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Piketty Vs. Mankiw On Economic Challenges And Inequality
Economists Thomas Piketty and N. Gregory Mankiw (AP / Harvard University)

Economists Thomas Piketty and N. Gregory Mankiw (AP / Harvard University)

French economist Thomas Piketty is burning up the book charts as of late — during our Tuesday morning broadcast, it was pointed out by a variety of publications that his “Capital In The Twenty-First Century” was on back-order on Amazon — and his theories and policy prescriptions are also heating up the economic world.

Piketty’s main points — that extreme  wealth concentration in the very tip top of the economic scale is bad for overall growth, that a weak middle class is bad for the functioning of our larger democratic society and that there’s more we can do overall to promote a more even economic playing field — came out in his early interview segments with host Tom Ashbrook.

But we were interested — and thought you might be, too — in the scope of the conversation he had with our other guest, Harvard University economist and former Chairman of the Council of Economic Advisers N. Gregory Mankiw. Beyond the international divide, Mankiw and Piketty have a very different understanding of the problems plaguing our economic system at the moment.

“Most people would rather have a root canal than read a book on economics, so I applaud his success in this,” Mankiw said, congratulating Piketty on the surprising and overwhelming popularity of his new book. But from there, Mankiw veers away from total praise.

“Where I part company with Thomas is looking forward,” Mankiw said. “He has this premise which he called the central contradiction of capitalism, which is that we’re in trouble if the rate of return on capital is greater than the growth rate, that the economy is gonna tend toward increasing inequality. 

I don’t see wealth increasing at the rate of return on capital. That’s simply because people spend their money when they have capital. Some it’s in consumption in the form of fancy vacations and luxury houses and fancy cars; some of its transformed in the form of charitable giving. Wealth tends to get dissipated as people have children, it gets split up in multiple ways. I don’t see wealth as naturally growing at the rate of return on capital, and as a result I don’t see as wealth concentration as continuing to increase.”

Piketty’s take on wealth consumption is bit different.

“Of course, people will consume some of the return to wealth,” Piketty said. “What’s the point of having property if you reinvest 100% of the return? 

“The problem is that this can go together with a huge concentration of wealth and a very large perpetuation of wealth over time and across generations. And of course, inequality will grow forever. I agree with Greg that this will stop somewhere. But there’s no natural force that brings this into any reasonable level in any meaningful sense.” 

Mankiw’s concern with some of Piketty’s policy suggestions are that they threaten the initiative of upper income workers.

 “The question is how do we help people at the bottom, rather than thwart people at the top. I would much rather see, rather than policies that taxed capital if people accumulate too much, I’d rather see policies that encourage people at the bottom to accumulate capital. For example, things like automatic enrollment in 401K plans so that the typical worker out there when they get a job can put some of that away and they can become capitalists as well.”

Piketty noted the inequality of the US system leaves a lot to be desired.

“Right now, the bottom half of the US population owns two percent of US national wealth. You know, I’m not saying that we should have  perfect equality where it would be fifty percent by definition of national wealth for the bottom. I’m just saying that it’s hard to pretend that two percent is the best we can do. I think there must be an instition that make it to five percent, eight percent, I don’t know, would you really say that two percent is the social optimum, that there’s nothing more for the bottom half of the population, we can do?”

Mankiw found Piketty’s concern for optimization as too close to the politicization of economics.

“I think when we start talking about questions like what’s the optimum, you’re moving beyond economics and going into political philosophy…I think we need to think about what is economics, and what are the facts, and what’s the forecast, and then when we think about normative economics, as what should we do, you have to realize that that’s not just a matter of science that’s a matter of philosophy, that’s a matter of political philosophy.”

Their entire conversation is worth a listen — especially a section on the shrinking middle class and its implications on democracy — and we’d love to hear your take on the tax and economic talk here. Who’s got a better handle on the pulse of the moment? Will you read Piketty’s text and judge for yourself?

Let us know in the comments below, or on Facebook, Tumblr and @OnPointRadio.

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  • foxy9795

    Mankiw is wrong on several counts.

    He says don’t worry about the super-rich. I have heard that one before. They are the ones hoarding all the money and taking it out of circulation and not doing anything good with it. The super-rich have such ridiculously high amounts of wealth that they can’t spend it even when they have several houses, yachts, and planes. “A rising tide lifts all yachts.”

