Tag Archives: Economic Growth

The Piketty Opportunity

One of the projects that I have been pursuing over the last year or so is now available, and Pat Hudson and I are very pleased with the way it has turned out. We planned the collection in the autumn of 2015, recruited contributors who all delivered on time, it was copy-edited over the summer and went to the printers in early October. Not only are we very grateful to all the contributors for being such good citizens, our publisher Agenda has done a truly excellent job in seeing the project through.  The details can be found here: Agenda Catalogue.

Pat and I are presenting the book at the Core Seminar in Cambridge on 10 November, and there will be a more formal launch event at the LSE on 26 January 2017.

It’s the Stupidity, Stupid!

Last September I wrote about the recent General Election and the unlikely elevation of Jeremy Corbyn to lead the Labour Party; the lack of a post since then has been, I now realise, the result of deep-seated dismay.  In Britain, the first half of 2015 was dominated domestically by the backwash of the Scottish Independence referendum; internationally, by the circus of the Greek debt crisis, where Tsipras would agree one thing in Brussels and then go home and disown what he had agreed on TV, as if nobody outside Athens watched Greek TV.

Scottish independence vanished from the public agenda of the SNP just over a year after the referendum, with the collapse of the oil price.  Scotland’s prosperity now clearly lies with the current terms of the Union.  Although it should be noted that when in 2013 it looked as though the Grangemouth refinery was to be closed, the real problem was that this one closure would take 10% of the Scottish manufacturing base with it.  In January 2016 Scotland’s non-oil and gas exports to the rest of the United Kingdom were four times that to the rest of the EU and increasing – exports to the rest of the EU had fallen 8% in one year.  So the idea that the path to prosperity lay through an independent Scotland was always a rather flaky idea.  Besides which, actually establishing an independent Scotland could well turn out as costly as the Darien project.

Much the same is true of the idea that Britain could prosper through leaving the EU.  As Philip Stephens has pointed out in the FT recently, the idea that Britain could “reclaim sovereignty” by leaving the EU is self-refuting: the possibility of leaving is itself confirmation of sovereignty.  Quite apart from the very rudimentary idea of “sovereignty” that those who make such arguments display, detached from any serious consideration of the relationships now existing between European states, or any comprehension of the government of modern polities.  Best estimates of the economic gains from membership of the EU run at about 10%: that Britain is now 10% better off than it would have been had it never been a member of the EU.  Detaching Britain from the EU, and reorganising our political, economic and social relationships with the world’s third-most important political bloc, could well chew through that in short order.  What the dawning new era would be like is anyone’s guess, but there is no particular reason to suppose that it would be any improvement on the present.

Scottish independence could well follow on from Brexit.  The turbulence of Spanish politics could well lead into Catalan independence given the reduced legitimacy of established parties.  In France there is a related lack of support for the mainstream parties of right and left, which only together seem capable of stemming the electoral advance of the Front National.  Similar stories of disaffected voters placing their faith in the politics of anti-politics can be told about Italy, Germany, Greece, The Netherlands, Denmark.  And on the other side of the Atlantic those with any commitment to serious politics look on aghast as a huckster channelling the ghost of Huey Long steadily treads his path to nomination as the Republican Party presidential nominee.

As Max Weber noted, modern politics requires the firm, slow boring of hard boards, united with passion and a sense of proportion.  Today many seem to think that passion is enough.  “People” are said to be disaffected from politics and political leadership; a new antipolitics is said to be abroad.  True enough, today some of the leading British parliamentary figures plumb new depths of shallowness.  David Cameron presents himself as an honest broker, but he seeks to save us from a mess he created in the first place by his casual approach to party politics. George Osborne, set on spending ever less to “restore our finances”, seems baffled by the way that the less “he spends”, the poorer the nation becomes.  Tariq Ali tells us in the last London Review of Books that Jeremy Corbyn articulates a national mood – clearly he does not get out much, nor has he noticed that it is Corbyn’s advisers who seem to do all the articulating, the Labour Party leader being mostly mute.

