March 26, 2014 § Leave a comment
I apologize for this follow-up post. A short time after I posted a link to the New Yorker article I discovered that another blogger, Brad DeLong, the proprietor of the Washington Center for Equitable Growth, and far better informed concerning the critical reaction to Thomas Piketty’s book, had posted on his blog a list of eleven reviews. My friend Milton Lower is responsible for guiding me in these matters. He recommends Brad DeLong’s blog and, after looking at it, I agree.
Here is a link to that blog post: http://equitablegrowth.org/2014/03/25/2366/dialogue-ten-so-far-worthwhile-reviews-of-and-reflections-on-thomas-pikettys-capital-in-the-twenty-first-century-wednesday-focus-march-26-2014
If you want to find out what the word “heiristocracy” means, be sure to check out Kathleen Geier’s review in Washington Monthly. It’s one of the eleven listed reviews.
I now recognize that keeping up with all of the reviews of Piketty’s book may exceed my capacity for research. I don’t promise not to post more about this subject. I am so enthusiastic about it because Piketty did something that precludes his ideas from being iegnored: He did a prodigious amount of work, compiled a database of facts based on arithmetic, not opinion, and then based his conclusions directly and precisely on those facts. That faces those who disagree with his conclusions with a problem: They either have to prove that his data is not accurate ; they must contend that the trend toward inequality will reverse itself without the measures he proposes; or they must shrug and say, “So what!”
I think they will find each of those alternatives difficult to defend. In any case, I believe the debate will be useful because it begins with an admission that economic inequality is a reality.
March 26, 2014 § Leave a comment
Here is a link to a New Yorker article about Piketty’s book:
I continue to believe this to be a subject worth studying.
My friend Milton Lower alerted me to this article.
March 16, 2014 § Leave a comment
My friend, Milton Lower has alerted me to the scandal of drug patents. I try to be reasonably informed about significant public policy issues but, this time, I was either asleep or failed to monitor the right sources of information.
Dean Baker, an economist and the impresario of CEPR (Center for Policy Research), a web site where he posts readable and insightful commentary on economic issues, has been writing about the evils of our system of drug patents for more than a decade. I suggest that you do a Google search for “Dean Baker drug patents”. You can then sample some interesting factual information about this subject.
To give you an idea of the significance of this issue, consider this statistic: If the excess (unearned) profits showered on Big Pharma by our system of drug patents were distributed to consumers of drugs it would add an estimated 3% to our annual GDP. And, instead of recognizing this problem and trying to solve, or at least mitigate it, our government, including the Obama administration, has not only supported the progressive extension of the period of time during which a patent protects the owner from competition from 15 years to 20 years, but also has promoted trade policies that coerce other countries to conform their patent protection to ours.
Baker advocates separating drug patents from other types of patents, such as industrial processes. Patents are a small percentage of the cost of patent protected processes used for manufacturing, but they are the main component of drug pricing. The cost of producing drugs is minimal. They command high prices solely because they are monopolies protected by our patent laws.
Our patent laws are not only overly protective, they are also administered in ways that border on the absurd. If you want a grin, just Google “peanut butter and jelly sandwich”. The Wikapedia recounts how Smuckers obtained a patent on a PBJ. A federal appellate court had to conclude that this stretched the patent laws too far.
The claimed justification for this system is that, without patent protection, the costs of drug research and testing would not be economically feasible. Baker and others have proposed alternative solutions for this problem. One, proposed by Bernie Sanders in recently filed legislation, would establish a government prize fund to be awarded to researchers based on competitive applications. It would be substantial and would be granted on condition that drugs resulting from the research would be available to consumers based on free market prices. Others have proposed variations on this model: up-front financing for the research based on competitive applications followed by free market pricing for the results. Here is a link to Bernie’s proposal:
It includes a video of Bernie Sanders defending his proposal.
After reading some of the facts about this issue, it seems obvious to me that, instead of trying to force this flawed system on other countries, we should reform it to make it more sensible and just for our own citizens as well as for those in other countries. As Bernie Sanders says, Americans should not be dying of medical conditions for which effective medicine is available, solely because they cannot afford to buy the medicine.
