The best of your work is these interviews. Thank you for continuing to introduce us to fascinating thinkers and authors. Echoing others comments, more like this please...
Wow,great interview with a fascinating guy with a range of information I know nothing about! Now I have to go get his new book and Rawls's book, and that other person... geez, it's like just signed up to audit a class! Thank you for the truly enlightening info!
This was absolutely terrific. I love these interviews. But I am curious about how you measure and compare poverty/wealth in different regions. In a poor country or region, if peoples’ needs are met, even though their incomes are low on a global scale, their lifestyles are comfortable and relatively secure. But in a rich area, 10x that income, might not lift you out of poverty. So how do you square the cost of living with real life experience, with such extreme differences in currency values and social support? Some groups/regions look poor on paper, but all their needs are met because they have a good interactive social/cultural system. Other groups/regions look rich on paper, but huge numbers of people fall through the cracks, are hungry, houseless, ill, and uneducated - even though they work long hours. Costs of living, currency values, and social support, are wildly different, so being pulled up out of poverty can’t be just a numbers game. How do you measure global poverty with those real variables in costs and social support?
As he explains, Milanovic has a very tough job in trying to bring different countries on the same "scale" so he can both make international comparisons and to arrive at a global decentile income distribution. Clearly he has been taking into account cost of living (PPP), currency values, etc ("numbers" as you call them), but you are making a very valid point that there is much more to global (and local) poverty.
May the next US administration and other rich nations support further research in this area.
I wonder how this is impacted by the homesteading lifestyle, or farm families or sustainable communities who grow their own food, sew, repair machinery, build/mill their structures? All of that labour is not reflected monetarily, and GDP is useless in determining their income, social class, and quality of life.
Yes. I thought of such disparate communities/countries as Bhutan, Mormon, Amish, and other societies or communities and cultures where labor and product are often shared and traded - including coalitions of families or townships getting together and paying for someone's legal, medical, teaching, or veterinary, education, or pitching in to build a well, or cook, do early child care, or install solar power. During the Depression my grandfather was foreman on a cotton ranch. They got to live in the foreman's house. They had a cow, big vegetable garden, and chickens. She sewed their clothes, cleaned, and cooked 3 meals a day served on the big family table, for the family and the 3 men who slept in the bunkhouse. Hardly any money - and hard work - but they did not consider themselves poor. They weren't poor. They just didn't have much cash. Some of my grandchildren have bought 40 acres (no mule, unfortunately) They are going back to the land - and are near an established communal settlement of neighbors. Not much money. A lot of trading, sharing, and sweat equity. How to quantify those lifestyles?
As Targut says, it's about establishing and reliably converting to common units of measurement (in this case PPP). On the one hand, there are certainly improvements to be made in those data standardization and conversion methods, but on the other hand, if you change methodology you may then have the challenge of comparing disparate measures over time!
I'm going out on a limb. What Prof. Krugman revealed of Galbraith might somewhat relate to your question: ""John Kenneth Galbraith in The Affluent Society is saying, basically, “we all have enough.” That's not the problem anymore. Maybe there are a few “pockets of poverty.” That's his phrase.""
Adding my layperson observation of some of those we see on a daily basis in the news. Some of these people quite possibly have a pathological level of obsession with making mountains of wealth. Are they crying out for help? Should we help them through a recovery program, or continue this absurd codependent relationship?
At the extremes it becomes manifestly clear. I think this discussion is about where the intersection of the two are both in location and lived experience.
There's good work in this area in psychology and sociology, but the short answer is that it is complicated. Certainly inequality and happiness are not entirely independent of one another, but there are many other intervening variables, particularly cultural ones. In fact, happiness and inequality are probably more strongly linked in richer nations/economies than in broadly poorer ones, but that could be because in places like the US we are fed a steady media diet of "lifestyles of the rich"
I can see that you and I seem both to be fastidiously engaged with Paul's writing. I've known about him somewhat 'forever,' but never had the chance to maintain such direct access to really everything that he is putting out. His choice to use Substack as a platform is tremendously enabling, and it's very exciting to see the 'network effect' that this is (correspondingly) producing.
Do you know about Bob Metcalfe's observation in this regard?
I've been reading the good Professor since the mid 90s as I began to learn economics to fill in my trading experience. Like many in the early derivatives game, I got hired for my math skills.
