the t-rex commentary

Sep 02

Capital in the Twenty-First Century: Thomas Piketty is Absolutely Right -


Capital in the Twenty-First Century by Thomas Piketty, translated by Arthur Goldhammer (Belknap Press)

Income inequality in the United States and elsewhere has been worsening since the 1970s. The most striking aspect has been the widening gap between the rich and the rest. This ominous anti-democratic trend has finally found its way into public consciousness and political rhetoric. A rational and effective policy for dealing with it—if there is to be one—will have to rest on an understanding of the causes of increasing inequality. The discussion so far has turned up a number of causal factors: the erosion of the real minimum wage; the decay of labor unions and collective bargaining; globalization and intensified competition from low-wage workers in poor countries; technological changes and shifts in demand that eliminate mid-level jobs and leave the labor market polarized between the highly educated and skilled at the top and the mass of poorly educated and unskilled at the bottom.

Each of these candidate causes seems to capture a bit of the truth. But even taken together they do not seem to provide a thoroughly satisfactory picture. They have at least two deficiencies. First, they do not speak to the really dramatic issue: the tendency for the very top incomes—the “1 percent”—to pull away from the rest of society. Second, they seem a little adventitious, accidental; whereas a forty-year trend common to the advanced economies of the United States, Europe, and Japan would be more likely to rest on some deeper forces within modern industrial capitalism. Now along comes Thomas Piketty, a forty-two-year-old French economist, to fill those gaps and then some. I had a friend, a distinguished algebraist, whose preferred adjective of praise was “serious.” “Z is a serious mathematician,” he would say, or “Now that is a serious painting.” Well, this is a serious book.

It is also a long book: 577 pages of closely printed text and seventy-seven pages of notes. (I call down a painful pox on publishers who put the footnotes at the end of the book instead of the bottom of the page where they belong, thus making sure that readers like me will skip many of them.) There is also an extensive “technical appendix” available online that contains tables of data, mathematical arguments, references to the literature, and links to class notes for Piketty’s (evidently excellent) lecture course in Paris. The English translation by Arthur Goldhammer reads very well.

Piketty’s strategy is to start with a panoramic reading of the data across space and time, and then work out from there. He and a group of associates, most notably Emmanuel Saez, another young French economist, a professor at Berkeley, and Anthony B. Atkinson of Oxford, the pioneer and gray eminence of modern inequality studies, have labored hard to compile an enormous database that is still being extended and refined. It provides the empirical foundation for Piketty’s argument.

It all begins with the time path of total—private and public—wealth (or capital) in France, the United Kingdom, and the United States, going back to whenever data first become available and running up to the present. Germany, Japan, and Sweden, and less frequently other countries, are included in the database when satisfactory statistics exist. If you are wondering why a book about inequality should begin by measuring total wealth, just wait.

Since comparisons over vast stretches of time and space are the essence, there is a problem about finding comparable units in which to measure total wealth or capital in, say, France in 1850 as well as in the United States in 1950. Piketty solves this problem by dividing wealth measured in local currency of the time by national income, also measured in local currency of the time. The wealth-income ratio then has the dimension “years.” The comparison just mentioned says in fact that total wealth in France in 1850 amounted to about seven years worth of income, but only about four years for the United States in 1950. This visualization of national wealth or capital as relative to national income is basic to the whole enterprise. Reference to the capital-output or capital-income ratio is commonplace in economics. Get used to it.

There is a small ambiguity here. Piketty uses “wealth” and “capital” as interchangeable terms. We know how to calculate the wealth of a person or an institution: you add up the value of all its assets and subtract the total of debts. (The values are market prices or, in their absence, some approximation.) The result is net worth or wealth. In English at least, this is often called a person’s or institution’s capital. But “capital” has another, not quite equivalent, meaning: it is a “factor of production,” an essential input into the production process, in the form of factories, machinery, computers, office buildings, or houses (that produce “housing services”). This meaning can diverge from “wealth.” Trivially, there are assets that have value and are part of wealth but do not produce anything: works of art, hoards of precious metals, and so forth. (Paintings hanging in a living room could be said to produce “aesthetic services,” but those are not generally counted in national income.) More significantly, stock market values, the financial counterpart of corporate productive capital, can fluctuate violently, more violently than national income. In a recession, the wealth-income ratio may fall noticeably, although the stock of productive capital, and even its expected future earning power, may have changed very little or not at all. But as long as we stick to longer-run trends, as Piketty generally does, this difficulty can safely be disregarded.

