Economists Do It With Models

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On French Men, And Iron Men…

June 3rd, 2014 · 9 Comments
Economic Growth · Macroeconomics

First off, I will be the proud owner of this in 4-5 business days:

In related news, Stephen Colbert offers up an explanation for the above item as it relates to Thomas Piketty’s Capital in the Twenty-First Century:

In case you haven’t been following along, allow me to get you up to speed: French economist Thomas Piketty wrote a book that is essentially 600 and some odd pages on wealth inequality in French, it got translated into English and became the number one seller on Amazon. (Not number one in economics, number one overall, as Colbert notes. Colbert made a Harry Potter joke, but you can basically think of of the book as 50 Shades of Economics, though better written than the original- not that I would know. This is actually a big deal if for no other reason than it follows a lot of discussion on how nobody pays attention to economic scholarship.) Various scholars and media outlets, most notably the Financial Times, have accused Piketty of errors reminiscent of the Reinhart-Rogoff austerity paper debacle, but Piketty responded with what basically amounts to an intellectual smackdown. (You can read a far more elegant summary here.)

The r and g, as Piketty uses them, refer to the return on property and investments and the rate of economic growth, respectively, and he argues that r being larger than g leads to increasing concentration of wealth. This is mostly reasonable but initially seemed a little odd to me from a notation perspective, since, if I remember my macro correctly, r generally represents the real interest rate and g generally represents the growth rate of technological progress. BUT…I suppose that the real interest rate if capital markets are competitive is equal to the return on capital (i.e. the marginal product of capital minus depreciation) and, along a steady state balanced growth path, the growth rate of the economy is in fact equal to the growth rate of technological progress. (Now who’s deathly boring, Colbert?)

Let’s go to Piketty directly, since he can obviously explain himself better than I can do so on his behalf:

Actually, the book is more interesting and nuanced than that interview suggests (at least the beginning of it), since Piketty certainly does a lot more than rehash the minimum-wage debate.

While watching the Colbert segments, I couldn’t help but giggle at Colbert’s choice to commiserate with Tony Stark, since Stark and the actor that plays him show up in a related work on the subject of income inequality:

Yes, the Wealthy Can Be Deserving
by N. Gregory Mankiw

In 2012, the actor Robert Downey Jr., played the role of Tony Stark, a.k.a. Iron Man, in “The Avengers.” For his work in that single film, Mr. Downey was paid an astounding $50 million.

Does that fact make you mad? Does his compensation strike you as a great injustice? Does it make you want to take to the streets in protest? These questions go to the heart of the debate over economic inequality, to which President Obama has recently been drawing attention.

I’m not sure whether I would rather think that the significance of the bit was a conscious choice or that the world just happens to come full circle when appropriate. (Who am I kidding- I absolutely want the Colbert writers to read as much of the econ interwebs as I do.)

Tags: Economic Growth · Macroeconomics

9 responses so far ↓

  • 1 Mikhail Voloshin // Jun 4, 2014 at 9:40 am

    One thing that I’ve heard nobody address vis-a-vis Picketty’s book (which I admit I haven’t read yet) is why exactly the increased concentration of capital is a bad thing? Who cares if the rich are getting richer, considering that the poor and middle-class are getting richer as well? (And anyone who doubts this need only look at their cellphone and internet connection and ask themselves, Would I rather be poor in 1960 or poor in 2014?) Even if Picketty’s premises and analyses are entirely correct, why exactly would anyone care?

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