Thomas Piketty and Joseph Schumpeter (and Gerard Debreu)

Everybody else seems to have an opinion about Thomas PIketty, so why not me? As if the last two months of Piketty-mania (reminiscent, to those of a certain age, of an earlier invasion of American shores, exactly 50 years ago, by four European rock-stars) were not enough, there has been a renewed flurry of interest this week about Piketty’s blockbuster book triggered by Chris Giles’s recent criticism in the Financial Times of Piketty’s use of income data, which mainly goes to show that, love him or hate him, people cannot get enough of Professor Piketty. Now I will admit upfront that I have not read Piketty’s book, and from my superficial perusal of the recent criticisms, they seem less problematic than the missteps of Reinhart and Rogoff in claiming that, beyond a critical 90% ratio of national debt to national income, the burden of national debt begins to significantly depress economic growth. But in any event, my comments in this post are directed at Piketty’s conceptual approach, not on his use of the data in his empirical work. In fact, I think that Larry Summers in his superficially laudatory, but substantively critical, review has already made most of the essential points about Piketty’s book. But I think that Summers left out a couple of important issues — issues touched upon usefully by George Cooper in a recent blog post about Piketty — which bear further emphasis, .

Just to set the stage for my comments, here is my understanding of the main conceptual point of Piketty’s book. Piketty believes that the essence of capitalism is that capital generates a return to the owners of capital that, on average over time, is equal to the rate of interest. Capital grows; it accumulates. And the rate of accumulation is equal to the rate of interest. However, the rate of interest is generally somewhat higher than the rate of growth of the economy. So if capital is accumulating at a rate of growth equal to, say, 5%, and the economy is growing at a rate of growth equal to only 3%, the share of income accruing to the owners of capital will grow over time. It is in this simple theoretical framework — the relationship between the rate of economic growth to the rate of interest — that Piketty believes he has found the explanation not only for the increase in inequality over the past few centuries of capitalist development, but for the especially rapid increase in inequality over the past 30 years.

While praising Piketty’s scholarship, empirical research and rhetorical prowess, Summers does not handle Piketty’s main thesis gently. Summers points out that, as accumulation proceeds, the incentive to engage in further accumulation tends to weaken, so the iron law of increasing inequality posited by Piketty is not nearly as inflexible as Piketty suggests. Now one could respond that, once accumulation reaches a certain threshold, the capacity to consume weakens as well, if only, as Gary Becker liked to remind us, because of the constraint that time imposes on consumption.

Perhaps so, but the return to capital is not the only, or even the most important, source of inequality. I would interpret Summers’ point to be the following: pure accumulation is unlikely to generate enough growth in wealth to outstrip the capacity to increase consumption. To generate an increase in wealth so large that consumption can’t keep up, there must be not just a return to the ownership of capital, there must be profit in the Knightian or Schumpeterian sense of a profit over and above the return on capital. Alternatively, there must be some extraordinary rent on a unique, irreproducible factor of production. Accumulation by itself, without the stimulus of entrepreneurial profit, reflecting the the application of new knowledge in the broadest sense of the term, cannot go on for very long. It is entrepreneurial profits and rents to unique factors of production (or awards of government monopolies or other privileges) not plain vanilla accumulation that account for the accumulation of extraordinary amounts of wealth. Moreover, it seems that philanthropy (especially conspicuous philanthropy) provides an excellent outlet for the dissipation of accumulated wealth and can easily be combined with quasi-consumption activities, like art patronage or political activism, as more conventional consumption outlets become exhausted.

Summers backs up his conceptual criticism with a powerful factual argument. Comparing the Forbes list of the 400 richest individuals in 1982 with the Forbes list for 2012 Summers observes:

When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.

