Piketty Inequality and the Role of the State

in Economic Thinking

Raul V. FabellaUP School of Economics and NASTBSP UP Professional Chair Lectures 2014

The Context: Clash of Ideologies

• “Property is theft.”K. Marx / P. Proudhon (1840s)

• “The inherent vice of Capitalism is the unequal sharing of blessings; the inherent virtue of Socialism is the equal sharing of miseries.” -Winston Churchill

• Parasites, Looters, Moochers: the destroyers of progress: Ayn Rand’s Atlas Shrugged (1957)

The Context: Clash of Idealogies

• Industrialists / Rational Profit Seekers are the creators of progress: Ayn Rand in Atlas Shrugged (1957)

• "...Atlas Shrugged is a celebration of life and happiness… Creative individual and undeviating purpose and rationality achieve joy and fulfillment. Parasites who purposely avoid either purpose or reason perish as they should.“-Alan Greenspan

"... Atlas Shrugged is not merely a novel. It is also… a cogent analysis of the evils that plague our society... You (A.R.) have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions… you owe to the efforts of men who are better than you.“

-Ludwig von Mises(letter to Ayn Rand)

- inspired F. Hayek who mentored M. Friedman

The Context: Clash of Idealogies

Contemporary Echoes

• To raise or not to raise the tax on the rich

• To embrace or not the affordable health insurance

• To reduce or not the coverage of safety nets such as unemployment insurance

• To impose or not user fees in education and public goods

• To do or no to do CCT.

The State in Economic Thinking

• First Fundamental Theorem: Given no-market failures, the welfare optimum is attained without the state.

• Second Fundamental Theorem of Welfare: If the Walrasian optimum violates the socially desired Rawlsianequity norm, redistribute initial assets and then let Walrasian tattonnementattain the preferred welfare optimum.

• Meta-Market Failure vs. Market Failure!

The State in the Kuznets Economy

• By SFTW, the state has a role! Or has it?

• Enters the Kuznets Inverse U Hypothesis (1954): In the process of development, income inequality first rises, reaches a maximum and finally falls as per capita income grows.

• Income Inequality is a temporary itch, part of the life cycle of economic catch-up – the price of rapid growth.

The State in the Kuznets Economy

• SFTW just a neat existence theorem, not a serious policy prescription!

• Faster income growth eventually fosters income equality.

• Redistribution of asset is politically messy and contentious.

• Growth-enhancing policies are less so –export-promotion led to higher growth with lower GINIs in Tiger Economies.

The Berg and Ostry Thesis

• Berg and Ostry (2011): What factors contribute to sustainability of growth in developing countries?

• Income inequality shortened the duration of growth – robustly!

• The downward phase of the KuznetsCurve may never come!

• The State has a role at least in developing countries!

The Piketty Thesis

• Enter Thomas Piketty (2014): Capital• The Piketty Thesis: Income inequality,

measured by the share of top income decile, relentlessly rises with economic growth in well-functioning market economies.

• Nothing to do with ordinary market failures! It comes from r > g! This is true of mature high-income economies.

The New Yorker Magazine

By far the best summary of the Piketty Thesis:

“Piketty Inequality in Six Charts”

Chart 1

Chart 2

Chart 3

Chart 4

Chart 5

Chart 6

The Piketty Thesis

• The Piketty empirics seems robust against challenges (e.g., FT’s Giles et al., 2014)

• Piketty’s growth theoretic interpretation (r > g) plausible but may not be unique (e.g., Ray, 2014)

The State in the Piketty Economy

• Meta-Market Failure (the real objection of socialists to markets) grows relentlessly leading to

• Loss of legitimacy and possible Armageddon for Capitalism.

• The new role of the state: snatch Capitalism from the jaws of death!

• SFTW is restored as a policy prescription!

Piketty, Marx, Schumpeter and Keynes

• Marx’s Kapital:Capitalism’s demise is a law of scientific socialism; progressive impoverishment inevitable; the state cannot stay its execution.

• Schumpeter Capitalism, Socialism Democracy: “Can Capitalism survive? No. I don’t think it can.” (To be fair, JS referred to Laissez Faire Capitalism)

Piketty, Marx, Schumpeter and Keynes

• JM Keynes General Theory: The market at times cannot heal itself; fiscal activism can and must heal it.

• Piketty Capital: The market is headed towards self-destruction; the state can and must save it.

• T. Piketty and J.M. Keynes are the true intellectual soulmates.

Thank You!

Mabuhay Kayo!

Summary of Gil B’s Results

• Between 2012 and 2009: GINI and SharesIncome Gini fell from .345 to .288Share of lowest income decile rose from

2.0 to 2.9%Share of the highest decile fell from 35.3

to 30.5%• Determining Factors OFW and GDP no impact on lowest

decile share, impacts the 2nd and 3rd

Summary of Gil Beltran’s Results

• CCT raises the lowest decile’s share• Microfinance raises the shares of the

lowest three deciles• LagsGDP growth takes 6 years to impact

shares of the poorer decilesCCT impacts only after 3 years Microfinance has immediate positive

impact on shares of lower deciles