March 12, 2014 § Leave a comment
Today’s New York Times has an extensive review of Thomas Piketty’s new book. Here is a link
March 9, 2014 § Leave a comment
This is my reaction to Ari Shavit’s book, “My Promised Land: The Triumph and Tragedy of Israel”. The book describes the creation of Israel in sixteen chronological chapters beginning in 1897, when the first Zionist pioneers arrived and established a small colony and ending with a shrewd discussion of the present internal and external conflicts which dominate the headlines about Israel. I will try to express my own opinions with humility appropriate for a gentile non-believer whose previous knowledge of Israel’s history was based on the Exodus movie starring Paul Newman and Sal Mineo and the novel on which it was based. Although I have a Jewish son-in-law and three treasured Jewish grand-children, I have no claim to “insider” status. Shavit, a talented journalist, states plainly his own opinions but also includes those of others with whom he disagrees. I think his book contains important information that will aid those trying to understand the present issues that threaten peace in the Middle East.
Ari Shavit is well known in Israel as a columnist for Harretz, a major newspaper as well as a TV commentator on Israeli politics and government policy. This book also was, to me, convincing evidence that he is a gifted writer. Every page is strewn with apt metaphors and graceful word-pictures that seem to flow effortlessly from his mind. Here are some examples:
His great-grandfather was Herbert Bentwich, a wealthy successful British copyright lawyer. He was one of the earliest Zionist leaders who began the process of establishing what became Israel. Here are a couple of sentences from Shavit’s description of Bentwich’s first trip to Palestine. “. . . as the flat-bottomed steamer Oxus carves the black water of the Mediterranean, Bentwich is still an innocent. My great-grandfather does not wish to take a country and to establish a state; he wishes to face God.” And later: “He arrives on April 16 at the mouth of the ancient port of Jaffa. I watch him as he awakens at 5:00 a.m. in his first-class compartment. I watch him as he walks up the stairs to the oxus’s wooden deck in a light suit and a cork hat. I watch him as he looks from the deck. The sun is about to rise over the archways and turrets of Jaffa. And the land my great-grandfather sees is just as he hoped it would appear: illuminated by the gentle dawn and shrouded by the frail light of promise.”
Throughout the book, Shavit shifts back and forth from third-person narrative to first person participant. At least half of the book consists of transcripts of his interviews. He gained access to the principal actors in each of the historical segments that comprise the chapters in his book. The other half is Shavit’s informed commentary on the background and context surrounding the men he interviewed.
Here is a taste of his chapter entitled, “Sex, Drugs, and the Israeli Condition, 2000″. “They call themselves the Nation. The Dance Nation. At 3:00 a.m. on most Thursday nights, Allenby 58 [a Tel Aviv club occupying a former movie theater] is at its peak. . . . And when the lights cut the dark hall with pulsating rays of pink and white, and the floor is full, and the stairways are crowded, and the top balconies are heaving, it seems that there is something here that is more than nightlife, something more than one more hot night in one more hot city at the dawn of the new millennium.”
I know that those with more sophisticated taste may find Shavit too richly flavored but I was captivated.
The Zionist Beginning
In the first few chapters of the book Shavit traces the establishment of the first Jewish colonial outposts, settlements and industries in Palestine. The Zionist organization began in the late 1800′s as an effort to re-establish a Jewish nation in a part of North Africa then controlled by the Ottoman Empire. Shavit portrays early Zionism as a secular socialist movement financed and led by Ashkenazim from Europe and Britain. He follows the travels of a small group of Zionist-sponsored Brits, led by his great-grandfather. As they explore Palestine, he portrays their perceptions so encapsulated by their cultural expectations that they fail to consider, or even to see, the dozens of primitive Arab villages that dot the land. To the Zionists, this is the land of the Jews, to which they will return after centuries of Diaspora.
Much of the land is purchased from wealthy Arab landowners but, again, no serious thought is given to thousands of Arab farmers and villagers, descendents of families who occupied the land for centuries.
