Friday, April 25, 2014

In a World of Bullshit, This Is Some Egregious Bullshit

Via Scott McLemee and Corey Robin, I learn that Lawrence & Wishart, the publishers of the collected works of Marx and Engels, have issued takedown notice to the Marxist Internet Archive to remove all the material that L & W have copyright on.  Which apparently they're going to do -- on May Day, appropriately enough.

As Scott points out, its not clear that this assertion of its property rights is going to earn L & W any money:
Somehow it has not occurred to Lawrence & Wishart that, by enlarging the pool of people aware of and reading the Collected Works, the archive is actually expanding the audience (and potential market) for L & W’s books, including the somewhat pricey MECW volumes themselves, available only in hardback at $25-50 per volume. ... If Lawrence & Wishart still considers itself a socialist institution, its treatment of the Archive is uncomradely at best, and arguably much worse; while if the press is now purely a capitalist enterprise, its behavior is merely stupid.
The probability that copyright infringements can increase the income of copyright-holders has been mentioned on this blog before. If you take five minutes to think about who the market is for the collected work of Marx and Engels, it'll be clear that that the existence of the Marxist Internet Archive is probably not cutting into it.

But beyond the pure stupidity of this, there's the ideological stupidity.

I'm on an email list about teaching. The issue was raised recently, the list is a space for people to talk about what they do in the classroom, what works, what doesn't, to vent about what pisses them off. It won't work if stuff gets shared outside the list. Which, I totally agree! But what struck me, the request not to disseminate things people say on the list elsewhere, it wasn't phrased in terms of privacy or professional courtesy, it was about respecting people's intellectual property. That is how ideology happens.

L & W have put up response to being called out on this. We are, they say
not a capitalist organisation engaged in profit-seeking or capital accumulation, but a direct legatee of the Communist/Eurocommunist tradition in the UK, having been at one time the publishing house of the Communist Party of Great Britain. Today it survives on a shoestring, while continuing to develop and support new critical political work by publishing a wide range of books and journals. It makes no profits other than those required to pay a small wage to its very small and overworked staff, investing the vast majority of its returns in radical publishing projects...
In other words, it’s ok for us to use the power of the state to prevent people from reading Marx because we are Good Communists and we are going to do something awesome with whatever rents we can squeeze out of our copyrights. Raskolnikov had nothing on these guys.

Besides, they say, it's so unfaaaaaair to ask them not to steal every penny they can get their fingers on. If you were real radicals, you'd respect the sacred rights of Property.
In asking L&W to surrender copyrights in this particular edition of the works of Marx & Engels, the Marxist Internet Archives and their supporters are asking that L&W, one of the few remaining independent radical publishers in the UK, should commit institutional suicide. 
I guess there's some dramatic irony in seeing Marx's publishers engaged in this kind of primitive accumulation. But seriously, this is some egregious bullshit.

Cases like this bring out the black-is-white language of IP piracy. Here we have a group of people engaged in ongoing economic activity -- an ongoing sharing of knowledge -- and then an outsider arrives and tells them to stop what they're doing on threat of violence, unless they pay up. Wouldn't the pirates in this case be that outsiders? Wouldn't the pirates be the ones using the threat of violence to disrupt an ongoing sharing of  in order to appropriate a little booty? — which, as Scott points out, may not even be enough to defray the costs of their pillaging expedition.

L & W's statement amounts to: “it’s ok for us to use the power of the state to prevent people from reading Marx because we are Good Communists and we are going to do something awesome with whatever rents we can squeeze out of our copyrights.” Raskolnikov had nothing on these guys.

Monday, April 21, 2014

"Disgorge the Cash" in The New Inquiry

The New Inquiry, an excellent new online magazine some readers may be familiar, has published an article I wrote based on the various disgorge the cash posts on this blog. Thanks to the superb editing of Mike Konczal and Rob Horning, the article develops the argument more cohesively than I've been able to on the blog. Go read it there, and then, if you like, comment here.