The practice of politics in a representative democracy is an unedifying sight.  Representative democracy is however what we have, and the alternatives – plebiscitary democracy, authoritarian democracy, monarchy, dictatorship, oligarchic rule, theocracy – are all much worse.  We should be grateful for what we have, not be surprised by how imperfect it is.  Our efforts should be directed to improving ourselves and those around us, not blaming remote others for not giving us what we want.  All of the countries and regions mentioned above belong to the wealthiest part of the modern world.  Even being poor in a wealthy country is very rarely much like being even reasonably well-off in a poor country, a point that Adam Smith made long ago.  Articulating this principle in discussion of Europe’s immigration crisis would be helpful.  Simply being alive is a privilege; being alive in a wealthy country confers enormous benefits on those who live there, benefits to which they themselves have directly contributed little.

There is no economic case for Brexit, but that is more or less beside the point.  Extending the line of argument above, being a citizen of an EU member state brings with it social and cultural advantages that, being taken for granted, are usually ignored.  Britain is now more like eg. Holland than it is like any other non-EU country in the world – not the same, but in many significant ways similar.  Only for tourists and a wealthy elite does the USA look anything like Britain.  The truth of this is confirmed by the progress of Donald Trump through the Republican primaries.  But even here we can find confirmation of Adam Smith’s analysis of commercial society: that its motor is emulation and vanity; translated into the political process, those who already have much of what they need respond to politicians who promise them more of what they already have, which they no longer even notice they have.

Thomas Piketty: Kondratiev Redux

In 1971 I went to hear Ernest Mandel give a lecture at the LSE.  He talked, as always, about the contradictions of capitalism, and the global forces that would drive it on to its eventual doom.  Whenever an event seemed out of place in this determinist story, he put it down to the “dialectic of history”.

Thomas Piketty is a master dialectician.  At several points in his book Capital in the Twenty-First Century one can read (eg. pp. 24, 90, 58, 168) qualifications to his main argument that are simply bulldozed aside in the onward march of history.  The history that he constructs has a flimsy theoretical framework, and its empirical foundation has been put through the statistical equivalent of a blender.  It is a big book, but diffusely, not densely, argued.

The analytical basis seems to be elementary neoclassical economics combined with a loose grasp of the economics of Malthus, Ricardo and Marx.  He fails to recognise that Malthus has an underlying mechanism that links population growth to output and prices; while he entirely misses the point that Ricardo’s argument for free trade was linked to his analysis of the long run tendency of the rate of profit to fall.  A deeper understanding of the arguments advanced by Malthus and Ricardo might have enabled him to develop a rather more complex and comprehensive story.

Later on in the book there is some discussion of the idea of “human capital”.  This idea is an unfortunate metaphorical blind alley given its standard form by Gary Becker’s classic work of 1964, Human Capital.  Becker here deployed lifetime returns to education and training over periods in the mid-twentieth century where life-chances depended mainly on nationality, involvement or not in military conflicts, or the sheer luck of being born in the West after the 1940s and not before.  But instead of pointing to the essential vacuity of seeking precise aggregate estimates for “returns” to “investment” in “human capital”, Piketty wonders rather whether more data might clarify the picture (p. 223).

The same kind of problem characterises his use of various formulations related to the long-term growth of economies.  The Cobb-Douglas production function, the Harrod-Domar growth model, the Solow growth model (the “Dual Sector” model of Arthur Lewis is not mentioned, but very relevant): these are all textbook tools for training students, not instruments for practical economic analysis.  Picketty treats these very elementary models as direct ways of making sense of “long-run” trends in real economies, which trends owe a great deal to the highly-aggregated nature of the data he uses.  For a Professor of Economics he has a very attenuated grasp of what economic analysis might offer.