    He says low wage earners should have 401k accounts so they can “become capitalists.” What sheer and utter nonsense. It shows that he lives in a rarefied world. The lowest wage workers are scrambling to get to work, sometimes on several buses, keeping themselves on food stamps so they can have SOMETHING to eat, and staying one step ahead of the landlord every month. The idea that they could put any of that aside is just out of sight.

    Mankiw still saws the old saw about less wealth sapping the initiative of the rich. The ones at the very top have absolutely no initiative to create more jobs. Been there, done that. He is also wrong about trying so hard not to “politicize” economics. They are inextricably bound up in each other. I have news for you, Greg Mankiw. By thinking you can avoid politicizing it, you have done just that.

    • http://pragmatarianism.blogspot.com/ Xerographica

      The ones at the very top have absolutely no initiative to create more jobs? Do they have an initiative to reduce costs?

      It stands to reason that the last 40 years of globalization has been an effort to reduce costs. If a factory owner reduces costs then he’ll increase his profits.

      Jobs left America because people like you wanted “poor” Americans to have higher wages. We have a Rust Belt because of people like you. Now foreigners are doing American jobs. As a direct result of the significant reduction of labor costs…the rich have gotten richer. Wealth inequality is extreme…and it’s all because of people like you.

      The other day I received a letter from a poor person in Africa. He said that he wants you to go to China and organize the workers to strike for better pay. I wonder why he wants you to help the Chinese workers shoot themselves in the feet. Doesn’t he know that this will provide factory owners with the initiative to reduce costs by moving their factories to countries with cheaper labor…oh…I get it now.

      What are you good for? Chasing jobs away. Bad for us…good for them. Naw, it’s good for everybody when the rest of the world uses our capital to catch up. Keep up the unintentionally good work. Whatever you do…make sure that capital doesn’t return to America. God knows there are plenty of countries that need it way more than we do.

      • John

        Its a fairy limited point of view to think that policies aimed to increase wages artificially are the sole reason that companies seek cost reduction through moving production elsewhere.

        Your view on the effect of wage rates seems to have reversed causality for sake of your argumentation. It is economic globalization that fuels the movement of jobs from the US to poorer countries, not artificial tampering of wage rates. Before globalization would happen, the welfare and wage rate of US workers was relatively independent of the global, average wage rate of the working class. If your neoliberalist view on what wage rates should be is desirable (im not taking a position here) it inevitably means that under a trend of globalization, wage rates in the US will move down towards the average wage rate of the world as labour is mobile by virtue of moving production facilities to the south and east.

        On the short run that means that real wages of US workers go down as their wage rates are more and more linked with the true poor the world. It is true that artificial wage rigidity will accelerate this process by increasing the incentive for firms to move production elsewhere, but the alternative is second/third world type poverty among the working class for as long as most of the world’s population is living off a dollar and a dime. I think you will find it hard to argue with people who oppose that kind of development, even if it is inevitable under the prevailing neoliberalism in modern politics.

        • http://pragmatarianism.blogspot.com/ Xerographica

          It makes me sad that you don’t grasp that, because of capitalism, there’s far less inequality between countries. It also makes me sad that you think this huge decrease in global inequality is a “major flaw in the system of capitalism”. You’re a leftist because you don’t care about poor people in developing countries. The truth of the matter is that you’re just as greedy as the capitalists you despise. The difference is…the capitalists are responsible for lifting millions and millions of people out of poverty.

          • Guest

            Far less inequality compared to what? The fact that there’s no reasonable alternative to capitalism, which is something I acknowledge, doesn’t mean I can’t point to its flaws.

            It also makes me sad that each of your arguments is based on unfounded assumptions and personal attack. Typical provocation.

          • red_donn

            It would be much harder to describe my position as inherently “leftist.” I’d be satisfied to refer to my own notions as democratized capitalism, treating all actors as being worthy of the same rights to information and bargaining power. It’s a fairly straightforward contention, accepted by any economist who isn’t a shill for a political ideology of any stripe, that both labor and capital should be compensated according to their productivity. Sadly it is clear this is not how labor markets work. I’ve been able to calculate, in three case studies, that income often settles at around two thirds of a clearly reasonable, if not minimal, economic value. Productivity is a merely correlative notion to income, far less important than the societal factors involved.

            To see the societal role, let’s consider an example. A recent college graduate in economics, with a solid graduate’s resume, given a 40 hour work week, can expect to make between 45-55 thousand in a large city such as San Francisco or Chicago. The fluctuation off the average of 50 thousand is mostly down to the name recognition of the company. Extremes may reach to 40-60 thousand, for small businesses or buy-side firm jobs. Once hired, the new employee may be able to determine they are worth far more than they are paid, but they have no recourse at that point. The fact of the matter is, that they are simply paid “what a new hire is paid” rather than what they are worth.

