r > g

October 15th, 2014

A standard piece of advice to researchers in math-oriented fields aiming to publish a popular book is that every equation reduces the readership by a factor of x (x can range from 2 to 10, depending on who is giving the advice). Thomas Piketty’s Capital has only one equation (or more precisely, inequality), at least only one that anyone notices, but it’s a very important one. Piketty claims that the share of capital owners in national income will tend to rise when the rate of interest r exceeds the rate of growth g. He suggests that this is the normal state, and that the situation prevailing for much of the 20th century, when r was less than g, was an aberration.

I’ve seen lots of discussion of this, much of it confused and/or confusing. So, I want to offer a very simple explanation of Piketty’s point. I’m aware that this may seem glaringly obvious to some readers, and remain opaque to others, but I hope there is a group in between who will benefit.

Suppose that you are a debtor, facing an interest rate r, and that your income grows at a rate g. Initially, think about the case when r=g. For concreteness, suppose you initially owe $400, your annual income is $100 and r=g is 5 per cent. So, your debt to income ratio is 4. Now suppose that your consumption expenditure (that is, expenditure excluding interest and principal repayments) is exactly equal to your income, so you don’t repay any principal and the debt compounds. Then, at the end of the year, you owe $420 (the initial debt + interest) and your income has risen to $105. The debt/income ratio is still 4. It’s easy to see that this will work regardless of the numerical values, provided r=g. To sum it up in words: when the growth rate and the interest rate are equal, and income equals consumption expenditure, the ratio of debt to income will remain stable.

On the other hand, if r>g, the ratio of debt to income can only be kept stable if you consume less than you earn. And conversely if r < g (for example in a situation of unanticipated inflation or booming growth), the debt-income ratio falls automatically provided you don’t consume in excess of your income.

Now think of an economy divided into two groups: capital owners and everyone else (both wage-earners and governments). The debt owed by everyone else is the wealth of the capital owners. If r>g, and if capital owners provide the net savings to allow everyone else to balance income and consumption, then the ratio of the capital stock to (non-capital) income must rise. My reading of Piketty is that, as we shift from the C20 situation of r <= g to one in which r>g the ratio of capital to stock to non-capital income is likely to rise form 4 (the value that used to be considered as one of the constants of 20th century economics) to 6 (the value he estimates for the 19th century)

This in turn means that the ratio of capital income to non-capital income must rise, both because the capital stock is getting bigger in relative terms and because the rate of return, r, has increased as we move from r=g to r>g. For example if the capital-income ratio goes from 4 to 6 and r goes from 2 to 5, then capital incomes goes from 8 per cent of non-capital income to 30 per cent[^1]. This can only stop if the stock of physical capital becomes so large as to bring r and g back into line (there’s a big dispute about whether and how this will happen, which I’ll leave for another time), or if non-capital owners begin to consume below their income.

There’s a lot more to Piketty than this, and a lot more to argue about, but I hope this is helpful to at least some readers.

[^1]: Around 20 per cent of GDP is depreciation, indirect taxes and other things that don’t figure in a labor-capital split, so this translates into a fall in the labor share of all income from a bit over 70 per cent to around 50 per cent, which looks like happening.

Categories: Economics - General Tags:
  1. Jordan
    October 15th, 2014 at 22:46 | #1

    There are multiple confussions in this piece. Some could be thanks to confusions and conflations in Pikkety’s Capital, intended and not intended.

    Piketty claims that the share of capital owners in national income will tend to rise when the rate of interest r exceeds the rate of growth g.

    it should be: ‘Pikkety claims that the share of capital* (wealth) in national income will rise when the rate of return to wealth* (capital) r exceeds the rate of growth g.’

    1. ‘Share of capital owners’ would imply that the numbers of owners that enjoy income from ownership of capital stock would rise. This would imply that there would be more people leaving of off ownership of means of production which is positive.
    But there is also confusion about what is ‘capital’. Is it capital stock which are tools and materials (real value) that are used in production of real value that is consumed or also money, claims on assets, productive and unproductive (consumed like house on land), financial value of financial insurance or value on future claims etc. It conflates financial values, wealth, with capital stock which have to be used to produce something marketable.

