Tuesday, March 6, 2012

Krugman and Keynes on the political economy of the rentier

Krugman comments on the modern political economy of the rentier here. We've seen articles recently on the growing top 1% and the tax on carried interest too. All worth reading.

This is Keynes's perspective on exactly these sorts of trade-offs, from his 1926 letter to the French Minister of Finance:

"I have written about the French franc many times in recent years, and I do not find that I have changed my mind. More than two years ago I wrote: "The level of the franc is going to be settled in the long run, not by speculation or the balance of trade, or even the outcome of the Ruhr adventure, but by the proportion of his earned income which the French taxpayer will permit to be taken from him to pay the claims of the French rentier." I still think that this is the root idea from which your plans ought to develop.

Now it is obvious that there are two methods of attaining the desired equilibrium. You can increase the burdens on the taxpayer, or you can diminish the claims of the rentier. If you choose the first alternative, taxation will absorb nearly a quarter of the national income of France. Is this feasible? If it is ever safe to speak about the political atmosphere of another country, I should judge from recent indications that the French public will certainly refuse to submit to the imposition of a burden of additional taxation sufficient to satisfy the claims of the rentier at their present level. And even if such taxation were politically possible, it would probably break down administratively. The pressing task of the French Treasury is not to devise additional taxes, but to construct an administrative machine capable of collecting those which exist. If, therefore, I were in your place, I should not, as a politician, give another minute's thought to new taxes, but would concentrate, so far as concerned the fiscal part of my office, on consolidating and administering the taxes already voted.

Since this by itself is not enough, your next business—provided you accept my conclusion as to the mind of the French public—is to consider coolly how best to reduce the claims of the rentier. Three methods offer themselves: first, a general capital levy; second, a forced reduction of the rate of interest on the public debt; third, a rise of prices which would reduce the real value of the rentier's money claims. Unquestionably, the first is preferable on grounds of virtue, justice, and theory. For Britain in a similar fix I should advocate it. But I think it so probable that such a project would be defeated in France to-day by the same political and administrative difficulties which stand in the way of further taxation, that I should not lose my time on it. The second method is attractive, if only because it offers no administrative difficulties. I believe that some authorities in France have favoured it. Nevertheless, I should decline this expedient also, if I were in your place, because, unlike a general capital levy or a depreciation of money, this species of discrimination is truly named Repudiation, and Repudiation of the National Debt is a departure from financial virtue so extreme and so dangerous as not to be undertaken but in the last emergency."

The next section is related to the earlier discussion with David Glasner and Brad DeLong about the insane Bank of France. Note also Keynes going back to the arguments he made three years earlier in his Tract on Monetary Reform (where - I should highlight from personal interest - he approved of the American reaction to the 1920-1921 depression).

"We are left, therefore, by a process of the exclusion of alternatives, with one Exit only—a rise of internal prices; which leads us away from the fiscal field to the price level, the foreign exchanges, the gold in the Bank of France, the volume of foreign investment, and the balance of trade. Here I must invite your particular attention to an interesting paradox.

Successive Finance Ministers have, in fact, done their utmost to find an escape through the Exit I indicate. They have inflated magnificently, and they have brought down the gold value of the franc by progressive stages with only temporary set-backs. What more could they have done?

I will tell you. The great army of your predecessors have failed, in spite of all their efforts, to depreciate adequately the internal purchasing power of the franc. Your present difficulties are due, not to the inflation of the notes or to the fall of the exchange (for these events are tending all the time to help you out of your troubles), but to the failure of these factors to diminish proportionately the internal purchasing power of the rentier's money claims."


  1. Aren't speculators and rentiers very similar in Keynes's book? In the later part of his life, John Maynard Keynes was aware of the dangers of financial speculation. According to Michael Emmett Brady, J.M. Keynes converges with Adam Smith on curtailing financial speculation.


    After all, too much speculation can be dangerous...

    1. I think they're a little different in Keynes's view. His discussion of speculation really relates to the instability of asset prices. The rentier is the class that earns income simply because of the scarcity of capital.

    2. Are you sure that's exactly what Keynes means here?

      I find the article confusing because I can't see who he is calling "rentiers", is it the owners of government bonds or the owners of all capital?

      In some ways the article can be taken as advice to investors on things to watch out for, in particular as advice to be wary of fixed interest investments where you're at the mercy of a price inflation rate determined by state monetary policy.

  2. I suspect others have pointed this out before but anyway: "When the facts change I change my mind. What do you do, sir?" which appears as a Keynes quote at the top of your blog, is apocryphal.

  3. The more I think about what Keynes is saying here the less sense it makes in Keynesian terms.

    There are two types of capitalist, those who own assets denominated in money such as bonds and those who own other assets such as businesses, property and shares. Unexpected price inflation is designed to take from the first group. But it can't easily take from the second. It may very well enrich the second group because of contracts that take time to change, such as wage contracts. In GT Keynes talks about price inflation being a mechanism to reduce real wages, I agree with him about that in the short-run as long as that price inflation is unexpected.

    So, if there is price inflation then two things happen. Holders of nominal assets see their wealth taken by others. Landlords see their rental incomes erode. But, holders of shares an business owners see their profits increase as wages are sticker than other prices, so they can raise prices without raising wages in the short run. How can Keynes be sure one effect will outweigh the other?

    (All of this is without taking into account injection effects or account falsification).

    Krugman on the other hand provided evidence recently as to why he thinks one effect will overwhelm the other. He thinks nominal assets are mostly held by the rich. His evidence could be questioned, but at least he's thinking about it.


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