Tuesday, April 29, 2014

Capital, Politics, and Piketty

So, along with everyone else, here's my tuppence worth about Piketty. This is probably reckless on my part as I've actually not read the book yet (thanks Amazon), as indeed I suspect many other people sounding off about it haven't. But I've already spent hours thinking about his arguments so I may as well get my thoughts down somewhere. So here is what I think about what I think Piketty says in the book, based on what a bunch of other people think he says in the book (amongst the many reviews, I recommend Solow, Krugman and Milanovic). I get to hear him speak on Wednesday, so I'll post again if I've got him wrong.

And the point is this: it's all about the politics. Piketty actually pays a fair bit of attention to politics, and like Hacker and Pierson he is concerned that the concentration of income and wealth at the top is affecting the distribution of power in the political system. But, as an economist, in the end it appears that Piketty believes that market economies have a kind of underlying dynamic that leads to the concentration of capital independently of whatever political forces may be dominant. Politics can only come along to disturb this dynamic through thing like wars, revolutions, organised labour.

This is not surprising, as the economists' ontology, even for someone as critically minded as Piketty, still posits markets as a kind of state of nature. But the problem is that there is no such thing as a pre-political market, a point powerfully made in a recent book by Murphy and Nagel: The Myth of Ownership. Markets are sustained by institutions, and these institutions are political artefacts, albeit influenced by raw economic forces. Nowhere is this more obviously the case than in the definition of returns on capital, especially in our financialized age. Almost nothing about Piketty's r is meaningful unless we consider the various rules and regulations governing property rights, credit, taxation, and permitted behaviours in formalised markets.

All of which implies that there is a social and political foundation to the kind of capitalism in which r tends to > g. That social and political foundation has to be explained, and even where economic forces powerfully influence policy and institutions, we still need to understand the political sources of the property rights which allow economic forces to do what they do.

In other words, we need a political theory of how the conditions under which  r > g can come about. The rise and fall of the labour movement, and indeed the rise of fall of 'populist' democracy more generally, is the historical backdrop to this, and Piketty indeed may be right that the mid-twentieth century was a blip and that patrimonial capitalism is the norm over the past three centuries. But to explain this we need to know how people act politically to tame capital (including unintentionally, given that the Second World War probably wasn't on anyone's wish list), and economics, in the end, can't answer this question on its own.

The irony of ironies is that Piketty's work itself seems to be having a major political impact, at least for now - how sustained it will be is anyone's guess. The ink spilled over this 'rockstar economist' may be a sign of the fickleness of the media, but there is no getting around the fact that inequality is emerging as a political issue, finally. What happens next depends on a lot of variables, but those variables are social, cultural and political, rather than economic. Piketty's work is important for economics, but it should also alert political scientists that there is a big political story to be told about how capitalism got to where it is today.

Saturday, April 19, 2014

On the Hypocrisy of the One Per Cent

Well, actually, that should read the hypocrisy of the one per cent's cheerleaders, such as the Wall Street Journal's James Taranto, who has penned a crass article criticising Paul Krugman's new salary as a Research Professor at CUNY ($225,000). Apparently Krugman is a hypocrite: on the one hand he proclaims the injustice of the top one per cent enjoying huge and rising incomes, and on the other he himself has... a huge and rising income. Hypocrite!

This is familiar territory - the right has always enjoyed pointing out the contradiction between egalitarianism in principle and higher-than-equal incomes in practice. There is a superficial appeal to the notion that concern for inequality should translate, in practice, to being poor rather than rich. This has been present in the political rhetoric of the Anglo-Saxon right for some time: Labour's Roy Jenkins was famously condemned as a 'champagne socialist' back in the 1970s, whilst the Daily Telegraph joyfully pointed out that current leader Ed Miliband, the son of a Marxist academic, lives in a massive house in one of London's more exclusive neighbourhoods. If they really cared about inequality, wouldn't they give everything they have to the poor?