Nonetheless, the prime weakness of this book does not lie in its rudimentary analytical framework, but rather in the way data is employed to account for the flux of economic inequality since the eighteenth century.  Chris Giles in the Financial Times highlighted the way in which conclusions were drawn from smoothed data involving very few countries – that, essentially, the trends identified in the empirical evidence are in some cases created out of aggregated constructs.  When this highly aggregated data is plugged into his simple ratios, it is no surprise that we see stable relationships over time.  That is the outcome of the aggregation, not of the “analysis”.  The level of aggregation at which Piketty is forced to work means that very often we are talking about averages of averages over long periods.  That is one reason why this post suggests that he is the new Kondratiev, whose cyclical “long waves” rested upon price and income data of dubious reliability.

There is another reason to introduce the name of Kondratiev in this context.  Piketty’s story is about long-run trends in “capitalism”.  While there is a nod to Marx in the title of his book, he largely ignores Marx’s efforts at making sense of the new business cycle of the nineteenth century.  Despite recent interest in the work of Joseph Schumpeter, who thought Business Cycles (1939) to be his magnum opus, there is only one passing reference by Piketty to Schumpeter, to his 1942 Capitalism, Socialism and Democracy.  Even if Kondratiev’s own long waves of fifty or sixty years were provided with a better empirical foundation, the underlying problem with such long-term trends is usually the absence of a unitary cause demonstrably and consistently producing the observed effect.  And if we have a number of causes, or different combinations of causes, are we really talking about the same effect?

As with Mandel, identifying a long-term trend which turns out to be made up of all sorts of apparently random and sometimes contradictory events tells us nothing about the origin, course and resolution of each event.  The grand narrative of Piketty’s r > g sheds no light at all on the real processes by which “capital” in its broadest sense is accumulated, and also suffers random destruction – as, for instance, in the Savings and Loans crisis, the severe recession in the UK housing market from 1988 to 1996, the 1997 Asian crisis, the dotcom bubble, the Argentine default of 2001, and last but not least, the near collapse of the global financial system starting in 2007.  And these are only some comparatively recent financial events that relate to issues of the “accumulation of capital” and its random destruction.

None of this is to deny that the fruits of the growth of the world economy since the early 1800s have been shared unequally, within and between nations.  Argument about this issue among British economic historians goes back at least to the 1950s, when the issue of economic growth versus the distribution of income took the form of the “Standard of Living Debate”.  To put this in perspective, we could ask today whether Robert Malthus with his £500 per annum, free house, coal and candles was not in fact better paid than any modern economist?  Of course, the question makes little sense, mainly because changes to the structure of employment over time blurs trends in individual countries, let alone continents.  So long as we depend on prices and incomes as key indicators of change in the “standard of living” over long periods of time and across large numbers of countries, the results will always be inconclusive.

They can however be augmented with other indicators to make more sense of changes in social and economic structure.  Jane Humphries has for example recently applied modern estimates of human nutritional requirements to historical English households of differing sizes and structures.  When compared with contemporary prices, she is able to draw conclusions about the level of current income, throughout the household life cycle,  required for the basic needs of its members (Economic History Review Vol. 66 (2013) 693-714).  In the early nineteenth century the question of inequality among European households can more or less be reduced in this way to the life-chances represented by nutrition and mortality.  Humphries shines a bright light into such problems of inequality in early nineteenth-century England.  In time, other factors come to play a major part, and then in turn give way to new markers: housing, sanitation, clean water, medical care, working hours, job security, education.

Income and price data have an important part in making sense of all this, but things quickly become very complex.  Sensible argument over policy, including whether there is a need for any policy, requires that this complexity be preserved and properly understood.  Whether such argument is best served by the identification of putative long-run trends is questionable; and a focus on such “trends” leads inexorably to a need for comprehensive “solutions”, like the global tax on capital which Piketty advocates in conclusion.  For that, you would need H. G. Wells’ “world government”.