Kieran Latty | The University of Sydney - Academia.edu

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Kieran Latty

The University of Sydney, Political Economy, Graduate Student

The University of Sydney, Political Economy, Graduate Student |

Political Economy

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Papers

The adjusted generalised entropy curve as a general descriptive and normative measure of income inequality, with a compression and estimation procedure

The generalised entropy index gives a summary measure of concentration of a distribution, where t... more The generalised entropy index gives a summary measure of concentration of a distribution, where the order of the index determines the sensitivity of the index to top and bottom tail inequality respectively. This paper introduces an adjusted generalised entropy index as a normative and descriptive measure of income inequality. Disagreement over normative and positive issues impacting upon the degree of warranted inequality aversion provides a case for generalising the information within a sample distribution, so that any Atkinson-Kolm-Sen social welfare function which is itself a function of one or many GE indexes may be calculable. This may be achieved by specifying or estimating an adjusted GE curve giving the adjusted GE index for all orders. A method for estimating the GE curve as a two tailed generalised logistic function of order is given. The estimation procedure is accurate; errors are typically less than 1% over a wide range of order.

Reconsidering the socialist calculation problem as a problem of policy choice: the case for an interdisciplinary socialist welfare economics

This paper suggests that the problem of socialist calculation be reconsidered as a subset of the ... more This paper suggests that the problem of socialist calculation be reconsidered as a subset of the problem of policy choice, where a large and growing literature outlines the importance of normative and public choice considerations, and for analysis that goes beyond the limited confines of the ‘new’ welfare economics. Formulation of viable socialist models calls for an interdisciplinary socialist welfare economics, comprising; (1) ethical analysis of the proper social objective function; (2) construction of normatively grounded indicators to measure policy performance; (3) analysis of policy options best suited to maximising the objective function; (4) political economic analysis of the institutions best suited to ensuring that actual policy choices conform to those recommended by (3). The paper then makes a case for a neo–utilitarian approach on two grounds; firstly a utilitarian social welfare function (SWF) is well supported philosophically, and approximates for many policy questions popular alternative welfarist SWF (priority, egalitarianism). Secondly, welfarism provides a unitary indicator of social improvement, mitigating the requirement for arbitrary decisions by planners. In a complex economy the scope for direct democracy is limited - hence the case for formal, welfarist policy assessment criteria. Socialist policy formation would then be a subset of a broader problem of constrained maximisation of welfarist SWF, where insights from all relevant fields (moral philosophy, economics, public health, psychology, sociology, political economy) are incorporated. The particularly socialist subset of this discipline would limit investigation of local optima defined by (1) high socialisation of investment and (2) low consumption inequality.

A Generalised Logistic Prioritarian Social Welfare Function

This paper introduces a logistic prioritarian social welfare function, where the weight given to ... more This paper introduces a logistic prioritarian social welfare function, where the weight given to marginal increases in utility is a decreasing logistic function of utility. The SWF then is weakly prioritarian, as the ratio of marginal value of marginal utility gains between any two hypothetical individuals is constrained to be finite. The paper outlines properties of the functions utilising a series of numerical examples. Solutions for an Atkinson like index are given, so that welfare losses from deviations from the ideal first best income distribution can be expressed in monetary equivalents (mean of a welfare equivalent equally, or alternatively optimally distributed income distribution). Finally, the paper gives numerical examples of calculated losses when the optimising and assessment parameters of the SWF disagree – For example losses when the income distribution is set to be optimal for some level of priority that is lower or higher than the level when assessing outcomes. The relatively small magnitude of such losses even under wide variation in parameter values suggest that normative disagreements over the strength of priority may not have large implications in terms of optimising policy.

A theory of institutional choice and change as a result of conflict between the ‘deep’ and ‘shallow’ state over redistributive policy

Presentation slides from seminar at the conference, 'Historical Materialism Australasia 2014', 5-... more

A Kaleckian theory of tax inefficiency: How elite influence favours inefficient redistributive mechanisms

Presentation at the seminar: 'Getting the G20 to work against Corporate Tax Avoidance' Sydn... more

Optimal Inequality on the Utilitarian-Prioritarian-Egalitarian Spectrum

A five parameter Atkinson like index featuring relative income effects, with a seven parameter extension for nonlinear (prioritarian) social welfare functions