But something else is also going on here, a misunderstanding, derived from a fundamental ambiguity, about what capital actually means. Capital can refer either to a durable physical asset or to a sum of money. When economists refer to capital as a factor of production, they are thinking of capital as a physical asset. But in most models, economists try to simplify the analysis by collapsing the diversity of the entire stock of heterogeneous capital assets into single homogeneous substance called “capital” and then measure it not in terms of its physical units (which, given heterogeneity, is strictly impossible) but in terms of its value. This creates all kinds of problems, leading to some mighty arguments among economists ever since the latter part of the nineteenth century when Carl Menger (the first Austrian economist) turned on his prize pupil Eugen von Bohm-Bawerk who wrote three dense volumes discussing the theory of capital and interest, and pronounced Bohm-Bawerk’s theory of capital “the greatest blunder in the history of economics.” I remember wanting to ask F. A. Hayek, who, trying to restate Bohm-Bawerk’s theory in a coherent form, wrote a volume about 75 years ago called The Pure Theory of Capital, which probably has been read from cover to cover by fewer than 100 living souls, and probably understood by fewer than 20 of those, what he made of Menger’s remark, but, to my eternal sorrow, I forgot to ask him that question the last time that I saw him.

At any rate, treating capital as a homogeneous substance that can be measured in terms of its value rather than in terms of physical units involves serious, perhaps intractable, problems. For certain purposes, it may be worthwhile to ignore those problems and work with a simplified model (a single output which can be consumed or used as a factor of production), but the magnitude of the simplification is rarely acknowledged. In his discussion, Piketty seems, as best as I could determine using obvious search terms on Amazon, unaware of the conceptual problems involved in speaking about capital as a homogeneous substance measured in terms of its value.

In the real world, capital is anything but homogeneous. It consists of an array of very specialized, often unique, physical embodiments. Once installed, physical capital is usually sunk, and its value is highly uncertain. In contrast to the imaginary model of a homogenous substance that just seems to grow at fixed natural rate, the real physical capital that is deployed in the process of producing goods and services is complex and ever-changing in its physical and economic characteristics, and the economic valuations associated with its various individual components are in perpetual flux. While the total value of all capital may be growing at a fairly steady rate over time, the values of the individual assets that constitute the total stock of capital fluctuate wildly, and few owners of physical capital have any guarantee that the value of their assets will appreciate at a steady rate over time.

Now one would have thought that an eminent scholar like Professor Piketty would, in the course of a 700-page book about capital, have had occasion to comment on enormous diversity and ever-changing composition of the stock of physical capital. These changes are driven by a competitive process in which entrepreneurs constantly introduce new products and new methods of producing products, a competitive process that enriches some owners of new capital, and, it turns out, impoverishes others — owners of old, suddenly obsolete, capital. It is a process that Joseph Schumpeter in his first great book, The Theory of Economic Development, memorably called “creative destruction.” But the term “creative destruction” or the title of Schumpeter’s book does not appear at all in Piketty’s book, and Schumpeter’s name appears only once, in connection not with the notion of creative destruction, but with his, possibly ironic, prediction in a later book Capitalism, Socialism and Democracy that socialism would eventually replace capitalism.

Thus, Piketty’s version of capitalist accumulation seems much too abstract and too far removed from the way in which great fortunes are amassed to provide real insight into the sources of increasing inequality. Insofar as such fortunes are associated with accumulation of capital, they are likely to be the result of the creation of new forms of capital associated with new products, or new production processes. The creation of new capital simultaneously destroys old forms of capital. New fortunes are amassed, and old ones dissipated. The model of steady accumulation that is at the heart of Piketty’s account of inexorably increasing inequality misses this essential feature of capitalism.

I don’t say that Schumpeter’s account of creative destruction means that increasing inequality is a trend that should be welcomed. There may well be arguments that capitalist development and creative destruction are socially inefficient. I have explained in previous posts (e.g., here, here, and here) why I think that a lot of financial-market activity is likely to be socially wasteful. Similar arguments might be made about other kinds of activities in non-financial markets where the private gain exceeds the social gain. Winner-take-all markets seem to be characterized by this divergence between private and social benefits and costs, apparently accounting for a growing share of economic activity, are an obvious source of inequality. But what I find most disturbing about the growth in inequality over the past 30 years is that great wealth has gained increased social status. That seems to me to be a very unfortunate change in public attitudes. I have no problem with people getting rich, even filthy rich. But don’t expect me to admire them because they are rich.

