WEBVTT

1
00:00:13.173 --> 00:00:14.363
It’s a pleasure to be here.

2
00:00:15.223 --> 00:00:22.913
Let me begin by talking about the key puzzles and questions that I want to talk about.

3
00:00:23.413 --> 00:00:28.073
And it really begins with, is there an equilibrium distribution of wealth and, if so, what determines it?

4
00:00:28.863 --> 00:00:31.963
And how do we account for the increase in wealth output ratio

5
00:00:32.253 --> 00:00:38.224
and the fact that a return to capital which does not seem to be declining?

6
00:00:38.224 --> 00:00:42.994
Average wage rates which in many countries seem to be stagnating or declining?

7
00:00:43.304 --> 00:00:47.784
And a share of wages which seems to be decreasing, at least in many countries?

8
00:00:48.604 --> 00:00:57.865
The context of these remarks is Thomas Piketty’s book which deservedly has gotten a lot of attention recently.

9
00:00:58.845 --> 00:01:03.786
It suggests an ever-increasing concentration of wealth.

10
00:01:04.583 --> 00:01:16.664
What is quite important about the book is that it also emphasises the period that I was growing up in.

11
00:01:16.664 --> 00:01:22.074
The period after World War 2 was the golden age of capitalism.

12
00:01:22.374 --> 00:01:26.555
When I was growing up I didn’t realise that this was the best that capitalism ever got.

13
00:01:26.885 --> 00:01:34.055
Because as I was growing up I saw unemployment, discrimination, labour strife - lots of things that weren’t so golden.

14
00:01:34.385 --> 00:01:39.835
But then I was told by Piketty’s book that’s the best capitalism ever gets.

15
00:01:40.146 --> 00:01:50.946
And that, in fact, inequality in the post-1980 era has soared in a way

16
00:01:51.196 --> 00:01:58.637
that was bringing us back to the inequality that had marked the 19th century.

17
00:01:59.337 --> 00:02:05.687
Actually, as I’m going to try to explain in a few minutes, there is a fundamental difference though,

18
00:02:05.687 --> 00:02:14.268
between inequality in the post-1980 world and inequality in the world

19
00:02:14.268 --> 00:02:21.148
that existed in say the 19th century until World War 1 or World War 2.

20
00:02:21.838 --> 00:02:27.479
And that is that during the 19th century wages increased enormously.

21
00:02:28.229 --> 00:02:32.189
Standards of living of most citizens increased enormously.

22
00:02:32.679 --> 00:02:36.759
And what’s been happening since 1980 is real stagnation.

23
00:02:37.069 --> 00:02:40.210
So we have a puzzle.

24
00:02:41.030 --> 00:02:47.830
We have a puzzle that is why is the post-1980 world different from the earlier world.

25
00:02:48.290 --> 00:02:54.821
We have a puzzle that’s related to these movements in wages and returns to capital.

26
00:02:55.821 --> 00:03:00.681
Standard theory suggests that increasing the capital labour ratio should lead

27
00:03:00.681 --> 00:03:05.341
to a decrease in the return to capital and an increase in average wages.

28
00:03:05.982 --> 00:03:08.882
And that’s true even in models with many types of capital.

29
00:03:08.882 --> 00:03:16.912
So if there’s skilled biased technical change it will change the relative wages but not the average wage.

30
00:03:16.912 --> 00:03:20.473
The fact that the average wage should be increasing.

31
00:03:20.473 --> 00:03:27.447
There’s some important aggregation problems that are swept under the rug in almost all macroeconomics which are really first order.

32
00:03:27.997 --> 00:03:33.678
Important issues that used to be discussed and really limit the applicability of standard macroeconomic models.

33
00:03:33.678 --> 00:03:37.238
But this is a fairly general result.

34
00:03:37.758 --> 00:03:41.958
Technological change, or an increase in efficiency as a result of globalisation,

35
00:03:42.388 --> 00:03:46.599
would be expected in fact to increase average wages even more.

36
00:03:48.169 --> 00:03:53.779
And studies of elasticity of substitution suggest that the elasticity is less than unity,

37
00:03:54.099 --> 00:04:03.620
so an increase in the capital labour ratio, or the effect of capital labour ratio, would lead to a diminished share of capital.

38
00:04:04.340 --> 00:04:14.591
So let me just review very quickly some of the data that Piketty was talking about

39
00:04:14.591 --> 00:04:16.411
and some of the problems that I’ve just highlighted.