Agreed. It's great to walk through his daily thought process unfiltered by NYTimes editorial constraints - especially in the current moment.
I am familiar with Metcalfe. Today is going to be a great example of such - No Kings all over the country.
Metcalfe was mostly up at Xerox PARC at the time, but we used to see him on the hallways now and again in Margaret Jacks Hall (at Stanford) where the old guard of the Computer Science Department were principally housed.
At the time I was there, Metcalfe had just drafted his business proposal to start this little networking company that he had in mind. It was called 3COM :)
I have other assorted stories about a few of the things that happened in those early days. Mostly these are things that I have since reflected on as quite funny, and are now very endeared to me.
Ah well David, I think we are all Mathematicians and Scientists "fallen from grace" into Computing, or Finance or ...
But I feel quite blessed to have received the foundations I was given in my initial patch of education. That was a rather nicely formed outline, and a framework that I can still rely upon, in those remedial moments when I'm trying to put a bit more flesh on those bones :)
I do really wish that I'd has the maturity to read a great deal more history at an earlier age though. But maybe we have to have lived a few years before we gain an awareness of why this is so critically important!
I sold my business in 1999 and "retired" - meaning I just managed my and my family's money.
This gave me lots of time to correct exactly the educational deficits you mention. History is such a help. Otherwise, as Walter Sobchak puts it, "you're like a child who wanders into the middle of a movie...."
26 years to read all that I should have read before and the list of what I still want to read keeps getting longer.
Be very careful about ceteris paribus when reading Piketty. Piketty himself is careful, but as with many economists it is very easy for others to misinterpret their work without such careful attention.
As I noted, my interest was mainly on the data sets.
And yes, counterfactuals are a trick in themselves and to then assume other things equal on top of that, especially in this case when force was the deciding factor more often than not, can lead one astray.
It would be nice if Profs. Milanovic and Krugman had connected the various elements that they brought up. They spoke of the state of distribution ("inequality" or "concentration") but they didn't speak about the act of distribution, which might have connected concentration with capitalism and classes.
One way of connecting them is to note that, in our industrial economy, commercial production is mainly done by large firms, whose sales income is the money value of output. Personal income is received almost entirely by the business sector's act of distribution of that income, and income concentration results from that act.
The principle on which firms distribute income is profit maximization. That is, the people who control the firms — capitalists — make their decisions regarding products, techniques, hiring, etc. to maximize the benefits for themselves. Over time, they shape their firms and technology to minimize the share that other people get, in large part by automation etc., which reduces the number and skills of employees needed and thus allows employees share of the income distributed to be pushed down.
Is that the way the professors would put it? If not, then what?
You have put your finger on a core problem in economics, and especially in the incomplete (deliberate in many cases) understanding of what economics teaches us by policy makers. Every Econ 101 student understands that the interaction of supply and demand leads to an equilibrium wherein the right amount of a good is produced to meet demand at a particular price. Across lots of different goods and services and lots of individual profit/utility maximization decisions, these equilibria result in an efficient distribution of resources to meet society's demands (the so-called invisible hand and all that). What most econ 101 students don't learn (or forget) is that this equilibrium only function in atomistically competitive markets, which effectively don't exist in the real world for many reasons including technological and capital barriers to market entry and exit, monopoly rent seeking, network effects, and so on. About the only effective tool we have to correct market inefficiencies are public policy interventions which are themselves plagued with all sort of imperfections. Inequality is not the result of economic forces, especially in a modern world where we could produce and distribute enough for everyone, but rather is the result of policy decisions interacting with economic, sociological, and psychological forces.
Fascinating, especially the piece on Smith. In addition to what Milanovic said, Smith seemed fairly uninterested in the output from the Industrial Revolution, which he usually describes as trinkets and baubles - but saw the great advantage deriving from the fact that the landowning classes were frittering away their income (and hence their power) on these baubles. More at https://substack.com/home/post/p-163917124
What else to say? It is wrong to use troops. They know that and move to authoritarianism anyway. It will be soon that the tensions on this strap will break and violence will escalate. I am not hopeful that protest peacefulness can be sustained. The authoritarians are stoking the flames to start the fire. https://hotbuttons.substack.com/p/troops-in-los-angeles?r=3m1bs
Water, food, clothing and shelter, the needs of people.
