Tuesday, April 15, 2014

Thomas Piketty - Capital in the 21st Century

Distributional effects of the current economic system have received growing interest as the distribution of income and wealth within the largest economies has grown steeper. It seems that this month, Capital in the 21st Century is on the bedside table of every economist I know, as Michael Lewis's book is on the table of every trader. And as with Flash Boys, everyone's has a problem or two with Piketty's theses, while the consensus is that it's an important book even after taking the flaws into account.

Brad DeLong's "Finger exercises" provide a simple model to play with, and begins with a discussion of four different possible return rates (r) that might relate to the growth rate (g) in Piketty's models. He then looks at the levels of r, g, and wealth to income (W/Y); the results of the model suggest that at least to some extent, the inverse relationship of return rates to capital and accumulation of wealth does in fact hold.

James K. Galbraith's review provides a number of interesting critiques, and finds that while the book contains good information on "flows of income, transfers of wealth and the distribution of financial resources in some of the world's wealthes countries," it does less well in proposing remedies appropriate to the times, and in clarifying the various meanings of "capital"; he also appears to muddle the precedents of the growth model he uses to drive his argument.
[T]he argument of the critics was not about Keynes, or fluctuations. It was about the concept of physical capital and whether profit can be derived from a production function. In desperate summary, the case was three-fold. First: one cannot add up the values of capital objects to get a common quantity without a prior rate of interest, which (since it is prior) must come from the financial and not the physical world. Second, if the actual interest rate is a financial variable, varying for financial reasons, the physical interpretation of a dollar-valued capital stock is meaningless. Third, a more subtle point: as the rate of interest falls, there is no systematic tendency to adopt a more “capital-intensive” technology, as the neoclassical model supposed. 
In short, the Cambridge critique made meaningless the claim that richer countries got that way by using “more” capital. In fact, richer countries often use less apparent capital; they have a larger share of services in their output and of labor in their exports—the “Leontief paradox.” Instead, these countries became rich—as Pasinetti later argued—by learning, by improving technique, by installing infrastructure, with education, and—as I have argued—by implementing thoroughgoing regulation and social insurance. None of this has any necessary relation to Solow’s physical concept of capital, and still less to a measure of the capitalization of wealth in financial markets. 
There is no reason to think that financial capitalization bears any close relationship to economic development. Most of the Asian countries, including Korea, Japan, and China, did very well for decades without financialization; so did continental Europe in the postwar years, and for that matter so did the United States before 1970. 
And Solow’s model did not carry the day. In 1966 Samuelson conceded the Cambridge argument!
DeLong finds fault with Galbraith's critique, and Galbraith responds in the comments on DeLong's post. Chris Bertram reviews Rawls' Economic Justice in light of Piketty over on the Crooked Timber group blog. Paul Krugman has a laudatory review of the book up at the NYRB.

*
 

My own first impression is to think that it would be quite difficult to maintain a return on capital much in excess of the growth rate in cases where capital provides nearly all of the factor input of production, at least for the time periods we're talking about (50+ years). I could be mistaken, otherwise if r-g is large for any substantial length of time, then the quantity of capital would greatly exceed the entire output of the economy of which the capital is a part. Mathematically, these two growth rates have to converge as one becomes closer to another. Moreover, we would also expect that r would fall before that, due to diminishing returns. Piketty's exploding models, in which one factor totally predominates seems less appealing than some kind of pendulum model.

We are in a second Gilded Age, according to the evidence, and the question is what to do about it, and how bad might it get?Rather than raising the income tax to confiscatory levels as Piketty reommends, the most promising policy prescriptions available to us at this time seem to be to neutralize the favorable tax treatment of dividends and capital gains relative to wage income, to invest in public goods (both tangible and intangible), and to strengthen the social safety net.

Some questions I'm still thinking about: If wealth and income inequality are increasing in certain economies, but moderating globally, how much of the argument still holds? Has Piketty chosen the correct definition of r? Is Noah Smith correct in saying that this is just a restatement of the robots vs. globalization argument?

Monday, April 07, 2014

Giordano Bruno


For here is a philosophy that opens the senses, contents the spirit, glorifies the intellect, and produces the humane and true state of blessings that humanity desires, consists through balance, frees from care and pacifies sorrow, causes one to rejoice in the present and not to fear the future; for that Providence or fate or chance in life which determines our course through our particular vicissitudes neither wants nor permits us to know about one thing without ignorance of another, so that at first glance, we are always doubtful and perplexed. But, when we consider more profoundly the being and substance of the universe in which we immutably dwell, we see that neither we nor any real substance truly dies; for nothing is diminished in its substance, but all things that travel in infinite space change in aspect. And since we are all subject to the same Ultimate Efficient Cause, we should not believe, expect or hope otherwise than that, since everything comes from good, all is good, for the good and to the good; from good, through good, to good; anyone who believes the contrary apprehends nothing but what is present, as the goodness of a building is not manifest to one who sees only a tiny piece of it, like a stone affixed with a bit of cement to a garden wall, but which is visible  to one who sees the whole inside and out, who has the ability to see how each part converses with all the others. We have no fear that what has accumulated in this world could, through the vehemence of some errant spirit, or the wrath of Jove’s thunderbolt, be dispersed through this little sepulcher or cupola of the heavens, or shaken or scattered like dust throughout this starry mantle; and in no other way could nature be made to empty itself of subsistence, except when to our eyes it appears that air compressed within the concavity of a bubble vanishes on release, because there is nothing known in the world where one thing does not always succeed another, nor is there some ultimate deep of the world where being is finally dispersed into nonbeing by the Maker’s hand. There are no ends, boundaries, limits or walls which defraud or deprive us of the infinite multitude of things. Therefore, the earth and sea are fecund, therefore the sun burns forever, eternally supplying fuel for the voracious flames, as vapors feed diminished seas, therefore the infinite perpetually bears forth new material.

