit3/cm3y

  5. October 9, 2014 at 5:25 pm

    First fundamental law vs. Fundamental theorem of income distribution
    Comment on Galbraith’s ‘Unpacking the first fundamental law’

    “In the early pages of Capital in the Twenty-First Century, Thomas Piketty states a “fundamental law of capitalism” that α = rxβ, where α is the share of profit in income, β is the capital/output ratio, and r is the rate of return on capital, or the rate of profit. Thus: r = α/β.” (Galbraith, 2014, p. 145)

    The fundamental law does not hold because the fundamental theorem of income distribution states: Profit is not a factor income (2012, p. 4).

    Piketty does not realize that profit and distributed profit are fundamentally different economic entities. Therefore, there is no such thing as “a share of profit in income” but there is “a share of distributed profit in income”.

    The correct Profit Law reads

    (i) for the pure consumption economy

    Qm = Yd-Sm (2012, p. 4, eq. (5))

    (ii) for the investment economy

    Qm =Yd+I-Sm: (2014, p. 8, eq. (18))

    Legend: Qm: monetary profit, Yd distributed profit, Sm: monetary saving, I investment expenditure

    The structural axiomatic Profit Law gets a bit more sophisticated when foreign trade and government is included. By summing up investment expenditures over time and taking depreciation into account (ii) ultimately yields the profit rate (2011b, Sec. 6.2).

    Note that profit for the economy as a whole does not depend on productivity. What holds for a single firm does not hold for the economy as a whole. One has to be careful here not to commit a fallacy of composition.

    Changes of the valuation price of assets are captured by nonmonetary profit Qn. This is a different and lengthy issue (2011a)

    From the fact that Piketty’s profit theory is not correct follows logically that his First fundamental law is not correct either.

    Time to get the formal foundations right (see http://www.axec.org/#!axioms/cy2g).

    Egmont Kakarot-Handtke

    References
    Galbraith, J. K. (2014). Unpacking the First Fundamental Law. real-world economics
    review, (69): 145–148. URL http://www.paecon.net/PAEReview/issue69/
    Galbraith69.pdf.

    Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working
    Paper Series, 1917012: 1–26. URL http://ssrn.com/abstract=1917012.

    Kakarot-Handtke, E. (2011b). Squaring the Investment Cycle. SSRN Working Paper
    Series, 1911796: 1–25. URL http://ssrn.com/abstract=1911796.

    Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN
    Working Paper Series, 2012793: 1–13. URL http://ssrn.com/abstract=2012793.

    Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
    Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792.

  6. October 20, 2014 at 5:37 am

    Out of the box
    Summary comment on RWER issue 69

    With the growing mass of new facts about distribution coming in, what has been already clear becomes even clearer: distribution theory is hanging in the air. It is not that hard to see why conventional models fail. What is preferable, though, is an outline of the true model of distribution. As you have read and heard enough explanations why there is no satisfactory explanation you might appreciate to learn how the economy really works. What has to be done is to change the formal foundations of economic theory. For the new paradigm see:

    “The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?”

    The working paper has been posted recently on SSRN:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741

    Egmont Kakarot-Handtke

  7. April 9, 2016 at 6:19 pm

    Syll’s critique of Rodrik”s Economics Rules in Issue 74 hits the nail on the head with respect to what is fundamentally wrong with both the mainstream neoclassical approach and with the New Keynesian approach. What Rodrik appears to say in his book is not much different from what Wren-Lewis says in his blog referring to economics student pretests. Both want a plethora of theories from which to choose with the core being the neoclassical core.

    Syll distinguishes Core Assumptions and Auxiliary Assumptions. This is effectively the same distinction made by Pierre Duhem and elaborated by Willard Quine. The Duhem-Quine approach to the falsification of scientific theories has been used to show that Popper’s approach to falsification was too simple. While Popper often thought that falsification of a scientific theory could be relatively straight-forward, Duhem and Quine showed that the hypothesis could always be saved by reference to auxiliary hypotheses. One of them could be falsified instead of the core hypothesis that was considered to be under test.

    Syll uses the Duhem-Quine approach slightly differently. He uses the approach to show instead that the testing of hypotheses can be rendered useless. He claims that Rodrik does not make any distinction between Core and Auxiliary assumptions. Assuming that this is true, and I have no reason to believe that it isn’t, this is a striking blow to Rodrik’s explication of the economic theory testing scenarios that he has in mind. Syll contends that one can go on forever, as it were, assuming auxiliary hypotheses ad infinitum, and this is so, even in the Duhem-Quine approach, but this way of dealing with the test of scientific hypotheses quickly becomes otiose.

    While in normal science this approach would quickly pall, it seems that in neoclassical, and perhaps New Keynesian, paradigms, they do in fact invent new adjustments and parameters, &c continually in order to save their favorite hypotheses. Lakatos would have viewed this kind of research program as degenerating. As Syll argues, this way of approaching the testing of hypotheses renders them immune from falsification. Any paradigm that effectively protects its theories from falsification is not essentially a scientific paradigm but rather something akin to a religious cult.

    While Syll’s article is relatively elementary, it cuts to the bone and renders Rodrik’s entire approach and others like his irrelevant to the social scientific analysis of economic phenomena.

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