Archive for May, 2014


As if to illustrate the point I made the other day (about earnings at the top being themselves distributions of the income captured by capital), Seth Ackerman put together the chart above (from data in Simon Mohun’s recently published article on unproductive labor) comparing the sum of profits and managerial compensation to non-managerial compensation, both as shares of total net income.

Indeed, in a direct rebuttal of the neoclassical marginal-productivity theory of distribution, capital’s share of income has been growing at the expense of labor’s share since the late-1970s.

BMI-Summer of R

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I have been arguing all along (e.g., here) that, after the crisis of 2007-08 and in the midst of the Second Great Depression, capitalism faces a legitimacy crisis.

But don’t take my word for it. Consider the words of Mark Carney [pdf], the Canadian governor of the Bank of England, who is worried that capitalism is eating its own children.

Inclusive capitalism is fundamentally about delivering a basic social contract comprised of relative equality of outcomes; equality of opportunity; and fairness across generations. Different societies will place different weights on these elements but few would omit any of them.

Societies aspire to this trinity of distributive justice, social equity and intergenerational equity for at least three reasons. First, there is growing evidence that relative equality is good for growth. At a minimum, few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined. Second, research suggests that inequality is one of the most important determinants of relative happiness and that a sense of community – itself a form of inclusion – is a critical determinant of well-being. Third, they appeal to a fundamental sense of justice. Who behind a Rawlsian veil of ignorance – not knowing their future talents and circumstances – wouldn’t want to maximise the welfare of the least well off?

This gathering and similar ones in recent years have been prompted by a sense that this basic social contract is breaking down. That unease is backed up by hard data. At a global level, there has been convergence of opportunities and outcomes, but this is only because the gap between advanced and emerging economies has narrowed. Within societies, virtually without exception, inequality of outcomes both within and across generations has demonstrably increased.


The economists at Goldman Sachs have now come in with their predictions for the 2014 World Cup finals. And, by a wide margin, Brazil are the favorites to win (3-1 over Argentina in the final match).

The problem, of course, is that football is a low-scoring game and, therefore, quite unpredictable. Thus, as the Goldman Sachs team admits, when looking at how their model would have done in predicting the goal difference in each game of the 2010 World Cup finals,

Overall, there is a positive and statistically significant relationship between the actual and predicted outcomes. However, the fit of the relationship is not particularly tight with an r- squared of 0.24, because football is ultimately a pretty random game.

As for me, with only the most informal of statistical analyses (in my head, based on what I know of the various national teams and the history of World Cups), I actually agree with the prediction: a final four of Germany, Spain, Brazil, and Argentina, and Brazil raising the trophy.

Then again, anything can happen. . .


I find it interesting that Thomas Piketty’s classical treatment of inequality is being interpreted—and criticized—as a battle of capital versus labor. (Is that just because Piketty begins chapter 1 with the story of the August 2012 strike at Lonmin’s Marikana platinum mine? It must be, because the book (as far as I’ve read) focuses much more on rates of demographic growth than it does on class conflict.)

In any case, as I suspected, the main line of attack (at least within mainstream economic thinking) against Piketty’s treatment is to undermine the idea of capital versus labor and to focus instead on growing inequality among workers. We saw this with David Autor’s article. Now, it’s Laurence Kotlikoff:

The deep flaws in parts of Piketty’s book don’t mean that inequality is either small or benign. But the real source of inequality these days is not due to capitalists saving every penny and workers spending every cent or to r always exceeding g. It’s due to labor earnings becoming ever more skewed. This is happening for a variety of reasons, including the advent of smart machines. This rising wage inequality, which Berkeley’s Emmanual Saez and co-author Piketty have spent years carefully documenting, doesn’t pit capitalists against workers. It pits workers against workers.

In my view, the problem with juxtaposing ownership-of-capital inequality and labor-earnings inequality is that it ignores the extent to which earnings at the top are themselves distributions of the income captured by capital. That’s a point that seems to have been missed by both Piketty and his mainstream critics.


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