At first, this is not a problem. The first Jewish immigrants live peacefully with their Arab neighbors. They use technology and engineering to drain swamps, re-surface the land, irrigate it and convert deserts into flourishing groves of fruit trees. Primitive villages become comfortable bustling towns The indigenous Arabs are hired to work the new farms and they benefit from a healthier and more prosperous environment.
There’s No Place Like Home
Robert Frost wrote, ““Home is the place where, when you have to go there, they have to take you in.” The Zionists established Frost’s aphorism as the unique immigration policy for their colony in Palestine. The Jews faced two conflicting imperatives: On the one hand, their culture was endangered by assimilation in Europe and the United States. Intermarriage and the advantages of simply abandoning Jewish identity threatened extinction of Judaism. In Eastern Europe Jewish shtetls were targeted by pogroms and other forms of anti-Semitic oppression. On the other hand, the managers of the small North African colony, operating with limited resources and no formal support from any nation, would be sorely taxed to accommodate limitless waves of immigrants. Also, sudden expansion of Jewish immigration would disturb the peaceful acceptance by the Arab population and the Arab countries surrounding the slim sliver of land between Jordan and the Mediterranean.
Shavit describes with obvious pride the way the Jews responded to these challenges. They developed a young, committed and well trained military force. He describes how it was inspired by the historical story of Masada, a mountain fortress where a small group of Jewish defenders chose suicide rather than surrender to a Roman army. He devotes a chapter to the hurried construction of a huge complex of apartments to house arriving boatloads of immigrants.
These were the glory days of democratic socialism and secular political power. The leaders were Ashkenazim from Europe. Farms were created and run by kibbutz organizations. Shavit acknowledges that this sudden expansion of immigration overwhelmed and, in some instances, destroyed Arab village life and forced Arab families to flee to neighboring countries. He offers no defense for this except to deny the efforts of some to equate it with the brutality of Nazi expansion into Austria and Poland. He writes, and I agree, that the Jews’ motives and methods were not analogous to the Nazis. The Jews never embraced the kind of vicious philosophy that was at the Nazi core. The clash between Zionist immigration and the indigenous Arab population was probably inevitable. The Jews did not hate Arabs but they could not let anything thwart what they perceived as their historical claim to their “promised land” and the preservation of Judaism.
The Wars – The Glory and the Shame
In the 1930′s and 40′s, Jews and Arabs fought guerrilla wars with each other and with the British, who had succeeded the Ottomans as Palestine’s empirical overseer. Jewish terrorist organizations carried out violent bombing attacks on civilians, Arab and British. The British and Arabs retaliated with similar brutality. As stated earlier, the Masada-inspired military organization was created and became the IDF, the Israeli Defense Force, after the British withdrew from Palestine and the Nation of Israel was established in May, 1948.
The Arab countries surrounding Israel declared war when the Israel nation was formed. The war was brilliantly led by Israeli generals, including Moshe Dayan. The Israelis swiftly defeated the combined armies of Egypt, Jordan, Syria, Iraq and Lebanon, a humiliation that insured a neighborhood surrounding the new nation suffused with hatred and a festering desire for revenge.
This victory, however, was stained by incidents of harsh brutality, incidents recorded with unflinchingly vivid descriptions by Shavit, who writes about them with obvious regret and sorrow. He describes the savage interrogations of Arab prisoners by an Israeli military man whom he does not name except to refer to him as “Bulldozer”. He describes the deliberate killing of Arab civilians. He devotes an entire chapter to the atrocity in Lydda, a medium sized Arab city located on the West Bank about 40 miles southeast of the Mediterranean port of Jaffa.
After Lydda surrenders to Israeli forces, negotiations commence between Israeli leaders and Arab civilian representatives. A large number of Arabs take refuge in a mosque. An Israeli armored vehicle enters the city and is fired upon. It then fires a missile into the m0sque, killing the occupants. The Israeli military then rounds up the remaining Arab population and forcibly evacuates them from Lydda in a long march of refugee men, women and children out of Israel into Jordan. There is little water or food. Stragglers are urged onward by Israeli soldiers firing over their heads. Shavit ends this painful chapter, “I see the column marching east. So many years have past, and yet the column is still marching east. For columns like the column of Lydda never stop marching.”
