Wealth Is Not Capital: The Brilliant Seth Ackerman Explains It All 4 U
I’m stunned by how good the new Jacobin piece by Seth Ackerman is: “Piketty’s Fair-Weather Friends.” It gives what I find to be the best understanding so far of the whole Piketty “think space.”
It’s so good that I can’t encapsulate it, so I’ll just share some of the passages I’m most taken with, with my highlights for your skimming pleasure. RTWT.
it’s increasingly doubtful whether (or how) [Capital‘s] arguments can be reconciled with the MIT-style economic paradigm to which Piketty’s most ardent American promoters — liberal economists like Joseph Stiglitz, Paul Krugman, Brad DeLong — swear allegiance.
For [Paul Krugman], the lesson of Capital in the Twenty-First Century is that mainstream theory has shown its worth: “You really don’t need to reject standard economics either to explain high inequality or to consider it a bad thing.”
At the heart of the neoclassical apparatus lie the twin concepts of marginal productivity and the aggregate production function (more on these below), and as Thomas Palley has written, when it comes to these totems, “you are either in or out.” Thus, as soon as an economist who aspires to theoretical originality wishes to investigate the dynamics of income distribution, she’s liable to find herself swiftly tangled in a conservative straightjacket.
Now that the book’s arguments are being digested, the same liberal, MIT-style economists who did so much to thrust Piketty’s book into the spotlight are expressing serious doubts — and the reason goes back to marginal productivity theory. That theory might end up resembling less a wall that Piketty could circumvent than a maze in which he will find himself trapped.
Marginal productivity theory … makes up something like neoclassical economics’ “operating system” — the language in which almost every proposition must be embedded in order to work.
Popular attempts to recount [the Cambridge Capital] debate tend to get needlessly bogged down in the abstract. They typically focus on the brain-teaser question of whether it’s possible to quantify the “amount” of capital in the economy, given that this capital stock is made up of a vast number of heterogeneous goods, from jackhammers to hard drives. And that was, in fact, the issue that first got the debate started.
But what the argument was fundamentally about was whether the marginal productivity theory of income distribution — marginalism — is a logically coherent theory.
In the Cambridge capital debate, this textbook theory was advanced by neither side. It’s a fairy tale told to undergraduates.
the leading mid-century neoclassicals, they had long disavowed any claim that this story could logically explain the income distribution, for a simple reason: whether or not such marginal products actually exist in the real world is an entirely empirical question, and the answer is that they generally don’t.
Today, empirical studies of manufacturing industries are unanimous in finding that per-worker productivity is constant, not diminishing, as more are put to work in a factory; while even in fast food joints (as this riveting online tutorial for McDonalds managers makes clear) the volume of sales per worker does not depend on how busy the store is, except maybe during the graveyard shift, due to a residuum of fixed labor costs.
…it would be irrational for a firm to lay off some workers just because, say, a strike or a minimum wage law hiked up their wage. The employer would get the worst of both worlds: a lower profit margin on every unit of output produced (because of the higher wage) and fewer units produced (because of the laid-off workers). Rather, her best option would be to keep producing as much as she can manage to sell while simply accepting the lower profit rate, assuming profits are still being made. Analyzed in this way, there’s no necessary reason why the platitude “when the price goes up, less is bought” ought to apply to human labor.
But the neoclassical economists on the MIT side of the Cambridge debate already knew all that. They were defending a more sophisticated version of marginal productivity theory that was subtler and, in a way, simpler.
It argued as follows: when the wage is hiked up …consumers switch their purchases from labor-intensive to capital-intensive goods, while firms and entrepreneurs building new lines of business choose more capital-intensive, rather than labor-intensive, techniques. … they are exerting demand for labor or capital through their purchases
And this was the argument that the Cambridge University side defeated
it becomes clear that a rise in the wage does not necessarily make labor-intensive goods relatively more costly to produce, as the neoclassicals had assumed. …it all depends on the complex pattern of input-output relations in the economy as a whole — how many units of good A it takes to produce good B, how many of good B to produce good C, etc., for all the millions of goods in the economy.
Once this neoclassical story — where the relative demands for labor and capital are dependent on their relative prices — is “debunked,” to use Paul Samuelson’s contrite term [he admitted that he lost the argument –SFR], the competitive market economy no longer contains any necessary mechanism pushing the various wage rates or the profit rate to any determinate level.
Rather, history and custom, as well as politics, laws and struggle, will determine who gets what. It’s a system of grab what you can.
