Sunday, April 06, 2014

James Galbraith on Capital

James Galbraith in his review of Piketty's Capital 21 says
"Although Thomas Piketty, a professor at the Paris School of Economics, has written a massive book entitled Capital in the Twenty-First Century, he explicitly (and rather caustically) rejects the Marxist view. He is in some respects a skeptic of modern mainstream economics, but he sees capital (in principle) as an agglomeration of physical objects, in line with the neoclassical theory. And so he must face the question of how to count up capital-as-a-quantity.
His approach is in two parts. First, he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not. He excludes only what neoclassical economists call “human capital,” presumably because it can’t be bought and sold. Then he estimates the market value of that wealth. His measure of capital is not physical but financial.
This, I fear, is a source of terrible confusion. Much of Piketty’s analysis turns on the ratio of capital—as he defines it—to national income: the capital/income ratio. It should be obvious that this ratio depends heavily on the flux of market value. And Piketty says as much."
But Piketty also says that he is looking for long term trends. It is not clear to me that housing or land cannot be considered as capital. For one thing, money can be made in investing in real estate. Money can be borrowed using land and housing and can be invested. Lot of middle class people, apart from the rich, have been doing this. Once you accept physical capital (James Galbraith has objections to this too), I do not see why housing and land cannot be accepted as capital.
Just trying to understand Piketty bit by bit taking criticisms into account.
P.S. Brad DeLong pitches in "Two pieces on Thomas Piketty that I do not like so much.
The first is the almost always reliable and very sharp James K. Galbraith, who--for some reason I don't understand--thinks that Piketty intends his Capital to be a book about production rather than about distribution. And as a result I think his review goes awry: James K. Galbraith"

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