Finally, you may be wondering what all of this has to do with Gerard Debreu. Well, nothing really, but I couldn’t help noticing that Piketty refers in an endnote (p. 654) to “the work of Adam Smith, Friedrich Hayek, and Kenneth Arrow and  Claude Debreu” apparently forgetting that the name of his famous countryman, winner of the Nobel Memorial Prize for Economics in 1983, is not Claude, but Gerard, Debreu. Perhaps Piketty confused Debreu with another eminent Frenchman Claude Debussy, but I hope that in the next printing of his book, Piketty will correct this unfortunate error.

UPDATE (5/29 at 9:46 EDST): Thanks to Kevin Donoghue for checking with Arthur Goldhammer, who translated Piketty’s book from the original French. Goldhammer took responsibility for getting Debreu’s first name wrong in the English edition. In the French edition, only Debreu’s last name was mentioned.

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25 Responses to “Thomas Piketty and Joseph Schumpeter (and Gerard Debreu)”


  1. 1 Kevin Donoghue May 29, 2014 at 10:39 am

    “Now one would have thought that an eminent scholar like Professor Piketty would, in the course of a 700-page book about capital, have had occasion to comment on enormous diversity and ever-changing composition of the stock of physical capital.”

    By capital, Piketty simply means wealth, which takes many forms:

    “To be clear, although my concept of capital excludes human capital (which cannot be exchanged on any market in nonslave societies), it is not limited to “physical” capital (land, buildings, infrastructure, and other material goods). I include “immaterial” capital such as patents and other intellectual property, which are counted either as nonfinancial assets (if individuals hold patents directly) or as financial assets (when an individual owns shares of a corporation that holds patents, as is more commonly the case). More broadly, many forms of immaterial capital are taken into account by way of the stock market capitalization of corporations.” (Page 49)

    Interesting slip regarding Debreu. Considering the French edition came out last year I’m surprised that wasn’t picked up.

  2. 2 Kevin Donoghue May 29, 2014 at 10:48 am

    Now this is interesting. The Debreu error doesn’t appear in the French edition; he dispenses with first names and refers simply to Hayek, Arrow & Debreu. I’m going to tweet his translator about this.

  3. 4 nottrampis May 29, 2014 at 3:45 pm

    I have a special Piketty article section on my blog of every article I have read on Piketty for interested parties. This is of course on it.

    My guess is what I have not linked is in some of the articles.

    Bravo Dave again! Keep it up

  4. 5 David Glasner May 30, 2014 at 8:39 am

    Kevin, Thanks for helping clear up the misnaming of Debreu in the English edition of Piketty’s book. Thanks also for the quote about the broad meaning of capital. But the question remains (at least in my mind) what analytical principle allows Piketty to draw conclusions about the distribution of income and wealth (conceived as a heterogeneous collection of material and immaterial assets) from an inequality in which the rate of interest represents the yield on a fictitious homogeneous substance?

    Luis, Thanks

    nottrampis, Thanks. I will try.

  5. 6 Kevin Donoghue May 30, 2014 at 10:16 am

    David,

    Piketty’s ‘r’ is not the rate of interest. It’s the sum all non-labour income (interest, rent, royalties etc) divided by the market value of all wealth. I think of it as being akin to the Weighted Average Cost of Capital (WACC) which I used to see in old-fashioned corporate finance textbooks. But of course the WACC is a firm-level concept whereas Piketty is mostly thinking in terms of the consolidated accounts of a large closed economy. Note that in that context bonds are not wealth (alias capital); debtors and creditors net out.

    Now, suppose r, thus defined, generally exceeds g, the growth-rate of real GDP. On reasonable assumptions about initial endowments, propensities to consume and inheritance of wealth, wealth will eventually become highly concentrated.

