Why I am not persuaded by Thomas Piketty’s argument(marginalrevolution.com)
marginalrevolution.com
Why I am not persuaded by Thomas Piketty’s argument
http://marginalrevolution.com/marginalrevolution/2014/04/why-i-am-not-persuaded-by-thomas-pikettys-argument.html
4 comments
[deleted]
The piece seems to attack Piketty for not explaining why capital accumulation rates don't diminish, but then ignores the arguments presented; namely that capital accumulation allows privileged access to the political system.
A failure to accept the mere possibility of institutional corruption in free market enterprises was the defining failure of the Greenspan era. Regulators working through the '90s and the '00s could not have turned a blinder eye to the deleterious effects of their own capture on account of having no more blind eyes to turn. This was due, in large part, to the efforts of academic economists who laid the intellectual groundwork for deregulation of the financial industry.
Many members of the economic profession have yet to emerge from the fog of idiocy, corruption, and denial that let to / resulted from the faith misplaced in their malarky - much of which boiled down to the "wisdom" of Ayn Rand, thinly veiled.
The sum of Randian-in-Chief Greenspan's concessions to reality can be found here. Needless to say, it's a pretty brief read.
http://www.nytimes.com/2008/10/24/business/economy/24panel.h...
For a more extended piece of outrage - which really centers on the corruption of university economics departments - see "Inside Job", which won a (richly deserved) Oscar and which can be downloaded here:
http://vimeo.com/57527797
You can also watch the final 20 minutes (which is the most searing part, as well the section that focuses on the domain of academic economists) here:
http://vimeo.com/20170617
And you can read a bit more about the film here.
http://en.wikipedia.org/wiki/Inside_Job_(2010_film)
I have nothing to do with the making or selling of this film, by the way. I just think it's one of the sharpest accounts to emerge from the Fiasco of '08.
Many members of the economic profession have yet to emerge from the fog of idiocy, corruption, and denial that let to / resulted from the faith misplaced in their malarky - much of which boiled down to the "wisdom" of Ayn Rand, thinly veiled.
The sum of Randian-in-Chief Greenspan's concessions to reality can be found here. Needless to say, it's a pretty brief read.
http://www.nytimes.com/2008/10/24/business/economy/24panel.h...
For a more extended piece of outrage - which really centers on the corruption of university economics departments - see "Inside Job", which won a (richly deserved) Oscar and which can be downloaded here:
http://vimeo.com/57527797
You can also watch the final 20 minutes (which is the most searing part, as well the section that focuses on the domain of academic economists) here:
http://vimeo.com/20170617
And you can read a bit more about the film here.
http://en.wikipedia.org/wiki/Inside_Job_(2010_film)
I have nothing to do with the making or selling of this film, by the way. I just think it's one of the sharpest accounts to emerge from the Fiasco of '08.
"Piketty converts the entrepreneur into the rentier. To the extent capital reaps high returns, it is by assuming risk (over the broad sweep of history real rates on T-Bills are hardly impressive)."
The high returns entrepreneurs and investors can receive is a result of capturing winner-take-all market opportunities. Mark Zuckerberg, for instance, took very little risk in the scheme of things. I heard a talk by a Sequoia partner once. He said that their investing philosophy is pretty simple: Look for billion dollar market opportunities, and invest in the team/company most likely to capture that market. Thanks to Sequoias's reputation and contacts, they can attract the top entrepreneurs and thus earn extraordinary returns. Risk has little to do with it.
Much of the risk in startups actually comes from the fact that the market opportunities are usually pretty obvious, so there are a bunch of startups competing for the space, and only one or two can win. There are some entrepreneurs who take on genuine technology or market-existence risk, but this tends to be the exception these days.
The high returns entrepreneurs and investors can receive is a result of capturing winner-take-all market opportunities. Mark Zuckerberg, for instance, took very little risk in the scheme of things. I heard a talk by a Sequoia partner once. He said that their investing philosophy is pretty simple: Look for billion dollar market opportunities, and invest in the team/company most likely to capture that market. Thanks to Sequoias's reputation and contacts, they can attract the top entrepreneurs and thus earn extraordinary returns. Risk has little to do with it.