UPDATE: Matt Levine at Bloomberg calls me "the world's leading Marxist analyst of the capital structure of the modern corporation." That's very flattering, but not remotely the case. What little I've written about this is all based on things I've learned from Jim Crotty, Dumenil and Levy, and Doug Henwood. (Including the phrase "disgorge the cash," which I got from Doug.) Any of them might be contenders for that title (I won't pick one), but not me. I'm just developing their ideas. And of course the original source of all this stuff is Part 5 of Volume III of Capital, especially chapter 27.

Sunday, April 20, 2014

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.

Friday, April 18, 2014

A Harrodian Perspective on Secular Stagnation

I’ve mentioned before, I think a useful frame to think about the secular stagnation debate through is what’s become known as Harrod’s growth model. [1] My presentation here is a bit different from his.

Start with the familiar equation:

S - I + T - G = X - M

Private savings minus private investment, plus taxes minus government spending, equal exports minus imports. [2] If the variables refer to the actual, realized values, then this is an accounting identity, always true by definition. Anything that is produced must be purchased by someone, for purposes of consumption, investment, export or provision of public services. (Unsold goods in a warehouse are a form of investment.) If the variables refer to expected or intended values, which is how Harrod used them, then it is not an identity but an equilibrium condition. It describes the condition under which businesses will be “satisfied that they have produced neither more nor less than the right amount.”

The next step is to rearrange the equation as S - (G - T) - (X - M) = I. We will combine the government and external balances into A = (G - T) + (X - M). Now divide through by Y, writing  s = S/Y and a = A/Y. This gives us:

s - a = I/Y

Private savings net of government and foreign borrowing, must equal private investment. Next, we decompose investment. Logically, investment must either provide the new capital goods required for a higher level of output, or replace worn-out or obsolete capital goods, or be a shift toward a more capital-intensive production technique. [3] So we write:

s - a = gk + dk + delta-k

where g is the growth rate of the economy, k is the current capital-output ratio, d is the depreciation rate (incorporating obsolescence as well as physical wearing-out) and delta-k is the change in the capital-output ratio.

What happens if this doesn’t hold? Realized net savings and investment are always equal. So if desired savings and desired investment are different, that means that somebody’s expectations were not fulfilled. For a situation to arise in which desired net savings are greater than desired investment, either people must have saved less than they wish they had in retrospect, or businesses must have investment more than they wish they had in retrospect. Either way, expenditure in the next period will fall.

What prevents output from falling to zero, in this case? Remember, some consumption is linked to current income, but some is not. This means that when income falls, consumption falls less than proportionately. Which is equivalent to saying that when income falls, there is also a fall in the fraction of income that is saved. In other words, if the marginal propensity to save out of income is less than one, then s — which, remember, is average saving rate — must be a positive function of the current level of output. So the fall in output resulting from a situation in which s > I/Y will eventually cause s to fall sufficiently to bring desired saving into equality with desired investment. The more sensitive is consumption to current income, the larger the fall in income required; if investment is also sensitive to current income, then a still larger fall in income will be required. (If investment is more sensitive than saving to current income, this adjustment process will not work and the decline in output will continue until investment reaches zero.) This is simply the logic of the Keynesian multiplier.

In addition to current income, saving is also a function of the profit rate. Saving is higher out of profits than out of wages, partly because profit recipients are typically richer than wage-earners, but also because are large fraction of profits remain within the business sector and are not available for consumption. [4] Finally, saving is usually assumed to be a function of the interest rate. The desired capital output ratio may also be a function of the interest rate. All the variables are of course also subject to longer term social, technological and economic influences.

So we write

s(u, i, p) - a = gk + dk + delta-k(i, p)

where u is the utilization rate (i.e. current output relative to some measure of trend or potential), i is some appropriate interest rate, and p is the profit share. s is a positive function of utilization, interest rates and the profit share, and delta-k is a negative function of the interest rate and a positive function of the profit rate. Since the profit share and interest rate are normally positive functions of the current level of output, their effects on savings are stabilizing — they reduce the degree to which output must adjust to maintain equality of desired net savings equal and investment. The effect of interest rates on investment is also stabilizing, while the effect of the profit share on investment (as well as any direct effect of utilization on investment, which we are not considering here) are destabilizing.