    Of course r > g is not a law of nature. From 1914 to 1980 or thereabouts, r was less than g. But Piketty regards that period as exceptional whereas the periods 1815-1914 and 1980 onwards are the norm. There’s an interesting contrast with Keynes, who referred to the age which ended in 1914 as “an extraordinary episode in the economic progress of man” (you’ll remember that famous passage in The Economic Consequences of the Peace). In some moods Keynes would have liked to return to the world of his youth, but he dismissed that as a pipe-dream. Piketty feels the same way about Les Trente Glorieuses.

    So who is right, Keynes or Piketty? I think we can make either of them right depending on our policy choices. It’s rather like the contrast between Orwell’s 1984 and Huxley’s Brave New World. Depending on how we screw up, we could make either nightmare come true. But we don’t actually have to screw up. Keynes and Piketty do agree on that.

    Off-topic (& apologies for being a blog-whore): I do have a quibble with Piketty’s terminology in one particular passage, which I grumble about here:

    http://anyoldbullshit.blogspot.ie/2014/05/piketty-and-marginal-product-of-capital.html

  6. 7 Lorenzo from Oz June 1, 2014 at 12:51 am

    Kevin Donoghue: so, both Piketty and Keynes preferred the world when they were young and fear such joy will not come again …

  7. 8 Mike Sax June 1, 2014 at 7:28 pm

    My take on it is what Piketty means is that labor’s take from profits relative to ‘capital’ but one could maybe just call it the employers has gotten smaller over the last 30 years. Its seems to me that this is empirically plausible.

    Like with the computer and Internet revolutions the amount of required labor is less. Overall, labor is doing much worse over the last 30 years than it was before.

    In the late 60s it was the opposite as we heard a lot about labor shortages.

  8. 9 Mike Sax June 1, 2014 at 7:35 pm

    “Winner-take-all markets seem to be characterized by this divergence between private and social benefits and costs, apparently accounting for a growing share of economic activity, are an obvious source of inequality. But what I find most disturbing about the growth in inequality over the past 30 years is that great wealth has gained increased social status. That seems to me to be a very unfortunate change in public attitudes. I have no problem with people getting rich, even filthy rich. But don’t expect me to admire them because they are rich.”

    However, David, do you think it’s accidental that there is a correlation between greater inequality and greater social admiration for those who are wealthy? To the extent that people desire social prestige it’s not surprising that with one comes the other

  9. 10 Mike Sax June 1, 2014 at 7:38 pm

    I think it’s easy to speak at cross purposes on the question of ‘capital.’ In a sense though it’s a given that if the amount of profits going to labor goes down then necesarily going to their bosses goes up and I think maybe that’s what he means by capital here.

  10. 11 David Glasner June 2, 2014 at 9:35 am

    Kevin, There are two issues. One is how we define the wealth/capital variable and the corresponding yield; the other is whether it makes senses to draw any long-term inferences about historical trends from what is essentially an argument about the implications of an equilibrium growth path. My point is that the heterogeneous components of that wealth/capital variable are being transformed so radically over time that any inferences drawn from relations that would obtain in a long-term growth path are very tenuous. Great fortunes are, I conjecture, mainly the result of extraordinary returns accruing over a relatively short period of time, owing mainly to luck or exceptional circumstances – don’t ask me to distinguish between the those two categories – not to patient gradual accumulation over time. So my point is that Piketty is emphasizing a relationship that may be logically valid, but is not very relevant to the problem he is interested in.

    I would also observe that there was probably a substantial improvement in the welfare of the bottom 20% in the US and Western Europe between 1815 and 1914. It is not so clear that the welfare of the bottom 20% in the US and Western Europe increased substantially from 1980 to 2014. So the question that interests me is what accounts for the difference between the most recent period and the nineteenth century, not what makes the two periods similar.

