Tuesday, June 3, 2014

Ray on Milanovic on Ray on Piketty

Branko Milanovic has commented in some detail on a recent post of mine, about Piketty's Capital in the Twenty First Century. My initial urge was not to reply. But I see that Branko's post is getting a fair amount of attention on the net, with a wealth of approving accompanying comments about theorists who know nothing of that grand place, the Real World. 

So here is an attempt to point out why Branko's post is problematic. Not that it will help much with the general public who are (to some extent understandably) distrustful of academic arguments. And we all know it never ends: the title of this post puts me in mind of the little old lady who snapped, "Young man, it's turtles all the way down!" 


At various points Branko claims that I bring to bear a ahistorical, abstract set of arguments on what is a vibrant historical process. In doing so I'm apparently missing all the nuanced depth of Piketty's Laws. It is hard to convey just how strongly I disagree with this position, and I am not going to try. Suffice it to say that there is no substitute for one indispensable tool of debate, and that is logic. So let me take Branko's points, one by one, and attempt to address them logically.

NB. I personally like Branko, and I like his work too. So if what follows sounds hard-hitting, it is all in good spirit. With that Branko, pick up your chhota peg: cheers!

Point 1.

"While r>g may be a feature of all growth models it is still a contradiction of capitalism for three reasons: because returns from capital are privately owned (appropriated), because they are more unequally distributed (meaning that the Gini coefficient  of income from capital is greater than the Gini coefficient of income from labor), and finally and most importantly because recipients of capital incomes are generally higher up in the income pyramid than recipients of labor income."

I agree with all three of these observations. So far, I see no connection between them and r > g. But wait, I've interrupted him, he has more to say:

"The last two conditions, translated in the language of inequality mean that the concentration curve of income from capital lies below (further from the 45 degree line) the concentration curve of income from labor, and also below the Lorenz curve. Less technically, it means that capital incomes are more unequally distributed and are positively correlated with overall income. Even less technically, it means that if share of capital incomes in total increases, inequality will go up. And this happens precisely when r exceeds g."

Ah, here we are: r > g is precisely when the "share of capital incomes in the total increases" (presumably he means increases over time), and then the rise in overall inequality follows from the other assumptions --- his "last two conditions". There are, then, two pieces in his reasoning, and r > g apparently generates a progressive dominance in the share of capital income --- this is the first piece. 

But this piece is clearly wrong, and as I will fully describe in the next point (and have already stated in my earlier article), r > g implies nothing about the share of capital in total income, nor its change over time. For instance, in any model of balanced growth, r > g is entirely compatible with constant income shares of capital and labor. I've said as much in my article, but as there seems to be some persistence of this confusion, see point 2 below.

Dear reader, do not infer from this statement that I believe that the share of capital incomes will not rise. Indeed, I believe that they will rise. I say as much in my post when I discuss the "fourth fundamental law" of capitalism. My only assertion here is that r > g has nothing to do with it.

The second piece of Branko's reasoning is correct. If we assume that capital incomes are more unequally distributed than labor incomes, and if  we assume that the share of capital incomes in the total increases over time, then sure, total inequality will generally climb. But all these "ifs" are endogenous outcomes. Sure, they could be empirically what we observe. And as I have said many times: I fundamentally agree with the empirics. But please, don't tell me that this is some deep theory of inequality when all the "ifs" in that sentence pretty much assume the answer already. I expect the public to swallow it, but I don't expect a serious scholar to peddle it.

In any case, for the 87th time, r > g has nothing to do with any of the reasoning in the paragraph above, and I drive that home (dream on, Debraj!) in my discussion of Branko's next point.

Point 2.

"[r > g] It is indeed a contradiction of capitalism because capitalism is not  a system where both the poor and the rich have the same shares of capital and labor income. Indeed if that were the case, inequality would still exist, but r > g would not imply its increase. A poor guy with original capital income of $100 and labor income of $100 would gain next year $5 additional dollars from capital and $3 from labor; the rich guy with $1000 in capital and $1000 in labor with gain additional $50 from capital and $30 from labor. Their overall income ratios will remain unchanged. But the real world is such that the poor guy in our case is faced by a capitalist who has $2000 of capital income and  nothing in labor and his income accordingly will grow by $100, thus widening the income gap between the two individuals."

Oh dear, here we go again, a repetition of the very same error I've been trying to fix. Let me first make my point in words, and then we'll see where Branko makes his mistake.

Here is the point: income is income is income, no matter where it comes from. Therefore, inequality will increase if the rich save more than the poor. It will stay constant if the rich save at the same rate as the poor. And it will decline if the rich save at a lower rate than the poor.

