Beyond Piketty’s Capital

Income-USA-1910-2010

What Ben Franklin and Billie Holiday Could Tell Us About Capitalism’s Inequalities

It has now been two years since French economist Thomas Piketty published his tome, Capital in the Twenty-First Century, and one year since it was published in English, raising a fanfare of praise and criticism. It has deserved both, most notably for “putting the distributional question back at the heart of economic analysis.”[1] I would imagine Professor Piketty is also pleased by the attention his work has garnered: What economist doesn’t secretly desire to be labeled a “rock-star” without having to sing or pick up a guitar to demonstrate otherwise?

Piketty’s study (a collaborative effort, to be sure) is an important and timely contribution to economic research. His datasets across time and space on wealth, income, and inheritances provide a wealth of empirical evidence for future testing and analysis. The presentation is long, as it is all-encompassing, tackling an ambitious, if not impossible, task. But for empirics alone, the work is commendable.

Many critics have focused on methodology and the occasional data error, but I will dispense with that by accepting the general contour of history Piketty presents as accurate of real trends in economic inequality over time. And that it matters. Inequality is not only a social and political problem, it is an economic challenge because extreme disparities break down the basis of free exchange, leading to excess investment lacking productive opportunities.[2] (Piketty ignores the natural equilibrium correctives of business/trade cycles, presumably because he perceives them as interim reversals on an inevitable long term trend.) I have followed Edward Wolff’s research long enough to know there is an intimate causal relationship between capitalist markets and material outcomes. I believe the meatier controversy is found in Piketty’s interpretations of the data and his inductive theorizing because that tells us what we can and should do, if anything, about it. Sufficient time has passed for us to digest the criticisms and perhaps offer new insights.

Read the full essay, formatted and downloadable as a pdf…

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[1] Distributional issues are really at the heart of our most intractable policy challenges. Not only are wealth and income inequalities distributional puzzles, so are hunger, poverty, pollution, the effects of climate change, etc. Unfortunately, the profession tends to ignore distributional puzzles because the necessary assumptions of high-order mathematical models that drive theory rule out dynamic network interactions that characterize markets. Due to these limitations, economics is left with the default explanations of initial conditions, hence the focus on natural inequality, access to education, inheritance, etc. General equilibrium theory (GE) also assumes distributional effects away: over time prices and quantities will adjust to correct any maldistributions caused by misallocated resources. For someone mired in poverty or hunger, it’s not a very inspiring assumption.

[2] As opposed to distributional problems, modern economics is very comfortable studying and prescribing economic growth. Its mathematical models provide powerful tools to study and explain the determinants of growth. This is why growth is often touted as the solution to every economic problem. (When you’re a hammer, everything looks like a nail.) But sustainable growth relies on the feedback cycle within a dynamic market network model, so stable growth is highly dependent on sustainable distributional networks.

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Gambling on the Welfare State

State-sponsored gambling is the one acceptable way of raising taxes on lower-income folks to help fund the welfare state. …Dancing in [politicians’] heads are visions of new state-sponsored gambling empires built on online poker, online slot machines and online lottery-ticket sales, with politicians collecting most of the vig.  …With or without federal regulation, legalized online poker is likely coming your way in 2013.

LOL. These are some great quotes from the article cited below. I’ve been waiting for someone to expose this dark secret about one way our politicians seek to fulfill their promises to take care of the poor. A remarkable trend that is probably inevitable, like sin taxes.

In my 2002 article titled CasinoWorld (downloadable pdf), I identified four behavioral types in terms of gaming strategies that explain risk behavior under uncertainty. These four types are explained in the following excerpt from the study:

The two dimensions of risk-taking (odds and stakes) yield four separate categories of agents (see Table 4.1):

  1. High odds/variance + high stakes = gambler
  2. Low odds/variance + high stakes = investor
  3. High odds/variance + low stakes = lottery player
  4. Low odds/variance + low stakes = subsistence/saver

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If we run a game of chance with these four strategies employed, eventually we end up with only two types: investors who own all the wealth and lottery players who live a subsistence life. Is this the world our leaders have planned for us? The 1% and 99%? Think about it, carefully. Happy Holidays!