    Mike, I think that you are raising interesting questions. Has the technological progress of the last 30 years been significantly more labor-saving than technological progress in the nineteenth century? But remember that opponents of technological progress in the nineteenth century opposed the adoption of new technologies even then because they felt that it would reduce the demand for labor. I don’t see Piketty’s comparison of r and g as being very relevant in this regard.

    Concerning the attitudes toward the rich, I agree that the fact that the rich are doing better and better is adding to their social prestige. But the relationship is not entirely one way. There are societies in which the social status of the rich is below those of other groups. I think of highly religious, traditional, or hierarchical societies in which the wealthy must pay for their status, it doesn’t come automatically. It seems that in societies dominated by utilitarian ethics, the social status of the wealthy tends to be higher than it is in traditional societies. That is pure armchair sociology on my part, but it seems at least superficially plausible.

  11. 12 Kevin Donoghue June 2, 2014 at 10:01 am

    “Great fortunes are, I conjecture, mainly the result of extraordinary returns accruing over a relatively short period of time….”

    Piketty would certainly dispute that. It’s not what his research shows.

  12. 13 David Glasner June 2, 2014 at 10:04 am

    So what would Piketty have to say about this?

    “Summers backs up his conceptual criticism with a powerful factual argument. Comparing the Forbes list of the 400 richest individuals in 1982 with the Forbes list for 2012 Summers observes:

    When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.”

  13. 14 Kevin Donoghue June 2, 2014 at 12:06 pm

    “So what would Piketty have to say about this?”

    He has quite a lot to say about it. The index entry “Forbes Wealth Rankings” refers us to pages 432-434, 439-443, 458, 518, 625n23.

    I really don’t see much point in transcribing his comments. If, when you read the book, you find it unconvincing so be it.

    I will relay one question posed by Piketty: why does Steve Forbes list himself as a “nurturer” of inherited wealth, whereas Liliane Bettencourt is classified as a “pure” heiress? Just where is the boundary between “pure” and “partial” heirs?

    He is too polite to ask whether the classification is affected by one being female and French, and the other being male, American and the owner of the magazine which publishes the rankings. But I suspect that question also crossed his mind.

  14. 15 David Glasner June 2, 2014 at 1:04 pm

    So, Kevin, do you think that Summers has not read the book either?

  15. 16 Shahid June 2, 2014 at 2:16 pm

    A lot of people had a lot to say about Piketty and his work. For me, what is most important (and interesting) here is that his book started a debate that contains renditions about two centuries of economic history. The debate started by David adds to that intellectual ferment. Let me add my part to it for the sake of intellectual discourse.

    Let us first be clear about the main theme of the book; for me its the overall inequality rather than returns to capital. My first thoughts on inequality, be it due to Piketty’s book or to some other source, is the question that what kind of inequality are we talking about? To make the distinction clear, let me give two contrasting examples. Rich people in the US (most of them, if not all) became rich due to their fair efforts (mental or physical). I have people like Bill Gates, Mark Zuckerberg and Warren Buffet in my mind, who earned their wealth largely as a result of applying their intellectual capital (transforming an idea into a physical reality and then earning rewards). In contrast, i have the example of rich people in my country (typical third world country) ranging from democracy subverting generals to filthy rich landlords or business driven politicians who form the core of governing circles. They make their wealth mostly by rent seeking, arm twisting or cajoling, undue or illegal favors, and through having contacts with the influential of their time.

    Now i have absolutely no problem with the former, but every problem with the latter version of inequality. I term the former as ‘effort driven’ inequality and the latter as ‘robber baron’ inequality. Thomas Pikkety’s book, i believe, is mostly about the effort driven inequality type since all his data is centered on the industrial nations rather than the developing ones. And like David and Summers, i do have problems with what he says. Most of them have been pointed out by these two gentlemen, so i’ll just add a few lines.