    From Varoufakis critique of Pikkety’s Capital in 21st C

    Teaching economics to undergraduates requires, as a first step, ‘deprogramming’ them. To relate properly the concept of economic rent, we must first expunge from
    students’ minds the everyday meaning of ‘rent’. Similarly, with economic (as opposed to accounting) cost, profit etc. But perhaps the hardest concept to convey to students is that of capital.
    To understand what capital means in the context of either classical or neoclassical
    economics, students must leave outside the seminar room’s door their preconception that
    capital means ‘money’ or assets expressed in money terms. Instead, they need to embrace
    the idea of capital as scarce goods that have been produced so as to be enlisted in the
    production of other goods; “produced means of production” as we keep repeating hoping that
    repetition will help free our students’ thinking from their urge to conflate a firm’s or nation’s (a)
    capital and (b) the total valueof its marketable assets.

    Unfinished debate about what capital realy is is called Cambridge Capital Controversy. Pikkety is using wealth as Capital and later switches to meaning of capital stock which is explained why in Varoufakis critique of Pikkety.

    2. Even tough simbol for interest rate is r in general economics, Pikkety is using r as a rate of return on financial investments, not as interest rate. In Cin21stC r is return on all investment, into capital stock that is used to produce marketable assets and also in pure financial speculation. Better to call it rate of return on wealth then on capital since financial value of asset can grow without producing more then before – capital gains.

    Later on he switched the meaning of capital to to mean physical capital to produce incorrect conclusion

    This can only stop if the stock of physical capital becomes so large as to bring r and g back into line

    and confusion by PrQ.

  2. Ikonoclast
    October 15th, 2014 at 23:24 | #2

    So in very simplistic terms, does this means that the following are the workers’ friends?

    (a) Inflation.
    (b) Economic growth.
    (c) Low interest rates.

    (It’s hard to see (a) and (c) occuring together but I guess it’s possible in some circumstances.)

    I wonder if the effect of r>g and the knowledge of this fact explains the attractiveness of moneterist policy for owners of capital and its imposition since about 1970? Keeping inflation very low helps capital. It hurts workers especially if unemployment is used to discipline workers and their wage demands.

    Does this also mean that whilst financial capitalists are interested in the growth of their own business they somewhat paradoxically might have a vested interest in slow growth of the economy overall?

    I don’t think there is any surprise re the third item as owners of capital clearly like high interest rates.

    On a personal anecdote level, these factors and attendant factors made it more attractive for me to become a superannuant than a worker at least on my assessment of the utility and disutility of various items. When I made this move;

    (a) my gross income dropped by about 50%.
    (b) but my net income after tax dropped by only about 25%.
    (c) add in savings from no fares, no work apparel, no lunch purchases and other sundries I would say my real net income only dropped by about 15%.
    (d) add in the fact I was paid a year’s salary untaxed to go away and be unproductive in formal economic terms (called a voluntary redudancy);
    (e) add in the fact that neoliberalism, managerialism, loss of conditions, staff shortages and stagnant or declining real wages were making it a misery to be a worker anyway.

    Frankly, I am surprised anyone in Australia gets out of bed for fulltime paid work for less than $75,000 p.a. Except for one fact of course, they mostly have NO choice.

  3. Newtownian
    October 16th, 2014 at 09:57 | #3

    Fascinating economics 101 lesson (not sarcastic). A couple of questions.

    1. Who are the capital owners and has the demarcation with workers been blurred in Australia by superannuation? Much fixation has been on the filthy rich top 0.1%. But currently superannuation in Oz is at $2 trillion heading toward $4-6 trillion in the near future of very liquid money. To put this in perspective $6 trillion is about the combined known assets of all 1500 or so billionaires identified by Fortune magazine much of which is tied up in hard assets which arent so liquid.

    Put simply are the capital owners in Oz at least also at least conceptually the older ‘workers’ to a very significant extent. This mucks up the capital v. others demarcation but also explains the panic at ANU’s minor proscription of the miners.

