Monday, 2 June 2014

Rich People belong to a different Species.

I recall drunkenly watching the 1992 cult movie, Society, where, it turns out, the Rich really are, as Fitzgerald said, different from the rest of us not because they have more money but because they turn into pullulating, pustulating, disgustingly pink giant amoebae at high toned incestuous orgies- before proceeding to eat us.

Alex Tabarrok has a lucid- therefore obviously ludicrous- post at Marginal Revolution which compares Piketty's pataphyique model with the standard Solow witted shite we were all forced to learn at School.

Tabarrok is commenting on Krusell & Smith who highlight Piketty's definition of Y (Income) as net of Depreciation- i.e. Income is what you can spend such that future Income doesn't fall- so if stuff you need to maintain your standard of living needs repair, then your Income is what's left over after you've done the repairs. Now, some 'Capital' (i.e. man-made stuff needed to sustain your standard of living) is 'Social' or 'Communal' or relates to Education, Training and Psychological Motivation and Boulding 'Psychic Capital'.  If this depreciates by wear and tear or whatever and you don't (either collectively or by yourself) repair it, then- in some sense- though your consumption may have gone up, still you have 'dis-saved'- you have less Wealth.
Similarly, suppose the value of your house has gone up because rents in your area have gone up. You still spend the same and earn the same in dollars. Still, according to the National Income Statistics, you now get an 'imputed rent' from owner occupation. This could be considered an increase in your yearly Savings, which is why your 'Wealth' increases over time and why, hopefully, you will be eventually reconciled to that selfish little shit of a son of yours who, disgusted by your parsimonious refusal to buy him a burger for his birthday, stormed out of the house when you insisted, by way of judicious reparation, on telling him for the umpteenth time the tragic tale of your brutal date-rape at the hands of his mother that time she took you to see Sir Partha Dasgupta lecture on Optimal Depletion and everybody else was so engrossed in the lecture that they failed to come to your aid... and...sorry this stuff is still just too painful. How would you like it if someone stuck their titty in your mouth just when you'd raised your hand to say "I'm sorry Sir Partha, that equation is wrong?'

Anyway, turning to less horrific topics, this is Tabarrok's mistake- ...' Piketty’s model ... defines output and savings in a non-standard way (net of depreciation) but when written in the standard way Piketty’s saving assumption is that I=dK + s(Y-dK). What this means is that people look around and they see a bunch of potholes and before consuming or doing anything else they fill the potholes, that’s dK. (If you have driven around the United States recently you may already be questioning Piketty’s assumption.) After the potholes have been filled people save in addition a constant proportion of the remaining output, s(Y-dk), where s is now the Piketty savings rate.'
I haven't read Piketty- indeed, my Literacy Worker is no longer allowed to read Econ type books out to me coz of my incontinence issues- still, surely, that smelly Malinvaudian snail-eater wouldn't have committed to homogenous agents just to get in with the Anglos? At worst, he might have 'Schutzian ideal types'. However, a more radical possibility is opened up by my own comment, given below, which now proudly besmirches Marginal Revolution's meretricious web-site.

Windwheel June 2, 2014 at 11:08 am
One way of saving Piketty’s conclusion within the above framework would be to permit depreciation to sometimes be negative savings for one class of agents which, by some bizarre convention re. imputed rents, counts as positive savings for another class of agents. Then what you actually have is two different populations with something like a speciation event occurring- i.e. there is now no  driver for ‘canalisation’.
 Perhaps it’s the visceral feeling that the Rich really are now a different Species- like in the classic 1992 film ‘Society’- which explains Piketty’s appeal. 
For my part, I thought Growth theory had died an unlamented death in the Sixties. To be clear, heterogenous Accounting Identities can always be made to line up if you are Paranoid enough.

P.S- You will be pleased to hear my subsequent comments have been barred.


Anonymous said...

Can you clarify- what is the mistake of Tabarof?

windwheel said...

Tabaroff's approach only holds if all agents are homogenous so no Schutzian ideal type heterogeneity obtains- more particularly, if some Schutzian Identity classes are heteronomous in the sense of following a rule rather than rational Utility maximisation.
Because Piketty is talking about 'net Income' Tabaroff's approach gains no purchase because we don't know in advance what the future will hold and, therefore, what is or is not 'sustainable'.
More generally, 'Capital', 'Wealth', 'Income', 'Savings' etc are all essentially contested concepts because the future is unknown. Thus, it is purely a Scholastic matter- independent of Empirical evidence- if a particular model sets r (rate of return) as some arbitrary constant such that the Accountancy Convention re. Savings widely diverges from whatever we have grown used to expect.
Put simply, a guy who thinks he isn't saving anything but who lives in his own house might be judged (indeed, is judged, by current Anglo-American National Income Accounting Conventions) to be saving 'imputed rent', and thus getting Wealthier.

Anonymous said...

If agents have Rational Expectations, no 'essentially contested' categories arise.
Does your result depend on 'Simpson's paradox'?

windwheel said...

R.E is an impredicative theory w.r.t the facts. Facts aint Categories. So, the latter remain 'essentially contested' and not just for heuristic reasons.
Simpson's paradox would militate for the opposite of my thesis. Actually, you could probably use it for a 'result' of your own, provided you drop Muth Rationality for some Bayesian shite, which- sadly- would still be Garbage in Garbage out coz, Mum, that's the nature of your subject.
BTW, I've asked you before to stop posting anonymous comments on my blog. It makes me look bad in front of the cool kids.