The Atkinson Index provides a normative measure of income inequality which is identical to welfar... more The Atkinson Index provides a normative measure of income inequality which is identical to welfare losses from inequality under an additive utilitarian SWF where utility is solely based on individual income or consumption, and the inequality aversion parameter is equal to the elasticity of marginal utility of income. However, it is now generally accepted that wellbeing is partially dependent on relative, in addition to absolute income, and therefore the standard Atkinson index is not a very good predictor of utilitarian welfare losses when relative income effects are salient. Furthermore prioritarian concerns may raise inequality aversion somewhat above the utilitarian optimum. This paper introduces a five parameter generalization of the Atkinson index, adding parameters to control the intensity of relative income effects, the weight given to individuals with varying income in determining reference income, and two parameters regulating the effect of inequality on reference income via an indirect pathway. The index is further generalized to a seven parameter case, where prioritarian concerns are modelled via an additive nonlinear SWF. Depending on parameter values, the index is capable of simultaneously being sensitive to both bottom and top tail inequality. In particular, the index may be sensitive to super-heavy power law (Pareto) top tail inequality, for example within a lognormal-Pareto two class distribution, as shown by example. A closed form solution is given for lognormal inequality; the index can be estimated via a simple transformation under the lognormal assumption from various inequality measures, including all generalized entropy (GE) indexes and the variance of logarithms. Under restricted conditions estimates are obtainable without the lognormality assumption, less restrictively estimation of the index may be obtained with some precision simply from a pair of generalized entropy indexes of order 0 and 1.

A note on inequality equilibrium and dynamics in a model of elastic intergeneration transmission of income with progressive redistribution

The Atkinson Index provides a normative measure of income inequality which is identical to welfar... more The Atkinson Index provides a normative measure of income inequality which is identical to welfare losses from inequality under an additive utilitarian SWF where utility is solely based on individual income or consumption, and the inequality aversion parameter is equal to the elasticity of marginal utility of income. However, it is now generally accepted that wellbeing is partially dependent on relative, in addition to absolute income, and therefore the standard Atkinson index is not a very good predictor of utilitarian welfare losses when relative income effects are salient. Furthermore prioritarian concerns may raise inequality aversion somewhat above the utilitarian optimum. This paper introduces a five parameter generalization of the Atkinson index, adding parameters to control the intensity of relative income effects, the weight given to individuals with varying income in determining reference income, and two parameters regulating the effect of inequality on reference income via an indirect pathway. The index is further generalized to a seven parameter case, where prioritarian concerns are modelled via an additive nonlinear SWF. Depending on parameter values, the index is capable of simultaneously being sensitive to both bottom and top tail inequality. In particular, the index may be sensitive to super-heavy power law (Pareto) top tail inequality, for example within a lognormal-Pareto two class distribution, as shown by example. A closed form solution is given for lognormal inequality; the index can be estimated via a simple transformation under the lognormal assumption from various inequality measures, including all generalized entropy (GE) indexes and the variance of logarithms. Under restricted conditions estimates are obtainable without the lognormality assumption, less restrictively estimation of the index may be obtained with some precision simply from a pair of generalized entropy indexes of order 0 and 1.

A note on the relationship between the Atkinson index and the generalised entropy class of decomposable inequality indexes under the assumption of log-normality of income distribution or volatility

Estimating the Atkinson index typically requires the estimation of the complete income distributi... more Estimating the Atkinson index typically requires the estimation of the complete income distribution, and the selection of a suitable value for the inequality aversion or elasticity of marginal utility parameter (ε). The Index can also be calculated from the generalised entropy (GE) class of decomposable inequality indexes (GE) via a standard transformation, however in this case choice of (ε) is removed as this parameter is then dictated by the order of the GE index (α) via the relationship α=ε-1. Under a restrictive assumption of log-normality of the true distribution, absolute freedom is restored in the choice of ε and the Atkinson index for any ε can be readily computed from any GE indexes, including those of order 0 (The mean log deviation) or 1 (the Theil index).

Capital-labour relations, income distribution, and capital accumulation in state–capitalist economies: a model with application to the post-reform economy of the People’s Republic of China