    The two century history of nations around the world is filled with examples of prodigal sons and heirs who wasted what their predecessors earned (that made them rich). If over two centuries, the same families have been able to maintain their wealth (and status), then it must be so that the successive generations of that wealthy family (or person) found persons who were smart enough themselves to hold on to that wealth, maintain it or increase it in the face of changing circumstances and increasing competition. I don’t see anything wrong with it.

    The profile of wealthy has changed over time. David repeated Summers’ example of Forbes’ list, which i believe is pretty pertinent. I’ll add another one: ‘How the West grew Rich’ by L.E. Birdzell, in which he stated similar results based on centuries of English wealthy family data to show that not many of them were able to maintain what their predecessors possessed. In short, i really have a hard time in believing that over two centuries, the wealthy were bale to maintain what their forefathers had before them.

    The “1 percent” at the top also tends to mask the difference between the nature of their accumulation of wealth over time. Recent estimates (i am sorry i am forgetting the source) of America’s top percent indicates that more than half of them owe their fortunes to labor income, not rent income. Thus, just like capital, the 1 percent themselves are not a homogeneous group. Their nature of accumulation and their effect upon society differs as they themselves are different people from different backgrounds. You just can’t bunch them together.

    Please do note another thing, one that many people tend to ignore (i am talking about fair, equal opportunity capitalism here, not robber Barron one). The matter of increasing returns to assets of wealthy is a bit circular in nature. Ask yourself this: why would the value (or rent) of an asset increase? And the simple answer is that it is the result of increase in overall incomes, not just the incomes of wealthy people. Wealthy people don’t increase the value of their assets by bidding on each others’ assets, but it is rather the growth in income of the middle and lower classes that increases its demand and value. That is what predominantly increases the returns of assets of wealthy people, and vice versa. So here’s a dilemma: the nature of Smithian capitalism ensures to a large extent that the fruits of growth diffuses to all segments (although to differing degrees), and it is the growth in overall incomes that tends to make the returns to capital increase. The implication is straightforward: if you have a problem with increasing returns on capital, then you’ll have to ensure that growth doesn’t take place. This proposition, i am sure, will strictly be unacceptable to even the most ardent opponents of increasing inequality.

    Wealth of the wealthy is not something to be frowned upon if a society is aware that it is due to sheer effort (intellectual or otherwise) and that there is equal opportunity for everyone to excel. For these kinds of societies, i find Piketty’s idea of high tax on capital a bit jarring. What message and incentive are we trying to get across those trying to excel with their hard work effort and effort if they know that most of their future earnings will be taxed? Might as well give up the effort. Remember that people like Gates, instead of stashing their wealth in Swiss bank accounts (as most of wealthy of the robber barron variety do), use it to create and expand business ventures that provide jobs and opportunity to millions. That, by any standard, is laudable.

    Important thing is that the governing class strives to create a society that has equal opportunity for everyone. Some will excel more to become wealthy, while some will excel less. That is the iron law of nature. For those who have a problem with inequality of capitalism, i always pose the question: show me another system that has led to the creation of so much wealth over time and helped every class to taste the fruits of its success. Even Karl Marx, who was so sure of Capitalism’s collapse, was intellectually honest enough to concede that the Bourgeoisie (the capitalist) had created such enormous forces of productivity and wealth within a 100 years which none of the preceding generations had.

    Policymakers should focus on creating equal opportunity rather than worrying about the wealth of wealthy. The only exception to this should be a situation where the accumulation of wealth leads to social harm, as in the case of financial industry on whom David has commented extensively.

  16. 17 RICHARD LIPSEY June 2, 2014 at 3:43 pm

    One thing that I could not agree with in Larry Summers excellent review was his invocation of the law of diminishing returns with respect to capital accumulation. New capital, as David stresses, typically embodies new technology. And with new technology there is no guarantee of diminishing returns to ideas or there embodiment i physical things. We probably have much more capital than did Victorians but the return is not lower.
    If one wants to think in terms of a simplistic gob of undifferentiated capital then new technology pushes the marginal product curve outwards while accumulation moves us done it. If the rate of out push is equal to the rate of downward movement, the rate of return stays constant. If the rate of out push due to new technology exceeds the rate of downward movement due to accumulation, then the return rises. There is no reason therefore to invoke diminishing returns to capital accumulation when dealing with a homogeneous lump of capital, let alone a heterogeneous one.. .

