Thursday, June 5, 2014

Clio and the Economics of Piketty

Berkeley economist (and former Clinton Treasury Dept. official) Brad DeLong is puzzled, again. Fortunately James Hamilton takes pity, and the time to re-educate him;
Here’s your second clue. I made exactly the same point as Krusell and Smith in an earlier Econbrowser post in which I made no claims whatever about how big the depreciation rate has to be. It’s true that I illustrated the implications of Piketty’s assumptions using a simple numerical example. My numerical example used GDP = $100 and δ = 0.10, but those numbers were chosen just to keep the arithmetic simple. I know that GDP isn’t really $100! If you run through the numerical example instead with δ = 0.05, or 0.02, or any positive number and any numerical value for GDP, you will arrive at exactly the same necessary implication of Piketty’s “second fundamental law of capitalism” as in my numerical example. His assumption of a constant netsaving rate implies that capitalists always try to increase the capital stock if they have any level of positive net income whatever. That mathematically and necessarily implies that the economy’s total depreciation expense has to be higher every year. The necessary implication of Piketty’s assumed saving behavior is that as the growth rate becomes smaller and smaller, the capital stock would tend to an arbitrarily large multiple of net income (tending to infinity as the growth rate goes to zero) and the net income of capitalists after paying the depreciation bill would become arbitrarily small (tending to zero as the growth rate goes to zero).
To summarize: Piketty’s assumption that the ratio of net saving to net income remains constant as the economy’s growth rate falls is incompatible with any coherent model of saving behavior.
If that wasn't bad enough news for DeLong, Hamilton's commenters piled it on. We are confident though that Brad will persevere in failing to understand the critics of Piketty. Even those heavy hitters in the profession, whose professional accomplishments outweigh his.

We say that, because we've seen this tactic from DeLong before. And so had Deirdre McCloskey back in 2005 (on the EH.net website);
Dear Brad,
It's my turn to be puzzled. No typing-intensive company since computers have made the change trivial has ever adopted the Dvorak board. Have I got that right? I'm no student of these matters, so maybe it's wrong. Suppose it's right. Changing keyboards is not hard for professional typists--they do it for example when shifting between Danish and British boards; more, between Cyrillic [you know what I mean: Russian!] and Latin.
Clarinetists play oboe after a little practice. So it's no big trick to retrain typists if the filling out of, say, thousands and thousands of insurance forms would be sped up by the change. Doesn't that mean that Qwerty (boy, is that easy to type!) is not superior? So doesn't that make Paul's story into an urban myth? I've not had success in getting Paul to answer this, or similar questions about, say, economies of farm size in reapers or economies of scale in railways. But maybe you can, Brad: I mean, answer it; or get Paul to.
Does the market "work"? Of course not, says the postmodern free market feminist, by the standard of blackboard perfection that Pigou and his followers have imposed. But we're talking quantitatively here, about which the blackboard can say nothing at all (it's a contradiction in Coase's career that though he is always and everywhere talking about quantitative oomph he is not a quantitative economist).
So does use of property rights do better than use of central planning rights, or on the contrary is the blackboard result that lighthouses are public goods of any use? Coase early and late said that the blackboard is of no use, and implicitly said that property rights do better, often (not always: back to blackboards), than more direct forms of government intervention.
Love, Deirdre McCloskey 
That was a discussion about another theory of market failure--essentially what Thomas Piketty is arguing--made by another prominent (Stanford) economist (in the American Economic Review! in 1985 by Paul David) and repeated by Paul Krugman in his 1994 book Peddling Prosperity. When the market failure turned out to be based on a hoax perpetrated by the entrepreneurial creator of the Dvorak Simplified Keyboard, DeLong tried obfuscation.

But Deirdre was made of sterner stuff. She took it seriously, what David said in his paper;
Cicero demands of historians, first, that we tell true stories.


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