Friday, December 19, 2014

Bunker mentality

At the Washington Center for Equitable Growth, Nick Bunker tells us;
The clear winner for the most cited mathematical formula of 2014 is Thomas Piketty’s famous inequality: r > g. The relationship concisely summarizes the argument at the heart of his “Capital in the Twenty-First Century”— the difference between the return on capital and the growth rate of the overall economy is a powerful force for economic divergence.
We beg to differ. Because r > g isn't a formula at all. And when it's followed by a prediction about income inequality (i.e., economic divergence), it's a non-sequitur.
r is a price--the price an entrepreneur needs to pay to use other people's money to bring his idea to fruition--it's not a rate of growth. g on the other hand, is the opposite; a growth rate (of GDP), not a price. So, when Nick Bunker follows with;
In the months since the book was published in English, economists and others have fought about the Paris School of Economics professor’s relationship.
One of the reasons for the intensity of this debate is that Piketty’s argument doesn’t seem to mesh with widely cited models of economic growth.
He's simply missing the point about why Piketty's argument doesn't seem to mesh. It's because comparing two dissimilar things makes no sense. Even when you can pin a number, expressed as a percentage, on those two different things.

Bunker goes on to cite a new paper;
A new National Bureau of Economic Research working paper [by Charles I. Jones, Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality] argues that the relationship between r and g can be best understood in the context of the Pareto distribution.The distribution is named after Vilfredo Pareto, an Italian economist who wrote about the unequal distribution of land.
So we'll cite one we think makes a lot more sense, by Deirdre McCloskey; Measured, Unmeasured, Mismeasured, and Unjustified Pessimism: A Review Essay of Thomas Piketty's Capital in the Twentieth Century. In which the interested reader will find a 55 page, detailed, explanation of what we said above.

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