How does this help make sense of secular stagnation?

In modern consensus macroeconomics, it is implicitly assumed that savings and/or investment are sufficiently sensitive to interest rates that equilibrium can be normally be maintained entirely by changes in interest rates, with only short-term adjustments of output while interest rates move to the correct level. The secular stagnation idea — in both its current and original 1940s edition, as well as the precursor ideas about underconsumption going back to at least J. A. Hobson — is that at some point interest rate adjustment may no longer be able to play this role. In that case, desired investment will not equal desired saving at full employment, so there will be a persistent output gap.

There are a number of reasons that s - a might rise over time. As countries grow richer, the propensity to consume may fall simply because people’s people’s desires for goods and services are finite. This was what Keynes and Alvin Hansen (who coined the term "secular stagnation") believed. Desired saving may also rise as a result of an upward redistribution of income, or a shift from wage income to profit income, or an increase in the share of profits retained by firms. [5] Unlike the progressive satiation of consumption demand, these three factors could in principle just as easily evolve in the other direction. Finally, government deficits or net exports might decline — but again, they might also increase.

On the right side of the equation, growth may fall for exogenous reasons, slowing population growth being the most obvious. This factor has been emphasized in recent discussions. Depreciation is hardly mentioned in today’s secular stagnation debate, but it is prominent in the parallel discussion of underconsumption in the Marxist tradition. The important point here is to remember that depreciation refers not only to the physical wearing-out or using-up of capital goods, but also to capital goods displaced by competition or obsolescence. In competitive capitalism, businesses invest not only to increase aggregate capacity, but to win market share from each other. Much of depreciation represents capital that goes out of use not because it has ceased to be physically productive, but because it is attached to businesses that have lost out in the competitive struggle. Under conditions of monopoly, the struggle over market share is suppressed, so effective depreciation rates, and hence desired investment, will be lower. Physical depreciation does also exist, and will change as the production technology changes. If there is a secular tendency toward longer-lived means of production, that will pull down desired investment. As for delta-k, it is clearly the case that the process of industrialization involves a large upward shift in the capital-output ratio. But it’s hard to imagine it continuing to rise indefinitely; there are reasons (like the shift toward services) to think it might reach a peak and then decline.

So for secular, long-term trends tending to raise desired saving relative to desired investment we have: (1) the progressive satiation of consumption demand; (2) slowing population growth; (3) increasing monopoly power; and (4) the end of the industrialization process. Factors that might either raise or lower desired savings relative to investment are: (5) changes in the profit share; (6) changes in the fraction of profits retained in the business sector; (7) changes in the distribution of income; (8) changes in net exports; (9) changes in government deficits; and (10) changes in the physical longevity of capital goods. Finally, there are factors that will tend to raise desired investment relative to desired saving. The include: (11) consumption as status competition (this may offset or even reverse the effect of greater inequality on consumption); (12) social protections (public pensions, etc.) that reduce the need for precautionary and lifecycle saving; (13) easier access to credit, for consumption and/or investment; and (14) major technological changes that render existing capital goods obsolete, increasing the effective depreciation rate. These final four factors will offset any tendency toward secular stagnation.

It’s a long list, but I think it’s close comprehensive. Different versions of the stagnation story emphasize various of these factors, and their relative importance has varied in different times and places. I don’t think there is any a priori basis for saying that any of them are more or less important in general.

One problem with this conversation, from my point of view, is that people have a tendency to pick out a couple items from this list as the story, without considering the whole question systematically. For instance, there’s a very popular story in left Keynesian circles that makes it all about (7), offset for a while by (13) and perhaps (11). I don’t doubt that greater income inequality has increased desired private saving. It may be that this is the main factor at work here. But people should not be confidently asserting it is before clearly posing the question and analyzing the full range of possible answers.

In a future post we will think about how to assess the relative importance of these factors empirically.

