Tired of anti-Piketty diatribes …

4 June, 2014 at 10:17 | Posted in Economics | 18 Comments

We also take a first look at U.S. postwar data and find, roughly speaking, that the optimal-saving model—that is, the model used in the applied microeconomics literature and by Cass and Koopmans in a growth context — seems to fit the data the best, somewhat better than the textbook Solow model. Piketty’s model, on the other hand, does not appear consistent with this data …
elite-daily-sleeping-student[W]e conjecture that it was not until researchers started to take “micro-foundations” seriously—in the sense of specifying explicitly the decision problem faced by savers and identifying the state variables, such as capital, upon which their decisions depend — that some of the confusions … about how to specify saving rules began to clear up.

Per Krusell & Tony Smith

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  1. I’ve been reproducing this quote at various places – Piketty explicitly says that the 2nd law is not actually a binding equality but a dynamic tendency:

    “First, it is important to be clear that the second fundamental law of capitalism, β = s / g, is applicable only if certain crucial assumptions are satisfied. First, this is an asymptotic law, meaning that it is valid only in the long run: if a country saves a proportion s of its income indefinitely, and if the rate of growth of its national income is g permanently, then its capital/income ratio will tend closer and closer to β = s / g and stabilize at that level. This won’t happen in a day, however: if a country saves a proportion s of its income for only a few years, it will not be enough to achieve a capital/income ratio of β = s / g.”

    So KS are attacking a straw man.

    • No, they don’t. K&S write about steady state / balanced growth path, i.e. precisely about the long run tendency.

    • I’ve a more fundamental question concerning these critics. Here, they are using very standard models of growth that are know to be… Well, at best questionable. The framework itself is not reliable (Solow and Ramsey-Cass-Koopmans?). How to make comparisons in the first place..?

      • Piketty explicitly says the equation is not meant to describe an actual state that will be realised, but that it determines the direction towards which certain variables will tend. Since KS are saying that for the equality to be ‘true’, savings must equal 100%, they’re missing the point – it need never be true for the effects Piketty is talking about to take hold.

  2. I disagree, Piketty made a theoretical mistake. He used the Solow Model with net instead of gross variables. If he had written it in gross variables then β = s / (g + δ). The depreciation variable δ dampens the effect of a decline of the growth rate of GDP upon the capital / income ratio.
    This slight theoretical does not imply that Piketty has not done fantastic empirical work. But the capital income ratio will not increase massively in this century and the actual nasty effects of capital are more due to political economy than due to fundamentals.

    • Piketty explicitly writes:

      “One can also write the law β=s/g with s standing for the total [gross] rather than the net rate of saving. In that case the law becomes β=s/(g+δ) (where δ now stands for the rate of depreciation of capital expressed as a percentage of the capital stock)…”

      So, I still wonder, where is the theoretical mistake?

      • Piketty makes a two-step prediction, population and GDP growth will decline in this century and thus the capital income ratio will increase as Y/K=β=s/(g+n).
        The problem is, as the paper you quote shows, the net savings rate. It makes little sense to assume that the net savings rate is constant as the gross savings rate would then increase massively with low GDP growth.

        So in short, Piketty overestimates the increase of the capital income ratio because he uses the Solow model sloppily.

        How this does not imply that Krusell and Smith are not making mistakes of a different kind themselves:
        “We think, in contrast, that future developments of other
        determinants of wealth inequality—such as educational institutions, skill-biased technical change, globalization, and changes in the structure of capital markets—are likely to be much more fundamental.”

        While his theory is old and sloppy Piketty has made fantastic empirical work. One key result of his work has been that the driving factor of income inequality is the rise of the incomes of the top 0.1%, i.e. not professionals but managers and heirs. So the old skill-biased technological change theory is basically falsified but right-wingers like Krusell and Smith still try to use it as explanation of the rise of income inequality.

