Thursday, April 24, 2014

On Gattopardo Economics





FT Alphaville sends us to Thomas Palley on Piketty and his boosters. Palley raises an interesting point, one that I’m hearing from some other people on the left: they’re disappointed that Piketty’s book relies mainly on conventional, mainstream economics.
And it’s mostly true. For the most part Piketty works with an “aggregate production function” in which labor works with a stock of capital to produce output, and both labor and capital are paid their marginal product — the rate of return on capital is equal to the amount an extra dollar’s worth of capital adds to production. True, when discussing the rise of “supermanagers” Piketty talks about imperfect competition and rents, but that’s not the core of his work.
So Palley and others are disappointed; and Palley worries that at least as far as doctrine is concerned, this could be “gattopardo economics” — the reference is to the novel, made into a Visconti movie, about how Sicilian aristocrats manage to maintain their position despite Garibaldi and the coming of democracy, by wooing and co-opting the bourgeoisie. Note: the aristocrats Palley has in mind are not Piketty’s oligarchs but mainstream economists like, well, me.
And I have some sympathy for his point — although if the suggestion is that people like me are jumping on the inequality bandwagon late, that just isn’t true; I was talking about the one percent literally decades ago.
The thing to bear in mind, however, is that you really don’t need to reject standard economics either to explain high inequality or to consider it a bad thing.
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.

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