Raul V. Fabella
UP School of Economics and NAST
52 nd PES Annual Conference 2014

• “Property is theft.”
K. Marx / P. Proudhon
(1840s)
• “The inherent vice of Capitalism is the unequal sharing of blessings; the inherent virtue of Socialism is the equal sharing of miseries.”
-Winston Churchill
• Parasites, Looters, Moochers: the destroyers of progress:
Ayn Rand’s
Atlas Shrugged (
1957)

• Industrialists / Rational Profit Seekers are the creators of progress:
Ayn Rand in
Atlas Shrugged
(1957)
• "...
Atlas Shrugged is a celebration of life and happiness… Creative individual and undeviating purpose and rationality achieve joy and fulfillment. Parasites who purposely avoid either purpose or reason perish as they should.“
-Alan Greenspan

"... Atlas Shrugged is not merely a novel. It is also… a cogent analysis of the evils that plague our society... You (A.R.) have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions… you owe to the efforts of men who are better than you.“
-Ludwig von Mises
(letter to Ayn Rand)
- inspired F. Hayek who mentored M. Friedman

• To raise or not to raise the tax on the rich
• To embrace or not the affordable health insurance
• To reduce or not the coverage of safety nets such as unemployment insurance
• To impose or not user fees in education and public goods
• To do or no to do CCT.

• First Fundamental Theorem:
Given no-market failures, the welfare optimum is attained without the state.
• Second Fundamental Theorem of
Welfare: If the Walrasian optimum violates the socially desired Rawlsian equity norm, redistribute initial assets and then let Walrasian tattonnement attain the preferred welfare optimum.
• Meta-Market Failure vs. Market Failure!

• By SFTW, the state has a role!
Or has it?
• Enters the Kuznets Inverse U Hypothesis
(1954): In the process of development, income inequality first rises, reaches a maximum and finally falls as per capita income grows.
• Income Inequality is a temporary itch, part of the life cycle of economic catch-up – the price of rapid growth.

• SFTW just a neat existence theorem, not a serious policy prescription!
• Faster income growth eventually fosters income equality.
• Redistribution of asset is politically messy and contentious.
• Growth-enhancing policies are less so – export-promotion led to higher growth with lower GINIs in Tiger Economies.

• Berg and Ostry (2011): What factors contribute to sustainability of growth in developing countries?
• Income inequality shortened the duration of growth – robustly!
• The downward phase of the Kuznets
Curve may never come!
• The State has a role at least in developing countries!

• Enter Thomas Piketty (2014): Capital
• The Piketty Thesis: Income inequality, measured by the share of top income decile,
relentlessly rises with economic growth in well-functioning market economies.
• Nothing to do with ordinary market failures! It comes from r > g
! This is true of mature high-income economies.

By far the best summary of the Piketty Thesis:
“Piketty Inequality in Six Charts”

• The Piketty empirics seems robust against challenges
(e.g., FT’s Giles et al., 2014)
• Piketty’s growth theoretic interpretation
( r > g
) plausible but may not be unique
(e.g., Ray, 2014)

• Meta-Market Failure
(the real objection of socialists to markets) grows relentlessly leading to
• Loss of legitimacy and possible
Armageddon for Capitalism.
• The new role of the state: snatch
Capitalism from the jaws of death!
• SFTW is restored as a policy prescription!

• Marx’s
Kapital:
Capitalism’s demise is a law of scientific socialism; progressive impoverishment inevitable; the state cannot stay its execution.
• Schumpeter
Capitalism, Socialism
Democracy
: “Can Capitalism survive?
No. I don’t think it can.” (To be fair, JS referred to Laissez Faire Capitalism)

• JM Keynes
General Theory
:
The market at times cannot heal itself; fiscal activism can and must heal it.
• Piketty
Capital:
The market is headed towards self-destruction; the state can and must save it.
•
T. Piketty and J.M. Keynes are the true intellectual soulmates.

Thank You!

• Between 2012 and 2009: GINI and Shares
 Income Gini fell from .345 to .288
 Share of lowest income decile rose from
2.0 to 2.9%
 Share of the highest decile fell from 35.3 to 30.5%
• Determining Factors
 OFW and GDP no impact on lowest decile share, impacts the 2 nd and 3 rd

• CCT raises the lowest decile’s share
• Microfinance raises the shares of the lowest three deciles
• Lags
 GDP growth takes 6 years to impact shares of the poorer deciles
 CCT impacts only after 3 years
 Microfinance has immediate positive impact on shares of lower deciles