40
00:04:16.411 --> 00:04:17.431
And I’ll do this very quickly.

41
00:04:18.472 --> 00:04:26.253
So the standard chart is that inequality at the top - and this is just one aspect of inequality,

42
00:04:26.253 --> 00:04:30.873
because there’s also a weakening in the middle and increase in poverty at the bottom –

43
00:04:31.123 --> 00:04:36.984
has reached levels that haven’t been seen since before the Great Depression.

44
00:04:38.174 --> 00:04:46.534
The second is to show that trickle-down economics, as usually meant, isn’t working.

45
00:04:47.454 --> 00:04:50.824
You know in some ways trickle-down economics never worked,

46
00:04:51.215 --> 00:04:55.005
the idea that if you throw enough money at the top everybody would benefit.

47
00:04:55.445 --> 00:05:01.045
I wish it were true because if it were true - we’ve thrown so much money at the top everybody would be doing well.

48
00:05:01.655 --> 00:05:10.346
But, in fact, as this chart shows for the United States median income is at the level that it was a quarter of a century ago.

49
00:05:11.536 --> 00:05:15.046
Of course, different demographic groups are affected differently.

50
00:05:15.786 --> 00:05:19.537
This is an average or a median.

51
00:05:19.537 --> 00:05:24.207
An important demographic group that I feel very empathetic with is males.

52
00:05:24.517 --> 00:05:37.178
And if we look at the median wages of a full-time male worker in the United States, it’s lower than it was 40 years ago.

53
00:05:37.718 --> 00:05:42.048
So when I say that capitalism is failing -

54
00:05:42.498 --> 00:05:48.429
any economic system that doesn’t deliver for very large groups in the population,

55
00:05:48.689 --> 00:05:53.429
doesn’t deliver for a majority of citizens, is an economic system that is failing.

56
00:05:53.819 --> 00:06:01.219
And certainly capitalism in America, and its true in many other countries, is in these terms failing, and failing very badly.

57
00:06:02.039 --> 00:06:04.440
It’s not because productivity hasn’t increased.

58
00:06:04.440 --> 00:06:08.210
In fact, productivity has increased significantly.

59
00:06:09.048 --> 00:06:14.418
This chart shows that over the last 40 years there’s been 100% increase in productivity.

60
00:06:15.798 --> 00:06:19.218
It’s just that most citizens haven’t participated.

61
00:06:19.928 --> 00:06:25.439
Here’s a chart that shows the average wages in the United States over the last 40 years –

62
00:06:25.939 --> 00:06:30.929
this is the pay per hour - has actually gone down by about 7%.

63
00:06:31.609 --> 00:06:36.780
All the increase in productivity has gone elsewhere.

64
00:06:38.280 --> 00:06:41.140
Now, one thing I’m not going to be able to talk about very much.

65
00:06:41.490 --> 00:06:45.250
And a dimension of inequality that is very important.

66
00:06:45.250 --> 00:06:48.691
Particularly those on the right talk about it all the time.

67
00:06:48.974 --> 00:06:58.415
And say we don’t care about inequality of outcomes, what we care about is equality of opportunity.

68
00:07:00.079 --> 00:07:01.819
But that’s also not very good.

69
00:07:03.159 --> 00:07:13.960
Inequality of opportunity varies from country to country.

70
00:07:14.360 --> 00:07:19.800
In the United States, which thinks of itself as the American dream, the land of opportunity,

71
00:07:20.120 --> 00:07:26.301
the fact is that a young American's life prospects are more dependent

72
00:07:26.301 --> 00:07:31.111
on the income and education of his parents than in other advanced countries.

73
00:07:31.111 --> 00:07:35.752
So the idea that America is a land of opportunity is really a myth.

74
00:07:35.962 --> 00:07:42.212
We ought to call it not the American dream, but the Danish dream or the Scandinavian dream.

75
00:07:42.562 --> 00:07:47.472
And one sees that there’s a clear relationship.

76
00:07:47.708 --> 00:07:53.648
And this is a really important research topic to try to understand why this is so.

77
00:07:54.018 --> 00:08:01.589
But it’s been well documented - not only across countries but across counties in the United States –

78
00:08:01.589 --> 00:08:10.739
that what you see is that countries with more inequality of outcomes have more inequality of opportunity.

79
00:08:11.069 --> 00:08:19.100
There are many other dimensions of inequality that I could talk about but I’ve been told I only have 21.41 minutes.

80
00:08:19.100 --> 00:08:22.240
So let me move on very quickly.