Relax, dear reader! I know you're itching to say, "but in the Real World only the first of those statements is true." I grant that to you without the semblance of a quibble. But my point was and is that r > g has nothing, absolutely nothing, to do with whether inequality goes up or down. All that matters (in this particular context) is whether the relatively rich save more of their income than the poor, and not the current composition of savings. 

The following thought experiment might help. Remove a rich man's capital wealth completely, but allow him to keep his labor income of $1 million. Meanwhile, find a poor man with some meagre labor income, say $10,000 a year, and present him with a one-time gift of $100,000 in shares, yielding another $10,000 in dividend income. I've now created a situation in which the rich man currently has no capital income, whereas the poor man has 50% of his income from capital income. Does this mean that the poor man's income will grow faster? The answer is: certainly not. It will all depend on who saves more out of his income. It is irrelevant whether that income is earned in the form of capital, or labor.

This discussion yields two lessons:

Lesson 1. Income is income no matter how it is earned, so the composition of income at any date is irrelevant. All that matters is whether the rich save more than the poor.

Lesson 2 (for the 88th time). r > g has nothing to do with any of this. 

Where did Branko make his mistake? It is right here, in this line (and in similar lines after it):

"A poor guy with original capital income of $100 and labor income of $100 would gain next year $5 additional dollars from capital and $3 from labor..."

What the guy makes next year from his capital income is emphatically not $5. What he makes depends on how much of that income he saves. Each dollar he saves will earn him a 5% return, but that does not mean he will have $5 tomorrow simply by virtue of having a capital income of 100 today. That makes no sense.

What's more, he would make that 5% return no matter whether he saves part of his capital income or part of his labor income. That saving would yield him 5%, because that is the assumed rate of return on capital (=savings) in this example.

After all this confusing (and confused) flailing around with r > g, we finally get to something we can agree on:

Point 3.

"Let us be clear: If capitalists were spendthrifts and used all their income on consumption,  there would be indeed no accumulation of capital, we would be in Marx’s simple reproduction, and Debraj would be right. But again this is not the  world we live in.  Not only is the assumption that capitalists save and reinvest 100% of their capital income a standard one in growth models... [i]t also corresponds with empirical data."

I didn't say anything different. I have been emphasizing different savings propensities throughout my article. I completely agree that differential savings rates between rich and poor is an enormous driver of inequality. If you consistently save a larger fraction of your income than I do, and our labor incomes grow at the same rate g, you will become infinitely richer than me as time goes by. I guarantee it. Yet, at the risk of developing a sore throat, let me say it for the 89th time: r > g has nothing to do with it.

Much of Branko's article consists of statements made about my thinking that are odd, to say the least, and I am not sure how to respond to them. But hey, blogs will be blogs, so let's hear:

"Now, why has Debraj gone astray in his otherwise very lucidly argued paper? Because he essentially assumes that economic processes described by theory of growth are abstract and do not take place in a capitalist environment..."

Hmm...and what is this "capitalist environment"? Milanovic barrels on:

"...where indeed the facts are such that capitalists tend to be rich (and not poor), and where such capital owners do not spend all of their income on consumption."

Oh Branko, are you sure you've read what I wrote? Here are some quick extracts from my post:

"richer people can afford to (and do) save more than poorer people. But that has to do with the savings propensities of the rich, and not the form in which they save their income. A poor subsistence farmer with a small plot of land (surely capital too) would consume all the income from that capital asset."

And later:

"[T]he savings rate climbs with higher incomes. This is an important driver of secular inequality. One can pass through several Kuznets cycles, but the rich will always be in a better position to take advantage of them, and they will save at higher rates in the process. The process is cyclical, but not circular." 

It sounds like this aspect of the "capitalist environment" is something that I just might be aware of. (And there's more --- much more --- to be aware of, such as the implacably labor-displacing nature of technical progress, which I discuss in my article.) What Branko is doing is turning a precise discussion, in which I am examining Piketty's Third Law, into a statement about my general ignorance of the capitalist system. Come now Branko. Would you like to examine Piketty's Third Law, or would you like to tell me about the savings propensities of the rich? On the latter we are in agreement. In fact it is far better candidate for a "Law" than any in Piketty's book. But what has the Third Law to do with it? And if it doesn't (as I hope you see by now), my leaving it out is not a hallmark of my "going astray," but rather to discuss things in the only way I know: scientifically.


In closing, let's get something straight. I've read my Capital (nope, the other Capitaland here's a little secret: the author is a hero of mine for asking some of the greatest questions of all time). As a matter of fact, I am deeply interested in historical processes. I believe I do not neglect them in my work, or I try not to. I firmly believe that capitalism tends to generate ever-widening inequalities, for the reasons that I have outlined in my previous post and that I will expand upon in the near future. And I am not some right-wing stooge dumping on Piketty using abstract mathematical arguments, or an economist who unabashedly believes in free markets. These are simplistic ways to categorize Piketty's critics.

