84 thoughts on “Sandpit

  1. @Ernestine Gross

    Is this accurate:

    If physical and financial asset prices rise faster than labour service prices (in aggregate) then there is an increase in wealth inequality between ‘capital’ and ‘labour’.

    I thought Picketty’s “r” was not price but return. Do you have a page reference?

    In value terms – maybe at equilibrium, price = return, but then there would be no further increase in inequality.

  2. @Ivor

    I think E.G. was not directly talking about the formula (r greater than g) at that point. However, what she says is completely consistent with the formula.

    Firstly, as you say the formula is “rate of return on capital is greater than the rate of economic growth”. So, you are correct that r is rate of return.

    Secondly, as per E.G. “if physical and financial asset prices rise faster than labour service prices (in aggregate) then there is an increase in wealth inequality between ‘capital’ and ‘labour’.” This can be realised when any individual asset owner sells an asset for capital gains. This will contribute to the asset owner’s return on capital. Even while the asset owner holds the appreciated asset it can be used for security on a loan which could purchase, for example, more relatively depreciated labour. This again potentially contributes to the asset owner’s return on capital. Relative price shifts like the one E.G. talks about will (in the aggregate) increase the rate of return on capital.

    We certainly shouldn’t conceive of the return on capital as being limited to interest rates paid on certain sorts of accounts. Petty rentiers, such as self-funded retirees, may be hurt by low interest rates if they keep all their money in Pensioner Security Accounts. Large scale capitalists however can potentially borrow at very low interest rates and then find high returns by investing (speculating) in negatively geared shares and the Sydney property market (for examples). As you and I would agree (along with E.G. I think), the current economic conditions encourage speculation but not productive investment. We have an over-capacity of production (globally and probably in Australia) and worker wages are not sufficient (given the importance of their higher marginal propensity to consume compared to the rich) to buy up the produced goods. Capital would rather speculate than invest productively in this phase. The speculation in Australia is further fueled by a set of foolish policies like negative gearing and housing grants.

    Footnote:

    It has to be remembered that r GT g is a conditional equation. It does not say r is greater than g all the time. It only says IF r GT g then wealth inequality increases. Piketty then goes on to demonstrate there were long periods of capitalism where r was GT than g and one significant period where it was not. Then he shows we are again in a prolonged period where r GT g.

    Thus the conditional logical statement “IF r GT g then wealth inequality increases” says something about a fundamental trend inherent in capitalism IF a given condition is met. What would be really interesting would to be find out what conditions the outcomes of “r GT g” and “r LT g”. Piketty does not address this mystery IIRC. He does map out the historical data which show when the two conditions applied. Piketty’s claimed or genuine ignorance of Marxian scholarship is at this juncture (post his work) unfortunate. It may have been felicitous earlier because it induced him to examine these issues in a new non-Marxian, empirical manner (which is not to imply that all Marxian thinking is empirical). Some of his discoveries have tended to vindicate Marxian thinking whether he would agree with this or not.

    A reasonable conclusion is that there are tendencies in crude capitalism and in modern financial capitalism which drive the system towards the condition r GT g. There are obviously also some counter-tendencies as well. This generic or family resemblance in the behaviours of crude or industrial capitalism and modern monopoly finance capitalism induces me to think “capitalism is still capitalism”. That is to say, it is false in my opinion to assess that “capitalism” is an obsolete word or that it does not point to a useful explanation of a real, pervasive and continuing system.

  3. @Ikonoclast

    Re your post #74.

    I’ve got news for you regarding the philosophical ideas represented in math-econ agents models I talked a tiny bit about.

    The minimum wealth condition is found in the Arrow-Debreu GE model (early 1950s). I don’t know whether GE theorists in general would agree with it, but I did identify the philosophical basis of this model to be ‘laissez faire’ and four quite prominent math economists passed it.

    (The role of this condition in these models is to ensure that the phrase ‘freedom of choice’ is not empty (meaningless, undefined, propaganda, sloppy theorising, ….)

    This as well as subsequent models of this type do not model either ‘capitalism’ or ‘socialism’ (or any other ism word).

    By the way, I do not wish to promote these models; they are neither descrptive nor prescriptive, they are, according to some classification systems, analytical. This type of work may overlap with what seems to be called analytical philosophy.