The 1967 “Six Day War” was another decisive victory for the Israeli military. A series of skirmishes between Israel, Syria and Egypt culminated in an Egyptian invasion of the Sinai desert and blocking the Straits of Tiran, a narrow passage that enabled Israel shipping access to the Red Sea. Israel responded by destroying the air forces of four Arab states, driving the Egyptian army out of the Sinai. The war ended with Israel expanding its territory into the Sinai, the Golan Heights and the West Bank.
The 1973 Yom Kippur War was another victory for Israel. But this time, the Israelis were caught by surprise. They came closer to disaster than in any previous conflict. Their self confidence was shaken. They strengthened their resolve to guard against future threats.
The Settlements – Barrier to Peace
Ari Shavit describes the origin of the settlements that now house 400,000 Israelis living illegally on the West Bank between the Jordan River and the Mediterranean Sea. A military outpost stationed in the West Bank to guard against a surprise attack on Israel was surreptitiously converted into a housing complex inhabited by a group of Orthodox Jews who regarded the West Bank as part of the land promised to Israel by God. The settlement grew out of a mass movement within Israel to confront the weak Labor government with demands that Israel expand into the biblical lands set aside for the Jews. When the government did not sanction, but did not take any action to force the withdrawal of the first settlement, the political forces supporting the settlements grew stronger. In a short time, the West Bank became a permanent part of Israel.
Shavit does not conceal his belief that this development was and is a serious error. His pessimism about the future of Israel is based, in large part, on this development. He sees no likelihood that a “Two State Solution” will come to pass because he does not believe it is possible without dismantling the settlements. And he sees no possibility that the Israeli government will find the courage or the ability to accomplish that.
One of the most interesting segments of Shavit’s book regards the remarkable achievement represented by Israel’s acquisition of nuclear weapons. He has done some skillful research about how this was done. He describes the results with care not to reveal classified material obtained from Israeli sources. He interviewed one of those who helped establish the complex at Dimona, where the nuclear capability was created by adding Jewish brain power to material and knowledge acquired from external sources, primarily from the French. The transcription of the interview is like a striptease dance. Each dancer reveals almost everything necessary to guess the rest. Israel has never formally declared their possession of a nuclear weapon but it is one of the worst kept secrets. One jolting disclosure comes when the scientist being interviewed states that he is sure that Iran already has a nuclear weapon, regardless of Obma’s insistence that he will never allow it. He, the scientist, does not state the basis for his belief, but he doesn’t sound like a man given to careless statements.
The Difference Between Perception and the Truth
As I read this book, packed with information and history new to me, I realized how carefully fashioned my perception of Israel was. Without being unduly boastful, I claim to take an interest in public affairs, politics and history. When I finished Shavit’s book, I realized that, while I had not been lied to about Israel for the past fifty or sixty years, there was a lot of information that I believe was willfully omitted from the news sources I relied on.
I used the Internet to look at the New York Times in July of 1948, when the events in Lydda were occurring. The July 12, 1948 edition of the Times had a lengthy report on the Israeli war. The headline was, “Arabs Encircled at Vital Highway, Surrender Lydda”. It included the following paragraph: “Mopping up operations were still going on tonight, with armored car (sic) of both sides darting back and forth, with mortor fire crashing about. . . The Arabs were left little choice of direction in their withdrawal. They had to flee eastward and over camel trails. . . .” I looked both before and after this story, but found no hint at the wholesale slaughter of civilians or the brutality of the “Lydda column” portrayed by Shavit. The implication of the Times story that the “Arabs” were military forces was plainly misleading. The ones on those “camel trails” were civilian refugees expelled from their homes.
Protesters in Arab countries celebrate every summer what they call “Akba Day”. “Akba” is the Arab word for the expulsion of Arabs by the Israelis following the May, 1948 wars. The October 16, 2012 New York Times contains a remarkable story containing video and interview transcripts of both Arabs and Israelis who were in Lydda in July, 1948. Both describe the horror and express profound sadness still present in their memories after more than sixty years.