What I do believe in, however, is clear-headed reasoning. There is data --- and a lot of great data in Piketty's book --- and then there is explanation, or theory. When discussing the data, discuss the data. But when doing the theory, let's not slip  "historical truths" or "capitalist reality" in there. If you want to explain something, don't hide behind the skirts of that great seducer, the Implicit Assumption. 

Sunday, May 25, 2014


A Comment on Thomas Piketty’s Capital in the Twenty First Century
[For a pdf version with an appendix, click here.]

Thomas Piketty’s heart is definitely in the right place. Capital in the Twenty First Century addresses the great question of our times: the phenomenon of persistent and rising inequality. Piketty has amassed data — both from a motley collection of sources and from his own empirical work — that shows how inequality has not just been high, but on the rise. Piketty purports to provide an integrated explanation of it all. Paul Krugman calls it “the unified field theory of inequality.” Comparisons to Marx’s great Capital abound (perhaps not entirely unsolicited). Even in this quick-moving bite-hungry world, everyone is still cheering, weeks after the English translation has appeared. That’s pretty amazing.

Amazing, but at another level, unsurprising. We’ve been handed a Messiah — in the form of a sizable tome that contains the laws of capitalism, yes, Laws! The tome has been approved — nay, embraced — by seemingly sensible economists and reviewers. It is written by a good economist whose intellectual acumen is undisputed (I have first-hand evidence for this). It unerringly asks the right questions. So the knee-jerk intellectuals are all a-Twitter, so to speak.

Yet, Piketty’s heart apart, the rest of him is a little harder to locate, and I don’t just mean his coy statement that ”I was hired by a university near Boston,” or his distancing from those economists that just do economic theory without studying the real world: “Economists are all too often preoccupied with mathematical problems of interest only to themselves.” Those remarks are at worst a mildly irritating digression. What I mean is Piketty’s positioning on the whole business, his little nod-and-wink to the media and his vast potential audience who feel they already know what economics is all about: look guys, there’s Marx, then a bunch of punctilious theorem-provers, then a small-fisted clutch of real economists, and then there’s me, Piketty, and in case you’re not getting the point, read the title of my book.

Which, by the way, is probably all what many people who are raving about the book have done.

Piketty’s very long opus, which would benefit not a little from severe compression to around half its size or perhaps less, can be viewed as having the following main components:

1. The empirical proposition that inequality has been historically high, and apart from some setbacks, has been growing steadily through the latter part of the twentieth century (with capital incomes at the heart of the upsurge), and

2. A theoretical apparatus that claims to explain this phenomenon, via the promulgation and application of three “Fundamental Laws of Capitalism.”

I begin with the empirics, but my main points will be about theory.

Long ago, there was Simon Kuznets, an American economist who painstakingly (but with relatively little at his informational disposal) attempted to piece together data on economic inequality in developed and developing countries. With a rather remarkable leap of intellectual virtuosity, Kuznets formulated what soon became known as the Inverted-U Hypothesis (or the Inverted-U Law in some less timid circles): that economic inequality rises and then inevitably falls in the course of economic development. Remember, Kuznets was writing in the 50s and 60s, when all within his experiential ken was agriculture and industry and not much else. So, to him, the story was clear: as an agricultural society transits to industrial production, a minority of the labor force begins to work in industry, and both this minority as well as the relatively few industrial capitalists receive high profits, thereby driving up inequality. Later, as the minority of industrial workers turns into a majority, and as other industrialists come to challenge the incumbent capitalists, the initial inequalities are competed away, leading to a phase of falling inequality.

This is a sensible story, but necessarily incomplete, because as we all know now, agriculture and industry are not the only games in town. Here, for instance, is me writing in 1998 (in an even larger book which could also do with some serious pruning):

"Even without the biases of technical progress, industrialization itself brings enormous profits to a minority that possess the financial endowments and entrepreneurial drive to take advantage of the new opportunities that open up. It is natural to imagine that these gains ultimately find their way to everybody, as the increased demand for labor drives up wage rates. However, the emphasis is on the word ‘ultimately’...

"Such changes may well create a situation in which inequality first rises and then falls in the course of development . . . but to go from this observation to one that states that each country must travel through an inverted-U path is a leap of faith. After all, uneven (and compensatory) changes might occur not only under these situations, but in others as well. Thus it is possible for all countries to go through alternating cycles of increasing and decreasing inequality, depending on the character of its growth path at different levels of income. The complexity of, and variation in these paths (witness the recent upsurge in inequality in the United States) can leave simplistic theories such as the inverted-U hypothesis without much explanatory power at all.” (Development Economics, 1998, Princeton University Press.)

