In a fine piece relatively free of neoclassical dogmatism ‘When Piketty Argued for Income Redistribution, He Changed Economics‘ Mark Thoma raises parallels between Piketty and the concern of classical economics including Malthus. Some key takeouts:
Today’s debate over the distribution of income resembles debates in Ricardo’s time. Ricardo and Thomas Malthus had a famous debate over whether general gluts – their term for recessions/depressions – could exist, and if so what could be done about them. Ricardo argued for Say’s law, i.e. that an excess supply of goods in one sector (think of the excess supply of housing, i.e. the glut of houses, in the housing crisis) would always be matched by excess demand in another sector.
There could be temporary mismatches, excess supply in one sector and excess demand in another, but these would quickly resolve themselves. Malthus disagreed and proposed a theory of underconsumption, a theory that is very much like the arguments Robert Reich and others have been making today. Malthus believed that landlords with very high incomes, would consume all they wanted, and still have money left over.
Imagine, for example, gold piling up in their “cookie jars” at home. All of that unspent income would represent deficient demand. Goods and services would be produced generating income of equal value, but not all of the income would be spent leading to a “glut” of goods. The solution for Malthus was to encourage lavish spending by landlords on goods, servants, whatever it took to spend the idle income (the trickle down theory of his time).
Lets recap on Malthus’s argument, being aware that it changed over his lifetime, it was in simple terms that workers only consumed what they earned whilst capitalist invested everything they saved, but this was not necessarily true for renters who could stack up wealth, liquidity as we would call it today, and this could produce a ‘general glut’.
Malthus’s argument was attacked by Ricardo, Mill and Torrens who all in different ways demonstrated that in the long run general gluts could not persist, as the price level would fall’in the long run’ restoring what today we would call general equilibrium. Malthus accepted that but he contended he was only ever dealing with the short term, his was a disequilibrium theory.
Keynes was essentially an update of Malthuses argument, generalizing it to liquidity overall but sadly missing out the distributional arguments.
For Thoma the main achievement of Piketty is to revive distributional arguments.
What Piketty has done in his book is revive the study of the distribution of wealth
But I think misses the point. He is right that the rise in margialism led to a neglect of distributional issues. But Piketty’s main achieve is not so much the institutional analysis but the theoretical one, the focus on the tendency for r>g, for wealth to outpace growth.
Lets generalise Malthus’s argument, to look not just at land rent but all quasi rents on assets which though scarcity tend to return yield returns greater than g.
All such asset purchases will deduct from savings and investment. If we take the proportion of wealth invested in assets as A then the correct expression is not S=I but S(1-A)=I. Of course we also need to consider the investment of yields from assets. So you can modify this through a geometrical expansion (effectively getting an NPV) adding interest as a term.
So we can see that rentier income r>g is deflationary, it reduces aggregate demand. One might indeed argue that the growth in debt over the 20th Century has been a means of compensating for this deflation and once this stops – as per now through austerity – we get deflationary stagnation. Of course assets cant inflate in price forever above their real returns, we get bubble and bust.
You can extend the argument further by including rentier income in a Kalecki type profits equation and using the outputs in dynamic pricing equations, but that is a task for another article, as is looking at the effects of intertemporal investment changes on the capital stock. What this shows is a classical like analysis of distribution and the contribution of factor returns to investment and aggregate demand is essential.