Tuesday, April 29, 2014

Some imbalances are corrected by the fall of civilization

I don't often read Greg Mankiw. But his First Thoughts on Piketty snagged me. In that post Mankiw asks:

What does r>g tell you in a standard overlapping generations model?

He gives this answer:

That the economy is dynamically efficient (that is, it has not over-accumulated capital).

I think this is what he means: If the economy had over-accumulated capital, then r would fall, becoming less than g.

Sort of like, if they print too many dollars, the value of the dollar falls.

Mankiw's answer is a little too brief and dismissive for me. For one thing, r might fall due to over-accumulation of capital without becoming less than g.

But here's what really bothers me:

Mankiw's answer assumes that the relation between r and g is the natural result of economic forces. Yet I know for a fact that economic policy encourages the growth of r. It encourages the growth of r as a way to encourage the growth of g.

Man interferes with nature. Policy distorts the "natural" economy. It's supposed to do that, yes. But you can't then turn around and argue, as Mankiw argues, that things that happen because of policy are natural results. That argument is used all the time, and it is wrong, all the time.

Because policy interferes, r>g tells us nothing about the over-accumulation of capital. Mankiw's assertion is baseless.

One more thing... Mankiw's answer appears to depend on what Anatole Kaletsky calls "an inbuilt assumption that the economy is self-stabilizing." Mankiw thinks everything comes naturally to balance in the economy, like water seeking its own level. If there is an over-accumulation of capital, he thinks, the economy will naturally change so that the over-accumulation dissipates and balance is restored.

Maybe... but on what terms, and at what scale? The business cycle is part of that natural process. So is the Kondratieff wave. And so is the Cycle of Civilization.


Jazzbumpa said...

I don't get Mankiw's answer at all.

How can

r > g

Not tell you that rentiers and capitalist are accumulating wealth faster than the economy is growing?

Isn't that literally what the inequality represents? How do you get from there to non-over-accumulation?

What makes the standard overlapping generations model 1) correct and 2)proper in this instance?

There is no "natural" economy. An economy is a rule-based system, and the rules are made by people. Different times, different places, different rules.


The Arthurian said...

Nosir, the rules are not "made by people".

Jazzbumpa said...

Esplane, pliz.

The Arthurian said...


Oh, man, I was making notes today at work, toward a post on the topic. But I need to gather my thoughts and search the archives and stuff. What follows is a bit disorganized; work with me on this.

I'd say that cultural rules are made by people, building on the past and guided by technological progress and chance and what-not.

But to me, economic rules are always numbers-based: an excess of this relative to that causes problems like unemployment or inflation. Unemployment and inflation are not problems for the economy; they are only problems for people. For the economy, inflation and unemployment are solutions; they are ways to correct what the economy sees as imbalances.

Something caused the "Great Inflation". But what? Nobody made a rule saying that we should have such inflation. Nobody made that rule. The inflation was the economy's response to things we did, or to things we allowed to happen.

The economy moves in a way that tends to correct imbalances. Our task is to understand what the economy sees as an imbalance, and to make policy cooperate with the economy and satisfy its needs, so that it behaves in a way that satisfies us.

Some people would object to the idea that the economy acts independently of people, but look: Keynes wrote of "the fallacy of composition". For example, total savings may fall even when individual savings attempt to rise.

The paradox of thrift is a perfect example of the economy moving in a way that differs from the rules created and the actions taken by people.

The Arthurian said...

By the way, I really like your first argument:

How can "r > g" not tell you that rentiers and capitalist are accumulating wealth faster than the economy is growing? Isn't that literally what the inequality represents?