Should-Read: Thomas Piketty: After Piketty: The Agenda for Economics and Inequality http://amzn.to/2qSUgdl: "Had I believed that the one-dimensional neoclassical model of capital accumulation...

...(based upon the so-called production function Y = F(K,L) and the assumption of perfect competition) provided an adequate description of economic structures and property relations, then my book would have been 30 pages long rather than 800 pages long. The central reason my book is so long is that I try to describe the multidimensional transformations of capital and the complex power patterns and property relations that come with these metamorphoses (as the examples given above illustrate). I should probably have been more explicit about this issue....

Aggregate capital/income ratios and aggregate capital shares tend to move together: they were both relatively low in the mid-twentieth century, and they were both relatively high in the nineteenth century and the early twentieth century, as well as in the late twentieth century and the early twenty-first century. If we were to use the language of aggregate production functions and the assumption of perfect competition, then the only way to explain the fact... would be to assume an elasticity of substitution that is somewhat larger than 1 over long periods.... Standard estimates suggest smaller elasticities (as rightly argued by Devesh Raval in Chapter 4), but they are typically not long-run estimates. It is also possible that technical change and the rise of new forms of machines, robots, and capital-intensive technologies (along the lines described by Laura Tyson and Michael Spence in Chapter 8) will lead to a gradual increase of the elasticity of substitution over time.

Let me make clear, however, that this is not my favored interpretation of the evidence.... At this stage, the important capital-intensive sectors are more traditional sectors like real estate and energy. I believe that the right model for thinking about why capital-income ratios and capital shares have moved together in the long run is a multisector model of capital accumulation, with substantial movements in relative prices, and most importantly with important variations in bargaining power and institutional rules over time. In particular, large upward or downward movements of real estate prices have played an important role in the evolution of aggregate capital values during recent decades, as they did during the first half of the twentieth century. This can in turn be accounted for by a complex mixture of institutional and technological forces....

More generally, the main reason capital values and capital shares are both relatively high in the late twentieth and early twenty-first centuries is that the institutional and legal systems have gradually become more favorable to capital owners (both owners of real estate capital and owners of corporate capital) and less favorable to tenants and workers in recent decades, in a way that is broadly similar (but with different specific institutional arrangements) to the regime that prevailed in the nineteenth century and early twentieth century. In contrast, the legal and institutional regimes prevailing in the mid-twentieth century and during the “Social Democratic Age (1945–1980)” was more favorable to tenants and workers....

This does not mean that changing production functions and elasticities of substitution are not important: I am convinced that this form of mathematical language can be useful to clarify certain concepts and logical relations between concepts. But these notions need to be embedded into a broader social-institutional framework and historical narrative if we want to be able to account for observed evolutions. In some cases, institutional change directly interacts with technological change—as in, for example, the decline of unions and the evolution toward a “fissured workplace” analyzed by David Weil in Chapter 9...

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