Wednesday, 28 May 2014

Prof Debraj Ray, Capitalism and the inevitability of increased Inequality.

Apropos of Piketty's book on Inequality, this is Prof. Debraj Ray's- Fundamental Law of Capitalism. Uneven growth or not, there is invariably a long run tendency for technical progress to displace labor

There is a simple argument why this law must hold. It is this: capital can be indefinitely accumulated, while the growth of labor is fundamentally limited by the growth of population. Therefore there is always a tendency for capital to become progressively cheaper relative to labor, and so all technical progress must be fundamentally redirected away from labor. But there is a subtlety here: that redirection must of necessity be slow. If it is too fast, then the demand for labor must fall dramatically, resulting in labor being too cheap. But if labor is too cheap, the impetus for labor-displacing technical progress vanishes. So, this change must be slow. But it will be implacable. To avoid the ever widening capital-labor inequality as we lurch towards an automated world, all its inhabitants must ultimately own shares of physical capital. Whether this can successfully happen or not is an open question. I am pessimistic, but the deepest of all long-run policy implications lies in pondering this question. 

Can Capital be indefinitely accumulated? Let us take
1) Physical Capital. Urm, either it occupies space or it provides an input to something which takes up space. Space isn't infinite. So Physical Capital can't be infinitely accumulated. It can be periodically junked and sometimes even replaced.
2) Financial Capital. Can it indefinitely accumulate? Perhaps in nominal terms but not in terms of a claim on present day goods and services. However, only a small subset of what is in circulation comes under this rubric for all sorts of reasons- Legal, Customary, Government Policy etc. Furthermore, Financial Assets are less like pots of gold and more like a software program. They are the product of engineering and can go obsolete or get buggy or just do a Madoff. Assuming the Stationary Bandit of the State is on the prowl, what we can say about Financial Assets (and the sort of Inequality Piketty highlights) is that, insofar as they keep their value, under Red Queen type pressure (i.e. exhibit co-evolved complexity) they show typical Predator Prey cyclicity. Sure, from a peak, looking back, this may not appear because we no longer recognize genotypal variants which went extinct as belonging to the same species. 
3) Human Capital. Are you shitting me? Rahul Gandhi has an MPhil from Cambridge. Smriti Irani is a Tenth standard drop-out. Whom would you rather see in charge of the HRD Ministry? Nuff said.

What about the 'growth of labor'? It certainly isn't limited by the growth of population. First World War- women started to work- the labour supply increased. In a sense, Technological advances, embodied in fresh Capital goods, determine the potential increment in the Labour supply at any given time. A guy who would have had to retire at 70 may be able to earn a wage at 90 thanks to new technology. A kid of 8 might create an app and sell it for more than a Computer Studies graduate circa 1980.

I can't make sense of the rest of the Professor's remark. He's a real smart guy and knows from multiple equilibria and complementarity and re-switching and so on. His story about indefinitely accumulating Capital ignores rats- Madoff type rats (Principal Agent hazard) and Red Queen type Stationary Bandit, Bureaucratic rats, not to mention good old fashioned Depreciation.
Of course, he may be right. Maybe them smartypants on Wall Street really do know what the future fitness landscape will look like AND what's more incentive compatibility obtains such that no Principal-Agent hazard exists and what's more all the Politicians have been bought off a la Arundhati Roy or Arvind Kejriwal.

If so, History really has ended. However, this still doesn't tell us anything about Inequality. Why? Well, if History has ended then there is no driver for 'canalisation'- human beings will separate out into different species. 
I personally hope to be a pedigree breed of pussy-cat prized by bosomy women who will cook me plenty of treats and let me sharpen my claws on Amartya Sen.
OMG, if only Rahul had taken the same course, he'd now be PM! Seriously, scratching Amartya Sen's face and saying miaow and then jumping into Smriti Irani's cleavage is the only way to defeat Hindutva.


  1. There's another way to look at this. Conventionally we think of Entrepreneurship as only earning a factor income after Capital, Labor and Land have been paid off. However, nobody gets paid anything till the Entrepreneur comes along. If the market for Entrepreneurship is radically flawed, then a few behemoths get to take an illicit slice out of other factor income just to keep the show on the road.
    I don't recall the context but you had a post about Capitalism as the victim of Vampire like Entrepreneurship.
    Perhaps that's what the Professor is getting at when he says 'long run, everybody needs to be owning some physical income'. Not ownership, but the right to combine factors- i.e. entrepreneurship- is of the essence.

    1. Sorry, that should read 'everybody needs to own some physical capital'.

    2. Hi Satish,
      I think, following Schumpeter and Baumol, that what's important is that the interests of everybody are considered when determining the Insitutional/Legal framework such that 'unproductive' entrepreneurship (rent seeking, theft, corruption, endless law suits etc) is curbed as part of Competition/Industrial policy (in Japan, a 'patent troll' would first have to get permission from the Office of Fair Trading before going to court) while 'productive' entrepreneurship which does 'good' Creative Destruction is encouraged even if, as Schumpeter says, this means Entrepreneur makes a living by reducing certain sorts of Wealth.
      After all, most people don't want to be taking any sort of risk when it comes to bread and butter issues or stuff like Educating their kids or getting Health care. So whether they hold wealth or not isn't important because wealth is just a hedge against uncertainty. It's a quite separate matter if those already comfortably off wish to 'take a punt' or have a go at backing an idea of their own or something of that sort.
      My point is Wealth inequality may increase in a 'superfair' manner such that the risk averse (who may have lower income) hold less of something which is essentially stochastic but, because of Institutional/Legal arrangements, now face less risk when it comes to Health, Education, Employment and so forth.