I had several reactions to Shavit’s book, some of them required a few days of reflection before they surfaced. At first, when I read of the atrocities and the terrorist attacks on civilians, the torturing of prisoners, I was appalled. Later, I finally realized what really bothered me: The more apt analogy is the American expansion into the West. The progression from peaceful co-existence with the indigenous Indians, to fitful and unsuccessful efforts at negotiated peace arrangements, to brutal genocide that destroyed all but a few remnants of Indian culture and population – there are striking parallels, but with significant differences. The forced removal of five Indian tribes from their homelands in the eastern part of the United States to reservations in Oklahoma in the 1830′s, now known as the “Trail of Tears”, is only one episode in the destructive record of our country’s history with Indian tribes.
The difference is that, while Israel removed the Arabs who obstructed the occupation of their “promised land”, they did not destroy them as we destroyed the Indian nations. They were not guilty of genocide. Their collective conscience and their culture precluded it. They created enemies with long memories who now surround them. And we now have an unqualified commitment to defend Israel from the consequences of that sequence of choices. And we face that obligation as the Middle East appears to be on the threshold of an arms race involving nuclear weapons. Shavit’s book is well written and packed with useful and interesting information, but it describes a future fraught with peril.
February 18, 2014 § 1 Comment
When I re-read my recent post on Thomas Piketty I discovered a significant error. When I referred to his graph based on the ratio of capital to income between the World Wars, I described it as “an inverted U”. That was wrong. It was, of course, a “U-shaped graph”: high before WWI, low between WWI and WWII, then climbing back to prewar levels beginning in the 1970′s.
I regret the error.
I have also corrected some grammatical errors (I just had to correct my misspelling of “grammatical”) and have removed some extraneous words but those editorial tweaks have not changed the meaning.
There are some interesting details about Pikkety’s analysis and some implications of his predictions that I am still processing. When I have organized my thoughts about these issues, I will post another essay about Piketty. Reading about his theory has prompted me to reconsider and re-frame my thinking about our economic system and the cultural norms that have developed around it.
February 16, 2014 § 3 Comments
The Ratio of Capital Income to Worker Income
Piketty designates the “stock of capital” as K. He defines “capital” more broadly than previous theorists. Here is his definition, according to Branko Milanovic, one of the secondary sources I have read: “The stock of capital includes all forms of explicit or implicit return-bearing assets: housing (which Piketty, unlike many authors, emphasizes as being an integral part of capital), land, machinery, financial capital in the form of cash, bonds and shares, intellectual property, and even human persons in the time of legalized slavery. ” His theory rests, in large part, on the relationship of K to the “flow of income”, which he designates as Y. He defines that relationship as β.
After postulating this relationship, he states the first “fundamental law of capitalism”: Milanovic writes: “The first fundamental law states that the share of capital incomes in total national income (α) is equal to the rate of return, in real terms, on capital (r) multiplied by β. There is nothing new here: this is simply an identity.”
I can’t tell you how many times I re-read these two sentences before I grasped their meaning. The fact that Milanovic stated them as “simply an identity” merely humiliated me. In case you have the same problem, here, I think, is what that means: First, you calculate the total amount of income. (“Y”) Then you calculate the total value of capital. (“K”) Then you calculate the rate of return on capital (“r”) by dividing the income generated by capital by the total value of capital (“K”). Then you multiply the result by β to get the share of the total income attributable to capital (“a”). (a/K)β = a
The more capital there is, the more “return on capital” will be generated. So, as the ratio of capital to total income increases, the ratio of income generated by capital to income from labor increases. To those of you with minds more agile than mine (I hope this is all of you), I apologize for this explanation. I need to write it down so it will remain available to me. I also write it down so that, in case I am wrong, some kind reader will send me a correction.
The Data On Which Piketty’s Theory Is Based
Piketty, unlike previous theorists, does not rely on household income data. He created a gigantic database consisting of tax information from France, the UK and the United States. Based on that database, he plotted a graph showing the β relationship as a U-shaped curve beginning before WWI to 2010. The ratio of capital to income was high until shortly before WWI; plunged during the two World Wars and the Depression; and has climbed back to pre-WWI levels during the past 40 years.