  4. @Ikonoclast

    Re your 71.

    I have to disappoint you regarding my work. I am retired for quite some time. My GE work, ‘partially segmented markets with multinational firms’ was done in the 1980s. With the GE models with incomplete markets, the GE type research program (in which there were many people involved) has come more or less to an end by the late 1990s. Cutting edge theoretical research is in computational methods of complex systems and in particular game theory and stuff I am no longer aware of.

  5. @Ernestine Gross

    I understand your caveats, I believe. There is an inherent and good (I think) moral philosophy position in wanting to ensure “freedom of choice” is not just an empty phrase. I am also fine with this statement;

    “This as well as subsequent models of this type do not model either ‘capitalism’ or ‘socialism’ (or any other ism word).”

    However, I do wonder if these models do model production, distribution, exchange and consumption as I described these in my post 75 via quotes and in my own words. It would be my position at this stage, without further education or convincing, that these would be the minimum required modules (each with several or many model-able parameters) for the model. I would expect there to be some “analogical congruence” (my term) between the model and possible real economies. Bertrand Russel would refer to this as “structural isomorphism”. The structural isomorphism would have to be both of an entity kind (agents, objects, resources) and of a processual complex system kind. Meaning by the latter that processes through time are modelled (changes over time to agents, objects, resources, and quantities of any kind).

  6. @Ikonoclast

    Re your #75

    1. “… the minimum wealth condition is “a much stronger condition than the idea of a safety net”. How do the models assume, or set by parameters, the minimum wealth condition?”

    Suppose there are i = 1, 2, …, m individuals in an economy and there are j = 1, 2, …, n physical objects of choice (‘commodities’). A ‘commodity’ is defined by its physical properties, time and location and state of nature where it is made available.

    The minimum wealth condition is fulfilled if
    a) each individual is ‘endowed’ with (owns) a strictly positive quantity of each of the n commodities such that for commodity prices p = p[1], … p[n], and endowment e[i] = e[i;1], … e[i;n], wealth[i] = pe[i] (inner product of two vectors) is ‘big enough’ to allow each individual buy at least a little bit (more) of any of the commodities by selling a bit or all of what it owns according to the individual’s preferences.
    OR
    b) each individual is endowed with a skill (labour type service), s = 1, …, m such that for service prices P = P[1] , …, P[M] and commodity prices p, each individual can buy at least a little bit of any or all commodities, according to his/her preferences by selling a labour service because the market value (wealth) of the service, say P[i]Q[i] is big enough. (An individual may have more than one skill but it can’t sell more than one at a particular point in time. However, with IT technology, a particular type of service can be sold at various locations at the same point in time. I don’t write this out in notation because it gets a bit messy to write and possibly also to read for people like you who tell me they prefer words.)

    OR (if an economy with a financial system is considered)
    c) each individual is endowed with a strictly positive ownership fraction of each of the k = 1, … K financial securities such that the sum of the ownership fractions is 1 and, for security prices z[k], a vector, and an endowment z(i), a vector, i’th wealth z[k]z[i] is ‘big enough’ to buy at least a little bit of each of the commodities j = 1, …, n, according to his or her preferences, by selling some securities.
    OR
    d) a combination of (a), (b), (c), depending on the model considered.*

    Note, no matter what the source of wealth, the notion of minimum wealth always relates to wealth being ‘big enough’ to buy the most preferred bundle of commodities (goods and services). I’ve seperated goods from services explicitly because of the discussion re Piketty. In many models this is not done because the whole exercise reqires only a bit of interpretation of the concept of a ‘commodity’.

    This gives a clue regarding how the efficiency of an economic system as conceived by these models is to be evaluated, namely the allocation of physical resources in relation to the preferences of people.

    * The introduction of financial securities makes a difference though (not only interpretation) because, as Radner observed, in contrast to commodities (including labour type services) where the total supply has a ‘natural limit’ (a person can’t ever work more than 24 hours a day, the total amount of oil is finite), there is no ‘natural limit’ on the sale of financial securities (short selling is unbounded). (‘deregulating’ the financial system as if it had the properties of a fruit and vegitable market or even the mining industry was, IMHO, a big mistake which was or should have been quite obvious since the mid-1970s).