The data then exhibit a clear pattern. In France and Great Britain, national capital stood fairly steadily at about seven times national income from 1700 to 1910, then fell sharply from 1910 to 1950, presumably as a result of wars and depression, reaching a low of 2.5 in Britain and a bit less than 3 in France. The capital-income ratio then began to climb in both countries, and reached slightly more than 5 in Britain and slightly less than 6 in France by 2010. The trajectory in the United States was slightly different: it started at just above 3 in 1770, climbed to 5 in 1910, fell slightly in 1920, recovered to a high between 5 and 5.5 in 1930, fell to below 4 in 1950, and was back to 4.5 in 2010.

The wealth-income ratio in the United States has always been lower than in Europe. The main reason in the early years was that land values bulked less in the wide open spaces of North America. There was of course much more land, but it was very cheap. Into the twentieth century and onward, however, the lower capital-income ratio in the United States probably reflects the higher level of productivity: a given amount of capital could support a larger production of output than in Europe. It is no surprise that the two world wars caused much less destruction and dissipation of capital in the United States than in Britain and France. The important observation for Piketty’s argument is that, in all three countries, and elsewhere as well, the wealth-income ratio has been increasing since 1950, and is almost back to nineteenth-century levels. He projects this increase to continue into the current century, with weighty consequences that will be discussed as we go on.

The key thing about wealth in a capitalist economy is that it reproduces itself and usually earns a positive net return. That is the next thing to be investigated. Piketty develops estimates of the “pure” rate of return (after minor adjustments) in Britain going back to 1770 and in France going back to 1820, but not for the United States. He concludes: “[T]he pure return on capital has oscillated around a central value of 4–5 percent a year, or more generally in an interval from 3–6 percent a year. There has been no pronounced long-term trend either upward or downward…. It is possible, however, that the pure return on capital has decreased slightly over the very long run.” It would be interesting to have comparable figures for the United States.

Now if you multiply the rate of return on capital by the capital-income ratio, you get the share of capital in the national income. For example, if the rate of return is 5 percent a year and the stock of capital is six years worth of national income, income from capital will be 30 percent of national income, and so income from work will be the remaining 70 percent. At last, after all this preparation, we are beginning to talk about inequality, and in two distinct senses. First, we have arrived at the functional distribution of income—the split between income from work and income from wealth. Second, it is always the case that wealth is more highly concentrated among the rich than income from labor (although recent American history looks rather odd in this respect); and this being so, the larger the share of income from wealth, the more unequal the distribution of income among persons is likely to be. It is this inequality across persons that matters most for good or ill in a society.

This is often not well understood, and may be worth a brief digression. The labor share of national income is arithmetically the same thing as the real wage divided by the productivity of labor. Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income. But there could be political and social advantages to the second option. If a small class of owners of wealth—and it is small—comes to collect a growing share of the national income, it is likely to dominate the society in other ways as well. This dichotomy need not arise, but it is good to be clear.

Suppose we accept Piketty’s educated guess that the capital-income ratio will increase over the next century before stabilizing at a high value somewhere around 7. Does it follow that the capital share of income will also get bigger? Not necessarily: remember that we have to multiply the capital-income ratio by the rate of return, and that same law of diminishing returns suggests that the rate of return on capital will fall. As production becomes more and more capital-intensive, it gets harder and harder to find profitable uses for additional capital, or easy ways to substitute capital for labor. Whether the capital share falls or rises depends on whether the rate of return has to fall proportionally more or less than the capital-income ratio rises.

