Piketty’s Capital

Review of Thomas Piketty’s Capital in the Twenty-First Century

So this is the book Nobel Prize winning economist Paul Krugman lauds and billionaire apologists decry. No need for such drama, though. This book – a close reading of the historical trajectories of capitalism with special attention to things like growth and inequality – is no call to storm the walls of capitalism. Indeed it is a reformist attempt to save capitalism from its own excesses, to save it from the kind of sweeping revolution that Russell Brand heralds.

Of course, Piketty, unlike Brand, is a professional economist, more wonkish than visionary, and still working in the Adam Smith to Karl Marx tradition of homo economicus, which presents homo sapiens fundamentally as economic units and human relations fundamentally as economic relations (compare to the dramatic conclusion of my “Taxes, Private Property, and the Age of Aquarius). But Piketty, with his line graphs and tables, his sorting of economic laws that are mathematically fixed from economic laws that are subject to political intervention, is like a hungry badger digging into the internal mechanics of today’s capitalism. At least he seems a good “inside game” player to liaise with our visionaries when the Aquarian revolution comes.

Indeed, in his appetite for detail, the hungry badger sometimes seems unsure of his audience. He wants to pitch to a general audience, which means high-level narrative instead of “showing your work,” but, always aware of the secondary (academic) audience, he gets bogged down for pages on disclaimers, caveats, apologies for methodological imprecision, etc., that really just bore the general reader. And although the stats and charts are great for the most part, here also he sometimes gets bogged down in the numbers. It reminds me a little of Darwin’s 200-page digression (or so it seemed) on the tail feathers of the rock finch in Origin of Species (a book that was otherwise quite compelling for the average reader).

What the wonkish Piketty can and does give us, however, is a layman’s way into one of the basic problems in the trajectory of capitalism: Since return on capital always outstrips growth (r > g), the tendency is toward greater inequality (the capital/income ratio increasingly favors capital). This inexorable feature of capitalism was temporarily obscured by the shocks of the 20th century (1914-1945 and a recovery period through the 1970s). This period was anomalous in two ways: (1) growth of 2-3% came to seem normal (Piketty’s centuries of data show that 1% is actually robust growth in long run); (2) those shocks and after effects reduced the role of capital/inherited wealth, so it seemed capitalism was on a “natural” track toward increasing meritocracy and diminishing importance of inherited wealth. Now that the shock waves are over, both trajectories have returned to normal – growth is coming down and will probably level out at about 1%, and the role of capital/inherited wealth is concurrently going back up. Some of Piketty’s points are debatable, but the overall argument is compelling and the urgency real.

So how do we check the underlying forces of capitalism now pushing toward a renewed importance for inherited wealth and increased inequality? State expropriation of private property has been tried and failed to deliver on its promises. National taxes on capital won’t work because today it is too easy for the wealthy to relocate resources. Only an annual global tax on capital will do the trick, according to Piketty, and that means greater financial transparency and greater cross-national political collaboration. So he may not see beyond the age of homo economicus, he may not see into a future where self-actualization is detached from purchasing power and from the age-old struggle for resources, but if he develops his thesis with the restraint of a reformer, these final recommendations reveal a little bit of the visionary idealist in Piketty after all.

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14 thoughts on “Piketty’s Capital

  1. Are you cherry-picking your inferences? Although you don’t say it, your conclusion is that “the rich get richer and the poor get poorer”. That’s not what Pilketty concludes, however, if I understand what you’ve written.

    Here’s an alternative reading:
    1. Capitalism is the only proven method of delivering consistent economic growth (i.e. material improvements in people’s lives). Much like democracy is the worst form of government, apart from all the others that have been tried, capitalism may be the worst from of economics, apart from all the others.
    2. The rich may get richer faster than the poor get richer, but capitalism is still the fastest way for the poor to get richer.
    3. Tax takes roughly 50% of income from the wealthy and hands it to the poor. It does this year after year. That’s an enormous transfer of wealth. If the rich weren’t getting a 3% return on their investments, that wealth would simply disappear. No one would have it. It wouldn’t exist.
    4. Wealth tax vs income tax vs capital gains tax is just detail. The principle is the same in each case. If you take too much tax you destroy wealth. If you take the right amount of tax, you create a safety net for the poor. [I’m not against tax.]
    5. Most of the wealth owned by the wealthy is re-invested in the economy, creating jobs and wealth for everyone. It’s rather academic who owns it. Invested capital is invested capital.

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    • Funny how we can get such different narratives out of Piketty. The main throughline I took away about Piketty’s attitude is (a) that some amount of inequality is healthy for everyone but ever-increasing inequality (“divergence”) ultimately leads to systemic collapse; (b) that current trends are toward ever-increasing “divergence”; (c) that Piketty’s reforms can mitigate the “divergent” forces and save capitalism from its own excesses. (That he is overall pro-capitalism is not in doubt by either of us, I presume. Perhaps the difference is that I see Piketty emphasizing the need to regulate capitalism whereas your comment seems to emphasize a trust in the goodness of market forces.)

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      • My narrative is different, but then, I haven’t read the book 🙂

        I’m not an economist, but I see no reason why capitalism is in danger, except from people who want to overthrow it. That happened many times in the twentieth century, in many different countries, and always led to great misery. It may happen again, and we may all be miserable again. That’s one of the lessons of history, isn’t it?

