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Piketty, inequality and volatility: How can r exceed g?

chrisstucchio.com

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Re: Piketty, inequality and volatility: How can r exceed g?

#31

Post by yummyfajitas »

mrow84 wrote: post #30
yummyfajitas wrote: post #13

Earlier quoted context omitted.

I only got that "straw man" from the book reviews. It's incorrect that r > g implies inequality grows. You need r - volatility > g.

So is your thesis that inequality will increase in periods of economic stability, where the volatility is low? Also, can you provide a ballpark figure for (abs(r - g) / volatility)? (edited to improve phrasing)

So is your thesis that inequality will increase in periods of economic stability, where the volatility is low?

Yes. Some data vaguely suggesting this is directoinally correct:

http://www.nytimes.com/2011/12/13/business/economy/recession...

Recessions tend to hurt the rich the most.

I don't have a ballpark figure - I'd need to dig into Piketty's data and it would take a while to come up with that. I'm kind of hoping someone who actually read the book can tell me it's in there, since I think it's a bit crazy that everyone is talking about Piketty's book without mentioning this.

Re: Piketty, inequality and volatility: How can r exceed g?

#32

Post by bryanlarsen »

alnafie wrote: post #22
davidiach wrote: post #16

Nassim Nicholas Taleb has also debunked the math in Piketty's book. Here is the paper: https://docs.google.com/file/d/0B8nhAlfIk3QIbzRrRkhhc1RNY0U/...

One of the best and most accessible pieces I've ever read on inequality is PG's essay on the subject: http://paulgraham.com/gap.html My all-time favorite quote on inequality: "You need rich people in your society not so much because in spending their money they create jobs, but because of what they have to do to get rich. I'm not talking about the trickle-down effect here. I'm not saying that if you let Henry Ford ge…

"Replacing a horse with a tractor with a horse" is 'g'. Any action that reduces the incentives of the next Henry Ford to create will reduce both 'r' and 'g', and have very little effect on the relationship between r & g. Piketty realizes this. It's the heirs of Henry Ford, who did nothing but get lucky in the genetic lottery, who have the most to worry from broad adoption of Piketty's book. It may be the actions of Bill Gates and everybody else who signs and propagates the giving pledge who do the most to prevent the doom that Piketty prophesies.

Re: Piketty, inequality and volatility: How can r exceed g?

#33

Post by igonvalue »

yummyfajitas wrote: post #26
igonvalue wrote: post #15

I think there are two flaws in your premise. First, I think Piketty is merely making the claim that whenever r is greater than g, inequality tends to increase. From the book: > When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable ineq…

Your second point is an interesting theory, but seems unstable. What if one capital owner decides to consume a smaller amount of his wealth, and thereby increase his share of the economy? Eventually he would rule the world.

Yes, I'm not saying that's where society is actually headed. It's just a hypothetical to illustrate how r can diverge from capital's "growth rate". To rephrase the last sentence, "In the extreme case, you can imagine a hypothetical equilibrium where..."

Re: Piketty, inequality and volatility: How can r exceed g?

#34

Post by RivieraKid »

arghbleargh wrote: post #2

Disclaimer: I have not read the book either. One thing I don't understand about the r and g thing is how it makes sense to compare these two values at all. Isn't capital a measure of accumulated wealth, while GDP is a measure of wealth produced in a certain unit of time? For example, what if we just maintained a perfectly steady GDP that exceeded our consumption needs; wouldn't that yield a positive r and explain r >…

It's pretty simple if I understand it correctly. GDP = total income in the economy = income that goes to labour + income that goes to owners of capital.

g is the absolute growth of GDP, r is the absolute growth of income that goes to capital. If r > g, then the share of income that goes to labour is shrinking as a ratio of GDP.

Another problem is that the income that goes to labour is increasingly unevenly distributed.

Re: Piketty, inequality and volatility: How can r exceed g?

#35

Post by mrow84 »

yummyfajitas wrote: post #31
mrow84 wrote: post #30

Earlier quoted context omitted.

So is your thesis that inequality will increase in periods of economic stability, where the volatility is low? Also, can you provide a ballpark figure for (abs(r - g) / volatility)? (edited to improve phrasing)

So is your thesis that inequality will increase in periods of economic stability, where the volatility is low? Yes. Some data vaguely suggesting this is directoinally correct: http://www.nytimes.com/2011/12/13/business/economy/recession... Recessions tend to hurt the rich the most. I don't have a ballpark figure - I'd need to dig into Piketty's data and it would take a while to come up with that. I'm kind of hoping s…

Take individual income as (l + c), where l is the return on labour, and c is the return on capital, and assume a recession reduces both. The rich are rich (long term) through large c, not a balance of l and c, and so as a group they will inevitably be hurt the most during a recession. The only way this wouldn't be the case is if the reduction in returns to capital was negligible which, given what recessions are, seems unlikely. Also, whilst the rich are, undoubtedly, proportionally hurt the most be recessions, I presume you wouldn't claim that they were hurt the most in absolute terms (on average)?

