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The Contradictions of Capital in the Twenty-First Century: The Piketty Opportunity

Editor(s):Hudson, Pat
Tribe, Keith
Reviewer(s):Geloso, Vincent

Published by EH.Net (July 2017)

Pat Hudson and Keith Tribe, editors, The Contradictions of Capital in the Twenty-First Century: The Piketty Opportunity. Newcastle upon Tyne: Agenda Publishing, 2016. xii + 300 pp. $30 (paperback), ISBN: 978-1-911-116-11-0.

Reviewed for EH.Net by Vincent Geloso, Texas Tech University.

By the turn of the millennium, the study of inequality was more or less the poor child of the discipline of economics. The financial crisis brought this subfield back into prominence. It was hauled back onto the stage thanks in large part to the efforts of Thomas Piketty alongside research partners such as Emmanuel Saez and Gabriel Zucman, and kindred spirits like the late Tony Atkinson. Piketty’s three-pound tome Capital in the Twenty-First Century, which aggregated a series of prior works, will likely keep scholars abuzz for many years. This is because it attempts the dual task of considering the theoretical linkages between inequality and growth while also providing detailed methodological approaches to measuring inequality. Given the breadth of the concepts underlying those contributions, an entire book (or three or four) discussing and expounding on the finer details, limitations and promises contained in Piketty’s work is well justified.

The Contradictions of Capital, edited by Pat Hudson and Keith Tribe, is therefore a welcome contribution, with a few reservations. On the empirical front, there is very little to quibble about. The chapters produced by Patrick Manning, Matt Drwenski, Tetsuji Okazaki and Prasannan Parthasarathi are particularly valuable as they consider regions often ignored and about which little is known. Each on their own present relevant empirical contributions linking certain key regions to what we can refer to as the “Piketty narrative.” For these chapters alone, the book should be considered a valuable addition to one’s library.

More importantly, the book not only attempts to measure inequality (and capital), but it tries to expand theoretically on how to measure it. To do so, some chapters (notably the introduction by the editors, as well as Mary O’Sullivan’s chapter) pound the need to import more features of the Cambridge capital controversy. Simply explained, this debate centered on the ability to measure capital accumulation as an aggregate (K) which could be introduced into the commonly-used Cobb-Douglas production function. Joan Robinson and Piero Sraffa at the University of Cambridge contended that capital was not some fungible fund of homogeneous composition. In addition, capital could not possibly be measured independent of price levels without the risk of tautology. Since the role of capital features prominently in Piketty’s claim that the returns to capital (r) are greater than economic growth (g), this discussion should be welcomed as an interesting theoretical refinement of his work. To be fair, this reviewer is skeptical of the role that the Robinson-Sraffa brand of capital theory can play in terms of theorizing about capital, and even more of its value in terms of providing empirical progress. Indeed, while the other side of the Two Cambridges capital debate (Paul Samuelson and Robert Solow of MIT) conceded the logical validity of the argument, the absence of valid empirical alternatives to supplant the simplistic (but often sufficient) Cobb-Douglas function (or even more sophisticated functions such as those seen in the debates over the economics of slavery in antebellum America) limits the value of reintroducing the capital controversies of the 1960s. Nonetheless, it is important to be reminded of these theoretical points.

