Capital-biased technical change vs low interest rates?

Paul Krugman says that recent technical change has been capital-biased. That robot story sounds plausible to me too. But if so, why are real interest rates so low? (Yes I know there's a global recession on, but real interest rates were falling even before the recession). Maybe we are forgetting a third factor, land, and land rents are rising?

Suppose there were a new technology that caused both wages and interest rates to fall. Why wouldn't capitalists and workers say "Stuff that, let's go back to the old technology!"? Any individual firm, or group of firms, that went back to the old technology, while borrowing at the new low interest rates and paying the new low wages, would make super-normal profits. And all the other firms would eventually choose to, or have to, follow it back.

Unless there were a third factor, and the new technology paid higher rents to that third factor.

We used to think that that third factor was skilled labour, that knew how to work with the new "skill-biased" technology, was very productive at the margin, and so earned high rents. But if, as Paul says, the college premium has stopped rising, and so that third factor is not skilled labour, what is it?

Much longer ago, in the days of Malthus and Ricardo, we used to think that that third factor was land. Maybe it is again. Maybe some of those increasing "profits" are really increasing resource rents?

(I have found good data showing strongly rising rents on agricultural land in the UK, but I can't find a Canadian or US equivalent, only anecdotal evidence of rising rents. And there are more natural resources than agricultural land, of course. Rising land prices are consistent with my story, but don't really support it, because if real interest rates fall land prices will rise even if rents stay the same.)

Or maybe, if not land, it's some other fourth factor that is earning higher rents?

[PS. Historians of thought may recognise some very old questions here. Like how could Marx get both increasing immiserisation of the proletariat and a falling rate of profit? Unless land rents were rising, like In Ricardo. I can't remember if they ever solved that one.]

Comments

[K]

Frank: "If that land is highly illiquid (is not bought and sold very often) then determining that value is a shot in the dark."

My municipal government sends me a tax bill every year based on the judgment of an assessor of the values of the land and structure. Some houses in my neighbourhood haven't changed hands in 50 years.

[Ritwikbut]

K

I get the theoretical justification of a Georgist tax, and am on-board.

I just think that 'assessed unimproved land value' is winging it. What is the assessed unimproved land value? That's precisely the question. When someone is willing to offer $4/sqft for something that typically retails at $0.4/sqft, is the remaining $3.6/sqft an improvement or not? If it is an improvement, and on account of the buyer, then we're basically saying that in a 100% Georgist system, the sale should have been conducted per force at $0.4/sqft.

In a world where the government taxes the land sale at 100%, the government effectively owns the land. It could then choose to sell it off at $4/sqft or $40/sqft or indeed at $0.3/sqft, depending on whether it wants to help out the buying party in question or the tax payer.

The big problem with eminent domain in India has precisely been that since there has been no market, the government's assessment of land value has been ridiculously cheap. This is before we even get into the question of people who claim to be native to a village/forest/river-system for a few thousand years. The 'land' as it exists now did not exist without them.

I'm fully on-board with the Georgist project. I just think

1) A 100% Georgist tax does not make sense.
2) For any idea of the 'unimproved land value' a market has to exist. This has to be solved for, somehow, in the Georgist implementation.
3) The govt could certainly implement an x% Georgist tax by owning and leasing x% of the land bank, but it's not very clear whether the leases should be auctioned or given away at a fixed price (the short rate).

As an aside, I did indeed invoke Indian farmers to reverse the typical morality play around Georgist proposals, but we can let that be. However, you're not quite correct that there are poorer people in India. As in sure, it's India, there's always someone who is poorer still. But as a matter of aggregate stats, you should note that the average Indian farmer makes about 1/3rd of India's average per capita income or about $500/annum. Even at PPP, that's only about $1,250 per annum. As a profession, farmers are pretty much at the bottom of the Indian chain, and surely much below the mean/median. Ceteris paribus, a Georgist dividend in India is likely to be quite regressive.