And a follow up to my previous question: I realise it's difficult to guess a figure for (abs(r - g) / volatility), and it inevitably varies with economic conditions, but I'm interested in your sense for how it changes. Are you suggesting that it is mostly less than 1, mostly greater than 1, or that it spends roughly equal amounts of time greater than and less than 1?

edit: Sorry, after re-reading my post I realise that my use of absolute could easily be misinterpreted - I meant that although those with large capital portfolios will lose proportionally more of their income, they will still, on average, have significantly more wealth in absolute terms than those who started with small capital portfolios; and so the suggestion that they are 'hurt' more is, itself, fairly misleading.

Re: Piketty, inequality and volatility: How can r exceed g?

#36

Post by RivieraKid »

1. Of course that over the long term, r will become equal to g (well, it's actually mathematically possible that r > g forever). But the point is that we don't want to live in a world where 90% of the GDP goes to people who own capital.

2. The volatility argument says, that even if r = g over the long-term, the per-year average of r can be bigger than the per-year average of g. What Piketty's claim does it debunk?

Re: Piketty, inequality and volatility: How can r exceed g?

#37

Post by kome »

alnafie wrote: post #22
davidiach wrote: post #16

Nassim Nicholas Taleb has also debunked the math in Piketty's book. Here is the paper: https://docs.google.com/file/d/0B8nhAlfIk3QIbzRrRkhhc1RNY0U/...

One of the best and most accessible pieces I've ever read on inequality is PG's essay on the subject: http://paulgraham.com/gap.html My all-time favorite quote on inequality: "You need rich people in your society not so much because in spending their money they create jobs, but because of what they have to do to get rich. I'm not talking about the trickle-down effect here. I'm not saying that if you let Henry Ford ge…

Piketty's book is about rentiers and rentier capitalism; the comment you quote is an intellectually weak justification of why riches do exits. In the real word is not like that.

Re: Piketty, inequality and volatility: How can r exceed g?

#38

Post by RivieraKid »

bayesianhorse wrote: post #20

Maybe I am naive, but if g is the growth rate of an economy, and r the growth rate of a smaller part of it, doesn't this mean that if r>g the portion of capital growing at rate r increases? This would also mean that g increases.

r can be positive and g negative at the same time. Total growth consists of labour and capital growth. Piketty's point is that capital is growing faster than labour – if that continues forlong enough, we can end up in a world where 99% of income goes to owners of capital.

Re: Piketty, inequality and volatility: How can r exceed g?

#39

Post by _delirium »

bayesianhorse wrote: post #21
apsec112 wrote: post #3

In a fast-paced, industrial society, like the one we live in, long dynasties tend to get wiped out by high volatility. I don't know exactly what happened to the aristocrats of Russia as of 1910, or the businessmen of Germany as of 1935, but it can't have been good. Likewise for China, France, Poland, India... In a stagnant, agricultural society, like medieval Europe, dynasties tend to get weighed down by the problem…

The businessmen of Germany from 1935 eventually got to use slave labor to build lucrative weapons... Quite a few corporations and individuals survived the war.

The Krupps are perhaps the most famous. They profited handsomely from both WW1 and WW2, managed to escape losing their fortunes during denazification (for unclear reasons), and the family still controls large amounts of wealth today: https://en.wikipedia.org/wiki/Krupp

Re: Piketty, inequality and volatility: How can r exceed g?

#40

Post by jfager »

I'm only through the introduction right now, but assuming that it's representative of what's coming later, Piketty isn't saying 'r > g' as mathematical fact, he's saying 'when r > g, divergence in the distribution of wealth happens' and 'empirically r has frequently been and is again moving towards > g'. And his concern with this is the same as the problem you state, that r > g implies, eventually, r = g, which translated back to English means economic activity devolves into rent paying.

Quoting:

"When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income... Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime's labor"

"Forces of convergence also exist, and in certain countries at certain times, these may prevail, but the forces of divergence can at any point regain the upper hand, as seems to be happening now, at the beginning of the twenty-first century"

"My conclusions are less apocalyptic than those implied by Marx's principle of infinite accumulation and perpetual divergence... In the model I propose, divergence is not perpetual and is only one of several possible future directions for the distribution of wealth"

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