        Ignoring empirics is a far worse mistake than getting some theoretical stuff about net and gross variables wrong. And while I think that it is important to look at fundamentals like the capital income ratio I also think that political economy matters a lot. Sure, political power of capital and K/Y are most likely highly correlated but K/Y is not the only factor that influences the political power of capital. It is feasible to imagine a world with a lot of capital but little political power of capital.

  3. Addendum: Of course the other error (I don’t think it is an error but a blunt lie) is, as DeLong has pointed out, that these guys overestimate the depreciation rate massively. But even with δ=0.01 – 0.04 you get an significant effect as n and g are low and likely to decrease.

    I think it is in general important to be critical of everybody. Just because Piketty has written a brilliant book it is not error-less and just because Krusell and Smith have detected this theoretical error they are not making far worse mistakes themselves.

    • So everyone is wrong. Does this ring any bells to you? Do you really think that economic problems of such significance can be described by a ratio of two ambiguous variables which same people have the audacity to call laws?

      The major problem of this world is the massive replacement of human labor by machines. It started in Italy in a Fiat factory in the 1970s which was fully robotic based. The justification was a blunt lie, i.e. that Southern Italians were lazy. The true reason was that industrialists wanted to own the labor force and the capital. This continued in Japan with lights-off factories, in the US where I was part of teams that unfortunately and regrettably enough displaced hundreds of thousands out of work by applying robotic automation and now it is spreading in the services sector worldwide with Google promoting a driver free cab and soon other companies will offer software and sensors to replace even airline pilots. Driverless busses are appearing for tests even in bankrupt Greece where the unemployment rate is close to 30%.

      Leibniz foresaw a world where law decisions would be made by digital machines but rumors have it that then got so scared of the binary system he invented that he did not want to speak about it. There is no sense to talk about economics any more as the owners of the digital robots will soon own everything. Of course this is not capitalism but some peculiar form of technological oligarchy. Save the simple rations for a parallel universe. Read this for more info: http://www.digitalcosmology.com/Blog/2012/12/11/the-new-digital-world/

  4. “The major problem of this world is the massive replacement of human labor by machines.”

    Stopped reading right here. This is Luddite nonsens, capital does not substitute all labour, it only substitutes simple labour. If you think otherwise I am eager to read your argument about how the industrial revolution increased unemployment until kingdome come.

    • You are in denial of reality of you think that replacing bus drivers and airline pilots is simple labor substitution. And your reference to industrial revolution is a false analogy. And how do you want to argue about things if you stop reading and stick to a dogmatic stand? I read your strawman arguments about Piketty’s analysis though. I did not stop reading because I am always interested in the way people construct strawman arguments to satisfy the cognitive biases. If Piketty is wrong, it has nothing to do with your simplistic arguments.

  5. “You are in denial of reality of you think that replacing bus drivers and airline pilots is simple labor substitution.”

    Substitution of simple forms labour has happened ever since the existence of capitalism/modernity and it has not hitherto increased unemployment. Everytime a new technology comes along halfwits like you think just see that a new piece of technology makes a particular job obsolete. What they do not understand (because they only see and do not think) though is that a new job is created in the process, somebody has to build and maintain the new machines.
    What is incredibly funny though is that you think that your Luddite nonsense is superior to an actual economic theory like the Solow model (if you had any understanding of economics you would know that the two are unrelated as there is no labour market in the Solow model).

    I mean, gee, you do not just not understand basic economics, you also totally ignore the facts. Once again for the braindead: the ever on-going process of technological innovation has not increased the long-term unemployment rate during the last 200 years.

    • I am surprised by your language and your manners. I am sorry you cannot have a civilized discussion. Your ad hominen attacks cannot conceal the facts.