This paper analyses the relationship between the relative economic strength of labour and capital... more This paper analyses the relationship between the relative economic strength of labour and capital; the functional and personal distribution of income; and economic growth and crisis within state-capitalist economies. A surplus-based theoretical approach to economic growth is developed where the relationship between the distribution of income, the potential economic surplus, and investment in physical and human capital is mediated by economic structure and policy. In state capitalist economies with highly profit-inelastic investment functions, there is a dramatically reduced susceptibility to cyclical breakdowns in the process of capital accumulation due to both wage and terms-of –trade induced profit-squeezes. In this case, crisis in state capitalist economies is theorised to be a long-run phenomena, and can result from an increased profit elasticity of investment (for example as a result of neoliberal restructuring); severe declines in the rate of return to capital (as a result of exceptionally low capital productivity and/or profit share); or debt crisis (resulting from a level of domestic savings insufficient to finance the state supported rate of capital accumulation). This theoretical approach is then applied to the case of the post-reform economy of the PRC. This analysis suggests that the Chinese economy will likely remain resilient to crisis resulting from cyclical and long-run dynamics over the next couple of decades, including potential wage driven profit-squeezes, and growth will likely remain at a high level. This analysis implies a significant degree of political-economic scope for pro-labour reform movements, (from both above and below), to achieve large real wage increases, including in the social wage, especially as the rural reserve army of labour is depleted by steady employment growth. Crucially, even very rapid real wage growth is unlikely to precipitate a self-limiting breakdown in the process of capital accumulation. The paper concludes with a brief discussion of the political-economic implications of these findings.

The adjusted generalised entropy curve as a general descriptive and normative measure of income inequality, with a compression and estimation procedure

The generalised entropy index gives a summary measure of concentration of a distribution, where t... more The generalised entropy index gives a summary measure of concentration of a distribution, where the order of the index determines the sensitivity of the index to top and bottom tail inequality respectively. This paper introduces an adjusted generalised entropy index as a normative and descriptive measure of income inequality. Disagreement over normative and positive issues impacting upon the degree of warranted inequality aversion provides a case for generalising the information within a sample distribution, so that any Atkinson-Kolm-Sen social welfare function which is itself a function of one or many GE indexes may be calculable. This may be achieved by specifying or estimating an adjusted GE curve giving the adjusted GE index for all orders. A method for estimating the GE curve as a two tailed generalised logistic function of order is given. The estimation procedure is accurate; errors are typically less than 1% over a wide range of order.

Reconsidering the socialist calculation problem as a problem of policy choice: the case for an interdisciplinary socialist welfare economics

This paper suggests that the problem of socialist calculation be reconsidered as a subset of the ... more This paper suggests that the problem of socialist calculation be reconsidered as a subset of the problem of policy choice, where a large and growing literature outlines the importance of normative and public choice considerations, and for analysis that goes beyond the limited confines of the ‘new’ welfare economics. Formulation of viable socialist models calls for an interdisciplinary socialist welfare economics, comprising; (1) ethical analysis of the proper social objective function; (2) construction of normatively grounded indicators to measure policy performance; (3) analysis of policy options best suited to maximising the objective function; (4) political economic analysis of the institutions best suited to ensuring that actual policy choices conform to those recommended by (3). The paper then makes a case for a neo–utilitarian approach on two grounds; firstly a utilitarian social welfare function (SWF) is well supported philosophically, and approximates for many policy questions popular alternative welfarist SWF (priority, egalitarianism). Secondly, welfarism provides a unitary indicator of social improvement, mitigating the requirement for arbitrary decisions by planners. In a complex economy the scope for direct democracy is limited - hence the case for formal, welfarist policy assessment criteria. Socialist policy formation would then be a subset of a broader problem of constrained maximisation of welfarist SWF, where insights from all relevant fields (moral philosophy, economics, public health, psychology, sociology, political economy) are incorporated. The particularly socialist subset of this discipline would limit investigation of local optima defined by (1) high socialisation of investment and (2) low consumption inequality.

A Generalised Logistic Prioritarian Social Welfare Function

This paper introduces a logistic prioritarian social welfare function, where the weight given to ... more This paper introduces a logistic prioritarian social welfare function, where the weight given to marginal increases in utility is a decreasing logistic function of utility. The SWF then is weakly prioritarian, as the ratio of marginal value of marginal utility gains between any two hypothetical individuals is constrained to be finite. The paper outlines properties of the functions utilising a series of numerical examples. Solutions for an Atkinson like index are given, so that welfare losses from deviations from the ideal first best income distribution can be expressed in monetary equivalents (mean of a welfare equivalent equally, or alternatively optimally distributed income distribution). Finally, the paper gives numerical examples of calculated losses when the optimising and assessment parameters of the SWF disagree – For example losses when the income distribution is set to be optimal for some level of priority that is lower or higher than the level when assessing outcomes. The relatively small magnitude of such losses even under wide variation in parameter values suggest that normative disagreements over the strength of priority may not have large implications in terms of optimising policy.

