GV4D4 - week 2

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These are my notes from October 03 for GV4D4 at the London School of Economics for the 2017-2018 school year. I'm taking this module as part of the one-year Inequalities and Social Science MSc program.

The usual disclaimer: all notes are my personal impressions and do not necessarily reflect the view of the lecturer. Feel free to email me (ilostwaldo, gmail) with any questions or corrections.


Growing the State, Shrinking Capital: Democracy, Redistribution and Inequality

Readings

Inequality by Anthony B. Atkinson (chapter 2)

No notes, since I also read this chapter for SO478 last week (though I didn’t really take notes then either, tbh).

Capital in the Twenty-First Century by Thomas Piketty (chapters 3-6)

Chapter 3: we look at wealth over time in the UK and France, taking a brief detour though literature (Balzac, Austen) to illustrate. Early on, land comprised most of the value of capital, but now it’s mostly housing/industrial/finance. Recall that both the UK and France were imperial powers with large foreign assets, which allowed them to run up trade deficits without larger economic problems. In the UK, with cap-inc ratio of 6:1, public assets are worth one years of NI (slightly less than in France); this is balanced out by public debt so roughly zero net wealth. Thus most wealth is private.

One core difference between the two countries has to do with their treatment of debt. France defaulted on public debt (via inflation?) whereas the UK never did, and instead financed wars (etc) by borrowing from wealthy citizens, thus increasing public debt at the same time as private assets (the result of the British monarchy preferring to borrow money rather than raise taxes). Of course bondholders get paid interest, too. There was some inflation after both wars which lowered the value of public debts, but not to the same extent as in France. Still, this is what prompted Keynes’ famous 1936 claim of the “euthanasia of the rentier”, which was influenced by him seeing a collapse of rentierism as a result of inflation. The UK moved toward a more mixed economy (stronger welfare state and socialist policies like nationalisation) in the post-WWII era, which was influenced partly by the success of the Soviet Union and partly due to suspicions that the economic elite had collaborated with Axis Powers (mostly true). This resulted in both govts owning around 25-30% of their nation’s wealth by 1950s (though since the UK had massive debts, their net public wealth was negative until the 60s/70s). In the 70s, of course, things started to shift: cracks were visible in the Communist bloc, and stagflation + a tricky geopolitical situation paved the way for increasing liberalisation.

Chapter 4: Now we look at Germany, which is slightly different from the two cases above mostly because it had no colonial empire. Its capital consisted mostly of agricultural land. Hyperinflation in the 20s shrank the value of its post-WWI public debts, but of course that experience also had the effect of scarring the nation. During/after the wars, asset losses (mainly foreign) were more significant than physical destruction (revolutionary expropriation, nationalisation like that of the Suez canal). Plus firms went bankrupt during the depression, meaning stock/bondholders lost out, which had the effect of lowering the cap-income ratio and thus inequality.

The US: lots of farmland (which meant value/acre wasn’t very high) + populated mostly by recent immigrants who couldn’t bring much capital with them, so capital low at first. This reflected structural differences in inequality compared to Europe, as landlords and wealth owners had less power in such a large country with plenty of arable land for the taking. After WWII, asset prices remained low, and we saw extremely progressive taxation and lots of government spending (New Deal), but no nationalisation (unlike in Europe—wonder why?). Recall that the US was never a true colonial power (at least not in the same way as the trailblazers over in Europe), and in fact had a negative net foreign capital during the 19th century. Also note the role of slavery in US wealth. Canada was similar to US but slightly different politically due to the legal influence of the UK (no tea partying for us).

Chapter 5: notes from SO478 last week.

Chapter 6: mostly on the capital-labour income split in the 21st century. Most salient idea: α=r*β computes the share of income from capital.

Lecture

Just going to start off this recap with a bit of heavy editorialising: these lectures are a ton of fun. If you’re at all interested in the politics of inequality, and have the opportunity to attend these lectures, you should. The lecturer is very engaging, despite material that can be quite dry at times. Bonus: he’s personally very left-leaning politically, which might not endear him to any Conservatives in the class, but works for me (and, really, if you’re teaching a class on inequality, you’d better be left-leaning—otherwise, what would you say, “inequality is fine because I’m rich and I don’t really care that others are poor”?).

Some paraphrased quotes to give you a sense of what the lecturer is like and what his political views are:

Inequality and the welfare state in the 20th century

Piketty’s book

What is capital? Adam Smith’s definition, “from the times before gender-neutral language was to be expected”:

That part of a man’s stock which he expects to afford him revenue is called his capital.

