Compton and Long Beach Togetha on This One: Piketty Has No Clue About Capital
It’s rare that you will see Peter Klein and James Galbraith agree, but they do. And after getting my own copy of Capital in the 21st Century, I can join the party: Thomas Piketty doesn’t have the foggiest idea what economists are arguing about when they bring up concerns over aggregation in capital theory.
Here’s Klein (his is the second review, under Hunter Lewis):
Piketty understands “capital” as a homogeneous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quality of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.”
Profits are amounts, not rates. The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible from the perspective of modern production theory.
Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.
The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.
After quoting from Piketty’s (3-page) discussion of the Cambridge Capital Controversy–in which Piketty somehow manages to conclude that Solow’s model “carried the day”–Galbraith points out, “And Solow’s model did not carry the day. In 1966 Samuelson conceded the Cambridge argument!”
I am really trying not to be a know-it-all about this, lashing out with suppressed jealousy at the guy who is getting worldwide acclaim. But I am pretty sure my jaw literally dropped when I went right to the section on the Cambridge Controversy in Piketty’s book (which I obtained just a few hours ago, and have only spent 30 minutes perusing so far).
Does anyone know, does Piketty’s book elsewhere deal with the problem of aggregating capital? I mean, since he doesn’t even bring it up in three pages devoted to a debate about aggregating capital (really: Wikipedia tells you more in the first two paragraphs than in Piketty’s 3 pages), I would be surprised if he mentioned it elsewhere…but I don’t want to assume. Who knows how these Frenchmen write books?
I’m sure Galbraith would also be surprised by our agreement, if he had any idea who I was. BTW a longer version of my comment is here: http://organizationsandmarkets.com/2014/04/23/notes-on-inequality/
Bob, have you seen this post by Krugman?
http://krugman.blogs.nytimes.com/2014/04/24/on-gattopardo-economics
He says that treating the capital stock as homogeneous is just a simplifying modeling assumption, not something essential to Piketty’s work.
“There are a few economists on the left who seem to believe that:
1. You need to believe in the existence of a perfectly well-defined aggregate measure of capital to believe in the marginal productivity theory of income distribution;
2. If you believe in, or even use, marginal productivity theory, you are conceding that capitalists deserve their income.
Neither of these things are true. Nothing about marginal productivity theory depends on the exact truth of a simple aggregate production function with capital defined by a single number. And saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get.
So by all means let’s continue to debate how we do economics. But inequality really isn’t a wedge issue in that discussion. You can be perfectly conventional in your economics — or, my own attitude and what I think is Piketty’s, willing to use conventional models when they’re convenient and seem useful without treating them as irrefutable truth — while still taking inequality very seriously.”
Educate me in case I’m wrong here…
What I understand of Piketty’s model is that it is basically Cobb-Douglas, which I always understood to be a microeconomic model. Is it fairly mainstream to use it as a macroeconomic model? Even if we ignore capital heterogeneity, don’t we still run into the problem of firm heterogeneity, i.e. that r is different for every firm and that an aggregated r bears no relevance to an individual firm’s production investment decisions?
I mean, if you were considering whether or not to invest in some capital, would you base your decision on the rate of return you would be able to get, or the average rate of return that people in general are able to get? Maybe if you don’t have access to your own data, then using the aggregate number is the best you can do. But how many capital investors lack microeconomically relevant estimates of r for themselves?
Finally, we can repeat this series of questions about g.
Keshav,
Yes I saw that. Krugman is totally wrong and doesn’t seem to even understand the problem.
But, he is better than Piketty: Krugman at least understands what the Sraffian-esque critique *is*. In contrast, Piketty’s treatment of the CCC is like someone saying the Scopes Trial was a battle over private vs. public education.
Keshav,
I am going to explicitly respond to Krugman’s post; I put it on my calendar. But I have a more general EconLib piece on capital coming out soon, and wanted that to run first to lay the foundation.
