Vampire Capital

It bothers me as a general matter that so much of our discourse about the economy can proceed as if capitalism distributes things according to variations in work and contribution, or in short desert. It bothers me both because it is wrong and also because it is clearly wrong in ways that have been known for centuries, but which no major commentator is interested in talking about.

When faced with such nonsense, it should be simple enough to point out that 30% of the national output each year goes to owners of capital that did not produce it. You can quibble over whether we should describe that 30% as having actually been produced by workers (Marx’s view) or as having been produced by the capital itself (the more conventional view), but there is no quibbling over the fact that the capitalists did not produce it. The marginal productivity of capital is not the marginal productivity of its owners, a fact made even more compelling (and dangerous) by the fact that “ownership” is a purely legal construct.

What’s more, if you understand the process of compounding capital accumulation, it could not be more obvious that capitalists are receiving distributions from production that they have absolutely nothing to do with. The production of a unit of capital (say a machine) is, in the first instance, a creation of labor. And from a basic desert view, we would say its producer has a right to it. But from that point on, the production of the capital itself, and the capital income that flows from that production, is not the creation of the capitalist’s labor and the capitalist cannot seriously maintain they are the producer of it. This is, technically, where the desert chain first breaks down.

But even if you thought, as might be reasonable to some, that someone who physically makes a machine is owed both the machine itself and the future income flowing to it, this would never be able to explain how compounding capital income is justified. If a person who physically makes a machine takes the capital income from the machine and then pays someone else to make more machines from which he also then takes the capital income, the capital income from the second-order machines cannot be justified at all. Unlike the initial machine from which he derived capital income, he did not make the second-order machines. What he is doing at that point is leveraging capital income to capture capital produced by other workers, the capital income from which he will then use to capture even more capital produced by other workers, and so on. As this cycle progresses on, we find ourselves with a guy that is living on rents from rents from rents from rents.

Karl Marx is 100% correct on the merits when he famously described this sort of capital accumulation as such: “Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.” That is simply a factual empirical claim. There is nothing to quibble about on this. It’s not even a philosophical point. It’s just a correct observation about the mechanics of capital accumulation.

I realize that hegemony is a hell of a drug and, as Marx himself points out, legitimating ideologies form up around whatever the economic system happens to be at any given time. But really this desert style of argument is not something people should be entertaining at all. The fact that capitalism does not distribute out according to desert was like 95% of the whole Marxist point! The pro-capitalist response is supposed to be that, for instrumental utilitarian reasons, it’s OK to essentially tax 30% of the national product and hand it over almost entirely the wealthiest 10%. That’s supposed to be a compelling argument, so why can’t we all stay in our lanes on this?

Why The Big Government Land Deed Program Creates Growth-Destroying Distortions

One of the biggest government programs in the US is the land deed welfare program. Under this program, the government gives people the privilege to use the police to violently exclude everyone else from specific pieces of land denominated on pieces of paper called deeds. Through the operation of this guaranteed police violence, deed-holders are afforded a private and infinite right to the value that flows from the deeded land. They are also promised that the rent they must pay for this flow will forever be capped at $0/year.

As with most rent control regimes, the land deed welfare program is susceptible to severe growth-destroying distortions. Because the annual rent of the land is capped at $0, the deed holders are not required to employ any of the value of the land to “make rent” (if you will). The net effect of this is that land is often under-utilized.

A deed holder may simply let the land lie dormant, perhaps speculating that its rental value will go up over time, allowing them to make easy money by selling off the rental stream that the state gives them for free. A deed holder might also under-build on the land, for instance by maintaining their single family home on it rather than putting a multi-unit apartment complex on it. Since they do not have to pay out the economic costs of such under-utilization (because of the free rent they are given by the government welfare program), there is nothing that would force them to do otherwise.

To be sure, when gaps between potential land utilization and actual land utilization open up, bidders might come knocking to try to convince the deed holder to sell away the deed, thereby calling off the police violence that prevents the would-be developers from coming in and utilizing the land. This sort of arrangement can be highly lucrative to the deed holder, but that doesn’t necessarily mean that they will go for it. In family homes, for instance, the deed holders seem often to want to stay on the under-utilized land, perhaps passing it along to family members in death or only selling it many years down the line when they are ready.