    2. To move toward a sustainable even degrowth future we need to find a source of capital to invest for the long term with slow and low returns assuming we keep a capitalist model of sorts. So………………..

    a. Is degrowth or no growth feasible at all given this ugly debt picture and the way capital operates as a mechanism for piling on debt so that its impossible to turn the Titanic as it were?

    b. How do you convince (softly softly government policy?) capital controllers (the finance industry) and owners (millionaires, retirees) to happily part with their moneys for the good of all and the planet when capitalism is fundamentally based on short term self interest given the ugly maths you present?

    I still havent finished Naomi Klein’s book but these sticking points seem to suggest that structurally we cant afford the future if we keep capitalism as the basic model even if we returned to a 20th century ‘social democratic’ situation/balance.

  4. Ikonoclast
    October 16th, 2014 at 10:47 | #4

    @Newtownian

    Basically correct. Capitalism is morally unsupportable and demonstrably maladaptive. Capitalism and true democracy are in tension and opposition. They are not complementary. Left to its own devices, capitalism tends to ever greater inequality, monopoly and damaging exploitation of people and environment. Pariliamentary democracy attempted to reach an accomodation with capitalism culminating in the “golden economic age” of post depression / post WW2 Keynesianism. Capitalists could afford to accomodate first world worker demands because of the accumulated profits of capitalist imperialism and colonialism.

    The modern gains of neoliberalism have proven that the accomodation with capitalism is fragile and always subject to roll-back or regression. The capitalists and corporatists have been winning the game every year from about 1975. Globalism proved the perfect strategem for disciplining first world workers. Capital began to move manufacturing to the third world to find cheaper manufacturing labour.

    Under capitalism, every attempt to address serious AGW has been thwarted or delayed. There is some movement now but it may be too little too late. We cannot afford to continue this grossly maladaptive system.

  5. Ikonoclast
    October 16th, 2014 at 11:02 | #5

    An interesting piece of recent evidence or outcome is the derisory Australian Defence Dept. pay offer. The neoliberal government expects defence personnel to be their puppets and to go away and fight distant, dangerous wars of very dubious value in terms of genuine domestic security. This is to say nothing of the dubious morality of it. For this “privilege”, Defence personnel are being required to take loss of conditions AND a pay cut in real terms. Could there be any more obvious proof of the contempt capital has for the servants who protect its profits and privileges? This is happening at a time when capital is getting an ever bigger slice of national income compared to labour.

    I am outraged on behalf of our Defence personnel on two counts. One, the government and its capitalist masters requiring participation in unjust or very poorly conceived war. Two, making a derisory pay offer at the same time which is grossly insulting. Of course, the argy-bargy of politics could result in this particualr pay decicion being improved. This will not alter the fact that the neoliberals have put in place a raft of policies to reduce real wages and this remains their general policy.

  6. Newtownian
    October 16th, 2014 at 16:08 | #6

    @Ikonoclast

    No disagreement – it was, I am embarrassed to say, a bit of a Dorothy Dixer for John, though not completely. It was in part to draw him out on how he reconciles the (morally repugnant?) commodification/dollar value assignment of the natural world e.g. carbon trading schemes, with the appalling stories the arithmetic of real capitalism tells and his own clearly progressive ethics and morality.

    Separately his example is of itself a useful example of the perverse arithmetic of economics which I find fascinating (discounting is my favorite example).

  7. Ikonoclast
    October 16th, 2014 at 17:48 | #7

    @Newtownian

    Yes, I am not sure how J.Q. views all that. I guess (just guess mind you) that he’s still looking at the mixed economy, social democratic accommodation with capitalism. I have varied (vaccillated?) quite a bit myself being socialist as a uni student, more mixed economy, social democratic accomodationist in middle age and now moving further left again. At the same time, I am not a revolutionary nor an activist in any sense.

    I more of an Ahimsa, non-harm, non-involvement sort of person and unaligned left. Somehow I think all political parties are just plain hopeless and the whole organised politics thing inevitably leads to self-interest, sectional interest, corruption and violence. At the same time, I am definitely not an anarchist if by anarchy one means lack of social organisation and cohesion. If by anarchy one means no hierarchy or at least minimal hiearchies then I might be an anarchist in that sense.

    I try to remind myself I am not in a position to judge. The world is always more complex than our simplistic ideosyncratic mental models.