81
00:08:22.510 --> 00:08:28.501
What I want to do is spend the time this morning trying to explain some of these anomalous facts.

82
00:08:28.501 --> 00:08:29.491
What is going on?

83
00:08:30.301 --> 00:08:41.381
The basic problem in Piketty’s work and the easy resolution of the quandaries that, from a theoretical perspective,

84
00:08:41.581 --> 00:08:50.712
his analysis throws up is, that there’s a fundamental confusion between 2 variables, wealth and capital.

85
00:08:51.292 --> 00:08:57.973
He talks about wealth going up - wealth output ratio going up, wealth labour ratio going up –

86
00:08:58.183 --> 00:09:01.913
but that doesn’t mean that capital is going up.

87
00:09:02.503 --> 00:09:05.883
Now, if you use a very simple model, W and K are the same thing.

88
00:09:06.293 --> 00:09:08.743
But, in general, they are not.

89
00:09:09.783 --> 00:09:14.854
Most of the increase in the value of wealth is an increase in the value of land.

90
00:09:16.214 --> 00:09:17.694
It’s not that there’s more land.

91
00:09:18.984 --> 00:09:20.474
But the price of land has gone up.

92
00:09:21.774 --> 00:09:33.215
The data on K, the value of capital, actually shows a decline in the capital labour ratios in many countries.

93
00:09:33.755 --> 00:09:40.996
In Piketty’s own country, in France, the capital - according to data that I’ve been able to get from the OECD –

94
00:09:40.996 --> 00:09:46.786
the capital stock has actually been going down.

95
00:09:47.726 --> 00:09:49.846
There are other important measurement problems.

96
00:09:49.846 --> 00:09:56.877
And I emphasise that because too many people, in macroeconomics particularly, just take the data

97
00:09:56.877 --> 00:10:03.087
that come out of the national accounts without asking, what does the data mean?

98
00:10:03.087 --> 00:10:06.397
And this is particularly true when it comes to capital data.

99
00:10:07.667 --> 00:10:14.648
So for instance, the value of capital could go up because of an increase in monopoly power.

100
00:10:15.208 --> 00:10:20.878
Increase in monopoly power means that monopoly rents will go up.

101
00:10:21.288 --> 00:10:26.089
The capitalised value of those monopoly rents will show up in stock market values.

102
00:10:26.572 --> 00:10:33.133
There are reasons for us to not be surprised that monopoly rents might be going up

103
00:10:33.453 --> 00:10:42.524
because of an increase in network effects that have been identified in areas like computerisation and telecommunication.

104
00:10:43.373 --> 00:10:51.574
The second thing is there could be a shifting of resources to the private sector from the government,

105
00:10:51.574 --> 00:10:55.414
exemplified in the value of the government bailouts.

106
00:10:55.973 --> 00:11:01.833
In each of these cases there’s a negative, but the negative doesn’t get reflected in our accounting framework the way it should.

107
00:11:02.163 --> 00:11:07.973
In the first case, when there’s an increase in monopoly power, there’s a decrease in the value of human capital.

108
00:11:07.973 --> 00:11:13.244
But when we talk about wealth we don’t include the decrease in the value of human capital.

109
00:11:13.724 --> 00:11:18.534
In the case of the shifting of resources from the government to the private sector,

110
00:11:18.814 --> 00:11:24.446
we don’t talk about the decrease in the value of taxpayer wealth in the data.

111
00:11:26.236 --> 00:11:36.017
Now, the next question we need to ask is how do we think of or how do we explain the increase in the value of land?

112
00:11:37.528 --> 00:11:43.579
Important to emphasise that an increase in the value of land doesn’t mean that there’s more productive land.

113
00:11:44.879 --> 00:11:55.020
An example of why the value of land might go up is that if some Russian oligarchs, who have been able to steal money

114
00:11:55.020 --> 00:12:02.580
from their country and become very wealthy, decide they want to buy more land in the Riviera, in the south of France.

115
00:12:03.520 --> 00:12:07.471
This is the one example where trickle-down economics works.

116
00:12:07.471 --> 00:12:11.581
It trickles down from the Russian oligarchs to the rich people in France. (Laughter)

117
00:12:13.766 --> 00:12:16.396
So the price of land in the Riviera goes up.

118
00:12:17.286 --> 00:12:20.316
The same views of the ocean, the same water is there.

119
00:12:20.726 --> 00:12:23.877
In fact, fewer people will be enjoying it.

120
00:12:24.677 --> 00:12:27.927
But in terms of the value wealth is going up.