[K]

Ritwik,

I absolutely defer to you on poverty in India. But I doubt that a land tax could be regressive. I'm sure there is huge land value in Delhi and Mumbai. And anyways, if the revenues are distributed as an equal citizen's dividend, regressive seems impossible in principle.

As the technicalities, I agree. In practice it probably has to be less than 100%.

Will,

It's not just Arden. Pittsburgh had an LVT when I lived there and it seems to have functioned well. But like in Arden, it was later killed by rentier interests when land values started rising. Big mistake - they could have avoided the whole housing bubble and kept the rents within the community That is hardly an indictment of the LVT. Crony capitalists will always attempt to subvert good government. Sometimes they succeed.

[Michael Hollander]

> Michael,
> Technology, in economics, means something that *raises* productivity. CPDOs don't count!

But CPDOs were supposed to raise productivity. They were a vehicle through which funding could be provided en masse in a way that was supposed to decrease the amount of information necessary to manage funding. Once the securitization chains were built out the cost of running them would have gone down, way down.

[beowulf]

Man, this is really in Michael Hudson's wheelhouse.

"Current macroeconomics ignores the roles that rent, debt and the financial sector play in shaping our economy. We discuss the Classical view on rents and policy responses to the rentier sector in the 19th century. The finance, insurance & real estate sector is today’s incarnation of the rentier sector. This paper shows how financial flows can be conceptually and statistically studied separately from (but interacting with) the real sector. We discuss finance’s interaction with government and with the international economy."
http://michael-hudson.com/2012/09/incorporating-the-rentier-sectors-into-a-financial-model-3/

[Robert]

Here is another paper that tries to parse the data in the US, UK, and EU.

http://www.resolutionfoundation.org/media/media/downloads/Decoupling_of_wages_and_productivity.pdf

I'm not convinced there's any there there.

[jonny bakho]

A recent report attributes about 88 percent of the corporate profits among S&P top 500 to only 10 companies. Only Apple IBM and GE manufacture and the other 7 companies are Finance- Goldman Sachs, Wells Fargo, Bank of America, AIG, JPM, &c.

http://www.slate.com/blogs/moneybox/2012/11/26/apple_aig_goldman_sachs_and_bank_of_america_provided_most_of_2012_s_earnings.html

NONE of these companies hires a large fraction of the American labor force. If all the profits are concentrated in a few companies, How do these profits get spread to labor that does not work for these companies?

The 12 percent of the profits that are not captured by the Top 10 must go to the vast majority of workers who don't work for them.

How much is the concentration of corporate profits into a few businesses responsible for the lack of gains by workers?

[Nathanael]

Tim, it's not true in the US; the share taken by rich corporate executives, which I can only call capital as they control the means of production, has increased to a really blatant degree here in the US.

Will: the problem with Georgist land taxes is the impossibility of valuation of land without improvement. I don't think there's any coherent way to do it. Perhaps you could figure out the current manufacture cost of creating the buildings, and *subtract* that from the market value of the whole property. Which I don't think has been tried, actually.

[Matthew]

Perhaps you are taking the concept of "rent seeking" a bit too literally. Given the massive consolidation between ownership and management of corporations in the past few decades, it seems plausible that the rent seekers are corporate executives, who's income is often misclassified as income from capital, due to accounting rules, when in reality it is essentially part of their salary from the corporation. The fact that CEO's are now often also the chairmen of their boards of directors, substantial shareholders, and comprise all the members of all the boards of directors of each other's companies means that they have an incentive to try to extract worker's surplus, to some extent even at the cost of lower returns to capital.

I've not come up with a coherent theoretical model of this, but it would explain some facts. The rent seeking could explain capital's rising share of income and the stagnation of worker's wages. It would also explain why most of the increase in income inequality has been concentrated between the wealthy and the super-wealthy, while inequality among the bottom 90% has been relatively unchanged.