New Yorker Review of Piketty's "Capital in the Twenty-First Century"

Here 

 "Piketty is certainly right to emphasize that there was nothing natural or inevitable about the income compression that occurred in the middle of the twentieth century. It was the product of global conflict and domestic political struggles. In Europe, two World Wars and the progressive tax policies that were needed to finance them did enormous damage to the old estates and great fortunes: many rich people, after paying their income and inheritance taxes, didn’t have enough money left to replenish their capital. During the postwar era, inflation ate away at their savings. Meanwhile, labor-friendly laws enabled workers to bargain for higher wages, which raised the proportion of income that labor received. And the task of rebuilding after the wartime destruction made for the rapid expansion of G.D.P. This helped to keep the growth rate above the rate of return on capital, fending off the forces of divergence.

In the United States, the story was less dramatic but broadly similar. The Great Depression wiped out a lot of dynastic wealth, and it also led to a policy revolution. During the nineteen-thirties and forties, Piketty reminds us, Roosevelt raised the top rate of income tax to more than ninety per cent and the tax on large estates to more than seventy per cent. The federal government set minimum wages in many industries, and it encouraged the growth of trade unions. In the decades after the war, it spent heavily on infrastructure, such as interstate highways, which boosted G.D.P. growth. Fearful of spurring public outrage, firms kept the pay of their senior executives in check. Inequality started to rise again only when Margaret Thatcher and Ronald Reagan led a conservative counter-revolution that slashed tax rates on the rich, decimated the unions, and sought to restrain the growth of government expenditures. Politics and income distribution are two sides of the same coin." 

I have heard of this book, not read it though. Maybe I will now though. I think it is all well and good to point out that economies do not exist in political and cultural vacuums (and, really, not many economists claim that they do), but the criticism cuts both ways. Policy is not made in an economic vacuum either. It is easy, and in some sense true, to point to changes in say labor and tax and policy and blame them for rising inequality. However, I think that a more important question is why were those policy changes implemented when they were, and why were they not effectively resisted by those who stood to loose out. I mean the conservative government of Edward Heath also tried to break the miners unions in Britain before Thatcher did, and they failed to do so. So what changed about the world that allowed these political changes to happen? I would not claim to answer the question entirely, but I think that technological change and changes in the price and capital structure (i.e. 'sterile' economic variables) are an important part of it.

Also, it is a bit of an incomplete picture of inequality to look only at the share of income going to the top X percent. It ignores the important role of inequality amongst the lower (100-X) percent. A society could easily have a relatively small share of income going to the top, say, one percent and a relatively equal income distribution down most of the income ladder, but still be a really unequal society if say, the bottom ten percent are living in abject poverty. The postwar era in America was a relatively more equal society in the sense that the middle class expanded pretty rapidly among the educated white population. However, large swathes of society (primary racial and ethnic minorities, to say nothing of the status of women) were largely left behind by this, and it does not seem quite right to call the postwar era more equal simply because a smaller share of national wealth went to the top one percent. Really, this is a problem that I have with a lot of the "one percent, ninety-nine percent" rhetoric that you hear alot of these days, even if I am broadly sympathetic to the goal of trying to reduce inequality. Admittedly, inequality is not the easiest thing in the world to measure, but Gini Coefficients will paint a more complete (if, still, subjective) picture of inequality.

Al-Jazeera Article on Time Banking

Some of the best bits:

"One critique of time banking is that it degrades acts of generosity to an IOU. But traditional charity, Blech points out, rarely leads to sustained relationships."
"Cahn believes that we can use time banking to improve civic engagement and decrease government spending: An elderly person who has someone to lend an arm on an icy walk or check the fine print on prescriptions is less likely to need hospital care. Cahn’s projects have received political support from both liberals seeking new tactics for providing social welfare and small-government conservatives (the IRS has ruled that time credits cannot be taxed)." 

"According to Cahn, time banking allows for a more efficient use of our skills: Most people are paid for just one particular kind of labor, even if they’ve also spent decades practicing a hobby.""Most large time banks have at least one paid employee –— the VNSNY time bank has seven — but the cost of operating a time bank, Cahn says, can be as low as $1.50 for each hour of service provided. Critics have said that the necessity for paid staffers belies an obvious flaw in time banking — it requires money to sustain itself. But Cahn says his idea was never to create a wholly different economy, but to validate the kinds of people and labor that the monetary economy does not. They are, he says, a cost-efficient way of offering assistance to those who have lost unemployment benefits or have been pushed to the sidelines of the economy."

      Read the whole article. I am interested to see just how much potential these kind of schemes have. Taking the article at its word, it is an idea with a long history that computing has made much easier to administer, so that bodes well. Also, as my last post suggests, these types of schemes will probably benefit from the languishing monetary economy's slack capacity.

