Regular Features Sandpit January 8, 2018 John Quiggin2 Comments A new sandpit for long side discussions, conspiracy theories, idees fixes and so on. Share this:TwitterFacebookLike this:Like Loading... Related
2 thoughts on “Sandpit”
I want to ask what may be a very stupid question, arising from superficial reading about Piketty.
If the long-term return on investment in capital is higher than that in labour:
a) why don’t countries put all their investment into capital, rather than some mix of the two?
b) if the increment (ie how much higher the return is from investment into capital) is somehow justified as being a risk premium – one hears about risk premium from all sorts of investment commentators – how can that actually be so if the returns are so consistently higher over so many countries and times? Doesn’t that actually mean that there is no risk, so somewhere, the market is being rigged?
Robert you are very perceptive! The whole artificial intelligence debate, the self drive transport debate, the robotisation debate all hinged on your first observation. The entrepreneur would love to do as you suggest as it is optimal based on long term ROIs. But Piketty knows that the day that happens the greatest depression ever seen will grip that economy. Let me explain by using an actual case study from the Great Depression. General Motors was facing falling profits. They decided to protect those profits by laying off a large part of their workforce. This was possible because their inventory investment was so high. Instead of protecting future profits, General Motors had a collapse in profitability. Much later hindsight showed that their most loyal customers were in fact their workers, families of workers and friends of workers. Simply put General Motors had shot themselves in the foot by sacking their best “word of mouth” advertisers. Economists know that demand comes from wages to a very large extent. Reduce wages across the industry spectrum and you reduce consumption demand.
Your second point is even more prescient. You have exposed a hidden ugly truth of capitalism. Capitalism is based on risk taking. Entrepreneurs are expected to be risk takers. But the downside of risk is business failure. To minimize this “the market” IS rigged. So we have banks that are “too big to fail”; we have large insurance companies bailed out with taxpayers money; we have legal protection for risk takers called limited liability. As one American businessman famously once said:
“the business of government IS BUSINESS!”
Joseph Schumpeter said that ‘Creative destruction” was the only way to keep capitalism as a vital economic system. He was saying that businesses MUST be allowed to fail.