I am writing a grant application which would allow me to teach a MOOC (massive open online course) on the bread & butter of (monetary) economics: how does the monetary system function? It is all quite basic stuff, but I am very much afraid that not many colleagues in Germany could explain to their students how money is created, how banks clear their accounts at the end of the day, how the government spends or how the fiscal is related to the monetary.econoblog 101
Piketty: “There is no economic science” (but there could be!)
Dirk Ehnts | Berlin School for Economics and Law
13 comments:
Tom, bit off topic: You may have noticed already, but Naked Keynesianism has linked to a quality critical evaluation/review of Piketty's book by Tony Aspromourgos.
http://nakedkeynesianism.blogspot.com.au/2014/10/tony-aspromourgos-on-thomas-piketty.html
Yes, thanks. I perused that when it was put up, but I haven't worked through it. It's an article rather than a post and not only longish but also a wonkish. I am still reading Piketty, too (slowly and not reading the notes). With so much of the so-called criticism of Piketty having been superficial, with a good deal by people that haven't actually read the book or at least not closely, an detailed critique is welcome.
I say "slowly" because this is not a high priority for my time. It's an interesting approach and important historically, but iIMHO it's not very relevant to the present situation other than as background. In fact, PIketty admits that the disparity now is in labor income, with the income and wealth of high earners pulling way ahead.
But the upshot is what we already know — in a capitalistic system owners of real and financial assets, and those having labor bargaining power, have the largest incomes and that tends to accumulate as concentrated wealth. The issue is therefore the degree to which power and control enable the extraction of rents and what can be done about it socially and politically to correct the economic disparity resulting from asymmetrical power and control.
BasIcally, economics as a social science is positive and therefore amoral. The study of animal behavior shows that animal groups don't spontaneously organize harmoniously but rather along lines of dominance and submission, that is, power. Humans have developed along those lines, on one hand, and one the other, have also developed institutions such as the rule of law rather than men in order to impose social control in addition to dominance and submission. The fundamental question is the balance between power in terms of dominance-submission and institutions that limit that dynamic in the interest of social harmony.
Presently, the dominators are winning all the economics can do is tell us that based on data such as Piketty et al have assembled. The real issues are political in that they are concerned with distribution of power, which determines distribution of resources other than solely on the basis of dominance and control.
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Capitalism is based on a political compromise that limits the law of jungle by establishing basic rules establishing governance under the rule of law and laws, regulations and customs regarding criminal and civil behavior. This is where the issues really lie. Economics cannot and is not supposed to deal with such matters. Economics simply shows how things stand in an economy run under certain rules and how they are likely to stand under different rules. But the rules are political choices.
What PIketty shows, for example, that similar rules of capitalism produce different results in different areas owing to different historical and natural endowments. For example abundant land available for expansion with population density has result in less economic asymmetry that Europe where land is scarce, so the national capital/income share is more equal in the US than Europe, but to meet the challenge Europe has adopted more socialistic distributive legislation, so that economic disparity may be less in Europe than the US even through economics would predict more cet. par. owing the natural endowments.
Piketty points out that the social difference seems to arise from the frontier mentality that persists owing to historical land abundance, and also the huge destruction of capital with the abolition of human capital in the form of slavery, creating a permanent underclass in dominant -submissive conditions that where until recently enforced by law and even now are customary.
In my view this is the primary contribution of PIketty's work, and arguing over the so-called equations or "laws," which Piketty points out are accounting identities that work only in the long run and are asymptotic. Left to themselves, capitalistic economies concentrate wealth and income because they are based on concentrated power and control, and a major factor in creating the persistence of this disparity of social control is ownership and bargaining power, both of which are more influenced institutionally (politically and legally) than economically in the neoclassical sense in which he is often viewed.
Of course, folks like Marx and Kalecki had told us this already. But Piketty reminds us of it, although more obliquely. But I think that was he intention in titling the book Capital in the 21st Century. He is inviting comparison. So I think that this is the challenge to take up.
Moreover, Piketty warns at the outset that he doesn't think that economics exists independently of other relevant disciplines such as the other social sciences, history, and even the humanities, all of which he makes use of. He is not doing economics as usual and he rejects economics as usual as useful.