For every year that they continue to occupy that rent-free under-utilized land, the economy suffers. Buildings that should be built aren’t. Capital investment is lower. And overall utility is not maximized. As the Land Value Tax advocates point out, the only way to solve this ongoing economic catastrophe is to blow up at least certain substantive provisions of the land deed welfare program. After such a reform, “owners” (if that is still an apt term) would be required to pay land rent every year rather than having their rent controlled at $0. By internalizing the cost of under-utilization on the “owners,” this will ensure a more efficient allocation of resources, more investment, and more growth.

It’s time to get big government out of the way and to end the land deed welfare program.

How much do economists understand Piketty?

The IGM Forum asked economists to agree or disagree with this statement purportedly sourced from Piketty:

The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.

This question is getting at whether “r > g” explains the recent rise in wealth inequality. Most of the economist said no. Thomas Piketty also would have said no.

After the poll released, many remarked that economists had rejected Piketty. Then, many others remarked that the economists just didn’t understand him. The poll, as it is, doesn’t actually tell us either of these things. It only tells us that whoever came up with this specific IGM question didn’t understand Piketty. The economists are not wrong to answer that “r > g” doesn’t explain things that nobody has ever said it explains. It’s just really odd that they were asked the question in the first place.

In response to the backlash saying these economists clearly don’t understand Piketty, Justin Wolfers conducted a poll of sorts that purportedly shows all of the economists in the IGM poll (except the 40% who didn’t respond to Wolfers) had engaged in some way with Piketty’s argument, even if they didn’t read the book entirely. He concludes thusly:

If you lined up all the economists end to end, we probably still wouldn’t agree about what to do about inequality. But many of us would have done the required reading to debate the issues seriously.

But here’s the problem. It’s not at all clear that many economists, even those who seem to have read the book, actually understand Piketty. Justin Wolfers is chief among the confused, and coincidentally, one of the economists in the IGM panel linked to Wolfers’ confused explanation of Piketty in his reasoning for why Piketty is incorrect.

I’ve already written about Wolfers’ clearly and indisputably wrong presentation about Piketty. Among other things, he conflates Piketty’s two separate inequality theories, claims “r > g” is supposed to explain the wealth-to-income ratio, and claims the wealth-to-income ratio can only rise when capital income is invested at 100% and labor income at 0%. Wolfers also quotes approvingly Larry Summers writing that Piketty argued that the wealth-to-income ratio increases forever so long as r > g and that wealth grows at the rate of return. All of this is wrong. I don’t mean to say “I think it is wrong.” I mean to say it is just objectively incorrect. It is not what Piketty says. Moreover, these mistakes are not trivial and reveal severe misconceptions about fundamental parts of Piketty’s book.

Economists who haven’t read the book directly are necessarily relying on what others have said about it. They may think they have done the “necessary reading” to get caught up, but that depends on which secondary description of Piketty they relied upon. Anil Kashyap, for instance, explicitly relied on Wolfers to tell him what Piketty said, but Wolfers has no idea. Wolfers appears to have heavily relied upon Larry Summers to tell him what Piketty said, but Summers has no idea either. With Piketty secondary literature, we have a little game of economist telephone going on where garbage in has produced garbage out.

Finally, there is a challenge in Piketty even for economists who may have read him. Piketty presents his arguments in a somewhat winding prosaic style that it’s not clear economists are good at digesting. He doesn’t lay it straight out for you in a page of equations; instead, it unfolds like a story almost, and you do have to do real work to piece it all together. I am not convinced economists are doing this well. Wolfers, if I recall correctly, explicitly remarked that he had a hard time putting it all together (I put it all together here if you’re like him, by the way).

For these reasons, I don’t think you should immediately assume an economist, whether they’ve read Piketty or claim to be familiar with secondary explanations of Piketty, actually know what Piketty argues. Some do and some don’t. If you want to be sure though, you really need to ask them what they think his argument is, not just assume they got it because they claim they got it.