Sunday, June 1, 2014

Thomas Piketty v The Legion of Broom

Just as Peyton Manning entered the SuperBowl with all the gaudy numbers, only to have a guy named Smith emerge as the MVP. Every leftist's fave French economist is getting kicked up one side and down the other of the econosphere. The latest to sweep away the cobwebbed thinking, being NYU's Debraj Ray;
...economic growth is fundamentally an uneven process. Whether or not the workhorse growth models satisfy r > g [Piketty's grande idée](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. .... Each creates its own inequalities, as the lucky or farsighted individuals already in the beneficiary sector experience an upsurge in their incomes. 
Which is a story of returns to human capital, not physical capital (as Piketty is having it). And then;
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. 
In a world of rapid globalization that's exacerbated (as in the USA). Deal with it, and get an education (or somehow acquire more human capital);... 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. 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.
Politicians can pass all the minimum wage/living wage laws they want, but it won't alter--and will only accelerate--the fact.

[Bold by HSIB in the above]

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