These are the basic measures of wealth. As the population grows, it depends on the brightest educated and yes, greedy among us to create growth to create profits to sustain a growing population much like the availability of food drives population growth. But in the conflict of beliefs in either Capitalism or Communism, the clear winner is Capitalism that creates growth as Communism remains stagnant absent financial stimulus. A growing world needs Capitalism to sustain growth and to promote the peace. Prosperity will supply the needs that when lacking, result in conflict. We need Capitalism just to keep up with population growth.
As for Conservative versus liberal, it's a false conflict generated by leaders to gain following. I am as we as most people, given personal independence in thought, am both conservative and liberal simultaneously. In essence, I believe in a singular relationship, personally with some possessiveness, but I do believe in it's liberal practice.
Agreed, but I do feel that we need *constructive* Capitalism.
What I mean by this, is that those reaping the rewards of their ideas and industry must be responsible to the social civilisation that has afforded them that opportunity, and water the darn garden!
I am concerned that what i believe we are seeing is a great (and increasingly rapid) wealth transfer from those who have lesser means (economically or socially speaking,) and that this is widening up an enormous wealth gap.
Perhaps this relates rather to the subject area and specialty that Branko Milanović is discussing with Paul in his report to us today.
I could try to elaborate a bit on some thoughts I have about these different political (social and economic) ideologies that we have bandied about over the centuries, but let me not get into a tear about this in *this* note :)
If you mention Capitalism you should also mention Colonialism and the many ways a few countries in Europe (later the US too) enriched themselves by looting the rest of the world. Can Capitalism survive if it cannot steal other peoples riches? (Just asking.)
Communism never really existed, some countries just designated themselves as such. According to Marx Capitalism is a needed phase, after that Socialism and only after that could Communism be achieved. Marx was an economist, not a medium. He thought water and air had no value as these were so abundantly available. They were in his time, now the situation is different. He also had no idea what the average family would need besides food, shelter, a frock. Because not long after he died we invented the telephone, the car, the camera/projector, the gramophone, the radio, and a whole lot more.
Great conversation, Paul and Branko. The data doesn’t lie: global inequality is down a notch, but let’s not kid ourselves, the deck’s still stacked. World Bank says poverty reduction has stalled, and labor rights are falling off a cliff (only 7 countries fully protect them now, down from 18 a decade ago). That’s a structural risk that doesn’t show up on most people’s Bloomberg terminals, but it should.
Investors love a good macro trend, but the truth is, extreme wealth concentration and collapsing worker protections are red flags for long-term stability, markets or otherwise. We can debate theory all day, but in the end, if the scaffolding beneath the so-called “middle class” crumbles, the whole market pyramid shakes. Curious to hear your take: Is there a way capital markets can actually help reverse the slide, or are we just along for the ride?
We used Paul Samuelson's textbook in Econ. 101. I loved the book. It was part of the reason I changed my major to Economics. I was dismayed by developments in the '80s when attacks against Keynesian economics and ideas like Rational Expectations became commonplace. I had thought that Samuelson's text was accepted conventional wisdom. I had no idea it could be viewed as being controversial or liberal.
I arrived in Boston in mid-70s from India and had imbibed Paul Samuelson's textbook, and thought the world's problems can all be solved... and then found nothing was solved -- first came rational expectations, then sticky wages, later behavioral economics --- and we were all floundering to understand the world, rather than solving the problems
Great discussion! I view the global inequality display as a sort of three-dimensional elephant graph with global location as the third dimension and time as a fourth dimension, something that computers are great at producing now days. Also loved the discussion about the social viewpoints of the central economic figures. I will have to go find a copy of Branko's book with which I am not familiar.
Another astonishing (great) work product from Paul Krugman.
How do you maintain this rate of production of such profoundly informative material Paul?
I can barely keep up as a reader.
But please don’t stop :)
p.s. And that's not just any old guy down the hall there!
The best of your work is these interviews. Thank you for continuing to introduce us to fascinating thinkers and authors. Echoing others comments, more like this please...
Fabulous discussion! Many thanks.
C. Peter Timmer
Cabot Professor of Development Studies, emeritus
Harvard University
I am regularly surprised by how much I don't know.
