Thursday, September 22, 2016

Really starting to like Branko Milanovic

Nature - income inequality is cyclical.

As an aside, which of these two methods of doing economics is better?

On the one hand, you have Branko Milanovic's nuanced explanation of some explicit features which have affected income inequality over the long term:

In modern times, economic factors seem to have been the most important drivers of change. In the United Kingdom and the United States, an upswing of inequality, which lasted most of the nineteenth century, followed the introduction of inventions such as the steam engine and the cotton gin. With demand high and competition low, people who invested in the new products and services could enjoy large 'rents' (payments over and above what is needed to cover production costs). Inequality was also probably pushed up by the movement of people from the countryside into cities — to better paid, more diverse (and hence more unequally paid) jobs.

In the United Kingdom, the data suggest that inequality peaked around 1870. Around this time, demand rose for labour (driven in part by people leaving the country) and legislation limited child labour, hours of work and so on. Thus workers' conditions began to improve. In the United States, inequality seems to have peaked in the 1920s to 1930s, its decline probably held back longer than in the United Kingdom by immigration from Europe4.

Next came the great decline in inequality that many have associated with progressive modernization. For the many countries involved, the First World War destroyed assets (particularly in Germany, France and Russia), and brought large taxes on the rich to finance the conflict. These changes, along with the emergence of socialist movements and trade unions, the massive scale up of public education (fuelled in part by an increased need for skilled and educated labourers) and the greater participation of women in the workforce, ushered a period of more than half a century of growing equality in all developed countries. For the West, the period from the end of the First World War to the early 1980s saw a 'great levelling'.

Ultimately, this levelling occurred worldwide. Policies such as the distribution of land to landless people, the introduction of widespread education and the creation of state-owned enterprises — such as those running the railways, or producing coal or sugar — boosted equality in developing nations (particularly in Turkey, Iran, South Korea and Egypt). The nationalization of factories, narrowing of wage distribution, and the elimination of almost all capital income (which tends to be more unequally distributed than are wages) accomplished the same in Communist economies such as the Soviet Union and Czechoslovakia.

And so on.

On the other hand, you have Daron Acemoglu shoehorning a μ term into

an infinite-horizon non-overlapping generations model with bequests. A continuum of agents of mass λ live for only one period and each begets a single offspring. A proportion of these agents are “poor,” while the remaining 1-λ form a rich “elite.”

Where μ means "likelihood of revolution" - except if you actually read it, all it is is a policy decision term where the economic policy, if not decided by the government, is decided by the mass of revolutionary proletariat.

In other words, μ has only whatever meaning anyone bothers to give it. And in any case it doesn't matter what it is, really, since everybody dies each period anyway. It certainly doesn't yield any policy suggestions.

I think I've figured out why I'd prefer doing my Ph.D. in political economy instead of economics.

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