So this is the direction that I would like to see pursued in addressing of Piketty's contribution rather than arguing over the supposed "laws of capitalism" that PIketty states are not laws or equations in first place. They are indications of how capital taken as real and financial assets tend to accumulate over time in capitalistic societies in terms of ratios that can be demonstrated from available data that admittedly involves a good deal of estimation.
To relate this to the MMT policy proposals that are design to reconcile the trifecta of growth, price stability and employment, what is not considered is income and wealth distribution. There is therefore a further consideration needed and that is distributional effects compatible with promoting liberal democracy globally along with growth, price stability and employment. I have proposed that this involves addressing economic rent along the lines that Michael Hudson has articulated.
However, since there are policy matters they involve issues and actions that extend beyond the purview of economics alone. Economics can inform the debate but cannot determine it. However, to the degree that this economics contributes to policy it can formulate proposals and a rationale for them.
The neoliberal alternative, to which it is claimed there is no viable alternative, is "hands-off" and let market forces operate in accordance with the "laws" that government them. Owing to the complexity of national economies and the global economy, a free market is the only information system capable of processing the complexity optimally.
That position has to be refuted and an alternative more suitable to liberal democratization adopted that addresses the trifecta of social, political and economic liberalism harmoniously.
Relying on economic liberalism alone can be shown to result in social and political illiberalism owing to the resultant asymmetry of class, status, power, control, and ownership of resources, such that pursuit of economic liberalism results in economic liberalism as well as social and political illiberalism.
Now a bit on topic: there is already a MOOC that gives us not only the bread & butter but also a good deal of the detailed workings of monetary economics: Perry Mehrling's "The Economics of Money and Banking".
Take your point about it being an academic paper, not post, Tom. The first half, in particular, probably is heavy going for lay readers. Took me a while, myself. ;-)
Just by way of clarification, I think a central point in the review is that Piketty's acceptance of marginal productivity theory and implicitly of supply-side determination of growth is at odds with any desire he may have to argue that distribution depends on institutions and power as opposed to "economic laws". The latter perspective is of course taken by Aspromourgos (being Sraffian, the social determination of distribution is a defining feature of his perspective). For example, from pp.12-13):
"With respect to the dynamics of r and α – and for that matter, the increasing inequality within the labour income category – these are better understood within the classical theoretical framework, in which the general rate of return on capital is not uniquely determined by narrowly economic parameters (as in marginalist theory) but is subject to wider socio-economic forces, commonly summarized by reference to bargaining power. It is the ‘degree of freedom’ in the modern reconstruction of the classical approach to competition, profit-maximizing choice of production methods, price determination and its interrelationship with functional distribution, which provides the ‘space’ for socio-political forces to naturally play a fundamental role in these dynamics (Kurz and Salvadori 1995, pp. 94–426). From the marginalist standpoint, these wider forces – obvious to close observers of the reality of distribution – appear as a kind of artificial intrusion into the economic process. Relative wages also are in substantial measure governed by social conventions and socio-political forces.
A consideration of these wider forces would point to the following key issues: the general level of real wages over time results from the relationship between the dynamics of money wages versus commodity prices; the ratio of money prices to money wages is governed by the set of rates of return on capital in different employments; this course of money wages relative to prices depends upon the whole set of institutions – including the legal framework, the size and character of the public sector, the extent and forms of labour unionism, tax policy – governing the balance of bargaining power around the labour contract; at the same time, rates of return on the variety of capital investments depend upon central banks’ interest rate policies and the spreads between the consequent riskless rates of return and wider yields; those spreads in turn depend upon differential risk and illiquidity, costs of intermediation, restrictions on capital mobility that generate monopoly power and so on; the distribution of rising value-added per worker resulting from technical progress is also determined by the balance of these forces (see, e.g., Stirati 2001; Cesaratto et al. 2003). And all this is shaped by the specific histories and sensibilities of ‘place’. There is no intrinsic, determinate and systematic relationship between the accumulation of capital proper (produced means of production), or accumulation of wealth, and rates of return on investments – or between 13
capital-output (or wealth-income) ratios and rates of return. (At least this is so, so long as gross rates of return cover minima compensating for risk, illiquidity, managerial costs and so on.) There is no need here to revisit the ways in which these forces, institutions and mechanisms have changed since the 1970s. The return of large-scale unemployment was obviously a crucial factor. Unemployment is an issue hardly mentioned, and only in passing, in Piketty’s book."