Much of the risk in startups actually comes from the fact that the market opportunities are usually pretty obvious, so there are a bunch of startups competing for the space, and only one or two can win. There are some entrepreneurs who take on genuine technology or market-existence risk, but this tends to be the exception these days.
VC is hardly an investment category full of good returns at all.
http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture...
And given that VC returns tend to be based on a small number of long tail hits, I have no idea how you could say "risk has little to do with it".
http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture...
And given that VC returns tend to be based on a small number of long tail hits, I have no idea how you could say "risk has little to do with it".
Risk has little to do with it for the top firms (like Sequoia) that have built the networks and reputation to attract the top companies. Yes, they take some risk on individual companies, but across their entire portfolio the risk is not that great compared to the expected value. The VC industry is winner take-the-best, just like the tech industry as a whole. The top firms are not taking risk proportional to their reward.
It is true that the VC sector underperforms. That is because the lower tier firms are just pretenders. They are funding second tier companies, and second tier companies are not good enough in these winner-take-most markets. These firms should shut down and limited partners should stop burning their money by investing in them.
My disagreement with Piketty (judging from the summaries - I haven't read him yet), is that the cause of inequality is not capital versus labor. The cause is the rise of winner-take-all-dynamics, which causes stratification within sectors.
It is true that the VC sector underperforms. That is because the lower tier firms are just pretenders. They are funding second tier companies, and second tier companies are not good enough in these winner-take-most markets. These firms should shut down and limited partners should stop burning their money by investing in them.
My disagreement with Piketty (judging from the summaries - I haven't read him yet), is that the cause of inequality is not capital versus labor. The cause is the rise of winner-take-all-dynamics, which causes stratification within sectors.
Also I should note that I am not saying their is no risk in investing. Even for Sequoia there is risk. I am that the the risk that exists does not cause high returns. I am that this statement is wrong: "to the extent capital reaps high returns, it is by assuming risk." Sequoia reaps returns by avoiding risk, if it had even better vision into markets and companies it could reap even higher returns.
He dropped out of college to build a start-up taking on Myspace and Friendster, two well-funded incumbents. Furthermore, Zuckerberg didn't have the wealth or family connections of say, the Winklevii. I don't really like Zuckerberg, but to minimize the risk facing him and his investors is kind of ridiculous.
At the time he took leave from Harvard (which was not dropping out), the company already had offers for $500k in seed money at a $10 million valuation. The chance that going full-time on Facebook would end up worse than staying at Harvard was remote. Even if failed, the experience and connections would have been far more valuable than two more years at Harvard.
Piketty need not wait for the return of patrimonial capitalism for democratic and meritocratic institutions to be undermined by elite economic interests: that ostrich has already taken off, that horse has bolted, that rising tsunami has already smashed all boats.
"Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence."
http://www.princeton.edu/~mgilens/Gilens%20homepage%20materi...
"Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence."
http://www.princeton.edu/~mgilens/Gilens%20homepage%20materi...
I don't think he presented enough evidence to make that statement without a lot of qualifiers, but for now, let's just assume that it's correct.
What Piketty absolutely failed to account for is that capitalism's greatest strength (and even Marx thought this) is that it causes the marginal utility of currency to decrease over time.
That means that even if the dollar gap between rich and poor is bigger today than it was 200 years ago, the actual quality of life gap is just getting smaller and smaller.
A billionaire can afford caviar and ten lamborghinis.
A thousand-aire can afford hamburgers and a used civic.
The billionaire is not a million times better off, and every year, as brutal market forces push the development of better and cheaper technology in every field, the difference between the rich man and the poor man, measured in the quality of food, goods, and services they have access to, gets smaller and smaller. For the most part, billionaires can only buy more of the same thing that almost everyone has access to. The rich guy can buy a harvard education, and the poor guy can buy a cheap but effective online education. The rich guy can buy a gold-plated iPhone, and the poor guy can buy a cheap Android. It's all the same stuff, just with different levels of class.
Compare that to not so long ago when only the rich had cars, refrigeration, electricity, etc.
The best example right now is medical technology. The rich have significant advantages regarding medical treatment, but how long will that last? Look at the plummeting costs of gene sequencing, diabetes tests, advanced prosthetics...