            It is your contention that capitalists create jobs, which is actually a political one. A capitalist cannot create jobs without labor supporting them in the first place. Productivity begets productivity, and it is a purely political contention that capital is the true driving force of productivity. Milton Friedman, that radical leftist, held to the belief that labor was responsible for around 75% of production. Other ranges often go from 70-80% and so, in an efficient market we would expect to see that share of income go towards labor. However, studies in 2008 showed the labor share of income in the US is between 58-64% of total. Bear in mind that was a bad year for capital.

            Even addressing that information is nowhere near enough, as the comparative difference between median and mean US household income demonstrates another level of inequality, which exists in part due to the extreme lack of bargaining power in the unskilled labor force. An financial analysis can demonstrate that many fast food employees have a productive value well in excess of $12 an hour, some will be above $15, but their attempt to utilize collective bargaining and attain this income was rarely framed in productive terms. Only business owners and investors are allowed such methods, according to the more conservative media, and such thoughts don’t even occur to more left-leaning voices, who paint it as a purely moral issue.

            Applying an economic analysis throughout the entire workforce, rather than just the upper echelons, will correct a great deal of capital-labor imbalance. Correcting imbalances, according to the most basic precepts of economics, will result in greater utility and productivity across the economy.

          • http://pragmatarianism.blogspot.com/ Xerographica

            Markets work because true imbalances are profitable to correct. In the 50s and 60s…there was a true imbalance between the wages of 1st world workers and 3rd world workers. How do we know it was a true imbalance? Because manufacturers increased their profits by employing 3rd world workers.

            Right now you’re telling me that there’s a true imbalance in wages. You’re telling me that there’s gold in those mountains. So go dig it out. Start your fast food restaurant, pay your workers more money and earn a nice profit. But you’re not going to do this. Because that’s really not how leftists work.

            Leftists don’t put better options on the table. Leftists aren’t builders…they are knockers.

          • red_donn

            Let me begin with a polite observation – it is an implicit assumption in your arguments that all profit, beyond the minimum necessary cost of labor, “rightfully” belongs to the capital-intensive agents. In these terms, there is no consideration of the productivity of labor at all. There is absolutely no reason why this is inherently true, and it can only be enacted when the labor portion of productivity does not function in a capitalist manner. This is dehumanizing to workers. It is my fundamental contention that all agents are of equal standing and entitlement to bargain for their respective portion of income.

            Please, take some time to consider that notion.

            There is a truism, that someone with a little knowledge of a subject, which is either false or vastly oversimplified, is far less likely to assess new information in an objective light than someone who knows nothing at all. I hope you may at least set aside your rather silly propaganda slogans to consider the following.

            Your statement regarding a fast food franchis is telling. Of course, what economics says is *not* that a given employer will necessarily be enriched by paying more to labor than others. Very often, this no more serves the profit motive than reducing pollution. Economics clearly states that the *overall economy* will benefit from efficiency, as any correction of negative externalities or market distortions demonstrates.

            You reveal a lack of economic analysis by suggesting that the only way to determine a “true imbalance” is to identify the shift historically. No such thing as current analysis eh? No point in contrasting current capital-labor income distributions with widely accepted free-market theories of productive value of labor. You, therefore, are advocating for labor to await “prosperity through passivity” in hopes that the benevolent capitalist will smile on them.

            Even given your historical hypothesis, why choose only to look at that one point in the 60′s? Even a cursory glance of history demonstrates regular exploitation of labor. The profit motive has always been present and would suggest that the labor movements of the last 150 years were arguing for nothing. After all, how could an imbalance develop, if it is always “profitable” to maintain the fairest wages?

            It is folly to believe that market distoritions are nonexistent, simply because the overall economy would be stronger without (most of) them. It is in the interests of many powerful economic agents to create these distortions, such as dangerously high pollution, monopoly power, and so on.

            (PS – This “leftist” claptrap really is ridiculous on your part. Most self-identified libertarians who have taken at least a year of economics work heartily agree with information asymmetry issues.)

          • http://pragmatarianism.blogspot.com/ Xerographica

            Regarding your “polite observation”…it’s hogwash. If you want to start a democratically owned company then be my guest. Except, again, that’s not what knockers do.

            Regarding your “truism”…it’s entirely irrelevant…to me at least. You mistakenly believe that you’re sharing some new information with me.

