Robert Solow on Piketty
According to Solow, if Piketty gets his way, real wages will stagnate.
My copy of Thomas Piketty’s Capital in the Twenty-First Century finally arrived and now I face a tradeoff between reading it and reading many reviews of it. I’m tending towards the former, but one big exception I make is for Robert Solow. I met him in 1972 and we had about a 30 to 40-minute conversation. Although I saw him speak at American Economics Association meetings a number of times after that, we never spoke one on one until sometime in the early 2000s, when we were both staying at the Stanford Park Hotel in Menlo Park, he for a meeting at Stanford and me for a talk I was giving at Hoover. I said “Hi” to him and told him that he might not remember me but I had talked to him years earlier and my name is David Henderson. “I know,” he said, with a slight grin. I was pleasantly surprised.
Anyway, the point is that although one of Solow’s articles disappointed me in a big way and could reasonably be described as trash-talking, when I see anything written by him, I tend to read it. He is one of the best writers in economics, not just in the sense that he writes well–many economists do–but also in the sense that he explains difficult concepts clearly. In that sense, he reminds me of Paul Krugman in the 1990s and Armen Alchian for most of his career. All three understand that you can have rigor in words.
Although I don’t agree with Solow’s political views, I do think his review of Piketty is analytically nice. One paragraph stood out. It’s one of the most important paragraphs in the piece, but Solow doesn’t highlight it in his conclusion. So it’s conceivable that many people will miss it. He writes:
This is often not well understood, and may be worth a brief digression. The labor share of national income is arithmetically the same thing as the real wage divided by the productivity of labor. Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income. But there could be political and social advantages to the second option. If a small class of owners of wealth–and it is small–comes to collect a growing share of the national income, it is likely to dominate the society in other ways as well. This dichotomy need not arise, but it is good to be clear.
In other words, as Solow sees it, if Piketty is right about both the fact that inequality is rising and about the reason for the rise–the rising share of national income that goes to capital–the result will be higher real wages, and, as Solow says, you don’t eat your share of income, you eat your wages. So if this rising share of income that goes to capital is reversed, workers will suffer with either wages that are rising more slowly or wages that are actually stagnating.
Solow doesn’t totally tip his hand about which he prefers, but he seems to prefer the latter–limiting the share of capital and settling for slower growth or even stagnation of real wages. He never tells us why. The closest he comes to an explanation is in the paragraph above, and elsewhere in the piece where he writes, “If the ownership of wealth in fact becomes even more concentrated during the rest of the twenty-first century, the outlook is pretty bleak unless you have a taste for oligarchy.”
I don’t like oligarchy either. But wouldn’t the best way to prevent most of its bad effects be to reduce, not increase, the power of government and thus the power of the oligarchy to get its way?
UPDATE: Former Econlog blogger Arnold Kling covers much of the same ground here.