Krugman is mixing up two kinds of modelling idealizations-
(1) Where you simplify a model to make it computationally tractable or to disregard unimportant factors in order to highlight the important causal relations.
(2) Where you simplify a model in such a way that the idealization is essential to your conclusion.
So the fact that it’s sometimes useful to make idealizing assumptions doesn’t mean that “assuming a can-opener” is good methodology.
You may disagree, but I think Krugman believes that homogeneous capital is the first type of idealization, not the second type.
I don’t know if I agree or disagree, but a lot of people (from Galbraith to Klein) seem to think it’s important, so I’d want to see some rigorous argument from Krugman before I give him the benefit of the doubt. Saying “it’s an idealizing assumption” won’t do.
The thing that really alarms me in this is that Piketty totally misconstrued the CCC in his 3-page summary of it. Krugman at least is correctly explaining the main issues (though without giving any explanation for why he thinks one side was the winner).
Peter Klein: Piketty understands “capital” as a homogeneous, liquid pool of funds, not a heterogeneous stock of capital assets.
That’s wrong; see for example pgs 46-47.
Galbraith disputes the claim that Solow’s model “carried the day” — apparently the fact that Joan Robinson routed Paul Samuelson at a seminar means she went on to dominate the profession? Sadly, no; maybe she should have; I don’t know where Piketty stands on that. But as a matter of realpolitik, Solow captured the profession as completely as the Holy Inquisition conquered Spain (to borrow a phrase from the sage of Tilton).
I see that Peter Klein wrote on his own blog, on April 23rd: “I haven’t yet read Thomas Piketty’s new book but am aware of — and amazed by — the buzz it’s generating.”
Peter,
Did you read the book before posting your Mises review (dated April 26th)?
Kevin, I have not written a review of Piketty’s book, just a blog post (recycled into the article cited by Bob) on the themes raised by the book, and the current discussion about inequality. Please read carefully.
Bob Murphy: “his is the second review, under Hunter Lewis”
Is that you Bob is referring to? I think it is, but maybe I’m not reading carefully enough.
Not sure if you’re just sparring with Peter, but yeah Kevin I was referring to him.
Thanks Bob.
It’s Bob’s fault (as usual). What Bob referred to as my “review” does not purport to be a book review, just some comments.
Peter just own it. “Yeah I don’t NEED to read this guy’s book, it’s so bad!”
Please see comments #6 and #7 here: http://organizationsandmarkets.com/2014/04/23/notes-on-inequality/#comments
“The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible”
And yet austrians constantly argue that money should earn a rate of return automatically, just by existing. This is called deflation, which so many austrians love.
Also, I note the austrian outrage at zero interest rates, which are deemed unnatural. The austrian assumption is that you should be entitled to a positive real rate of return on your money at all times, even if you never take the slightest risk with it.
You are being ridiculous, please cite some examples of Austrians loving deflation in the belief that all money should automatically generate a return just by existing.
Zero interest rates are deemed unnatural, not by their numerical value but by the massive market intervention required to get them to zero. You have been paying attention to what’s going on regarding world currencies haven’t you?
during deflation money generates a real rate of return just by existing. You can keep it under your bed and it still gains value, without having to be invested.
During deflation.
many austrians bang on about the desirability of deflation, about how deflation is the natural state of affairs, about how we should have deflation, etc.
During deflation money earns a rate of return automatically, just by existing. Hence my statement that:
“austrians constantly argue that money should earn a rate of return automatically, just by existing”
I must of missed the bit where you cited an example…
are you saying it’s not true that many austrians love deflation and even think we should have deflation all the time?
But wages and prices go down,
Cash isn’t accruing interest just sitting in your shoebox, it’s relative to real prices.
to put it simply, you calculate the real rate of return by subtracting the rate of inflation from the nominal rate of return.
