Jon Elster and Robert Nozick on the economics of Karl Marx
29 Jun 2014 Leave a comment
in Marxist economics, Rawls and Nozick Tags: Jon Elster, Karl Popper, Robert Nozick
Popper held that Marxism had been initially scientific: Karl Marx postulated a theory which was genuinely predictive.
When these predictions were not in fact borne out, the theory was saved from falsification by adding ad hoc hypotheses to explain away inconvenient facts. By this, a theory which was genuinely scientific became pseudo-scientific dogma.
Popper criticizes theorists like Marx who attempt to accumulate evidence that corroborates their theories and not looking for evidence that would demonstrate that their hypothesis is false.
Popper claimed that falsifiability was an essential feature of any useful scientific theory. If a theory cannot be falsified, neither it nor its predictions can be validated, for everything that happens is by definition consistent with the theory.
As Popper and Kuhn understood it, bold, risky hypotheses are at the heart of great advances in the sciences and scholarship generally.
Why I am not reviewing Thomas Piketty’s Capital in the Twenty-First Century – updated again
29 Apr 2014 Leave a comment
in applied welfare economics, entrepreneurship, macroeconomics, market efficiency, politics, Rawls and Nozick, taxation, technological progress Tags: Greg Mankiw, Jon Elster, Mirrlees Review, Robert Lucas, Thomas Piketty, Tyler Cowen
It’s 700 pages long and goes on about Marx. Some people were watching the other channel when the Berlin Wall fell.
My 1 o’clock lecture at ANU in 1990 was next to a room rented out ironically from 12 to 1 to the Campus Trots and then to the Campus Christians for an hour of prayer to another saviour.
The Twitter summary of Piketty is this:
Karl Marx wasn’t wrong, just early. Pretty much. Sorry, capitalism. #inequalityforevah
The only Marxist I bother with is Jon Elster. He is a leading proponent of Analytical Marxism and one of the last polymaths. Brian Barry once wrote that to review one of Elster’s books one:
would either have to have taken off several years to master the many fields which fall within Elster’s purview or would be a consortium of at least twenty carefully-chosen experts.
All of Elster’s books and writings are worth reading, including
- Ulysses and the Sirens (1979);
- Sour Grapes: Studies in the Subversion of Rationality (1983);
- Making Sense of Marx (1985); and
- An Introduction to Karl Marx (1986).
As Jon Elster noted:
Marxian economics is, with a few exceptions, intellectually dead
and Marx’s labour theory of value is:
useless at best, harmful and misleading at its not infrequent worst.
To go on with my non-review, I will quote Tyler Cowen:
The crude seven-word version of Piketty’s argument is “rates of return on capital won’t diminish.”
Piketty’s reasons why rates of return on capital won’t diminish are fairly specific and restricted to only a small share of capital.
.. In any case this is pure speculation and Piketty’s entire argument depends upon it.
… Piketty converts the entrepreneur into the rentier.
To the extent capital reaps high returns, it is by assuming risk…
Yet the concept of risk hardly plays a role in the major arguments of this book.
Once you introduce risk, the long-run fate of capital returns again becomes far from certain.
In fact the entire book ought to be about risk but instead we get the rentier…
Overall, the main argument is based on two (false) claims.
First, that capital returns will be high and non-diminishing, relative to other factors.
Second, that this can happen without significant increases in real wages.
Piketty’s advocacy of a top marginal income tax rate of 80% and a an international treaty for a wealth tax are wildly impractical and destructive of economic growth and entrepreneurship. His advocacy of 60% marginal tax rates on incomes above $200,000 strike at the heart of the professional and managerial occupations that are the backbone of day-to-day capitalism. Piketty’s wealth tax would tax the homes and the retirement savings of the ordinary middle class:
- wealth below 200,000 euros be taxed at a rate of 0.1 percent,
- wealth between 200,000 and one million euros at 0.5 percent,
- wealth between one million and five million euros at 1.0 percent, and
- wealth above five million euros at 2.0 percent.
