The chapter ends with a brief discussion of natural assets, which cannot be accumulated by simply saving more and are hence not covered by β = s / g. He suspects that the value of these assets is not large, partly because his 2nd law seems to explain so much variation.
Can you elaborate on this, or is that really all he says? It seems kind of crazy to me that this would not be a factor, particularly when you have things like subsidised leasing of Federal land. Does he look at any countries which produce most of their national income from natural assets?
Also, the thing that makes me skeptical about the robustness of Piketty's result(s) is willingness to make these semi-arbitrary exceptions and carve-outs. Between that and the choice of datasets, it seems like a classic researcher degrees of freedom problem waiting to happen.
He says that agricultural land seems to be mostly about improvements, and he'll deal with oil-exporting countries later. And that urban land seems mostly to reflect net savings. I wanted a more extended treatment of that.
The chapter ends with a brief discussion of natural assets, which cannot be accumulated by simply saving more and are hence not covered by β = s / g. He suspects that the value of these assets is not large, partly because his 2nd law seems to explain so much variation.
I had forgotten this, I seems cray cray to me. Anyone else?
Not really. The value of labor and the accumulated labor stored in various non-natural assets is huge.
I've been sort of thinking about this off and on. I was really looking forward to the next Piketty thread so I'm especially glad I caught it early. (I'm procrastinating on my Arabic right now)
I just read a critique last night which argued that the book should properly be called Weath in the 21 Century. I agree. One reason is that the asset he is talking about, ownership denominated in cash value, is really a social relationship or privilege rather than a factor of production.
I guess I need to explain #3 a little. I read the Archdruid Report and i'm vaguely remembering an argument that the natural world provided value annually of more than 2/3rds of GDP. That doesn't sound unreasonable to me at all.
Even with a lot of capital and hard work I think we would have a hard time even just surviving in the absence of the free resources the earth provides.
So at least from my perspective a system which doesn't value the natural world highly seems suspect.
A Piketty-relevant article in the NYT today.
Mr. Zucman's tax evasion numbers are big enough to upend common assumptions, like the notion that China has become the world's "owner" while Europe and America have become large debtors. The idea of the rich world's indebtedness is "an illusion caused by tax havens," Mr. Zucman wrote in a paper published last year. In fact, if offshore assets were properly measured, Europe would be a net creditor, and American indebtedness would fall from 18 percent of gross domestic product to 9 percent.I do notice that now that I am reading this book that I tend to be far "impressed" by statements like 18% of GDP ... peanuts, relatively speaking.
We are even more dependent on the free energy the sun provides, but economically the price of that is basically zero.
7.1 i'm vaguely remembering an argument that the natural world provided value annually of more than 2/3rds of GDP. That doesn't sound unreasonable to me at all.
If I understand what Piketty says versus what you're saying correctly, in order for this to be an objection to his numbers you'd have to be saying that 2/3rds of GDP would just fall into our laps from the bounty of nature even if we weren't doing any work to get it. Which does sound a little unreasonable.
As in the earlier discussion, I still want to know why s/g stays so constant.
Semi-related to the tax haven thing a recent World Cup initiated family discussion on Switzerland led to the conclusion that by taking the Milo Minderbinder role in WWII that Switzerland was the country that most thoroughly backed the real winning side which was unfettered global capitalism (of course it took a few extra decades to sort out Russia and Eastern Europe).
I'm not objecting to his numbers, just pointing out that their value is limited to a specific context which isn't necessarily always the right way to look at things.
There does seem to be some conflict between the things that Picketty says and what I have read from environmentalists, but so far that has just made me want to side with Picketty.
The chapter on growth, for instance, was an eye-opener. For a long time I was reading people saying "Exponential growth cannot continue forever! We are going to exhaust all our natural resources and DIE!" Instead, Picketty says "High rates of growth cannot continue forever. We will soon go back to a period of low growth, perhaps even the vanishingly small growth that we saw before 1700." Which seems much more reasonable. Economic growth is like population growth, which is in fact a factor in economic growth.
I sure hope Picketty is a better prophet than John Micheal Greer. I dunno that I'd bet on it.