While it is correct to question the measure of capital and the theory of capital behind it, the book more or less elides the deeper question about inequality. The book simply assumes that inequality tends to be detrimental to society and that there is a case for reducing it by state action. This is not necessarily true. There is income inequality between a hedge fund banker and a Benedictine monk. That gap in income does not map to a gap in utility as the two individuals are maximizing their well-being on different planes of existence. While this is a reductio ad absurdum, it does speak to reality as there exist threshold earners and/or individuals who are on the backward-sloping portion of their labor supply curve where the substitution effect is greater than the income effect. There are also individuals who would refuse to swap places with others simply for greater income. A university economist, for example, might earn less than his partner who happens to be a lawyer and yet he would still be reluctant to swap places even though the income be significantly greater. That university economist is simply maximizing his well-being under the constraint that he does not want to practice law for the proposed income. In what way is that inequality a detrimental one? Such discordance between income and well-being is bound to emerge in rich societies where heterogeneous preferences imply that different channels of well-being maximization exist — many of which cannot be captured by income measures. In fact, the most problematic fact for those who want to tackle the topic of inequality is that while income inequality is rising within Western societies, inequalities of happiness and life satisfaction are falling (Dutta and Foster 2013; Stevenson and Wolfers 2008). Recognizing this fact forces one to accept the need for a further step in research: the decomposition of inequalities by source in order to identify which ones are actually detrimental (Welch 1999). The ones described above, as well as those that would emerge mechanically from population aging causing compositional change (Schirle 2008; Almas and Mogstad 2012, 2014; Goldstein and Lee 2014) or differences in labor hours households decide to provide (Pistolesi 2009) can hardly be considered detrimental. Those inherited at birth — the stickiness of present inequality as represented in the popular Great Gatsby Curve (Corak 2013) — can more easily be categorized as harmful. The same can be said of inequality that results from government action: regressive taxation, subsidies favoring richer households, regulations preventing entry and raising prices that feature disproportionately in lower income household budgets. In fact, the case can easily be made that a substantial proportion of inequalities actually result from state actions that distort markets (Geloso and Horwitz 2017). Thus, it is surprising that in Contradictions of Capital, this issue is not taken up with more vigor, as it was one of the arguments (albeit a peripheral one) made by Joan Robinson (1953).

When one accepts the possibility that some inequalities are not detrimental, one must logically accept the need to decompose inequality and consider the possibility that the proposed firefighter (the state) is often the pyromaniac who started the blaze in the first place. Although the present book is informative about the existing interpretations (and their shortcomings) of inequality, while also being empirically inquisitive about the Piketty legacy (which in itself makes the book a worthy read), it falls one step shy of considering this salient prospect which is still unaddressed. As such, it does not fully live up to the promise made in its early pages, even if it does achieve some pretty good mileage.

References:

Almås, Ingvild, and Magne Mogstad. “Older or Wealthier? The Impact of Age Adjustment on Wealth Inequality.” Scandinavian Journal of Economics 114, no. 1 (2012): 24-54.

Almås, Ingvild, Tarjei Havnes, and Magne Mogstad. “Baby Booming Inequality? Demographic Change and Earnings Inequality in Norway, 1967–2000.” Journal of Economic Inequality 9, no. 4 (2011): 629-650.

Corak, Miles. “Income Inequality, Equality of Opportunity, and Intergenerational Mobility.” Journal of Economic Perspectives 27, no. 3 (2013): 79-102.

Dutta, Indranil, and James Foster. “Inequality of Happiness in the U.S.: 1972–2010.” Review of Income and Wealth 59, no. 3 (2013): 393-415.

Geloso, Vincent, and Steven Horwitz. “Inequality: First, Do No Harm.” The Independent Review 22, no. 1 (2017): 121.

Goldstein, Joshua R., and Ronald D. Lee. “How Large Are the Effects of Population Aging on Economic Inequality?” Vienna Yearbook of Population Research (2014): 193-209.

Pistolesi, Nicolas. “Inequality of Opportunity in the Land of Opportunities, 1968–2001.” Journal of Economic Inequality 7, no. 4 (2009): 411-433.

Robinson, Joan. “The Production Function and the Theory of Capital.” Review of Economic Studies 21, no. 2 (1953): 81-106.

Schirle, Tammy. “Age-adjusted Measures of Earnings Inequality in the United States, 1980-2010.” Economics Bulletin 32, no. 3 (2012): 2662-2669.

Stevenson, Betsey, and Justin Wolfers. “Happiness Inequality in the United States.” Journal of Legal Studies 37, no. S2 (2008): S33-S79.

Welch, Finis. “In Defense of Inequality.” American Economic Review 89, no. 2 (1999): 1-17.

Vincent Geloso is the author of Rethinking Canadian Economic Growth and Development since 1900: The Quebec Case (Palgrave Macmillan, 2017).

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Subject(s):Income and Wealth
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII