The Accidental Controversialist: Deeper Reflections on Thomas Piketty’s “Capital

Thomas Palley over at his website [h/t: Mona Ali]:

Using a conventional marginal productivity framework, Piketty provides an explanation of rising inequality based on increases in the gap between the marginal product of capital, which determines the rate of profit (r), and the rate of growth (g). Because capital ownership is so concentrated, a higher profit rate or slower growth rate increases inequality as the incomes of the wealthy grow faster than the overall economy.

The conventional character of Piketty’s theoretical thinking rears its head in his policy prescriptions. His neoclassical growth framework leads him to focus on taxation as the remedy. There is little attention to issues of economic institutions and structures of economic power because these are not part of the neoclassical framework. That substantially explains progressive economists’ diffident embrace of the book. Furthermore, even if technically feasible, Piketty’s tax prescriptions are politically naïve given capital increasingly controls the political process.

These features have led some critics to raise old “Cambridge” arguments about the intellectual incoherence of marginal productivity income distribution theory. Critics also assert Piketty conflates physical and financial capital, overlooking the role of finance in determining rates of return and patterns of income and wealth distribution. There are two problems with these responses. First, mainstream economists determined long ago to turn a blind eye and deaf ear to such arguments. Second, these arguments miss the bulls-eye which is the nature of capitalism.

A better response is for critics to stick with the rate of profit versus growth argument while dumping the neoclassical marginal productivity aspect of Piketty’s theoretical argument. Mainstream economists will assert the conventional story about the profit rate being technologically determined. However, as Piketty occasionally hints, in reality the profit rate is politically and socially determined by factors influencing the distribution of economic and political power.

More here.