Review of Dumenil and Levy

The new issue of Rethinking Marxism has my review of The Crisis of Neoliberalism by Gérard Duménil and Dominique Lévy. Since RM is paywalled -- a topic for another day -- I'm putting the full text here.

Incidentally, I do recommend the book, but I would suggest just reading chapters 3-6, where the core arguments are developed, and then skipping to the final three chapters, 23-25.  The intervening material is narrowly focused on the 2008-2009 financial crisis and is of less interest today.

* * *

Historical turning points aren't usually visible until well after the fact. But the period of financial and economic turmoil that began in 2008 may be one of the rare exceptions. If capitalism historically has evolved through a series of distinct regimes -- from competition to monopoly in the late 19th century, to a regulated capitalism after World War II and then to neoliberalism after the crises of the 1970s, then 2008 may mark the beginning of another sharp turn.

That, anyway, is the central claim of The Crisis of Neoliberalism, by Gérard Duménil and Dominique Lévy (hereafter D&L). The book brings together a great deal of material, broadly grouped under two heads. First is an argument about the sociology of  capitalism, hinging on the relationship between capitalists in the strict sense and the managerial class. And second is an account of the financial crisis of 2008 and its aftermath. A concluding survey of possibilities for the post-neoliberal world unites the two strands.

For D&L, the key to understanding the transformations of capitalism over the past hundred years lies in the sociology of the capitalist class. With the rise of the modern corporation at the turn of the 20th century, it became more problematic to follow Marx in treating the capitalist as simply the "personification of capital." While the logic of capital is the same -- it remains, in their preferred formulation, "value in a movement of self-expansion" -- distinct groups of human beings now stand at different points in that process. In particular, "the emergence of a bourgeois class more or less separated from the enterprise" (13) created a new sociological gulf between the ownership of capital and the management of production.

Bridging this gulf was a new social actor, Finance. While banks and other financial institutions predate industrial capitalism, they now took on an important new role: representation of the capitalist class vis-a-vis corporate management, a function not needed when ownership and management were united in the same person. "Financial institutions," D&L write, "are an instrument in the hands of the capitalist class as a whole in the domination they exercise over the entire economy." (57) This gives finance a dual character, as on the one hand one industry among others providing a particular good (intermediation, liquidity, etc.) but also as, on the other hand, the enforcers or administrators who ensure that industry as a whole remains organized according to the logic of profit.

The stringency of this enforcement varies over time. For D&L, the pre-Depression and post-Volcker eras are two periods of "financial hegemony," in which holders of financial claims actively intervened in the governance of nonfinancial firms, compelling mergers of industrial companies in the first period, and engineering leveraged buyouts and takeovers in the second. By contrast, the postwar period was one of relative autonomy for the managerial class, with the owners of capital accepting a relatively passive role. One way to think of it is that since capital is a process, its expression as an active subject can occur at different moments of that process. Under financial hegemony, the political and sociological projections of capital emanated mostly from the M moment, but in the mid-century more from C-C'. Concretely, this means firms pursued objectives like growth, technical efficiency, market share or technological advance rather than (or in addition to) profit maximization – this is the "soulful corporation" of Galbraith or Chandler. Unlike those writers, however, D&L see this corporation-as-polis, balancing the interests of its various stakeholders under the steady hand of technocratic management, as neither the result of a natural evolution nor a normative ideal; instead, it's a specific political-economic configuration that existed under certain historical conditions. In particular, managerial capitalism was the result of both the crisis of the previous period of financial hegemony and, crucially, of the mobilization of the popular classes, which opened up space for the top managers to pursue a strategy of "compromise to the left" while continuing to pay the necessary tribute to "the big capitalist families."

