Tag Archives: Economics

My Review Of “Capital in the Twenty-first Century”

Capital in the Twenty First Century by Thomas Piketty

My rating: 5 of 5 stars


This book is an important contribution to the economic analysis of a major issue of our times, inequality. In a time when non-economists are comfortable talking about the 1% and the 99%, it is clear that this issue has moved into the forefront of social thinking in the 21st century. But even though the title promises an analysis of the 21st century, Piketty begins with an historical look, primarily at England and France. And he uses an interesting and hitherto ignored data source, literature. By looking that the novels of Jane Austen and Gustave Flaubert he brings in the assumptions that these novelists had about the nature of wealth and income in these societies. The point here is that inequality of income and wealth are not new results of our time, they are the natural outcomes of laws of economics. His fundamental law involves the rate of return on capital (r) and the growth rate of the economy (g) and he shows that the historical data support an average return on capital of 4-5%, and an average growth rate of the economy of 1-1.5%. And from this he works out that as long as r is greater than g, there will be tendency for wealth to concentrate and accumulate.

This is not healthy for society and cannot proceed indefinitely. Something will come along to restore the balance. In the late 18th century, this would be the French Revolution, followed by the Napoleonic Wars. In the 20th century, two World Wars very effectively wiped out a lot of accumulated wealth. But the inequality is rapidly growing again, as r>g would stipulate, and the growing class of multi-billionaires and increasing numbers of trillion+ companies give evidence. So how will we restore the balance this time? Piketty’s answer is that we should do this by a graduated tax on wealth, which is surely preferable to another World War, particularly with the proliferation of nuclear weapons.

This is a long book, and may be bit heavy going, but I think it is worth the investment of time and effort. Piketty is making the observation that a democratically-controlled tax policy of taxes on wealth to restrain the runaway accumulation is better than any alternative. And while I have joked about eating the rich from time to time, I doubt they would be tasty or particularly nutritious.




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My review of Living With Moore’s Law

Living With Moore’s Law: Past, Present and Future by Dana Blankenhorn

My rating: 5 of 5 stars


This was a fascinating book. I first started following Blankenhorn when he was a reporter covering technology, particularly Linux and Open Source software. Then I added his blog to my feed reader, and it remains there to this day. Moore’s Law is named for Gordon Moore of Intel, who once forecast that the number of transistors on a silicon chip would roughly double every two years, which is of course an exponential growth curve, and if you know anything about mathematics you know that exponential growth curves get insanely steep insanely quickly. In the real world, of course, that cannot persist. Some factor will step in to stop the exponential growth. But Blankenhorn expands on the notion and explores how something very much like Moore’s Law happens in other areas. And the implications are important. For example, with the role that computers play in our economy, this implies a deflationary bias to the economy, which very few people are even thinking about. (Most people are worried about inflation, which concerns me not the least.) But then look at biology. Our ability to sequence DNA and manipulate it meant that the first vaccines for Covid-19 started to appear in record time from when the virus was sequenced and described. The sequencing of the virus happened in record time, and then the vaccines came out in record time. And it is not a fluke or a one-time thing, advances build on what went before. So what this book does is explore how exponential growth in various ways will affect our future. As such, it is reminiscent of Ray Kurzweil’s work. I thoroughly enjoyed this book.



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My Review of The Great Crash of 1929

The Great Crash of 1929 by John Kenneth Galbraith

My rating: 5 of 5 stars


The Great Depression was the key formative event in the economic history of the US in the 20th century. It is hard to imagine things like Social Security, the Security and Exchange Commission, Deposit Insurance, and so on. This was the trigger event for farm price supports, which are still an essential part of the government budget. This began the Federal Government’s involvement in employment, through programs like the Civilian Conservation Corps. and the Works Progress Administration. What is sometimes not fully appreciated by Americans is that the Crash of 1929 was really a world event, beginning with the collapse of the Creditanstalt collapse in Austria, and spreading across Europe until it hit the U.S. In Europe, the economic collapse brought about Hitler and Mussolini. That this never happened in the U.S. is because of the reforms of Roosevelt. Galbraith gives a masterful account of how the collapse happened in the U.S.