        I can understand that ever-increasing divergence could theoretically lead to problems at some level. But that isn’t what I see in the world. I see that many of the richest people in the world started off poor or average. I see that the very poorest people on the planet are experiencing unprecedented rapid growth in material wealth. And I see that all of us are better off than when I was born.

        As for your future vision of a world “where self-actualization is detached from purchasing power and from the age-old struggle for resources”, that’s precisely my vision of the future too, and I believe that capitalism is the quickest way to get us there.

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        • Hahaha, ok, I was talking about Piketty’s take on capitalism, you were opining on capitalism in general. You might want to read Piketty one day. He too thinks capitalism is still the best way forward from here, but in a way the whole book interrogates the optimistic position you’ve presented: he sees problems like inequality as more destabilizing than you do, sees the idea of capitalist “meritocracy” as extremely fragile, if not illusory, and he sees the need for conscious political intervention in the market. This doesn’t mean he’s right and you’re wrong, but maybe worth a read, as the book is already casting a big shadow. (It does get tedious after a few hundred pages though – Piketty is a professional economist, after all.) And per our shared vision, I agree that capitalism has been a step forward. If it is to remain “the quickest way to get us there,” I guess that would depend on how rapidly capitalism itself can evolve. E.g., if consumerism is the engine of capitalism, I see a paradigm shift coming sooner rather than later.

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          • The engine of capitalism is surely economic freedom and choice, just as the engine of democracy is political freedom and choice. I see them as partners. The third partner is secularism, which is (you guessed it) religious freedom and choice. I guess I’m all for freedom and choice. Maybe I’ll read the book.

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            • If capitalism means freedom, choice, democracy, and secularism (i.e., pluralistic religious freedom), I’m all for it. The problem with using this as a definition is that I believe all disputants – from the capitalist purists of America to the socialist-capitalist blends of continental Europe to the anti-capitalist revolutionaries like Russell Brand – all claim allegiance to these values. The question is what’s the best vehicle for advancing those values. As in our previous debates, I think you define capitalism very broadly – as almost a universal descriptor of civilization – and I define it narrowly, as one historically-specific system among others. We should both resist reifying capitalism. It’s not a “thing in the world” but a malleable hodgepodge of ideologies and practices. E.g. one could argue that in the more socialized European version of capitalism, the middle class is more free to enjoy the fruits of its own productivity, as compared to the U.S., where the profits of middle-class productivity flow more quickly to the top percentile. Overall, as we approach our shared vision, the practices we lump under “capitalism” will either evolve to the point where we need a new descriptive term or will rupture under the weight of a revolution in human sensibility.

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    • Yes to our common enemies (though there are gray areas — e.g., disputes about whether socializing certain services enables or disables freedom for the people affected). Your linked article was interesting and enjoyable to read — a good illustration of the “picture theory” of language we see in Wittgenstein’s Tractatus (which Wittgenstein later rejected). I think, though, that treating “capitalism” as if it were a substantive in the same manner as “horse” may be a misleading reification, as it treats an abstract concept as if it were a concrete thing.

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  2. Great review, Gary, and a fascinating follow-up debate with Steve.

    Regarding the post-World Wars period (1945 to 1973) in which the U.S. experienced greater than normal economic growth, which in turn benefited a broader than usual social spectrum (i.e. the domestic economy was, of necessity, quite self-contained, giving the poor more opportunities to join the middle class), I wonder if we, and Piketty, are seeing that time in too positive a light. Yes, it certainly seemed a golden era for the “common man,” but in that time the common man could only be properly defined as the American white male. In economic terms, American minorities, women of all races (at least those not married to American white males) and the entire Third World were either badly attenuated or entirely excluded as the result of systemic bigotry.

    I wonder if it is better for us to view inequality as a condition inherent to human nature and common to all systems of economy. Regulating your economic system, be it capitalist, socialist, communist or a hybrid, can help the less fortunate, but it cannot eradicate human selfishness.

    I consider human selfishness the most toxic substance in the universe, which will be eradicated in one of two ways: evolution or extinction of the species.

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    • Thanks. Your take on selfishness (which I like) and your point about the privileged place of white males in the subject period, are consistent with Piketty (though, if I may test your loyalty to my blog, not “involved” in his study in Wittgenstein’s sense). He doesn’t sort them per se, but his statistics would cover them under the rubric of their “class.” E.g., when he says the wealth gap between the lower decile and the upper decile shrank in this or that decade, I believe all people in the decile are covered, and the racial makeup is a tangent beyond the scope of his book (though a worthy subject in its own right). His focus, incidentally, is not primarily on the U.S., although the U.S. plays a fairly large role. The best records dating back to the 1700s are in the UK and France. He also talks quite a bit about the economic forces at work between developed and developing countries.

      By the way, you may have just caused a rolling movement in Darwin’s grave. Not to mention Adam Smith.

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      • Your point is well-taken re class being the primary factor in wealth distribution (we are either haves or have-nots no matter how we got there).

        From my limited readings of both, I’m not sure Darwin and Smith, in their respective days, could conceive of a world grown all too finite in terms of usable natural resources and an exponentially growing mass of consumers threatening the sustainability of those resources. The Four Horsemen were much more powerful in the days before penicillin and agri-business, etc., etc.

        His deism notwithstanding, I think Darwin might agree with my take on the future of humankind. Species adapt or they perish.

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