Inequality, economics and politics – Thomas Piketty at the Bank of England

On Friday I attended an excellent conference at the Bank of England at which four speakers – Peter Lindert, Jaume Ventura, Orazio Attanasio and Tim Besley – gave presentations on aspects of Capital in the 21st Century, and Thomas Piketty responded to their comments and critiques. The presentations are due to go on the Bank’s website at some stage, although aren’t there yet.

Peter Lindert drew on material from his forthcoming book with Jeffrey Williamson (and also has a working paper on the Piketty book), to characterise the long-run trends in inequality as the result of ‘lucky’ historical accidents that wipe out concentrations of wealth, combined with policies that help the society stay equal. The period 1910 to the 1970s was the ‘great levelling’, due to wars, and there has subsequently been a fanning out in countries’ experience but in many cases a rise in top incomes. In this, he agrees with Piketty’s book; but disagrees with the famous ‘r>g means rising inequality’ prediction. Demography, technology and politics (mainly education and inheritance tax) – with a role for geography in the case of frontier societies – are his favoured explanations. South Korea, for example, has an inheritance tax of 50%: in principle the heirs of the ailing Lee Kun-Hee of Samsung will be due to pay £4bn in tax when he dies.

Jaume Ventura focussed on the dynamics of economic growth that might explain inequality trends: a u-shaped long-run evolution in the capital-income ratio; the changing components of wealth, with land playing a decreasing part; a not-quite-u-shaped evolution in capital-labour shares (the capital share has risen but is not back to its historic highs); and a stable return to capital of 4-5%. Like Prof Lindert, Prof Ventura does not think the model implied in Capital in the 21st Century, and the r>g inequality, stacks up. He argued that the assumptions in the book imply a world of multiple equilibria and cycles or chaotic dynamics, and also that the growth model ignores all the lessons of endogenous growth. He said: “There has been a change in the deep structure of capital in the 21st century.” Bubble-like capital gains now play a large part.

The two final papers moved on from diagnosis to solutions. Orazio Attanasio described the recent research confirming the importance of people’s early years, before the age of 3 and certainly before 10, for their lifetime earnings. Parents’ status and income is important but works through the early effects on a child’s cognitive and non-cognitive abilities. Early experiences even have epigenetic effects. He concluded that the biggest policy problem is the bottom 10% in society, not the top 1%. But also – optimistically – that individuals’ life outcomes can be changed by appropriate early interventions.Prof Attanasio also discussed the optimal level of the top tax rate – recent estimates range from 42% to 86% as the rate that would maximise revenue – to which Thomas Piketty replied that top tax rates should be seen as pollution taxes, the aim being to stop behaviour imposing an externality rather than maximising revenue. However, as 25% of UK income tax comes from the richest 1% (54% from the richest 10%), it would be a bold government that ignored tax revenues.

Tim Besley gave a fascinating talk about the political economy of inequality, referring to his most recent book with Torsten Persson, Pillars of Prosperity. He asked, does inequality undermine effective governance? In democracies there is normally thought to be a compact where the rich trade some redistribution in return for security of their property rights. But people don’t mind some kinds of high incomes – footballers vs bankers. And there is no link (looking across countries) between either top (marginal) tax rates and inequality. Quoting Lenin’s The State and Revolution, Prof Besley said there is no empirical support for the frequent claim that the median voter is decisive in political choices: “Democracy for an insignificant minority, democracy for the rich – that is the democracy of capitalist society.” He went on to show evidence that inequality limits the demands for social action, which over time reduces the capacity of the state to act – its legal capacity, fiscal capacity, and capacity to deliver public goods. Finally, he said, there is also evidence that from time to time the values of citizens shift markedly – after the war, for instance, in the overwhelming support for the NHS and welfare state. I couldn’t agree more with his final comment that there are three kinds of economics – the positive, the normative, and political economy.

When I read Capital in the 21st Century, I found it hard to work out the growth model implicit in the book, so was reassured that much cleverer economists than me found fault with them. However, as several of the speakers said, that doesn’t make it any less important a book. It has changed the public debate and climate of opinion about inequality, in large part through the long years of hard work giving us the first ever (open) data base of historical figures, the World Top Incomes Database. Jaume Ventura said his advanced macro students have to read it, along with Angus Maddison’s The World Economy: A Millennial Perspective. I was also most impressed by Prof Piketty’s openness to the critiques: “Every conclusion in the book is a temporary conclusion, and subject to discussion,” he said.

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An early Xmas present…

… from my publisher is a copy of the new econometrics book by Joshua Angrist and Jorg-Steffen Pischke, Mastering Metrics: The Path From Cause to Effect.

Christmassy…..

