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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!

Geoff Crocker
Author ‘A Managerial Philosophy of Technology : Technology and Humanity in Symbiosis’
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