Tuesday, September 2, 2014
Acemoglu and Robinson on Marx and Piketty
Acemoglu and Robinson, the authors of "Why Nations Fail" have written a critical review of the book by Thomas Piketty "Capital in the XXIst Century". They argue that what they call the "general law" of Piketty that the rate of return of capital (r) is higher than the growth rate (g), and that this persisting difference will drive increasing inequalities is as misguided as the "general laws" of Karl Marx, such as the decreasing profit rate and the fall of capitalism. Acemoglu and Robinson claim that the common mistake of Piketty and Marx is that they neglect institutions and politics. This is surprising to me, unless one takes a very narrow view of institutions and politics. Piketty and Marx are both very "political" authors, and their theories can be interpreted as institutional theories of capitalism, in the sense that they analyse the basic structures of society. Marx predicted that the forces of production and the relations of production (the infrastructure) determined the superstructure (politics and culture, for example), but one can interpret many institutions (such as property rights) as infrastructure. Acemoglu and Robinson claim that political institutions are first (their "general law"?) and that they determine economic institutions and outcomes. This general law is subject to discussion to say the least, as illustrated in the work of Robert Allen, one of the economic historians mentioned by Acemoglu and Robinson. Of course time has proven many of the Marxian predictions wrong, and time may prove many or some of Piketty's predictions wrong. I interpret Piketty's work as basically reporting in a very detailed way that r has been higher than g in many countries in the recent decades, and that, unless we take some very serious political and institutional decisions, this will expand and persist and have a very damaging effect for democracy. Acemoglu and Robinson provide analytical narratives of Sweden and Southafrica, and some simple econometric work, to claim that politics and institutions are more important than r-g. I do not think that Piketty claims that r-g is the only thing that matters, and that is precisely why he says that strong redistributive policies are needed. Acemoglu and Robinson accept that huge inequalities can have a negative effect on democracy, but it seems that their proposal to correct for this is some vague intervention on the political channel, but not strong taxation intervention on inequalities per se. I sympathize with this comment by Milanovic on the review by Acemoglu and Robinson (AR). But I look forward to the response by Piketty himself, who was a bit dismissive of the work by Acemoglu and Robinson in his book, arguing that while AR refer to the institutions that facilitated the industrial revolution, he makes proposals about the institutions (progressive wealth taxation and federalism) that should rein increasing inequalities in the era of globalization today.