From the WSJ:

D.C. Plays Fizzbin With Online Poker

How to make the poor pay for the welfare state: online gambling.

By HOLMAN W. JENKINS, JR.

Sometimes only a Star Trek metaphor will do. Remember the episode about a primitive people who developed a planet-girdling civilization based on the principles of the Chicago gangs? Many modern economic anthropologists would tell you that the state begins as organized crime, dividing up rackets and controlling turf.

Case in point: anything having to do with Internet poker.

It starts with the enterprising activities of the Justice Department. Seizing on a 2006 law making it illegal to process U.S. payments for online gambling, federal prosecutors last year brought charges against three offshore poker websites. While admitting no wrongdoing, the sites quickly settled and agreed to hand over substantial sums of money to the department.

Some of these funds were supposed to reimburse the “victims,” U.S. poker players who had money in their accounts when the sites were shut down. But so cumbersome and legalistic is the process created by Justice that many lawyers say they don’t expect their clients to find it worth the trouble or legal fees. Justice may end up keeping much of the loot itself under asset-forfeiture rules.

Don’t expect a hue and cry from gambling interests, however. Bigger stakes are up for grabs, not unlike the turf war Captain Kirk found when he beamed down to the gangster planet Sigma Iotia II.

Having cleared the online poker marketplace of its incumbents, Justice decided that under the 1961 Wire Act most Internet gambling isn’t illegal after all. This new “interpretation,” which came at the behest of Illinois and New York, has inspired a new light in the eyes of state officials looking for ways to fund the welfare state. Dancing in their heads are visions of new state-sponsored gambling empires built on online poker, online slot machines and online lottery-ticket sales, with politicians collecting most of the vig.

Not everyone is pleased by the prospect. Sen. Jon Kyl, an Arizona Republican who is retiring this year, doesn’t like gambling; Sen. Harry Reid, a Nevada Democrat, doesn’t like gambling when it’s not controlled by Nevada casinos.

During the lame-duck session, these improbable bedfellows promoted a bill to halt the online gambling stampede, except for online poker. Why the exception? Poker is a great American tradition, say supporters, including former Sen. Al D’Amato, representing something called the Poker Players Alliance.

More to the point, stopping Americans from playing Internet poker is probably impossible. Under the Kyl-Reid proposal, at least players would be pitted against each other, not the house, which is deemed less iniquitous and corrupting.

The bill satisfies Mr. Reid, meanwhile, because Nevada is already pushing ahead with in-state online poker. Nevada’s casinos and Nevada’s gaming regulators see a federal law as a way to give themselves a headstart in marketing a government-endorsed version of the game to the masses nationally and internationally.

The Kyl-Reid bill, as Captain Kirk would quickly suss out (aided by the deductive powers of Mr. Spock), was destined instantly to become a bone of contention among the various gangs jostling for a piece of the online poker action.

The state lottery commissioners and governors opposed the bill because it would prevent them offering an array of tantalizing new online games to suckers, er, citizens of their states.

Convenience-store owners opposed the bill, fearing it would clear the way for online lottery ticket sales, which would cut into their lucrative piece of the over-the-counter lottery racket.

The Nevada casinos naturally favored any law that would give them a leg up in the emerging marketplace for legal online poker.

In hearings before Congress last year, a Native American spokesman argued that tribes must be allowed to offer online poker on grounds that his 101-year-old grandmother had been a reservation schoolteacher fighting to preserve native culture. Therefore, “if anybody deserves to be at the front line in this industry it’s Native American people.”

Captain Kirk, it will be remembered, invented the deliberately convoluted card game “Fizzbin” as a ruse to distract the gambling-mad, gangster inhabitants of Sigma Iotia II. The Reid-Kyl gambit may have run out of time, but the feds aren’t likely to desist from trying to control so profitable a new racket. State-sponsored gambling is the one acceptable way of raising taxes on lower-income folks to help fund the welfare state. With or without federal regulation, legalized online poker is likely coming your way in 2013. Don’t be surprised if one of the games is called Fizzbin.