Monthly Archives: October 2014

Piketty: “[the powerful force behind rising income and wealth inequality in the US since the 1970s] has little to do with r>g.”

Much of the discussion about Thomas Piketty’s Capital in the Twenty-First Century has been concerned with his “law” of the relationship between the rate of return on capital (r) and the rate of economic growth (g), known as r > g. To such an extent that the Initiative on Global Markets at University of Chicago asked its panel of economic experts whether they agreed or not with the statement:

IGM Economic Experts 2014 Inequality and r versus g

The experts overwhelmingly disagreed.

Piketty’s reply in Slate was:

“I think the book makes pretty clear that the powerful force behind rising income and wealth inequality in the US since the 1970s is the rise of the inequality of labor earnings, itself due to a mixture of rising inequality in access to skills and higher education, and of exploding top managerial compensation (itself probably stimulated by large cuts in top tax rates), So this indeed has little to do with r>g.”

And he did indeed write e.g.:

“In short, two distinct phenomena have been at work in recent decades. First, the wage gap between college graduates and those who go no further than high school has increased, as Goldin and Katz showed. In addition, the top 1 percent (and even more the top 0.1 percent) have seen their remuneration take off. This is a very specific phenomenon, which occurs within the group of college graduates and in many cases separates individuals who have pursued their studies at elite universities for many years. Quantitatively, the second phenomenon is more important than the first. In particular, as shown in the previous chapter, the overperformance of the top centile explains most (nearly three quarters) of the increase in the top decile’s share of US national income since 1970. (p. 315)”

So why did the IGM ask this question in the first place? And why have so many economists been concerned with it? It is of course possible that they have not read the book. However it might also be the case that Piketty must take some of the blame and that in general it was not so clear in the book. At least the back cover text (on Amazon) is pretty ambiguous (though I hope the critics read more than that).

I should maybe disclose at this point that I have not read  Capital in the Twenty-First Century either, although now I might have to.

 

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Motivated by the clock

The telling figure below from an NBER paper (wp) by Allen, Dechov, Pope and Wu has been shared by several people this summer. From data on almost 10 million marathon finishing times, they show how people use their prospective finishing time as motivation to provide more effort and bunch at every 30 min. interval.

Figure 2. Distribution of marathon finishing times-Allen Dechov Pope Wu 2014 Reference-Dependent Preferences- Evidence from Marathon Runners

Figure 2. Distribution of marathon finishing times-Allen Dechov Pope Wu 2014 Reference-Dependent Preferences- Evidence from Marathon Runners

Monthly book roundup – 2014 September

Books finished in September:
(Warning: reviews are unpolished and quickly written.)

Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry by David Robertson. Too much about certain broad, canonical business strategies (“reach for blue ocean markets”) and LEGO’s failures, or rather failed timing, applying these strategies, but maybe that is just how business book are. The thing that keeps the book floating is its case – the Lego brick.

A busy month.

Ratings and old books are in the library.