Or in my words: the distribution of income, and supermanager compensation, is determined not by scarcity, but by rivalry. The prize goes not to those who put resources to best use, but to those who control who gets them.
it’s unsurprising we should find marginal productivity to be the point where Piketty’s sweeping vision of modern inequality would run into trouble with the economics mainstream.
marginal productivity theory sees a rise in the capital-output ratio as an increase in the “supply of capital,” which, in classic supply-and-demand logic, ought to bring about a reduction in its “price” — that is, a fall in r. According to the theory, this should neutralize the effect on the r–g gap.
[Piketty] contended that as growth slows and the capital-output ratio rises, r might decline (as theory predicts) but the magnitude of the decline might still be small enough to permit a net widening in the r – g gap.
The technical term for the quantitative relationship involved (that is, between the size of a change in the capital-output ratio and the size of the change in r that supposedly results, or vice versa) is the elasticity of substitution: the higher the elasticity, the smaller the “response” of r to a given change in the volume of capital.
Piketty’s estimate of the elasticity of substitution can’t really be compared with those in the literature. … his pertain to all private wealth, while the literature focuses narrowly on production capital. These are very different concepts.
To interject: this is exactly what I’ve been trying to say, folks. Returns on financial wealth (in the form of money/financial assets/dollars) have only the vaguest and most tenuous relationship to returns (in the form of real output) on real capital — even over very long periods. That’ the crucial lesson of the Cambridge Capital Controversy.
Money matters, and money doesn’t only appear due to the creation of real assets. It appears when real assets are indebted (particularly or generally).
Wealth is (financial assets, including deeds, are) claims on real capital — both particular claims on particular assets, and generalized claims on the stock of real assets. The relationship between wealth and capital remains almost entirely untheorized by economists.
Wealth is not an input to production. Capital is. The creation of wealth in the form of financial assets requires no inputs to production, or any real production at all. Capital does.
Even Piketty fails here; he uses “wealth” and “capital” synonymously, thereby walking right into the rhetorical mind-trap that is marginal productivity theory.
Ackerman says it perfectly:
the elasticity of substitution simply cannot be regarded as a meaningful measure of an economy’s technology (or anything else), or as providing any clue to its future.
What’s essential, rather, is Piketty’s empirical demonstration that the rate of return on wealth has been remarkably stable over centuries — and, contra Summers, with no visible tendency to vary in any consistent way against the “supply of capital.”
And that brings us to a lacuna in Piketty’s analysis that Paul Krugman and other reviewers of Capital have rightly pointed to. The skyrocketing of top-end income inequality we’ve actually witnessed so far in the English-speaking world has mainly come in the form of inflated “labor” earnings, rather than pure capital income.
Which brings us back to marginal productivity theory. Manacled to that concept as their “baseline” theory of income distribution, most liberal economists have done no better than Piketty in their efforts to account for the elephantine growth of these managerial incomes. They’ve had to depict that growth as the result of “rents,”
The problem with these arguments is that neither financiers nor public company executives have led the swelling of high-end incomes over the past several decades. Rather, the single largest contributor has been the income growth of managers in closely-held corporations outside the finance sector — that is, firms with only a few shareholders, where the controlling owners are almost always the managers themselves, usually family members.
the incomes of supermanagers are in fact an inseparable blend of “labor” and “capital” income.
resurgent capitalists in the 1970s and 1980s, emboldened by a weakened working class, drafted managers tightly into their ranks using the tools and personnel of Wall Street, and reshaped the economic landscape.
Capital has used extraordinary compensation schemes to conscript top management into their ultimate project: ensuring that all possible surplus from production goes to them.
Which prompts me to share this perfect encapsulation of our current situation, from an Albert Wenger post that you should also read in full:
Unskilled labor has been pushed to its reservation price, skilled labor is receiving its marginal product, and all the value creation [the surplus from production] is being split between top management and capital.
I’d say that pretty much nails it.
Cross-posted at Asymptosis.
Without reading the whole thing — I think I got the idea — I thought that I (admittedly Ph.D. in cab driving) had cut the Gordian knot on marginal productivity of labor (mostly because I had to — I couldn’t compute all the marginal productivity angles in my little head either, even any simplified model).
First, I delineated today’s labor market as part subsistence-plus — the part where workers wages are set by employer needs from a (should I say it? — a “sucker pool” of labor). Subsistence for the least needed labor — a little more if some quality of labor is needed more, etc. — with no input at all from what the consumer might actually be willing to pay.