  17. 18 Mike Sax June 3, 2014 at 1:44 am

    “Has the technological progress of the last 30 years been significantly more labor-saving than technological progress in the nineteenth century? But remember that opponents of technological progress in the nineteenth century opposed the adoption of new technologies even then because they felt that it would reduce the demand for labor. I don’t see Piketty’s comparison of r and g as being very relevant in this regard.”

    To be clear David I’m not opposed to technological progress though I do think it’s really cut into the standard of living of the average American over the last 13 years or so. Implicitly even Scott Sumner admits something like this with his call for a high wage subsidy as does Morgan Warstler with his auction the unemployed idea.

    What these ideas admit is that people are no longer able to live on their wages alone. Conservatives complain that a higher minimum wage costs jobs. What they don’t admit is that these jobs that they think will be lost are nowhere near to being able to support people on.

    http://diaryofarepublicanhater.blogspot.com/2014/06/sumner-sleepless-over-seattles-15.html

    It’s like economists say-you can have an equilibrium that is far from optimum, even Paretto optimum.

    It seems to me-as someone who lost my job at the time-that the recession in 2001 while superfically short had some very deep repercussions as many people with ‘white collar’ jobs were out of work and never got comparable jobs back again.

    If an accountant loses their job and ends up with a job as a cashier at McDonalld’s then superficially an unemployed person is now working again and the unemployment rate goes down. However, they are now not able to support themselves on their wages while previously they were. So even though the uenmployment rate went back down after the 2001 recession many people were a lot worse off.

    It seems to me that mainstream economists don’t look at this enough-underemployent. I’d say that’s been rampant since 2001.

  18. 19 Kevin Donoghue June 3, 2014 at 2:01 am

    “So, Kevin, do you think that Summers has not read the book either?”

    No. I thought that what Piketty had to say about the Forbes rankings was worth bearing in mind. Larry Summers disagrees with me but he doesn’t explain why.

    I’m not sure whether it’s relevant to your concerns, but you may be interested in Matt Bruenig’s critique of Summers; I myself haven’t made up my mind on the points he makes:

    http://www.demos.org/blog/5/15/14/what-larry-summers-gets-wrong-pikettys-capital

  19. 20 David Glasner June 3, 2014 at 9:51 am

    Shahid, Thanks for your comment with which I am generally sympathetic. I would suggest caution, however, in distinguishing sharply between the good honest capitalism of America and Europe and the rent seeking of many developing countries. I am sure you are aware that the distinction is not always clear. But let us take Bill Gates as an example. He is a smart guy. He invented an operating system DOS that was one of several that was available for the first generation of personal computers in the late 1970s. According to many people who know a lot about this stuff, the DOS system was substantially inferior to at least one other competing operating system, CPM, and perhaps others as well. Nevertheless, when IBM belatedly chose to enter the personal computer space in the early 1980s, it chose Microsoft’s DOS system and its related suite of software products (notably Word and Excel) and installed them on all their computers. Once IBM made DOS and Word and Excel standard equipment on IBM computers, quickly achieving a dominant market position in the PC space, and encouraging other software developers to write new software that would be compatible with DOS, Word and Excel, Microsoft became the dominant software supplier and quickly displaced IBM as the key player in the personal computer market. Gates’s position and most of his subsequent wealth were thus achieved almost entirely as the result of IBM’s stupidity. Some might also add that much of the rest of his wealth could be attributable to his abuse of the monopoly position essentially bequeathed to him by IBM’s decision to make DOS the standard operating system. If personal wealth is largely the result of a random process, why would imposing a substantial tax on accumulated wealth result in horrific consequences?