Those families -- the owners of capital, in the form of financial assets -- were willing to accept a relatively passive role as long as the tribute flowed. But the fall in the profit rate in the 1970s forced the owners to recohere as a class for themselves. Their most important project was, of course, the attack on labor, in which capital and management were united. But a second, less visible fight was the capitalists' attack on the managers, with finance as their weapon. The wave of corporate takeovers, buyouts and restructurings of the 1980s was not just a normal competitive push for efficiencies, nor was it the work of a few freebooting pirates and swindlers. As theorized by people like Michael Jensen, it was a self-conscious project to reorient management's goals from the survival and growth of the firm, to "shareholder value”. In this, it succeeded – first by bullying and bludgeoning recalcitrant managers, then by incorporating their top tier into the capitalist class. "During the 1980s the disciplinary aspect of the new relationship between the capitalist and managerial classes was dominant," write D&L, but "after 2000, ... managers had become a pillar of Finance." (84) Today, the "financial facet of management tends to overwhelmingly dominate” and "a process of 'hybridization' or merger is under way." (85)

These are not entirely new ideas. D&L cite Veblen, certainly one of the first to critically investigate the separation of management and control, and to observe that the "importance of securities in ownership of the means of production [gives] ... the capitalist class a strong financial character." But they make no mention of the important debates on these issues among Marxists in the 1970s, especially Fitch and Oppenheimer's Socialist Revolution articles on "Who Rules the Corporations?" and David Kotz's Bank Control of Large Corporations in the United States. Most glaringly, they fail to cite Doug Henwood's Wall Street, whose Chapter 6 gives a strikingly similar account of the revolt of the rentiers, and which remains the best guide to relations between finance and nonfinancial businesses within a broad Marxist framework. While Henwood shares the same basic analysis as The Crisis of Neoliberalism, he backs it up with a wealth of concrete examples and careful attention to the language of the financiers and their apologists. D&L, by contrast, despite their welcome interest in the sociology of the capitalist class, never descend from a high level of abstraction. D&L would have advanced the conversation more if they had tried to build on the contributions of Fitch and Oppenheimer, Kotz, and Henwood, instead of reinventing them.

Still, it's an immensely valuable book. Both mainstream economists and Marxists often imbue capitalist firms with a false homogeneity, as if the pursuit of profit was just a natural fact or imposed straightforwardly by competition. D&L offer an important corrective, that firms (and social life in general) are only kept subordinate to the self-expansion of value through active, ongoing efforts to enforce and universalize financial criteria.

The last third of the book is an account of the global financial crisis of the past five years. Much of the specifics will be familiar to readers of the business press, but the central argument makes sense only in light of the earlier chapters: that the ultimate source of the crisis was precisely the success of the reestablishment of financial hegemony. In particular, deregulation -- especially the freeing of cross-border capital flows -- weakened the tools states had previously used to keep the growth of financial claims in line with the productive capacity of the economy. (It's an irony of history that the cult of central banking "maestros" reached its height at the point when they had lost most of their real power.) Meanwhile, increased payouts to shareholders and other financial claimants starved firms of funds for accumulation. A corollary of this second point is that the crisis was characterized by underaccumulation rather than by underconsumption. The underlying demand problem wasn't insufficient funds flowing to workers for consumption -- the rich consume plenty -- but insufficient funds remaining within corporations for the purpose of investment. Just as investment suffered at the end of the postwar boom when the surplus available to capitalist firms was squeezed from below by rising wage claims, it suffered in the past decade when that surplus was squeezed from above by the claims of rentiers. So higher wages might only have made the crisis worse. This argument needs to be taken seriously, unpalatable though it may be. We need to avoid the theodicy of liberal economists, in which the conditions of social justice and the conditions of steady accumulation are always the same.

The Crisis of Neoliberalism is not the last word on the crisis, but it is one of the more convincing efforts to situate it in the longer-term trajectory of capitalism. The most likely outcome of the crisis, they suggest, is a shift in the locus of power back toward managers. Profit maximization will again be subordinated to other objectives. The maintenance of US hegemony will require a "reterritorialization" of production, which will inevitably weaken the position of fincance. There is an inherent conflict between a reassertion of state authority and the borderless class constituted by ownership of financial claims. But there is no such conflict between the interests of particular states, and the class constituted by authority within particular firms. "This is an important factor ... strengthening of the comparative position of nonfinancial managers."