            Regarding “efficiency”…a reduction in pollution will only increase efficiency if, and only if, the alternative uses of the necessary resources wouldn’t have produced more value. But if the government can accurately divine how much space exploration you’d be willing to forego for cleaner air…then markets are not only redundant…they are a complete waste of limited resources.

            Except, markets are not a waste of resources. Therefore, nothing the government has done can be considered “efficient”. The value of the supply cannot be determined without knowing what the actual demand is. In other words, you can’t evaluate the accuracy of a shot in the absence of a target.

            In case you missed it…we’ve clearly established that you have no idea what “efficiency” means. It’s not surprising because “leftist” is the same thing as “ignorant”.

            Here’s some more new information for you…I’m not a libertarian. I’m a pragmatarian.

            Therefore, your truism is entirely relevant to yourself.

          • red_donn

            The first observation, that assessing the productivity value of labor to be only equal to wages paid, shows you are begging the question. If that is your definition of labor productivity, it is impossible for economic exploitation to exist. It’s also impossible to uphold this notion historically.

            To paraphrase, you define markets as having a property of permanent efficiency, despite acknowledging that the market must have been operating inefficiently during the 50′s and 60′s. By your own arguments, your simplified statement cannot stand. Perhaps you would like to argue that the only consistent distortion is government or that certain timeframes are necessary, in which case we should test that against history.

            Not a word about the early history of labor still, I see. Somehow the Dickensian world of early industrialization doesn’t factor into the glowing assessment of ever-efficient markets. Children stuffed into mines and fed once a day, working 12-16 hours, were compensated according to their worth and trouble, I’m sure. After all, the exact same profit motive existed then, and government interference on behalf of labor was essentially nonexistent. **If you say that situation was a distortion, which has since been corrected, then what makes you think we don’t have distortions now?**

            One would think that the term “dangerously high pollution,” as well as the previous reference to it as a negative externality, would’ve been enough. You need not restate that non-trivial pollution is part of the economic equation. **Rather, I was hoping you might take a moment to consider that this market distortion has repeatedly occured, due to the acts of private agents.**

            Regarding efficiency, my statement of compensation being equivalent to proportion of productivity is the natural market equilibrium in the economy of highest utility. Stating it as I did is no different than stating one of the various forms of Kant’s maxim – they all come to the same thing.

          • http://pragmatarianism.blogspot.com/ Xerographica

            What a bunch of gibberish. Let me try and keep it really simple.

            There’s one scientist…and two problems. He can either try and solve the pollution problem (X) or he can try and solve the crime problem (Y). Which problem should he try and solve? Clearly he should try and solve whichever problem will provide the most benefit/value/utility for society.

            So in order to help the scientist efficiently allocate his limited time we need to determine the value of X and Y. If X > Y…then the scientist should try and solve X. If X < Y…then the scientist should try and solve Y.

            The challenge is that values are subjective. Some people might value X more than Y and vice versa. So how can we figure out how much society values X and Y?

            By learning about the preference revelation problem.

            There are a gazillion activities with positive and negative externalities. None of them are equally beneficial/harmful. In order to correctly prioritize how society’s limited resources are used…it’s absolutely imperative that we create a market in the public sector. Doing so would clarify the demand for public goods.

            Right now you’re talking about Kant instead of Buchanan and Samuelson. This means that you’re completely clueless. Please help make the world a better place by doing your homework.

          • red_donn

            Let me remind you that the point of this discussion was whether labor in America is wrong to desire wages at, at least, its current given level. You argued that, so long as labor could be rented for less in Africa, Americans were valuing their work too highly.
            It was my reply that, if wages are not determined by simply taking the lowest societally accepted level, but by productivity, the wages would be much higher. You argued that this fundamentally could not be the case, because market efficiency would not allow for that distortion in the present state. This has prompted my multiple references to the early industrial working conditions and compensation, which you have yet to fit into an idealized market framework. If exploitation and market distortion can exist, why not now?
            My point regarding negative externalities and other market distortions is merely to demonstrate that perfect market efficiency does not exist in the real world. You are making tangential statements to resolving actual distortions, while elsewhere denying that distortions in income can exist, as per perfect efficiency.
            Let me make it perfectly clear:
            1) If market distortions such as negative externalities exist, the market is not perfectly efficient.
            2) If the market is not perfectly efficient, then labor may be undercompensated depending on market conditions.
            3) Efficient state descriptions typically assume that all agents are compensated according to productive value.
            This, in brief, lays out the economic framework to understanding whether or not labor is receiving less income than it is worth. It also includes a considerable opportunity for debate regarding the actual productive value of all sides.
            The point with Kant was merely to draw another example, besides economic efficiency, where the same state can be described in multiple ways. You didn’t complain that a reference to Dickens should relegate my arguments to literary references, so I don’t see a reference to Kant as any less appropriate, given its use.