  8. Ikonoclast
    October 16th, 2014 at 17:59 | #8

    Footnote to the above:- All constitutions tend to be anachronistic and somewhat inflexible documents. Knowing what I think I know now I would advocate somejow proscribing political parties in our constitution. I would certainly proscribe ALL political donations and ALL paid political advertising. I would probably require that aspiring politicians take a vow of poverty and be required to divest themselves of all worldly goods before entering parliament. They would get a living stipend and accomodation valued at the minimum wage plus reasonable expenses. This vow of relative poverty would extend for ten years after they left parliament and exclude all jobs in private enterprise above the minimum wage. Let’s see then who will serve out of a sense of commitment and duty rather than self interest.

  9. Tim Macknay
    October 16th, 2014 at 18:56 | #9

    @Ikonoclast
    So you’d be aiming to be governed by the Church, then. 😉

  10. Ikonoclast
    October 16th, 2014 at 19:05 | #10

    @Tim Macknay

    LOL, not at all. They don’t have to be religious.

  11. ZM
    October 16th, 2014 at 19:30 | #11

    Ikonoclast,

    “Knowing what I think I know now I would advocate somejow proscribing political parties in our constitution.”

    I do not know how you could do that because they are not part of the constitution so far as I know. The people just make up clubs they call parties. But it would be hard to outlaw. The solution I have thought of is since government and opposition are meant to function in the parliament like the Oxford tutorial system where one person plays advocate of the good and the other plays devil’s advocate – we could make political parties irrelevant by not letting the people in parliament decide their groups but have the Governor General sort them into government team and opposition team mixing up party members and then he can choose the prime minister and leader of the upper house (high chancellor) too since they are not mentioned as having to be chosen by parliamentary election, and having the Governor General chooses is more proper than having bill shorten work it out in a chinese restaurant. In this fashion political parties would be much less important than they are now.

  12. Ikonoclast
    October 16th, 2014 at 19:42 | #12

    @ZM

    Yes, it is hard to know how one could proscribe political parties;

    (a) practicably; and
    (b) without that becoming an instrument of oppression in its own right.

    I guess it’s just a wild wish on my part given that I am disgusted by the policy platforms and neoliberal confluence of our major parties.

  13. Ivor
    October 17th, 2014 at 07:55 | #13

    All this is odd.

    How come so many want to make various points about Piketty without one single direct quotation from him nor even one single page reference.

    This is worse than some wannabe Marxists and soggy Keynesians who fill the blogging space with all number of strange and selective interpretations of Marx, Keynes (and Adam Smith).

    Is it a case of people wanting to appropriate Picketty for their own purposes?

  14. Newtownian
    October 17th, 2014 at 09:25 | #14

    @Ivor
    Like me maybe they havent read his book but mostly the articles around its contents. A metanalysis if you like.

    For example there are 200 pages of deconstruction on the latest Real World Economics (no 69) in about 10 focused articles. They look interesting but they are themselves fairly heavy going and havent inspired me to go and buy Picketty, not because of budget constraints but because
    a. the reports are that Picketty has said the bleeding obvious albiet with excellent documentation – repeating what Robert Reich did that ages ago with less documentation,
    b. there appears to be nothing of substance whatever on environmental economics or ecological economics that I have seen from this entrail reading.

    Indicatively I scanned the RWR reviews and they have ABSOLUTELY ZIP on climate change, peak oil, or environmental sustainability – except some throwaway about natural resources. This bizarre omission which seems on par with ignoring the 2008 crunch in any analysis if not worse indicates yet again how most progressive economists still dont get the maxim:

    The economy is an externality to the natural world not vice versa as is the mindset which I think also summarizes the difference between the perspectives of the environmental (natural resource) and ecological (scientists dabbling in economics) economists.

    And thus that there analyses though useful short term are fundamentally flawed.

    To their credit RWR have given space to Herman Daly the father of ecological economics in the past as well as one Richard Smith more recently who seems to be allying himself to Ted Trainer and the Simplicity push. So they are good guys and open to the alternative thinking. But the Picketty analysis says to me they still mainly cast the environment as an afterthought/externality when considering the big economic questions.