Are we starting to see the dethroning of Finance, a return to the soulful corporation, and a retreat from the universalizing logic of profit? It's too soon to tell. It's interesting, though, to see Michael Jensen, the master theorist of the shareholder revolution, sounding a more soulful note. Shareholder value, he recently told The New Yorker, "is the score that shows up on the scoreboard. It's not the objective... Your life can't just be about you, or your life will be shit. You see that on Wall Street." That  business serves a higher calling than Wall Street, is the first item in the managerialist catechism.  We might look at Occupy Wall Street and the growing movement against student debt in the same light: By singling out as the enemy those elites whose power takes directly financial form, they implicitly legitimate power more linked to control of the production process. Strange to think that a movement of anarchists could be heralding a return to power of corporate management. But history can be funny that way.

Functional Finance in Rome and Kansas City

Arjun and I have continued to work on our project on fiscal and monetary policy, which develops the simple -- but strangely overlooked [1] -- point that both the level of output and the trajectory of the public debt-GDP ratio are jointly determined by both the government budget balance and the interest rate set by the monetary authority. (An early stage in our thinking on this was the subject of a post on this blog last year.) Part of our argument is that the fiscal space metaphor is backward -- that the case for countercyclical fiscal policy gets stronger, not weaker, when debt ratios are already high. I'm hoping there will be a working paper version of this soon. But in the meantime, the work is getting presented at various places -- by me at the Eastern Economic Association this past spring, by both of us at the International Economics Association in June, by Arjun at an OECD conference in Rome earlier this week, and by me at the University of Missouri at Kansas City tomorrow. If you're interested, here are our current slides.


[1] This paper by Michael Woodford, which I haven't yet had time to read properly, seems to have a similar starting point but ends up somewhere quite different.

Liza Featherstone on Focus Groups

Yesterday, we at the John Jay Economics Department hosted my friend Liza Featherstone, author of Students Against Sweatshops and Selling Women Short: The Landmark Battle for Workers Rights at Wal Mart, for a talk about her new book, on the history and politics of focus groups. (That's me introducing her.)




The whole thing is worth watching. As with so many institutions, the history of the focus group has interesting twists and turns that you wouldn't guess just from its current state. I hadn't realized, for example, that the focus group originated -- like so many technologies -- in the US war effort of the 1940s. The first focus groups, apparently, were convened to improve the quality of radio propaganda. Only later was the technique adopted by commercial advertising, before migrating into the electoral arena in the 1980s and 1990s.

The most interesting part, though -- for met at least -- is the end, where Liza talks about the funny parallels between focus groups and the kind of consensus decision making practiced by mass movements like Occupy. (And by popular movements at least back to the 18th century, for that matter.) In contrast to surveys, polls and elections, focus groups and assemblies do not assume that people enter the process with well-formed views that just have to be registered and tallied. Instead, they assume that people's true views only emerge in a process of active exchange with others.

The classic example in the marketing context is New Coke. In blind tests, clear majorities preferred the new flavor, but in a setting where the two cokes were discussed, people were somehow convinced that they preferred the old flavor after all. Apparently focus groups sponsors often complain in cases like this that one strong personality bullies everyone else. But isn't that how people's choices get shaped in the rest of life too?

Is it better to keep our private views intact? There's a view that instability in asset markets arises precisely because people allow their views to be shaped by interaction with others -- herd behavior, the madness of crowds. To have efficient asset markets, it's important that people trade on their private information. We use secret ballots in elections and some people even consider it rude to ask who you are voting for. Too much discussion corrupts the process of aggregating up private beliefs. More generally, there's a sense that the way our ideas change in contact with others can be a problem, and that we may need to protect our authentic selves from social pressures.

To love you must have someone else,
Giving requires a legatee,
Good neighbours need whole parishfuls
Of folk to do it on -- in short,
Our virtues are all social; if,
Deprived of solitude, you chafe,
It's clear you're not the virtuous sort. 

Viciously, then, I lock my door.
The gas-fire breathes. The wind outside
Ushers in evening rain. Once more
Uncontradicting solitude
Supports me on its giant palm;
And like a sea-anemone
Or simple snail, there cautiously
Unfolds, emerges, what I am.

That's Larkin, who would not have had much time for either focus groups or general assemblies.

Meanwhile, on the other side, along with the focus groups we have 12-step groups, psychoanalysis, the self-criticism practiced in some revolutionary groups. All of these elevate the process of communication itself as the source of beliefs and desires, as opposed to the liberal idea that we first come into possession of these individually and then act on them or communicate them.