[1] While the model itself is simple, the interpretation of it — the question it’s intended to answer — is quite controversial. Harrod himself intended it as a model of economic dynamics — that is, describing the system’s transition from one state to another in historical time. As it entered mainstream economics (via the criticism of Samuelson) and also much of structuralist work, it instead became treated as a model of economic growth — that is, of a long-run equilibrium one of whose variables happens to be the growth rate rather than the level of growth. It seems to me that while Harrod clearly was interested in dynamics, not growth in the current sense, the classic article is in fact ambivalent. In particular, Harrod is simply inconsistent in his definition of g: sometimes it is the change in output from one period to the next, while at other times it is the normal or usual change in output expected by business. Furthermore, as Joan Robinson pointed out, his famous knife-edge results depend on using the average savings rate as a parameter, which only makes sense if we are describing a long-run equilibrium. In the short period, it’s the marginal savings rate that is stable, while the average savings rate varies with output. So while it is true that Harrod thought he was writing about economic dynamics, the model he actually wrote is inconsistent. One way to resolve this inconsistency is to treat it as a model of equilibrium long-run growth, as Samuelson did; the other way, which I take here, is to treat it as a Keynesian short-run model in which the current, usual or expected growth rate appears as a parameter.  

[2] Strictly speaking it should be the current account balance rather than the trade balance but there's no harm in ignoring cross-border income flows here.

[3] I am writing here in terms of a quantifiable capital stock, which I have deep misgivings about. But it makes the exposition much simpler. 

[4] This is true even in the "disgorge the cash" era, because much of the higher payouts from corporations go to financial institutions rather to households, and thus stay in the business sector.

[5] On the other hand, in a world where investment is constrained by funding, a higher share of profits retained will raise investment as well as savings, leaving its overall effect ambiguous.

EDIT: I think I've been misled by reading too much of the Keynesian classics from the 1930s and 40s. The dynamic I describe in this post is correct for that period, but not quite right for the US economy today. Since 1980, the average private savings rate has moved countercyclically, rather than procyclically as it did formerly and as I suggest here. So the mechanism that prevents booms and downturns from continuing indefinitely is no longer -- as Keynes said, and I unthinkingly repeated -- the behavior of private savings, but rather of the government and external balances. I can't remember seeing anything written about this fundamental change in business cycle dynamics, which is a bit surprising, but it's unambiguous in the data.

Fortunately we are interested here in longer term changes rather than cyclical dynamics, so the main argument of this post and the sequel shouldn't be too badly undermined.

EDIT 2: Of course this change has been written about, what was I thinking. For example, Andrew Glyn, Capitalism Unleashed:
From Marx to Keynes at least, consumption was viewed as an essentially passive component of the growth process. Capital accumulation, investment spending on machinery and buildings, was the essential driving force on the demand as well as on the supply side. It was the capitalists’ access to finance which allowed capital spending to exceed the previous period’s savings and fuelled the expansion of demand; future profits ensured that such borrowing was repaid with a real return. Deficit spending by the government could, in wartime for example, impart a similar impulse to demand, at least till capital markets took fright at the growing debt interest burden and worries about inflation. However household consumption, some two-thirds of aggregate demand, was seen as playing the role of sustaining the current output level rather than driving it up. Savings ratios often fell during recessions, as consumers attempted to maintain spending in the face of falling incomes. Indeed, Milton Friedman criticized the Keynesians for exaggerating the dependence of consumption on current income and ignoring the extent to which savings could be used to ‘smooth’ out the path of consumption. More recently, rather than acting as a stabilizing influence, sharp falls in the savings ratio have occurred during expansions. By boosting consumption proportionately more than the rise in incomes this has intensified upswings, with the danger of sharp falls in demand if savings rebound sharply when the expansion slackens and pessimism builds up.

Wednesday, April 16, 2014

A Quick Note on Money

Nick Rowe and David Glasner are having an interesting debate on whether it is possible to speak of excess demand (or excess supply) for money in a world where most money consists of commercial bank deposits.

Nick, naturally, argues for the affirmative. Glasner argues for the negative, drawing on Tobin's 1967 restatement of the 19th century "law of reflux."

