on 26 March 2014
The main argument: The unequal distribution of wealth in the developed world has become a significant issue in recent years. Indeed, the data indicate that in the past 30 years the incomes of the wealthiest have surged into the stratosphere (and the higher up in the income hierarchy one is, the greater the increase has been), while the incomes of the large majority have stagnated. This has led to a level of inequality in wealth in the developed world not seen since the eve of the Great Depression. This much is without dispute.
Where there is dispute is in trying to explain just why the rise in inequality has taken place (and whether, and to what degree, it will continue in the future); and, even more importantly, whether it is justified. These questions are not merely academic, for the way in which we answer them informs public debate as well as policy measures--and also influences more violent reactions. Indeed, we need look no further than the recent Occupy Movement to see that the issue of increasing inequality is not only pressing, but potentially incendiary.
Given the import and the polarizing nature of the issue of inequality, it is all the more crucial that we begin by way of shedding as much light on the situation as possible. This is the impetus behind Thomas Piketty's new book Capital in the Twenty-First Century.
One of Piketty's main concerns in the book is to put the issue of inequality in its broader historical context. Specifically, the author traces how inequality has evolved from the agrarian societies of the 18th and early 19th centuries; through the Industrial Revolution and up to the First World War; throughout the interwar years; and into the second half of the twentieth century (and up to the first part of the twenty-first).
With this broad historical context we are able to see much more clearly the causes of inequality. As we might expect, what we find is that inequality is influenced by a host of societal factors--including economic, political, social and cultural factors. However, what we also find is that inequality is influenced by a broader set of factors associated with how capital works in capitalist societies (and market economies more generally).
Specifically, we find that capital (and the wealth it generates) tends to accumulate faster than the rate of economic growth in capitalist societies. What this means is that capital tends to become an increasingly prevalent and influential factor in these societies (at least up to a point). What's more, wealth not only tends to accumulate, but to become more and more concentrated at the top (mainly because those with more capital are able to earn a higher rate of return on their capital investments). For these reasons, capitalism on its own tends to produce a relatively high degree of inequality.
The natural tendency of capital to accumulate and to become ever more concentrated largely explains the high degree of inequality that was witnessed in the developed world in the early part of the twentieth century. This inequality was largely dashed, however, in the interwar years. The reason for this is that the major events of the first half of the twentieth century (including the two world wars, and the Great Depression) thwarted capital's natural tendency to accumulate, and also destroyed large stocks of wealth. The end result was that by the time World War II was over, inequality in the developed world had reached an all-time low.
After the Second World War, the natural tendency of capital to accumulate resumed. However, various political and economic measures (including progressive taxation, rent control, increasing minimum wages, and expanded social programs) worked to redistribute this growing capital, thus preventing inequality from growing as quickly as it would have otherwise.
In the 1980s, though, the developed countries did an about-face, and began eliminating many of the measures that had prevented inequality from rising according to its natural tendency. The consequence was that inequality reasserted itself in a major way, such that it is nearly as extreme today as it was on the run up to the Great Depression. Furthermore, the historical evidence indicates that capital will likely continue to accumulate and become ever more concentrated, such that we will witness an even greater level of inequality moving forward.
As far as justifying the growing inequality that we are currently seeing, Piketty raises serious doubts as to whether it may rightly be considered fair. What's more, as inequality continues to grow, it is increasingly likely that large parts of the population will also come to see it as unfair and unjustified--thereby increasing the likelihood of political opposition.
For Piketty, the best and fairest solution to these problems would be to steepen the progressive taxation applied to the wealthiest individuals. The problem, though, is that in a world of financial globalization (where there is a high degree of competition for capital--as witnessed by tax havens), it is extremely difficult to apply the appropriate tax scheme without the cooperation and coordinated efforts of the international community--and this is simply not something that is easy to achieve.
The alternative, however, is much more troubling for it is likely that it will involve reverting to protectionism and nationalism--and this is really in no one's interest.
This book is an absolute tour-de-force. The broad time-frame that Piketty explores, and the enormous body of data that he brings together, makes this study extremely comprehensive (no one will even think of accusing Piketty of cherry picking the data). Also, the reader is struck by how dispassionately Piketty analyzes the evidence he brings to the table. Indeed, while the author does have a position on inequality, one never receives the impression that this is corrupting his analysis (I consider myself to be a pragmatist politically, and often find that writers on both the left and the right massage the truth, but that was never the case here). Finally, it should be said that the book is very long, and just as dense, with the author often delving into extreme detail, so be prepared for a challenge. A must read for anyone with a serious interest in economics.
on 12 May 2014
Thomas Picketty offers the disclaimer that his book is ‘as much a work of history as of economics’ (p33) which he then goes on to prove. He introduces his 2 core economic equations and asks readers not well versed in mathematics not to immediately close the book. It is in fact readers who are well versed in mathematics who might well close the book, since his equations make no sense and cannot bear the weight of interpretation he places on them throughout the book. They are core to his argument, but they fail. He nowhere derives them, proves them, or empirically tests them. He merely states them.