The Uses, Meanings, and Limitations of Finance

      When discussing economic affairs, it is not uncommon for people to distinguish between the "real economy" and the "financial economy." The difference seems obvious enough; the financial economy is the economy of banks, hedge funds, stockbrokers etc. while the real economy contains everything else. That is not too bad as a starting point for a definition, but it does not really explain what the difference is and it leaves a lot of unclear cases, for example are insurance companies part of the financial sector or not?
      This in turn contributes to widespread, and probably not entirely accidental, public ignorance of and alienation from the financial industry. Ignorance and alienation that was useful enough for motivating the Occupy movement, but which ultimately leaves people mystified by finance. This mystification only serves to cement the power of financiers, because even their most vocal critics and most dependant customers (often enough the same people) do not have a good understanding of what financiers do, or even what finance really is. One sees this reflected in discourse about "complex financial instruments" like derivatives and credit default swaps that "almost no one really understands." This despite the fact that futures and options (the most common kind of derivatives) as well the infamous credit default swaps are actually relatively straightforward financial instruments, even if their specific contractual details can become somewhat technical.
      In an interview last year, Robert Schiller (recent winner of the economics non-Nobel prize), said the following in an interview:

“When you think ‘finance’, most people think ‘make money’, ‘get rich’, you should instead think ‘financing activities’, things that people do together that are important to them, achieving goals that are shared by groups of people, financing activities is what it is all about. And the underlying problem is that just about anything that we think is important to do can’t be done by one person. You needs groups of people and you need resources, various things that are produced in other countries that would be inputs to your activities. And the organization generally has to last for years and years to achieve the goal. So it has to have some kind of continuity of support from people and resources, and that support is called ‘financing’; so that is what it is all about.”

     This illustrates well the intended function of the financial industry to wider society, but it also, importantly, illustrates the wide variety of forms finance can take. As Schiller suggests, almost anything worth doing will require many different quantities and qualities of resources, often enough more resources than the people who would do it have at that particular moment, let alone what they might need in an unforseen eventuality. Fortunately, at that same time there are probably people somewhere  with more resources than they need for what they wish to pursue then. If those in the second group could lend their surplus to those in the first group and receive a cut, everyone could be better off (assuming the activities are as successful as its participants imagine, and  no one unexpectedly comes to need their resources back early).
     Of course, it is rarely so simple that the resources are simply transferred and, hopefully, eventually returned. More likely in a modern economy is that those with resources to spare do not know those short of resources let alone trust them with potentially large amounts of their wealth. Even if they did, they may very well lack the time or knowledge to realistically assess whether or not the proposed projects are likely to be worth the risk and temporary sacrifice. Enter the role of financiers, individuals who make it their living to find those with extra resources and borrow from them and lend these resources to those who need them. Since they intend on a share of the profits and support many ventures regularly, they can spend the time and money necessary to investigate opportunities and decide if they are worth the time and the risk. They pay those they borrow from and charge those to whom they lend. The (hopefully positive) difference or "spread" pays the costs of their searching.
      I want to be careful not to overstate the point and be precisely clear about what I am saying; accordingly I think it is important to emphasize two caveats. Firstly, there are many possible institutions that can be set up to do this, and there really is no reason to think that the financial industry we have today is necessarily the most effective or desirable way of achieving this end. Considering the recent financial crisis, its economic aftermath, and that little seems to have changed in response, I think it is hardly unreasonable to critically examine whether or not our social-financial machinery is really adequate, while remaining conscious that there are reasons for its existence beyond mere greed.
     Secondly, despite its media and national accounting prominence, the investment of surplus resources into financial instruments will be amongst the last places many will find it reasonable to direct accumulated resources. What do I mean by this?
       If surplus resources are taken to mean any resources above ones present level of consumption, then is nearly tautological that the rich will tend to have more resources and therefore have more available to invest, unless consumption increases one to one with income (it doesn't). More importantly, remember that the goal of finance is to redistribute extra resources between parties that do not necessarily know, care about, or trust each other. There are plenty of things of things that individuals, both alone and organized with others, will find reasonable to do with extra resources, before they see fit to make them available to strangers, even if the institutions set up to facilitate this are adequate. For example, in Poor Economics Abhijit Banerjee and Esther Duflo suggest that one of the most important ways that poor people save is spending extra time and money on DIY home improvements and construction. Considering that many of the individuals they discuss actually start living in their houses before they are completely built, it is simply inaccurate to suggest that their low rates of financial savings are because of meer myopia (or, to use more polite technical terminology, a high time-discount rate). While they may lack surpluses upon surpluses of resources to invest in many financial savings instruments; this does not  mean that they are not making considerable tradeoffs of time and money in the present in order to reap the returns later, i.e. saving. Education is another important example of this kind of non-financial investment.
       These investments are too often ignored when tabulating national accounts. If an individual is lucky their actual money spent on tools and materials may, at least, be counted as expenditure on consumer durables, even if its classification as "consumption" is questionable. The heart of the problem is that saving via financial instruments, is not the same thing as saving, i.e. making investments now for future payoffs. It is not entirely untrue to say that financial institutions help people allocate their savings, but it is important to understand that they represent a much larger share of some peoples savings than others, in particular those people lucky enough to have enough wealth to have already maxed out the savings options in their own immediate environment. While having an adequately developed financial infrastructure is useful, it is only relevant to a certain lucky few.
          We must keep all of this in mind when we seek to analyze, develop, and organize social economies.