If money sitting in a shoebox earns a nominal interest rate of 0%, and the rate of inflation is -5% (deflation), then the real rate of return on money sitting in a shoebox is 5%.
http://www.investopedia.com/terms/r/realrateofreturn.asp
“are you saying it’s not true that many austrians love deflation and even think we should have deflation all the time”
let’s assume Austrians are unanimous on this position – you still haven’t answered Tel’s question;
What Austrian has said that money should earn a rate of return automatically, just by existing?
Saying deflation is desireable vs. saying deflation “should happen automatically” are two different things.
“What Austrian has said that money should earn a rate of return automatically, just by existing?”
If you think deflation is desirable, if you think it should happen, then you think money should earn a rate of return automatically, just by existing. Because that is what deflation is.
With deflation, money earns a real rate of return automatically. You can keep it in a shoebox, not invest it anything, and it still earns a real rate of return.
Phillipe,
You are not applying what is meant by “automatically” consistently.
Klein (the Austrian) is attacking the notion that in certain economic models growth happens “automatically” because a bunch of capital goods are sitting around. He says the key to economic growth is not capital goods, but entrepreneurship, etc.
Your accusation that Austrian say the same thing when it comes to deflation is not at all consistent with what Klein is talking about.
To satisfy your accusation of inconsistency wrt “automatic”, Austrians would have to say something like “in an ideal world where the supply of money is left to markets and not managed by governments, economic growth, and subsequently, deflation, would just happen – no entrepreneurship etc. required. ”
They don’t say anything like this.
Peter Klein wrote:
“The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible from the perspective of modern production theory.”
The idea being that return on capital doesn’t happen by itself, it requires individuals to make investment decisions. But in a deflationary situation, there is a real rate of return on money even if it is just left in a shoebox and not invested in anything. No entrepreneurship or investment required. You earn a real rate of return just by sitting on your money and not doing anything.
No entrepreneurship or investment required.
That’s your opinion, and not one held by ‘Austrians’.
If you think they are wrong about that – fine – but all it means is that you claimed they believed something that they don’t and you do.
Richard,
sitting on money you have doesn’t require entrepreneurship or making investments. It just requires putting your money in a box and doing nothing.
Phillipe,
And Austrians would say this is not the case – if you think prices will be lower next year and decide to invest in cash balances because of it you have just made an entrepreneurial decision. And, if everyone did that prices may very well not be lower when next year rolls around.
But, apparently you think this is all wrong – I don’t care and it isn’t the point. The point is you are wrong about the Austrian position and thus wrong to call them inconsistent when it comes ‘automatic’ growth under deflation vs not.
Please stop changing the subject to what you think deflation means for entrepreneurship and investment.
“if you think prices will be lower next year and decide to invest in cash balances because of it you have just made an entrepreneurial decision.”
So entrepreneurial means nothing at all really in your schema.
For example, inheriting some money and putting in in a box under the stairs is “entrepreneurial” under your definition.
What you’re really taking about is speculation, not investment in the economic sense of the word.
Holding cash is not “investment” in the sense of creating the means by which increased production can be generated.
If you build a factory, you can see that it produces real things over time – that’s the real return.
If you just hold cash in a deflation, it gains value – but where is that real return coming from? Did you create it? No. You are not producing anything by holding cash. So who is producing the real return? Not you. You are speculating.
“you are wrong about the Austrian position”
The austrian position I’ve seen propagated all over the place is that deflation is always double plus good, but we don’t really know why. Obviously Hayek didn’t think that, but then again he thought about things.
“The austrian position I’ve seen propagated all over the place is that deflation is always double plus good, but we don’t really know why. Obviously Hayek didn’t think that, but then again he thought about things.”
Philippe, what is your purpose in commenting on this site? It seems like you just want to argue with people.
Philippe,
This is pretty strange way to admit you were wrong
about the Austrian position, but it’s the best we can expect I suppose.
are you the barbecue-party thought police now, Dan?
Richard,
my initial comment stands. Your responses are simply an attempt to redefine holding money as “entrepreneurship” and “investment”.