What do we make of this similarity? The negative answer is that focus-group politics have displaced more effective forms of political organization on the left as well as in the mainstream. People have come to feel that communication is an end in itself -- that the important thing is to have your voice heard, and only incidentally to exercise power. (Liza shared a rather depressing anecdote after the talk, about a union staffer who said that it was impossible to get members to come to meetings by saying there would be an important vote, but they would come if you told them they'd be taking part in a focus group.) Of course even this way of looking at things isn't entirely negative -- people do need to get their voices heard, especially people without the privileges that make it easy to be listened to.

But there's another way to look at these parallels. Maybe the marketers, in their desperation to "catapult the propaganda" (in the words of one of our most focus-grouped, and focus group-deriding, politicians) have stumbled on a truth about human nature that the left has always known. We are not monads, with a fixed set of preferences. As Liza says in the talk, human beings are profoundly social creatures -- our selves don't exist in isolation from others. (This is why solitary confinement is a form of torture.) Capitalism is intolerable but it has, historically, produced genuine progress in science and technology, and there's a sense in which focus groups could be an example. It's grotesque that this insight -- that people's beliefs and desires only emerge in exchange with others -- has been mainly used to sell soft drinks and candidates. But it's a real insight nonetheless.

Why Not Just Mail Out Checks?

A friend writes:

Let's suppose that the United States could get a Universal Basic Income, but it had to trade a bunch of stuff for it. What would be important to keep after a UBI? 

Obviously, various income support could right out the door (food stamps, unemployment insurance). But would we be willing to trade labor regulations (minimum wage, union laws)? Public schools? Medicare? Curious as to your thoughts.

This sort of choice comes up all the time these days. Of course in practice it's a false choice: They take our parks and public insurance, and never send out those UBI checks. Or occasionally, as in New York, they give us our universal pre-K and parks and bike lanes, and we don't have to give up our meager income-support checks to get them.

Still, it's an interesting question. How should we answer it?

1. At least for an important current on the left, the goal isn't to distribute commodities more equally, but to liberate human life from the logic of the market. Or, a society that maximizes positive freedom and the development of people's capacities, as opposed to one that maximizes consumption of goods. From that point of view, diminishing the scope of the market -- incremental decommodification, as Naomi Klein used to say -- is the important thing, so we'd always reject this kind of trade. (Assuming it's on more or less "even" terms.)

2. Setting that aside. Shouldn't we have a presumption that the goods that are currently publicly supplied are subject to some kind of market failure? Presumably there's some reason why many governments provide insurance against old age and health costs, housing, education, police and fire services, and very few governments provide clothing or restaurant meals. Of course one wouldn't want to say the current mix of public-private provision is ideal. But one wouldn't want to say it carries no information, either.

3. There's a genuine value in institutions that pursue a public purpose, rather than profit. We can debate whether hospitals should be public, nonprofit or even private at the level of management, but presumably in the operating room we want our doctor thinking about what's most likely to make this surgery successful and not what's most likely to make him money. (And we don't think reputation costs are enough to guarantee those motives coincide -- so back to market failures as above.) In the same category, and close to many of our hearts, are professors and other teachers, who teach better when they're focused on just that, and not worrying about their paycheck.

4. Related to (3), how do we manage a system in which the public sector is disappearing? Seems to me the logical outcome of the UBI-and-let-markets-do-the-rest approach is stuff like this. Either you agree that intrinsic motivation is important, in which case you have to honestly ask in each particular case whether self-interest adds more than it detracts. Or you deny it, but then you're left with the problem of how to you assure the honesty of the people sending out the checks. (Not to mention all the zillion commercial transactions that happen every day.) DeLong somewhere calls neoliberalism a counsel of despair, which makes sense only once you've given up on the capacity of the state. But without minimal state capacity even neoliberalism doesn't work. If the nightwatchman won't do what's right because it is right, you can't have markets either. Better pledge yourself to a feudal lord. And if the nightwatchman will, then why not the doctor, teacher, etc.?