A theory of institutional choice and change as a result of conflict between the ‘deep’ and ‘shallow’ state over redistributive policy

Presentation slides from seminar at the conference, 'Historical Materialism Australasia 2014', 5-... more

A Kaleckian theory of tax inefficiency: How elite influence favours inefficient redistributive mechanisms

Presentation at the seminar: 'Getting the G20 to work against Corporate Tax Avoidance' Sydn... more

Optimal Inequality on the Utilitarian-Prioritarian-Egalitarian Spectrum

A five parameter Atkinson like index featuring relative income effects, with a seven parameter extension for nonlinear (prioritarian) social welfare functions

The Atkinson Index provides a normative measure of income inequality which is identical to welfar... more The Atkinson Index provides a normative measure of income inequality which is identical to welfare losses from inequality under an additive utilitarian SWF where utility is solely based on individual income or consumption, and the inequality aversion parameter is equal to the elasticity of marginal utility of income. However, it is now generally accepted that wellbeing is partially dependent on relative, in addition to absolute income, and therefore the standard Atkinson index is not a very good predictor of utilitarian welfare losses when relative income effects are salient. Furthermore prioritarian concerns may raise inequality aversion somewhat above the utilitarian optimum. This paper introduces a five parameter generalization of the Atkinson index, adding parameters to control the intensity of relative income effects, the weight given to individuals with varying income in determining reference income, and two parameters regulating the effect of inequality on reference income via an indirect pathway. The index is further generalized to a seven parameter case, where prioritarian concerns are modelled via an additive nonlinear SWF. Depending on parameter values, the index is capable of simultaneously being sensitive to both bottom and top tail inequality. In particular, the index may be sensitive to super-heavy power law (Pareto) top tail inequality, for example within a lognormal-Pareto two class distribution, as shown by example. A closed form solution is given for lognormal inequality; the index can be estimated via a simple transformation under the lognormal assumption from various inequality measures, including all generalized entropy (GE) indexes and the variance of logarithms. Under restricted conditions estimates are obtainable without the lognormality assumption, less restrictively estimation of the index may be obtained with some precision simply from a pair of generalized entropy indexes of order 0 and 1.

A note on inequality equilibrium and dynamics in a model of elastic intergeneration transmission of income with progressive redistribution

The Atkinson Index provides a normative measure of income inequality which is identical to welfar... more The Atkinson Index provides a normative measure of income inequality which is identical to welfare losses from inequality under an additive utilitarian SWF where utility is solely based on individual income or consumption, and the inequality aversion parameter is equal to the elasticity of marginal utility of income. However, it is now generally accepted that wellbeing is partially dependent on relative, in addition to absolute income, and therefore the standard Atkinson index is not a very good predictor of utilitarian welfare losses when relative income effects are salient. Furthermore prioritarian concerns may raise inequality aversion somewhat above the utilitarian optimum. This paper introduces a five parameter generalization of the Atkinson index, adding parameters to control the intensity of relative income effects, the weight given to individuals with varying income in determining reference income, and two parameters regulating the effect of inequality on reference income via an indirect pathway. The index is further generalized to a seven parameter case, where prioritarian concerns are modelled via an additive nonlinear SWF. Depending on parameter values, the index is capable of simultaneously being sensitive to both bottom and top tail inequality. In particular, the index may be sensitive to super-heavy power law (Pareto) top tail inequality, for example within a lognormal-Pareto two class distribution, as shown by example. A closed form solution is given for lognormal inequality; the index can be estimated via a simple transformation under the lognormal assumption from various inequality measures, including all generalized entropy (GE) indexes and the variance of logarithms. Under restricted conditions estimates are obtainable without the lognormality assumption, less restrictively estimation of the index may be obtained with some precision simply from a pair of generalized entropy indexes of order 0 and 1.

A note on the relationship between the Atkinson index and the generalised entropy class of decomposable inequality indexes under the assumption of log-normality of income distribution or volatility

Estimating the Atkinson index typically requires the estimation of the complete income distributi... more Estimating the Atkinson index typically requires the estimation of the complete income distribution, and the selection of a suitable value for the inequality aversion or elasticity of marginal utility parameter (ε). The Index can also be calculated from the generalised entropy (GE) class of decomposable inequality indexes (GE) via a standard transformation, however in this case choice of (ε) is removed as this parameter is then dictated by the order of the GE index (α) via the relationship α=ε-1. Under a restrictive assumption of log-normality of the true distribution, absolute freedom is restored in the choice of ε and the Atkinson index for any ε can be readily computed from any GE indexes, including those of order 0 (The mean log deviation) or 1 (the Theil index).

