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When you say that he gives "some assorted data suggesting r has historically been bigger than g except when it wasn't, and that inequality grows except when ba

by mrow84 12y ago

When you say that he gives "some assorted data suggesting r has historically been bigger than g except when it wasn't, and that inequality grows except when bad things happen", does he make no attempt to correlate his time series of (r - g) with inequality data? If such a correlation was found, that would obviously represent evidence to support his hypothesis. His claim that I quoted is a causal one, however, as I am sure you are aware, it is very standard practice in all fields of inquiry to propose causal relationships from careful and qualified analyses of correlations. You are of course correct that demonstrating causality would require more than time series analysis, however a lack of causal analysis cannot be taken of itself to invalidate a well-identified correlation (I am of course assuming good faith and rigour on his part, which I am not in a position to attest to at the moment). Contrary data, or an explanation of a mechanism that would induce the identified correlation without the proposed causal relationship should now be sought to invalidate his claims, simply saying that he has only shown correlation is probably not enough. Finally, could you just explain this a bit more, I didn't quite get it: "If you simply have r > g (ignoring volatility, as he's done so far), and treat capital as homogeneous (as he's mostly done so far), then this will explicitly NOT happen: ..."

yummyfajitas 12y ago
There is no careful analysis. The graphs have basically 3 features: high inequality until the great depression, then low inequality, then inequality rises again. He doesn't have much in the way of graphs of r-g. Rather than explaining why you need more than just a correlation, I'll link to the Lucas Critique: http://en.wikipedia.org/wiki/Lucas_critique http://en.wikipedia.org/wiki/Lucas_critique Finally, could you just explain this a bit more Not sure I can explain better than the comment I linked to. If your capital and mine grow at the same rate, we'll have the same ratio of capital forever. I.e., my wealth will be X exp(rt), yours will be Y exp(rt). This seems to be Piketty's implicit model in most of the book, though once or twice he calls it unrealistic. But he never actually states explicitly what his model is, so it's a bit hard for me to be sure.
- mrow84 12y ago
  I hadn't heard of the Lucas Critique before, but it seems to be constrained to policy advice that operates on economic variables over which market actors have control, and I'm not sure that applies here - I'll have to think some more. > Not sure I can explain better than the comment I linked to. ... Thanks for the clarification, I'm not feeling very switched on at the moment. I would question your analysis though. It is certainly correct on its own terms, however it conflates wealth with capital (which is something I've seen people saying Piketty does - does he?). To me it seems to be vital to include both major sources of income, capital and labour. If you do that, then you can calculate the quantity (Xl exp(gt) + Xc exp(rt)) / ((Xl + Yl) exp(gt) + (Xc + Yc) exp(rt)) Where Xl and Yl are the labour "holding" for X and Y, and Xc and Yc are the capital holding. Here I'm taking r as the return on capital, and g as the return on labour, which seems abusive but I think it captures the point. This quantity tends to the capital ratio where r > g, and the labour ratio where r < g. Whilst it ends up at the same limit as your model (for r > g), it shows that there is a shift of wealth from labour to capital over time, so the inequality between capital holders and labour "holders" increases over time, as the returns on labour are dominated by the returns on capital. edit: Just thinking about it a bit more, this implies that we definitely do want g > r, because then in the limit wealth is proportional to labour, i.e. productivity, not to capital bequeathment. One can still make returns on capital, but in the limit your wealth will be proportional to your effort. Surely that is the goal of a meritocratic society? edit edit: To clarify, I have broader views on the value of pure meritocracy, in my first edit I was just trying to relate the implications of the wealth ratio given above to meritocratic goals.
  - yummyfajitas 12y ago
    The Lucas Critique basically just says that if you want to use broad correlations, you should make sure that the microfoundations which drive those correlations still apply. Unfortunately the relation of r to g tells us very little about meritocratic goals. Suppose that the growth rate r is driven entirely by startup founders building gigantic companies (or lotteries, which would be mathematically equivalent), which cease growing after the founder dies. Then you could have r be huge, inequality would be huge, and everything would be entirely meritocratic.

by mrow84 12y ago

yummyfajitas 12y ago

There is no careful analysis. The graphs have basically 3 features: high inequality until the great depression, then low inequality, then inequality rises again. He doesn't have much in the way of graphs of r-g. Rather than explaining why you need more than just a correlation, I'll link to the Lucas Critique: http://en.wikipedia.org/wiki/Lucas_critique http://en.wikipedia.org/wiki/Lucas_critique Finally, could you just explain this a bit more Not sure I can explain better than the comment I linked to. If your capital and mine grow at the same rate, we'll have the same ratio of capital forever. I.e., my wealth will be X exp(rt), yours will be Y exp(rt). This seems to be Piketty's implicit model in most of the book, though once or twice he calls it unrealistic. But he never actually states explicitly what his model is, so it's a bit hard for me to be sure.

mrow84 12y ago
I hadn't heard of the Lucas Critique before, but it seems to be constrained to policy advice that operates on economic variables over which market actors have control, and I'm not sure that applies here - I'll have to think some more. > Not sure I can explain better than the comment I linked to. ... Thanks for the clarification, I'm not feeling very switched on at the moment. I would question your analysis though. It is certainly correct on its own terms, however it conflates wealth with capital (which is something I've seen people saying Piketty does - does he?). To me it seems to be vital to include both major sources of income, capital and labour. If you do that, then you can calculate the quantity (Xl exp(gt) + Xc exp(rt)) / ((Xl + Yl) exp(gt) + (Xc + Yc) exp(rt)) Where Xl and Yl are the labour "holding" for X and Y, and Xc and Yc are the capital holding. Here I'm taking r as the return on capital, and g as the return on labour, which seems abusive but I think it captures the point. This quantity tends to the capital ratio where r > g, and the labour ratio where r < g. Whilst it ends up at the same limit as your model (for r > g), it shows that there is a shift of wealth from labour to capital over time, so the inequality between capital holders and labour "holders" increases over time, as the returns on labour are dominated by the returns on capital. edit: Just thinking about it a bit more, this implies that we definitely do want g > r, because then in the limit wealth is proportional to labour, i.e. productivity, not to capital bequeathment. One can still make returns on capital, but in the limit your wealth will be proportional to your effort. Surely that is the goal of a meritocratic society? edit edit: To clarify, I have broader views on the value of pure meritocracy, in my first edit I was just trying to relate the implications of the wealth ratio given above to meritocratic goals.
- yummyfajitas 12y ago
  The Lucas Critique basically just says that if you want to use broad correlations, you should make sure that the microfoundations which drive those correlations still apply. Unfortunately the relation of r to g tells us very little about meritocratic goals. Suppose that the growth rate r is driven entirely by startup founders building gigantic companies (or lotteries, which would be mathematically equivalent), which cease growing after the founder dies. Then you could have r be huge, inequality would be huge, and everything would be entirely meritocratic.