Monday, November 24, 2014

Piketty: Deirdre McCloskey Weighs In

Back in the spring the intellectual world was convulsed by a book about capitalism written by a Frenchman, Thomas Piketty. The book, Capital in the Twenty-first Century argued that the return on capital was always bigger than the economic growth rate (expressed as r > g) and this would mean that the rich would forever get richer and richer.

Since the left is currently focused on "inequality" you know that this is a Bad Thing. How can we solve this problem? Easy. All it takes is higher taxes on high incomes and a global tax on capital.

I read the whole thing so you wouldn't have to and I blogged on the book with commentary on each chapter, starting with the introduction here. Broadly speaking, the book is balderdash. Of course r is greater than g. The rate of return on capital is connected to time preference whether or not there is any growth. If you want to borrow money you have to pay for it; you have to pay the capitalist for the fact that when you repay his money in a couple of years you need to pay him for the fact that right now money in two years is worth less than money in the hand right now. Because time preference.

Now Deirdre McCloskey, economist and author of the "Bourgeois Era" books celebrating bourgeois dignity and virtue, has weighed in with a long review of Capital in the Twenty-first Century. It will appear in the Erasmus Journal of Philosophy and Economics. Her judgment is scathing. Piketty set out, she observes, to write a book that surveyed the modern world with a view "at once economic and political, social and cultural".
But he has not achieved it. His gestures to cultural matters consist chiefly of a few naively used references to novels he has read superficially—for which on the left he has been embarrassingly praised. His social theme is a narrow ethic of envy. His politics assumes that governments can do anything they propose to do. And his economics is flawed from start to finish.
 Exactly. For instance he offers Balzac's Pere Goriot as a tableau of life in the accumulating rentier class. But Goriot is a novel about how people with money will gladly throw it all away for the chance to climb the social ladder. It also turns out that people without money are happy to throw other peoples' money away in order to climb the social ladder.

Now McCloskey's great virtue is her story-telling. Her "Bourgeois Era" books retell the economic miracle of the last 200 years as the Great Enrichment in which per capita income in real money went from $1 per day to $100 per day. But all the Left can think about is that there are still people that haven't got their share.
And yet the left in its worrying routinely forgets this most important secular event since the invention of  agriculture—the Great Enrichment of the last two centuries—and goes on worrying and worrying, like the little dog worrying about his bone in the Traveler’s insurance company advertisement on TV, in a new version every half generation or so.
What does the left (and sometimes the right) worry about? I'm glad you asked that. McCloskey has a little list:
[G]reed, alienation, racial impurity, workers’ lack of bargaining strength, women working, workers’ bad taste in consumption, immigration of lesser breeds, monopoly, unemployment, business cycles, increasing returns, externalities, under-consumption, monopolistic competition, separation of ownership from control, lack of planning, post-War stagnation, investment spillovers, unbalanced growth, dual labor markets, capital insufficiency (William Easterly calls it “capital fundamentalism”), peasant irrationality, capital-market imperfections, public choice, missing markets, informational asymmetry, third-world exploitation, advertising, regulatory capture, free riding, low-level traps, middle-level traps, path dependency, lack of competitiveness, consumerism, consumption externalities, irrationality, hyperbolic discounting, too big to fail, environmental degradation, underpaying of care, overpayment of CEOs, slower growth, and more.
And now, of course, net neutrality. The whole point is that "'capitalism' is doomed
unless experts intervene with a sweet use of the monopoly of violence [my bold] in government to implement anti-trust against malefactors of great wealth or subsidies to diminishing-returns industries or foreign aid to perfectly honest governments or money for obviously infant industries or the nudging of sadly childlike consumers or, Piketty says, a tax on inequality-causing capital worldwide.  
Like I said, McCloskey is great with words, and that's a good thing in an economist. It's also a good thing in a writer.

I could do on and on quoting her bon mots, but I won't. Instead I'll close with this.

A big problem in Piketty's book, according to McCloskey, is that he doesn't really tell us why inequality is a bad thing. He is no better than intellectual fluffball Glencora Palliser (nee M'Cluskie) who says in Phineas Finn that "Making men and women all equal. That I take to be the gist of our political theory."

Well, you can have your M'Cluskies (although we love our McCloskeys). But I'll take Madame Max Goesler, the incomparable rich young Viennese widow who in the end gets the hand of young Phineas, courtesy of Anthony Trollope. The only way to find out why is to read the book. But I will give you a hint: Character.

The best chap I've found that discussed freedom and equality intelligently is the German sociologist Georg Simmel. It just happens that I blogged on his analysis of equality and freedom in the 18th and 19th centuries last week.

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