There has been a lot of research around this question within economics, but no definitely conclusive answer has emerged. This suggests that the ultimate effect on the capital share, whichever way it goes, will be small. Piketty opts for an increase in the capital share, and I am inclined to agree with him. Productivity growth has been running ahead of real wage growth in the American economy for the last few decades, with no sign of a reversal, so the capital share has risen and the labor share fallen. Perhaps the capital share will go from about 30 percent to about 35 percent, with whatever challenge to democratic culture and politics that entails.

There is a stronger implication of this line of argument, and with it we come to the heart of Piketty’s case. So far as I know, no one before him has made this connection. Remember what has been established so far. Both history and theory suggest that there is a slow tendency in an industrial capitalist economy for the capital-income ratio to stabilize, and with it the rate of return on capital. This tendency can be disturbed by severe depressions, wars, and social and technological disruptions, but it reasserts itself in tranquil conditions. Over the long span of history surveyed by Piketty, the rate of return on capital is usually larger than the underlying rate of growth. The only substantial exceptional sub-period is between 1910 and 1950. Piketty ascribes this rarity to the disruption and high taxation caused by the two great wars and the depression that came between them.

There is no logical necessity for the rate of return to exceed the growth rate: a society or the individuals in it can decide to save and to invest so much that they (and the law of diminishing returns) drive the rate of return below the long-term growth rate, whatever that happens to be. It is known that this possible state of affairs is socially perverse in the sense that letting the stock of capital diminish until the rate of return falls back to equality with the growth rate would allow for a permanently higher level of consumption per person, and thus for a better social state. But there is no invisible hand to steer a market economy away from this perversity. Yet it has been avoided, probably because historical growth rates have been low and capital has been scarce. We can take it as normal that the rate of return on capital exceeds the underlying growth rate.

Sep 01


First fucking page


First fucking page

(via wakethesheeple)

Aug 31

“Everything we feared about communism - that we would lose our houses and savings and be forced to labor eternally for meager wages with no voice in the system - has come true under capitalism.” — Jeff Sparrow (via anticapitalist)

God dammit I’m tired of this post and all the bazillion notes

(Source: anticapitalist, via anticapitalist)

Aug 30


Aug 29


“It was funny because she thought of herself as a good team player, although sometimes she suspected that no one else on her team did.”― Kate Atkinson, When Will There Be Good News?


“It was funny because she thought of herself as a good team player, although sometimes she suspected that no one else on her team did.”
― Kate Atkinson, When Will There Be Good News?

Aug 28

“A propaganda system will consistently portray people abused in enemy states as worthy victims, whereas those treated with equal or greater severity by its own government or clients will be unworthy.” — Manufacturing Consent - Noam Chomsky 

(Source: noam-chomsky)

Aug 27


Vinyl and needle magnified X1000 
Via Microscopic Images.


Vinyl and needle magnified X1000 

Via Microscopic Images.

(via divineirony)

Aug 26

It's Not Just the Stock Market That's Rigged: the Entire Status Quo Is Rigged -

The stock market is only the tip of the iceberg of what’s being rigged. For a taste of what’s rigged, ask yourself this question: if Mr. Elite Insider perpetrates a scam, and Mr. John Q. Citizen breaks similar laws, is there any difference between the treatment each receives?

Let’s go even deeper and ask: why is looting legal, even though it is obviously crooked? Why is high-frequency trading legal? Why is it legal for the Fed to offer money at 0% to its buddies but not to Mr. John Q. Citizen?

Why is it legal to issue student loans to future debt-serfs that is unlike all other debt in that it cannot be discharged in bankruptcy?

(Source: azspot)

Aug 25

“Normcore was about dropping the pretense and learning to throw themselves into, without detachment, whatever subcultures or activities they stumbled into, even if they were mainstream. “You might not understand the rules of football, but you can still get a thrill from the roar of the crowd at the World Cup,” the report read.” — Normcore: Fashion Movement or Massive In-Joke?

(Source: khuyi)

Aug 24


New book explores ‘frontier’ metaphor in science
Leah Ceccarelli is a professor of communication and author of the book “On the Frontier of Science: An American Rhetoric of Exploration and Exploitation.” 