Piketty’s reason for these high top tax rates is not to bring in more revenue or to redistribute wealth to poor and the downtrodden but simply “to put an end to such incomes.” Harsanyi argues that:
Like many progressives, Piketty doesn’t really believe that most people deserve their wealth anyway, so confiscating it presents no real moral dilemma.
He also argues that we can measure a person’s productivity and the value of a worker (namely, low-skilled labourers) while arguing that other groups of workers (namely, the kind of people he doesn’t admire) are bequeathed undeserved, “arbitrary” salaries. What tangible benefit does a stockbroker or a kulak or an explanatory journalist offer society, after all?
This takes me back to Jon Elster who had this to say on socialism:
Optimism and wishful thinking have been features of socialist thought from its inception.
In Marx, for instance, two main premises appear to be that whatever is desirable is possible, and that whatever is desirable and possible is inevitable.
…It has become clear that classical socialism massively underestimated the importance of economic incentives
.
Greg Mankiw is less harsh, but still to the point:
Like President Obama and others on the left, Piketty wants to spread the wealth around.
Another philosophical viewpoint is that it is the government’s job to enforce rules such as contracts and property rights and promote opportunity rather than to achieve a particular distribution of economic outcomes.
No amount of economic history will tell you that John Rawls (and Thomas Piketty) offers a better political philosophy than Robert Nozick (and Milton Friedman).
John Rawls was actually very much alive to the importance of incentives in a just and prosperous society.
Unequal incomes might turn out to be to the advantage of everyone. Work effort and entrepreneurial alertness respond to incentives; incentives channel people into the occupations and jobs where they produce more.
Rawls lent qualified support to the idea of a flat-rate consumption tax because these taxes:
impose a levy according to how much a person takes out of the common store of goods and not according to how much he contributes.
A simple way to have a progressive consumption tax is to exempt all savings from taxation.
With his emphasis on fair distributions of income, Rawls’ initial appeal was to the Left. Left-wing thinkers then started to dislike his acceptance of capitalism and his tolerance of large discrepancies in income and wealth.
It’s impossible to make the workers better off by taxing capital. The optimal rate of tax on income from capital is zero. This is why the Mirrlees Review of the UK taxation system argued for zero taxation of the returns to capital.
Robert Lucas estimated in 1990 that eliminating all taxes on income from capital would increase the U.S. capital stock by about 35% and consumption by 7%.
Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, and Laurence J. Kotlikoff (2014) found that eliminating the corporate income tax completely would raise the U.S. capital stock (machines and buildings) by 23%, output by 8% and the real wages of unskilled and skilled workers each by 12%.
Book reviews serve the same purpose as film reviews. They are filters for our time. Do you agree?
I made a time management decision to not read a long book plenty of others reviewed and some even understood.
As for the growing income inequality, there is a long literature dating back 25-years arguing that skill-biased technological change is increasing the returns to investing in education as Gary Becker blogged in 2011:
Earnings inequality in the United States and many other countries has increased greatly since the late 1970s, due in large measure to globalization and technological progress that raised the productivity of more educated and more skilled individuals.
While the average American college graduate earned about a 40% premium over the average high school graduate in 1980, this premium increased to over 70% in 2000.
The good side of this higher education-based earnings inequality is that it induced more young men, and especially more young women, to go to and finish college.
The bad side is that many sufficiently able children could not take advantage of the greater returns from a college education because their parents did not prepare them to perform well in school, or they went to bad schools, or they lacked the financing to attend college.
As a result, the incomes of high school dropouts and of many high school graduates stagnated while incomes boomed for many persons who graduated college, and even more so for those with post graduate education.
There is nothing new under the sun.
Why are there so few workers’ co-ops?
19 Mar 2014 6 Comments
in Austrian economics, industrial organisation, labour economics, managerial economics, organisational economics, theory of the firm Tags: adverse selection, cooperative ownership, Jon Elster, kibbutzim, moral hazard, Ran Abramitzky, Robert Nozick, worker ownership
If workers’ cooperatives are so efficient, why are there so few cooperatives? Workers’ cooperatives should be able to slowly undercut other firms on price because they do not have to pay a profit to the capitalists.