121
00:12:28.677 --> 00:12:34.657
With the next slide - which I can’t talk about because Peter has restricted my time –

122
00:12:35.118 --> 00:12:40.238
is that we can try to explain the value of these kinds of positional goods.

123
00:12:40.558 --> 00:12:51.799
And we can show that, in fact, when there is an increase in wealth, there can be an increase in these positional goods

124
00:12:51.799 --> 00:12:59.269
in such a way as actually to lead to a decrease in the value of K, of capital stock.

125
00:13:00.209 --> 00:13:02.829
There’s another explanation of what might be going on.

126
00:13:03.079 --> 00:13:11.120
And that’s related to dynamic instability that’s been well explored in theories of heterogeneous capital goods.

127
00:13:11.610 --> 00:13:16.950
In the theories of heterogeneous capital goods, where there are multiple capital goods,

128
00:13:16.950 --> 00:13:21.191
one can show that the equilibrium is a saddle point.

129
00:13:21.741 --> 00:13:26.851
And without futures markets extending infinitely far into the future, or infinite foresight,

130
00:13:27.141 --> 00:13:33.202
there is no reason to believe that the boundary value, the transversality conditions, will be satisfied.

131
00:13:33.722 --> 00:13:37.252
Now you can translate these kinds of ideas directly:

132
00:13:37.252 --> 00:13:43.662
2 kinds of capital, physical capital, the kind that’s productive and the value of land.

133
00:13:43.892 --> 00:13:52.533
And the dynamic instability shows up in the amount of capital goods and the value of land.

134
00:13:52.533 --> 00:13:54.193
There’s a dynamic instability.

135
00:13:54.473 --> 00:14:01.254
The suggestion is that it may be that we are in one of these unstable paths with the value of land going up.

136
00:14:01.254 --> 00:14:09.644
And, eventually, there will be a correction of this trajectory.

137
00:14:09.844 --> 00:14:19.135
But unfortunately, even when there’s a correction, it can go to creating another land bubble of the kind

138
00:14:19.395 --> 00:14:23.735
that we’ve seen repeatedly in capitalist economies.

139
00:14:25.560 --> 00:14:37.641
The next issue is putting aside this problem, which helps explain the anomalous behaviour of the increase in wealth,

140
00:14:37.641 --> 00:14:42.781
at the same time that the rate of interest has not gone down.

141
00:14:42.781 --> 00:14:48.541
This says they’re not surprised their interested rate hasn’t gone down because the capital stock hasn’t gone up.

142
00:14:49.291 --> 00:14:51.732
What’s really happened is just the value of land has increased.

143
00:14:52.551 --> 00:14:55.462
But there’s another aspect of Piketty’s work that’s really interesting.

144
00:14:55.462 --> 00:15:03.712
It's that he suggests that there is going to be ever-increasing inequality in the distribution of wealth.

145
00:15:04.162 --> 00:15:10.243
And this is a really important research agenda which has not being studied intensively for a very long time.

146
00:15:10.623 --> 00:15:20.293
And one can formulate very simple models, for instance with dynastic families leaving bequests among their children.

147
00:15:20.883 --> 00:15:27.194
Right down simple differential equations describing the wealth distribution that results.

148
00:15:27.884 --> 00:15:36.084
In the simplest kind of models, where for instance savings is described by a simple solo model,

149
00:15:36.294 --> 00:15:43.165
where savings is a constant fraction of income, you get some striking results.

150
00:15:43.165 --> 00:15:49.975
Which is: regardless of the initial distribution of income, there will eventually be equality of wealth.

151
00:15:49.975 --> 00:15:52.936
Very different from the results that Piketty got.

152
00:15:55.186 --> 00:16:05.537
If the savings rate, returns on capital, rates of growth of families are all the same but wages differ,

153
00:16:05.927 --> 00:16:11.387
then, his studies say, the wealth distribution will correspond precisely to the wage distribution.

154
00:16:12.147 --> 00:16:17.807
It’s easy to, or I shouldn’t say 'easy' - it’s possible to extend this to stochastic models.

155
00:16:18.057 --> 00:16:30.148
For instance where wages of families are determined by a simple stochastic process with regression towards the mean.

156
00:16:30.748 --> 00:16:38.679
That is to say if the parent is of unusual ability, it’s more likely that his children will be of some less ability.

157
00:16:39.569 --> 00:16:44.789
One can formulate models of this kind with a lower bound on wealth –

158
00:16:44.789 --> 00:16:53.850
that is to say individuals can’t borrow more than a certain amount - and assume the families optimise intergenerational utility.