She answered a few questions about the book for UW Today. 

Q: What’s the concept behind this book? Why did you write it? A: I kept seeing appeals to the American frontier spirit in the public arguments of scientists. That rhetoric was often inspiring, giving scientists an exciting image of their work across the metaphorical “boundaries” of knowledge. But it was also troubling in the expectations it set out about the manifest destiny of scientists to push forward at all costs, and in the way it reinforced their separation from a public that funds their endeavors. (via New book explores ‘frontier’ metaphor in science | UW Today)


New book explores ‘frontier’ metaphor in science
Leah Ceccarelli is a professor of communication and author of the book “On the Frontier of Science: An American Rhetoric of Exploration and Exploitation.”

She answered a few questions about the book for UW Today.

Q: What’s the concept behind this book? Why did you write it? A: I kept seeing appeals to the American frontier spirit in the public arguments of scientists. That rhetoric was often inspiring, giving scientists an exciting image of their work across the metaphorical “boundaries” of knowledge. But it was also troubling in the expectations it set out about the manifest destiny of scientists to push forward at all costs, and in the way it reinforced their separation from a public that funds their endeavors. (via New book explores ‘frontier’ metaphor in science | UW Today)

Aug 23

The history of the movie trailer


Filmmaker IQ has a nice exploration of the history of the movie trailer. And yes, they actually used to play at the end of (i.e. “trail”) the film.

Coming into the 1960s, a new generation of star directors began to redefine the trailer - among them was the legendary Alfred Hitchcock. Instead of showing scenes from the movie, Hitchcock, who had become quite well known to audiences from his “Alfred Hitchcock Presents” TV series, cashed in on his celebrity… taking audiences on a tour using his gallows humor style in this trailer for 1960’s Pscyho.

The reemergence of Cubism in film and commercial art in the 1960s was not lost on another emerging filmmaker - Stanley Kubrick. Having experimented with fragmented cutting styles in the trailer to 1962’s Lolita, Kubrick comes back strong in 1964’s “Dr. Strangelove” with a trailer that I consider one of the most bold and brazen pieces of movie advertising ever made.

Aug 22

“To many Americans, the U.S. economy of recent years has become a vast casino in which too many decks are stacked and too many dice are loaded. I hear it all the time: The titans of Wall Street made unfathomable amounts gambling with our money, and when their bets went bad in 2008 we had to bail them out. Yet although millions of Americans are still underwater and many remain unemployed, not a single top Wall Street banker has been indicted. In fact, they’re making more money now than ever before. Top hedge-fund managers pocketed more than a billion dollars each last year, and the stock market is higher than it was before the crash. But the typical American home is worth less than before, and most Americans can’t save a thing. CEOs are now earning more than 300 times the pay of the typical worker yet the most workers are earning less, and many are barely holding on.” — Robert Reich

(via azspot)

Aug 21

“Again, the ego of a man was as fragile as the heart of a woman.” — Eric Jerome Dickey
Eric Jerome Dickey - DecadenceDecadence
(Via Akilah Lamsee)

(Source: kindlequotes)

Aug 20

“Nostalgia is inevitably a yearning for a past that never existed, and when I’m writing, there are no bees to sting me out of my sentimentality. For me at least, fiction is the only way I can even begin to twist my lying memories into something true.” — John Green (via alighthouseofwords)

(via trexcommentary)

Aug 19

Scale Americana


Michael Paul Smith takes photographs of classic cars that evoke feelings of nostalgia for America in the 30s, 40s, 50s, and 60s. Take a look, these are about as Pleasantville as you can get:

Michael Paul Smith 01

Michael Paul Smith 02

But as you’ll discover browsing through Smith’s collection, the cars he photographs are scale models. Here’s the set-up for that second shot:

Michael Paul Smith 03

And here’s further evidence of Smith’s trickery:

Michael Paul Smith 04

No Photoshop here…all effects are done in-camera. As Smith notes, “It is the oldest trick in the special effects book: lining up a model with an appropriate background, then photographing it.” (via @osteslag)