    2. Producers. I deliberately didn’t talk about producers, although I did mention the agent type ‘producer’, in my initial post because I feared it would become too dense.

    In the class of ‘private ownership economy’ models, all producers are owned by individuals via ownership shares.

    As indicated in the above note, the overriding efficiency criteria is the satisfaction of people, given their preferences and total resource constraints. Hence any objective of the ‘producers’ has to be at least logically consistent with the objectives of its owners. This is by no means a satisfactorily resolved theoretical problem.

    It is impossible for me to say very much about this problem on this blog site, no matter how big the brush I were to use. I can illustrate a little bit.

    In the Arrow-Debreu model there is no problem with the objective of producers because there is a ‘complete market for commodities’ and it opens only once. In my model I partition the Arrow-Debreu model into a finite number of local economies and introduce multinational producers. The difference between local and multinational producers is that the latter have the technological know-how on how to produce in at least 3 local economies while local producers cannot, keeping all else the same (setting aside a lot of technical stuff). Well, this little change in a model resulted in the conclusion that there are wealth transfers possible between the local economies, even if all producers are price takers (‘competitive’) and these wealth transfers (real resources) cannot be undone in the same way as they could be undone by local wealth redistribution.

    I hope I said enough to make the distinction between the blind belief version and the theoretical literature on GE clear.

    3. “By your description, the models address markets, agents, institutions and resources.”

    Not quite. The models have common elements, namely agents, resources (natural environment but not quite satisfactorily represented because of the complexity of biological systems) and an institutional environment. In the class of ‘competitive private ownership economy’ models, the institutional environment is ‘the market’, as conceptualised by a price system. In this class of models and focusing only on those which deal with alternative assumptions about the institutional environment, we have ‘complete commodity markets’, sequence of commodity and financial securities markets, partially segmented markets with multinational producers, incomplete markets. Then there are models which have a government agent, represented by the issuance of a currency unit and wealth redistribution. Then there are models where imperfect competiton is considered. (Imperfect markets has two interpretations, imperfect competition and incomplete markets, or, of course both but I don’t know of a model which considers both at the same time, it doesn’t mean there is none.)

    Now, you make an interesting point, when you write (at the right time in the discussion) that: “since distribution is determined by society and exchange by individuals.”. On the empirical level, it is the legal institutional environment which largely determines ‘the distribution’, in the sense of corporate law, competition law, labour laws, etc etc. For example, the change in the legal institutional environment from a central wage fixing system, imperfect as it may have been according to some criteria, to enterprise bargaining has huge implications regarding ‘distribution’ of profits and incentives. Why would top managers have to be ‘good’ in whatever sense you wish to interpret it if they can negotiate down wages or reduce the real wage by demanding more productivity to show a profit after all?

    IMHO, it is not discussions about ‘capitalism’ vs ‘socialism’, ‘the Left’ and ‘the Right’, no matter how learned and extensive that bring about improvements in a society. In the end they are only words. It the scrutiny of details of legislation over time that matters. Don’t you think JQ is doing an excellent job in this regard?

    ps, thanks for replying to Ivor on my behalf. Nothing to add, really.

    THE END

  7. @Ernestine Gross

    You say of the minimum wealth condition, “each individual can buy at least a little bit of any or all commodities”. You define it mathematically. This is all consistent with your statement that these are analytical models. I understand in broad terms and I accept the value of doing analytical economics of this kind. It seems a worthwhile research program to me. (Not that my unlearned assessment means much of course.) The only problem with the definition perhaps is whether a “little bit” of elite luxury goods is a meaningful concept. Can a person in the minimum wealth condition get a little bit of a private Lear jet? Does hiring one for day count? Does being able to satisfy this need at a lower hedonic level by going first class in a passenger jet or even by standard “steerage class” count? Overall, this might be a weak objection. I am just wondering how this concept pans out when applied to the real world?

    What I am directly interested in, is how could a functioning real economy implement policies and measures which would result in the minimum wealth condition being satisfied in practice for all? I mean with this happening either in the current general institutional environment or in another imaginable, “transition-to-able” and apparently feasible institutional environment? What are the practical measures and changes we could undertake to get to the minimum wealth condition being satisfied in practice?

