Tuesday, 23 May 2017

More debunking of Piketty.

This time from a hard-left perspective, from Jacobinmag.com:

The bulk of Piketty criticism has focused, rather boringly, on whether the rate of investment return will remain steady when the wealth-to-income ratio soars. But economists like Dean Baker, J. W. Mason, and now Naidu have pioneered a more interesting line of attack. According to them, Piketty has not made some mistake in judging elasticities. Rather, he has the entire order of events backwards. It is not an increase in the wealth-to-income ratio that prompts capital’s share to rise — it’s the exact opposite dynamic.

Piketty’s account of how wealth builds over time centers on savings. In his telling, the capitalist is prudent, dutifully investing large amounts of his income every year into capital goods. As these investments steadily accumulate, so too does the national wealth (which, according to this account, is the sum of all the previous years of savings minus depreciation). When the quantity of total past savings becomes very high in relation to the country’s annual income, the seemingly permanent 5 percent rate of return on wealth drives up the capital share.

The problem with Piketty’s story, which Naidu and his peers get at in various ways, is that it doesn’t match reality. Assets like real estate, equity, and debt are not assessed according to the quantity of savings that go into creating them. They are assessed according to the expectations of how much income those assets will deliver to their owners in the future. Put simply: asset values are forward-looking, not backward-looking.

This has quite startling implications for the way we think about the nature of wealth in a capitalist economy. Ownership of something like a company share does not entail ownership of capital goods in any real sense. It amounts to owning a bundle of legal rights to future flows of income. Thus, the value of assets, and therefore wealth, reflects the value of the rights to future income flows — not the value of accumulated savings.

Once this truth is understood, it becomes easy to see why Piketty may well have everything backwards. If capital increases its ability to extract income from the economy, that would boost the future flow of income that goes to owners of existing assets, and thereby increase the capital share. When a greater portion of the national income is being funneled to owners of assets, the market value of those assets will go up, causing measured wealth to go up as well.

In other words, the capital share drives the wealth-to-income ratio, not the other way around.


Or as I always say, it makes most sense to look at incomes and disposable incomes after housing costs (and other rents), forget about "assets". Let's say a tenant and a home-owner next door, do the same job, have the same gross income, pay the same in tax and live in very similar homes. Clearly, the home-owner is "richer" because he owns an "asset". But that's comparing apples and pears. Far easier to say that the tenant has a much lower income after housing costs.

Superficially, you could say there is income equality between the two. Of course there isn't. Whether somebody is a net collector/enjoyer or net payer of rents makes the biggest difference to real inequality.

Compare that with two home-owners living next door with the same gross incomes, but one has a priceless masterpiece hanging on the wall. The value of that painting has nothing to do with the way society is run, it is not subsidised by the taxpayer, does not generate income and does not place a burden on anybody else. If the painting were destroyed, the owner is poorer but nobody else is better off. Their net disposable income is the same, the fact that the one with the valuable painting is "richer" is of no concern to anybody (and certainly not a suitable subject for taxation).

8 comments:

Lola said...

Ignoring 'land' as an 'asset' and recognising that it is not a 'capital good' pretty well debunks both Piketty and the article.

It seems to be that 'capital goods' - plant and machinery and buildings - actually depreciate over time. They wear out, get superseded, become redundant. The 'capitalist' has to keep re-investing his return to stay ahead. And what's more that re-investment in more productive kit increases the income of his workers, they being more productive as a result. I just cannot see that 'capital' breeds higher returns in the sense that I think Piketty means.

Land however does just that. The more the capitalist invests and the harder his employees work the more the landlord earns. Profits from labour and capital always return to rents.

Mark Wadsworth said...

L, exactly. Hooray for capital and all who provide it!

Bayard said...

"It seems to be that 'capital goods' - plant and machinery and buildings - actually depreciate over time. They wear out, get superseded, become redundant. "

Which is why it is important to separate buildings, which behave just like that, from the land they sit on, which doesn't.

Mark Wadsworth said...

B, yes of coiurse.

L fairfax said...

@"Let's say a tenant and a home-owner next door, do the same job, have the same gross income, pay the same in tax and live in very similar homes. Clearly, the home-owner is "richer" because he owns an "asset". But that's comparing apples and pears. Far easier to say that the tenant has a much lower income after housing costs."
Not always true - particularly a few years ago if the tenant rented from the council.
However a good point.
This
" Assets like real estate, equity, and debt are not assessed according to the quantity of savings that go into creating them. They are assessed according to the expectations of how much income those assets will deliver to their owners in the future."
Is so obvious that you wonder how anyone could think otherwise. Everyone has heard of bad investments but under Pikety's theory they cannot exist - all investments are equally good - and if you believe that I have some wonderful investments to sell you!

Bayard said...

Mark, but so rarely done outside the LVT circle. Sorry, I know I'm preaching to the converted, but I do hope there are outsiders who read this blog.

Mark Wadsworth said...

LF: For sure, council tenants get a better deal. Their net of housing costs income (for a given wage) is higher than private tenants, but lower than owner-occupiers.

"Is so obvious..."

Yes, but it's good to spell it out.

B, I hope so too.

Mike W said...

Thanks, very good post and comments. I have to confess Piketty is going to be one of those, I only know through the secondary sources!

By pure chance I had watched this: https://www.youtube.com/watch?v=wNLPO2j9RQ0.

Effectively Yanis Varoufakis predicts the that the coach and horses, will be driven through Piketty's 'Capital in the Twenty-First Century'. For the wealth capital/'conflation' discussed above, which he calls 'propaganda' for Neo-Libs. He calls the book a 'theological work' that most do not read past page 12! Piketty is 'shifty'. Made me laugh, the point being that the work, despite its grand title echoing Marx, is wholey conservative.

Thinking of Bayard's point above:

What upsets me is that the commentators below the video do not understand Varoufakis is debating with a proper Georgist.Mostly, they do not see the subtle point about Neo-Lib conflation. So what alternative on offer is lost.Shame. Also at 26:49 minutes, Varoufakis quickly agrees that he supports a Georgist approach, but then calls it a 'mansion tax' and moves on. Annoying! I have to say that invoking John Rawels, 'veil of ignorance' (I had read years ago) is high flying stuff. But Wadsworth here chose a lefty driving the coach and horse through the book, Varoufakis guessed a Libertarian would do it! One for Lola, et al, at the end.

*Before anyone says it, yes it is a bit funny to hear Yanis accuse Piketty of being a fame seeker with a book marketing ploy :)