    I was discussing this broad issue again with an ecological footprinting colleague yesterday. He doesnt get it either.

    By way of another excuse I’m trying to simultaneously get through Naomi Klein (not much new yet but very well synthesized and integrated) and Steve Kean (confirms conventional economics is stuffed albiet laboriously which brings into question the need to spend a lot of time ploughing through this stuff.

  15. Newtownian
    October 17th, 2014 at 09:37 | #15

    @Ikonoclast
    Worthy ideal however the problem remains that the world also has a lot of [email protected]#holes who cannot and wont be ignored – many of my extended (catholic) peers have tried to live your ideals as well – but this left a rump of nasties who have now seized wider power and are epitomised by the Abbot cabinet.

    Since you are being nostaligic do you recall the old Redgum song ‘If you dont fight you lose’? Says it all.

  16. Collin Street
    October 17th, 2014 at 09:39 | #16

    I guess it’s just a wild wish on my part given that I am disgusted by the policy platforms and neoliberal confluence of our major parties.

    It’s a structural problem with hierarchical organisation. I think I’ve linked to this before

    http://nielsenhayden.com/makinglight/archives/014039.html

    Political parties in this regard are nothing special: no better than many workplaces, a vast improvement on some.

  17. Fran Barlow
    October 17th, 2014 at 11:46 | #17

    Ikono

    It sounds like a system that would be hard to do compliance with and that wouldn’t be a lot better than we have now.

    I’ve suggested a hybrid sortition-direct democracy model here, amonst other places in the past. In practice, such a system would circumvent most of the concerns you have since parties could not, by definition, nominate candidates. Their ability to influence politics would be limited to developing and promoting ideas for public policy. In this system, all MPs would be independent.

    Major policy frameworks would emerge from the interplay of the one-time members of parliament and a referendum/plebiscite kind of process, which, when resolved, would become the business that the parliament would be charged to deal with.

    Institutionally, the system would be andragogic and inclusive.

  18. Ikonoclast
    October 17th, 2014 at 12:37 | #18

    I had to look up andragogic but it’s derivation is obvious once one sees the meaning.

    Yes, it’s clear that corporate-oligarchic capitalism has found a way to heavily game the out-dated constitution of Australia and the even more archaic and fundamentally flawed US constitution which was written right from the start to defend oligarchy against any real democracy.

    How would the sortition-direct democracy model you envisage work?

    I presume it does away with professional politicians (an enormous plus I would think) and replaces them with lottery selected citizens to represent local areas. But how then do the lottery-selected citizens vote in Parliament? A possibility is that they must vote as directed by citizens of their local area of be subject to recall by those citizens. The devil might be in the detialed mechanics of this but with modern internet and interconnectedness there is no technical obstacle to direct democracy. Many seem to see direct democracy as a right-wing stalking horse. Others still claim it is technically impractical. I am not convinced by either argument. Is Switzerland somewhat of model we could follow in this regard?

    Clearly, representative government has been fatally subverted, suborned and made captive to corporate-oligarchic interests. Something radical has to be done constitutionally.

  19. Fran Barlow
    October 17th, 2014 at 15:25 | #19

    @Ikonoclast

    How would the sortition-direct democracy model you envisage work?

    I’d bifurcate as follows

    Direct Democracy

    The MPs negotiate a social/economic/environmental plan for the coming five years or update modify an existing one. At a predetermined part of the year this is put in a plebiscite to the public for approval. Where there is a lack of adequate consensus (this could be where less than a given percentage of MPs support it — say 70%) a minority report could be put as well, and people could vote for no change, or option one, two or three by preference.

    Once the plan/modification was approved the parliament would be bound to reconcile their proposed dealings with the plan, and would report regularly on their progress towards realisation of the plan. In between these periods, matters of controversy in which MPs were dissatisfied with the resolution, could form committees which would be resourced to allow them to advocate alternative options, seeking public support and if they could secure the support of 3% of the voting public, then a process of inquiry and public consultation followed by a referendum would take place. If the referendum were resolved in the negative, then neither that matter nor any similar matter could be raised within the life of the parliament or three years, whichever was the longer. If it were resolved positively, then that would be binding on the parliament, and would render parts of the national plan inconsistent with it void to the extent of the inconsistency.