This is a tricky question to take sides on. The problem, from my point of view, is that to get from the classical "real exchange" economy , to our actual "monetary production" economy (both phrases are Keynes's), takes not one but two steps. First, you have to see how real activity depends on liquidity conditions. And second, you have to see how liquidity conditions depend on the whole network of actual and potential balance sheet positions — liquidity as a social relation, as Mike Beggs says. A focus on the special role of money is helpful in the first step but an obstacle to the second.

I think Keynes himself contributed to the problem with his discussion money in the General Theory. He was working so hard to get people to take the first step that he pushed the second one out of view. The GT is full of language like:
Unemployment develops, that is to say, because people want the moon; -- men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control.
This is a story about exogenous money; this kind of language smoothed the the way for what Perry Mehrling calls “Monetary Walrasianism,” as you get from someone like Nick Rowe. Jorg Bibow's definitive account of Keynesian liquidity preference theory (summarized here) makes it clear that Keynes did this for clear strategic reasons, and the Treatise on Money is better in this respect. But it’s still a problem.

So for me the Tobin article (and Glasner’s summary) has an ambivalent character. They are right to criticize the idea of an exogenous stock of money, and the related idea that transaction demand for money is central to aggregate demand; but I worry that their arguments tend to tip backward toward the classical dichotomy rather than point forward toward a fuller account of liquidity.

Monday, April 14, 2014

Substitutes or Complements: Marx and Brad and Me

by Suresh Naidu

Since Brad Delong has attributed some thoughts on Marx to me, and I have gotten some emails inquiring whether or not I did say them, I thought it would be useful to publically air what I understand to be the context. Brad has been a mentor and advisor for 10 years now, and is one of the very few economists broad and open enough to know anything about what Marx wrote. I have met very few other people in mainstream economics departments who cared enough to read Marx, let alone enough to assign the Communist Manifesto and Wage Labor and Capital in a mandatory first-year economics Ph.D. course (even I don’t do that).

The context of the long-running conversation has been trying to establish a dialogue between Marx and modern growth theory. Inside the modern production function there is a pretty undifferentiated view of “K” (which leads it into some troubles as bad as any in the labor theory of value). Marx on the other hand distinguishes (at least) machines, technology, and money-qua-productive-input as different from each other conceptually. The fact that these are rolled into an aggregate production function by mainstream growth theory is not Marx’s fault. And so when somebody is trying to translate Marx into modern economics, the slippage between what is “K” and “what Marx meant” can get confusing. I am still thinking about these issues, and won’t pretend to have figured it all out, but let me lay out some preliminary thoughts.

Brad in one sense is correct. I believed and still believe that Marx’s view of capitalist technological change is labor-saving. There is no way to read the chapters on machines and modern manufacturing without thinking that Marx was pretty convinced that technologically advanced machinery would displace labor and lower wages. 
But we have already seen that, with every advance in the use of machinery, the constant component of capital, that part which consists of machinery, raw material, etc., increases, while the variable component, the part laid out in labour-power, decreases.
But on the flip side, the increased use of machines can increase the demand for labor. More factories means more labor demand, even if those factories are 90% robot. So the relationship of capital and labor is both of these things: the net substitutability of labor by capital, holding output constant, and the gross complementarity of capital and labor while output changes.
We also know that in no, other system of production is improvement so continuous, and the composition of the capital employed so constantly changing as in the factory system. These changes are, however, continually interrupted by periods of rest, during which there is a mere quantitative extension of the factories on the existing technical basis. During such periods the operatives increase in number.
In terms of wages, Marx I think can be read as saying that that medium-run wages are pinned down by institutions and norms and the reserve army of labor. Long-run wages could be determined by political conflict and changing economic institutions, and short-run wages could be determined by the business cycle and labor-saving technological change. This is a pretty rich theory of wage-setting, and I think focusing on the technological change dimension of it is missing a lot of the full Marx story.