5. How confident are we that unfettered markets plus UBI is politically sustainable? Being a worker expecting a certain wage gives you some social power. Being a participant in a public institution gives you, arguably, some social power, an identity, it helps solve the collective action problem of the poor. (Which is the big problem in all of this.) But receiving your UBI check doesn't give you any power, any capacity to disrupt, it doesn't give you a sense of collective identity, it doesn't form a basis of collective action. My hypothesis is that the parents at the local public school are more able to act together -- they have the PTA, to begin with -- than the same number of voucher recipients are.

Piketty and the Money View: A Reply to MisterMR

The last post got some very helpful comments from MisterMR (the regular commenter formerly known as Random Lurker) and Kevin Donoghue. Both of them raise issues that are worth posts of their own. I'll reply to MisterMR now, and perhaps to Kevin Donoghue later. Or perhaps not -- the biggest thing I've learned in four years of blogging is: Never make promises about future posts.

* * *

MisterMR is coming from what I hope he won't mind my calling a classical Marxian perspective -- a perspective I'm simpatico with, tho I haven't been taking it here. One aspect of this perspective is the idea that capital can be understood in physical terms, as embodied labor. Now I agree that Marx does clearly say this, but I think this can be seen as a concession he is making to the orthodoxy of the day for the sake of the argument. Capital is subtitled "A Critique of Political Economy," and I think we should take that subtitle seriously. In effect, he is saying to Ricardo: OK, let's accept your way of thinking about capital, the system based on it is still conflictual, exploitative and in contradiction with its own conditions of existence.

I'm not sure how widely this view is held -- that Marx adopts the labor theory of value ironically. Anyway, that's not the argument I want to have here. What I want to do is clarify the perspective I'm offering in place of the labor theory. It's more in the spirit of the other core Marxian idea about capital, that it is a social relation between people.

MisterMR writes:

I think that there are 4 different kinds of capital assets (though in reality most capital assets are a mix of the four kinds). 

1) There are some capital goods that are stuff that is materially produced, such as factories. This stuff has a cost of production, that arguably has some relationship with its "value". This is what I would call "real" capital. The ambiguity in Piketty comes from the fact that he speaks as if all capital is "real" capital, and as if every money flow translates in "real" capital. 

2) There are some assets that are a finite resource that someone controls, like land. In fact, classical economists distinguished between "capital" and "land". The value of land can't be linked to the "cost of production" of land, because said cost doesn't exist. So arguably the value is just the cashflow derived from the asset divided by the normal rate of profit. I'd call this kind of assets simply "land". 

3) While land is certainly something that exists, there are some assets that have an economic value but that don't relate to something that clearly exists or that can be produced: for example, ownership on patents, or a famous brand that has an high market penetration and visibility etc. I think that these assets have dinamics that are similar to land, although they are mostly non material. 

4) Finally, there is credit. Credit also is a non material thing, and is different from all the 3 previous classes of capital for these reasons: 

4.1) It doesn't have a "cost of production";
4.2) It isn't related to any fixed resource, something that differentiates credit from both 2 and 3;
4.3) It has a fixed nominal value (which implies that the currency provider can literally print it out of existence).
4.4) It usually has a nominally fixed interest rate, something that can obviously cause chain bankruptcies. 

My problem with the "monetary view" is that it sounds like if assets of the 2 and 3 classes all are just a "montary" thing, as opposed to a "real stuff view" that sees all assets as if they were of the 1 class.

My response is that the money view is not a substantive claim about the nature of particular assets, but a way of looking at assets in general -- "real" capital goods as much as the more vaporous claims in categories 2 through 4. It does imply some kind of ontology, but in itself, the money view is just a choice to focus on money payments.

But I do want to explain the broader view of social reality that, for me at least, lies behind the money view.  Here's the way I want to look at things.

* * *

On the one hand, there is the human productive activity of collectively transforming the world and maintaining our conditions of existence, along with the conditions that make that activity possible. When you sit down and write a blog post, you are engaged in creative activity with the goal of building up our collective knowledge of the world, and you are also maintaining the network of social ties through which this kind of activity is carried out. Your ability to engage in this activity depends on a great number of objective conditions, ranging from your physical health to the infrastructure that communicates your words to the rest of the world. Many of these conditions are the result of past human activity.