Many austrians love deflation, as deflation is a kind of magic. You put your money in a box under the stairs, and somehow, by magic, it increases in value. So obviously everyone gets richer, because all you have to do to get richer is put your money in a box under the stairs!
Phillipe wrote;
. Your responses are simply an attempt to redefine holding money …
Nope – they were an attempt to explain the Austrain position which you clearly know nothing about and don’t seeem to care too. And that’s fine. But what is not fine is calling them inconsistent (hypocritical?) based on *your* definitions.
Phillipe no, that is not how Austrians talk about deflation, and if any Austrian is saying that deflation is desirable and the natural state of affairs, then they aren’t being consistent.
What Austrians do point out is that economic actors can calculate in a world of deflation or inflation, it really doesn’t matter, but that it does matter how such a state came about.
“it does matter how such a state came about”
What you’re saying is that in an imaginary world “without a state”, decisions by supposed economic actors will result in the best of all possible worlds. This is circular reasoning, which assumes that this imaginary world is the best of all possible worlds, therefore whatever happens in this imaginary world can only result in the best of all possible worlds.
By “imaginary world”, I imagine that you’re talking about the ERE.
I hate to break it to you but almost every Austrian economist of note has jumped through hoops to make it clear that the “imaginary construct” of the ERE is certainly not a desirable state of affairs (nor is equilibrium), and that in the real world, time and change are ever-present. So I have no idea what nonsense you’re rambling on about.
However, if one were to propose the hypothetical: if I kick you in the nuts, you’ll probably buckle over in pain, and extrapolate from that that the reason that you’re in pain is that your balls were bludgeoned; then yeah, your analogy would hold true.
Nope. When you say:
“What Austrians do point out is that economic actors can calculate in a world of deflation or inflation, it really doesn’t matter, but that it does matter how such a state came about.”
what you’re actually saying is that ‘economic actors’ can only ‘calculate’ properly in an imaginary world without a government doing things.
In this imaginary world, the ‘calculations’ of these ‘economic actors’ will be as good and as correct as they possibly can be. Thus the result of their calculations and actions will be the best possible world.
If instead the government starts doing things, then these ‘economic actors’ won’t be able to calculate properly, because they’ll get all confused by the government doing things. So the result won’t be the best possible world.
This circular story makes sense because we assume that the best possible world is a world in which the government doesn’t do things.
Therefore, we can deduce that if the government does things, it will mess everything up and things will be all bad.
Philippe:
“what you’re actually saying is that ‘economic actors’ can only ‘calculate’ properly in an imaginary world without a government doing things.”
Close. It is the violence and coercion that prevents economic actors from calculating properly. Violence and coercion in money prevent money denominated signals from properly communicating actual subjective preferences throughout the population. This is because subjective preferences can only be communicated when there is no force stopping them.
This occurs to a certain extent in the real world, in black markets and such. It is not purely imaginary. It would only be purely imaginary if it were claimed to describe the whole population of people. The argument isn’t “this is what would happen in this particular purely imaginary world.” It is “This is what would happen to an even greater extent than is already taking place now to a limited extent, due to coercion and violence introduced into certain aspects of people’s lives.”
It is considering already existing activity subject to property rights, and expanding it to things other than just food, housing, and insurance, for example every “good” the state does, such as contract protection and enforcement, security and safety, and licensing.
“This circular story makes sense because we assume that the best possible world is a world in which the government doesn’t do things.”
That is precisely what makes it NON circular. Keep going and you’ll hopefully learn the actual foundation for why statelessness is necessarily superior to statism, when it comes to ensuring safety, security, and wealth protection and formation.
Philippe:
“Therefore, we can deduce that if the government does things, it will mess everything up and things will be all bad.”
Close. It is not government per se. It is initiations of violence that messes everything up.
It just so happens that government is an institution of initiating violence, and since initiations of violence messes things up, governments mess things up.
This category includes what you define as “violent criminals” as well. This violence also messes things up, although nowhere near the level of governmental mayhem, of theft, murder, fraud, and other violations of property rights.