When "capital" is understood as money and financial services enlisted in circuits of production (the M-C-M' increments) or the quantity of investment, I think you can find passages where Marx thinks of them as complements to labor (i.e. they increase labor demand, even if marginal products don’t exist and wages are institutionally set). For example, here is a passage where (a young) Marx talks about capital and labor as complements, and perhaps even thinks of wages at marginal products.
To say that "the worker has an interest in the rapid growth of capital", means only this: that the more speedily the worker augments the wealth of the capitalist, the larger will be the crumbs which fall to him, the greater will be the number of workers than can be called into existence, the more can the mass of slaves dependent upon capital be increased.
In fact, rhetoric aside, this passage is completely consistent with, say, vintage optimal tax theory, which says that the best way to increase workers' crumbs wages in the long run is to not tax capital ever. And I think it is illuminating about the manifold criticisms Marx makes of capitalism. Perhaps Marx thought that even if workers’ standard of living increased under capitalism, it would not undo the exploitative/unfree/ undemocratic institutions inherent in the labor market. Maybe some of those criticisms are empirically wrong or don't resonate with contemporary ethical intuitions. In any case, it is not just any particular analysis of inequality and business cycles, but instead the unrelentingly political and conflict-ridden view of the economy that is what is precious to me in Marx. 

But all this said, I think Brad wrote a good column, even if the question of “Was Marx Right?” is fundamentally silly. The larger point is that Marx’s fertile mind generated many ideas, distributed over a lifetime of thinking and writing exactly as capitalism was transforming itself and the world. The theological endeavor to discern and police "what Marx really meant" is the worst kind of intellectual program. Marx, like Smith and Ricardo and Keynes, is a place to draw on for inspiration and hypotheses, not the last word on anything. So, at the end of the day, I don’t really care if “Marx was right”, and I certainly don’t begrudge others the right to find support for a variety of arguments on the invaluable The howls of outrage from the online guardians of the one true Marx in response to the NYT panel were more irksome than anything written by the panelists. Marxist economics is much larger than Marx, and textual exegesis of the original manuscripts, as opposed to reinventing and redeploying the concepts in new historical and intellectual environments, does it a great disservice. Brad is right to look to Capital  for inspiration to understand our possible robot future, even if Marxists don’t like it. To paraphrase Joan Robinson, the critics have Marx on their screens, not in their bones.

Monday, April 7, 2014

Wealth Distribution and the Puzzle of Germany

There’s been some discussion recently of the new estimates from Emmanuel Saez and Gabriel Zucman of the distribution of household wealth in the US. Using the capital income reported in the tax data, and applying appropriate rates of return to different kinds of assets, they are able to estimate the distribution of household wealth holdings going back to the beginning of the income tax in 1913. They find that wealth inequality is back to the levels of the 1920s, with 40% of net worth accounted for the richest one percent of households. The bottom 50% of households have a net worth of zero.

There’s a natural reaction to see this as posing the same kind of problem as the distribution of income — only more extreme — and respond with proposals to redistribute wealth. This case is argued by the very smart Steve Roth in comments here and on his own blog. But I’m not convinced. It’s worth recalling that proposals for broadening the ranks of property-owners are more likely to come from the right. What else was Bush’s “ownership society”? Social Security privatization, if he’d been able to pull it off, would have  dramatically broadened the distribution of wealth. In general, I think the distribution of wealth has a more ambiguous relationship than the distribution of income to broader social inequality.

Case in point: Last summer, the ECB released a survey of European household wealth. And unexpectedly, the Germans turned out to be among the poorest people in Europe. The median German household reported net worth of just €50,000, compared with €100,000 in Greece, €110,000 in France, and €180,000 in Spain. The pattern is essentially the same if you look at assets rather than net worth — median household assets are lower in Germany than almost anywhere else in Europe, including the crisis countries of the Mediterranean.

At the time, this finding was mostly received in terms the familiar North-South morality tale, as one more argument for forcing austerity on the shiftless South. Not only are the thrifty Germans being asked to bail out the wastrel Mediterraneans, now it turns out the Southerners are actually richer? Why can't they take responsibility for their own debts? No more bailouts!

No surprise there. But how do we make sense of the results themselves, given what we know about the economies of Germany and the rest of Europe? I think that understood correctly, they speak directly to the political implications of wealth distribution.

First, though: Did the survey really find what it claimed to find? The answer seems to be more or less yes, but with caveats.