Sorry, "The latter perspective" in the second paragraph should instead read "The perspective that distribution depends on institutions and power ..."
I agree that the heterodox analysis is superior, of course. However, I have argued that Piketty's approach that is close enough to the mainstream to get noticed is therefore a feature as much as a bug. Heterodox analysis has been around as long as classical economics and Marx, but it gets no notice. Even Smith is misrepresented an an economic "authority" that is appealed to.
Piketty's contribution is to be close enough to orthodox to pass enough muster to get actually considered and discussed before being dismissed on the usual grounds. But Piketty is careful to make his work adaptable to both orthodox and heterodoxy, thereby creating a bridge in the debate. He is is definitely heterodox in his overall approach to economics, but he is orthodox enough to frame the argument in terms that conventional economists will accept.
I understand where he is coming from in terms of my own field, which is comparative spirituality and philosophy of spirituality where the challenge is to make something that is inherently supernaturalistic naturalistic enough to be credible to rigorous thinkers if not to reductionists.
We see the same dynamic in economics where orthodoxy is reductionistic in this case not to empiricism but to formalism. Piketty has presented his case in formal enough terms to be relevant but is also insistent on not only empirical and historical factors but also assumptions involving institutions, for example, that are considered non-economic by the mainstream.
It's kind of like Michael Hudson, who understands how the monetary system works, but says thing that way out of paradigm for strategic purposes. For example, "taxpayers having to foot the bill" can be used tactically in arguments instead of using a long explanation that will lose people. Yves Smith does the same thing.
So I see two related debates arising from Piketty. One among the heterodox and other among the orthodox. Hopefully there will be some cross-influence but I would not count on it, much of it anyway if the orthodox can avoid it. But Piketty has put the discussion of inequality on the table, whereas it was shoved under the table before. That is a significant advance strategically.
What it boils down to is that there are basically two camps. One based on homo economicus and the other on homo socialis.
The former presumes that inequality is a necessary outcome of economic liberalism and it is in fact optimal because it ensures that the meritorious receive their just deserts, which include political power and social status as the most highly qualified. The optimal social organization is based on the rule of the best. Formerly that was the warrior class under feudalism and now it is the acquisitor class under capitalism. In this view everything is as it should be and is getting better all the time, albeit with ups and downs that are just part of the economic process that leads to higher levels of prosperity for all. "Even the poor have television sets and electronic gadgets."
The latter presumes that the objective of social organization is progressive achievement of an ideal society as one in which social, political and economic liberalism are balanced harmoniously, recognizing merit and just deserts as incentives, but also recognizing that there are institutional factors involved that make the assumption of the methodological individualism on which market fundamentalism is based inapplicable in modern civilized societies. "Self-made man" is an oxymoron. Everyone is a product of the system and the system benefits some other than others to the degree that asymmetry is institutionally established and endowments based on previous asymmetry play a major role.
These are characterized by different worldviews based on contrasting values, norms, rules, and criteria.
This is why the argument over distribution is so difficult. What one cohort views as just the other views as unjust and vice versa, based on contrasting worldviews and their norms.
Piketty's statement is empty and of no any value. Just a slogan.
Economics as is taught nowadays and since long is not a science but an ideology, but that is the goal.
Economics is a social and political science so ask for the right languages.
There is the skin of the earth and its resources. And human values. 4.7B human beings with black, brown, white, yellow and red skin pigmentations (some say seven in nature, but not all manifest) - and every colour in between. None of them like being
controlled, but spend all day most of their days trying to control others. Trying to fulfill their minds. Or trying to fulfill a 'group mind' :-) Then they die and its dust back to dust. One day, even the moon and the Sun and the stars will not be there. We (looking in the rear view mirror) call it progress - 'Societeee'. Oh, lets have a parade!
For me, there is also evolution, real creativity - the mind's job is to understand; the heart's job (your heart's job) - is to teach
(most people are surprised at the thought their heart could teach them anything)!
The greatest richness that exists in any human being is their heart. From the heart comes fulfillment. From the heart comes
unconditional freedom and joy. Without it, mind would be absolutely chaotic and eat itself. Without it, mind is the lion that ventures out into the desert, until all that is left is its tail (?).