    Historically, it seems we have attempted to meet the minimum wealth condition, or something approaching it, in various ways. You allude to this in general. The old fashioned minimum wage concept was one such practical attempt. In an era when welfare for families was, I assume, much less than it potentially is today, the concept was that a single minimum wage should be enough to feed, clothe and house a family of four including enough to educate the children at least to a basic level, albeit in state provided schools. Of course, this functioned in a sexist environment where women were largely excluded from paying work and were financially dominated by husbands or fathers.

    You say: “IMHO, it is not discussions about ‘capitalism’ vs ‘socialism’, ‘the Left’ and ‘the Right’, no matter how learned and extensive that bring about improvements in a society. In the end they are only words. It the scrutiny of details of legislation over time that matters. Don’t you think JQ is doing an excellent job in this regard?”

    You might be right to some extent but this debate gets complex. The statement; “It is the scrutiny of details of legislation over time that matters.” is correct IF it includes under the concept of “scrutiny” direct action by workers as strikes etc.: that is of workers reacting directly to the impact of unjust legislation, unjust worker-owner relations and so on. JQ is doing intellectual economic and social-democratic scrutiny of legislation over time and yes I do think he is doing an excellent job in that regard. It would be enough for any citizen to do this (as an analyst or as a citizen absorbing such analysis and then voting accordingly) if the system were responsive to what we might call enlightened analysis and enlightened voting behaviour.

    However, there is something about the system which renders it stubbornly unresponsive to the above approach. That is all I will say for now. I mean other than to say I don’t view J.Q. as just doing academic work and intellectual economic and social-democratic scrutiny of legislation over time. I would hazard a bet that he has also done much more direct action work and charity work than I have done. So, I set myself way below him in all those senses. Yet, I still presume to criticise him in what I call the political economy arena because I see a system systemically unable to act in the ways necessary to fully promote equality and ecological sustainability.

  8. @Ikonoclast
    You agreed that the notion of ‘minimum wealth constrain’t and the notion of ‘freedom of choice’ are, in principle, compatible with the notion of ‘democracy’ (we haven’t defined in an analytical sense as yet and I’d like to leave it that way for a long time in our conversations).

    You are now interested in how the abstract definition of ‘minimum wealth constraint’ is related to real life societies. This is of course a relevant question.

    Obviously, if one considers the entire ‘world economy’, then one encounters an obvious problem, namely, most if not all of us, everywhere, don’t even know what is on offer everywhere at any point in time. This consideration is enough to realise one has to interpret the condition ‘in context’, not any arbitrary hypothetical context, but the one we have inherited.

    You chose examples (private jet, etc) which are in the actual context of Australia (and similar countries).

    The wealth distribution is such that there are many people in Australia who couldn’t hire a private jet even for an hour or two. This by itself is not cause for a ‘revolution’, IMO. If everybody can at least pay for an air ticket at least once or twice in their life to experience flying and see far away places or whenever they need or want to fly from say a country town to a city in Australia, I would say we haven’t got a problem with a serious violation of the theoretical condition of the minimum wealth constraint. (Having idle private jets seems to me like a bit of ostentatious wastage of resources, but this is only my opinion.) What if some people can’t afford to get a driving licence or can’t afford a cab fare or can’t afford to hire a car for a day or two or can’t even afford a train ticket? Surely, there comes a point where people are excluded from experiencing even cheaper substitutes of modes of travel such that their life experience and their choices regarding other activities is categorically different from that of relatively more wealthy other members of society with the private jet owners on the other end of the wealth distribution. I can’t determine where these critical points are with respect to locally available goods and services and nor can you. We can only express our opinions. In a democratic society, everybody’s opinion should count in some sense. Detailed social research and opinion pieces in the public press or other mass media provide at least some communication channels for establishing, at least temporarily, some social norm as to what is a fair wealth distribution. (The vexed question of differences among people regarding their physical or mental or social abilities, bad or good luck as well as or including their motivation cannot be ignored either.) As an economist with perhaps more than average knowledge about theoretical models of ‘competitive private ownership economies’, I feel my duty is to say to people who talk markets, competition, private ownership and freedom of choice or ‘economic freedom’ that there is this minimum wealth condition. Talk about it. I say the same to people who talk about ‘capitalism’ vs ‘socialism’.

    Ikon, I now want a longish break from our discussions.

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