At the time of that writing, and coming into the end of a long stock market boom in the United States, the fact of rising inequality was already widely visible, and several papers were being written on the subject. Two of the main contenders were labor-displacing technological change (computers, for instance) and the rise of globalization, which kept domestic wages down while allowing profits to grow. There was much discussion and healthy debate. My goal is not to review the debate, but to point out to the hyperventilating readers of Piketty that such a debate was indeed alive and well.

What Piketty brings to this particular table are the following points:

1. Inequality has been rising, and to see it well, one should study “top incomes,”: those of the top 1% or even, in a variant which we might call SuperOccupy, the top 0.1% or 0.01%. This is an extremely important observation. There are lots of people in the top 1% (more in India, for instance, than in a good-sized European country), and they cast a long and enviable shadow. Theirs are the cars you see gliding by on the streets. Theirs are the gadgets we’d like to buy. Theirs are the lives the media gorge on. Theirs are the styles we covet. Even a large sample survey will often fail to pick these people up, so Piketty’s meticulous examination of tax records (along with co-authors) in different countries is to be applauded. This is data work at its best, with a well-defined reason for doing it, and when I read the papers with Emmanuel Saez and Tony Atkinson that put these findings together, I felt I had learnt something.

2. Piketty’s second point is that the rise in inequality is driven, by and large, by the progressive domination of capital income. Piketty presents different pieces of evidence to suggest that “capital” is making a comeback, and yes, it is important to put capital in quotes because he does lump together a variety of forms of capital in that term: ranging from capital holdings that directly bear on production (such as stocks or direct investments) to those that might serve a more speculative purpose (such as real estate). On these matters the empirical story is far less firm, though Piketty doggedly sticks to Capital (oh, but the title at all costs!). For instance, Bonnet et al (2014) observe that once housing prices are removed from the Piketty compilation of capital, the phenomenon of rising share of capital income goes away. At the time of writing, the Financial Times (May 23, 2014) is reporting arithmetical errors in some of the Piketty spreadsheets. I am not yet competent enough to comment on these empirical critiques, but I’m pretty sure that the overall observation of rising inequality will stand in some definitive shape or form. Nevertheless it is disconcerting to see how the aggregation of disparate “capital holdings,” some productive, others less so, might drive the finer details of a trend.

There is also the not-so-small matter of the United States, an exception noted by Piketty. It is unclear that the story of rising inequality in the US is one of physical (or financial) capital coming to dominate. Rather, inequality in the United States appears to be propelled by incredibly high returns to human capital at the top of the wage spectrum. This points to a very different set of drivers, and also shows that the physical capital story is not pervasive.

Which brings me to the Fundamental Laws of Piketty. “Make no mistake,” (to quote one of his favorite phrases) description is not enough, and it is laudable that Piketty, despite his distaste for mere theorizing, feels the need for deeper understanding — for an explanation as opposed to a mere description — of the great phenomenon of rising inequality. That he feels this need is worthy of acclaim in itself, for in fact too many researchers today are content with mere description. Whether he succeeds is a different matter, to which I now turn.

Piketty’s Laws 1 and 2 can, alas, be dismissed out of hand. (Not because they are false. On the contrary, because they’re true enough to be largely devoid of explanatory power.) For the benefit of the reader interested in a brief, self-contained account, I have relegated a statement of these laws to an appendix (see the appendix here in this pdf version), but here is an even briefer description.

Law 1 is merely an accounting identity, a simple tautology that links variables: the rate of return on capital, capital’s share in income, and the capital-output ratio. These are all outcomes or “endogenous variables,” no subset of which can have explanatory significance for the rest unless something more is brought to bear on that piece of accounting (which as far as I could tell, isn’t).

Law 2, which links the savings rate, the capital-output ratio and the growth rate, is the famous Harrod-Domar equation. This goes further than mere tautology, unless we allow all these three variables to freely move, in which case it is not much better than Law 1. Law 2 turns into a falsifiable theory once we impose further restrictions: Harrod did so by presuming that the capital-output ratio is constant. Solow did so by presuming that the capital-output ratio evolves along a production function. Piketty, as far as I can tell, does neither. For instance, there are sections in the book that explain the rise in the capital-output ratio by referring to a fall in the rate of growth. (See the Appendix.) This is silly, because the rate of growth is as much as an outcome as the capital-output ratio, and cannot be used as an “explanation” except one of the most immediate (and therefore un-illuminating) variety.

Moreover, these relationships pertain to simple equations that link macroeconomic aggregates: national income, capital-output ratios, or the overall rate of savings. Without deeper restrictions, they are not designed to tell us anything about the distribution of income or wealth across individuals or groups. And indeed, they do not.

And so we come to Piketty’s Third Fundamental Law, what he calls “the central contradiction of capitalism”:

The rate of return on capital systematically exceeds the overall rate of growth of income: r > g.