Under capitalism, a subset of human productive activity gets marked off as "labor." Labor has a number of special characteristics, most obviously that it is carried out at the direction of a boss. But for current purposes, the most important distinctive characteristics of the activity that we call "labor"  are (a) it carries a price tag, the "wage," with labor that is somehow similar carrying a similar wage. And (b) labor becomes substantively more similar over time, with the disappearance of specific skills and increasing interchangeability among the human beings performing it; it follows from this that the wage also become uniform. To the extent that (a) is true, we can attribute a "cost" to some particular set of conditions and to the extent (b) is also true, that cost will correspond to the hours of labor expended maintaining those conditions. Of course all productive activity additionally requires many conditions, both natural and social, that are not reflected in labor hours. In particular, a great deal of passive social cooperation is required for any productive activity, especially when there is an extensive division of labor.

Even in the pure case, where labor is completely homogeneous and all production is carried out for profit, under identical conditions and with no barriers to competition, there will not in general be a unique mapping from labor hours to costs or relative prices. The best we can do is to reduce all the infinite possible sets of relative prices to variation along a single dimension, with one set of relative prices corresponding to each possible profit rate. (I think this is Sraffa's point.)

So the description of assets in group 1 is correct -- but only with respect to one particular way of describing one particular way of organizing production, not as statements about reality in general. The productive activity that takes place in a factory does, of course, require the past activity that resulted in the existence of the factory. But it requires lots of other activity as well, much of which is not counted as "labor." And the fact that "labor" is a measurable input at all only holds to the extent that the productive activity has been deskilled and homogenized, a sociological fact that is never completely true and is not true at all in most historical contexts.

The think you have to avoid is believing that quantities like "value" or "cost" have any existence outside the specific social relations of capitalism.

The next question is what it means to “own” some conditions for productive activity, like a factory. The beginning of wisdom here is to recognize that ownership is a legal relationship between persons, not a relationship with a physical object. To own a piece of land means you have certain legal rights with respect to other people — to exclude them from the use of that land, to receive some equivalent from them if you do permit use of the land, to transfer those rights to someone else — and that no one else has those rights with respect to you. However, that’s only the first step. Next, we have to recognize that what constitutes “use” of piece of an asset is not a physical fact, but a social one. (As in the old story, the baker can exclude others from eating his rolls, but not from enjoying the smell of them.) So it would be more accurate to say that ownership of a piece of property is simply a form of social authority — a bundle of rights over other people. Indeed, if we want to relate the world of money flows to broader social reality, the most fundamental fact is probably this: The person who receives a money payment labeled “profit” gives orders, and the people who receive money payments labeled “wages” have to follow them. To say you own a piece of property is simply to say there is a set of commands that, if you issue them, other people are compelled to obey. Those rights are metonymously referred to by a label which bears a picture of some tangible good, just like the insignia on an officer’s uniform bear a picture of a leaf or a bird.

So:

When you say, here is a means of production, a factory, with a certain cost, you have already chosen: to ignore all the various conditions that make a certain form of collective productive activity possible, and let the existence of this one tangible object, the factory, stand in for all the rest; to ignore all the various forms of productive activity and social coordination that were necessary to bring the factory  (and the rest of the conditions of production) into existence, except for those we class as wage labor; to convert that wage labor to some common quantitative standard by measuring it in wage payments;  to assume some exogenously given profit rate, to give you the discount rate you need to add up wage payments made at different dates. Only then can you say the factory has a cost — and even then, this money cost is calculated by adding up a certain set of money payments.

At that point we have MisterMR's category (1) as a concrete social reality. We still have to establish the profit rate, since it cannot be reduced to a marginal physical product. Only then do the issues specific to the other three categories come into play.

I should be clear: the money view is not a complete account of the sphere of social reality we call the economy. (And again, I’ve adopted the term from Perry Mehrling, it’s not my invention.) The money view is defined by making the atomic units of analysis bundles of money payments. I would argue that it is logically consistent to think of any capital good as simply a bundle of income streams contingent on different states of the world, in a way that it is not logically consistent to think of it as a physical object producing a stream of physical outputs.