Paul de Grauwe points out some distortions in the headline numbers reported by the ECB. First, this is a survey of household wealth, but, de Grauwe says, households are larger in the South than in the North. This is true, but it turns out not to make much of a difference -- converting from household wealth to wealth per capita leaves the basic pattern unchanged.

Per capita wealth in selected European countries. From de Grauwe.

Second, the survey focuses on median wealth, which ignores distribution. If we look at the mean household instead of the median one, we find Germany closer to the middle of the pack -- ahead of Greece, though still behind France, Italy and Spain. The difference between the two measures results from the highly unequal distribution of wealth in Germany -- the most unequal in Europe, according to the ECB survey. For the poorest quintile, median net worth is ten times higher in Greece and in Italy than in Germany, and 30 times higher in Spain.

This helps answer the question of apparent low German wealth — part of the reason the median German household is wealth-poor is because household wealth is concentrated at the top. But that just raises a new puzzle. Income distribution Germany is among the most equal in Europe. Why is the distribution of wealth so much more unequal? The puzzle deepens when we see that the other European countries with high levels of wealth inequality are France, Austria, and Finland, all of which also have relatively equal income distribution.

Another distortion pointed to by De Grauwe is that the housing bubble in southern Europe had not fully deflated in 2009, when the survey was taken — home prices were still significantly higher than a decade earlier. Since Germany never had a housing boom, this tends to depress measured wealth there. This explains some of the discrepancy, but not all of it. Using current home prices, the median Spanish household has more than triple the net wealth of the median German household; with 2002 home prices, only double. But this only moves Germany up from the lowest median household wealth in Europe, to the second lowest.

The puzzle posed by the wealth survey seems to be genuine. Even correcting for home prices and household size, the median Spanish or Italian household reports substantially more net wealth than the median German one, and the median Greek household about an equal amount. Yet Germany is, by most measures, a much richer country, with median household income of €33,000, compared with €22,000, €25,000 and €26,000 in Greece, Spain and Italy respectively. Use mean wealth instead of median, and German wealth is well above Greek and about equal to Spanish, but still below Italian — even though, again, average household income is much higher in Germany than in Italy. And the discrepancy between the median and mean raises the puzzle of why German wealth distribution is so much more uneven than German income distribution.

De Grauwe suggests one more correction: look at the total stock of fixed capital in each country, rather than household wealth. Measuring capital consistently across countries is notoriously dicey, but on his estimate, Germany and the Netherlands have as much as three times the capital per head as the southern countries. So Germany is richer in real terms than the South, as we all know; the difference is just that "a large part of German wealth is not held by households and therefore must be held by the corporate sector." Problem solved!

Except... you know, Mitt Romney was right: corporations are people, in the sense that they are owned by people. The wealth of German corporations should also show up as the wealth of the owners of German stocks, bonds, or other claims on those corporations -- which means, overwhelmingly, German households. Indeed, in mainstream economic theory, the "wealth" of the corporate sector just is the wealth of the households that own it. According to de Grauwe, the per capita value of the capital stock is more than twice as large in Germany as in Spain. Yet the average financial wealth held by a German household is only 25% higher than in Spain. So as in the case of distribution, this solution to the net-wealth puzzle just creates a new puzzle: Why is a dollar of capital in a German firm worth so much less to its ultimate owners than a dollar of capital in a Spanish or Italian firm?

And this, I think, points us toward the answer, or at least toward the right question.

The question is, what is the relationship between the level of market production in an economy, and the claims on future production represented by wealth? It’s a truism — tho often forgotten — that the market production counted in GDP is only a part of all the productive activity that takes place in society. In the same way, not all market production is capitalized into assets. Wealth in an economic sense represents only those claims on future income that are exercised by virtue of a legal title that is freely transferable, and hence has a market value.

For example, imagine two otherwise similar countries, one of which makes provision for retirement income through a pay-as-you-go public pension system, and the other of which uses some form of funded pension. The two countries may have identical levels of output and income, and retirees may receive exactly the same payments in both. But because the assets held by the pension funds show up on balance sheets while the right to future public pension payments does not, the first country will have less wealth than the second one. Again, this does not imply any difference in production, or income, or who ultimately bears the cost of supporting retirees; it is simply a question of how much of those future payments are capitalized into assets.