Relatively speaking, this is the most interesting of the three laws. It is a genuine prediction. It is falsifiable. And empirical research throws real light on this phenomenon: Piketty amasses data to argue that this inequality has held, by and large undisturbed, over a long period of time. (And reading this description of empirical trends, I continue to be impressed.)

Here is what Piketty concludes from this Law, as do several approving reviewers of his book: that because the rate of return on capital is higher than the rate of growth overall, the income of capital owners must come to dominate as a share of overall income. Once again, we are left with a slightly empty feeling, that we are explaining one endogenous variable by other endogenous variables, but I don’t want to flog this moribund horse again. Rather, I want to make two related points: (a) the above assertion is simply not true, or to be more precise, it may well be true but has little or nothing to do with whether or not r > g, and (b) the law itself is a simple consequence of a mild efficiency criterion that has been known for many decades in economics. Indeed, most economists know (a) and (b), or will see these on a little reflection. But our starry-eyed reviewers and genuinely interested readers might benefit from a little more explanation, so here it is.

The rate of return on capital tracks the level of capital income, and not its growth. If you have a million dollars in wealth, and the rate of return on capital is 5%, then your capital income is $50,000. Level, not growth. On the other hand, g tracks the growth of average income, not its level. For instance, if average income is $100,000 and the growth rate is 3%, then the increase in your income is $3000. Saying that r > g implies that capital income will grow faster than labor income is a bit like comparing apples and oranges.

To make the point clear, I’m going to expand upon this argument in two ways. First, let us look at a situation in which the argument apparently holds. Suppose that capital holders save all their income. Then r not only tracks the level of capital income, it truly tracks the rate of growth of that income as well, and then it is indeed the case that capital income will come to dominate overall income, whenever r > g. But the source of that domination isn’t r > g. It is the assumption that capital income owners save a higher fraction of their income!

Now, is there anything special about capital income that would make their owners save more of it? After all, a dollar is equally green no matter which where it grows. The answer is a measured “not really,” with the little hesitation added to imply: well, possibly, because the owners of capital income also happen to be richer than average, and richer people can afford to (and do) save more than poorer people. But that has to do with the savings propensities of the rich, and not the form in which they save their income. A poor subsistence farmer with a small plot of land (surely capital too) would consume all the income from that capital asset. It may well be that the return on that land asset exceeds the overall rate of growth, but that farmer’s capital income would not be growing at all.

In short, I’m afraid that as far as “explaining” the rise of inequality goes, Piketty’s Third Law is a red herring. In the discussion above, everything depends on the presumption that the savings is a convex function of income, thus generating ever-widening inequality over time. That argument does not pin down whether such inequality will manifest itself in the ultimate domination of capital income, as defined by Piketty. It might, if the rich choose to save their wealth — or transfer it over generations — in the form of dividend-paying capital assets. And they do, more often than not. But it won’t, if the rich use skill acquisition as the vehicle for their intergenerational transfer. It would show up in human capital inequality instead. (And indeed, some version of this discussion appears to be true for the United States, a notable exception to the Piketty argument, though my argument shows that the exception isn’t so exceptional after all.1)

But the Piketty faithful will still cling to the magic of that all-pervasive formula: r > g. That looks right, doesn’t it, and besides, it is impressive how empirically the law appears to hold through decades of data. My answer is: yes, it does look right, and its empirical validity is indeed impressive, but to me it is impressive for a different reason: that it is a mini-triumph of economic theory.2

Here is a fact. Take any theory of economic growth that is fully compatible with “balanced income growth” of all individuals, the kind we already know does a bad job in explaining rising inequalities. Under the mildest efficiency criterion — one that essentially states that it must be impossible to increase consumption for every generation, including the current generation, by lowering savings rates — it follows, not empirically but as a matter of theoretical prediction, that r > g. Piketty’s Third Law has been known to economic theorists for at least 50 years, and no economic theorist has ever suggested that it “explains” rising inequality. Because it doesn’t. It can’t, because the models that generate this finding are fully compatible with stable inequalities of income and wealth. (More on this in the appendix to the pdf version.) You need something else to get at rising inequality.

What then, explains the marked and disconcerting rise of inequality in the world today? Capital, in the physical and financial sense that Piketty uses it, has something to do with it. But it has something to do with it because it is a vehicle for accumulation. It is probably the principal vehicle for accumulation by the top 1% or the top 0.01%, simply because there are generally limits on how high the compensation to human capital can be in any generation. It is hard enough to make a few hundred thousand dollars in annual labor income, and reaching the million-dollar mark (let alone tens of millions) is far harder and riskier. But physical capital — land and financial assets — can be steadily and boundlessly accumulated. In this sense Piketty is right in turning the laser on capital. But, as I said, it’s just a vehicle. (Even a lower middle class family in a high-income country can buy a few shares of Apple or Google.) What’s driving that vehicle is the main question. On this I have three things to say.