The fact that this is a logically consistent account doesn’t mean it’s sufficient. Obviously the money view doesn’t give a complete story, since we don’t know why the income streams attached to different assets are what they are, or why they change over time, or why assets in the monetary sense are attached to tangible goods or production processes, or for that matter why anyone cares about money payments in the first place. But by adopting a consistent story about money payments and assets, we get a clearer view of these other questions. We distinguish the questions that can be addressed with the formal techniques of economics from other questions that require a different approach. This is a step forward from the perspective that mixes up questions about money flows with questions about tangible productive activities and so can’t give a coherent story about either.

Piketty and the Money View

I recently picked up Capital and the 21st Century again. And what's striking to me, on revisiting it, is the contrast between the descriptive material and the theory used to make sense of it.

Piketty’s great accomplishment is the comprehensive data on wealth he has compiled, going back to the 18th century. He deserves nothing but praise for making that data easily accessible. (You could think of his project as an iceberg, with most of the substance hidden below the waterline in the online appendixes.) I have not seen any serious doubts raised about the accuracy of this data; and the descriptive generalizations he draws from it, while not above criticism, are obviously based in a deep study of the concrete historical material. But the connections between this material and the theoretical claims it's mixed in with -- r > g and all that -- are tenuous at best.

It’s important to remember that all the underlying data is in nominal terms. All the empirical material in the book relates to stocks and flows of money. But when he turns to explain the patterns he finds in this data, he does it in terms of physical inputs to physical production. The money wealth present in a country is assumed to correspond to the physical capital goods, somehow converted to a scalar quantity. And the incomes received by wealth owners is assumed to correspond to a physical product somehow attributable to these capital goods. I am hardly the first person to suggest that this is not a sensible way to explain trends in private wealth as measured in money, and the money-income derived from it. But what I haven’t seen people say — even people who jump at the chance to revisit the Cambridge Capital Controversies — is the remarkable difference in the attitudes of Piketty the historian and Piketty the economic theorist to data. Shifts in the scale and distribution of private wealth are described on the basis of years of meticulous study of the tax records of various countries. But the production processes that are supposed to explain these shifts are described without any data at all, purely deductively.  You would think that if Piketty believed that the share of property income in total income depends on physical production technologies, returns to scale, depreciation, etc., then at least half the book would be taken up with technological history. You’d think he would spend as much energy studying the inputs and outputs associated with different degrees of mechanization of major production processes, how long is the useful life of different kinds of buildings in different eras and how much annual maintenance they require, and so on. After all, these are the kinds of factors that he believes — or claims to believe — drive the money-wealth outcomes the book is about. In fact, of course, these topics are not discussed at all. Terms like “production” and “depreciation” are black boxes, pure mathematical formalism. You would think that Piketty, who presents himself as a historian and is admirably critical of the deductive character of so much of economics, would have hesitated before staking so much on deductive, evidence-free claims about physical production.

Because when you take a step back and think about it, this is what Piketty has done:  He has carefully described the historical evolution of monetary wealth, and then postulated an imaginary physical reality that exactly matches that evolution. It’s a kind of economic preformationism, or like the folk psychology that tries to explain your actions by imagining a little homunculus in your head that is choosing them.  The “real economy” in Piketty is just a ghostly mirror-image of the network of money payments and money claims that is actually observed.

* * *

Let me give a concrete example. Piketty shows that around 1800, the wealth-income ratio was relatively low in the United States -- about 300% of national income, compared with 600-700% in England and France. About half of this difference was the lower value of agricultural land, which totaled about 150% of national income in the US and over 300% in both England and France. Piketty suggests that this is because the great abundance of land in the New World meant that its marginal product was relatively low. This sounds reasonable enough -- but it flies in the face of Piketty's larger argument about the capital share. His big theoretical claim is that the capital share is determined by the growth rate of cumulated savings relative to the growth rate of income. And this only works if the return on "capital" is relatively insensitive to its scarcity or abundance. (This is the question of the elasticity of substitution between capital and labor, which has dominated economists' debates about the book.) If having more land makes the share of land rents in national income go down, why won't the growth of "capital" similarly push down its return?