When (non-sucker employee) consumers whose wages are limited only by what other consumers are willing to pay have the opportunity to purchase goods made by “suckers” — THEN — the market’s distribution of goods is DISTORTED (there is that scary word usually used by free market addicts) away from the spectrum that would “naturally” occur IF PRICES WERE SET ONLY BY THE CHOICES OF CONSUMERS. That is, only by other consumers’ willingness to pay — not by how much underpaid employees (also consumers) may be skinned. (Think today’s cab drivers in most of the country).
IOW, a true fair and balanced market can only be set up if every employee can withhold labor (not just their own; but labor per se — no more Wal-Mart undercutting supermarket employee contracts with always lower wages) to bargain (ULTIMATELY) for what the consumer is willing to pay.
PS. Fast food is such a huge part of our lives and such a small part of our costs that if McDonalds prices went up 25%, (a) the 65% of customers who come through the drive thru in their $5 a gallon burning four-wheelers may not even notice that their weekly family outing has gone up from $24 to $30 — sure wont give it a thought. The 35% who come in the door will be enjoying an $8,000 a year raise — oh; that is if prices went up because the minimum wage was raised to $15. That is the day-to-day market reality.
Ditto in the extreme for Wal-Mart’s prices going up 3.5% after the same raise.
Please try to keep a labor market bargaining truth before your eyes at all times, folks: labor is only a fraction (usually small — giant in fast food) of the price of the product. It is often the case that labor can raise its price way up and lose very few sales — day-to-day market reality. (Probably gain sales if enough other employees are getting a raise.)
I will be bold enough to post both the Gordian Knot cutter in full below.
Almost forgot: classic case of subsistence-plus overtaking a consumer priced market — we all know — is when the individual weavers in pre-industrial England were replaced by the power loom operators — the latter could not afford wheat bread to feed their families, only oat cakes, forget meat.
Labor extracting the max consumers will pay — versus — the road to subsistence-plus serfdom
What I call a subsistence-plus labor market exists when employees have no mechanism with which to withhold labor from employers in attempt to extract the maximum price consumers may be willing to pay — pay levels set to suit employers needs only.
Examples: Fast food pays subsistence (or less). Starbucks — pays up a rung — a couple of dollars an hour more plus benefits for more yuppie-attuned employees (English as a first language). Starbucks employees may expect they are headed for better things (likely) — may be why they endure pay too close to bottom money. Whole Foods — up another rung — pays a couple of more bucks plus benefits (to the 80% who turn over) because it needs what Starbucks needs plus some additional industry.
My (un)favorite example of subsistence-plus is regional airline pilots whose pay and benefits may hover around Whole Foods level – with typically $100,000 educations and years of building flight hours – but who hope for much better things (which may be getting less hopeful all the time).
When employees whose wages extract the max consumers will pay have the opportunity to purchase products made by employees whose wage potentials are skinned (skimmed) under subsistence-plus, then, the labor price/value spectrum as assessed by consumers only becomes distorted. Ditto for any labor-price extraction differential.
If all employees were paid according to the maximum price their products could command from consumers – instead of too many by how little (how few rungs) above subsistence the boss can skin them – the working rubric would be: from each consumer according to their needs; to each employee according to their abilities. (You had it all backwards, Vladimir Ilyich. :-])
There is only one modality — introduced by legal mandate in late 1940s continental Europe, since picked up elsewhere in the world and established by the Teamsters Union National Master Freight Agreement in 1964 in the US — that ownership cannot work its ratcheting-down, subsistence-plus ways around: centralized bargaining – where all employees doing the same category of work in the same locale (nationwide where applicable) work under a single collectively bargained contract with all employers. (This should eliminate the use of scabs who don’t have a legal contract – I’ve never heard of scabs in Europe.)
My old Teamsters local 804 (left in 1970, age 26) recently won (as they like to phrase it) a 30-and-out retirement benefit of $3900 a month. Which may double what regional pilots earn while still active.
http://teamsterslocal804.org/story/biggest-pension-increases-country
Time is a-waisting. A few years ago, Northwest Airlines squeezed a billion dollars in givebacks out of its major airline flight crews only to next year award a billion dollars in bonuses to a thousand of its execs. The pace on the road to serfdom may be speeding up. Help! Now!
http://conversableeconomist.blogspot.com/2014/05/hours-worked-no-change-output-up-42.html