I note that some readers might be interested in some of my journalistic economic writing. So, I’m going to start posting it on here. Here is a piece that I wrote for Al Jazeera that was published today.
Our fragile economy of stock bubbles and luxury goods
Also, while on the subject of stock markets and inequality and so forth, I started reading the Piketty book and I must say that Galbraith’s criticisms — especially regarding the measurement of capital — strike me as rather damning. I really don’t think that this is a silly gripe on Galbraith’s part at all.
Piketty’s work does indeed seem to suffer from considering capital from the standpoint of its (highly volatile) valuation while at the same time trying to write a theory around this with a conception of capital-as-machinery lying in the backdrop.
Finally, I should also note that Piketty strikes me as having a marked tendency to confuse accounting identities with laws. Indeed, he refers to the following as the ‘First Fundamental Law of Capitalism’:
α = r × β
Where β is the capital-to-income ratio, r is the rate of return on capital and α is the share of capital in income. Well, that’s not a law. That’s an accounting identity. This leads him to some other rather dubious ‘laws’. For example his ‘Second Fundamental Law of Capitalism’ is as follows,
the higher the savings rate and the lower the growth rate, the higher the capital/income ratio (β).
Again, that doesn’t strike me as a law at all. That, again, strikes me as an accounting identity. All of Piketty’s so-called laws strike me as heavily watered down versions of the Cambridge Equation.
I’m showing my ignorance here, but is Thomas Piketty even a heterodox economist?
Oh no way. I’ve gotten through a bit of the book. I’ll do a post tomorrow. I actually like the book because of the format and the data. But there’s a lot of bad macro and dodgy history in it.
Certainly measurement of the capital stock is tricky to do empirically, but I don’t see what that has to do with the theoretical basis for Piketty’s argument. I see Piketty as trying to bring into the mainstream policy discussion what has been a fairly robust theoretical result in the mechanism design literature for decades now: capitalism has a tendency towards immiseration, whereby inequality increases without bound leaving almost everyone impoverished. I explain the theory here http://www.separatinghyperplanes.com/2014/04/piketty-and-immiseration-of-capitalists.html
Indeed, the trick for theorists is not so much to explain rising inequality, but rather to produce a realistic model in which immiseration *doesn’t* happen.
“Well, that’s not a law. That’s an accounting identity. This leads him to some other rather dubious ‘laws’.”
If by law you mean behavioural relationship you are right, this is not a law. If by law you mean something that is always true you are wrong. As you heterodox folks usually advocate for non-microfounded macro due to aggregation problems you have to role with number two, i.e. most “laws” are statistical relationships while only some roughly capture some human behaviour (e.g. assuming that investment is negative in the interest rate without deducing the demand for capital on the micro level).
Yes, by “law” I meant behavioral relationship. The heterodox are unanimous in this respect. Joan Robinson et al were very clear about avoiding this confusion.