yadayada Posted September 2, 2014 Share Posted September 2, 2014 In the comments of that peter schiff article. Might interest some people here. The article itself was very mediocre at best, but this comment was excellent. It seems that capitalism will enhance automation and productivity, which will be good for everyone in the end. And socialism is envy, that will hurt the 1% and the 99% in the end. Probably the 99% more then the 1%. And the general public is generally in favor of it because they do not fully understand it's implications in the long run. If they knew they would not want a government this large, regulating and arranging as much stuff as they do now. Of course Mr Schiff is right that Picketty is a load of horsefeathers, but in the international sport of taking whacks at him I find a distinct lack of aim. Yes capitalism makes everyone better off, yes seeking greater equality by cutting off the heads of the successful is an idiotic as well as an immoral idea. But crimenny, just destroy the man's completely innumerate math first. Stipulate that the average rate of return on capital is higher than the average rate of economic growth, and ask if anything whatever follows for inequality. The answer is a resounding no. You cannot deduce a *distributional* consequence from an *average*. An average consequence, you might deduce. But the average rate of return on capital tells me literally nothing about the distribution of returns on capital. An average is a single point in the middle of the weight of a distribution. The distribution is a plethora of millions of actual outcomes for specific cases. When you are trying to derive a distribution-effect outcome, you need the entire *distribution* of returns on capital as your input, *not* one point. The rate of return on capital might average 5% a year because every scrap of capital in existence returned exactly 5% a year, and you'd have one distributional consequence - except the premise does not obtain, so we don't actually see that distributional consequence. Or the rate of return might average 5% a year because 99% of all capital was lost instantly without any return, and the other 1% won a lottery and returned just enough to raise the overall average to plus 5% a year after covering all the losses of the losers. Anyone want to pretend that the distributional consequences of those two would be the same? The returns of investing in US stocks in the 20th century were quite good, and even in real after tax terms come to positive several percent per year. Bully. But the returns of investing in Czarist bonds in the 20th century were 100% loss, and the French public lost $3 trillion in present value in that asset class. In 1900, there was no particular reason to think that the latter was a riskier asset class than the former. So US stock investors got wealthier in that century, and French investors in Russian debt did not (from those investments at least). Nobody got the average. Bill Gates got rich from the success of Microsoft; nobody got rich off the failure of Word Perfect - there are natural lotteries in the marketplace, where one solution will reap the rewards of all the rival efforts that it replaces. So capital returning r does not mean capitalists enjoy a return of r. And it certainly doesn't mean they can enjoy a return of r without running very material risks and encountering wide dispersion of returns, across investors and across time periods and all the rest of it. The Italian economist Wilfred Pareto invented the power law distribution because he was studying income statistics and the exponentially damped normals that previous generations of statisticians told him to use were clearly just completely wrong about everything that happens with income. Income is power law distributed - it follows "80-20" rules in which the top 1/5 account for 4/5th of the weight, as a rough illustration - not narrow normal distributions were almost everyone gets the average or close to the average. This has been true for as long as statistics have been kept, in every human society and under every political, economic, or monetary regime. Normal distributions arise whenever random chance interacts with a fixed, constant probability of occurrence. The normal distribution is the limit as the number of independent trials increases of binomial chance - coin flipping writ large. We would not get equality of outcomes even if everyone's abilities and chances were precisely the same; luck alone would give us normals. But skill gives us power laws instead. If you assign each participant a random success probability over a wide range, then have each of them make repeated tries, the success cases will not be distributed normally. Those with a higher prior success probability who are also on the lucky side will account for a very large share of the successes, others with high prior probability and average luck plus those with good luck and still decent prior probability will account for the next slice, and so on. At the low enough of small prior probability one will find few if any successes and their combined weight will not move the needle on overall successes. Sharp peak distributions result - by mathematical law. Having dealt with the math, it is next time to deal with the history. Look around you at the large fortunes in existence today. How many of them were the result of modest sums lent out at interest in the ancient past, just compounding down to today untouched? None of them. Instead we find *recent entrepreneurship*, in the largest cases in successful *public* companies (meaning their gains were widely shared with millions of other people, from services renders to millions of people). For middling fortunes we find recent entrepreneurship is smaller and private enterprises, and the highest paid learned professions (successful doctors late in their careers e.g.). But, someone will say, Picketty has a chart that shows the top 10% in the year 1970 owned... Who were they? None of his charts tracks the same people as they or their descendants wander through the categories. Again it is the trick of bad distributional thinking brought in when he wants it, and left out of the question entirely, by mere silence not argument, when it goes against his thesis. The 10% line in one year and one country is not the same as it is in another, and above all the people over that line are not the same people. Some invested in Czarist bonds or Word Perfect - or just retired from being a doctor - and dropped out of the category. Others invested in US stocks or Microsoft, or built a practice up over the intervening decade. But Picketty tries to pretend they are the same people with money on deposit just adding interest. The reality in the 20th century is that even the pre-tax return on just deposits left at interest was zero in real terms. Leave aside being greater than g, that sort of r was barely positive. You could have borrowed at the prevailing short term interest rate in 1900, discounted your interest costs at the prevailing business tax rates throughout as a business expense, and roll over the whole sum clear down to 2000, and you would have *gained* in real value terms *as the borrower*, not the lender. r is only positive for those who actually ran risks, in other words, and only the successful among investors got a return as high as that average. Unsuccessful risk takers lost their capital, and those who took no risks did not get any return on their capital at all. They lent its use to other men in return for staying even, at best, against the headwinds of taxes and inflation. Finally there is the fallacy of double counting the capital income of those who do achieve a return of r. If it is supposedly compounding away to outstripping g, then they are reinvesting all of it, and spending none of it. Which means they gave away the full use of that capital to other men, and in return drew flat nothing from the produce of the rest of the society. If on the other hand they are supposedly living on the income of their capital without working, then they are *consuming* the returns of their capital, *not* saving them. The same dollar of capital income cannot be in both places at once. Suppose g is 3 and r is 5 (generous indeed on the latter score, when all the low risk stuff is returning more like 0 to 1); then someone can only keep up with economic growth if they live on an income of 2% of their capital. And they do not, in that case, increase economic inequality - they only stay even. The demographic reality is, instead, that those with high incomes save over lifetimes to modestly endow their descendants; that only a very small number of the skillful and lucky can do more than that, balanced by the risk takers who failed; that most fortunes that are used to support consumption off the income from capital are dissipated in the process, not concentrated or grown further. They are further dispersed by the natural growth of families, which spread the inherited benefit over more and more people in later generations. This is why the present cohort of the rich is made up of recent entrepreneurs, not the sons of medieval land barons. In all of it, Picketty has committed the same mathematical sin of treating the entire weight of a distribution as being concentrated on the single value of its average. When engaged in a discussion of distributional effects, this is simply unforgivable. Link to comment Share on other sites More sharing options...
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