According to Picketty, the ‘first fundamental law of capitalism’ (p52) is that α=rxβ where α is the share of capital in national income, r is the rate of return on capital, and β is Picketty’s capital/income ratio. This is a simple identity, is no more than telling us that a/b x b = a. Picketty admits this identity and tautology but nevertheless insists that this is the ‘first fundamental law of capitalism’, a claim he simply cannot justify. His ‘second fundamental law of capitalism’ (p166) is that β=s/g where s is the savings rate and g the growth rate. His example claims that a savings rate of 12% and a growth rate of 2% give a capital/income ratio of 600%. This is simply untrue. A simple spreadsheet taking 100 units of GDP growing in row 1 at 2%/year, showing 12% saving of that GDP in row 2, cumulating that in row 3 and dividing the result by row 1 to give Picketty’s capital/income ratio in row 4, shows that it becomes 600% only in year 199. Not only does this ‘fundamental law’ take so long to be true, as Picketty admits, but it is only true in that year and thereafter continues to grow, contrary to his claim that it reaches a long term equilibrium. His third equation is his claim that r>g drives capital accumulation. r and g are however measures in different units, r is a scalar ratio, whereas g is a first differential over time. Equations and inequalities require variables on each side to be in the same units. Picketty’s comparison of the return to capital and the growth rate are like comparing one person’s height to another person’s weight. His model is bogus.
He then conflates capital and wealth (‘I use the words ‘capital’ and ‘wealth’ interchangeably’ (p47)). This obscures more than it elucidates. Capital traditionally defined in economics is the means of production. It is an input to the economic process. Wealth by contrast is an output. We might very well care differently about how much capital and wealth we have, and who owns them. More effective capital may drive up output, whilst more wealth has no creative function and attracts a moral question. Picketty is wrong, analytically and morally, to confuse the two in one measure.
Picketty is disparaging in very short measure of Marx (p227-230), Keynes (p220), mathematical economics (p32), and economists generally (p296, 437, 514, 573, 574). Only Picketty has it right (p232). He quotes Jane Austen and Honoré de Balzac, more than he does either Marx or Keynes. His book is unnecessarily long and a tedious read, due to its rambling repetitive style. It could have been far more concise.
His main point is however well taken. Ownership of wealth has become increasingly unequal. His remedy is a global progressive tax on capital. By this he means all capital. But he doesn’t say what effect a progressive tax on each form of capital would have, how it would be paid, and what should be done with the payment. Would companies owning productive assets have to hand factories to the state? Or to the poor? Would house owners have to sell their houses, or shareholders their shares, in which case would their price be sustained? Or is he assuming asset owners also have income to pay the capital tax, in which case it becomes an income tax? And what’s the point? The purpose Picketty tells us on page 518 is ‘to regulate capitalism’ and thereby to ‘avoid crises’. But he doesn’t tell us how capitalism would be thereby made more acceptable or how crises would be avoided. He also admits it will never happen!
Whilst I agree with Picketty that extremes of income and wealth are morally repugnant, my complaint is that i) he should do more to investigate and attack the processes which allow this outcome, for example regulating the software market more effectively to avoid Bill Gates becoming obscenely wealthy based on Microsoft’s extreme and unjustified monopoly rate of profit, whilst also regulating natural resource markets to avoid billionaire build up there, ii) this is not in fact the major issue facing capitalism today. Far more important is the lack of effective macroeconomic demand and the fall in real wages caused by the high productivity of automation technology. For this a citizen’s income funded by QE (ie without being added to government debt) is the only and the urgently needed solution. Maybe we could compromise and use the proceeds of Picketty’s capital tax to fund a world citizen income. He clearly has a very good PR machine promoting his book – see the low votes attached to any critical review on Amazon, a fate very likely to meet this review!
Author ‘A Managerial Philosophy of Technology : Technology and Humanity in Symbiosis’
on 23 September 2014
Don’t be misled by this flawed masterpiece.
Piketty’s masterly work on Capital is an important and influential book. Among other things, it provides much of the theoretical framework for François Hollande’s socialist economic policies in France, make of that what you will. It should be noted from the start that the author is not only a distinguished professor of economics at the Sorbonne, but also an out-and-out socialist. What may well be rigorous economic analysis is laced heavily throughout with leftish assumptions that many people will not share, but which Piketty makes little attempt to justify or discuss.