159
00:16:54.200 --> 00:17:00.480
And out of that one can derive simple theories of equilibrium wealth distributions

160
00:17:00.900 --> 00:17:09.621
in which the inequality of wealth is related to the nature of the stochastic process of wages and intertemporal discount factors.

161
00:17:10.351 --> 00:17:19.992
A third model that one can focus on is a savings function

162
00:17:19.992 --> 00:17:28.352
where all the saving is done by the capitalist, by those who have capital.

163
00:17:28.827 --> 00:17:31.727
It’s not a bad approximation to what has been happening today.

164
00:17:31.727 --> 00:17:36.247
And it's really the model that is implicit in Piketty’s analysis.

165
00:17:37.287 --> 00:17:42.898
In that kind of case, for instance again an implicit assumption of a lot of what he talks about

166
00:17:42.898 --> 00:17:45.898
is the savings rate of capitalism is unity.

167
00:17:46.148 --> 00:17:51.748
Then, in the long-run equilibrium, you get the rate of growth is equal to the rate of interest.

168
00:17:52.304 --> 00:17:58.614
The important point here is that the interest rate is an endogenous variable.

169
00:17:59.255 --> 00:18:04.755
So in his analysis some of you who looked at it noted that he made a big point

170
00:18:04.755 --> 00:18:12.535
that you get increasing inequality as a result of the fact that the rate of interest exceed the rate of growth.

171
00:18:13.106 --> 00:18:16.126
But that’s not consistent with long-run equilibrium.

172
00:18:16.676 --> 00:18:18.866
In a long-run equilibrium the 2 will be equal.

173
00:18:18.866 --> 00:18:27.806
And in that case you get the rather striking result that in the long run the road to wealth of all families would remain the same.

174
00:18:28.147 --> 00:18:32.037
And the initial inequality of wealth would be perpetuated.

175
00:18:33.697 --> 00:18:40.088
Really, what I’m trying to highlight here is that there is an important research agenda,

176
00:18:40.088 --> 00:18:49.988
something that’s not really been researched as much as it should - on the determinants of the distribution of wealth over time.

177
00:18:51.208 --> 00:18:53.378
In some of the work I’ve been engaged in,

178
00:18:53.378 --> 00:18:59.819
it's been focusing on trying to identify what you might call the centrifugal and centripetal forces.

179
00:19:00.099 --> 00:19:04.739
What are the forces at play that lead to increasing inequality of wealth?

180
00:19:05.119 --> 00:19:09.839
And what are the forces that lead to reduced inequality of wealth?

181
00:19:11.630 --> 00:19:15.440
And we’ve been able to identify a lot of the factors.

182
00:19:16.190 --> 00:19:26.911
Analytic questions that arise are: Can we interpret the increase in inequality that we’ve observed?

183
00:19:27.711 --> 00:19:31.151
Very strong increases in inequality since 1980.

184
00:19:31.521 --> 00:19:34.651
Are we moving from one equilibrium to another?

185
00:19:34.961 --> 00:19:38.081
Is it possible for inequality to increase without bound?

186
00:19:38.301 --> 00:19:41.522
Or are we temporarily off an equilibrium path?

187
00:19:42.662 --> 00:19:57.823
As I say I don’t have time to identify all the forces that are at play, either the centrifugal or the centripetal forces.

188
00:19:59.223 --> 00:20:10.894
One of the aspects that I will have a chance to talk about is that if the very rich can use their position to get higher returns –

189
00:20:11.644 --> 00:20:18.804
more investment in information, more extraction of rents - and if the very rich have equal or higher savings rate,

190
00:20:18.804 --> 00:20:21.584
then wealth will become more concentrated.

191
00:20:21.784 --> 00:20:28.135
Although there will be again, typically, an equilibrium distribution of wealth.

192
00:20:29.415 --> 00:20:38.716
So that comes to the question: Can we identify factors that are currently at play,

193
00:20:39.176 --> 00:20:46.286
that are contributing to this increase in wealth income, the increasing inequality in wealth and income?

194
00:20:47.336 --> 00:20:52.987
And there are a couple of things that I want to try to identify

195
00:20:52.987 --> 00:20:57.237
that go beyond some of the standard models that have been talked about.

196
00:20:58.287 --> 00:21:03.927
The most important aspect of this is trying to go beyond the boundaries of economics.