If I understand what Piketty says versus what you're saying correctly, in order for this to be an objection to his numbers you'd have to be saying that 2/3rds of GDP would just fall into our laps from the bounty of nature even if we weren't doing any work to get it. Which does sound a little unreasonable.
On the other hand, Piketty's stance seems (from third hand) to suggest that if a land-owner gets some people to chop down a forest and then sells the timber, that's a return on labour, rather than his capital. Which seems nuts.
17: the capital involved is the axes, the lorries (or elephants) to carry the felled timber away, the bulldozers (or shovels) used to build the forestry road and so forth. And, in any case, felling natural forest is a pretty tiny part of most advanced countries' economies, so it probably doesn't make much difference to the results of his analysis. Most profitable forestry is basically farming trees, not hunting them.
I mean, sure, NOW.
But doesn't the book rely on trends from 19th and 20th centuries as well?
Well, I have some news for you about Trees in the 19th Century (in North America).
I doubt grazing and timber count much in the grand scheme, but mining might, and oil certainly does.
farming and fishing count too
20: but mining (which Piketty mentions a lot) relies very heavily on capital - mining machinery. He actually refers to it in chapter 1 as an example of an extremely capital-heavy industry. (I've only got through chapter 1 so far, sorry). Oil rigs are hugely expensive. Drills are expensive, conveyors are expensive, winding gear is expensive. Giant trucks are expensive.
And also - see the first half of 18: forestry requires capital in addition to the land on which the trees grow. You need some way to cut the trees down, and some way to transport them to market.
If there were a major industry that really did rely simply on a combination of labour and unimproved land, then you'd have a point, but there isn't.
Oil is important in the grand scheme of things, but I don't think that makes all the value of it natural. It has been a long time since anybody was getting much oil without a huge investment in capital and labor. And then it needs a great deal of refining and a whole distribution network to be useful.
23 to 20, before seeing the more extensive 22.
All the capital involved in the oil industry will become worthless when the oil runs out though.
Right, but some reasonably high percentage of the capital ever used in the oil industry has already become worthless through depreciation, wear and tear, replacement by more advanced technology, or the use of a big boat in combination with vodka and a reef.
Just like a lot of the capital ever used in any other industry, in fact.
And, in any case, felling natural forest is a pretty tiny part of most advanced countries' economies, so it probably doesn't make much difference to the results of his analysis. Most profitable forestry is basically farming trees, not hunting them.
Sure, but it's the principle of the thing*, and of course there are lots of parts of the economy based on exploitation of natural resources, which added up do make a substantial portion of GDP at least for some countries.
* More generally, I'd like to nail down how Piketty defines and justifies the boundary between return on capital and labour. Is a private equity fund manager's carried interest income from capital or labour? It seems to me you could quite easily maintain the stability of the ratio by fudging that boundary.
26, 28: Not worthless, but it would be worth a whole lot less.
of course there are lots of parts of the economy based on exploitation of natural resources, which added up do make a substantial portion of GDP at least for some countries.
None that don't involve capital inputs as well though.
31: it'll still be useful for other things. Or at the very least it'll have scrap value.
That seems like it is a close relation to quibbling. The scrap value makes it equivalent to high grade ore which you seem to be saying is worthless without the capital necessary to work it.
I wonder if you can proxy the natural vs Piketty capital ratio for oil and other extractive industries by looking at direct production costs vs royalties/leasing/profit-sharing.
And that urban land seems mostly to reflect net savings. I wanted a more extended treatment of that.
Housing looks to be a large portion of national wealth since the 70s according to Piketty. In the US and France, housing in thriving big cities is much more expensive than elsewhere. But these are markets with artificial scarcity (NIMBY laws, rent control).
Here is a critique claiming that this is an important effect. To me, it reads like it is not crazy. Not my field, it will take me a while to work through the argument, don't know if it's correct. I am curious how much of residential housing wealth is NYC, SF, Chicago, LA in the US, and how much of France's is Paris.
I am also looking forward to Piketty's discussion of oil-exporting countries. For whatever it's worth, there's a considerable labor and equipment investment necessary to extract oil after the initial boom.