Peace is not a luxury for human beings - it is a fundamental necessity: it is the only quality we possess, the only potential energy that once emergent, can tame the jungle and mindlessness of mind. Concepts cannot tame concepts.
Only the heart holds the energy that brings clarity to the mind. That is a fundamental of human nature. That is the backdrop to
the world stage and the dramatic actors on it!
Tom you write:
"But Piketty is careful to make his work adaptable to both orthodox and heterodoxy, thereby creating a bridge in the debate. .... It's kind of like Michael Hudson, who understands how the monetary system works, but says thing that way out of paradigm for strategic purposes."
Tom you have no evidence of this...
iow this is your interpretation but there is no evidence that either of these people are "saying one thing while thinking another..."
I dont think either of these 2 quite get it... based on what they have written in public... I have to go with their testimony...
So Peter writes: "distribution depends on institutions and power as opposed to "economic laws".
Correct but only under a FFNC regime which must be fully understood in order to not undermine or weaken our own arguments...
So folks like Pickety and Hudson may see some injustice and want to impose judgment ("to set right") thru our govt institution, but unless they completely understand the authority present in this institution (which imo they dont... Peter points out how they still rely on supply-side stuff, etc... ) then they end up coming up short.
rsp,
Hudson has actually said that privately. He is very clear that we are fighting a class war in which they are winning. He is quite aware that there will not be any significant change without waking the masses up to how badly they are getting screwed. He also knows that the subterfuge is quite sophisticated, especially on the financial side, and he doesn't think that the best strategy is for reaching the masses is wonk. He goes for the argument, you are paying for the fat cats' champagne and yachts, and the wars that support their greediness for resources and control. Those gains are parasitic rent that should be taxed away, and this won't disturb growth as long as productive contribution (productive investment and work) is incentivized.
Read PIketty and come to you own conclusions. He undercuts the most important the methodological assumptions of orthodoxy and says that at MIT he woke up to the fact that conventional economists don't know what they are talking about.
I don't see any evidence that he is familiar with heterodox schools but that doesn't imply that he is not. But he is much more concerned with the historical/empirical method and I think that he and his colleagues believe that they are reorienting the way conventional economics is done around. I don't see how one can read Capital and not come away with the impression that Piketty is in the heterodox camp.
He is also expert in econometric modeling but there is none in Capital in the 21st Century. As he says, he could have stated his argument without algebra and in fact he does so in explaining himself for those that may be math-adverse. As Alfred Marshall advised, conceptualize your ideas, formalize them with math for rigor, then throw away the math and state your position clearly. Piketty does this in Capital in the 21st Century, which may be longish but it is not wonkish. Even the notes are mostly about historical data rather than citation of econometric papers.
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Did he take a more or less neoclassically based angle by dressing his argument up in terms of "laws" (that he quickly clarifies are not) for strategic reasons, or at least make an argument recognizable by the mainstream to get noticed? I don't know that, but he is smart enough to know what fellow economists are likely to respond to, and his background is certainly conventional (MIT).
I do think that his intention was to rock the orthodox boat and he implies this strongly if he doesn't state it explicitly. He really criticizes conventional economics quite explicitly for being off track, and, he implies, irrelevant to major issues about which people look to economics for clarity.
I don't have a problem with the way he uses variables either, since he relates them to historical numbers in his data set. One argue for example with his use of the term "capital" for total wealth, but he explains the data it is based on.
Basically, Piketty's Capital is about owners' share in a capitalistic society and its dynamics over time. He shows that over time, while owners shift, e.g., from land ownership to industrial capital goods to finance, that share tends to the same capital/income ratio of between four to seven to one depending on country, with the US being at the low end and Europe at the high end, chiefly due to the role played by land scarcity affecting land valuation with land a source of wealth and therefore included in capital in his use.
His accounting identities function the same as the MMT accounting identities. They are boundary conditions in terms which change is constrained. If one variable changes then others have to offset to maintain the identity. It's a very simple argument.
It would be nice if Piketty were in paradigm, but then it's likely that no one in conventional economics would have taken notice and the media wouldn't have picked up on it. Actually, the Piketty phenomenon was chiefly in the US. He was mostly ignored in France. The chief reason cited is that Occupy shifted the focus to inequality and Piketty was in the right place at the right time.
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