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Symposium
Wealth and Inequality
Daron Acemoglu and James A. Robinson, “The Rise and Decline of General Laws of Capitalism”
Charles I. Jones, “Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality”
Wojciech Kopczuk, “What Do We Know about the Evolution of Top Wealth Shares in the United States?”
Thomas Piketty, “Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century”
Articles
Marion Fourcade, Etienne Ollion, and Yann Algan, “The Superiority of Economists”
Allen R. Sanderson and John J. Siegfried, “The Case for Paying College Athletes”
David H. Howard, Peter B. Bach, Ernst R. Berndt, and Rena M. Conti, “Pricing in the Market for Anticancer Drugs”
Wallace E. Oates and Robert M. Schwab, “The Window Tax: A Case Study in Excess Burden”
Andrei Shleifer, “Matthew Gentzkow, Winner of the 2014 Clark Medal”
Features
Brett M. Frischmann and Christiaan Hogendorn, “Retrospectives: The Marginal Cost Controversy”
Timothy Taylor, “Recommendations for Further Reading”
Correspondence: “Fair Trade Coffee,” Victor V. Claar and Colleen E. Haight . . 215
Editorial Note: “Correction to Richard S. Tol’s ‘The Economic Effects of Climate Change’”
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Symposium
Wealth and Inequality
"The Rise and Decline of General Laws of Capitalism," by Daron Acemoglu and James A. Robinson
Thomas Piketty's (2013) book, Capital in the 21st Century, follows in the tradition of the great classical economists, like Marx and Ricardo, in formulating general laws of capitalism to diagnose and predict the dynamics of inequality. We argue that general economic laws are unhelpful as a guide to understanding the past or predicting the future because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society. We use regression evidence to show that the main economic force emphasized in Piketty's book, the gap between the interest rate and the growth rate, does not appear to explain historical patterns of inequality (especially, the share of income accruing to the upper tail of the distribution). We then use the histories of inequality of South Africa and Sweden to illustrate that inequality dynamics cannot be understood without embedding economic factors in the context of economic and political institutions, and also that the focus on the share of top incomes can give a misleading characterization of the true nature of inequality.
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"Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality," by Charles I. JonesSince the early 2000s, research by Thomas Piketty, Emmanuel Saez, and their coauthors has revolutionized our understanding of income and wealth inequality. In this paper, I highlight some of the key empirical facts from this research and comment on how they relate to macroeconomics and to economic theory more generally. One of the key links between data and theory is the Pareto distribution. The paper describes simple mechanisms that give rise to Pareto distributions for income and wealth and considers the economic forces that influence top inequality over time and across countries. For example, it is in this context that the role of the famous r - g expression is best understood.
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"What Do We Know about the Evolution of Top Wealth Shares in the United States?" by Wojciech Kopczuk
I discuss available evidence about the evolution of top wealth shares in the United States over the course of the 20th century. The three main approaches—the Survey of Consumer Finances, estate tax multiplier, and capitalization methods—generate generally consistent findings until mid-1980s but diverge since then, with the capitalization method showing a dramatic increase in wealth concentration and the other two methods showing at best a small increase. I discuss strengths and weaknesses of different approaches. The increase in capitalization estimates since 2000 is driven by a dramatic and puzzling increase in fixed income assets. There is evidence that estate tax estimates may not be sufficiently accounting for mortality improvements over time. The nonresponse and coverage issues in the SCF are a concern. I conclude that the changing nature of top incomes and the increased importance of self-made wealth may explain difficulties in implementing each of the methods and why the results diverge.
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"Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century," by Thomas Piketty
When a lengthy book is widely discussed in academic circles and the popular media, it is probably inevitable that the arguments of the book will be simplified in the telling and retelling. In the case of my book Capital in the Twenty-First Century (2014), a common simplification of the main theme is that because the rate of return on capital r exceeds the growth rate of the economy g, the inequality of wealth is destined to increase indefinitely over time. In my view, the magnitude of the gap between r and g is indeed one of the important forces that can explain historical magnitudes and variations in wealth inequality. However, I do not view r > gas the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of income and wealth inequality in the 21st century. In this essay, I will take up several themes from my book that have perhaps become attenuated or garbled in the ongoing discussions of the book, and will seek to re-explain and re-frame these themes. First, I stress the key role played in my book by the interaction between beliefs systems, institutions, and the dynamics of inequality. Second, I briefly describe my multidimensional approach to the history of capital and inequality. Third, I review the relationship and differing causes between wealth inequality and income inequality. Fourth, I turn to the specific role of r > g in the dynamics of wealth inequality: specifically, a larger r - g gap will amplify the steady-state inequality of a wealth distribution that arises out of a given mixture of shocks. Fifth, I consider some of the scenarios that affect how r - g might evolve in the 21st century, including rising international tax competition, a growth slowdown, and differential access by the wealthy to higher returns on capital. Finally, I seek to clarify what is distinctive in my historical and political economy approach to institutions and inequality dynamics, and the complementarity with other approaches.
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Articles
"The Superiority of Economists," by Marion Fourcade, Etienne Ollion and Yann Algan
In this essay, we analyze the dominant position of economics within the network of the social sciences in the United States. We begin by documenting the relative insularity of economics, using bibliometric data. Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure. Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and their confidence in their discipline's ability to fix the world's problems. Taken together, these traits constitute what we call the superiority of economists, where economists' objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists' practical involvement and their considerable influence over the economy, it has also exposed them more to conflicts of interests, political critique, even derision.