The first is that economic growth is fundamentally an uneven process. Whether or not the workhorse growth models satisfy r > g (as I’ve said, they do by and large), they fail on the grounds that they do not capture this intrinsic unevenness. Agriculture to industry was just one of the greatest structural transformations. But there are others. The IT revolution brought about another seismic shift, and a great displacement of unskilled labor that is still not over. When the dust has settled, that too will have created a rise in inequality, followed by a Kuznets-like adjustment as job-seekers across generations struggle to deal with the creation of new occupational niches, and the disappearance of others. There are other, perhaps smaller revolutions, but important enough to be visible at the country level: the rise of services, or the software industry, or a boom in finance or engineering. The fact of the matter is that there isn’t just one Kuznets inverted-U. To caricature things a little (but only a little), there are many overlapping inverted- Us, one for each source of uneven growth. Each creates its own inequalities, as the lucky or farsighted individuals already in the beneficiary sector experience an upsurge in their incomes. That inequality then serves as an impetus to reallocation, as the individuals in the “lagging” sectors (or their progeny) attempt to relocate to the growing sector. Whether or not that reallocation can occur will depend on how quickly the new generation can adjust, and on their access to resources (such as the capital market). Whether or not that reallocation is successful depends on the next tsunami of unevenness and where it hits, and so it goes.

The second point is that such unevenness is invariably exacerbated in a globalizing world. As countries open up to trade, some sectors, propelled by comparative advantage, will reap immense rewards, and the inhabitants of those sectors will be the beneficiaries. Each wave of globalization starts off a potential Kuznets curve in each country that reacts in this way.

My third point is that in this uncertain, uneven world, inequalities will invariably rise and fall with the great shifts: industry, information technology, and whatever is to come. Is it possible to predict whether the rise and fall will bring us back to the same starting point in “inequality space”? In other words, is there a long-run, secular trend to inequality? I believe that there will be, for a few important reasons.

To begin with, the reallocations demanded by uneven growth can be best dealt with by the already-wealthy. They have the deep pockets to finance the human capital of their children. In a world with perfect credit markets, this problem would go away. But the world does not have perfect credit markets.

Next, the savings rate climbs with higher incomes. This is an important driver of secular inequality. One can pass through several Kuznets cycles, but the rich will always be in a better position to take advantage of them, and they will save at higher rates in the process. The process is cyclical, but not circular.

And finally, if I may be so bold as to supplement Piketty’s Three Laws by yet another, here it is:

The Fourth Fundamental Law of Capitalism. Uneven growth or not, there is invariably a long run tendency for technical progress to displace labor.

There is a simple argument why this law must hold. It is this: capital can be indefinitely accumulated, while the growth of labor is fundamentally limited by the growth of population. Therefore there is always a tendency for capital to become progressively cheaper relative to labor, and so all technical progress must be fundamentally redirected away from labor. But there is a subtlety here: that redirection must of necessity be slow. If it is too fast, then the demand for labor must fall dramatically, resulting in labor being too cheap. But if labor is too cheap, the impetus for labor-displacing technical progress vanishes. So, this change must be slow. But it will be implacable. To avoid the ever widening capital-labor inequality as we lurch towards an automated world, all its inhabitants must ultimately own shares of physical capital. Whether this can successfully happen or not is an open question. I am pessimistic, but the deepest of all long-run policy implications lies in pondering this question.


1To be sure, as Piketty (p.300) notes, “a very substantial and growing inequality of capital income since 1980 accounts for about one-third of the increase in inequality in the United States — a far from negligible amount.” But it is the inequality in labor incomes that accounts for the bulk of it.
2The fact that economic theory occasionally uses some mathematics isn’t reason to abandon it. Rather, it suggests that as readers, we need to work a little harder ourselves instead of having things handed to us on platters suitably disinfected of mathematical symbolism.

Some References:

O. Bonnet, P-H Bono, G. Chapelle and E. Wasmer (2014), Does housing capital contribute to inequality? A comment on Thomas Piketty's Capital in the 21st Century, SciencesPo Economics Discussion Paper 2014-07.

P. Krugman (2014), “Why We’re in a New Gilded Age,” New York Review of Books, May 8, 2014.

T. Piketty (2014), Capital in the Twenty-First Century, English edition translated by Arthur Goldhammer, Cambridge, MA: Harvard University Press.

D. Ray (1998), Development Economics, Princeton, NJ: Princeton University Press. 

“Piketty findings undercut by errors,” The Financial Times, May 23, 2014. 

Sunday, September 8, 2013

Translating Tagore

I woke up early this morning to be reminded of one of Rabindranath Tagore's most beautiful songs, "মেঘ বলেছে যাব যাব". (Thank you Monobina Gupta.) Here's a link to the song, sung by Indrani Sen. Here's another, sung by Debabrata (George) Biswas.