          • http://pragmatarianism.blogspot.com/ Xerographica

            You still don’t get it. In order for resources to be efficiently allocated (put to their most valuable uses)…we have to assign the correct value to the various possible uses. Given that values are subjective…buyers and sellers should be completely free to determine whether they can agree on prices that are mutually beneficial.

            In the 50s and 60s…greedy unions engaged in rent seeking behavior. They drove wages high enough that greedy manufacturers were incentivized to start leaving the Rust Belt. They relocated to the Sun Belt where there was a larger supply of non-unionized immigrant labor. But the manufacturers didn’t stop there. At greater risk…they set up factories in developing countries.

            Their profit margins created a bright value signal which more and more manufacturers responded to. As the demand for cheap labor increased… labor became more costly. Now the wages in some developing countries have nearly caught up with those in advanced nations.

            Greedy unions unintentionally donated their valuable manufacturing jobs to poor people around the world…and now those 3rd world workers are better off. In the past 40 years…world poverty has been reduced by 80%.

            The efficient allocation of labor…like everything else…depends on accurate value signals. Minimum wages and union wages are false value signals. They don’t accurately communicate demand. As a result of these lies, society’s supply of goods and services are suboptimal. Lies divert limited resources away from more valuable uses.

            Clearly though, in certain situations, lies can have very unintended and very beneficial consequences. So go to China and start lying. Put your leftist ignorance to good use.

          • red_donn

            I do get it – I simply disagree with your method of valuating the worth of the labor resource. You position appears to argue that the amount paid to rent the most desperate and impoverished people qualified to do the job is an accurate way to measure the value of labor

            Still not a word about child miners, sweatshops, or the good old 12-16 hour workdays going for six days a week. All for a pittance insufficient for living on. It was only the organization of greedy, greedy labor that ended this situation in America. By your model, the acceptance of those wages, if you wish to dignify the payment as such, demonstrates that the workers were indeed being paid what they were worth. That crazy “weekend” must have been a terrible lie against demand, eh?

            “Union wages are a false signal.”

            I’m afraid that you have taken up the assumption that only organized capital is allowed to negotiate, to seek the best deal possible. What drives a profit for capital is, in your arguments, synonymous with the overall improvement of the economy.

            The reason I referred to myself as a supporter of democratized capitalism is that I differ sharply on the matter. A simple microeconomic model, utilizing one employer, with one available position, and a workforce with a surplus population, immediately demonstrate the tendency of labor to bid itself down to the lowest socially acceptable wage. Capital benefits, at least in the short term, but at the expense of overall utility. Through organization, labor as a whole can bargain for its worth in terms of production, but this requires collective bargaining and, in essence, welfare payments.

            In those cases, both theoretical and practical, organized labor and capital set the income in open negotiations, both agreeing that business was viable in that situation. This was a free negotiation, where both parties had similar leverages and information. Unions, of course, have demonstrated a serious failing in retaining a focus on wages, rather than obtaining a fair share of income in terms of productive value, but the mutual acceptance demonstrates that the productive value of labor is present. Transnational capital can secure a better deal elsewhere, by playing on the fractured and isolated labor populations, but that does not alter the underlying value of labor in the production process.

            It is the payment of labor income below the productive value of labor that can clearly be referred to as the economic exploitation of labor, since the value of labor is paid to capital agents. This must be understood in terms, not simply of the most desperate, but of the entire macroeconomic factor

            The fact is, that if Chinese and Africans demanded the same proportionate level of income as US workers, then the amount could and would be obtained. This does, of course, require sacrifice and solidarity, for the mutual improvement of the entire macroeconomic factor of labor. That means that American workers would have to aid the efforts of third world workers to obtain a fair payment structure.

            The point is that it’s not necessarily the case that American labor income is too high – it’s that third world income is too low. History, the child miners of yester-year and the modern day sweatshops, bear this out.

          • http://pragmatarianism.blogspot.com/ Xerographica

            You’re drowning me in hogwash. You’re blaming builders for child miners and giving credit to knockers for saving them. You have absolutely no idea how absurd that is.

