Notes from Capital in the 21st Century Panel

by Suresh Naidu

While I have a long piece on Piketty's book coming out in Jacobin, I was lucky enough to be a discussant on a panel with Thomas last Thursday, where I got a chance to lay out some second-order reactions to the book as well as talk with him a bit. Here are my notes from that, tidied up a bit and including some things I didn’t get to say.

Perhaps a useful analogy is that this is the "Free to Choose" or “Capitalism and Freedom” for our time, from the left. I can’t think of a book that emerged from economics for a mass audience with as much reception since then. And what good news this is for economics! For 50 years Milton Friedman was the public face of partisan economics, and stamped it with a conservative public face that persisted. Maybe now Piketty’s book will give my discipline another public face.

But let me push back against the book a bit. I think there is a "domesticated" version of the argument that economists and people that love economists will take away. Then there is a less domesticated one, one that is more challenging to economics as it is currently done. I'm curious which one Thomas believes more. I worry that the impact of the book will be blunted because it becomes a “Bastard Piketty-ism” and allows macroeconomics to continue in its modelling conventions, which are particularly ill-suited to questions of inequality.

The domesticated version is a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates. It is fundamentally a story about market forces, technology and trade making the demand for capital extremely elastic. We continue to understand r as the marginal contribution of capital to the production of the economy. I think this is story that is told to academic economists, and it is plausible, at least on the surface. 

There is another story about this, one that goes back to Keynes. And the idea here is that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand of the capital market. Keynes writes that "But the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners." Keynes footnotes it with the 19th century saying that “John Bull can stand many things, but he cannot stand 2 percent.”

The book doesn't quite take a stand on whether it is brute market forces and a production function with a high elasticity of substitution or instead relatively rigid organization of firms and financial institutions that lies behind the stability of r.  

I think the production approach is less plausible, partly because housing plays such a large role in the data, partly because average wages would have increased along with K/Y, partly because the required elasticity of substitution is too big for net quantities, and partly because of the differences between book and market capital. The (really great) sections from the book on corporate governance actually suggest something quite different, that there is a gap between cash-flow rights and control rights, and this is why Germany has lower market relative to book values. This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view. This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies.

The policy stakes from this are also potentially large, because if it is just a very high substitutability, a variety of labor market reforms are taken off the table, as firms just replace workers with machines if you try to raise the wage.

Second, what is gained by producing long-run data? Why do economic historians do what we do? And why is it important that the series go before 1960? Part of the answer is that we discipline the modelling with useful analogies to a past. History gives us a library of options for understanding the present.  So if the wealth or income share looks like 1890 or 1913, maybe our social structure is also starting to look like 1890 or 1913. And the book uses literature to make some of those analogies vivid.  For example maybe our marriage patterns will start to look like those in the literature of the period.

But let us look at other dimensions of that time. The Gilded Age U.S. North was riven with labor conflict and the South was an apartheid state. U.S. military forces were deployed on U.S. territory more times in the late 19th century than any other period, solely for breaking up strikes and repressing labor conflict.And this points us towards one of the costs of inequality, which is a large amount of social conflict. But note that this doesn’t have to be actually observed to be costly. You could have a peaceful high inequality society by spending a lot on security guards and gated enclaves (or hired economists to tell people it is all efficient and for the best), but that is still costly, in that social resources are getting unnecessarily spent to repress, persuade, and manage social conflict. We see the same thing in unequal societies like India, South Africa or the gulf countries.

There is a place where the analogy breaks down, however. We live in a world where much more of everyday life occurs on markets, large swaths of extended family and government services have disintegrated, and we are procuring much more of everything on markets. And this is particularly bad in the US. From health care to schooling to philanthropy to politicians, we have put up everything for sale. Inequality in this world is potentially much more menacing than inequality in a less commodified world, simply because money buys so much more. This nasty complementarity of market society and income inequality maybe means that the social power of rich people is higher today than in the 1920s, and one response to increasing inequality of market income is to take more things off the market and allocate them by other means.

Finally, let me suggest that if we're aiming for politically hopeless ideas, open migration is as least as good as the global wealth tax in the short run, and perhaps complementary. One weakness of the book is its focus on the large core economies (the data obviously is better and the wealth is obviously larger). But liberalizing immigration, while not solving the ultimate problem the book diagnoses, can go some of the way by raising growth of both income and population. With political rights and liberties, it is also one thing that could set off a new set of progressive political energies. These restless and young populations of the developing world might catalyze a new set of political energies, just as socialist movements of the Gilded Age were powered by immigrant workers.

Another constituency for the global wealth tax could also be from this same group, demanding reparations for past slavery and colonialism. If those primordial injustices created the initial conditions for the accumulation of wealth in the core, perhaps those legacies can build energy for rectifying them in the future.