What a song, what a poem.

But the links above will clarify what Problem No. 1 is with renditions of Tagore. In the overwhelming majority of cases, the songs are sung with the most dreadful instrumental accompaniment. But dreadful. What astonishing voices Indrani Sen and George Biswas have, and how these and other voices are ground into the dust by the sentimental cacophony of the sitar/sarod/violin that often accompanies them, not to mention that absolute bane of Rabindrasangeet, the harmonium

In passing, here is an example of how it might be done. It won't go down well with everyone, but there's definitely something there. I'll even take this Bollywood-style number. Just keep the lachrymosity down, please. 

And then there is Problem No. 2. I find the translations of Tagore generally impossible to take. Not least by the Great Man himself. They feel exactly like the musical accompaniments: ornate, excessive, sentimental, and without any real feel for the English language.

So there I was, completely locked into the utter poetry of this song at 7 a.m. I googled, looking for English versions. Don't try it. Well, ok, if you insist: scroll down on this link, and steel yourself. 

I'm teaching a new class this term, so I had no business floating around, wasting time, trying to translate it myself. I had spent some hours on this mad endeavor before I realized that as I was reading and re-reading the Tagore poem, a line from García Lorca was tapping gently on my subconscious:

Pero yo ya no soy yo, 
ni mi casa es ya mi casa.

(But I no more am I
Nor is my house my house.) 

Here's the entire masterpiece (avoid the transliteration).

And it unlocked Tagore's great poem into English for me. 

All right, in celebration of the previous post on Free Speech, I have decided to make an ass of myself in public. To exorcise the ghosts of this poem, I will share my translation with you:

The Clouds declare, “We're leaving.” 
The Night echoes, "Goodbye."
The Sea replies, “I touch the shore, 
And I no more am I.” 

But Sorrow says, “I will stay kept
In the imprint of His step." 
The I cries out, “Dissolve me now
There's nothing else that's left.” 

The World responds, “For you, my friend
I've made a wedding strand.” 
The Sky agrees, “For you, my friend
I've lit a thousand lamps.” 

And Love complains, “It's for your sake
That all the night I stayed awake."
But Death announces (quietly),  
"Your life’s canoe is rowed by Me.” 

And here, for completeness, is the original:

মেঘ বলেছে যাব যাব,
রাত বলেছে যাই ;
সাগর বলেছে কুল মিলেছে,
আমি তো আর নাই |

দুঃখ বলে রইনু চুপে,
তাহার পায়ে চিহ্নরূপে |
আমি বলে মিলাই আমি,
আর কিছু না চাই |

ভুবন বলে তোমার তরে আছে বরণ মালা |
গগন বলে তোমার তরে লক্ষ প্রদীপ জ্বালা |

প্রেম বলে যে যুগে যুগে
তোমার লাগি আছি জেগে |
মরণ বলে আমি তোমার জীবন তরী বাই |

Free Screech

It is refreshing (though slightly alarming) to see that my occasional  and much-beloved correspondent, the voluble Parakeet Ghost, is a free speech fundamentalist. 

I'm not. But this week my vocal and mental faculties are fully employed elsewhere. Therefore, I'm handing it over to the Ghost Who Talks, permitting him to eloquently squawk below (or perhaps more aptly for the occasion, to engage in free screech).

Confessions of a Fundamentalist

I am a free speech fundamentalist. Let me explain.

Free speech is often supported because it is seen to produce good results. It creates more informed citizens and voters. New and useful ideas emerge from the cacophony of voices. Problems attract the attention of decision makers more quickly. Amartya Sen famously argued that famines tend not to occur in democratic open societies because news of a crisis spreads fast.

The problem with a purely instrumental view of free speech is that it allows speech to be suppressed when it poses a real (or even imaginary) threat to social welfare. For example, provocative opinion on sensitive religious issues could potentially lead to friction between communities and cause riots. In such cases, freedom of expression must take a back seat to the public interest, it is argued.

This view has become the orthodoxy in India. Its genesis probably lies in the banning of Salman Rushdie’s Satanic Verses. The “stop the riots first” mindset is deeply problematic and the seed sown by Rajiv Gandhi in 1989 is bearing some of its toxic fruit now. I haven’t yet read Joseph Anton. Debraj thinks Rushdie’s batting for free expression is ruined by his narcissism and self regard (he is not alone in thinking so). Maybe, but I think the principle here is worth defending if not the victim.

Despite a generally favourable speech climate, Europeans sometimes place social goals over freedom of expression, as reflected in the head scarf laws of France or the criminalization of Holocaust denial. In America, some landmark First Amendment cases defended speech that was disreputable or unpopular, like Larry Flynt’s pornographic parody or the anti-semitic rally in Skokie, Illinois (while we are at it, though, let us spare a thought for Bradley, er, Chelsea Manning).