Giordano Bruno
On the Infinite, the Universe and the Worlds
Prefatory Epistle

Thursday, March 20, 2014

Links for Later 3-20-14

  1. Strategist Lawrence Freedman on the Ukraine crisis, and why making friends is often the best strategy. Exaggerates neither the dangers nor the ease of the current situation.
  2. Strategist Edward Luttwak is less sanguine.
  3. Hugh Howey on why every writer should self-publish.
  4. The greatest juggler alive leaves to run a concrete business.
  5. Cyberpunk tumblrs.
  6. PTSD and moral injury.
  7. Visiting Andre Linde, who proposed the inflationary model, on the occasion of the observation of gravity waves, supporting his theory.

Tuesday, March 18, 2014

Giordano Bruno - On the Infinite, the Universe and the Worlds


Prefatory Epistle


Written for the most illustrious

Signeur Michel de Castelnau


Signeur of Mauvissiere, Concressault and Joinville

Councilor of the Privy Council,

Captain of 50 men at arms,

And Ambassador to Her Serene Majesty of England.

O most illustrious Knight, if I had driven a plow, herded sheep, cultivated a garden, or trimmed a garment, then no one would have held me in much regard, few would have seen me, and even fewer chosen to deal with me, and then I could well try to please everyone. But, because I have tried to describe the field of nature, consider the disposition of the soul, partake of the life of the mind, and travel like a master artificer through the maze of the intellect, those who have regarded me have threatened me, those who have seen me have assailed me, those who have encountered me have tried to bite me, and those who have understood me have tried to destroy me; not just one, nor a few, but many, or virtually all. If you want to understand why this is so, I will tell you the reason: everyday people displease me, commoners are odious, the multitude discontent me, and only the singular one is my beloved: through her I have freedom in subjection, happiness in sorrow, wealth in poverty, and life in death; through her I escape envy of those who are servants in freedom, have pain even in pleasure, are poor despite their wealth, dead though living; for in their body is that chain that binds them, in their spirit is the hell that oppresses them, within their soul is the sin that sickens them, within their mind is the sloth that kills them; for they lack the magnanimity that grants resolve, the endurance for success, the splendor of the illustrious, and the knowledge that enlivens. Thus, I do not avoid the arduous path for want of energy, nor spare my arm from this work for laziness, nor in cowardice shrink from the enemy who confronts me, nor, dazzled, turn my eyes from the splendor of the divine; I am aware that I have a bit of a reputation as a sophist, more interested in seeming to be clever than in truly being wise, more ambitious to establish a new and false sect than to support that which is old and true; a bird catcher, trying to capture splendor and glory; an unquiet spirit, trying to undermine the foundations of good discipline by using siege engines of perversity.

Therefore, My Lord, let the saints disperse those who unjustly hate me, may I always do what is pleasing before my God, may I gain favor with the rulers of this world, may the stars grant me fertile land for my seed and abundant seed for my land, that I might harvest abundant fruit from my labors, that the spirits be awoken and the hearts be opened of all who suffer in darkness: for I certainly make no falsehood, if I err, it is by accident, and I do strive for love of victory itself (because empty success and hollow victory are enemies of God, vile and without honor, and such are not truly triumphs); rather, I suffer, torment and tire myself for love of true knowledge and true contemplation. All this shall I make manifest through demonstrative arguments, dependent on lively reasoning, supported by moderated senses, admitting no false particulars, rather arriving like true ambassadors of objective Nature, presenting themselves to the searcher, appearing to the observer, clear to those who would understand, plain to those who would comprehend. So here I present my contemplation of the infinite, the universe and the innumerable worlds.



[1] Literally: to do what Daedalus did.

Monday, March 17, 2014

Andy Othling - Daydream (Tycho cover)

Tycho's new album, Awake, comes out tomorrow in the US. Have you ordered your copy yet?

Bruce Sterling closing keynote at SXSW 2014


The chairman speaks.

Bigger After the Bang

Scientists using data from the BICEP2 telescope array uncovered the signature of inflation in the immediate aftermath of the Big Bang (10 -25 seconds after the beginning of the universe) by looking at polarization of light caused by gravity waves. More here. BICEP data releases available here.

Monday, March 10, 2014

Cosmos - Giordano Bruno segment

Links for Later 3-10-14

  1. William Ackman shorts Herbalife, then tries to make the short pay off by whatever means are at his disposal.
  2. Is there a tradeoff among equity, efficiency and freedom in economic systems? Paul Krugman says, not so much.
  3. Bill Janeway on the present and future of venture capital (via Brad DeLong)
  4. The US military looks a lot like Sweden. (via Helen DeWitt)

Thursday, February 27, 2014

Roentgen Furniture



Exquistely made furniture from the father and son furniture makers Abraham and David Roentgen was displayed recently at the Metropolitan Museum of Art. The pieces were built with intricate mechanisms for opening and closing drawers, compartments and components.

More info over at BLDG BLOG.

Links for Later 2-27-14

  1. Sexy diagrams of glutamate receptors in the central nervous system, featuring stepwise activation by multiple subunits.
  2. Hot, hot, hot! Article on ITAR fusion reactor project.
  3. Dreamy description of government debt and government assets spooning.
  4. Not sexy: GHCQ spied on your Yahoo! video chats, 3-11% of which involved nekkid people of one sort or another.
Once the miracle of creation has taken place, the group can build and extend it, but the group never invents anything. The preciousness lies in the lonely mind of a man.

    -John Steinbeck