Building societies, credit unions and some life insurance companies were mutually owned by their customers for a long time, but recently fell out of favour because of a growing lack of competitiveness and under-capitalisation.
Cooperatives are not economically viable because of intrinsic difficulties of entrepreneurship and management. And most workers prefer to work in firms for a wage rather than wait for the co-op to start up and hopefully break even before they get their first pay cheque. That could be a slow train coming.
The kibbutzim are Israeli agricultural communities initially organized on socialist lines, mostly between the 1910s and 1950s. The kibbutz is an example of voluntary socialism. The founders of kibbutzim were socialist idealists wanting to create a new human being.
Robert Nozick pointed out that few people actually join a kibbutz. Six per cent is the maximum proportion of any population who would voluntarily choose to live in these socialist communities. More recently, 2.6% of the Israeli population live on a kibbutz.
Originally, most kibbutzim followed strict socialist policies forbidding private property; they also required near-total equality of income regardless of differences in productivity, and in some cases, even abandoned the specialisation of labour. Kibbutzim are communities whose aim is equal sharing.
Kibbutzim were expected to fail because of moral hazard and adverse selection. Other organisations subject to adverse selection and moral hazard are professional partnerships, co-operatives, and labour-managed firms because they are all based on revenue sharing.
Kibbutzim have persisted for most of the twentieth century and are one of the largest communal movements in history. About 40% are still run on communist principles. Why is this so?
The kibbutz movement was founded by individuals who can be regarded as ex-ante homogeneous in their ability and potential income, and who came to a new land full of uncertainties. They were young unattached individuals who share a comparatively long period of social, ideological, and vocational training.
An even more durable example of voluntary collectivist living is Catholic monasteries and convents, but notice that these too were founded on a realization that close family ties are inimical to communal order.
Kibbutz founders wanted insurance, but their founders realised that members who would turn out to have high abilities might leave the Kibbutz.
- The founders of the kibbutzim decided to abolish all private property and to own all wealth commonly, which served as a lock-in device.
- Like monasteries and convents, kibbutzim deter members from fleeing through this communal ownership of property. You leave with the shirt on your back!
Kibbutzim also put prospective members through lengthy trial periods to make sure they are made of the right stuff. Those raised on a kibbutz tend to have learned kibbutz-specific skills, such as agronomy, which also makes exit to the outside world even more difficult.
Kibbutzim are similar to law firms, medical and business partnerships that pool income for risk sharing purposes.
Mutual monitoring and peer pressure replace direct monetary incentives in mitigating moral hazard in a kibbutz (and in monasteries and convents) in the same way as in professional partnerships, cooperatives, and labour-managed firms with pooled assets and the option of exit.
The trade-off between insurance and adverse selection determines the level of equality within a kibbutz and its size, as with any other professional partnership:
- Kibbutz vary in size from less than a hundred to over a thousand, but most have between 400 and 600 members, with an average of 441 members.
- Kibbutz size is limited by the savings on income insurance no longer offsetting the costs of moral hazard and other transaction costs as the Coasian firm grows in size.
Ran Abramitzky writes with great insight on the economics of the kibbutzim. He is writing a book The Mystery of the Kibbutz: How Socialism Succeeded. He found that high-ability individuals are more likely to leave a kibbutz. The brain drain would be worse if kibbutzim didn’t make it so costly to exit. Is this a familiar theme of socialism?
Many hybrid organisations exist in the market, ranging from joint ventures and agricultural seller and supermarket buyer co-ops to labour-owned firms such as in most of the professions.
But rarely do we find real life existing cooperatives with all workers and only workers having equal ownership rights. As Jon Elster noted, there are often non-working owners, non-owning workers and unequal distribution of shares in real life workers’ co-ops. All other types of co-ops and professional partnership share this feature.
Utopia, you are standing in it! 
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