Saturday, May 03, 2014

Believe in Inequality? Why, I've Seen It Done.

Interesting David Leonhardt article about Piketty's theory of inequality.

So I called Piketty at his office in Paris, and he agreed to walk me through it.

He suggested imagining a hypothetical village from centuries ago in which neither the population nor the economy was growing. Every year, the village produced the same amount of goods for the same number of people to divide — a reality that was typical before the Enlightenment, when material living standards and human longevity barely rose. (The peasants of the 15th century were not better off than peasants in ancient Rome.) Even in a zero-growth society, however, assets that helped people produce goods — also known as capital — had value. Capital, Piketty told me, counts as anything “useful, any kind of equipment. Basic tools. Stones in prehistorical times.” Anything, in other words, that “makes people more productive.”
In our hypothetical village, a large farm might produce $10,000 worth of crops in a year and yield $1,000 in profit for its owner. A small farm might have the same 10 percent rate of return: $1,000 in annual crop sales, yielding $100 in profit. If the large farmer and small farmer each spent all of their money every year, the situation could continue ad infinitum, Piketty said, and the rate of inequality in the village would not change.
But one of capital’s great advantages is that its owners can make enough income to spend some of their money and sock the rest of it away. If the large farmer saved $500 of that $1,000 profit, he could buy more capital, which would bring more profit. Perhaps a few owners of smaller farms had debts to pay, and one of the large farmers bought them out. Eventually, the owner of the expanding farm might find himself owning land that yielded $1,500 or $2,000 in annual profit, allowing him to put aside more and more for future capital acquisitions. Less-stylized versions of this story have been playing out for centuries.
I have come to think of this idea as Piketty’s First Law of Inequality. The fact that the rich earn enough money to save money allows them to make investments that other people simply cannot afford. 

As I was reading about this imaginary village I realized I'd lived in just such a village, in Nepal 25 years ago.  And it was obvious how a basic inequality of capital influenced inequality of outcome.  I lived in a big house, owned by a wealthy family, in a region where people produced for subsistence.  The biggest inputs after land itself was seed, water, and human labor (performed largely by family members and especially women family members.)  Large families had more labor, but large families also tended to divide land and end up with smaller plots.  Wealthy families farmed their land by hiring labor from poorer families.  This was done with a combination of money and manipulation of important local inputs like food, seed, water, loans, gifts, and social connections.  A wealthy family, like my family, could afford to loan out food and to hoard seed in return for labor at a season in which labor was in demand.  Poor families, which needed that labor themselves, needed food or seed during other parts of the year. An underdeveloped market for other products, no ready cash, no banking system other than loans extended by rich families, meant that they had to trade what they had (labor) in exchange for necessities when their bargaining power was low.   Even where poor families owned something of value--land, gold, labor--the leverage that wealthy families had over poor families was the ability to time their transactions.  Larger amounts of something desirable (land, gold, labor, power, seed, water, government connections) meant that wealthy families could use their surplus at seasonally or socially critical times to force access to labor at other critical times at a price they preferred.  Sound familiar?

So why isn't it inevitable?  Well, lots of things can break into the system--new technology can replace family technology and make small families more productive (so they don't have to split their land up among too many children).  New sources of off farm employment can arise--in the case of Nepal, in the old days, men who went off to serve with the Gurkhas could send cash back to buy new land, in new locations, or to employ laborers to take their own place in the system. Each of these influxes of cash money into the economy disrupted the control of the former elites.  Education which created new choices for elites other than farming drew elite families out of the village entirely and rendered farming and control over the farming economy irrelevant.  For an interim period, before the collapse of the farming economy, foreign seed banks and low cost loans also intervened between local elites and their control over the labor economy.  No system has to stay at the equilibrium preferred by the elites. As Leonhardt and Piketty both argue rising inequality is a choice.

Cross posted at I Spy With My Little Eye


Victor said...

" As Leonhardt and Piketty both argue rising inequality is a choice."

Yes, it's a choice.

A choice made by those who can afford to pay-off politicians, who then help to further the inequality in order to keep laboring at their political jobs for another term.
The rest of us don't have the kind of money or power to wield enough influence to reverse even part of the process.

I'm afraid nothing but a revolution will change our system.

So, the rich better hope that the TV networks keep churning out entertaining programming, to lull the masses into their video induced couch-stupor.

I know the "slowly boiling frog" theory has been disproven.

But our middle class has sat still for over 3 decades, while the richest of the rich people have been slowly robbing them blind - and many, if not most, of them, even voted for the politicians who were the minions and lackey's moving that money from the pockets of the middle class, into the offshore accounts of the richest of the rich.

I'd love to see a non-violent revolution - like via elections.

But I don't hold out much hope, because even after over 40 years of Republicans stealing money from the middle class, they're still favored to keep the House in 2014, and maybe even gain control of the Senate.

So, the answer to the question, "Is our middle class learning?", is a resounding "NO!!!!!!!!!!!!!!!!"

Victor said...

Btw, aimai - great story about Nepal.

Is it as beautiful as I've heard it is?

aimai said...

Not anymore, alas. I went back a couple of years ago and the beautiful Kathmandu valley had dissapeared into the smog. As an enormous bowl it needed to be carefully managed from an ecological standpoint but as the rural areas emptied out because of a lack of opportunity for villagers the valley became overdeveloped.

Yastreblyansky said...

I was wondering through the quote why Leonhardt needs to be taught these facts of life through parables, as if it was a revolutionary new understanding. Lovely how you show that it's not just a parable.

aimai said...

Well, I don't think very many modern places are quite as limited in the nature of their inputs and labor issues as a remote village in Nepal. But its also the case that these fables should make us think very hard about how little leverage and power individual laborers have in societies in which human labor is not scarce or a deciding factor in production. This is basically the situation we have today--the rich don't need much human labor to produce what they want to produce (whether things or profit itself). And there is an oversupply of labor relative to the uses the rich want to put it to. So the bargaining power of labor is low and the ability of the rich to wait us out, or substitute something else or someone else's labor for ours, is high. People who have nothing to sell *but* their labor are increasingly disadvantaged relative to wealthy people--even more so than my Nepali vilagers in the story. At least labor was scarce and necessary.

Ken_L said...

"... as the rural areas emptied out because of a lack of opportunity for villagers the valley became overdeveloped."

Conservatives would argue this illustrates the danger of change, with unanticipated consequences outweighing the benefits brought about by altering the stable relationships of centuries. And I believe they have a point which deserves to be considered. One of the problems of the way politics has polarised in recent times is that neither side is willing to concede even the slightest merit in the other's argument.

For example: Picketty's little story has a glaring omission. He fails to explain how inequality came about in the first place. Why does the village have large farms and small farms? Or in your Nepalese village, how did a family get to be wealthy? What was the first cause of inequality, in other words? Was it perhaps because one family was smarter, or harder-working than the rest (the competitive markets hypothesis explanation)? Or was it because one family was prepared to steal from others using force, and then to create an institutional framework of laws and religions to retrospectively legitimise the theft?

Picketty's work is valuable but it seems to assume a theory of power based on wealth. While wealth is one source of power there are others, and we will have a very partial and skewed perception of power relations and the resulting inequality if we only worry about the distribution of wealth and incomes in society.

Richard said...

The original inequality came about through normal social needs in which people sacrificed personal goods to give to the community. Usually this was defense against bandits.

They gave the military leader extra power and control in order to protect the city. The military needed to have special full-time training in order to defeat the bandits or next door neighbors, so they needed to be fed. The military then gave the commander extra land for the military, and that was passed on through inheritance.

A lot of power in society has no economic productivity.