    Richard, Thanks so much your comment. It is an honor to receive a comment from you. I noted Summers’s reliance on diminishing returns and was troubled by it, but didn’t address it explicitly, so I appreciate that you have now done so. On the other hand, Summers has argued that we have entered into a period of secular stagnation and permanently low real interest rates. What do you think of that argument?

    Mike, Responsible conservatives – there may be some of those still out there – favor expanding the earned income tax credit as an alternative to raising the minimum wage.

    Kevin, Summers does say why, he compares the Forbes rankings of 2012 with those of 1982 and finds that there is much more changeover in the composition of the top 400 than is implied by Piketty’s simply r and g model.

  20. 21 Shahid June 3, 2014 at 10:22 am

    David!

    Thanks for enlightening me with a bit of Bill Gates history. Honestly, i did not know that part of his life. And i agree that its not that industrialized nation wealthy pupil are angels, playing by the rules and abiding by the principles. Your discussion of the millionaires who made their fortunes in the financial industry is a pertinent one. While a few individuals became millionaire’s and billionaire’s, it was the society that had to suffer the consequences as a whole in the end.

    My point is that although it happens all over the world, inequality through robber Barron methods is more severe in developing nations. At least Bill Gates got checkmated by the courts for infringement of anti-monopoly rules. There are little if any checks and balances in the developing societies.

  21. 22 Kevin Donoghue June 3, 2014 at 12:41 pm

    David: “Summers does say why, he compares the Forbes rankings of 2012 with those of 1982….”

    Summers does not say why he disregards Piketty’s warnings about those rankings. That was my point. Let’s review how we got into this:

    1) You asked me whether Piketty had any response to the “powerful factual argument” [the Forbes rankings] presented by Summers.

    2) I explained that Piketty discusses the Forbes rankings in his book, highlighting their shortcomings. (He does find them interesting, but then he finds Jane Austen interesting too. He believes we can’t dispense with anecdotal evidence given the paucity of hard evidence. So Forbes merits attention, just as Sense & Sensibility does.)

    3) You asked me if I supposed Summers hadn’t read the book.

    4) I answered that I do not suppose that at all. Rather, I suppose that for some reason which he doesn’t explain, Summers chooses to disregard Piketty’s reservations about Forbes.

    5) Now you tell me that Summers cites the Forbes rankings.

    We’ve come full circle.

  22. 23 David Glasner June 3, 2014 at 12:58 pm

    OK, I got it on the second try. Not bad.

  23. 24 gofx June 4, 2014 at 8:58 pm

    David
    Your response to Shahid regarding Microsoft and Bill gates seems a bit harsh towards Gates. That success was not just luck and the “lock-in effect”. (Incidentally, I believe Gates didn’t even invent, DOS, he purchased it (QDOS)). Microsoft was never a monopoly. The market was contestable (a la Baumol) There were other operating systems. And if he saw that software was to dominate hardware more than IBM realized, then so be it. You pretty much ignore the existence of Apple. In fact one of the reasons for Microsoft’s market share dominance is that they provided software (and indirectly as a more open platform, hardware) CHEAPER than Apple (Incidentally Xerox showed its mouse and GUI to Steve Jobs in 1979. The Xerox engineer did not want to do it, but was ordered to because Xerox management wanted to stick to copiers. There’s some luck there!). Thank goodness somebody was there to offer a cheaper computing experience than Apple! Apple was always free to lower their price. Apple was never driven out of business. Yes, the Windows GUI apparently was never as “good” as Apple’s, but it was good enough at its price! The development of an office SUITE concept is partially what drove Lotus 1-2-3 and WordPerfect (and Multimate) as well as the fact that Word and Excel were flat out better products, MS-Access was a helpful database program, and of course Power Point. And of course we have had entry over the years (Apple (already there), OS/2 (IBM and Microsoft), Linux, Android…).


  1. 1 Further Thoughts on Capital and Inequality | Uneasy Money Trackback on June 19, 2014 at 8:02 pm

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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