This isn't meant as a gotcha. Piketty frankly acknowledges the problem. He suggests two possible solutions: First, constant returns might only apply over some range of capital-output ratios. Beyond that that range, further accumulation might make capitalists as a group poorer rather than richer. Second, it might be easier to substitute between labor and modern capital goods, than between labor and agricultural land. Both these assumptions sound reasonable, altho I think they are both more problematic than they seem at first glance. But that's not the argument I want to have right now. The point I want to make now is that Piketty just takes it for granted that behind the smaller flow of money going to land owners in US circa 1800, there must have been a smaller physical flow of output coming off the marginal piece of land. Of course this isn't logically necessary -- the money-value of agricultural land will also depend on the legal rights associated with land ownership, the terms on which new land can be acquired, the ease with which land can be sold or borrowed against, etc. Presumably the same physical mix of land, tools and people would have led to a different share of money income being claimed as land rents if frontier land in the early United States had been owned by a few large landlords, instead of being freely distributed to white families by the government. But these types of explanations are not even considered. For Piketty, behind each flow of money there must be an identical flow of stuff.

The other strange thing is that, despite his insistence that money flows are fully explained by physical conditions of production, Piketty shows no interest in investigating those conditions. The numbers on the level and composition of money wealth in US are meticulously sourced and documented. The claims about physical production conditions, on the other hand, are entirely speculative. There is no shortage of material you could turn to if you wanted to ask whether whether land was really more abundant, in an economically meaningful sense, in the early US than in France or Britain, or if you wanted to know if adding an acre to an 1800-era American farm would increase its output proportionately less or more than adding an acre to a similar-sized British or French farm. But Piketty doesn't even gesture at this literature.

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I draw two conclusions. First, it's hard to say anything sensible about the book until you realize it consists of two distinct, almost unrelated projects. There is the historical data on money wealth and money incomes. And then there is the whole rigamarole of "laws of capitalism." The book is mostly written as if the latter somehow distill or summarize the former, but they are really very loosely articulated. Let me give one more quick -- but important -- example. You might think that with all the huffing and puffing about r > g, the data would tell a story in which the share of wealth in national income rises in periods when r is relatively high and g is relatively low, and falls when g is high and r is low. But the data tell no such story.

The great fall in the capital share took place between 1913 and 1950, according to Piketty. But his own data show that this was the period of the highest returns to capital, and the lowest growth rates, in the whole 240 years the book covers. I've reproduced his graph of r in the UK below; the figures for other Western European countries look similar. Meanwhile, he gives an average growth rate for Western Europe over 1913-1950 of 1.4%, compared with 1.8% in the high-capital share 19th century, and 2.1% in the period of rising capital shares since 1970. This is exactly the opposite pattern that we would expect if r and g were the central actors in the story.

Of course Piketty has an answer for this too: The fall in the capital share in the first half of the 20th century is explained by the World Wars and the destruction of the old social order in Europe. No doubt -- but if factors like these dominate the historical trajectory of wealth and income, why not tell your story in terms of them, instead of a few dubious equations from the orthodox growth model? Unfortunately, discussion of the book has been almost entirely about the irrelevant formalism. I think that is why the conversation has been so noisy yet advanced so little. To return to the earlier metaphor, it's as if everyone is ignoring the iceberg and talking about a little igloo built on top of it.

My second conclusion is that the disconnect between the two different Pikettys shows, in a negative way, why what I've been calling the money view is so important. The historical data assembled in Capital in the 21st Century is a magnificent accomplishment and will be drawn on by economic historians for years to come. Many of the concrete observations he makes about this material are original and insightful. But all of this is lost when translated into Piketty's preferred theoretical framework. To make sense of the historical evolution of money payments and claims, we need an approach that takes those payments and claims as objects of study in themselves.


LATE UPDATE: A friend forwards the following (verbal) comment from Joe Stiglitz:

"There is a confusion in Piketty on valuation and physical stocks. In France, the main 'increase' in wealth is because of higher prices of land. Do we really think that France has become wealthier (using Piketty's physical understanding of wealth in his model) because while the manufacturing capital stock has declined, the Riviera has become more expensive?"