Piketty’s definition is a little more narrow: basically wealth. And his main purpose in looking at capital is in calculating the capital-income ratio. If we look at the composition of capital in the UK over the last three centuries, we see that the value of agricultural land eroded in the last century, and the value of domestic capital went down around WWI and has been climbing since then. Housing, of course, has gone up dramatically in value over the last half century.

Capital’s share of income has gone up somewhat steadily since around ‘75, though there has been a recent decline since the crash (capital defined as rent, profits, interest, dividends, capital gains, etc).

Piketty doesn’t do much justice to the poitical dimensions—his book is focused almost entirely on the structural economic features that result in greater inequality over time. Which is probably intentional (he is not trying to explain all the things that might affect inequality, but rather be meticulous about one particular component of it). Still, it means his take on inequality is very incomplete.

Other criticisms:

Our approach: the political and social institutions

This includes: political party scene, constitution, pre- and redistribution, welfare institutions, macroeconomic policy. We’ll be looking at two core (compatible) factors that explain changes in inequality:

The latter helps explain growth/reduction of government size as well as the difference between the distribution of votes and the distribution of (post-tax) income.

Meltzer/Richard’s simple model for explaining individual voter behaviour: individuals want to maximise income with a minimum amount of effort. Since the government taxes in order to redistribute, and the median voter has below average income, they vote for greater government spending as a way of getting more redistribution. Thus one could conclude that the government would grow and grow and grow. This prediction was made in 1980 and we all know what happened since then :(

Problems with this theory: it ignores institutional dynamics. For one, increased state spending doesn’t necessarily reduce inequality, depending on the political situation (maybe the money goes towards tax breaks for large corporate donors?). It also assumes that people are really “rational” in the sense proposed. But many voters act irrationally (according to an economist) or don’t have all the available information or believe in myths. Or they might prioritise other factors (cultural or religious ideas—national identity, pride, guns, abortion) over material factors! So they might end up voting in politicians that will take away their healthcare or otherwise do real material damage to them and still not regret it (partly because they might not have thought there was a better choice, and partly because they don’t understand the causality). In general, people tend to be “cognitive misers” who take mental shortcuts and vote out of habit. (Like the lecturer, who says he votes Labour “out of habit”.)

A summary of the ideational changes in macroeconomic policy:

We can think of political/economic ideas as having a key mediating role between forces (democracy and capitalism).

Seminar

(I’m in seminar group 3, which actually takes place the Thursday after the lecture. Run by the lecturer.)

Introductions

We started with introductions (where we’re from, and why we care about inequality). Pretty cool distribution of countries, mostly throughout Western Europe, the Middle East, and Asia (each country was represented by only 1 or 2 people). I mentioned my background in the tech industry and how I was radicalised partly by what I saw in the adtech space and partly by Trump, and that I’ve been reading a lot of critical theory and leftist political stuff since then. Hopkin’s response was encouraging—he’d never really gotten into critical theory (academia moves too slowly for him to switch topics easily), but he finds it interesting, and in general would like us to take a more critical approach to the texts we read.

Is inequality a political or economic phenomenon?

(Summarising the discussion.)

Obviously it’s both. There’s a bit of a chicken-and-egg element as well—political decisions are usually made in response to changing macroeconomic conditions, and these decisions further shape the economy. Piketty’s book is definitely more of an economic approach but he does mention some political elements. Atkinson’s book focuses more on social policies.

Other things mentioned:

Piketty’s argument

Leftwing vs rightwing governments

Another student mentioned that at least in the UK, left-wing governments tend to focus on income redistribution, whereas right-wing governments tend to focus on wealth redistribution (at least in theory) with the right-to-buy and similar practices. Perhaps this is because the Tories are trying to raise the status of capital to get everyone to buy into the collective capitalist dream? In any case, that’s an example of public policy affecting the distribution of capital (so it’s not just limited to market forces).

The US versus Europe

The capital-income ratio was significantly higher in Europe than in the US near the beginning of the charts, which would imply that the US would be more equal. And indeed it was, near the beginning! At least until the wars, when the value of capital was reduced dramatically in Europe (physically or otherwise). Think about why the trend has reversed since then. Did post-WWII American hegemony assure America’s current dismal place in the inequality rankings? Why did the political scenes of most European countries move so much more leftward?