197
00:21:03.927 --> 00:21:10.348
And to realise that economic inequality inevitably gets translated.

198
00:21:10.680 --> 00:21:15.710
Economic inequality of the magnitude of the United States, and some of the European countries,

199
00:21:15.710 --> 00:21:18.931
inevitably gets translated into political inequality.

200
00:21:19.801 --> 00:21:24.161
And political inequality gets translated into more economic inequality.

201
00:21:25.121 --> 00:21:30.181
The basic and really important idea here is that markets don’t exist in a vacuum.

202
00:21:30.831 --> 00:21:37.292
That market economies operate according to certain rules, certain regulations that specify how they work.

203
00:21:37.852 --> 00:21:41.442
And those affect the efficiency of those markets.

204
00:21:41.442 --> 00:21:45.993
But they also affect how the fruits or the benefits of those markets are distributed.

205
00:21:46.743 --> 00:21:54.863
And the result of that is that there are a large number of aspects of our basic economic framework

206
00:21:54.863 --> 00:22:02.304
that in recent years have worked to increase the inequality of wealth and income in our society.

207
00:22:03.584 --> 00:22:12.164
An obvious one is how we provide education to different groups in our populations.

208
00:22:13.074 --> 00:22:21.585
If we provide more education in rich districts, in rich parts of the country, then we help perpetuate wealth inequality.

209
00:22:22.095 --> 00:22:28.025
If we have systems of public transportation that make it more difficult for poor people to get access to jobs,

210
00:22:28.226 --> 00:22:30.256
we will get more inequality.

211
00:22:30.926 --> 00:22:39.986
If we have systems of taxation that lower the taxes on capital, which has happened in the United States since 1980,

212
00:22:40.566 --> 00:22:42.897
we get more inequality.

213
00:22:43.587 --> 00:22:52.757
And if we have legal frameworks like bankruptcy laws, systems of corporate governance, inadequate enforcement of anti-trust laws,

214
00:22:53.007 --> 00:22:55.497
we wind up getting more inequality.

215
00:22:55.977 --> 00:23:02.738
So, in fact, if you look closely at what has been going on, it’s not a surprise what we’ve been seeing.

216
00:23:04.508 --> 00:23:11.208
Empirically one of the striking things that’s been going on is an increased role of inherited capital.

217
00:23:13.467 --> 00:23:25.128
The question is: What is the role of inherited capital versus life cycle savings, savings that people do on their own?

218
00:23:25.778 --> 00:23:31.508
And the evidence is overwhelming: significant increases of the relative importance of inherited capital.

219
00:23:32.178 --> 00:23:35.749
Well, I don’t really have time to talk about this, except to note

220
00:23:35.749 --> 00:23:42.909
that it’s easy and important to try to construct models which answer that question.

221
00:23:42.909 --> 00:23:48.229
And which try to identify how policy changes of the kind that I described above

222
00:23:48.229 --> 00:23:54.870
lead to increases in the importance of inherited capital.

223
00:23:55.140 --> 00:24:02.680
Leading to a society which can better be described increasingly as an inherited plutocracy.

224
00:24:03.560 --> 00:24:06.061
The final part of my talk.

225
00:24:06.061 --> 00:24:11.831
I want to talk about the notions of credit, wealth, and inequality.

226
00:24:11.831 --> 00:24:16.291
And actually, in some ways, linking up macroeconomics to microeconomics.

227
00:24:18.237 --> 00:24:27.488
I observed in the beginning that the aspect of the increase in wealth

228
00:24:27.488 --> 00:24:35.018
that really characterised capitalist economies is really about the value of land.

229
00:24:35.578 --> 00:24:40.268
And I’ve put forward 2 possible explanations of this increase in the value of land.

230
00:24:40.268 --> 00:24:42.049
One is the value of position of goods.

231
00:24:42.571 --> 00:24:53.912
The second being of equilibrium paths, the saddle-point nature of markets with heterogeneous capital goods.

232
00:24:54.362 --> 00:25:01.913
There’s a third explanation which sees the growing wealth inequality as a result of misguided monetary policy.

233
00:25:02.263 --> 00:25:10.013
It should be very clear that monetary policy in the years before 2008 did not lead to economic stability.

234
00:25:10.383 --> 00:25:14.614
It led to the Great Recession.

235
00:25:14.614 --> 00:25:17.824
I think it was a pivotal role in that.

236
00:25:18.194 --> 00:25:25.744
But what I want to suggest is the nature of monetary policy, credit creation, actually it’s related to the increase in inequality.