Piketty attributes the temporary decline of capital value and resultant income relative to non-capital income to the global destruction of capital during the two wars, the increased taxation of upper incomes to pay for them, and the Great Depression that occurred between them, when capital value fell.
Piketty contends that the two-war-depression period was a circumstance unlikely ever to be repeated. He has extended his analysis of fiscal data to include other developed countries (Germany, Italy, et. al.) and to time periods extending back for more than two centuries. He found no other instance similar to this period of time when a global Depression was bracketed by two world wars.
There are both advantages and disadvantages to his choice of data. On the one hand, it enabled him to compare results from different countries because fiscal data is available for all developed countries during very long time periods. On the other hand, fiscal data does not include information from those who file no tax returns, a group that includes those too poor to meet the minimum income required for filing. Also, tax returns do not include income consisting of government transfers of money, such as welfare, food stamps, etc.. And finally, until 1987, interest on government bonds was not taxed in the U.S. although it was plainly income.
Piketty contends that, regardless of these problems, his data is more accurate and comprehensive than data used by other theorists. I am inclined to agree with him. “Household income” is calculated on the basis of sampling techniques and assumptions that are at least subject to question as Piketty’s. For example, capital gains are excluded from household income. The “hard” data is based on 2004 incomes and then extrapolated to obtain current figures, surely an inexact process. Household data does not take account of the number of people in a “household”, a figure that varies widely in different countries and different environments. Finally, the way that household data is calculated varies among countries.
The Longterm Cumulative Effect of Piketty’s β
The revolutionary nature of Piketty’s analysis of capitalism does not become apparent until its long term effects are appreciated. He theorizes, based on the database he has compiled, that two circumstances are crucial to understanding capitalism. First, most people do not own capital, even as broadly defined by Piketty. They rely on their “human capital”: their ability to work and earn wages. Second, so long as β remains positive, meaning that income attributed to capital exceeds income attributable to wages, the wealth of capital owners exceeds wealth of those who rely on “human capital” and, when the capitalists’ income exceeds their level of consumption, they save the excess and i invest in more capital, thus creating a progressively widening gulf between them and the rest of the population.
Piketty identifies the inheritance process as a major contributor to this evolution toward more and more inequality. “Human capital” obviously dies with its owner, but capital survives for generations. The same is true, of course, of capital owned by corporations, that are designed to last indefinitely.
This depicts capitalism in ways fundamentally different from Keynes. Keynes regarded capitalism as a system that generally functioned as a just and equitable mechanism for distributing wealth that, from time to time, became unbalanced because of unwise speculation by its rentiers, the practitioners of financial speculation or various types. He taught that those problems could be corrected with carefully guided interest rates, progressive taxation and “public investment” (public works, infrastructure repair, etc.).
Piketty, to the contrary, argues that such measures will not stop the relentless disparity between the owners of capital and the rest of the population. In fact, he seems to be saying, “It’s worse than you thought and palliative remedies will not cure it.”
The Piketty Solution
According to the secondary sources I have read, and according to some of Piketty’s published articles I have scanned, he proposes a solution that is truly revolutionary. He contends that confiscatory taxes on the wealthy followed by regressive distribution of money to those at lower income levels are the only effective ways of preserving the capitalist system. And, he recognizes that such solutions, especially the taxation remedy, must be administered globally, not nationally. This is necessary to prevent the wealthy taxpayers from transferring their wealth to “safe haven” countries thereby thwarting the remedy.
To read this, while the daily press reports that the U.S.. Congress won’t even consider repealing the tax cuts on our wealthiest taxpayers, is almost surreal. Piketty is not naive. He acknowledges his awareness of the power that has devolved on wealthy capitalists as a result of their ability to buy political influence. He presents the facts, based on his research and offers solutions. He is like a man posting a large sign: DANGER! STOP! ROAD ENDS! THOUSAND FOOT CLIFF AHEAD! He has done his job. He does not feel responsible if, instead of stopping, we step on the gas.