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"The Case for Paying College Athletes," by Allen R. Sanderson and John J. Siegfried
Big-time commercialized intercollegiate athletics has attracted considerable attention in recent years. Popularity of this uniquely American activity, measured by attendance, television ratings, or team revenues, has never been higher. At the same time, however, several high-profile scandals exposing unseemly behavior on the part of players, coaches, and even respected higher education institutions—as well as questions about the distribution of the enormous revenues pouring into university athletic departments—have marred the image of these college football and men's basketball programs. Currently there are several legal challenges to the National Collegiate Athletic Association (NCAA) and its member institutions that may change dramatically and permanently the arrangements between the NCAA cartel, its member colleges and universities, and the "student-athletes" who play on the teams. These challenges all focus on the NCAA's collective fixing of players' wages. We describe this peculiar "industry," detailing the numerous market imperfections in both output and labor markets, the demand for and supply of college athlete labor, and possible alternative arrangements in the college athlete labor market, including the ramifications of compensating players beyond the tuition, room, board, books, and fees that some current players already receive as grants-in-aid.
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"Pricing in the Market for Anticancer Drugs," by David H. Howard, Peter B. Bach, Ernst R. Berndt and Rena M. Conti
In 2011, Bristol-Myers Squibb set the price of its newly approved melanoma drug ipilimumab— brand name Yervoy—at $120,000 for a course of therapy. The drug was associated with an incremental increase in life expectancy of four months. Drugs like ipilimumab have fueled the perception that the launch prices of new anticancer drugs and other drugs in the so-called "specialty" pharmaceutical market have been increasing over time and that increases are unrelated to the magnitude of the expected health benefits. In this paper, we discuss the unique features of the market for anticancer drugs and assess trends in the launch prices for 58 anticancer drugs approved between 1995 and 2013 in the United States. We restrict attention to anticancer drugs because the use of median survival time as a primary outcome measure provides a common, objective scale for quantifying the incremental benefit of new products. We find that the average launch price of anticancer drugs, adjusted for inflation and health benefits, increased by 10 percent annually—or an average of $8,500 per year—from 1995 to 2013. We argue that the institutional features of the market for anticancer drugs enable manufacturers to set the prices of new products at or slightly above the prices of existing therapies, giving rise to an upward trend in launch prices. Government-mandated price discounts for certain classes of buyers may have also contributed to launch price increases as firms sought to offset the growth in the discount segment by setting higher prices for the remainder of the market.
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"The Window Tax: A Case Study in Excess Burden," by Wallace E. Oates and Robert M. Schwab
The window tax provides a dramatic and transparent historical example of the potential distorting effects of taxation. Imposed in England in 1696, the tax—a kind of predecessor of the modern property tax—was levied on dwellings with the tax liability based on the number of windows. The tax led to efforts to reduce tax bills through such measures as the boarding up of windows and the construction of houses with very few windows. In spite of the pernicious health and aesthetic effects and despite widespread protests, the tax persisted for over a century and a half: it was finally repealed in 1851. Our purpose in this paper is threefold. First, we provide a brief history of the tax with a discussion of its rationale, its role in the British fiscal system, and its economic and political ramifications. Second, we have assembled a dataset from microfilms of local tax records during this period that indicate the numbers of windows in individual dwellings. Drawing on these data, we are able to test some basic hypotheses concerning the effect of the tax on the number of windows and to calculate an admittedly rough measure of the excess burden associated with the window tax. Third, we have in mind a pedagogical objective. The concept of excess burden (or "deadweight loss") is for economists part of the meat and potatoes of tax analysis. But to the laity the notion is actually rather arcane; public-finance economists often have some difficulty, for example, in explaining to taxpayers the welfare costs of tax-induced distortions in resource allocation. The window tax is a textbook example of how a tax can have serious adverse side effects on social welfare. In addition to its objectionable consequences for tax equity, the window tax resulted in obvious and costly misallocations of resources.
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"Matthew Gentzkow, Winner of the 2014 Clark Medal," by Andrei Shleifer
The 2014 John Bates Clark Medal of the American Economic Association was awarded to Matthew Gentzkow of the University of Chicago Booth School of Business. The citation recognized Matt's "fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement." In addition to his work on the media, Matt has made a number of significant contributions to empirical industrial organization more broadly, as well as to applied economic theory. In this essay, I highlight some of these contributions.
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Features
"Retrospectives: The Marginal Cost Controversy," by Brett M. Frischmann and Christiaan Hogendorn
From 1938 to 1950, there was a spirited debate about whether decreasing-average-cost industries should set prices at marginal cost, with attendant subsidies if necessary. In 1938, Harold Hotelling published a forceful and far-reaching proposal for marginal cost pricing entitled "The General Welfare in Relation to Problems of Taxation and of Railway and Utility Rates." After several years and many pages of discussion, Ronald Coase gave a name and a clear formulation to the debate in his 1946 article "The Marginal Cost Controversy." We will tell much of the story of this controversy by comparing the frameworks of Hotelling and Coase, while also bringing in other contributors and offering some thoughts about contemporary relevance. The arguments marshaled by Coase (and his contemporaries) not only succeeded in this particular debate, as we shall see, but more generally served as part of the foundation for various fields of modern economics, particularly institutional, regulatory, and public choice economics as well as law and economics. Yet the underlying issues are quite difficult to resolve, and the strengths and weaknesses of the arguments for marginal cost pricing can turn on specific elements of the industry.
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"Recommendations for Further Reading," by Timothy Taylor
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"Fair Trade Coffee: Correspondence" Victor V. Claar and Colleen E. Haight
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Editorial Note: Correction to Richard S. Tol's "The Economic Effects of Climate Change"
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