237
00:25:27.596 --> 00:25:29.606
So the basic idea is a fairly simple one.

238
00:25:29.606 --> 00:25:33.276
It's credit not money that is central to macroeconomic behaviour.

239
00:25:33.586 --> 00:25:34.906
Normally they move together.

240
00:25:35.156 --> 00:25:38.326
In crisis monetary base may increase without an increase in credit.

241
00:25:39.026 --> 00:25:41.777
So we need really a theory of credit creation.

242
00:25:42.167 --> 00:25:50.397
And as we focus on credit creation, what we need to emphasise is that what matters is not the interest rate, the T-bill rate,

243
00:25:50.717 --> 00:25:58.498
as has been standard in DSGE models but credit availability, the spread between the T-bill rates and the lending rates.

244
00:25:59.468 --> 00:26:01.168
Well, what is credit?

245
00:26:01.758 --> 00:26:08.088
Credit is what enables individuals to spend more than the resources they have available at that moment.

246
00:26:08.498 --> 00:26:15.049
And one has to realise that credit is different from ordinary commodities.

247
00:26:15.449 --> 00:26:17.699
Credit can be created out of thin air.

248
00:26:18.369 --> 00:26:21.059
What gives rise to credit?

249
00:26:22.968 --> 00:26:32.468
Why can banks, for instance, create this kind of credit that allows people to spend more money than they’ve already earned?

250
00:26:32.938 --> 00:26:34.948
Credit economy is based on trust.

251
00:26:35.438 --> 00:26:37.999
Trust that the money that is borrowed will be repaid.

252
00:26:37.999 --> 00:26:41.179
Trust that the money that is received will be honoured by others.

253
00:26:41.769 --> 00:26:46.819
If a financial institution is trusted it can effectively create money or credit on its own,

254
00:26:47.019 --> 00:26:52.580
issuing IOUs that will be honoured by others and thereby can increase effective demand.

255
00:26:53.560 --> 00:27:00.010
Today trust in the financial system is the belief that the government will come to the rescue.

256
00:27:00.670 --> 00:27:09.331
And we saw that so clearly in 2008 where the US government and European governments basically said to the banks:

257
00:27:09.701 --> 00:27:16.581
Here are a few trillion dollars - we’ll back you up even though you’ve misallocated credit and mismanaged risk.

258
00:27:18.221 --> 00:27:24.862
What’s actually happened, if we look underneath the surface, is that the government has de facto delegated responsibility

259
00:27:24.862 --> 00:27:28.422
for the creation and allocation of credit to private banks.

260
00:27:29.702 --> 00:27:32.902
These private banks are effectively making use of its trust.

261
00:27:33.502 --> 00:27:36.813
So we’ve privatised a key national asset.

262
00:27:38.573 --> 00:27:43.573
Now, the central banks have only limited control of the quantity and, especially, the allocation.

263
00:27:43.793 --> 00:27:50.323
And much of the credit has gone to the purchase of existing assets, leading to asset price inflation.

264
00:27:51.154 --> 00:27:58.284
At the same time that the central banks were focusing on CPI, on commodity price inflation.

265
00:27:58.944 --> 00:28:06.375
This controlled the credit creation process - credit creation activity is a major source of inequality in our societies.

266
00:28:06.765 --> 00:28:13.095
Wealth not only going to those in the financial sector and to those that allocate credit,

267
00:28:13.485 --> 00:28:17.075
but to those that own the pre-existing asset whose prices are increasing.

268
00:28:17.406 --> 00:28:21.926
And it’s most evident in the creation of inequality in economies in transition,

269
00:28:21.926 --> 00:28:29.906
who went from a high level of equality to one of the highest levels of inequality in a short span of less than a quarter century.

270
00:28:30.526 --> 00:28:34.357
That brings me to the key policy issues.

271
00:28:36.217 --> 00:28:44.277
Central banks, on this particular issue - the regulators could have circumscribed the flow of purchase of existing assets,

272
00:28:44.657 --> 00:28:53.917
which is a form of macro-prudential regulation, but it was not part of the doctrine of central monetary policy of the DSGE models.

273
00:28:54.647 --> 00:29:04.788
Government could have taken a more direct role in the provision of credit, of making use of this scarce resource, their own trust.

274
00:29:05.258 --> 00:29:12.258
The crisis has shown that private markets were not good either in allocating credit or managing risk.

275
00:29:12.859 --> 00:29:17.179
Relatively little of the credit goes to productive investment.