I *love* their previous book, Mostly Harmless Econometrics, which has the most careful treatment of counterfactuals (among other things) I’ve come across. (Regular readers will know of my obsession with counterfactuals.) The new book looks awesome too. If you only buy one econometrics book, buy these two.

  

Diminishing returns to information

Although it was published three years ago, when the financial crisis was much fresher in our minds, the essays in What’s Next? unconventional wisdom on the future of the world economy (edited by David Hale and Lyric Hughes Hale) remain interesting.

Looking this morning at the chapter The Diminishing Returns of the Information Age by Mark Roeder, his two main points remain just as relevant. One is to underline the paradox that at a time when there was more information than ever about the financial markets, people in general failed to notice the huge phenomenon of the developing crisis – the signals were there and nobody paid attention. This attention deficit is something Paul Seabright has also explored.

A related point is the way certain themes or stories develop online and stick in the collective mind even if untrue. Roeder gives the example of people in the US continuing to buy unaffordable homes on sub-prime deals even after it had become very clear in 2007 that the narrative of ever-rising property prices was untrue. He links this power of certain narratives to the ‘online oligarchy’ of large news providers, increasingly keen on sensationalizing stories to grab attention, in the battle for advertising. But it is surely even more the case on social media. This is part of the tussle about ‘the right to be forgotten’ debate: falsehoods as well as truths last forever online.

Roeder ends pessimistically: “Never before have we had access to so much information, yet so little understanding of how to manage it.” Three years on, we don’t seem to have progressed any further in working out how to have understanding catch up.

As a brighter footnote, I have also read the lovely poems Dog Songs by Mary Oliver, an early Christmas gift from a friend. Here are a few lines from a poem about watching TV with her dog Ricky:

‘I’m getting a headache looking at this.
I have to bark.’ And he began.
It does no good to bark at the television
I said. I’ve tried it too. So he stopped.

Diminishing returns to barking at the TV too?

On reading Polanyi (sigh)

As promised in my last post, I’ve started re-reading Karl Polanyi’s The Great Transformation, which I first read (and shouted at) more than 20 years ago. It hasn’t started well.

On the first page he writes, about ’19th century civilization’: “The fount and matrix of the system was the self-regulating market.” The market system, he continues (writing in 1944), is the “explanation of one of the deepest crises in man’s history.” This dramatic accusation is left hanging for a while, the book turning to the balance of power, international finance and the Gold Standard. When he returns to markets in Chapter 4, he explains that the market system is an economy “directed by market prices and nothing but market prices” – a construct so unnatural that it requires strong intervention by the state to create and sustain it. Before the 19th century, the role of markets in the organisation of the economy had been minimal, he says – and there is an ethnographic turn to demonstrate the point. Polanyi asserts that pre-market societies had all had reciprocity and redistribution at the heart of their economic organisation, along with production for own consumption.

At this point, I’m obviously thinking that pre-market societies were all poor, and household production made the division of labour impossible. Besides, there surely were plenty of markets and market transactions before the 19th century. I’m also reflecting on the extraordinary evolution of non-market economic institutions in the 19th century – trade unions, friendly societies, mutual savings and insurance organisation, not to mention free schools, scientific and philosophical societies, working men’s clubs, lending libraries etc. But I’m going to stay open minded as I read on.

It’s tempting not to bother – this sympathetic recent summary by Robert Kuttner, also reviewing the Block and Summers book, is much clearer and more readable. But as Kuttner makes a point of noting that economists don’t read Polanyi, I’d better defy the stereotype and plough on.

Monday morning market fundamentalism

Easing myself into the week with a bit of browsing, this review by Michael McCarthy in The Boston Review of a new book about Karl Polanyi piqued my interest. The book is The Power of Market Fundamentalism: Karl Polanyi’s Critique by Fred Block and Margaret Somers.

As stated in the review, I wholeheartedly agree with the Polanyi perspective on markets: “Polanyi’s key work, The Great Transformation, demonstrates that markets and states are not separate entities, which each have their own unique and endogenous dynamics, but instead are inescapably intertwined and mutually constitutive.” Yet when I first readThe Great Transformation – some time in the mid-1980s – it irritated me enormously. I can’t remember why, and my brief notes on the book give no clue, but I do remember the emotion. So I’ve hauled it off my bookshelf and will have to re-read it, to find out why and whether it still has the same effect.

The review of the Block and Somers book, alluding to Albert Hirschman’s The Rhetoric of Reaction, makes it sound as though they are in effect arguing that there is a performative aspect to ‘free markets’: “Block and Somers’s unique contribution is to argue that these public narratives about the economy are key drivers of regulatory policy…. markets are not only embedded socially and politically; markets are also embedded in ideas.” Again, something I would agree with. One of the quotations I jotted down in my brief notes from The Great Transformation is: “The introduction of free markets, far from doing away with the need for control, regulation and intervention, enormously increased their range.”