Although his title is ‘Capital in the twenty-first century’, Piketty’s actual subject is the inequality and injustice of wealth distribution. Such injustice is as old as the hills. In a famous biblical passage quoted by George Orwell, the ancient preacher says “I returned, and saw under the sun, that the race goes not to the swift, nor the battle to the strong, neither bread to the hungry, nor yet riches to the wise…, but time and chance happeneth to all”. Piketty clearly finds time and chance upsetting and the accumulation of capital intolerable. After a long survey of economic history, he announces his own solution to the problem, one which most people will find hopelessly unworkable -a steeply rising global tax on wealth.
I am not personally qualified to comment on the validity of the economics in the book, except to note that it has been strongly criticised by other economists, notably by James Galbraith at Texas, and in the Financial Times. So I restrict my remarks to commenting on the readability of this very long work (577 pages of text plus another 80-odd of notes), and a few comments where it seems to me there are major deficiencies or unjustified assumptions that can be appreciated by a general reader.
The first thing to say is that this is a delightfully written (and well translated) work of breath-taking historical sweep, covering the economic landscape from mediaeval times onwards, and with special reference to the last 200 years or so. Piketty assembles huge amounts of data for consideration and illustrates what this can mean in human terms by references to the novels of Jane Austen, Balzac and Tolstoy. It is all very seductive, though he is not above selecting unsavoury but entirely fictional characters to rouse our ire against capitalism in general. This is not particularly helpful, for anybody can choose or create a fictional villain to reinforce their argument, but it doesn’t make it true. Also, one has to be careful about emotionally loaded language. Steeply rising taxes are described as ‘progressive’, technically correct but misleadingly reassuring; the ‘inequality’ he speaks of would be more accurately described as ‘difference’, ‘divergence’ or ‘diversity’; and where ‘inequality’, as he measures it, gets smaller for a while (which goes against his argument that things are getting worse), he shies away from the obvious word ‘reduced’ and describes it instead as ‘compressed’, which implies intensification rather than the reduction that has actually happened. But he is pretty good about explaining technical terms as he goes along. Where he doesn’t, the effect can be comical, as on page 406 where the word ‘cohorts’ appears ten times, conjuring up visions of Roman legions tramping through the pages. But it turns out that ‘cohort’ is the technical statistical term for a group of people born within the same period of time. You live and learn.
There is no escaping, of course, the fact that this is not a bedtime book, or something you pick up at the airport to flip through during the flight. It is solid stuff, and a determined reader will probably take a month or six weeks of dedicated effort to get through it, for it can only be tackled bit at a time. The extensive tables of data are fascinating and the graphs enlightening, but if data bores you and graphs make you feel ill, this isn’t your book. Likewise the maths that is presented is not at all difficult but might be horribly unfamiliar. If symbolic notation, Greek letters and a little light algebra aren’t your thing, best put this book aside before you buy it. Many people only realize afterwards, and a survey of Kindle statistics apparently indicates that most people give up round page 26.
For his analysis, conclusions and final recommendation, Piketty relies heavily on what he calls the first and second fundamental laws of capitalism. These are not like the first and second laws of thermodynamics, for example, to which no exception has ever been found; and not like a statute passed in parliament; nor even like Newton’s law of gravity, which has now been superseded by Einstein but which is still good enough for little everyday tasks like calculating the weight of the earth, or sending a mission to the moon. The first law of capital is not in fact a law at all, simply an identity, a way of rearranging quantities that are already known. The second ‘law’ relates the capital/income ratio of a country with the ratio of the savings rate to the growth rate of the economy in general. This is not a law either, but rather a tendency which takes decades to come about, and then only provided that nothing else intervenes (though it always does -natural disasters, wars, depressions, property bubbles, banking crises etc.). He describes the developing economic scene of the last two centuries in terms of these ‘laws’, and also adduces that the accumulation of capital will become more and more concentrated in a few hands when the percentage return on capital persists at a higher level than the growth rate of the economy in general. He sees this as a nightmare scenario of runaway inequality, and reserves his most particular criticism for inherited wealth.
Piketty’s grand idea to deal with this situation is a steeply increasing tax, not just on income or on inheritance, but on all one’s assets, every year, a “Global Tax on Capital”, with all the associated paraphernalia of enforcement. This includes having all one’s personal financial details automatically disclosed, and not just to one’s own government; given the international nature of capital flows, the information has to be available to every government in the world. It requires setting up a global financial authority with powers to coerce and to enforce the compliance of institutions (City of London? Swiss banks?) or countries (tax havens? oil states?) that take a different political outlook from Piketty. This will ensure democracy. Europe should lead the way with the creation of a new body, the European Budgetary Parliament.