You keep believing the falsehood that libertarian ethics are “circular”, when all you are really doing is showcasing your own refusal to understand it. You only see circles because you are not aware of the deductions.
And yet austrians constantly argue that money should earn a rate of return automatically, just by existing.
It doesn’t gain value automatically. It gains value because the supply of goods are increasing faster than the supply of money. So prices, in terms of that money, go down.
It’s not automatic, but it IS what gives commodities a value as a medium of exchange; That’s what you’re looking for in a money, is something that holds or gains value in relation to the goods it is used to buy.
Deflation is defined as an increase in the real value of money. As such, if there is deflation then by definition money is earning a real rate of return, automatically. It’s not complicated. You don’t have to do anything to get that real return if there is deflation. You just leave the money in your shoebox and you get wealthier. No need to invest in anything.
“That’s what you’re looking for in a money”
That’s what you’re looking for perhaps. The overwhelming majority of economists think that a positive rate of inflation is better.
Philippe, that isn’t what automatically means.
Also, your final sentence is ad populum fallacy. And it is suggesting that if enough people want to initiate coercion against the minority, then it is somehow justified.
You are also ignoring the “risk free” seigniorage that results from inflation. Why should the government experience an “automatic” real return through seigniorage?
Not an ad populum fallacy, just a statement of fact. Inflation is not coercion, it’s a general rise in prices (mainstream definition).
By definition, if there is deflation then money is gaining real value. So yes this is automatic if there is deflation, as by definition that is what deflation is.
“You are also ignoring the “risk free” seigniorage that results from inflation”
The amount of seigniorage gained by the US government is roughly equal to the amount of interest the federal reserve pays to the Treasury, minus the cost of producing notes, plus the difference between the face value of coins issued and the cost of producing them. The government is able to gain seigniorage as it has a legal power to create and issue money.
Philippe:
“Not an ad populum fallacy, just a statement of fact.”
Why state that fact if not to bolster the truth value of your argument? If merely stating facts, then they’re useless.
“Inflation is not coercion, it’s a general rise in prices (mainstream definition).”
What causes inflation is what is coercive.
This is what libertarians are against. They don ‘t want deflation as a goal, they want respect for property rights as the goal, and if that results in gradually falling prices, then so be it. People can calculate properly in a free market that has price deflation.
“By definition, if there is deflation then money is gaining real value. So yes this is automatic if there is deflation, as by definition that is what deflation is.”
That isn’t what automatic means.
You are just saying what (price) deflation IS, and then claiming that what price deflation is, automatically follows from the fact that there is price deflation.
“You are also ignoring the “risk free” seigniorage that results from inflation”
“The amount of seigniorage gained by the US government…”
Is positive, and yet I don’t see you complaining about that the way you are complaing about everyone who holds money experiencing the same rate of purchasing power increase.
“The government is able to gain seigniorage as it has a legal power to create and issue money.”
Government is just because they say so.
You don’t have to do anything to get that real return if there is deflation. You just leave the money in your shoebox and you get wealthier. No need to invest in anything.
Value is subjective.
If you pick up something off the street that has no value to anyone, and you go home and put it in a shoebox, and the next day it will sell for a lot of money, then you got wealthier because someone else valued it more than you (if you sell it).
You didn’t steal the value from anyone – THEY decided to value it. The increase in value wasn’t automatic, and yet you didn’t have to do anything but hold onto it.
By the way, saving is a form of investing.
That’s what you’re looking for perhaps.
No, that’s the function of a medium of exchange.
I would barter directly with people since there are fewer steps involved in transacting for the goods I want in return, except that not everyone wants what I have to trade.
So I need a medium of exchange that will buy that for which I’m looking.
In order to get the value I seek in return for the good which I sell, I either have to sell the medium of exchange quickly, or the medium of exchange has to hold or gain value.