Hypocrisy, Wikipedia tells us, is the practice of engaging in the same behaviour one criticises in others. What exactly do people like Krugman or Miliband criticise? Do they really condemn everybody in the top one per cent of earners? I don't think so. What they are criticising is a social phenomenon - the unequal and unfair nature of the distribution of rewards and assets in a capitalist society. Their political position is to do something about this, something you might disagree with, or believe to be futile, but which would probably make them personally worse off (both advocate higher taxes for people in the top income brackets, which includes them). So what's hypocritical about that?

The misunderstanding arises from confusing personal conduct with political commitments. The idea is that you would like to change society so that it produces more equal outcomes. This is a political project, in other words, a set of actions that a society has to pursue collectively, because to do so individually is largely pointless. If Ed Miliband chose to hand over half of his house to a couple of homeless families, that would be laudable, but would make no real difference to the problem of poverty in the UK. What would make a difference is if all people as rich as him were to give up some of their wealth to the benefit of the poor. The way to achieve this is to win election and change policy. How big Ed's house is doesn't really matter (although frankly a more humble dwelling probably would look less incongruous). J.K. Rowling gives very large chunks of her own money away and publicly espouses left-wing causes, but is still nearly a billionaire. Is she a hypocrite?

So what is Paul Krugman's sin? He is a Nobel-prize winner, not loved by everybody but undeniably one of the top economists of his generation. He is giving up a position at Princeton University which, I would bet my pokey London flat, pays him quite a bit more than $225,000. Probably double that, to be conservative. He almost certainly makes a handy pile from his more popular writings. So is he a hypocrite? Well for a start, he is leaving the gilded elite of US private schools to work in the public university system, way down the 'academic food chain'. But more important, Krugman spends a lot of his time advocating giving up a chunk of his wealth in favour of the poorer, as long as others do too (I have no idea how much he gives away privately, that's not the point). It's a political commitment. What would be hypocritical, would be to advocate tax rises for the rich, then avoid or evade those tax rises himself.

The irony of all this is that Paul Krugman has never been an egalitarian as such. No economist is - if you believe markets have any role to play in our society, then you believe in inequality by definition. The question is: how much? Krugman actually adopts a pretty standard Rawslian approach to inequality, typical of progressive-minded economists, and in fact of anyone who is not a raving libertarian. Markets are about talent and productivity being rewarded, and that means Krugman earns more from academic writing than I do. A lot more. But probably nowhere near as much more as he would do in a pure market system. He probably could afford to work for CUNY for free, but why should he? Those criticising him certainly wouldn't, so aren't they the real hypocrites?

Wednesday, April 16, 2014

George Osborne's report card

So I've just been reading George Osborne's 2010 Mais lecture. It's one of those that have been deleted from the Conservative Home website. He think I know why.

In this lecture, delivered just before the 2010 election, Osborne laid out the eight benchmarks under which he said his economic policy should be judged:

We will maintain Britain's AAA credit rating. 

We will increase saving, business investment and exports as a share of GDP. 

We will sell in due course the government's stakes in RBS and Lloyds . 

We will improve Britain's international rankings for tax competitiveness and business regulation with specific measures on corporation tax and regulatory budgets. 

We will reduce youth unemployment and reduce the number of children in workless households as part of our strategy for tackling poverty and inequality. 

We will raise the private sector's share of the economy in all regions of the country, especially outside London and the South East. 

And we will reduce UK greenhouse gas emissions and increase our share of global markets for low carbon technologies. 

We will raise productivity growth in the public sector to match the best of the private sector. 

On my count they've managed one of these eight - raise private sector share of the economy. I think. Given the reduction in the size of the public sector, it kind of follows. There may be similar productivity growth across public and private too - it's been awful economy-wide, so I guess it's not hard for a shrunken public sector to match whatever paltry gains there are in the private sector.

Anyway, it's easy to see why the speech has been buried by the Conservative party, although of course it can still be found, here.