276
00:29:17.429 --> 00:29:22.079
And that’s why the capital stock, the K, has actually been going down.

277
00:29:22.859 --> 00:29:28.370
And it emphasises the importance of significant macroeconomic externalities

278
00:29:28.600 --> 00:29:37.030
which were not taken into account by the private sector - a line of work that has now become very central to that at the IMF.

279
00:29:38.740 --> 00:29:46.101
So this leads me, very quickly, to both policy agenda and the research agenda, which is:

280
00:29:46.101 --> 00:29:51.961
Understanding the determinants of wealth inequality provides a framework for understanding policy reforms

281
00:29:52.455 --> 00:29:54.938
that will lead to lower level of inequality.

282
00:29:54.938 --> 00:30:00.028
And there’s a whole set of factors that I haven’t had a chance to talk about.

283
00:30:00.518 --> 00:30:06.779
Both public policies, polices that affect the extent of rent seeking, wealth appropriation that goes on,

284
00:30:07.119 --> 00:30:11.009
and social factors like discrimination and the role of unions.

285
00:30:12.469 --> 00:30:17.199
Before concluding there are just 2 comments I want to make.

286
00:30:18.329 --> 00:30:24.750
The first is there’s been a major change in perspectives on inequality in the last 10 years.

287
00:30:25.420 --> 00:30:29.750
The first is that the distribution of income does matter.

288
00:30:30.630 --> 00:30:38.011
In contrast with the prevalent macroeconomic models, particularly those that were prevalent before 2008,

289
00:30:38.841 --> 00:30:44.621
most of which assumed the distribution of income was of no relevance.

290
00:30:45.871 --> 00:30:52.482
It’s important to know what aspects of inequality of income and wealth are relevant, but it is very clear that they are.

291
00:30:52.808 --> 00:31:00.269
The second thing is that traditionally economists have talked about there being a trade-off between inequality and wealth.

292
00:31:00.779 --> 00:31:07.219
Yes, inequality is bad, but the view in many quarters is, if we were to do anything about inequality

293
00:31:07.219 --> 00:31:15.170
it would slow growth, introduce distortions in the economy and lead to less economic efficiency.

294
00:31:16.760 --> 00:31:25.871
We now realise that, at least given the extent of inequality in the United States and in many other advanced countries,

295
00:31:25.871 --> 00:31:31.571
and given the way inequality is created, the sources of inequality that I’ve talked about –

296
00:31:31.891 --> 00:31:39.962
actually we could have lower inequality and greater efficiency, greater stability, greater economic growth.

297
00:31:41.042 --> 00:31:49.682
In short, equality and efficiency should be viewed as complements.

298
00:31:49.992 --> 00:31:53.483
And this of course is the central theme of my book, The Price of Inequality,

299
00:31:53.743 --> 00:32:00.203
but it’s also now become a mainstream view that’s emphasised by research at the IMF.

300
00:32:00.813 --> 00:32:09.404
Again, an important research agenda is to understand the channels through which the effects get exercised.

301
00:32:10.604 --> 00:32:19.464
The final remark I want to make is that we can’t be sure that in the next 50 years, the trends of the last 30 will continue.

302
00:32:19.884 --> 00:32:20.795
We should hope not.

303
00:32:21.635 --> 00:32:25.805
But it’s not just a question of economic forces.

304
00:32:26.475 --> 00:32:30.715
Economic forces are the same on both sides of the Atlantic, both sides of the Pacific.

305
00:32:31.775 --> 00:32:40.636
But the outcomes, including the structure of opportunity are markedly different.

306
00:32:41.126 --> 00:32:46.086
And that says it’s not just economic laws, it's political forces.

307
00:32:47.026 --> 00:32:54.167
And so what’s at issue here is not just economic capitalism in the 21st century, as Piketty said.

308
00:32:54.167 --> 00:32:58.327
It’s really about democracy in the 21st century.

309
00:32:59.977 --> 00:33:09.828
There are, in fact, as I’ve hinted in this talk, many instruments at our disposal to create a more equal society.

310
00:33:09.828 --> 00:33:15.708
And many of these instruments would at the same time create a more efficient and better performing economy.

311
00:33:16.498 --> 00:33:22.469
Understanding the drivers of this growing inequality and the consequence will, and hope should be,

312
00:33:22.469 --> 00:33:25.229
a major area of research in the coming decades.

313
00:33:25.479 --> 00:33:26.259
Thank you.

314
00:33:26.699 --> 00:33:27.659
(Applause)