    In order to facilitate low cost and timely surveying of the public, dedicated voting machines would be set up in government offices, schools, major retail environments such as shopping centres and so forth permitting electronic voting.

    Sortition

    Those registered to vote could indicate their willingness to serve as MPs. Those not debarred due to having committed serious criminal offences could indicate a willingness if they wished to serve on the executive with a portfolio.

    Parliament would sit for four years but every two years, half the parliament would face election. In the first parliament after the system was implemented, the half that faced election would be determined randomly (by lot). Thereafter all MPs sent to parliament would serve for four years. The Australian Electoral Office would draw out at random a list of 20 people willing to serve from each electorate every two years (i.e. two years before those finally selected would be due to serve). These folk would then be interviewed, provided with training and a stipend equal to their salary (or if underemployed or not earning 20% more than AFTWE, then AFTWE + 20%). They would be supplied with competent staff from the public service who could mentor them and guide them in their professional development, and assist them in communicating their ideas to the broader public. At discrete moments they would be interviewed and asked to account for what they believed and the skills they believed they would bring to the job if selected as MPs.

    At the 12-month mark an initial cull would be done. Each candidate would publish a list of their proposed policies and priorities. These would be placed on a web site and registered voters would indicate using deliberative methods the extent to which they favoured or opposed these policies, and the significance they attached to each of them. Attaching greater significance to one policy would reduce the significance value they could attach to other policies. At the end of this process, the numbers would be crunched, the candidates ranked in order of public support and the bottom 50% would be culled from the list and be able to return to their lives.

    Surviving candidates could then consult further, modifying their policies and continuing their training as they thought fit. At the two year mark, the process would be repeated, but this time the rankings would determine chances in a barrel, and the final decision would be the winner by lot. The barrell would be preserved so that if the MP became unable to serve for any reason, a new draw could take place.

    In short, each winner would be a person who was

    a) not a professional politician and probably not someone who had spent his/her life serving one, and thus more like the public than current MPs.

    b) probably someone with substantial support in the community (though not necessarily from the majority

    c) someone predisposed to reach out to those disinclined to support their ideas.

    d) someone who had had some training in the usages of government.

    e) someone who knew that his or her career as an MP would last only four years and therefore didn’t need to worry about the next election

    The parliament itself would have a degree of renewal and continuity yet have room for ‘left-field ideas’ to get a hearing. Nobody could know for sure before the election how it would play out, and so bribing people would be pointless. In any event, financial transparency would be part of the package. After the election, the public could believe that writing to their politicians made some sense, because they might well persuade them on some point, and that even if their representatives were unsympathetic, others would be. The MPs would have no incentive to protect each other from scrutiny. Selecting an executive would be a genuinely open process.

    Most importantly, the continually iterated process above would create a over time a huge pool of people familiar with the usages of government who would probably be better equipped to encourage the involvement and foster the insight of their peers. This and the regular resort to consultation and Direct Democracy would ensure over time a far more informed public. Inaddition, the political parties in that setting could only hope to advance their ideas by popularising actual policies that might capture the imagination of the public at large. Most of their work would be in devising policy and promoting it, rather than tearing down opponents, being a small target and functioning as career vehicles for putative servants of the boss class.

  20. Newtownian
    October 17th, 2014 at 15:29 | #20
  21. Ikonoclast
    October 17th, 2014 at 20:43 | #21

    @Fran Barlow

    I will have to have a think about that version of sortition but the idea in general appeals to me. We certainly need to abolish the professional politicians as a class. But this is not even half of what needs to be done. The key issue is that we need to abolish capital owners and managers as classes. We need worker ownership, worker management and workplace democracy in all enterprises.

  22. Fran Barlow
    October 17th, 2014 at 21:39 | #22

    Ikono

    The first thing to do is to break the direct grip the boss class has over government, by destroying its proxies, demystifying governance and delegitimating the notion that elite control is indispensable. Until the sense of being a subject of the rich is broken, and people get it into their heads that governance is about what they think apt, the bosses will exercise an influence out of all proportion to their numbers. That’s why my system places so much effort on inclusion and andragogy. Working humanity must come to see itself as fit to govern in its own name and this as the natural state. You can’t teach that. People must learn it by living it. When they do, no propaganda system can hope to wrest this from them.