            How does a knocker save child miners? By making it illegal to employ children? Great f’ing job!!! Your knocker brigade should win the world’s most prestigious award.

            Can you think even a little bit? Probably not…which is why you’re a leftist.

            Working in a mine is a terrible option. If parents choose that option for their children…then what does that say about the alternatives?

            Knockers don’t create better options. They are knockers because they eliminate people’s best options. They think with their hearts because they are probably incapable of thinking with their brains.

            Builders, on the other hand, do create better options. They build sweatshops which provide workers with a new option. If people choose this new option…then clearly it’s better than their alternatives.

            Making it illegal to employ children doesn’t make children better off…it makes them worse off. It forces them to endure situations that, by their parent’s standards, are worse. In order for children to be better off…you need to give their parents better employment options. And that’s exactly what builders do. Knockers, on the other hand, do the complete opposite.

            Conditions don’t improve because of knockers…they improve despite knockers.

          • red_donn

            Knocker-knocker, knocker-knocker
            Knocker-builder, builder-knocker!

            It’s the Dr. Seuss propaganda hour!

            You are greatly mistaken to split the world into two sides, along the lines of Marx. The world includes more than two types of people, and many of your defenses would apply to builders, but not to “renters.” Renters are incentivized not to generate general growth, but to accrue as much as possible to themselves, and often actively keep down builders who would undercut established interests. I’ll happily be a renter-knocker. If nobody knocks renters, then they can and do crush builders.

            “This monopoly is running the town into the ground.”
            “Stop being a knocker and build something!”
            “I tried to start a challenge to their retail business, but they tripled the cost of my supply chain so I couldn’t compete. They also threatened lawsuits that were too expensive for me to defend against, so I closed up shop.”
            “Look, we live in a free market and you lost to a better builder. That’s the free market, then, so we must be better of for it! Stop knocking, you knocker, and help the better builder build, you bitter knocker!”

          • red_donn

            Some children today would be better off immediately if we reinstated child labor, but every study I know of demonstrates the long-term value of education outweighs the short-term gains. Nevertheless, it was consistently the aim of renters to keep children in horrendous conditions without education.

            You probably don’t believe that there is such a thing as economic coercion. That would be inefficient, you might say, and the cost to the company would allow competitors to surpass it. This, of course, ignores the history of oligopoly, monopoly, price-fixing, and so on, which clearly show that a few powerful players can profitably engage in actions to pull the dynamic away from the free market equilibrium.

            You might, in the light of overwhelming evidence, accept that established capital is incentivized to undermine aspects of free trade at times, but go on to say that workers wouldn’t stand for it if there is a better deal. After all, they always have free choice, so long as physical force isn’t used. I’ll go to the extreme example here – employee rape. Women, given a choice between keeping their job and being forced into sex, have throughout history been raped by employers, foremen, and others in a position of economic power. One must either accept that coercion exists, or be prepared to make the argument that “she chose it, so at most it’s prostitution.”

            Hell, these same arguments were made by slave owners! I’m not joking here, they claimed that because they owned the slaves rather than renting labor chattel, they took better care of their workers than industrialists, since they had an interest in preserving their property. Indeed, there was some evidence in support of this view. Should we therefore not have banned slavery, according to economics?

            Of course not. A recognition is made that the long-term situation of the laborers will be vastly improved without slavery, and that free, informed, rational choices were not presented to them. We spent a week covering similar situations in Intermediate Micro II, including the child labor question, and any perusal of a history on the subject insists that economic coercion by “renters” was utilized to prevent any “building” of other options.

            Now, any “builder” knows that a more effective proposition than outright legislation, in terms of economic efficiency, are incentivization programs. Education support movements are now often funded in just this manner. Cap-and-trade, vouchers, and so forth are considered the superior option, so long as there are not coercive actions present. However, that is a very important caveat, given the history of economic coercion.

            If you believe that the average public had options to go out and leave the industry factories once they were in, you don’t follow history. Monopolies and oligopolies dominated, crushing any upstarts, giving the same defenses you have. What’s a penniless laborer supposed to do? They were paid so little that their children had to go to work, which in turn, was used as an excuse to further suppress their own wages!

            It’s a perfectly rational move on the part of the business owner to do this, as it is for him to undercut any business that attempts to operate in a humane fashion. Somebody else starts a business using only adult labor, paid a wage capable of supporting a family, and he won’t have the resources to survive a price war. A big business, living off its position and capital reserves, can undercut prices, take the hit, and destroy the humane builder.
            But best not knock that renter eh? After all, that company was built once, so it must be good for forever.