Wow,great interview with a fascinating guy with a range of information I know nothing about! Now I have to go get his new book and Rawls's book, and that other person... geez, it's like just signed up to audit a class! Thank you for the truly enlightening info!
This was absolutely terrific. I love these interviews. But I am curious about how you measure and compare poverty/wealth in different regions. In a poor country or region, if peoples’ needs are met, even though their incomes are low on a global scale, their lifestyles are comfortable and relatively secure. But in a rich area, 10x that income, might not lift you out of poverty. So how do you square the cost of living with real life experience, with such extreme differences in currency values and social support? Some groups/regions look poor on paper, but all their needs are met because they have a good interactive social/cultural system. Other groups/regions look rich on paper, but huge numbers of people fall through the cracks, are hungry, houseless, ill, and uneducated - even though they work long hours. Costs of living, currency values, and social support, are wildly different, so being pulled up out of poverty can’t be just a numbers game. How do you measure global poverty with those real variables in costs and social support?
As he explains, Milanovic has a very tough job in trying to bring different countries on the same "scale" so he can both make international comparisons and to arrive at a global decentile income distribution. Clearly he has been taking into account cost of living (PPP), currency values, etc ("numbers" as you call them), but you are making a very valid point that there is much more to global (and local) poverty.
May the next US administration and other rich nations support further research in this area.
I wonder how this is impacted by the homesteading lifestyle, or farm families or sustainable communities who grow their own food, sew, repair machinery, build/mill their structures? All of that labour is not reflected monetarily, and GDP is useless in determining their income, social class, and quality of life.
Yes. I thought of such disparate communities/countries as Bhutan, Mormon, Amish, and other societies or communities and cultures where labor and product are often shared and traded - including coalitions of families or townships getting together and paying for someone's legal, medical, teaching, or veterinary, education, or pitching in to build a well, or cook, do early child care, or install solar power. During the Depression my grandfather was foreman on a cotton ranch. They got to live in the foreman's house. They had a cow, big vegetable garden, and chickens. She sewed their clothes, cleaned, and cooked 3 meals a day served on the big family table, for the family and the 3 men who slept in the bunkhouse. Hardly any money - and hard work - but they did not consider themselves poor. They weren't poor. They just didn't have much cash. Some of my grandchildren have bought 40 acres (no mule, unfortunately) They are going back to the land - and are near an established communal settlement of neighbors. Not much money. A lot of trading, sharing, and sweat equity. How to quantify those lifestyles?
As Targut says, it's about establishing and reliably converting to common units of measurement (in this case PPP). On the one hand, there are certainly improvements to be made in those data standardization and conversion methods, but on the other hand, if you change methodology you may then have the challenge of comparing disparate measures over time!
I am curious how wealth inequality would compare to happiness inequality — would it be obvious?
I'm going out on a limb. What Prof. Krugman revealed of Galbraith might somewhat relate to your question: ""John Kenneth Galbraith in The Affluent Society is saying, basically, “we all have enough.” That's not the problem anymore. Maybe there are a few “pockets of poverty.” That's his phrase.""
Adding my layperson observation of some of those we see on a daily basis in the news. Some of these people quite possibly have a pathological level of obsession with making mountains of wealth. Are they crying out for help? Should we help them through a recovery program, or continue this absurd codependent relationship?
At the extremes it becomes manifestly clear. I think this discussion is about where the intersection of the two are both in location and lived experience.
There's good work in this area in psychology and sociology, but the short answer is that it is complicated. Certainly inequality and happiness are not entirely independent of one another, but there are many other intervening variables, particularly cultural ones. In fact, happiness and inequality are probably more strongly linked in richer nations/economies than in broadly poorer ones, but that could be because in places like the US we are fed a steady media diet of "lifestyles of the rich"
This is excellent. Thank you both. A crash course, will need to read this article again at the end of today.
Great discussion. Thank you.
As Piketty was mentioned here's some of his more recent work.
https://wid.world/news-article/unequal-exchange-and-north-south-relations/
Some interesting global data sets
David,
I can see that you and I seem both to be fastidiously engaged with Paul's writing. I've known about him somewhat 'forever,' but never had the chance to maintain such direct access to really everything that he is putting out. His choice to use Substack as a platform is tremendously enabling, and it's very exciting to see the 'network effect' that this is (correspondingly) producing.