    Once this is done and all the taboos that protect business from being in the hands of working people are torn away, the new government can begin making rational decisions about where the boundaries for community enterprise should be drawn and the forms that will best suit the working folk of the world. It could well be that small enterprises with minimal capital might well be left in private hands, medium enterprises like retailers run by co-ops, large infrastructure and banking run by the state directly and so forth.

  23. Fran Barlow
    October 17th, 2014 at 21:42 | #23

    Oops … Forgot the word tab00 was tab00

    The first thing to do is to break the direct grip the boss class has over government, by destroying its proxies, demystifying governance and delegitimating the notion that elite control is indispensable. Until the sense of being a subject of the rich is broken, and people get it into their heads that governance is about what they think apt, the bosses will exercise an influence out of all proportion to their numbers. That’s why my system places so much effort on inclusion and andragogy. Working humanity must come to see itself as fit to govern in its own name and this as the natural state. You can’t teach that. People must learn it by living it. When they do, no propaganda system can hope to wrest this from them.

    Once this is done and all the tab00s that protect business from being in the hands of working people are torn away, the new government can begin making rational decisions about where the boundaries for community enterprise should be drawn and the forms that will best suit the working folk of the world. It could well be that small enterprises with minimal capital might well be left in private hands, medium enterprises like retailers run by co-ops, large infrastructure and banking run by the state directly and so forth.

  24. Ivor
    October 19th, 2014 at 08:44 | #24

    In his Introduction, Picketty constructs his aregument in the shadow of Marx and in the light of Kuznets. He claims it is possible to avoid a Marxist crisis but seems disturbed that these circumstances are still attended with inequality. Picketty then proposes a “new” theoretical framework, viz:

    When the rate of return on capital exceeds the rate of growth of output and income, as it… seems quite likely to do…capitalism automatically generates arbitrary and unsustainable inequalities?

    [p1]

    This is not new.

    Picketty then suggests that, there are “ways democracy can regain control over capitalism” (!?) while avoiding protectionist and nationalist reactions.

    In hidden opposition to Marx, Picketty highlights the sociological and subjective approaches found in the literature of Jane Austen and Honore de Balzac and in his proposition that workers and factory owners, peasants and nobles, waiters and bankers have their “own vantage points” which, through their “judgements of what is and is not just,…inevitably gives rise to political conflict that no purportedly scientific analysis can alleviate”.

    Of course, once there is no privileged group getting “r” when the rest just get leftover “g”, ie when nobles will no longer exist and when factory owners will be indistinguishable from workers, then, bankers and waiters will have no “own (economic or political) vantage points” and there will be no inevitable rise in political conflict. This is the science of Marxism.

    So it seems that the meaning of his equation, “r>g” really has nothing to do with debt specifically, as John Quiggin seems to propose, but is pointing at a deeper structural phenonema before debt complicates the picture.

    It is a far better interpretation of Picketty, to ignore the interplay with debt and all the associated obscurations, and focus on Picketty’s core analysis that r > g is the real problem or in his terms “the central contradiction of capitalism” [p571].

    In short – “r” can be greater than “g”, where there is no debtors.

  25. faust
    October 22nd, 2014 at 22:33 | #25

    r is the compensation for investors taking on risk it is the cost of capital. r > g is specifically designed for risk-taking to occur and is true on both the upside and the downside: capital accumulation when g is positive and capital destruction when g is negative.

  26. cs
    October 23rd, 2014 at 10:42 | #26

    Hi John, while I can obviously see where you’re coming from and what you’re saying, strictly can you reduce r to the interest rate? Thomas explicitly says no on page 52, insisting that r is ‘a broader notion than “rate of profit” and much broader than the “rate of interest”, while incorporating both’. He elaborates in endnote 15 on p. 584, where he insists that ‘interest is a special form of income from capital, much less representative than profits, rents, and dividends ….

    Cheers.

Comments are closed.