Category Archives: Economics

Why Thomas Piketty’s “Capital” Could Revolutionize Economics

Almost anyone with access to media has by now heard of Thomas Piketty’s “Capital in the 21st Century” – a book that is already being hailed as possibly the most important work of economics of the decade.

The book looks at 200 years of economic data and argues that free markets lead to growing economic inequality in the long run. It has made headlines for its main argument, and for its call for a global wealth tax to combat inequality. But just as importantly, it marks the return of history in economic analysis. This is a very, very big deal.

For the last few decades, mainstream economic thought has existed in a sort of timeless vacuum. Millions of college students, me included, read textbooks that presented macroeconomic laws as eternal truths, impervious to historical change: output always returns to its fixed, natural equilibrium; government intervention only ever affects prices in the long run; economic crises always solve themselves by lowering labor costs. These “laws”, textbooks imply, were as true in 1914 as in 2014.

Economics wasn’t always this ahistorical. In the 19th and early 20th century, leading economists like David Ricardo, Karl Marx and Joseph Schumpeter all analyzed economics within a larger historical trajectory, and their theories centered on change over time.

But the rise of neo-liberal economic thought has pushed history out of the profession. Modern economists, beginning with Alfred Marshall in the late 19th century but really taking off at the University of Chicago in the 1950s and 60s, have sought to turn economics into a science, with fixed laws based on math. If the laws of physics and chemistry don’t change over time, their thinking went, why should economic laws?

It’s not that these economists never referred to history to support their claims, but their theories still ended up being completely ahistorical.

While neo-liberal economic theories are far from universally accepted, they have succeeded in transforming the profession from a social science into a want-to-be natural science.

The main problem with this approach is that many of these scientific models in economics are based on unrealistic assumptions – perfect competition, completely rational actors and equal access to information, to name just a few – and therefore hardly ever work in reality.

Following the 2008 financial crisis, economists who take a less natural-science based approach to economics and base their theories on the recognition that markets aren’t perfect and actors not always rational have received more attention. The buzz surrounding Piketty’s book is the culmination of that trend.

Bringing history back into the study of economics may cost the discipline its scientific veneer, but it also offers a better understanding of how economic forces truly work, and how they change over time. As Piketty put it in his introduction to “Capital in the 21st Century”:

“To put it bluntly, the discipline of economics has yet to get over its childish passion for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. (…) This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.”




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Why Measuring Productivity Differently Will Change the Way We Live

Can you imagine a world without 9-to-5 jobs? Adam Davidson suggests it’s not too far away. In the latest New York Times Magazine, the journalist urges us to change the way we measure productivity. Accountants and Lawyers bill by the hour, encouraging slow work. Paying people by what they produce, rather than by how long it takes them to produce it, would more accurately reflect productivity in the modern economy.

What’s really interesting about Davidson’s argument is his historical narrative. He claims that measuring productivity by hour of work, popularized among accountants in the 1950s, is a leftover of the industrial age. This way of measuring made sense for assembly-line manufacturing, where time units had a fixed correlation to output. But since the 1960s industrial production has become less and less important at the expense of services and the creative economy. Measuring productivity of the latter has little to do with hours worked.


Davidson doesn’t address the consequences of measuring creative work by its value rather than by time worked, but they would certainly revolutionize our economy. On a microeconomic level, it might mean the end of the 8-hour work day. Measuring the value of ideas would let us work until we have achieved results, not until the clock hits five. How about working 2 hours on Tuesday and 13 on Wednesday? What’s already a reality in some creative professions could become the norm.

The possible macroeconomic effects are just as intriguing. Countries still tend to measure the productivity of their workforce by how many hours people work in a day. For example, business advocates have long lambasted unions for trying to shorten work days. During the Euro Crisis, some have urged Spain to scrap the Siesta, a lengthy lunch break, and stretch out work days to increase productivity. But what if a long break and shorter work days increase productivity in our modern service economy? A one-hour nap might make a good idea more likely than 20 hours of hard work. Perhaps the supposedly lazy Greeks are way ahead of the hard-working Americans.

The entire capitalist system revolves around the notion of productivity. If it turns out we’ve been measuring it incorrectly, sweeping changes are bound to follow.

Here’s a link to the article:

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Reading Tip

This article explains how the fact that everyone today buys diamond rings for their engagement is the result of one incredibly successful ad campaign by De Beers in 1938. If you consider the imprint global demand for diamonds has left on post-colonial Africa (Sierra Leone is the most famous case), a re-evaluation of the role ad agencies play in global politics might be in order. Interesting stuff.

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The rise of corporate money in politics








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Will the Eurozone Collapse? Lessons from the 19th Century










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