34: hmm. It's still wealth, though, isn't it? Just like a big pile of potatoes would be.
I wonder if you can proxy the natural vs Piketty capital ratio for oil and other extractive industries by looking at direct production costs vs royalties/leasing/profit-sharing.
I'm out of my depth here, so I apologize if this comment is dumb, but as best as I can reckon, a big chunk of what you're talking about here is contained in, say, the market capitalization of Exxon-Mobil, which Piketty does count.
When he talks about natural assets (I'm thinking) he's talking about something other than the value of oil in the ground - stuff more closely related to the sun in Moby's 9.
I'm sure I"m wrong about this, but I'd be grateful if someone could explain to me what I'm missing.
31, 33 etc:
Big boats can be used to haul other things. Pumps can be used to pump other things. Big pipelines from Canada will hopefully be used to transport maple syrup.
34 Sort of. If those potatoes were going to rot because there was no way to get them to market. Not the kind of thing which would have a high cash value, and thus not the kind of thing that Piketty considers capital.
39 lol
When a local sports team cons a city into paying for a new stadium, they usually have am old stadium that could be maintained at a modest cost. I don't think it usually gets re-purposed. I think it gets knocked down.
Shipping is specialized, I cannot imagine what we would use all those pumps for.
I suspect it'll be cheaper to let all that crap rust in place than to reuse it.
I think that in economic terms, easily extracted oil looks like a cleared fertile field. Some expenditure of capital and labor is necessary, but the returns are great.
35 would probably work as a valuation mechanism if multinationals and governments published worthwhile production figures, but I do not think that they do.
35 would probably work as a valuation mechanism if multinationals and governments published worthwhile production figures, but I do not think that they do.
I doubt the issues with that data are materially worse than the issues with the data sources Piketty does use.
The other day I went to radio shack to get a new battery for my ups unit. Turned out it was signifigantly cheaper to buy a new unit than replace the battery on the old one. The new unit contained the same kind of battery the old one had.
Replacement rechargeable batteries are always much, much cheaper online.
The argument that Piketty should have included natural capital seems similar to the argument Piketty should have included human capital (in the sense of you owning yourself) to me. Yes, you can make an argument for it, and there are interesting things to say from that perspective, but the usage of terms is putting you so far out of the mainstream semantic frame that anything like quantitative analysis of national accounts and tax returns becomes meaningless.
43. Now a tangent of a tangent, but Yergin's book The Prize goes into a lot of detail about just how carefully oil money is hidden. How many new wells did Aramco start last year?
Yeah the Radio Shack guy may have been scamming me and the ups unit people definitely are. He showed me the screen when he looked for the replacement battery, but I'm sure there is a generic version of the battery which is reasonable.
I didn't want to risk setting my apartment on fire though.
Is a private equity fund manager's carried interest income from capital or labour?
It's income from labor, both morally and analytically, if not always legally. This has been gone over here extensively because of the US tax loophole - it's no different from a salesperson's commission, because the manager does not own the capital.
There are, however, more edge cases like a sole proprietor's business income - how much of that is return on capital versus the proprietor's labor income? I believe Piketty said he allocates those incomes to capital versus labor identically to the proportion in the overall economy.
It's income from labor, both morally and analytically, if not always legally. This has been gone over here extensively because of the US tax loophole - it's no different from a salesperson's commission, because the manager does not own the capital.
But what if they do? It's certainly common for hedge fund managers to be invested in the funds they manage. Less common for private equity, but not unheard of.
If they do, then yes, it's their capital and it's their return on it. But if Wikipedia can be gone by, that's not what is generally meant by "carried interest," although it might be in the interests of some to blur the distinction.
Nor was the general rebound in asset prices, which he sees as reflecting a recovery to quasi-natural (or natural-under-capitalism) levels after a bottoming-out around 1950, when "the price of real estate and stocks fell to historically low levels in the aftermath of World War II for any number of reasons (rent control laws, financial regulation, a political climate unfavorable to private capitalism)".
This seems hugely significant to me. Often an affection for the 50s is thought of as politically retrograde, but if we brought back the tax and regulatory regime of the 50s we would go a long way towards fixing the problem of excess privilege we are concerned about.
