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Piketty Inequality and the Role of the State
in Economic Thinking
Raul V. FabellaUP School of Economics and NASTBSP UP Professional Chair Lectures 2014
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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)
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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
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"... 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
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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.
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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!
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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.
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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.
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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!
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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.
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The New Yorker Magazine
By far the best summary of the Piketty Thesis:
“Piketty Inequality in Six Charts”
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Chart 1
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Chart 2
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Chart 3
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Chart 4
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Chart 5
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Chart 6
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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)
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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!
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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)
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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.
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Thank You!
Mabuhay Kayo!
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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
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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