This is just an analogy; I don't think retirement savings are the story here. The story is about home ownership and the value of corporate stock.

First, home ownership. Only 44 percent of German households own their own homes, compared with 70-80 percent in Greece, Italy and Spain. Among both homeowners and non-homeowners considered separately, median household wealth is comparable in Germany and in the southern countries. It’s only the much higher proportion of home ownership that produces higher median wealth in the South. And this is especially true at the bottom end of the distribution — almost all the bottom quintile (by income) of German households are renters, whereas in Greece, Spain and Italy there is a large fraction of homeowners even at the lowest incomes. Furthermore, German renters have far more protections than elsewhere. As I understand it, German renters are sufficiently protected against both rent increases and loss of their lease that their occupancy of their home is not much less secure than that of home owners. These protections are, in a sense, a form of property right — they are a claim on the future flow of housing services in the same way that a title to a house would be. But with a critical difference: the protections from rent regulation can’t be sold, don’t show up on the household’s balance sheet, and do not get counted as wealth.

In short: The biggest reason that German household wealth is lower than than elsewhere is that less claims on the future output of the housing sector take the form of assets. Housing is just as commodified in Germany as elsewhere (I don’t think public housing is unusually important there). But it is less capitalized.

Home ownership is the biggest and clearest part of the story here, but it’s not the whole story. Correct for home ownership rates, use mean rather than median, and you find that German household wealth is comparable to household wealth in Italy or Spain. But given that GDP per capita is much higher in Germany, and the capital stock seems to be so much larger, why isn't household wealth higher in Germany too?

One possible answer is that income produced in the corporate sector is also less capitalized in Germany.

In a recent paper with Zucman, Thomas Piketty suggests that the relationship between equity values and the real value of corporate assets depends on who exercises power over the corporation. Piketty and Zucman:
Investors who wish to take control of a corporation typically have to pay a large premium to obtain majority ownership. This mechanism might explain why Tobin’s Q tends to be structurally below 1. It can also provide an explanation for some of the cross-country variation… : the higher Tobin’s Q in Anglo-Saxon countries might be related to the fact that shareholders have more control over corporations than in Germany, France, and Japan. This would be consistent with the results of Gompers, Ishii and Metrick (2003), who find that firms with stronger shareholders rights have higher Tobin’s Q. Relatedly, the control rights valuation story may explain part of the rising trend in Tobin’s Q in rich countries. … the ”control right” or ”stakeholder” view of the firm can in principle explain why the market value of corporations is particularly low in Germany (where worker representatives have voting rights in corporate boards without any equity stake in the company). According to this ”stakeholder” view of the firm, the market value of corporations can be interpreted as the value for the owner, while the book value can be interpreted as the value for all stakeholders.
In other words, one reason household wealth is low in Germany is because German households exercise their claims on the business sector not via financial assets, but as workers.

The corporate sector is also relatively larger in Germany than in the southern countries, where small business remains widespread. 14 percent of Spanish households and 18 percent of Italian households report ownership of a business, compared with only 9 percent of German households. Again, this is a way in which lower wealth reflects a shift in claims on the social product from property ownership to labor.

It’s not a coincidence that Europe’s dominant economy has the least market wealth. The truth is, success in the world market has depended for a long time now on limiting dependence on asset markets, just as the most successful competitors within national economies are the giant corporations that suppress the market mechanism internally. Germany, as with late industrializers like Japan, Korea, and now China, has succeeded largely by ensuring that investment is not guided by market signals, but through active planning by banks and/or the state. There’s nothing new in the fact that greater real wealth in the sense of productive capacity goes hand hand with less wealth in the sense of claims on the social product capitalized into assets. Only in the poorest and most backward countries does a significant fraction of the claims of working people on the product take the form of asset ownership.

The world of small farmers and self-employed artisans isn’t one we can, or should, return to. Perhaps the world of homeowners managing their own retirement savings isn’t one we can, or should, preserve.