Krugman has written a review of Piketty's book (not included in his post) but he has picked up on two points. His first point is that Republican political policies can be interpreted as support for the kind of economy that Piketty envisions. He calls this "patrimonial capitalism". I have described it as the Downtown Abby economy, because of the familiarity that many have with the popular TV series by that title.
Krugman's second point is that Piketty's analysis is more appropriate for Europe than it is for the US. Piketty agrees that income inequality in the US has more to do with the rapid rise in top management compensation than it does in Europe. He also argues that the rise in compensation has less to do with merit than it has to do with compliant corporate boards. He also suggests that it coincided with the changes in tax policy. The steep cuts in the top marginal tax rate encouraged executives to campaign for wage increases. Piketty is certainly correct in his analysis but Krugman would like to have seen more attention paid to the differences between the US and Europe. Perhaps Krugman will discover how his profession solved the "agency problem" by arguing that top executives should be compensated with stock options so that they would pursue the goal of increasing shareholder value. Corporate executives have milked that idea for all that is worth. They have become large shareholders of the corporations that they operate and they have focused their attention on managing financial metrics that increase the stock price. If the focus on short term financial engineering causes the stock price to fall, they can have the strike price on their stock options lowered by cooperative directors who they have carefully selected and placed on the compensation committee of the corporate board.
Keynes was concerned about the Great Depression and he made the case for government intervention in the economy. He believed that a modified form of capitalism was a better alternative than other ideas that were being debated at that time.
ReplyDeletePiketty is following Keynes in trying to socialize capitalism because he believes that a socialized capitalism is the best alternative that is available. His views will be attacked from the right and from the left. Those on the right will try to protect their interests. It is understandable that Marxists will argue against the socialization of an economic system that preserves capitalism in any form. The link provided above provides a good example of a Marxist critique of socialized capitalism.