Capital-labour relations, income distribution, and capital accumulation in state–capitalist economies: a model with application to the post-reform economy of the People’s Republic of China

This paper analyses the relationship between the relative economic strength of labour and capital... more This paper analyses the relationship between the relative economic strength of labour and capital; the functional and personal distribution of income; and economic growth and crisis within state-capitalist economies. A surplus-based theoretical approach to economic growth is developed where the relationship between the distribution of income, the potential economic surplus, and investment in physical and human capital is mediated by economic structure and policy. In state capitalist economies with highly profit-inelastic investment functions, there is a dramatically reduced susceptibility to cyclical breakdowns in the process of capital accumulation due to both wage and terms-of –trade induced profit-squeezes. In this case, crisis in state capitalist economies is theorised to be a long-run phenomena, and can result from an increased profit elasticity of investment (for example as a result of neoliberal restructuring); severe declines in the rate of return to capital (as a result of exceptionally low capital productivity and/or profit share); or debt crisis (resulting from a level of domestic savings insufficient to finance the state supported rate of capital accumulation). This theoretical approach is then applied to the case of the post-reform economy of the PRC. This analysis suggests that the Chinese economy will likely remain resilient to crisis resulting from cyclical and long-run dynamics over the next couple of decades, including potential wage driven profit-squeezes, and growth will likely remain at a high level. This analysis implies a significant degree of political-economic scope for pro-labour reform movements, (from both above and below), to achieve large real wage increases, including in the social wage, especially as the rural reserve army of labour is depleted by steady employment growth. Crucially, even very rapid real wage growth is unlikely to precipitate a self-limiting breakdown in the process of capital accumulation. The paper concludes with a brief discussion of the political-economic implications of these findings.

Economic theory and the problem of policy development

This panel considers the methodological implications the problem of policy development. If we acc... more This panel considers the methodological implications the problem of policy development. If we accept that one important objective of economic theory is to provide insight into important policy problems, then there is a strong case for an expansion in the scope of economics, including its heterodox branches. Heterodox approaches have been resistant to minimalist methodological prescriptions, but arguably still do not possess sufficient scope to provide answers to important policy questions. There is then a case for expansion in scope at the level of the school, and additionally for interdisciplinary and transdisciplinary approaches as a mechanism for scope expansion.

P1:Economic methodology and problems of policy development and assessment

This paper outlines the case for a policy development centred economic methodology. We outline the case for a ‘policy view’ where the theory assessment criteria is success in providing insight into normatively important policy problems. If this view is accepted, then there is a strong case for inverting the usual analytic priority given to positive over normative analysis. Moral philosophy is a prerequisite for clear evaluative criteria, and these evaluative criteria then inform the epistemic demands of positive theory. This ‘policy view’ further demands a multi dimension expansion in the scope of economics. Firstly, the ‘policy view’ requires expansion in scope to include explicit normative analysis, for example by a dedicated welfare economic branch. Secondly, there is a case for expansion of the subject matter of economics, in particular to include analysis of subjects commonly excluded from economic analysis but which are integral to certain policy evaluation criteria. Thirdly, there is the case for explicit political economic analysis. Lastly, given the inability of any particular school to satisfy these three requirements of scope, there is a case for explicit interdisciplinary or transdisciplinary analysis. The case for expansion in scope is especially strong if we consider that policy interventions are interactive, such that policy assessment should arguably be undertaken in reference to policy combinations. In this case, theory must be not only sufficiently broad in scope to provide insight into these policy areas individually, but also be sufficiently coherent to enable these interaction effects to be adequately analysed.

P2: Theory development and economic policy: issues for heterodox economics

This paper considers the problem of policy development and choice and potential as faced by heterodox economics. Under the ‘policy view’, a major goal of theory is providing insight into normatively important policy problems. In relation to this criterion, heterodox schools of thought then arguably suffer from insufficient scope. Heterodox schools include normative content, but rarely feature explicit treatment of ethical issues or possess formal evaluative procedures. Policy formation is inhibited by the limited subject matter of particular heterodox schools, and more fundamentally by limitations in the ability of the extant theory to be extended to cover new subject areas. The paper then considers as case studies a series of policy problems, including environmental degradation; income inequality; and economic planning and development. These cases studies demonstrate that important policy problems raise questions that cannot be adequately answered by any extant school. The problem becomes more severe if we allow for interactions between policy interventions - while particular heterodox schools may adequately address many questions raised by one policy problem, it is unlikely that the school will possess sufficient scope to cover interactive effects. Overcoming these limitations requires either the extension of particular schools, at a minimum to include evaluative procedures, and/or interdisciplinary or transdisciplinary approaches to policy formation and assessment. We conclude with a brief discussion of policy questions which we identify as high priority topics for investigation. In particular, we identify a series of important policy questions where insufficient answers have arguably inhibited the success of progressive, reforming, governments.

Paper presented at the Society for Heterodox Economics Conference 2015 (December, University of NSW)