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Arnold Kling On Piketty
See
Robert Solow on Piketty. Excerpts:
"Let me be blunt: Piketty’s nightmare scenario, in which capital
accumulates and has a high return, is a terrific scenario for wages in
absolute terms. If workers care about what they can consume, as opposed
to the ratio of their net worth to that of the capital owners, they
would hate to see any policy that might interfere with the high rates of
investment that Piketty is envisioning. Note, however, that I
personally would not concede that the distinction between workers and
capital-owners is as clear-cut as it is in the Solow growth model.
The tone of Solow’s review is generally laudatory. It also is by far
the clearest explanation of Piketty’s argument that I have read. It
reflects Solow’s command of the logic of economic growth as well as his
abilities as a teacher.
I think that Solow arrives at a higher evaluation of the book than I
would for two reasons. First, Solow gives Piketty the benefit of the
doubt on nearly every uncertain issue. For example, on the crucial
assumption that Piketty makes that the rate of return on capital remains
steady even as the capital-income ratio creeps ever higher, Solow
writes,
Maybe a little skepticism is in order. For instance, the historically
fairly stable long-run rate of return has been the balanced outcome of a
tension between diminishing returns and technological progress; perhaps
a slower rate of growth in the future will pull the rate of return down
drastically. Perhaps. But suppose that Piketty is on the whole right.
On another issue, the fact that inequality is high between different
workers, not just between workers and capitalists, Solow offers a
hand-waving defense of Piketty. Solow writes,
Another possibility, tempting but still rather vague, is
that top management compensation, at least some of it, does not really
belong in the category of labor income, but represents instead a sort of
adjunct to capital, and should be treated in part as a way of sharing
in income from capital…
it is pretty clear that the class of supermanagers
belongs socially and politically with the rentiers, not with the larger
body of salaried and independent professionals and middle managers
To this, I would say: why draw the line at supermanagers? Why not
say that the salaries of college professors that are paid out of
university endowments are “a way of sharing income from capital”? The
way I look at it, the amount of income that does not represent “a sort
of adjunct to capital” (including human capital) is miniscule, perhaps
less than 1 percent of GDP.
My second disagreement with Solow is that he, like Piketty, omits any
discussion of risk as a component of “r.” In that regard, Tyler Cowen’s skeptical review better accords with my own thinking.
The way I see it, Piketty and Solow work with models that incorporate
homogeneous workers (with no differences in human capital) and
homogeneous capital (with no differences in ex ante risk or ex post
returns). The real world is so far removed from those models that I simply cannot buy into the undertaking."
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