Sunday, June 1, 2014

Limits of neoclassical economics

When people criticize Piketty for elevating  a mere economic identity that shows that the share of capital income in total income  is x times y (not important for my argument) to a Fundamental Law of Capitalism they show their inability to go back to economics as a social science, or differently, to transcend neoclassical economics.

The share of capital income in total income is not only a reflection of the fact that people with a factor of production B have so much, and people with the factor of production A have the rest. It gives us a measure of the share of the total pie that owners of capital (who are the principal social group in capitalism) are able to claim for themselves without having to work. This is key. We are basically saying: 20% of people of  the richest people claim one-half of national output and they do so without having to work. If it were a question of changing the distribution in favor of factor A (donuts) and against factor B (pecan pies), there would be no reason to be concerned. But here you change the distribution in favor of those who do not need to work, and against those that do. You thereby affect the entire social structure of society. This is where social science comes in, and neoclassical economics goes away.

The entire 100 years  of neoclassical economics was, in part, driven by the attempts to make us forget this key distinction: between having or not having to work for a living. Hence neoclassicists like to treat capital (and labor) as basically  the same thing: factors of production: a donut and a pecan pie. You have a bit more of a donut, I have a bit more of the pecan pie. No big deal. Thence also the attempt to treat labor as human capital. We are all capitalists now: a guy who works at Walmart for less than the minimum wage is a capitalist since he is using his human capital; a broker who makes a million in a day is also a capitalist, he just works with a different type of capital.

The true social reality was thus entirely hidden. But once you bring back the sharp dividing line between those work to earn and those who earn by doing practically nothing, you are back into a social science and you ask yourself questions like, would a society where 20% of non-workers earn 70% of total income be okay? What are the values that such a society would promote?  What would be the consumption patterns it would encourage? What is the  religion or ethical system that says that it is fine that people who do not work should be rich?  (Can we find one?) And what about equality of opportunity as such wealth would be transmitted to their kids.

The principal, and stark, issue then becomes: can a society where most of the rich are non-workers be called a  “good society"?

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