Do you know about Bob Metcalfe's observation in this regard?
https://en.wikipedia.org/wiki/Metcalfe%27s_law
I've been reading the good Professor since the mid 90s as I began to learn economics to fill in my trading experience. Like many in the early derivatives game, I got hired for my math skills.
Agreed. It's great to walk through his daily thought process unfiltered by NYTimes editorial constraints - especially in the current moment.
I am familiar with Metcalfe. Today is going to be a great example of such - No Kings all over the country.
Metcalfe was mostly up at Xerox PARC at the time, but we used to see him on the hallways now and again in Margaret Jacks Hall (at Stanford) where the old guard of the Computer Science Department were principally housed.
At the time I was there, Metcalfe had just drafted his business proposal to start this little networking company that he had in mind. It was called 3COM :)
I have other assorted stories about a few of the things that happened in those early days. Mostly these are things that I have since reflected on as quite funny, and are now very endeared to me.
Very cool indeed.
Heady times in Computer Science for sure.
I was a Physics/Philosophy student but didn't go beyond Undergrad as I got picked up by Wall St.
Ah well David, I think we are all Mathematicians and Scientists "fallen from grace" into Computing, or Finance or ...
But I feel quite blessed to have received the foundations I was given in my initial patch of education. That was a rather nicely formed outline, and a framework that I can still rely upon, in those remedial moments when I'm trying to put a bit more flesh on those bones :)
I do really wish that I'd has the maturity to read a great deal more history at an earlier age though. But maybe we have to have lived a few years before we gain an awareness of why this is so critically important!
I sold my business in 1999 and "retired" - meaning I just managed my and my family's money.
This gave me lots of time to correct exactly the educational deficits you mention. History is such a help. Otherwise, as Walter Sobchak puts it, "you're like a child who wanders into the middle of a movie...."
26 years to read all that I should have read before and the list of what I still want to read keeps getting longer.
Be very careful about ceteris paribus when reading Piketty. Piketty himself is careful, but as with many economists it is very easy for others to misinterpret their work without such careful attention.
As I noted, my interest was mainly on the data sets.
And yes, counterfactuals are a trick in themselves and to then assume other things equal on top of that, especially in this case when force was the deciding factor more often than not, can lead one astray.
It would be nice if Profs. Milanovic and Krugman had connected the various elements that they brought up. They spoke of the state of distribution ("inequality" or "concentration") but they didn't speak about the act of distribution, which might have connected concentration with capitalism and classes.
One way of connecting them is to note that, in our industrial economy, commercial production is mainly done by large firms, whose sales income is the money value of output. Personal income is received almost entirely by the business sector's act of distribution of that income, and income concentration results from that act.
The principle on which firms distribute income is profit maximization. That is, the people who control the firms — capitalists — make their decisions regarding products, techniques, hiring, etc. to maximize the benefits for themselves. Over time, they shape their firms and technology to minimize the share that other people get, in large part by automation etc., which reduces the number and skills of employees needed and thus allows employees share of the income distributed to be pushed down.
Is that the way the professors would put it? If not, then what?
You have put your finger on a core problem in economics, and especially in the incomplete (deliberate in many cases) understanding of what economics teaches us by policy makers. Every Econ 101 student understands that the interaction of supply and demand leads to an equilibrium wherein the right amount of a good is produced to meet demand at a particular price. Across lots of different goods and services and lots of individual profit/utility maximization decisions, these equilibria result in an efficient distribution of resources to meet society's demands (the so-called invisible hand and all that). What most econ 101 students don't learn (or forget) is that this equilibrium only function in atomistically competitive markets, which effectively don't exist in the real world for many reasons including technological and capital barriers to market entry and exit, monopoly rent seeking, network effects, and so on. About the only effective tool we have to correct market inefficiencies are public policy interventions which are themselves plagued with all sort of imperfections. Inequality is not the result of economic forces, especially in a modern world where we could produce and distribute enough for everyone, but rather is the result of policy decisions interacting with economic, sociological, and psychological forces.