He also touches on some other current issues, such as the recent phenomenon of stratospheric senior-management salaries. He examines the disaster of the Euro, and how governments enmeshed by it might reduce their catastrophic debt burden now that the traditional remedy of currency devaluation is no longer available to them. Piketty’s answer to this is again a heavy tax on the relatively wealthy. But unmanageable government debt is mainly caused by the inefficiency, irresponsibility, or downright corruption of the government concerned. To give such a government even more power through money taken away from people who obviously manage it rather successfully, is an unconvincing recommendation.
What are we to make of all this? Some respected professional economists have hammered Piketty pretty hard, saying the both the analysis and the conclusions are flawed. One of the objections turns on Piketty’s use of the term ‘Capital’ to lump together such diverse things as investment in plant and machinery (which depreciate at a rapid rate), real estate including one’s home, (which tends to accumulate in the long term) and financial assets (which can be widely volatile). As for the concept of a confiscatory tax on capital, everyone will recognise the truth of the comment by John Bird (founder of “The Big Issue” ) that capital will simply move somewhere else; Galbraith makes the same point rather more acidly; and in France, Gérard Depardieu has proved it by voting with his feet.
So what has one gained on reaching page 577? The first answer must be ‘quite an education’. Unless you are a professional economist of independent outlook, you are unlikely to emerge unchanged from the experience. Whether you agree with Piketty or not, the mass of factual data presented is overwhelming, valuable and instructive. It often serves to put things in perspective. A single example: public and politicians are currently preoccupied with the level of benefit payments made to the less well off, but this amounts to only about 1% of national income in developed countries, compared with 10-20% on health and education, and typically 13% on pensions. This means it is not significant as a purely economic problem.
It is a pity that Piketty does not apply this self-same approach to what he calls ‘inequality’. He is outraged by the spectacular wealth of the top 1/1000th of a percent of the population, but one thousandth of one percent, even of something spectacular, does not add up to a large amount of the economy as a whole. Even if the threshold limits are extended downwards, he estimates it will only bring in about 3-4% of national revenue. Unfortunately he is probably wrong about that. Once governments discover a principle and a mechanism to collect a new tax, they will find it hard to resist the temptation to extend both the rate and the scope of it. That is what governments do.
Surprisingly, he is not explicitly concerned about the power that extreme wealth can bring. He reserves special bile for Liliane Bettencourt, the l’Oréal heiress who, he admits, takes no part in the running of the company. But he does not mention Rupert Murdoch, for example, whose News Corporation empire has considerable influence on governments and elections. This is presumably because of Piketty’s ingrained dislike of capital per se.
Piketty is an out-and-out socialist. He does not just write about capitalism, he detests it. That comes out in many side-swipes. “The rentier is the enemy of democracy”; “Democracy must regain control over capitalism” (though it never had it). Most tellingly, his historical survey never once mentions the positive aspects of capitalism; the rôle of credit, of lending money at interest, the invention of the joint stock company and so on, in liberating civilisation from a subsistence economy, creating jobs and increasing general wealth and well-being. He explicitly admits that his wealth tax is for doctrinaire reasons -not to fund the spending needs of government, but to control capitalism.
The reader is left with many practical and philosophical questions. What exactly does Piketty see as ‘equality’? He doesn’t discuss it at all. How much in-equality is acceptable, for there will always be some? How can a civilized man possibly maintain that “unequal wealth within a nation is surely more worrisome than unequal wealth between nations” when one considers the desperate plight of the poorest in the world? How much does inequality act as a driver for the enhancement of wealth generally -is there an entropy effect? What is so bad about someone working hard in order to leave something to their children and so increase social mobility? Is inherited wealth fundamentally more reprehensible than inherited intelligence, which also affects one’s personal economic outcome? Is Piketty’s view of meritocracy perhaps a little self-serving? Is it naïve to advocate massive expansion of the social state while trusting that the organizational problems will be overcome by “efficient re-design, or structures not yet invented”? Is he serious when he suggests that the state’s largesse might extend to culture and travel? (free tickets to Bayreuth? rock festivals? football matches? free petrol? cheap flights to Ibiza?). What is the moral justification for the state confiscating large proportions (up to 80% marginal) of private property? On this last issue, Piketty’s vague appeals to 18th century declarations of equality, made in a context where there was no publicly funded education, health care, unemployment benefit and so on, carry little more conviction than the American gun lobby’s claim to be justified by that country’s founding constitution. Understand that I am by no means defending the manifest abuses perpetrated by some aspects of capitalism, simply questioning whether Piketty’s proposals could have any beneficial effect, or whether they might even distract from the search for better solutions.
Finally the biggest question of all. Does Piketty actually believe in his own proposals? Well, not whole-heartedly at least. He describes them as “Utopian…… but no more so than creating a stateless currency like the Euro”. Enough said.