Of course there are some limits on free speech everywhere. Libel laws and penalties for false advertising are oft cited examples. But the exceptions should be narrow, based on concrete criteria and the bar ought to be set very high. So says the Supreme Court of the United States.

I must confess I find the American approach more appealing. Freedom of expression should be upheld regardless of immediate consequence. Social discord should not be an admissible argument for suppressing speech. Freedom of speech should be seen as an end rather than a means. I will give you three arguments to support this position.

My first argument is based on misuse. After the Bush administration’s sordid human rights violations came to light, some apologists grew rather fond of an ethical hypothetical: the ticking time bomb scenario. Wouldn’t you be willing to torture a terrorist to find out the location of a time bomb that is about to blow up the world? The answer is “yes, of course” but one should add: what does that have to do with anything? The question isn’t what is right in extreme (and extremely unlikely) scenarios but what kind of power the state can be trusted with. The speech issue is quite similar.

As a matter of public policy, if we are debating restrictions on free speech, we are talking about a systemic choice, not a particular application. We must judge it by the likely consequences that will arise when such powers are placed in the hands of political actors. What has happened in India in the last few decades is a clear illustration of how speech control invariably ends up as a tool serving the powerful. After all, they are the ones in control!

India’s most divisive politicians, folks who exploit people’s prejudice to reap a harvest of money and votes, still go about their own merry way. Repressive legislation like Section 66A of the IT Act has not helped one bit in restraining the true purveyors of hate. It is unleashed instead on those who are not in organized politics. It muzzles innocuous comments, artistic expression, dissent and criticism.

Earlier this year, Bombay (oops, Mumbai) was brought to a standstill by the death of Bal Thackeray, whose political career can be seen as a museum of local chauvinisms. The fickle shifting of his target groups (Tamils, Muslims, Biharis) is only matched by the brazen vehemence with which they were demonized. The same police who wouldn’t dare move against open exhortation to political violence arrested two college students who wondered aloud about the forced shutdowns that accompany powerful politicians’ deaths. One of them didn’t even say anything, just uprated a Facebook post!

In an even more surreal twist, West Bengal police arrested a college professor for emailing a political cartoon to a group of acquaintances. While the cartoon clearly mocked the political shenanigans of chief minister Mamata Banerjee, she described it – pushing common sense beyond its last breath – as a murder threat! Meanwhile, the culture of political violence in the state spirals out of control and Banerjee’s own party MLAs are heard issuing barely veiled threats at opponents in election rallies. Law enforcement pretends to be stone deaf.

In the last two decades, India’s illiberal speech laws have made us witness a series of unfortunate events. Artists, rationalists and feminists have been hounded into exile, critics of army atrocities in troubled states have been charged with sedition, the ruling party has gone after Google and Facebook, and con artists have bottled up any attempt at exposé. In the same time frame, we have seen the destruction of the Babri Masjid, politicians suspected of organizing riots attaining high office, anti-superstition activists being shot, and caste or communal calculus coming to dominate electoral politics. This medicine has only side effects, no healing properties.

My second argument is based on reverse causation. As we seal lips, cowering at the prospect of intolerance and violence, we sow the seeds of the very things we are afraid of. As we tie up and dumb down our discourse, we shed our capacity for nuance, complexity, analysis or irony. We encourage the prickly sensibilities that we are trying to assuage.

The climate of soft censorship that we have bred in India has led to the explosive growth of an outrage industry. No Bollywood blockbuster can be released today without some obscure and offended group throwing a hissy fit over something or the other. Every year the Jaipur literary festival descends into a farce over some throwaway comment, a book reading or maybe even a limerick or palindrome.

The latest episode involved Ashish Nandy, who made the trenchantly egalitarian observation that the privileged classes often define corruption to leave out nepotism and quid pro quo – unfair means in which they have a comparative advantage. As the networks endlessly recycled an out-of-context line, which appeared insulting to dalits and adivasis (but only out of context), Nandy grovelled before a local political boss but still ran afoul of the Prevention of Atrocities Act! From a people who occasionally risked coming to blows, we have become a nation capable of uttering only platitude and pablum in public.

My third argument is very simple. It doesn’t matter what the outcome is. Free speech is a beautiful thing, the same way the forest is more beautiful than the garden. Throughout history people have recited poetry and yelled obscenities, blown kisses and given the finger, sung sweet serenades and shouted stupid slogans, expounded scientific truths and muttered dark prophecies at street corners. This Tower of Babel is our heritage. This infuriating, discordant din needs no justification other than itself. I should really have skipped the elaborate logic of the preceding paragraphs and stuck to my fundamentalist position.

But then, why speak ten words if they let you speak a thousand? You may not always be so lucky.