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Rents and Rent-Seeking

The idea of rent is quite old, going back thousands of years to the ancient world. It originally applied primarily to land, and meant that some people had ownership rights to the land and could demand payment (rent) from anyone who sought to use the land. What tended to happen over time is that land ownership would get concentrated in the hands of a few people ultra-rich people and the rest of the population would become impoverished. At some point this would create pressure leading to land reform, which would mean taking some of the l and from the wealthy and giving it to the lower classes. In Rome (both Republican and Imperial) this frequently meant getting land to give to soldiers who had completed their service. After all, you don’t want a large group of armed veterans who are pissed-off to march on the government.

As the Western world moved into the middle ages the Roman institutions evolved into what we call feudalism, a system whereby the monarch was the legal owner, at least in the first instance, of all the land in the kingdom. The monarch would then distribute land to the nobility in exchange for military service. And the nobility would use their derived ownership of land to extract rent from the peasantry, and turn that relationship into serfdom, in which the peasants were legally prohibited from leaving the land. The serfs would be required to work the lord’s land (this is where the term landlord comes from) in exchange for being able to farm a little bit for themselves. What became clear when people looked closely at this is that feudalism was a very backwards system that was a brake on development, and that it had to be overturned for the industrial revolution to succeed. The first economists, such as Adam Smith, saw this very clearly.

Smith divided the sources of income into three pieces: Rents, Profits, and Wages. Wages are the income to people who work, Profits are the income to the capitalists who invest in machines and raise productivity, and Rents go to people who own land. But what does that mean exactly? To Smith, they were taking money that derived originally from productive activity and devoting it to non-productive enrichment of the already wealthy:

“Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which best bear to have a particular tax imposed upon them.”

“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce.”

“A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.”

As economists built on Smith’s insights, they expanded the definition of rent to include and payment that is due solely to ownership and not derived from productive activity. A prime example is a monopoly. If I am the sole owner of a desirable resource I can charge a much higher price for it. But the most general definition would include what we used to call “coupon clippers”, people with great wealth, often inherited, that can just live off of the dividends and interest without doing anything productive. Here is the dictionary.com definition:

Rent-seeking = the act or process of using one’s assets and resources to increase one’s share of existing wealth without creating new wealth.

What many people do not realize is that Smith saw clearly that restraining rent-seeking would require government action. He did definitely like what would happen with the development of industry, and but saw that this development was endangered by the rent-seeking behavior of the wealthy. and I submit this is just as true in 2017 as it was in 1776 when Smith published his great work.

Review of The Rational Optimist: How Prosperity Evolves

The Rational Optimist: How Prosperity Evolves by Matt Ridley

My rating: 3 of 5 stars

This is a book that I gave 3-stars to because parts of it are 5-star and parts are 1-star, so this is how it averages out. If you are reading to the right stuff, it is invaluable, but if you read it uncritically you would be making a big mistake.

First, the good stuff. Ridley does a great job of puncturing the “doom-and-gloom” view that everything is going wrong and the world is on a downhill slide. He points out that people having been saying this for a very long time, and events tend to prove them wrong. I’m reminded of the quote that was making the rounds in my youth about “kids these days…” and it turned out to have been written in ancient Greece over 2,000 years ago. Plus ca change, plus c’est la meme chose. A lot of that dim view comes from thinking unclearly. For instance, an example he notes is the famous Club of Rome report published in 1972 called The Limits to Growth. This book showed how we would be clean out of every resource you could name by the late 80s to mid-90s. How many of you remember when we had no oil, no steel, no copper, etc.? I don’t remember it either, because it never happened. And Ridley is very clear on just why this is so, and he gets it right. The reason is that when a non-renewable resource starts to get into short supply the price rises, and this rising price causes conservation on the demand side, a search for substitutes, and the increased exploration for new supplies. And this is exactly what happened in the 1970s and 1980s when oil seemed to be in short supply. This is not a new observation, Hotelling wrote about this in the early 20th century, but it is a good idea to keep basic economics in mind when addressing resource issues.

Where he goes wrong, in my view, is taking this basic insight into an extreme of Panglossian optimism that says all problems we might think exist are simply figments of our over-active imaginations, and that if we would just relax and let free markets take over everything would be wonderful. In the end he seems to say that you should ignore scientists on issues such as global warming because what do they know really? He has a view that unrestricted capitalism and markets will solve all problems, which probably plays well in Libertarian circles, but is more extreme than even most economists would go.

So, if you read it for a useful guide to the many things that do go right in the world, that is good. And reminding us of the very definite benefits of markets, specialization, and exchange is always useful. But on this topic Adam Smith did it better and with more nuance in the 18th century.

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