I am still in favor of a wealth tax but there is more than one way to skin this cat.
If they do, then yes, it's their capital and it's their return on it. But if Wikipedia can be gone by, that's not what is generally meant by "carried interest," although it might be in the interests of some to blur the distinction.
My point being that the lines are very blurred, and deliberately so. In the case of hedge funds, there's basically income from being a hedge fund manager, which is arbitrarily* divided between the direct return on investment, any salary, and carried interest aka performance/incentive fees. There are all sorts of ways in which capital and labour are manipulated so as to minimise tax burdens for the super-wealthy, which makes me highly skeptical that tax returns and high level national statistics have anything accurate to say about inequality, in the absence of highly granular case studies.
* Not literally arbitrary, but bearing no meangingful relation to the real capital/labour split.
My understanding (could be wrong!) is that the "natural resources" thing is designating a very specific problem, in connection with which he is making a very limited point. Beta, in his system, is defined the overall stock of capital/overall income ratio. He says that there's generally an effect in which, if you save more (thus increasing the stock of capital) than the growth rate (connected to the income generated by that capital, or the output of the economy), that ratio will increase.
In certain cases, though, you can have large shifts in the overall stock of capital that have nothing whatsoever to do with the savings rate. Assume you are Saudi Arabia in 1930; all of a sudden, oil is found and your national stock of capital expands momentously for reasons that have nothing whatsoever to do with a change in the savings rate. What Piketty says is that these kinds of changes have very little to do with the structure of capitalism in rich countries since the 19th century, and that in fact (for rich western countries) for rich countries, despite the potential counterexample of something like 1930's Saudi Arabia, you can use s/g as a reliable guide to the development of Beta (in his definition) over time and in the long run. It's a technical point driven by his definitions, not some kind of general assumption that natural resources don't matter for the economy.
I think the point in 54 is totally right. "Capital" and "labor" are ideal types and abstractions, not actually-existing things with unambiguous boundaries.
This is also something that Piketty explicitly acknowledges and addresses in some detail in the chapters on the structure of the 1%. Generally the sort of confusing mixed capital/income people (senior partners at major law firms, for example; their wealth derives from both ownership of the firm's resources and income paid purely as a result of their work) currently dominate the middle ranges of the 1%, and have increased their share up up to and including the present. The very tippety-top of wealth remains largely "pure" capital, though.
55 I think you are right about that.
There is also the possibility of a negative resource shock. If the oceans die or a dust-bowl forms nations can become poorer in a way that wasn't fully represented by their capitol stock.
Oh, there are certainly measurement problems, yes. I thought you were questioning what carried interest "really" was (given omniscience).
In his inequality of income tables in chapter 8, for the US, Piketty includes wages, bonuses, and exercised stock options in labor income; rent, dividends, and interest in capital income (one series with and another without capital gains for comparability with the French data); and business income and income from partnerships and S-corporations in "mixed income". The source is the World Top Incomes Database.
I'm still niggling at the human capital thing. I guess another way to think about it is yes, you could probably model self- and slave-ownership as capital, and all labour income as rental yield from that capital. And maybe you could do some quantitative history wizardry to obtain some stats on say higher education spending and years of duration. But what question are you trying to answer with that, especially in the context of inequality? Won't you end up contrasting groups with low/high human self-capital, and low/high inhuman capital (ie buildings and stuff)? Isn't that what you are mostly doing anyway by sticking with more conventional definitions of capital and labour? Maybe you will miss some aspects that way but the size of the conventional data set will give a tremendous ability to show trends that something more nuanced might not, and where you first have to convince the academic reader that changing the definition significantly is worthwhile,
It actually seems like a very Gary Becker-ish neoliberal way to attack the problem, human capital, erotic capital and whatnot.
Before the next chapter post, any chance one of the real economists could say more about the asset price stuff?
LB, emailed you the next installment at the unfogged address.
I'm now number 3 on the waiting list. I don't know if I'm ready for this.
Hoping to catch up by the end of today and participate again, but flagging Benjamin Kunkel's review in LRB, which is the most comprehensive critique of Piketty I've read from the Left.