More time is freed up to pursue other interests I have if I am able to wait to buy things with my medium of exchange, so acquiring mediums of exchange which hold or gain value is going to be a more efficient use of my effort.
“And yet austrians constantly argue that money should earn a rate of return automatically, just by existing. This is called deflation, which so many austrians love.”
No, they (meaning austro-libertarians) are saying money should be left to the free market, not that a unit of money “should” gain purchasing power over time as if people who earn money and abstain from consumption “deserve” to experience a definite, positive “rate” of purchasing power increase.
If a free market sometimes has increases in purchasing power of money, or sometimes decreases, the effects of this is not what Austrians “want.” They want the respect for property rights.
Most important of all, and this point will show that you don’t have any idea of what the debate is about: If in a free market, the purchasing power of money gradually rose by say 2% per year for a long time, this is a rate of purchasing power increase that EVERYONE who has ANY money will experience. However, it still requires people to earn money, or be given money voluntarily by those who earned it. The purchasing power of money could only rise if production of goods outpaced the production of money.
The debate with Piketty is about capital earning a return abstracted from any action whatsoever.
It is silly to argue that people don’t deserve a money that grows in purchasing power. Totally unjustified and out of left field. People deserve respect for their property rights, and if that means a money that gains purchasing power over time, then so be it. Nobody is being exploited by it. Everyone who earns money can experience the purchasing power increase together.
Finally, according to your silly logic, government debt should be abolished. After all, those who lend to the government experience a return and they are “not taking any risk” either.
In addition to what MF said, Austrian economics is a value-free science. http://mises.org/rothbard/value.pdf
“money should be left to the free market”
what you actually mean by that is that the state ‘shouldn’t exist’. No taxes, no legal tender, no regulation of banking or commerce, etc.
The reality is the state exists and so people argue about what policy should be. For example in the past people argued about whether we should have a gold standard system or not. We did have a state-imposed gold standard for a while.
You say we can get rid of the state and then we will have a so-called “free market”. But in reality that is just a different type of state (or de facto state), or else just chaos.
“If in [imaginary ancap world], the purchasing power of money gradually rose by say 2% per year for a long time, this is a rate of purchasing power increase that EVERYONE who has ANY money will experience”.
So?
“However, it still requires people to earn money, or be given money voluntarily by those who earned it”
No, it just requires people to have money, and then just sit on it.
“The purchasing power of money could only rise if production of goods outpaced the production of money”
incorrect. Deflation can occur for different reasons. If there is simply a reduction in total spending for some reason, or a credit contraction for example, you could go into deflation.
“The debate with Piketty is about capital earning a return abstracted from any action whatsoever.”
I haven’t read his book, but I don’t think that’s the issue. As far as I’m aware he talks about average rates of return rather than assuming returns abstracted from any actions.
“It is silly to argue that people don’t deserve a money that grows in purchasing power.”
Why should people expect a real rate of return for doing nothing at all (deflation)?
“Nobody is being exploited by it”
deflation has distributional consequences, so some benefit and others lose out.
“according to your silly logic, government debt should be abolished. After all, those who lend to the government experience a return and they are “not taking any risk” either.
That’s an argument for zero rates on government debt, not for the abolition of government debt.
the thing is, there has been deflation in terms of certain assets – Bitcoin, for example. If you owned bitcoin then you’ve experienced a large increase in the value of your asset. But that benefit requires some entrepreneurial risk taking.
Philippe:
“what you actually mean by that is that the state ‘shouldn’t exist’. No taxes, no legal tender, no regulation of banking or commerce, etc.
False. There can be private money in statism. It would be a burden for the thieves to know what to steal for sure, but in principle people can choose what money they use, and then the state taxes those people in the money of their choosing.
“The reality is the state exists”
So does murder and rape. What is your point by merely pointing to what some people are choosing to do to others?
“and so people argue about what policy should be. For example in the past people argued about whether we should have a gold standard system or not. We did have a state-imposed gold standard for a while.”
Wasn’t 100% reserve.
