comments on joe stiglitz

8/10/2019 Comments on Joe Stiglitz

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Comments on Joe StiglitzsTheoretical perspectives on the

distribution of income andwealth

Branko MilanovicNew York 4 December 2014


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The puzzles difficult to reconcile with thestandard approach

Can wages fall as capital-deepening proceeds? Can return to capital r remain constant as K/L and K/Y increase? Can elasticity of substitution be greater than 1 when most empirical

studies show it to be


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A two-part paper

Part I. Focused on the distinction between wealth and capital, howthe two can evolve differently and implications for personal incomedistribution

Part II. Combines a model of long-term wealth and incomedistribution among individuals with theory of growth [based onStiglitz 1969, which I read as an undergraduate in Yugoslavia aroun1975 and never thought I would have a chance to discuss it with thauthor]

But here my comments will be on Part I.


4/10

Wealth is not capital

It is legitimate to use W, and explicit and implicit returns from weain personal income distribution (as Piketty does; examples of housinand land values)

But it is not legitimate to use the results derived from the Kproduction function to apply in the W world of personal incomdistribution

How to solve this problem, that is to go from functional to personalincome distribution?

Bring land (T), the largest component of W, back into the productiofunction = F(K,L,T)

It could well be that paradoxes do not exist if K has not increased


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Adam Smith weighs on the issueWealth is different from capital. CORRECT.

Though a house, therefore, may yield a revenue to its proprietor, andthereby serve in the function of a capital to him, it cannot yield any to thepublic, nor serve in the function of a capital to it, and the revenue of thewhole body of the people can never be in the smallest degree increased byit. (On the division of stock. Book II, Ch 1)

Implicit income disregarded. NOT CORRECT.A dwelling-house, as such, contributes nothing to the revenue of itsinhabitant; and though it is, no doubt, extremely useful to him, it is as hisclothes and household furniture are useful to him, which, however, makes apart of his expence, and not of his revenue . (On the division of stock.

Book II, Ch 1)


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How can W and K move in different directions? W = K + R/r = value of K + capitalized rent or W=K + pT = K + pr

land x quantity of land Suppose that price of land increases as the entire credit expansion is

used to buy land. No change in productive assets K. Land and K are just two assets and in equilibrium

( ) +

( )

=

( ) So long as expected appreciation of land + rent/p exceed return on Kpeople will invest in land

Increase in p increases wealth inequality (land holders are rich) whileaving productive potential unchanged.


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If not even depreciation of K is covered, K might go down even as Wincreases.

So, in the longer- run, there could be K shallowing and thusdecrease in wages, simultaneously with rising wealth/output ratio an

rising wealth and income inequalities. The original puzzles disappe Some problems: Now, can the previous eq. that equalizes the return

on land and capital as stores of value be compatible with zero intererate (assumed in credit expansion)? Would not all 3 have to be inequal (in equilibrium): return on financial assets, land and physicalcapital?

Why is speculative or positional demand for land different from simbubble-driven demands for any other asset?

Suppose instead of land we use old paintings? The conclusions woube the same.

(Or land is different because it is a very big asset, half of all wealth

and it is not held by the poor?)


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Another aspect or explanation: Transmission ofinequality under globalization Let inequality increase in China & Russia only, and nowhere else For whatever reason, their rich demand land in Portugal (which e.g.

used for wine-making, but now will be used for housing) Such demand reduces K directly by withdrawing a part of T out of

production. But it also increases domestic W. This is a real (non-fictitious) incre

in W because the Portuguese can now by liquidating their wealth bumore goods So, Portugals LT growth is unaffected since Q=f(K,L) is the same, bu

W/Y ratio has increased and its W and Y distribution are more uneq An interesting twist is whether this increased W and Y inequality m

in turn have negative effects on future growth


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The wealth -inequality effect

In conclusion, we are dealing with a peculiar wealth effect tto the rising relative price of one (big) asset held by the non-poor.

This increases wealth inequality directly, and income inequalityindirectly.

The demand for the assets held by the non-poor increases whileleaving the production function unchanged, or even worse whiledraining savings that would have been invested in productive assets

Similar to A. Smiths observation of how demand for non -proassets (like gold) made accumulation of productive K more difficult

But here we have an inequality angle which was not noticed before


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Important modelling assumptions for Part II Heterogeneous labor (different wage rates by wage groups) No separation between capitalists and workers, but rather unification of

high K and L income in the same persons (households). Based on theempirical results from US tax data. High wage individuals save, become capitalists and invest in education o

their children; children then start as being both capitalists and high wageindividuals

Higher returns to larger K

= + ( )With >0 and >0 Higher MPS for higher income households Possibly modeling global income distribution by adding convergence

economics for the means

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