Fascinating, especially the piece on Smith. In addition to what Milanovic said, Smith seemed fairly uninterested in the output from the Industrial Revolution, which he usually describes as trinkets and baubles - but saw the great advantage deriving from the fact that the landowning classes were frittering away their income (and hence their power) on these baubles. More at https://substack.com/home/post/p-163917124
What else to say? It is wrong to use troops. They know that and move to authoritarianism anyway. It will be soon that the tensions on this strap will break and violence will escalate. I am not hopeful that protest peacefulness can be sustained. The authoritarians are stoking the flames to start the fire. https://hotbuttons.substack.com/p/troops-in-los-angeles?r=3m1bs
Water, food, clothing and shelter, the needs of people.
These are the basic measures of wealth. As the population grows, it depends on the brightest educated and yes, greedy among us to create growth to create profits to sustain a growing population much like the availability of food drives population growth. But in the conflict of beliefs in either Capitalism or Communism, the clear winner is Capitalism that creates growth as Communism remains stagnant absent financial stimulus. A growing world needs Capitalism to sustain growth and to promote the peace. Prosperity will supply the needs that when lacking, result in conflict. We need Capitalism just to keep up with population growth.
As for Conservative versus liberal, it's a false conflict generated by leaders to gain following. I am as we as most people, given personal independence in thought, am both conservative and liberal simultaneously. In essence, I believe in a singular relationship, personally with some possessiveness, but I do believe in it's liberal practice.
Agreed, but I do feel that we need *constructive* Capitalism.
What I mean by this, is that those reaping the rewards of their ideas and industry must be responsible to the social civilisation that has afforded them that opportunity, and water the darn garden!
I am concerned that what i believe we are seeing is a great (and increasingly rapid) wealth transfer from those who have lesser means (economically or socially speaking,) and that this is widening up an enormous wealth gap.
Perhaps this relates rather to the subject area and specialty that Branko Milanović is discussing with Paul in his report to us today.
I could try to elaborate a bit on some thoughts I have about these different political (social and economic) ideologies that we have bandied about over the centuries, but let me not get into a tear about this in *this* note :)
"Watering the Garden" was a splendid analogy.
If you mention Capitalism you should also mention Colonialism and the many ways a few countries in Europe (later the US too) enriched themselves by looting the rest of the world. Can Capitalism survive if it cannot steal other peoples riches? (Just asking.)
Communism never really existed, some countries just designated themselves as such. According to Marx Capitalism is a needed phase, after that Socialism and only after that could Communism be achieved. Marx was an economist, not a medium. He thought water and air had no value as these were so abundantly available. They were in his time, now the situation is different. He also had no idea what the average family would need besides food, shelter, a frock. Because not long after he died we invented the telephone, the car, the camera/projector, the gramophone, the radio, and a whole lot more.
Great conversation, Paul and Branko. The data doesn’t lie: global inequality is down a notch, but let’s not kid ourselves, the deck’s still stacked. World Bank says poverty reduction has stalled, and labor rights are falling off a cliff (only 7 countries fully protect them now, down from 18 a decade ago). That’s a structural risk that doesn’t show up on most people’s Bloomberg terminals, but it should.
Investors love a good macro trend, but the truth is, extreme wealth concentration and collapsing worker protections are red flags for long-term stability, markets or otherwise. We can debate theory all day, but in the end, if the scaffolding beneath the so-called “middle class” crumbles, the whole market pyramid shakes. Curious to hear your take: Is there a way capital markets can actually help reverse the slide, or are we just along for the ride?
We used Paul Samuelson's textbook in Econ. 101. I loved the book. It was part of the reason I changed my major to Economics. I was dismayed by developments in the '80s when attacks against Keynesian economics and ideas like Rational Expectations became commonplace. I had thought that Samuelson's text was accepted conventional wisdom. I had no idea it could be viewed as being controversial or liberal.
I arrived in Boston in mid-70s from India and had imbibed Paul Samuelson's textbook, and thought the world's problems can all be solved... and then found nothing was solved -- first came rational expectations, then sticky wages, later behavioral economics --- and we were all floundering to understand the world, rather than solving the problems
Great discussion! I view the global inequality display as a sort of three-dimensional elephant graph with global location as the third dimension and time as a fourth dimension, something that computers are great at producing now days. Also loved the discussion about the social viewpoints of the central economic figures. I will have to go find a copy of Branko's book with which I am not familiar.