“You say we can get rid of the state and then we will have a so-called “free market”. But in reality that is just a different type of state (or de facto state), or else just chaos.”
Fals on both counts. Private law society is neither statist nor chaotic the way you define chaos.
“If in [imaginary ancap world], the purchasing power of money gradually rose by say 2% per year for a long time, this is a rate of purchasing power increase that EVERYONE who has ANY money will experience”.
“So?”
So unlike inflation, where only some people gain from seigniorage, with a free market in money that results in price deflation, the real return on holding money is the same rate for everyone.
“However, it still requires people to earn money, or be given money voluntarily by those who earned it”
“No, it just requires people to have money, and then just sit on it.”
You can’t simply have money without earning it or being given it.
In a free market, money is only earned, or given via charity or gift. Those who give, must have earned it, or those who gave, were given by those who earned it. And so on.
“The purchasing power of money could only rise if production of goods outpaced the production of money”
“incorrect. Deflation can occur for different reasons. If there is simply a reduction in total spending for some reason, or a credit contraction for example, you could go into deflation.”
Not in the long run, which is the economic context by default.
“The debate with Piketty is about capital earning a return abstracted from any action whatsoever.”
“I haven’t read his book, but I don’t think that’s the issue. As far as I’m aware he talks about average rates of return rather than assuming returns abstracted from any actions.”
No, he talks about a single return on capital abstracted from actions.
“It is silly to argue that people don’t deserve a money that grows in purchasing power.”
“Why should people expect a real rate of return for doing nothing at all (deflation)?”
But they are not doing nothing at all. They receive money and instead of consuming real resources with it, they leave those resources for others to consume. They are providing society with more resources than otherwise would have existed had they consumed the resources themselves.
And the return for this would be quite modest, relative to investing in a bond or stock.
Which leads me to say, if people should not earn a return unless they work for wages, then that implies that worker pension funds, which earn a return without the workers doing any wage work to earn those returns, are earning unjustly.
“Nobody is being exploited by it”
“deflation has distributional consequences, so some benefit and others lose out.”
Not at all. Nobody “loses out” when prices fall because of productivity gains.
“according to your silly logic, government debt should be abolished. After all, those who lend to the government experience a return and they are “not taking any risk” either.”
“That’s an argument for zero rates on government debt, not for the abolition of government debt.”
Few if any investors would lend money for zero percent interest.
“The thing is, there has been deflation in terms of certain assets – Bitcoin, for example. If you owned bitcoin then you’ve experienced a large increase in the value of your asset. But that benefit requires some entrepreneurial risk taking.”
Then so does sitting on dollars, since the future value of dollars isn’t 100% certain.
But Bob, Piketty gets to the desired answer, which I’m sure you should know by now is far more important than how you got there, or what was the questions again?
I’m reading the book now and I think Piketty is making a political argument rather than an economic one.
He acknowledges how the poor can consume more even if their ratio of income doesn’t increase. In strictly economic terms, this isn’t a problem at all. He spends very little time on this and instead emphasizes the ratio between the poor and wealthy. The result being that the wealthy dominating the state and are able to make favorable laws. There’s a good summary of his view on pages 69-71.
One thing that annoys me is how he speaks of “shares of capital”. The share of capital between the rich and poor. The share of capital between the US and Africa. And so on. As if capital rightly belongs to everyone but they are just not getting their share. That’s what I’m getting while reading this.
Mises said that the public get their cues from intellectuals.
But here we have intellectuals (like Bob Murphy) getting their cues from the public (NYT bestseller list).
That’s interesting.
What are you talking about?
Sorry, that sounded snide the way I posted it when I didn’t mean it as an affront.
Let me elaborate. Mises said that the intellectuals are the thought leaders of society and the everyman gets his cues on what is important and what to think about the issues from the intellectuals.