      “Middle-skill, routine jobs still account for almost half of all existing jobs. Unfortunately, as computing power spreads, and with more nonroutine tasks becoming routine (driverless cars, drones, online education, robotic surgery), the pace of labor market polarization is unlikely to slow down anytime soon.” Cheremukhin is a senior research economist in the Research Department at the Federal Reserve Bank of Dallas.

      http://www.dallasfed.org/assets/documents/research/eclett/2014/el1405.pdf

      ” The development of advanced robots, drones, autonomous vehicles, artificial intelligence and other technologies could replace even more routine jobs in the future, and perhaps some nonroutine ones as well. Competing with the machines will only get more challenging.”

      http://finance.yahoo.com/blogs/daily-ticker/here-s-where-all-those-middle-class-jobs-went-113102720.html

      Please be very careful with your words. Insulting shows a weak position.

    • “halfwits like you”, “only see and do not think”, “your Luddite nonsense “, “again for the braindead”

      Carlos, do you have Asperger syndrome? (a form of autism)

      Are you out of your mind denying that automation creates unemployment? The unemployment rate doesn’t fall Carlos because people are forced to find low paying jobs in McDonald’s flipping burgers or drop completely out of the job market (In Europe they get to work for the government).

      • “The development of advanced robots, drones, autonomous vehicles, artificial intelligence and other technologies could replace even more routine jobs in the future”

        So what, somebody builds these machines. There is no net automatic net job loss. This is also not a new development, as I already wrote we have had significant technological growth ever since modernity started about 200 years ago and we have seen no increase of the unemployment rate because of this. This is also hardly surprising, a technological shock reduced the demand for one type of labour but increased the demand for another type of labour. Unless you think that toiling in 19th century like sweatshop is superior to contemporary office jobs technological progress is a good thing.

        I mean, gee, technological progress together with institutional change (the industrial revolution was not merely about technology but also about undoing feudal institutions like gilds that prevented competition and so on) is the single reason we are today far better off than 300 years ago so arguing against it is the most braindead thing about economics I ever read.

        You seem to confuse increasing income and wealth inequality which has indeed nasty consequences with technological progress, not to mention that it is painfully obvious that you write on an economic blog without understanding Econ 101.

      • “Carlos, do you have Asperger syndrome?”
        Dave, you lack a basic econ education?

        “Are you out of your mind denying that automation creates unemployment? The unemployment rate doesn’t fall Carlos because people are forced to find low paying jobs in McDonald’s flipping burgers or drop completely out of the job market (In Europe they get to work for the government).”

        So your claim is that “automation”, a process which has gone on for 200 years, does suddenly destroy jobs and all the workers who lose these brilliant jobs gotta work for McDonalds in the US or the government in Europe.
        The former is indeed a stylized fact but I fail to see the problem of a shrinking second and an increasing third sector. Sure, your particular example implies a loss for workers but third sector jobs are not per se inferior to second sector jobs and the low wages in the fast food industry have nothing to do with technological progress and more to do with political economy, worker’s bargaining power has shrunk.
        About your latter claim, it is empirically wrong as the size of the public sector in Europe, measured via jobs, has not increased while the size of the second sector has decreased.

        Confusing a correlation with a causation is typical. But if you had at least some basic econ education you would not commit such a basic error.

  6. Carlos, you you a breakfast cook in a Spanish hotel? You should look seriously into this Asperger syndrome thing.

    “So your claim is that “automation”, a process which has gone on for 200 years…”

    Yes, Carlos, automation has gone for 200 years. Tell that to the doc when you see him. Tell him that you went to an econ blog, you pretended to know econ using copy and paste and you said that 200 years ago there was automation. Carlos, the first industrial controller appeared in the 1950s. The first PC appeared in the 1980s. The first industrial robot was built in the 1980s. What are you talking about Carlos? You can’t be that confused unless you are totally mad and a real crank.

  7. Nobody said that technology is killing jobs. This is a strawman Carlos invented. There is a comprehension problem from his part, Technology is helping jobs. Widespread automation of human tasks kills jobs and started in the last 15 years. These are two different things but difficult for Carlos to differentiate probably because of a knee-jerk reaction and a need to be ad hominen to prove his points.


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