          • red_donn

            Just to demonstrate I understand your point, and contrast it with my view, let’s take an example:

            An American union worker demands 15 dollars an hour and can produce 15 units per hour

            An African worker demands 5 dollars an hour and can produce 10 units per hour

            Assuming the American worker works 40 hours a week, the employer can obtain the same productivity by employing an African 60 hours a week. The consumption of units of labor (hours) has gone up, indeed, but the amount paid to labor has gone from 600 to 300 with no change in labor’s productivity. It is this shift which would be (rather roughly) referred to as the exploitation of labor. The labor would be economically viable at 600, but by the market structure, the capital portion of production can pocket the difference.

            It would be in the interest of the two prospective employees to work out a mutual arrangement wherein one helps compensate the other for lost opportunity cost, and thereby maintains a higher overall wage for himself, as opposed to other economic options. Whatever net equilibrium they reach between themselves and employers would be the fair and rational value of labor.

      • red_donn

        It is a clear point of economics that an efficient market will generate the highest utility. Part of this fundamentally includes that all agents must be compensate according to their portion of productiviy. It can be clearly demonstrated, in theoretical and practical terms, that labor market distortions transfer a greater portion of income to the capital portion of the supply side equation.

        The argument that you offer, laid out in simple terms, is that American factory workers should accept the same pay as whatever impoverished Africans that could be put in an African factory. While labor bids itself down, generally having no concept of how much it is worth in economic terms, the capital-intensive agents (investors and business owners in lay terms) will garner the vast majority of the income and profits to themselves.

        The only methods available to keep the small number of players in concentrated capital from playing the many labor-intensive agents against each other are collective bargaining, boycotts, an informed sense of mutual dignity, and simple laws. You are actively advocating that the American people should accept themselves as hopelessly outmatched by trans-national capital, give up any attempt of forming unions or enforcing minimum wage, and simply take the barest minimum possible, rather than bargaining with capital owners as equals. It would be rude of me to draw out exactly how low you wish to see that sense of mutual dignity layed.

  • Coastghost

    Further perspective on Piketty’s reception:


    Id est: in his native France Piketty’s views are already dated, given the most recent performances of France’s Socialist Premier Hollande.
    The central critique of Piketty’s views seems to revolve around his contention that the overall rate of return on capital investment is greater than the rate of economic growth: many professional economists see clearly enough that Piketty’s central assumption is unwarranted and inaccurate.

    • Chris

      Which ones?

      • Coastghost

        Using the “Search” feature on the Marginal Revolution homepage, enter Thomas Piketty and you’ll find a number of articles on both Piketty and his collaborator Saez going back to 2004, I’ve not read most of the linked accounts by far. Some may be favorable, many seem not so congenial to Piketty’s premises and prognostications.

        • Chris

          Your original comment was that “many professional economists see clearly enough that Picketty’s central assumption is unwarranted and inaccurate.” When I asked you which economists, you replied that a search on Tyler Cowen’s blog pulls up blog posts regarding Picketty that you don’t seem to have read. So I don’t think you have a firm basis for your statement. It’s fine and important to honestly and diligently critique Picketty’s work, but to make an argument from authority is a bad enough logical error. To make an argument from authority you haven’t read is a little dishonest. If I didn’t know better, I would think you are trying to score debater’s points rather than make an honest contribution to an important discussion.

          • Coastghost

            Would your righteous indignation be impaired greatly if you were to spell Piketty’s name properly?

          • Chris

            Fair enough, I made a mistake! But maybe you could respond to the substance.

          • Coastghost

            I have responded substantively: I have alerted you and other readers to the central criticism of Piketty’s work noted by accomplished economists whose names I betray no specific interest in advertising, which meets my admittedly low standards for contributions to a blog post.

          • Chris

            Uh-huh. Ok, thanks!

    • Chris

      I want to make sure I respond substantively: Cowen’s full piece, which is available on the NYT site (link below), doesn’t suggest Picketty’s views are “dated” in the sense of theoretically dated; rather, Cowen and his co-author Veronique de Rugy attempt to explain why the book hasn’t made as big a splash in France. One idea, which the blog post quotes, is that right now it’s politically out-of-vogue in France. But that is at best a critique of Picketty’s policy prescriptions, which are the least important parts of his book: the most important parts are the historical explanations of income inequality in the West, which is not easily subject to honest political debate. In any event, I do not read Cowen and de Rugy as arguing that the central assumption is “unwarranted and inaccurate,” but rather they point to two papers that suggest weakness in Picketty’s theory. Two papers, and there are and will be many others, and Picketty’s wealth of data and explanations will be analyzed and re-analyzed and picked apart and refined and critiqued for at least the remainder of the decade. But the kicker in Cowen and de Rugy’s post is essentially that the big reception the book has gotten in the U.S. reflects deep anxiety about income inequality. Their last suggestion — that the reemergence of extreme income inequality is evidence that the American Founders’ work, and hope to escape European landed aristocracy, was a failure, and that possibility lies at the heart of Americans’ anxieties — is worth thinking hard about.