But here we have a situation where someone (I assume Piketty is also another “intellectual”) has written a book that was completely off the radar of intellectuals, and everyone gained awareness of it because the book has achieved mass popularity (NYT Bestseller list). So, in this way it seems like the intellectuals are getting their cues from the general public… the public has become the thought leaders and decided what the intellectuals will find worth discussing.
To illustrate further, if the Misesian theory of influence was at work, when this book hit the bestseller position Bob Murphy, etc., should’ve said something like, “Weird, we intellectuals debated Piketty in research articles and reviewed/panned his book right when it came out, and suddenly the public thinks this is worth reading, I wonder who gave them that idea?”
Instead, this book hits the bestseller list and Bob Murphy, etc. (intellectuals) are going, “What the… where did this come from?” and commenting on something none of them have even read (ie, “I haven’t read the book, but it sounds like he’s saying…”).
It just seems ass backwards. I am wondering if this evidence fits into Misesian social influence theory somehow, or if maybe we’re in a brave new world where the instantaneousness of internet communication has changed the paradigm for “mass consciousness” somehow. That, or the propaganda machine is so strong that the intellectuals are getting baited by it successfully, as with this book.
Am I making any sense here with what I find interesting or do I just sound like a punk still?
Anonyblogger OK yes that sounds less snide than your original remark. 🙂 But I think it’s more that the leftist intelligenstia decided to promote this book, and so now all the “in the know” public ordered it.
It doesn’t actually take that many book sales to get to #1 on Amazon. I’m not saying that to denigrate Piketty’s sales, I’m just pointing out that this isn’t Harry Potter. I think a lot of leftists are buying this book because Krugman et al. are telling them how important it is.
And I am not commenting on it without having read it. I’m limiting my comments to what I’ve read so far from it.
Okay. I think my response had more “insinuations” than I meant for it to have. For example, I didn’t mean to insinuate you were commenting irresponsibly. I just meant to highlight that the first reaction of you and several others was, “I think what he’s getting at based on a review I read” rather than something like, “When I read this book last year, I remember it said…”
My point was to emphasize the sudden consciousness aspect, the bolt-out-of-the-blue aspect to this book’s popularity.
Anyway, your latest reply just highlights for me another point or begged question. How is it that there are leftist intellectuals and non-leftist intellectuals? Who is setting the agenda for whom? Etc.
I think Mises came from an era where the “intellectuals” were more unified, either in fact or in impression, and they were kind of chattering and debating amongst themselves all the time and hashing things out behind the scenes, as it were. Whereas now it seems like the “debates” happen publicly and there is a lot of sound-biting (-baiting) to influence the course of the debate rather than letting calm, cool heads prevail.
I just noticed that Mises talks about the intellectuals somewhat monolithically and yet here we have an example where there are clearly factions with their own agendas and tactics (much like interest groups vying for control of the State…)
Anonyblogger, Ludwig von Mises didn’t have a blog, I agree.
Samuelson’s concession is interesting because it came in an article in which he takes a sort of side swipe at Bohm-Bawerkian Capital Theory. Basically he illustrates a hypothetical case of “reswitching” a theoretical phenomenon where a technique that was swapped in favor of another technique when the interest rate dropped from one level to another, would be switched back at a lower interest rate still.
The problem is that the example is highly contrived. Nobody has ever given a real world example of reswitching.
One needs to be careful here. The Sraffians are attacking Neoclassical theory in a way with an eye for overturning Austrian ideas, too. In fact they’d like to undo the marginal revolution if they could, and restore the labor theory of value.
You mean a book based on mid 19th century politico-economic philosophy (Marxism) is absent of post mid 19th century capital theory? Shocking.
He is only getting worldwide acclaim from those who already hate capitalism and are itching for an actual theory to fall back on. That is what violence on the brain thugs always need. They can’t intellectuallu justify violence, because intellectual arguments always lead to peace. So the closeted socialists of the world want to believe they found their flag bearer.
Don’t worry, the truth will out. In the golden age of the internet, his work will soon be exposed as another flash in the pan socialist propaganda.
consultingbyrpm blog tag piketty