Post #390,203
6/1/14 10:17:31 AM
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Suresh Naidu: Alternative thinking on Piketty's Capital.
https://www.jacobinmag.com/2014/05/capital-eats-the-world/[...]
In “The Causes of Slavery and Serfdom,”Evsey Domar famously argued that it was a historical impossibility to have free labor, abundant land, and an aristocracy simultaneously. Free labor and abundant land would make aristocratic claims on labor impossible, abundant land and an aristocracy would require coerced labor, and only scarce land could depress wages enough to allow an aristocracy to coexist with free labor.
Perhaps a similar trilemma exists with abundant robots, dignified employment, and unequal capital ownership.
This sort of institutions-as-primitives thinking is how we should approach the question of capital. Capital is a set of property rights entitling bearers to politically protected rights of control, exclusion, transfer, and derived cash flow. The capital share of income is just the last part of that sequence.
Like all property rights, its delineation and defense require actions of state power, legal standardization, and juridical legitimacy. In the last instance, capital includes the ability to call on the government to evict trespassers, be they burglars, sit-down strikers, or delinquent tenants.
In economics, we capture some of the political dimension of capital with incomplete contracts. Contracts between financiers, entrepreneurs, and workers (among others) can never be completely specified. Instead, large domains of the economic transaction are left to the discretion of one side of the market.
A CEO like Steve Jobs complains about the power exercised by Apple’s shareholders in the late 1980s as surely as Jobs’ workers complain about the tyrannical power wielded by Jobs himself. As Ronald Coase argued, this distribution of power is not outside the market, but part of the transaction. Workers do what they are told because they can be kicked out of the firm. Capital here is seen as not just a flow of income, but rather a right to exclude and appropriate. Focusing on balance sheets rather than bosses will miss this.
Seeing capital this way also blurs the line between supermanagers and rentiers. Supermanagers happen to have labor market contracts (in the form of bonuses and stocks and options) that entitle them to stupendous income when the firm is doing well. It is not clear that this is “labor” income as much as it is a form of capital that requires you to run meetings and wear a power suit.
Jointly, the rentiers and the supermanagers have cash flow and control rights inside the firm, and the institutions of corporate finance and governance that allocate these powers determine the demand for capital as surely as technology does.
The book is too good to miss this, however. It contains an excellent section on the gap between cash-flow rights and control rights in corporate governance, which suggests a capital demand schedule derived not just from firm optimization decisions, but from the distribution of power within the firm.
The book points out that German shares are “underpriced” because shareholders there do not have the same level of political power as shareholders in the US and UK, since they have to share power with workers’ councils and other stakeholders. The same thing is true of unions in the US. David Lee and Alexandre Mas shows that strong union victories in NLRB elections once reduced stock prices, yet it is very unlikely they changed the replacement value of the company’s underlying assets.
[...] It's well worth taking the time to read the whole thing. (via DeLong's blog) Cheers, Scott.
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Post #390,232
6/2/14 3:07:12 PM
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Defending Piketty from the jackals (follows as the night the day.)
http://www.salon.com/2014/06/02/pikettys_haters_fail_again_destroying_five_new_lies_designed_to_discredit_capital/
Piketty’s haters fail again: Destroying 5 new lies designed to discredit “Capital”
The economist demolishes a phony critique of his stats -- but desperate dolts won't stop trying to twist the facts
MATT BRUENIG
Two Fridays ago, Chris Giles of the Financial Times made a splash by claiming that there are serious problems with the data used by Thomas Piketty in one chapter of his surprise bestseller “Capital in the 21st Century.” A week of teeth-gnashing ensued until, last Thursday, Piketty responded to Giles’ accusations in devastating fashion.
That Piketty’s data is flawed will no doubt linger as a zombie idea in the circles of people for whom that’s convenient. But this isn’t the only misconception about Piketty’s book that has been swirling around in the commenting class. In no particular order, here are the top five common misconceptions I keep on reading.
1. Bastard Pikettyism
Piketty’s main argument is that the growth in national income will decline, but savings rates and the rate of return on capital (i.e., economic wealth) will hold relatively steady. This will cause the magnitude of capital in the economy to balloon and cause capital ownership to become even more heavily concentrated at the top than it already is. As a result, more of our national income each year will go to the increasingly concentrated owners of the nation’s capital. If Piketty is right, it is conceivable that, in the future, 35 percent or more of the national income will flow to capital, 90 percent of which will be held by 10 percent of the people.
One popular attack of this theory, especially coming from economist types, is to say that when the magnitude of capital balloons, the rate of return on capital will fall significantly, and that this will prevent the above inequality story from happening. But this attack totally misconceives what Piketty means by capital and his arguments about the determinants of the rate of return on capital, misconceptions Suresh Naidu has dubbed “Bastard Pikettyism.”
At its core, this economist objection has in mind a certain model of the economy where “capital” consists of physical stuff like machines and the rate of return on capital is determined rather mechanically by things called “marginal products.” When you add more and more machines, their marginal productivity will decline, and so too will the rate of return to capital. But this is not Piketty’s view of “capital.” For Piketty, political and social forces define what capital is — it consists of much more than physical machines — and play a leading role in determining what rate of return it actually fetches. Pushing Piketty’s analysis into some physicalist capital model is a bastardizing of his work that fails to respond to his actual theory and the long series of historical data that supports it.
2. Income inequality will rise because wealth inequality will rise
Under this misconception, the main argument of Piketty’s book is that capital will become more unequally distributed than it currently is, and this will cause national income to become more unequally distributed than it currently is. In fact, this is only one of Piketty’s theorized channels of increasing income inequality, and the most speculative one at that.
Piketty’s main argument is that the decline of growth will cause the amount of national capital relative to national income to go up a bunch. This will cause more of our national income to go to capital each year. This will have a disequalizing effect, not because capital will become more unevenly distributed, but because it already is very unevenly distributed. Seventy-five percent of our nation’s capital is already held by 10 percent of the people. Increasing the amount of the national income that goes to capital will increase inequality, whether wealth inequality increases or not.
4. Piketty assumes all capital income is saved3>
[. . .]
{{sigh}} Bloviation.. handmaiden to Language-murder everywhen. Wonder what happened to 3. ?? What's the matter Einstein; can't you count? (string quartet rehearsal..)
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