      • Coastghost

        Cowen must be ambidextrous, since this recent MR post (30 April) seems dismissive of claims that Americans are much concerned with perceived inequality:


        I identified in my post above the chief theoretical criticism leveled at Piketty’s work: his assertion that the overall rate of return on capital investment is greater than the rate of economic growth. As I am no trained economist, I didn’t note for my own benefit whose argument(s) I was adducing.
        By linking to the MR site, though, I am alerting any readers (you included, Chris) that substantive formal objections to Piketty’s basic argument are circulating fairly broadly in the community of professional and academic economists.
        My posts here have also alluded to the work of Emmanuel Saez, whose name I don’t think even came up in the “On Point” hour with Piketty and Mankiw, even though Piketty and Saez’s collaboration go back a good decade at least.
        Tabulate your own score as you see fit, Chris.

        • Chris

          Here’s what Cowen and de Rugy wrote in their NYT post, and readers can judge for themselves how to square the NYT post and the blog post. I think you’re right that Cowen doesn’t buy that inequality is a big problem and is skeptical that Americans think it is, but in this post he seems to be saying that one reason for the popular reception in the U.S., as opposed to France, is just such anxiety:

          Could it be, as suggested
          by Gillian Tett in The Financial Times, that Mr. Piketty’s power in the
          United States comes from a uniquely American anxiety? Whatever the
          debate over the book’s claims, it may be forcing Americans to admit that
          their revolution has failed and that the founders’ fight against the
          European tradition of inherited aristocracy and rented wealth will have
          ended up a noisy defeat. Hard work and dedication are platitudes, not
          practical advice, in Mr. Piketty’s America. Whether or not you agree
          with such a message, America — not France — is where that is news.

      • red_donn

        I consider it a failure of historical perspective, that it is thought the American Founders were fundamentally attempting to put an end to the notion of a landed elite. The actual debates regarding the framing of the constitution, not to mention such structures as the Electoral College and a Senate that was not subject to a vote by the masses, clearly demonstrate the desire to preserve the power of various elites.

        This is hardly anything new, of course – the Magna Carta was not a blow struck for the peasantry of England either. Projecting our highest ideals onto a period of the past, only to note those ideals have not been realized, creates a mythological view of human existence – an idyllic past contrasted with a rapidly approaching apocalyptic future, brought on by some present weakness of character. I think it far more encouraging to note the slow progression of society, as the game of power becomes open to more players over time.

  • gregghr

    Tom, I love your show and it’s too bad it’s limited to just two one-hour segments. Your show’s popularity is testified to by my inability to get in on your phone line. C’est la guerre!


    I have just started to read Pikkety’s new book so your discussion of it this week is very apropos. I think this book speaks to the underlying sickness not only in our economy but in our society as well. Everyone is talking about “we’re back to normal with only 6.7% unemployment”, “things are improving” and the “economy is coming along”, etc., etc. My concern is that the unemployment numbers are, as we all know, woefully understated given what the administration is allowing to be included in the statistics – the long-term unemployed, those who have given up looking. What we don’t know, and are never given in the stats, is what are the salary ranges that these new jobs have? My premise is that the vast majority of these new jobs are minimum wage jobs; definitely low-income jobs. For example, if 120,000 jobs are created, what percentage are below $10/hr, how many are between $10 and $15/hour, etc. Even salaried jobs can be broken down to an hourly wage based on a 40-hr work week. In addition, how many are part time jobs vs. full time jobs? How many below 20hrs/month, how many below 35hrs/month. How many are contract jobs vs. full-time hire jobs. How many come with benefits – healthcare, 401k, etc.

    Obtaining the additional statistics would, in my estimation, paint a more complete picture, one over which the administration’s spin-meisters cannot create a different truth in order to hide the realities; one that keeps most Americans spending to keep the cash flows moving to the upper echelons of society.

    Keep up the great reporting you and your team do!

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